Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Banco BPM First 2018 Group Results Presentation. As a reminder, all participants are in a listen only mode. At this time, I would like to turn the conference over to Mr.
Roberto Peronaglio, IR Manager. Please go ahead, sir.
Thank you very much everybody for attending the conference of the presentation of the first half result of Grupo Banco As usual, because leaving the words to Mr. Castagna, our CEO, I remind you that you can find the presentation on the website on Investor Relations section presentation and for the Q and A is reserved only to the financial analysts. Thank you very much. I leave the word to Mr. Castagna.
Hello, everybody. Thank you for being with us at this time on Friday in August, But I hope we will be quick and give you all the information you need. Let's start immediately on Page 5 of our presentation where we want to just let you aware of our de risking strategy and update starting from the revised plan that we presented to ECB in end of March this year. As you know, we have been presenting one of the most ambitious de risking plan Totally amount EUR 17,000,000,000 reduction in 3 year with EUR 13,000,000,000 of disposal of bad loans. During these first 6 months, we have been very much ahead of our plan.
We have done Good workout which together with the delivery of the Exodus project brought us to a net bad loan ratio of 3.4% already below the original 2019 target of 4.2% And also for UTP, which is of course characterized only by workout, we were able in 18 months to beat the 3 years target Getting down to 5.4% versus 6.7%. As you know, we have already in the new target for anticipating at least the €3,500,000,000 remaining to complete the €13,000,000,000 disposal plan In order to complete in the 1st year the entire plan of the 3 year. And as you know, we have today shortly The 3 bid for the project ACE, which is the project that I will which I will give you information later on. Just a quick look on Page 6 So related to the entire project of these 6 months of the risking, we went down from €30,000,000,000 to 19 €400,000,000, 24 percent to 16.6 percent. Meanwhile, we had a target for The first three out of EUR 23,000,000,000 17 percent.
As you know, the new operational plan will bring us to 11.5 percent with €13,000,000,000 of gross NPL. You will also find a figure for the net amounts which went down from €16,000,000,000 to €9,500,000,000 of which only €3,600,000,000 already at this time of net bad loans. Let's see what happened during the 1st 6 months, we started this year with a total amount of €25,500,000,000 of gross NPL. We have now reached EUR 19,400,000,000 versus EUR 13,000,000,000 project for the 3 year time. As you see on the right side of the slide on Page 7, we are right in the middle after only 6 months of the 3 year plan of the total implied reduction.
We have achieved the €5,000,000,000 of disposal through GACs and €1,000,000,000 of work out through the NPL unit which brought to €6,000,000,000 the amount out of €12,500,000,000 The remaining basically is the only €3,500,000,000 which we'll talk ahead and EUR 3,000,000,000 work out, which is very much in average below What we did in the 1st 6 months because we were able to get $1,000,000,000 in 6 months meanwhile We still have EUR 3,000,000,000 in the next 5 semester up to end of 2020. Just a few words on Page 8 about the Exodus transaction. I know that you already know everything. Just some information was for us of course a key milestone which make also us understand that gas remain one of the best solution in order to dispose at a good price without A big impact on capital bank loans and we were able to reach an excellent price of 34.3 percent notwithstanding we had to renounce through the market turmoil at least one full point due to the sale of the Juno Remanzeny notes. Also in terms of quality of our remaining non performing loans, I think We improved the quality of our portfolio.
As you can see we improved the pass of secured NPE loans from 64% to 67% versus unsecured 36% to 33 versus an average of the Italian banking system end of 2017, fifty-fifty percent. On the right side of Page 9, you can see also the in coverage we were able to perform in the last 18 months from 44% to 51%. Bad loan 57% to 66%, which grew to 68.7% including write off And also TP coverage went up from 24.7% to 33%. But what next? What we have in mind with the transaction with the project ASHA is?
We started from the increasing interest about the potential deals involving NPL sales together with the platform sales, which grew in the last Thanks also to the very good performing that we had in terms of internal workout. And as I was saying before, at the same time grew at the same pace also the interest and the Efficiency of GAC transaction. This brought us with many possibilities And we decide to start a new project, which of course has an immediate first results to sell the remaining €3,500,000,000 But at the same time, would I would explore all the opportunity which are in the market to increase also the size of the global disposal possibly also together with the rather than with another Gaks transaction. As you can see on Page 10 on the right side, Just to give you some plain number, at this pace that we have had in the first half of twenty eighteen, In only 1 year time, we would be able either to accelerate the base case scenario, which imply further disposal of €3,500,000,000 and a workout of €1,300,000,000 per year, which is much lower I remember to the results we had in the first half and with the loan growth equal to what we had in the 1st 6 months of this year of 2.5% would imply in only 1 year time reaching 12.2% of gross NPL ratio.
On the other side, if we would explore alternative scenario, We give you some sensitivity showing that if we can increase a potential disposal rather than a GAAPs to €5,500,000,000 to €6,000,000,000 with the same workout loan growth percentage, We would go immediately in 1 year time below 10% of gross NPL ratio. Some information about the project lease that we approved today in our board. This again give us full flexibility both in amount and in structure because it can allow us to go to a straight sale rather to a GAC transaction rather than both of them. We received many proposal and we received at the hand many qualified offers non binding and having explored the different opportunity, we decide today to choose 3 final bid in order to reach by I would say 2 or 3 months A final binding offer which would give us the clear and definitive volume and structure of our transaction. We are of course very confident that due to the quality of the bidders We can get this goal in the sensitivity scenario we gave you before.
But of course banks is not only de risking even though for us have been a massive engage both in terms again of bad loans and UTP reduction. We have in these 1st 18 months completed many projects In terms of product companies streamlining, new model for the banking reorganization, reorganization of Akros and Delekti Bank, Optimization of the internal model and the new validation, the IT system integration, the requalification, the staff reduction together with the branch rationalization for which we will give you some new numbers today. But still we have some other project to accomplish by the year end, which would be Some of them are already basically completed and needs only to have the final closing. For instance, the disposal of the custodian bank, which will come by this quarter, the merger of Banco BPM BPM into Banco BPM, which we anticipated of almost 15 months, respect to the final maturity of 3 year, The merger of our IT company SGS into Bank of BPM, potential further optimization of product factories like consumer finance or leasing for instance, the implementation of this project that I mentioned before And again, the closing of further 200 branch, which added on to the 300, We closed in June make the complete project well beyond the expectation of our 3 year business plan.
Let's go to the number. In the 1st 6 months, these are the stated number As you know in our balance sheet due to the merger and due to the many transaction also done in NPL, There are many restatements. I will try today to give you all the information you need. I'm Thank you. Thank you.
The request you made to us last quarter. So apart from this first Page 14, which give you the stated figures, which of course are not comparable and in any case shows very positive figures in almost all the lines with the final net income of EUR 353,000,000 versus EUR 94,000,000 last year. But we prepared on Page 15 A comparison of the 1st month this year versus last year excluding IFRS 9 So you see that net interest income compared is almost the same results basically is €20,000,000 better this year because last year we had €32,000,000 from The TLTRO can stabilized in 20 17 instead of the 16. Total income grew 0.5%, operating costs went down 4.4%, Profit from operation up 9%, loan loss provision down 14% and of course the other results are not comparable being better than the percentage. I also mentioned on the right column, The last column on the right, the PPA difference between the 2 semester, which as you can see are almost irrelevant Apart from being more negative on the loan loss provision, but you will find on page to the complete PPA analysis and details.
Let's pass through the different figures. On Page 16, we have the net interest income comparison. Again, on the first line, you see the stated effect, but better maybe to compare The like for like effect, we grew 1.4%. On the box on the left side, you find all the difference due to the PPA, IFRS 9 coming from the merger from the bank loans and the merger of BPM. IFRS 9 coming from time value and accrual OTP and one offs.
The same is in the last quarter, we grew like for like 1.8% and we consider this pace realistic also for the future. Thanks especially to the loan growth that we have experiencing in the last couple of months. On Page 17, the usual net interest spread table is almost stable, is basically we fostered the growth in loans by giving up 7 point in asset spread, which were basically feeded by a reduction of 6 basis points in the last 6 months from lower cost of funding. Talking of which, Both of them will have some further improvement. The cost of funding because of the maturity of almost $3,500,000,000 of retail bonds maturing in this semester and asset spread because of the new pace in loans that we have taken in the last months.
On Page 18, you have the net fees and commission, which frankly speaking are quite upsetting for us. We can only say that We consider these 6 months very peculiar for many reasons, some Turn now to the bank. As you know, we had the complete reorganization of the network. We had the change in the advisory portfolio from Prada to Portfolio, but also Of course, the effect of the market turmoil due to the spread increase. This brought us compared with a very good, especially Q1 in 2017, which as you can remember was the best quarter ever due to the ammunition we prepared in 2016.
The other aspect is a reduction in Ordinary commission of €20,000,000 in terms of year over year and only €3,000,000 in terms of a quarterly comparison due mainly to credit reduction, fee credit reduction. This is again for a couple of reasons. One is that we changed the accruing model for upfront credit fee. The second because as I was saying before, the new growth in the loan portfolio came only in the last couple of months. So we are expecting also this figure as is shown in the quarter by quarter comparison to overcome the previous year in the next quarter.
Net financial result on Page 19 is good. We anticipated these results Also commenting the Q1, we were able of course to realize some reserves And some hedging on our portfolio, this brought in the quarter €80,000,000 of net profit compared to €29,000,000 in the Q1 and this brought the 6 months to be bigger 9% respect to the 1st semester last year, which was again a very, very good quarter semester also last year. Operating cost very good. We decide in line with market practice to Split the systemic cost from the operating cost, we'll find it later on. Systemic costs in this way is completely comparable and you see that both on a year on year comparison and on a quarter on quarter comparison, the reduction is very consistently more than 4% on a yearly basis, almost 2% on a quarterly basis.
As I was mentioning before on Page 21, the 2 main driver, but together with the cost optimization project, We spread in all the cost of our bank, the advance that we reached both in the headcount evolution vis a vis the original plan and in the optimization of the retail network. For headcount evolution, we grew In the projection for 2019 up to 2,600 person, 2,170 out of the solidarity fund and the other 400 people because of the non replacing in the normal evolution of the business. All in all, next year we will have headcount compared to this year of 800 people less of which almost half of them accounting for 6 months and the other half for 12 months. The retail network, we accelerated our project. As you can remember, we were announcing to pass to reduce from 2,417 to 2,082 branch in 3 years.
After 18 months, we have already reached 19 36 branch with the closing of 311 branch last June and we forecast to close by year end another 214 branch, reaching the 1700 branch by year end, which was only in our business plan an aspirational target envisaged for the years to come after the completion of the plan with the developing of the digital bank. I won't go through very much To the personnel, I already gave you some mint. We have a 4% saving year for year, 1% on the quarterly basis. On Page 23, again, the saving on other administrative expenses Down 5% year on year and almost 4% on the quarter. Loan loss provision on Page 24, We continue just in line with what I announced to you In respect to the potential sensitivity of our project is to be very aggressive and determined to cover our bad loans in order not to have to avoid surprise if the opportunity to sell more than the expected EUR 3,500,000,000 which I remember you are already accounted for in case of disposal can arise in the 2nd part of the year.
Of course, we mentioned some detail also on Page 24. As you can see out of €680,000,000 almost €130,000,000 comes from the IFRS 9 impact, which you can see on a specular approach in NII and also on the quarterly evolution we show that €50,000,000 comes from the Exodus transaction due to the 1% I was mentioning before, which we were not able to realize with the junior and maiden in tranche and was expected only few days few weeks before the turmoil of the spread. Let's pass to the balance sheet Figure on Page 26, you see The increase in performing loans, which grew 2.6%, 2.9% in the quarter and year on year. This of course is also benefited from the exited senior notes underwriting Without that would be 1% growth, but we are really experiencing an increase in in underwriting and granting new loans in the last couple of months. In June, we reached our record in issuing new loans.
We reached EUR 2,200,000,000 in June compared with an average over the 1st 5 months €1,300,000,000 and €2,200,000,000 has in a way been confirmed also in July When we added on to our stock almost another €1,000,000,000 of new loans. This comes especially from the corporate activity, which grew 4% in the last months. Meanwhile, the retail activity is only 1% up. Let's talk on Page 27 about our deposit base. We are happy that not with Standing the turmoil, our deposit, especially current account and site deposit are continuing to grow.
As you can see in the last 3 months, we grew 3,000,000,000 from 78.3 to 81.4. Of course, this is also the results of the lower activity that you have seen in the commission and in the asset under management activity because after the spread increase many clients prefer to stay with their money into the deposit rather than starting new investments. On Page 28, I already anticipated that we still have for the final part of the year Globally, €3,800,000,000 of maturity at an average price of 2.6%. We have especially for the retail bonds, we don't have any project to replace this bond. So this would help to further reduce cost of funding and hopefully to foster new asset under management activity.
On Page 29, we talk about our liquidity. You see a big increase in use of eligible asset. We came up from 45 percent EUR 1,000,000,000 to €52,000,000,000 mainly due to the increase in loans, which we already talked about a few minutes ago and also to the increase in the portfolio, which we will see in a few pages Notwithstanding that we are still €18,000,000,000 of eligible assets unencumbered, which as of this day in August grew to 20,000,000,000. Indirect funding, this follows what we were mentioning before and the results of course the market On the stock, we have all in all a reduction from 59.6 to 59.2 in asset under management. But if we exclude the market effect, this figure grow EUR 700,000,000 bringing to EUR 60,000,000,000 the global of asset under management.
The same in a still Heavy proportion is for assets under custody that as you can imagine are mainly due by Italian govis, which lose EUR 1,600,000,000 due to the market. So the EUR 30,600,000,000 of assets under custody, custody would have been EUR 32,200,000,000 without market reduction effect. We have done on Page 31, the global Core funding of the last 6 months, as you can see, we grew globally EUR 1,300,000,000 If we will put together current accounts and deposit asset under management under custody and if you exclude the market effect, the real increase in volume was EUR 3,500,000,000. As I was anticipating before on Page 32, you see the security portfolio activity. We had a big reshape on these asset class.
Italian dollars reduced EUR 2,000,000,000 in the last 6 months. The real reduction is much bigger, is almost EUR 3,500,000,000 due to very short term trading position taken by our investment bank. But on the same time, we increased the total amount of our security portfolio, adding International growth is to our portfolio. So we grew almost 5,000,000,000. The diversification now see a reduction of the Italian govies for a couple of €1,000,000,000 and non Italian govies had 38% of the total portfolio, especially being France, U.
S, German and also small Spain bond. Italian gov is well globally down with respect to the total securities less than 50%. They are now standing at 49% with a very big reduction split 44% In how to collect and sale, 47% in how to collect and 8% at fair value. In order to collect and sale, we reduced further the Italian GOVISC portfolio. As you can see on the bottom right side of Page 32, in 18 months from 99% to 56% and we still have reduced over another EUR 600,000,000 this amount in the last few days.
The effect of the spread on our portfolio is quite dramatic passing from a positive position of EUR 220,000,000 in March to a negative position of €200,000,000 in these days. Let's go back for a minute to credit quality. On Page 34, We only shown the net NPS position. We already talked about the growth. As you can see, the reduction is even almost both in OTP and bad loans.
OTP went down EUR 3,600,000,000 in 18 months, bad loans EUR 4,400,000,000 in the same 18 months. If you see the evaluation of net non performing loans and net bad debt loan ratios On the bottom right side of Page 34, you can see how during this month we have more than half our net bad loans ratio. Also the trends in inflows In NPL confirmed this good pace, we have a reduction year for year, year on year of almost 9 percent in inflows to non performing and the reduction of the danger rate from of 12.8 percent going down almost €100,000,000 year on year. The workout activity I was mentioning before has been one of the most successful activity of our bank during this period and is continuing to give us big results. As you can see In the 1st 6 months of this year, notwithstanding the reduction in the total amount of bad loans, we have still grew 30% vis a vis last year with cash totaling €1,100,000,000 And with the cash recoveries of €330,000,000 and with a cost in excess to our provisioning of only €33,000,000 The recovery rate is increasing from 3.5% to 4.2%.
The GBV reduction due to internal workout is growing from 5% to 7.5 percent. On Page 3738, you will find the detail of the reduction and the composition and the coverage of bad loans and OTP experiencing unsecured the bad loans are very low part of the net book value being only EUR 600,000,000 17 percent of the total net book value Still very well collateralized and covered. Almost The same is in the UTP analysis. I would only mentioning how the reduction of the other UTP, which means the ones who are not restructured, which as I mentioned many times before are the ones that we consider more better. We consider better because they are the ones which are under special laws and special coverage, but also other OTP are going down at the pace of 10% on the last 6 months.
On Page 39, you will find the coverage which we still keep very high for the reason I mentioned before. And on the right side of Page 39, the comparison of our bad loan versus OTP composition of the global NPL portfolio. As you can see in the last 3 months, We have reduced the bad loans percentage visavis the total portfolio, of course, implying better asset quality also in the total NPE composition. Let's talk about Capital, Common Equity Tier 1, we had a very strong impact from the volatility of the bond portfolio. I will explain to you on the next page how comes that it amounts to 84 basis points.
This is basically the composition of 50 basis points of net impact, but unfortunately due to a situation to the CRR threshold, we cannot take the net position. We have to take the gross position and the reduction of the threshold, which amount for another 34 basis points, but we will see it on Page 40 Going back to Page 41, luckily enough, we have been able to reduce by 18 basis point, this effect by the transfer of the insurance reserve management and the impact of the Q2 results. And as you know, we have also performed the capital management action due to the sale of custodial banks, which amounted to around 35 basis points and the impact on the guarantee on the senior notes of the Exolu transaction, which better our position of 18 basis points. All in all, we come back to the 11.4% of common equity Tier 1 fully loaded. Meanwhile, we have still 13.5% of checked in phased in.
Some far detail, we want to be very open on the impact on the HATC Reserves, as you can see, there are all the details that we had on our portfolio, not only GOVIS, of course, which account amount for €490,000,000 which would have been 72 basis points gross with potential DTA reduction of 22 basis points. But for the effect, which is Detailing explained on Page 42, we were not able to deduct DTA and the impact on the narrowing of the thresholds which accounted globally for 34 basis points. This, of course, is a bad news also for us. But I have to say that these works also the other way around. So every euro of profit and every reduction in Participation in financial investment in financial institution or in reduction DTA will account double also the other way around.
So we expect to have the possibility to recover due to this possibility that we have in the second half of the year. All in all, just to say, we are Quite satisfied for the overall managing of these first 18 months of our bank, there have been very difficult months market side with a lot of impact from regulators with a lot of problems also in terms of Italian visibility on the market. Notwithstanding that we are going Very, very we are very consistent in trying to deliver whatever we announced to the market. So we will go ahead very strongly in the risk in the bank. We have seen some results of other banks in which Luckily for them, the cost of credit is going very much down and we really are that due to the de risking action that we have taken very prudently and very constantly, months by months by provisioning all our bad loans, we will be able after the de risking to deliver the results that we promised with our business plan.
So many things have been done. Some things is best to be done, But we are very much concentrating on delivering. Thank you very much and I am waiting for your answer.
Excuse me. This is the call for conference. Operator, we will now begin the question and answer session, The first question is from Jean Royes with Goldman
I wanted to ask 2 questions related to asset quality. The first one is that this year, we've seen some of your peers, some have not reported yet, but mostly, we've seen that midsized bank in Italy have had a tremendously lower cost of risk than yours for the transition to IFRS 9, Some with higher NPL ratio, some with lower. I just wanted to try to understand what's the trajectory for from here And in particular, compared to the assumption that you had made in your business plan in the past and the time line to a normalization and the levels? That's the first question. The next question is, maybe there is something I missed, but when I look at the simple disclosure on NPLs, Growth NPLs quarter on quarter, they go down by exactly €5,100,000,000 And if that is correct, unless there is a different scope being taken into account, it suggests that there was no organic reduction of gross NPL.
First, is that correct? And if it is correct, Can you please explain why the organic reduction would have slowed? Thank you very much.
Okay. Thank you very much. Why other banks go down so quick? I really We have a precise policy and strategy. We won't massively reduce our bad loans for portfolio.
And we feel that in order to do that, we know that we have to pay something more. So we will hope we are confident to conclude our de risking plan quite soon and is quite obvious that also for our bank we could enjoy the low level of cost of risk that other banks in Italy are experiencing right now. I don't know the project of other banks. I don't know the de risking plan of other banks. I know my plan.
I know that I going straight into delivering my plan.
And what is the timeline to the normalization you think?
As I was I don't know if you follow it all our presentation. I was mentioning that we can get Much earlier than envisaged business plan, which still of course has a target of 2020, but we said during the ACE project presentation that this could accelerate very much and deliver good results in 6 to 12 months time.
I was more thinking of
Cost of risk, sorry, not the de risking itself. The cost of risk is coming together with the de risking until we So how you can imagine that somebody can sell bad loans if you don't provision At the level you see at least the GACS transaction. So we have to be consistent with that.
Okay.
For the GACs, of course, the EUR 5,000,000,000 or better, The EUR 5,100,000,000 that we announced in September 2017 and that was then realized in June this year have had the normal pace of recovery also during these 9 months. And during that 9 months, the specific portfolio went down through recovery of €300,000,000 So the real amount that you have to deduct for the 6 months is for the quarter sorry is €4,800,000,000 and not EUR 5,100,000,000.
Excellent. That's very clear.
The next question is from with Intermonte. Please go ahead.
Yes. Good evening, everybody. I have a few questions. The first one is on fees. I think that This is the main disappointment of the quarter.
I understand that you are changing your commercial policy. I think that look at the first policy, I think that look at the first half results, we should think at commission that could be in 2018 lower than 2017. I don't know if you have an idea when the lower impact from upfront fees and more recurring fees will We will see a normalization in terms of commission quarter by quarter. The other question is on net interest income. We Should we expect a negative impact from the disposal of the at least EUR 3,500,000,000 NPEs in terms of impacts from the rest of the time value.
So if you can quantify the amount. And then on capital, you closed the quarter with common equity at 11.4% fully loaded, Similar to UBI. When do you expect you will be able to, let's say, to regain the 12% level? And finally, on the NPE strategy, Maybe I was wrong. I thought that there could be could have been an acceleration already in the second half twenty eighteen in terms of NPE disposals.
So if you Can elaborate a little bit from the presentation. So the base case is €3,500,000,000 Something has change in the last few weeks in terms of pricing. So maybe you could be could decide to be a little bit more cautious in terms of disposals due maybe to some pressure on the prices. So if you can give some color on that. Thank you.
Thank you, Mr. Queveza. Let's start from the NPE strategy. Nothing has changed. We wanted just to give you some flavor about the potentiality of the AACE project.
This imply again a very All the work not only by our side, but also from the bidder side. This has basically no limits for the amount because everybody is committed also to make a very big offer up to the total amount of our bad loans. Of course, for doing that we need the due diligence. They need the due diligence. We need to understand if gas will be renewed or not.
But by any chance by year end you will have we will have a final word about that. So we will know after due diligence which we think we can take up to maybe 2, 3 months up to November this year and then we will make a decision of the amount of the disposal, the amount of the potential gas or both of them. So of course, then we need the execution time, But everything will be clear by year end. Do you see the current
capital level as a constraint today? So the starting point last quarter was 12.1 percent and now it's 11.4%. So this could be Could bring you to be more cautious on the disposals or not?
Frankly speaking, of course, we are cautious because the situation in Italy is very So we cannot take anything for granted maybe as we were doing a few months ago. Let's say that out the remaining €10,000,000,000 that we have €9,500,000,000 that we have, €3,500,000,000 are already provisioned for the sale with the FDA. For the remaining, we think that depending on the structure, gas or not, platform or not, But we can reach an amount which would be enough to be covered also with our current capital which of course we are working in order to improve. I was mentioning some potential other activity on subsidiaries in order to give some strengthening to our capital. But the figure that we have in mind does not have not problematic vis a vis the potential disposal of our bad loans.
For NII, the decline we expect is some €10,000,000 due to the reduction of the vessel PPA and time value of bad loans, But this should be balanced by very much lighter cost of credit by the increase of loans I was mentioning before By reduction in cost of funding, I also was mentioning before. So if you take the stated figure, of course, Maybe we can see some €10,000,000 less, but if you take the like for like figures, of course, we forecast an increase in terms of NII. Common Equity Tier 1 basically I already told you We are working on many aspects on many opportunity. Again, also the opportunity of reducing This threshold of related to the CSSR, which can work on in order to have a better impact in terms of capital. But again, we have also other opportunity with our leasing and with our consumer finance activity.
Last but unfortunately not least the fee, I agree with you in my opinion is the most disappointing figure. The only good news that we in a way expected this first half because of the massive reorganization we had, We expected that the changing in the advisory would have brought some difficulties, immediate difficulties to understand the opportunity that this new strategy can give to the network. But we experienced that already few years ago with the BPM and we know that in the medium term time this would bring a lot of more commission and on top on recurring commission. I don't know how much this will take for asset under management only because of the Italian situation of course we will depending also from the confidence of the on the Italian investment during this day, these months. Meanwhile, the other figure of the fee which was related to the credit fee, We are really confident that in the 2nd part of the year, we can completely recover the gap.
Thank you very much.
The next question is from Giovani Razzoli with Equita. Please go ahead.
Good afternoon. Very quick question. First one is a clarification on the ACE project. So if I understood it correctly, you have 3 binding offers. So you have defined a short list of 3 players, which are interested into buying €3,500,000,000 of NPLs.
Those players may also consider buying more than EUR 3,500,000,000 so EUR 5,500,000,000 and the servicing platform and the time frame in second half of the year. Is my understanding correct, especially as far as the perimeters of the bidders and the scope of the possible assets under Disposal, that's my first question. The second one, you've mentioned that out of the capital management actions to restore the common equity Tier 1 to 18.4%, There is also an effect of the GACs for some 20 basis points. I was wondering whether this is referring to the of the risk weighted assets as a result of the sale, but I'm not sure about this. And the very final question, if we put everything together, let's say, asset disposals and NPLs, derisking or whatever, cash flow generation.
Can we assume that all else been equal? Where I mean at current levels of common equity of spreads, your common equity Tier 1 will remain in the 11.400000011.5000000 at least going forward. Thank you.
Thank you, Mr. Vazoli. ACE project, I want really to be clear about that. We have one main point we cannot be too tricky that is that our plan also for accounting principle and so on is €3,500,000,000 that we announced in March. Having said that, this project is not only for €3,500,000,000 We have already received the offer for almost the entire amount of our bad loans.
We've only to consider the due diligence and the binding offer, how much of this amount would be consistent with our situation end of the year Because we think that end of the year we will conclude the structure and due diligence decision. So by any means this could be any figure. We just mentioned to make an example as a sensitivity the 5.5% but not because 5.5% is the maximum amount that we can do, but just to make an example which would brought would bring us immediately below 10%. Yes, for the gas, We had this advantage because when we will receive the guarantee from the state, Of course, the 60% of the senior notes, which nowadays is waiting 60% will be massively reducing its weight and so we will gain the difference in basis point. Last And the risk of course, we are doing everything as we did in the last 18 months In order to have a good trade off between a consistent common equity Tier 1 and the willingness that we have to consistently reduce NPL.
We'd consider that if even though we should go around 11%, we have a 2019 opportunity of profitability, which is in line with what we announced and in the business plan, which can give us immediately back Lots of capital, especially considering the effect that I explained before that in case of new revenues would amount 1.5 times as it was unfortunately for reduction of GOVI's effect.
Thank you. The next question is from Alberto Cordara with Merrill Lynch. Please go ahead.
Hi, good evening. First all, thank you very much for the presentation and the very good disclosure, extremely good. In terms of questions, So, I have some point that maybe is a bit marginal, but I just wanted to get a bit of clarity. The first one related to You're going to benefit from a reduction of risk weighting because you obtain the The state guarantee. But my question is the following.
Is this something that is bulletproof in terms of regulatory attitude because these bonds will have a state guarantee, but my understanding is that they're technically ECB eligible. And while the interpretation, I think, of all return on base using gas so far has been to I'm just wondering if this has been really validated by the regulator. On a similar topic, I don't know if you maybe mentioned this before, but We are reading a bit of controversial statement regarding the possibility that banks will be awarded an LGD So some are saying that is likely we are just a couple of hours ago another popular saying that So I just wanted to understand how do you see this? And in case you may not get the waiver, what could be the negative impact on capital? Just hypothetically.
And then the final issue is there is this deadline of setup is at the 6 September for the end of the gas. And I think the government has asked for an extension of this deadline. I'm not aware if this I don't think this extension has been granted yet. It may just be Formality, but I just would like to know from you, what is your view and if as to the likelihood of this extension? Thank you.
Thank you, Mr. Cordara. Very simple question and quick answer. Gas reduction FWA as far as we know all banks who underwritten the senior notes adopted these reduction. So of course we have been confronting our auditors in order to do that.
On the LGD, we mentioned many times that we expected it even though we were doing €8,000,000,000 then we decided the spin. Now we're saying that maybe we're going to do more. So frankly speaking, we are really optimistic about a zero impact of this maneuver being so massive maybe the best one in so short time frame. GACS, maybe I was mentioning is not of course given for granted that the extension will come. This is exactly the reason why we are doing a double track, which can end up both with a straight sale or if the GACs will be extended due to the convenience right now of the GACS transaction for the leverage and for the old reason that we know in that case of course we will go also for
The next question is from Hugo Krause with KBW. Please go ahead.
Hi, thank you. Couple of things. So one, can you just clarify what's your new OpEx target for next year, you keep kind of beating getting ahead of your business plan So I just want to know what's kind of the absolute number in terms of €1,000,000 you're targeting? And second, I look at the cost of risk this quarter, even if I strip out exit the impact of Exodus, it's more than 100 basis points. Coverage It was higher than expected, but I estimate still something around 80 basis points, which is pretty high.
So once you do this Ace deal, for example, what kind of cost of risk you expect to have kind of on an underlying basis? Thank you.
Hello, Mr. Cruz. Unfortunately, I cannot give you the So target because again the target is the one that we announced to ECB which is €13,000,000,000 But I think we gave a lot of confidence saying that there are bidders interest to a bigger transaction that nowadays is difficult to quantify because of many reasons. One is the due diligence. The other one is the possibility to have the gas and so forth and so on.
So even though we say that the target stay as it was also for accounting principle we should change our provision if we would have a new target with nowadays we don't. But at the same time, I can confirm The strong willingness on our side and on the bidder side to do a much bigger transaction. We will see by year end. Cost to risk, in my opinion, is compatible more than consistent with this willingness that we have to sell. As you know, as I mentioned in One of my slides, if I would have the time to collect and work out all the NPL, I would not to do any more provision because as you have seen for dispose for work out EUR 1,100,000,000 I only spent EUR 30,000,000.
But unfortunately, if you have to sell the same €1,100,000,000 you could spend also €150,000,000 So I have to In a sort of way, just because I said that I am willing to sell more, I am obliged in a way to do more because I want to align not the provisioning to the workout, by the provision to the disposal which unfortunately is all of you know is much costly that having the time of running this business. And this is exactly the reason why there are so many bidders willing to do this transaction. I expect of course cost of risk going dramatically down once So we have strongly the risk of the bank. First of all, because we know the current cost of risk, how is it right now. Secondly, because you are experiencing the cost of risk of my competitor, which even though maybe have different strategy, They have already provisioning a cost of credit of 50 basis points.
So I would imagine that our bank is not worse than these other competitors.
Okay. Sorry. On the targets, I was actually talking about your operating for 2019, the original plan target was €3,000,000,000 We know you're going to do better than that, but I was just wondering If you can give a number that you're targeting now.
Sorry, I didn't understand well your question. Now I understand. So was the cost total cost? So for 2019 would be in the region of €2,800,000,000
Okay.
Thank you very much.
Thank you.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Good afternoon everybody. Just one question from my side. I just want to better understand Mr. Castagna on Project ACE. What is the time frame.
Is it fair to assume that before taking the final decision on what to do, you will you prefer to wait for the approval of the budget law in order to avoid to take decisions ahead of a period of time where when we might eventually have and we all hope not, it's not going to happen, but we might eventually have some additional turmoil on the sovereign given the impact that your Capital suffered this quarter on the back of that, is it a fair assumption that you will wait till then before taking a final
Hello, Mr. Robert. Good evening. I think it's a good assumption, but it comes together with all the other assumption that I mentioned before. So maybe for the that I mentioned before.
So maybe for a coincidence, but the time of due diligence, the times of the gas understanding for the renewal and by any chance also the budget law will all come I think by October November this year. So of course, we will not be driven only by that, but I think the complete set of this situation will allow us to have a better understanding.
Okay. Thanks. Very clear.
The next question is from Andrea
I have to thank you for providing it this time. It's all very clear and trends will be understood Much better going forward. So stick with what you have provided this time, please. Then I've got 4 questions. The first one is on costs.
It's more qualitatively. So by the end of the year, you'll be at your target branch footprint. In terms of personnel reduction plan, you'll be at target Before the end of 2019, if I don't if I'm not mistaken from your slide. So qualitatively, what areas can you still carve out costs from going forward since you have done Quite a lot already and you are already pretty much where you want it to be. The second question is on the dual track you are running for the disposals of the additional non performing loan portfolio.
I sense that for pricing reason, you seem to have a preference for going the GACs route, Assuming that gets renewal renewed and I don't see why it wouldn't to be honest. If I understand this correctly, Can you give us an idea of what size this second GACs could have or what minimum or maximum size it could have in your opinion? 3rd question is on fees. I agree with some of the comments that is that we made before. That is probably the weakest point in this set of results.
And I understand that it's due to lower upfront fees. But out of the €451,000,000 booked in the quarter of fees, what is the percentage of current up from fees. So what you have actually booked in the quarter? And finally, just a detail on the TLTRO, which may or may not have consequences for NII. Other banks are actually not managing to use all of the they'll TRO and they actually park it back at the ECB on a daily basis.
So implicitly, they are not really benefit from the minus 40 basis points. Is that the case also for you or you have used all of it and there's none of it parked back at the ECB? Thank you.
Okay. Thank you, Mr. Vercilo. Thank you twice also for the PPA compliments. This comes directly to Mr.
Peronaglio who is forcing me to be so transparent to make all of you very happy. And but first of all to avoid to aim to work harder after my conference call. Let's say on cost plenty of opportunity I would say. I was trying before to say that for instance personnel we still have next year 800 people less Then this year for half of them is for 6 months, half of them is for all the 12 months. So still some reduction also in this item.
I would say also in the restructuring in the cost of the branch Because we have closed the 300 branch in June, we will close the other 200 in December. And of course, the full cost will come Next year of all these rationalization, still we have IT cost to rationalize. Well, as you know, we are still this year we were still engaged in some projects like Aleti and Acros that of course required some upfront cost for the project realization. We have BPM A merger into Bank of BPM, which still will cost something and which will highly recover In real estate for instance next year we think we can rationalize all our Square foot that we utilize and we are working on it. So still I think the cost is an aptitude once you are in the good pace for reducing cost you will never stop to reduce.
So let's say that also the figure I mentioned before is something that we think we can beat. Dual truck disposal, you were saying, but maybe for sure is better AGX. I would say depends on how much you want to sell. Gas can be very good. I don't know if you compare the different transaction you had on the market, you can see different prices, which in my opinion they do not depend only by the quality of asset, but also by the size of assets.
So we want to explore This better opportunity, how much can be stretched not to start reducing the global value of the transaction. On top of that, we have people as bidders who are very confident also in buying the platform and buying straight sale and buying loans. So we will try at the end of these next 3 months and the due diligence period to understand better the preferred mix in order to get to the maximum for our bank. TLTRO as far as Mr. Gabuti is telling me we really utilize very, very rarely and for low amounts deposit into ECB.
And for upfront fees Nowadays the account they have been reduced to a global of 18%.
Thank you.
Thank you.
The next question is from Domenico Santoro with HSBC. Please go ahead.
Thank you for the presentation or the details. A couple of questions on my side left. On the non performing loan sale on this massive project that you have under implementation. My understanding is a little bit different. Of course, it's a trade off between capital and price.
And of course, you have visibility now on almost everything, I assume. You have probably already in a very good stage in terms of conversation with the regulator because for me the fact that you have a positive tone now on DRGD is Positive, of course, because the message so far was a little bit different from the conversation that you have with the regulator. This is my first question. In case there is an impact from the sale, of course, there will be. Is the regulator happy to see you with a quarter one of 11% more or less?
Or Let's talk hypothetically about unfortunately the worst case scenario. In case there is a downgrade of Italy, 1 notch that everybody probably is expecting. Should we expect any negative impact on your risk weighted assets or whatever Anything could impact on the capital? And then just a curiosity on the slide that you show at Page 53, I know that this is a symmetrically represented in terms of loan loss provision as well. So It's neutral in a way in a P and L.
On a P and L basis, the time value reversal of better loans, is the reduction quarter on quarter due to The Axiadux project, this is the question. And why is also so volatile the portion related to crew of interest on the OTP? Thank you very much.
Good evening, Mr. Santoro. I will try to answer directly to some of these of your question. Maybe I would require some help from my colleagues for the details. Yes, I frankly I agree with your definition.
Any transaction in my opinion is always a trade off between Something is different to end up having all the advantage from one transaction. But again, I have to stress that we consider Absolute priority to reduce the bad loans because it's been something that Up to now has been very successful. It gave us a lot of strength and give us a lot of profitability in the next once we will have derisked the bank. So we'll do our best also with our capital management action in order to take advantage of the most potential of the best potentiality we experience on the market. This in some way answer also to the 11% question that you made before.
Everything is moving, everything is running. Maybe if we derisk in the second in 2019, We will have a lot of capital to bring up. We have again some maneuvering capital management. So in my opinion, I will consider Quarter by quarter, what is my the trade off between a good common equity Tier 1 and the objective of reducing the risk. Let's also say that I know that Nobody thinks to the phase in common equity, but of course, we have also some time in terms of phasing to try to with a big gap between the SREP requirement and the fees in common equity Tier 1.
But again, we have plenty of potential maneuvers to do if we have the opportunity to have a big size of the risking. Downgrade, quite difficult to answer. I think that is, of course, this would bring A massive impact on Novi. So for sure there would be some effect on the bank. Anyway, on a technical basis, I am saying that LCH has already increased haircut 2 weeks in order to bring the increase of the risk to 3%.
So of course, on a tactical situation, No many problem. Of course, in my situation over the Italian perception, in my opinion, would be a bigger problem to solve. Sorry, maybe I have somebody to answer on the actual
Can I just ask a follow-up on this to finish? My question on the downgrade, well presumably the level of sovereign at this point already factors downgrade So my question was more episode of your capital might already reflect that. My show us more technically speaking on risk weighted assets of the bank instead.
Sorry, Mr. Santoro, on risk?
On risk credit asset.
Again, so I think I answer When we say that we can give more coverage to our Compensation, I think there would be any effect, but maybe this take a bit more time to answer. Sorry, but I am having many answers from my colleagues. I want to be precise with you.
That's fine. That's okay. Thanks.
The next question is from Madhur Racquelosi with Citigroup. Please go ahead. Hi, good evening. Just one quick question on net interest income. When I look at the spread, especially on the asset side, it's still compressing and you showed quite a good growth especially like in the corporate and the core area of the loan growth of the loan book of the company.
Is this because you are derisking more or is it because of competition or you are just a little bit more willing to leave a couple of business points in terms of spread in order to gain volume for the future. Could you clarify that? Thank you.
I'm not sure I understood. You are talking about the markup on long roads? Mark up, yes. Yes. Luckily enough, we are doing many transaction also big size.
And as you know, in some way for larger cap is easier to apply immediately the real cost of risk and cost of funds that now is increasing. So I don't know also today we're announcing 2 big transaction in Italy. We are part of it. Mainly we have good margin also in this transaction. Of course we are pushing since many months on the different area where we are present And so we were prepared to lose something, but always within the cost of funding saving that we will do by year end.
Unfortunately, this year, the cost of funding is more switched in the 2nd part of the year Because of the maturity of 3.5 almost €4,000,000,000 of bonds maturing. And so maybe in the second part you will see Better results also in the spread.
The next question is from Ignacio Treizo with UBS. Please go ahead.
Yes, hi, good afternoon. Thank you for the presentation. I'm going to try to ask Domenico's question in a different way in terms of whether you have a minimum CET1 ratio below which Feel not comfortable going. And the second question is on the net interest income. Can you share with us What kind of progression do you expect all considered during the rest of the year?
Thank you.
Frankly, thank you. Good evening. Frankly speaking, I don't have a figure of course which I am sure That I can go on or not. Let's say that we were really surprised also from these 80 basis points of reduction we experienced during this quarter. So of course we will try immediately to restore some of these room with the different action we have in mind.
I was only saying before that even though this derisking would bring a massive utilization of a common equity Tier 1, I think the positive effort that will come further on by big revenues coming from this situation would allow us immediately to recover also on common equity Tier 1. Having said that, of course, we are prudent enough to be quite careful not to go down too much. I was not If you would have done me this question a few weeks ago, I would have said 11.4%. So of course it's not I will work more on the 12%. But of course meanwhile we go down the risk in the bank I think it's also the case to consider that this is worth also in case of having a consistent common equity one also at this level.
NII, again, We were trying to give you some information with the many different slides, particularly I think on Page We'll find the different impacts on the IFRS 9. Of course, the gas will have some impact. I think it could be €20,000,000 €25,000,000 per quarter. But on the other side, we have The strong increase in loan and the reduction in cost of funding, which I mentioned before.
Thank you.
Okay. So thank you very much all of you. I know it's very late Friday night before holidays, even though I know that some of you has to remain next week From some other conference call, let me take this occasion to thanks all of you for the collaboration And to wish all of you a very nice holiday period. Thank you very much.