Good afternoon. This is the conference call operator. Welcome. Thank you for joining the Banco BPM first half 2018 group results presentation. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. 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 results of Gruppo Banco BPM. As usual, before 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&A is reserved only to the financial analysts. Thank you very much. I leave the words to Mr. Castagna.
Hello, everybody. Thank you for being with us at this time on Friday in August. 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 plans, total amount EUR 17 billion reduction in 3 years, with EUR 13 billion 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 Project Exodus, brought us to end net bad loan ratio of 3.4%, already below the original 2019 target of 4.2%.
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% or 7%. As you know, we are already in the new target for anticipating at least the EUR 3.5 billion remaining to complete the EUR 13 billion disposal plan in order to complete in the first year the entire plan of the 3-year. As you know, we have today short-listed the 3 bidders for the Project ACE, which is the project for which I will give you information later on. Just a quick look on page 6, related to the entire project of these 6 months of de-risking. We went down from EUR 30 billion to EUR 19.4 billion, 24% to 16.6%. Meanwhile, we had the target for the first 3 years of EUR 23 billion, 17%.
As you know, the new operational plan will bring us to 11.5% with EUR 13 billion of gross NPL. You will also find the figure for the net amounts, which went down from EUR 16 billion to EUR 9.5 billion, of which only EUR 3.6 billion already at this time of net bad loans. Let's see what happened during the first six months. We started this year with a total amount of EUR 25.5 billion of gross NPL. We have now reached EUR 19.4 billion, versus EUR 13 billion project for the three years' time. As you see on the right side of the slide on page seven, we are right in the middle, after only six months of the three-year plan, of the total implied reduction. We have achieved EUR 5 billion of disposal through GACS and EUR 1 billion of workout through the NPL unit, which brought to EUR 6 billion the amount out of EUR 20.5 billion.
The remaining basically is only EUR 3.5 billion, which we'll talk ahead, and EUR 3 billion workout, which is very much in average below what we did in the first six months, because we were able to get EUR 1 billion in six months. Meanwhile, we still have EUR 3 billion in the next five semesters up to end of 2020. Just a few words on page eight about the Project 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 GACS remain one of the best solution in order to dispose at a good price without a big impact on Capital bad loans. We were able to reach an excellent price of 34.3%, notwithstanding, we had to renounce through the market turmoil at least one full point due to the sale of the junior mezzanine notes.
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 percentage of secured NPE loans from 64% to 67%, versus unsecured, 36% to 33%, versus an average of the Italian banking system end of 2017, 50/50%. On the right side of page nine, you can see also the increase in coverage. We were able to perform in the last 18 months from 44% to 51.3%. Bad loan, 57% to 66%, which grew to 68.7% including write-off, and also UTP coverage went up from 24.7% to 33%. What next? What we have in mind with the Project ACE.
We started from the increasing interest about the potential deals involving NPL sales, together with the platform sales, which grew in the last months, thanks also to the very good performing that we had in terms of internal workout. As I was saying before, at the same time, grew at the same pace, also the interest and the efficiency of a GACS transaction. This brought us with many possibilities. We decide to start a new project, which of course has an immediate first result to sell the remaining EUR 3.5 billion, at the same time, would explore all the opportunities which are in the market to increase also the size of the global disposal, possibly also together with the platform rather than with another GACS 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 2018, in only one year time, we would be able either to accelerate the base case scenario, which imply further disposal of EUR 3.5 billion and a workout of EUR 1.3 billion per year, which is much lower, I remember, to the results we had in the first half. With the loan growth equal to what we had in the first six months of this year of 2.5%, would imply in only one 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 GACS to EUR 5.5 billion to EUR 6 billion, with the same workout and loan growth percentage, we would go immediately in one year time below 10% of gross NPL ratio. Some information about Project ACE 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 GACS transaction, rather than both of them. We received many proposal, we received at the end, many qualified offers, non-binding.
Having explored the different opportunity, we decide today to choose three final bidder in order to reach by, I would say, two or three 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. Of course, banks is not only derisking, even though for us, have been a massive engage, both in terms, again, of bad loans and UTP reduction.
We have, in these first 18 months, completed many projects in terms of product company streamlining, new model for the banking reorganization of Agos and Aletti Bank, optimization of the internal model and the new validation, the IT system integration, the re-qualification, the staff reduction, together with the branch rationalization, for which we will give you some new numbers today. 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 Depositary Bank, which will come by this quarter, the merger of BPM into Banco BPM, which we anticipated of almost 15 months respect to the final maturity of three-year, the merger of our IT company, SGS, into Banco BPM, potential further optimization of product factories like consumer finance or leasing, for instance, the implementation of the ACE 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 three-year business plan. Let's go to the number. In the first six 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 treasured the request you made to us last quarter. 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 a final net income of EUR 353 million versus EUR 94 last year. We prepared on Page 15 a comparison of the first months this year versus last year, excluding IFRS 9 effect. You see that net interest income compared is almost the same results, basically is EUR 20 million better this year, because last year we had EUR 32 million from the TLTRO contabilized in 2017 instead of the 2016.
Total income grew 0.5%, operating cost went down 4.4%, profit from operation up 9%, loan loss provision down 14%. Of course, the other results are not comparable, being better than the percentage. I also mentioned on the right column, on the last column on the right, the PPA difference between the two semester, which as you can see, are almost irrelevant, apart from being more negative on loan loss provision. You will find on Page 52 the complete PPA analysis and details. Let's pass to 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 bad loans and the merger of BPM, IFRS 9 coming from time value and accrue UTP, and one-offs. The same is in the last quarter. We grew like-for-like 1.8%. We consider this pace realistic also for the future. Thanks especially to the loan growth that we are experiencing in the last couple of months. On Page 17, the usual net interest spread table is almost stable, is basically we foster the growth in loans by giving up seven point in asset spread, which were basically feeded by a reduction of six basis point in the last six 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 EUR 3.5 billion 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 six months very peculiar for many reasons, some internal to the bank. As you know, we had the complete reorganization of the network. We had the change in the advisory portfolio from product to portfolio, but also, of course, the effect of the market turmoil due to the spread increase. This brought us, compared with the very good, especially first quarter of 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 EUR 20 million in terms of year-over-year, and only EUR 3 million in terms of quarterly comparison, due mainly to 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 quarter-over-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 first quarter. We were able, of course, to realize some reserves and some aging on our portfolio.
This brought in the quarter EUR 80 million of net profit compared to EUR 29 million the first quarter, and this brought the six months to be 9% bigger compared to the first semester last year, which was again, a very, very good semester also last year. Operating costs, very good. We decided in line with market practice to split the systemic costs from the operating costs. We'll find it later on. Systemic costs in this way is completely comparable. 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 two main drivers, but together with the cost optimization project we spread in all the costs of our bank, are the advance that we reached both in the headcount evolution vis-à-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 people, 2,170 out of the solidarity fund, and the other 400 people because of the non-replacement 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 six months and the other half for 12 months. The retail network, we accelerated our project. As you can remember, we were announcing to reduce from 2,417 to 2,082 branches in three years.
After 18 months, we have already reached 1,936 branch with the closing of 311 branch last June, we forecast to close by year-end another 214 branch, reaching the 1,700 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 hint. 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'm announcing to you in respect to the potential sensitivity of our Project ACE to be very aggressive and determined to cover our bad loans in order to avoid surprise if the opportunity to sell more than the expected EUR 3.5 billion, which I remember you had already accounted for in case of disposal, can arise in the second part of the year. Of course, we mentioned some detail also on page 24. As you can see, out of EUR 680 million, almost EUR 130 million comes from the IFRS 9 impact, which you can see on a specular approach in NII.
Also on the quarterly evolution, we show that EUR 50 million comes from the Project Exodus due to the 1% I was mentioning before, which we were not able to realize with the junior and mezzanine tranche, and was expected only a 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, has also benefited from the Project Exodus senior notes underwriting. Without that, it would be 1% growth. We are really experiencing an increase 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 2.2 billion in June, compared with an average over the first five months, EUR 1.3 billion.
2.2 billion has, in a way, been confirmed also in July, when we added on to our stock almost another EUR 1 billion of new loans. This comes especially from the corporate activity, which grew 4% in the last month. Meanwhile, the retail activity is only 1% up. Let's talk on page 27 about our deposit base. We are happy that notwithstanding the turmoil, our deposit, especially current account and site deposits, are continuing to grow. As you can see, in the last three months, we grew EUR 3 billion, from EUR 78.3 billion to EUR 81.4 billion. Of course, this is also the result 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 EUR 3.8 billion of maturity at an average price of 2.6%. 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 EUR 45 billion to EUR 52 billion, 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 ahead. Notwithstanding that, we are still EUR 18.6 billion of eligible assets unencumbered, which as of this day in August, grew to EUR 20 billion. Indirect funding.
This follows what we were mentioning before, and the results, of course, the market effect on the stock. We have all in all, a reduction from EUR 59.6 to EUR 59.2 in asset under management. If we exclude the market effect, this figure grew EUR 700 million, bringing to EUR 60 billion the global of asset under management. The same in a still heavy proportion is for asset under custody, that as you can imagine, are mainly due by Italian govies, which lose EUR 1.6 billion due to the market. The EUR 30.6 billion of asset under custody would have been EUR 32.2 billion without market reduction effect. We have done, on page 31, the global core funding of the last six months. As you can see, we grew globally EUR 1.3 billion if we put together current accounts, sight deposit, asset under management, under custody.
If you exclude the market effect, the real increase in volume was EUR 3.5 billion. As I was anticipating before, on page 32, you see the security portfolio activity. We had a big reshape on this asset class. Italian govies reduced EUR 2 billion in the last six months. The real reduction is much bigger, is almost EUR 3.5 billion due to very short-term trading position taken by our investment bank. On the same time, we increased the total amount of our security portfolio, adding international govies to our portfolio. We grew almost EUR 5 billion. The diversification now see a reduction of the Italian govies for a couple of EUR billion, and non-Italian govies at 38% of the total portfolio, especially being France, U.S., Germany, and also small Spain bond. Italian govies went globally down respect to the total securities, less than 50%.
They are now standing at 49%, with a very big reduction split 44% in Held to Collect and Sell, 47% in Held to Collect, and 8% at fair value. In Held to Collect and Sell, we reduced further the Italian govies 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 million 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 million in March to a negative position of EUR 200 million in these days. Let's go back for a minute to credit quality. On page 34, we only shown the net NPL position. We already talked about the gross. As you can see, the reduction is even almost both in UTP and bad loans.
UTP went down EUR 3.6 billion in 18 months, bad loans EUR 4.4 billion in the same 18 months. If you see the evaluation on net non-performing loans and net bad loan ratios on the bottom right side of page 34, you can see how during this month we have more than halved our net bad loans ratio. Also, the trends in inflows in NPL confirm this good pace. We have a reduction year-on-year of almost 9% in inflows to non-performing, and a reduction of danger rate of 12.8%, going down almost EUR 100 million 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 first six months of this year, notwithstanding the reduction in the total amount of bad loans, we have still grew 30% vis-à-vis last year with cash totaling EUR 1.1 billion and with cash recoveries of EUR 330 million, and with cost in excess to our provisioning of only EUR 33 million. 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%. On page 36, 37 and 38, you will find the detail of the reduction and the composition and the coverage of bad loans and UTP, experiencing how unsecured bad loans are a very low part of the net book value, being only EUR 600 million, 17% 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 better because they are the one which are under special laws and special coverage. Also other UTP are going down at the pace of 10% on the last six months. On page 39, you will find the coverage, which we still keep very high for the reason I mentioned before. On the right side of page 39, the comparison of our bad loan versus UTP composition of the global NPL portfolio. As you can see, in the last three months, we have reduced the bad loans percentage vis-à-vis the total portfolio, of course, implying a better asset quality also in the total NPE composition. Let's talk about capital common equity tier one.
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 point. This is basically the composition of 50 basis point of net impact. 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 point, we will see it on page 42. 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.
As you know, we have also performed the capital management action due to the sale of Depositary Bank, which amount to around 35 basis points, and the impact on the guarantee on the senior notes of the Project Exodus 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 CET1 phased in. Some further detail, we want to be very open on the impact on the HTC&S reserves. As you can see, there are all the details that we had on our portfolio, not only govies, of course, which amount to EUR 490 million, which would have been 72 basis points gross with potential DTA reduction of 22 basis points.
For the effect, which is detailing explained on page 42, we were not able to deduct DTA, and we impact on the narrowing of the thresholds, which accounted globally for 34 basis points. This, of course, is bad news also for us. I have to say that this works also the other way around. Every EUR of profit and every reduction in participation in investment in financial institution or in reduction DTA will account double also the other way around. 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 very consistent in trying to deliver whatever we announced to the market. We will go ahead very strongly in de-risking the bank. We have seen some results of other banks in which, luckily for them, the cost of credit is going very much down. We really are confident that due to the de-risking action that we have taken very prudently and very constantly, month by month, 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. Many things have been done, some things are yet to be done. We are very much concentrating on delivering.
Thank you very much. I am waiting for your answer.
Excuse me. This is the conference call operator. We will now begin the question and answer session, which is reserved to analysts only. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Jean Royer with Goldman Sachs. Please go ahead.
Hi, good evening. Thanks for the presentation. I wanted to ask two 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 midsize banks in Italy have had a tremendously lower cost of risk than yours, for the transition to IFRS 9, some with higher NPL ratios, some with lower. I just wanted to try to understand what the trajectory from here, and in particular, compared to the assumption that you had made in your business plan in the past, and the timeline 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, gross NPLs quarter on quarter, they go down by exactly EUR 5.1 billion.
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? 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 don't know. We have a precise policy and strategy. We won't massively reduce our bad loans portfolio, and we feel that in order to do that, we know that we have to pay something more. We are confident to conclude our de-risking plan quite soon, and it 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'm going straight into delivering my plan.
What is the timeline to the normalization, you think?
As I was, I don't know if you followed all our presentation.
Yeah.
I was mentioning that we can get much earlier than the 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 6-12 months' time.
I was more thinking of the cost of risk, sorry, not the de-risking itself.
The cost of risk is coming together with the de-risking.
Okay.
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. We have to be consistent with that.
Okay.
For the GACS. Sorry. For the GACS, of course, the EUR 5 billion, or better, the EUR 5.1 billion 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 nine months. During that nine months, the specific portfolio went down through recovery of EUR 300 million. The real amount that you have to deduct for the quarter is EUR 4.8 billion and not EUR 5.1 billion.
Excellent. It's very clear.
The next question is from Christian Carrese 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 looking 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 of when the lower impact from upfront fees and more recurring fees, we will see a normalization in terms of commission quarter by quarter. The other question is on net interest income. Should we expect a negative impact from the disposal of at least EUR 3.5 billion NPEs, in terms of impact from the reversal of the time value? If you can quantify the amount. On capital, you closed the quarter with a common equity at 11.4% fully loaded, similar to UBI.
When do you expect you will be able to, let's say, regain the 12% level? Finally, on the NPE strategy, maybe I was wrong. I thought that there could have been an acceleration already in the second half of 2018 in terms of NPE disposals or If you can elaborate a little bit from the presentation. The base case is EUR 3.5 billion. Something has changed in the last few weeks in terms of pricing, so maybe you could decide to be a little bit more cautious in terms of disposals due maybe to some pressure on the prices. If you can give some color on that. Thank you.
Thank you, Mr. Carrese. Let's start from the NP strategy. Nothing has changed. We wanted just to give you some flavor about the potentiality of the ACE project. This imply, again, a very hard 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 due diligence. They need due diligence. We need to understand if GACS will be renewed or not. By any chance, by year-end, we will have a final word about that.
We will know after due diligence, which we think we can take up to maybe two, three months up to November this year, we will make a decision of the amount of the disposal, the amount of the potential GACS, or both of them. Of course, we need the execution time, but everything will be clear by year-end.
Do you see the current capital level as a constraint today? The starting point the last quarter was 12.1%, now it's 11.4%. This could bring you to be more cautious on the disposals, or not really?
Frankly speaking, of course, we are cautious because the situation in Italy is very difficult, we cannot take anything for granted, maybe as we were doing a few months ago. Let's say that out of the remaining EUR 10 billion that we have, EUR 9.5 billion that we have, EUR 3.5 billion are already provisioned for the sale with [FDA]. For the remaining, we think that depending on the structure, GACS or not, platform or not, 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. The figure that we have in mind are not problematic vis-à-vis the potential disposal of our bad loans.
For NII, the decline we expect is some EUR 10 million due to the reduction of reversal PPA and time value of bad loans, this should be balanced by a 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. If you take the stated figure, of course, maybe we can see some EUR 10 million less, if you take the like for like figures, of course, we forecast an increase in terms also of NII. Common equity H1, basically, I already told you, we are working on many aspects, on many opportunity. Again, also the opportunity of reducing this threshold related to the CRR, which can work on in order to have a better impact in terms of capital.
Again, we have also other opportunity with our leasing and with our consumer finance activity. Last, 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 immediate difficulties to understand the opportunity that this new strategy can give to the network. 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 recurrent commission. I don't know how much this will take for asset under management, only because of the Italian situation. Of course, we will be depending also from the confidence on the Italian investment during these months.
Meanwhile, the other figure of the fee, which was related to the credit fee, we are really confident that in the second part of the year, we can completely recover the gap.
Thank you very much.
The next question is from Giovanni Razzoli with Equita. Please go ahead.
Good afternoon. A very quick question. First one is a clarification on the Project ACE. If I understood it correctly, you have three binding offers. Sorry, you have defined a short list of three players which are interested in buying EUR 3.5 billion of NPLs. Those players may also consider buying more than EUR 3.5 billion, EUR 5.5 billion, and the servicing platform, and the timeframe is 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 11.4%, there is also an effect of the GACS for some 20 basis points.
I was wondering whether this is referring to the deconsolidation of the risk-weighted assets as a result of the sale, I'm not sure about this. The very final question, if we put everything together, let's say asset disposals and NPLs, de-risking or whatever, capital generation, can we assume that all else being equal, where at current levels of common equity of spreads, your common equity tier 1 will remain in the 11.4%, 11.5% area, at least going forward? Thank you.
Thank you, Mr. Razzoli. Project ACE, 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 EUR 3.5 billion that we announced in March. Having said that, the Project ACE is not only for EUR 3.5 billion. We have already received offer for almost the entire amount of our bad loans. We've only to consider after 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. By any means, this could be any figure.
We have just mentioned to make an example as a sensitivity, the EUR 5.5 billion. Not because EUR 5.5 billion is the maximum amount that we can do, just to make an example, which would bring us immediately below 10%. For the GACS, we had the disadvantage because when we will receive the guarantee from the state, of course, the 60% of the senior notes, which nowadays is weighting 60%, will be massively reducing its weight. We will gain the difference in basis points. Last, NPL de-risking, 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 consider that even though we should go around 11%, we have a 2019 opportunity of profitability, which is in line with what we announced 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 effect.
Thank you.
The next question is from Alberto Cordara with Merrill Lynch. Please go ahead.
Hi, good evening. First of all, thank you very much for the presentation and the very good disclosure. Extremely good. In terms of questions, 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 the GACS. You're going to benefit from a reduction of risk weighting because you obtain the state guarantee. 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 not technically ECB eligible. While the interpretation, I think, of all Italian banks using GACS so far has been to attach zero risk weighting, 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, we are hearing a bit of controversial statement regarding the possibility that banks will be awarded an LGD waiver. Some are saying it is likely we heard Just a couple of hours ago, another Popolare saying that this may not happen. 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. The final issue is, there is this deadline of setup is set to the 6th of September for the end of the GACS, I think the government has asked for an extension of this deadline. I don't think this extension has been granted yet.
It may just be a formality, I just would like to know from you what is your view, as to the likelihood of this extension. Thank you.
Thank you, Mr. Cordara. Very simple question quick answer. GACS reduction RWA, as far as we know, all banks who underwritten the senior notes adopted this reduction. 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 EUR 8 billion, we decide EUR 13 billion. We're saying that maybe we're going to do more. Frankly speaking, we are really optimistic about a zero impact of this maneuver being so massive, maybe the best one in a so short frame time. 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 a GACS transaction for the leverage and for all the reasons that we know. In that case, of course, we will go also for a GACS.
Many thanks. Thank you very much.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi, thank you. One, can you just clarify what's your new OPEX target for next year? You keep getting ahead of your business plan target, so I just want to know what's the absolute number in terms of EUR million you're targeting. Second, I look at the cost of risk this quarter, even if I strip out the impact of Exodus, it's more than 100 basis points. Coverage was higher than I expected, but I estimate still something around 80 basis points, which is pretty high. Once you do this ACE deal, for example, what kind of cost of risk you expect to have on an underlying basis? Thank you.
Hello, Mr. Cruz. Unfortunately, I cannot give you the absolute target because, again, the target is the one that we announced to ECB, which is EUR 13 billion. 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 reason. One is the due diligence. The other one is the possibility to have the GACS and so forth and so on. 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. Nowadays, we don't. 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 of risk, in my opinion, is compatible and consistent with this willingness that we have to sell. 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 do any more provision because as you have seen, for dispose, for work out EUR 1.1 billion, I only spend EUR 30 million. Unfortunately, if you have to sell the same EUR 1.1 billion, you could spend also EUR 150 million. I have to, in a certain 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, but the provision to the disposal, which unfortunately, as all of you know, is much costly that having the time of running this business.
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 we have strongly de-risked 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. I would imagine that our bank is not worse than these other competitor.
Okay, sorry. On the targets, I was actually talking about your operating costs for 2019. The original plan target was EUR 3 billion. We know you're going to do better than that, 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. It was the total cost.
For 2019, would be in the region of EUR 2.8 billion.
Okay. Thank you very much.
Thank you.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Good afternoon to everybody. Just one question from my side. I just want to better understand, Mr. Castagna, on the Project ACE, what is the timeframe? Is it fair to assume that before taking the final decision on what to do, you prefer to wait for the approval of the budget law in order to avoid to take decisions ahead of a period of time 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 decision?
Hello, Mr. Rovere. Good evening. I think it's a good assumption, but it comes together with all the other assumption that were mentioned before. Maybe for the coincidence, but the time of due diligence, the times of the GACS understanding for the renewal, and by any chance, also the budget law will all come, I think, by October, November this year. 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 Vercellone with Exane. Please go ahead.
Good evening, everyone. First of all, since I complain every time about your PPA disclosure, I have to thank you for providing it this time. It's all very clear, and trends will be understood much better going forward. Stick with what you have provided this time, please. I've got four questions. The first one is on costs. It's more qualitatively. 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 turn out mistaken from your slide. 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 wanted 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 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? Third question is on fees. I agree with some of the commentaries that have been made before. That is probably the weakest point in this set of results. I understand that it's due to lower up-front fees. Out of the EUR 451 million booked in the quarter of fees, what is the percentage of current up-front fees? What you have actually booked in the quarter.
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 TLTRO, and they actually park it back at the ECB on a daily basis. Implicitly, they are not really benefit from the minus 40 basis points. Is that the case also for you? You have used all of it, and there's none of it parked back at the ECB? Thank you.
Okay. Thank you, Mr. Vercellone. Thank you twice, also for the PPA compliment. This comes directly to Mr. Peronaglio, who is forcing me to be so transparent to make all of you very happy. First of all, to avoid him 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 than this year, for half of them, it's for six months, half of them it's for four to 12 months. Still some reduction also in this item. I would say also in the restructuring in the cost of the branch, because we have closed 300 branch in June, we will close the other 200 in December, of course, the full cost will come next year of all this rationalization.
Still, we have IT cost to rationalize. As you know, this year, we were still engaged in some project like Aletti and Agos, that of course required some upfront cost for the project realization. We have BPM, a merger into Banco BPM, which still will cost something, which we will highly recover next year. 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. Still, I think the cost is an attitude. Once you are in the good pace for reducing cost, you will never stop to reduce. Let's say that also the figure I mentioned before is something that we think we can beat. Dual-track disposal, you were saying, maybe for sure is better at GACS. I would say depends on how much you want to sell.
GACS 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. 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. We will try at the end of these next three months and the due diligence period to understand better the perfect mix in order to get the maximum for our bank. TLTRO, as far as Mr. Caputi is telling me, we really utilize very, very rarely and for low amounts deposit into ECB.
For upfront fees, nowadays, their 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, all 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. Of course, you have visibility now on almost everything, I assume. You are 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 the LGD is a 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 there was some change in attitude considering what is happening in Italy right now? The second question is, let's talk hypothetically about, unfortunately, the worst-case scenario. In case there is a downgrade of Italy, one 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? Then just a curiosity on the slide that you show at page 53. I know that this is symmetrically represented in terms of loan loss provision as well, so it's neutral in a way on a P&L basis. The time value reversal on bad loans, is the reduction quarter on quarter due to the Project ACE?
This is the question. Why is also so volatile the portion related to accrual of interest on the UTP? Thank you very much.
Good evening, Mr. Santoro. I will try to answer directly to some of your question. Maybe I would require some help from my colleagues for the details. Yes, frankly speak, 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. 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 year once we will have de-risked the bank. We will do our best also with our capital management action in order to take advantage of the best potentiality we experience on the market.
This, in some way, answers also to the 11% question that you made before. Everything is moving, everything is running. Maybe if with the risk, in 2019, we will have a lot of capital to bring up. We have, again, some maneuvering capital management. In my opinion, I will consider quarter by quarter what is 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 phase-in to try to With a big gap between the SREP requirement and the phase-in common equity tier 1. Again, we have plenty of potential maneuver 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 so for sure there would be some effect on the bank. Anyway, on a technical basis, I am saying that LCH has already increased the haircut two weeks ago, in order to bring the increase of the risk to 3%. Of course, on a tactical situation, not many problem. Of course, in my situation with the Italian perception, in my opinion, would be a bigger problem to solve. Sorry, maybe I have somebody to answer.
Sorry, can I just ask a follow-up on this to finish? My question on the downgrade, where presumably the level of sovereign at this point already factors a downgrade of Italy. My question was more episode, your capital might already reflect that. My question was more technically speaking, on Risk-Weighted Assets of the bank instead.
Sorry, Mr. Santoro. On risk?
On Risk-Weighted Assets.
Weighted asset? Again, 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, I am having many answer from my colleagues. I want to be precise with you.
That's fine. That's okay, thanks.
The next question is from Azzurra Guelfi 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, is still compressing, and you showed quite a good growth, especially like in the corporate and the core area of the loan book of the company. Is this because you are de-risking more, or is it because of competition, or you are just a little bit more willing to leave a couple of basis point 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 markup on loans?
Markup, yes.
Yeah. Luckily enough, we are doing many transactions, also big size, and as you know, in some way, for larger cap is easier to apply immediately the real cost of the risk and cost of funds that now is increasing. I don't know. Also today we are announcing two big transactions 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, 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 second part of the year because of the maturity of EUR 3.5, almost EUR 4 billion of bonds maturing. Maybe in the second part you will see better results also in the spread.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Yeah. Hi, good evening, good afternoon. Thank you for the presentation. I am going to try to ask Domenico's question in a different way, in terms of whether you have a minimum CET1 ratio below which you feel not comfortable going. 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.
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. We were really surprised also from this 80 basis points of reduction we experienced during this quarter. Of course, we will try immediately to restore some of this room with the different action we have in mind. I was only saying before that even though this de-risking would bring a massive utilization of Common Equity Tier One, I think the positive effort that will come further on by bigger revenues coming from this situation would allow us immediately to recover also on Common Equity Tier One. Having said that, of course, we are prudent enough to be quite careful not to go down too much. If you would have given me this question a few weeks ago, I wouldn't say the 11.4%.
Of course, we were more on the 12%. Of course, meanwhile, we go down de-risking the bank, I think is also the case to consider that this is worth also in case of having a consistent Common Equity Tier 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 52, we will find the different impacts on the IFRS 9. Of course, the GACS will have some impact. I think could be EUR 20 million-EUR 25 million per quarter. On the other side, we have the strong increase in loan and the reduction in cost of funding, which I mentioned before.
Thank you.
Gentlemen, there are no more questions registered at this time.
Okay. 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.