Good afternoon. This is the conference call operator. Welcome, and thank you for joining the Banco BPM first quarter 2018 results presentation. As a reminder, all participants are 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. Thank you, everybody, to attending this presentation of first quarter result of the Group Banco BPM. Before leaving the field to Mr. Castagna, our CEO, for the presentation, let me remind that you can find the presentation on the website on Investor Relations section. The Q&A section that will follow the presentation is reserved for financial analysts. Now, I leave the field to Mr. Castagna. Thank you.
Good evening, everybody. Let me introduce this first quarter 2018 result with some update about our capital and de-risking strategy. As you know, this is the first quarter or the second year of the merger in which we have devoted a lot of activity in order to strengthen the capital and to enable the bank to afford a very increasing and demanding de-risking strategy. We start, therefore, with some numbers related to this capital management action, including the IRB validation, which officially from the 31st of March are inside our official number, allowing us to show a very sound Common Equity Tier 1, both in terms of phase-in and fully loaded.
As far as fully loaded is concerned, we have reached a fully loaded status Common Equity Tier 1 of 11.5%, including 180 basis point related to the First-Time Adoption applied only and completely on bad loans, which are going to be disposed through our de-risking strategy. The pro forma, which includes the two capital management action related to the insurance reserve management, already concluded with Anima last year, and which will be officially included in our balance sheet in the second quarter, give us another 21 basis point of Common Equity Tier 1, and in the third quarter, we will also show further 34 basis point due to the disposal of the custodian banking activity.
Together with some dividends from other associates for some five basis point, this bring us to a Common Equity Tier 1 fully loaded pro forma at 12.10 basis point, slightly above the forecast we gave you last quarter. Of course, due to the different phase-in of the rules related to IFRS 9, First-Time Adoption, we have almost a complete effect on our Common Equity Tier 1 of this maneuver, showing 13.5% of Common Equity Tier 1 phase in, and above 14% if we include the pro forma transaction we were mentioning before. This capital strength, and that, as you know, has been done only counting on our, I would say, optimization of our product factory, allowed us, and will allow us to proceed speedily in a de-risking plan, which we already announced last quarter, and is going to have some further effect during the next week.
We have included in the de-risking slide on page six, not only the effect of EUR 5.4 billion already reduction of gross amount of NPLs. We have added to that the further EUR 5 billion we are going to dispose through the GACS transaction that in these slides is called with this name Exodus. In 18 months after the merger, we will reach results of plus of EUR 10 billion of the de-risking in 18 months, vis-à-vis the EUR 8 billion forecasted when we announced the merger and the EUR 13 billion we are going to reach with the new NPL disposal plan. In terms of only bad loans, the reduction is proportionally even bigger because we are going to reach from EUR 18.6 billion as of December 2016, more than EUR 8 billion reduction post the GACS transaction in only 18 months.
All that having exploited very strong provisioning during all this quarter, and of course, taking advantage also from the IFRS 9, again, only devoted to bad loans. This allow us to increase massively also our coverage, which stand at almost 54% as total coverage of NPLs, and 66.5% as bad loans coverage, increasing respectively to 55% and 68% if we include the write-off. You already know that also the quality of our bad loans, we feel being a bit more covered than the average of the Italian banking system. We have shown here both bad loans and UTP composition, which is 68% related to collateralized assets, and only 32% to unsecured, versus 50/50, more or less, of the Italian banking system. Let's spend some word about what we have in mind for the future. Of course, we have included the number post Exodus.
As you can see, we are going to reduce the net bad loans after Exodus to only EUR 3.4 billion, starting from the almost EUR 8 billion in December 2016, and 3.3% as net bad loan ratio, again, in the first 18 months of our merger. This aggressive policy, which is confirmed also by our provisioning, leaves us a wide range of option to accelerate and potentially go beyond the de-risking plan targets. This is a strategy that we want to pursue, because we understood that, of course, we are announcing every time more aggressive plan, but we feel that starting from the GACS, the Exodus transaction, we are really in the position to reduce further the net bad loans remaining in our portfolio, considering also the level of coverage that we have now reached, that after Exodus, we will be even higher than before Exodus.
As you can see, the bad loan coverage is going to increase to 68%. Needless to say that in the last few months and weeks, especially after an important transaction performed by Intesa Sanpaolo, we have been receiving many reverse inquiry on the potential opportunity to sell the NPL platform together with other NPL, apart from the one that we have already forecasted in business plan. We would like to still keep a very comfortable level of coverage in order to be able, in any time, to exploit any opportunity should arise to accelerate, and again, go beyond the announced de-risking plan. Just few words about Exodus. We are going to conclude to respect the timing and to account the effects by this quarter, end of June. The GACS will be in the region again of EUR 5 billion.
This will allow us to reach, since 2016, a total of EUR 9.5 billion of disposed asset, 70% of the total disposal plan of EUR 13 billion. The composition of the portfolio will be 74% secured and 26% unsecured. I would like to emphasize another positive effect we are going to have through the disposal, which is the decrease of the RWA for EUR 1.3 billion due to the new model and the IRB model application. On Page 9, another very quick slide just to give you the idea of the quality of the entire portfolio of Banco BPM. As you can see, before and after the Exodus transaction, the geographical quality, the vintage composition, and the collateral split will remain more or less unchanged, confirming that the average of our portfolio is, in any case, very sound. Let's talk of what we have done recently during the first quarter of 2018.
As you know, we have started with the two bank put together, network of the bank put together, starting from the end of January this year. We had the opportunity of put in place the new organization of the division, splitting corporate from retail, organizing the bank in different division and activity. Moreover, putting together all the branch of the bank as if we were already only one bank also in terms of subject. As you know, we have anticipated the merger of BPM as a legal entity starting from the 1st of October this year. In any case, the new organization allow us to work as one bank since February this year. This new organization brought some reorganization needs. We had more than 10,000 people, employees involved in this reorganization. Over 3,000 employees have been reconverted to new professional roles, especially commercial roles.
To make some examples, 700 new managerial roles included many branch manager, 1,100 commercial roles, and a very big increase also in the people devoted to the first tier level of control in the ranking of the control activity at the branch level. We have also decided to close further 312 branches by June this year. This brings the total of the closing to 483 branch, vis-a-vis the 335 branch that we announced when we announced our merger plan. We will have 150 branch more than the entire 2016-2019 plan already after 18 months. This will bring our network to 1,900 branch, which allow us easily to reach by 2018, the closing of a further 200 branch, reaching what was just an aspirational target when we announced the plan of almost 700 branch closed in the first two year.
On page 12, you have also the effect on the people who is working with our bank and personnel involvement in this activity. On the left of the slide, you have the announcement of the plan, 2,600 personnel involved in the merger, in the optimization of the merger, 1,100 to leave the bank, 800 to be reconverted in new roles, especially commercial roles. We have now updated the plan. We have already reached 2,200, as you already know, of exit from the early retirement scheme, 690 of which will go out during 2018, and more than 1,100 people changing roles through the anticipation of the restructuring and rightsizing of our branch network. I leave you with page 13, just talking about the organization, which is still going on. A merger, I learn on our own experience, which is a never-ending activity.
As you can see, still in the first quarter of 2018, we were organizing the new retail and corporate distribution model, the private and wealth management activity closed in the first quarter 2018, the consolidation of internal model and so on. You will see in the yellow, the other activity we are involved almost terminated, which will take full place by 2018. This was just to give you the idea of the strategy that we are going to pursue this year, let's go to the first quarter figures on page 15. We have done the first slide with this comparison just to make for you easier to understand the IFRS 9 new accounting policy on the left and pre-IFRS 9 numbers on the right.
As you can see, the only difference is EUR 66 million, which are going to impact positively on NII and of course, negatively on loan loss provision. I would comment, going ahead in order to make you have a potential confrontation between the first quarter of last year, I just want to comment the net income, which is EUR 223 million, including EUR 176 million from the buy and sale of the bancassurance business. In page 16, we gave you the possibility to have a look to the first quarter 2018 under the pre-IFRS 9 adjustment. With the Q1 2017. As you can see, we had a net interest income pre-IFRS 9 on +2.5%, which we consider a very good result.
On the other side, we got less commission due to this reorganization, which took from 30 to 45 days, in which a lot of our colleagues were engaged in changing branch, in changing portfolio, and so on. This affected a bit our activity in the first quarter in terms of commission. This brought core revenues to a -2.6%, which was offset by a -3.4% in operating cost reduction. The profit from operation globally comes to EUR 403 million, vis-à-vis EUR 418 million of 2017. Loan loss provision, before, again, IFRS 9, was EUR 260 million compared to EUR 292 million of last year. Let's go to the details. Net interest income, I would comment only the like-for-like, so the EUR 429 million compared to EUR 417 million of 2017, this is the 2.4% increase.
This has been affected as for the previous, and constantly effect of the previous four quarters through a reduction of cost of funding, which offset a reduction of asset spread. In terms of comparison with last quarter, we still register a slight increase, but basically a result which is comparable with last quarter 2017. As I was mentioning before, the spread is constant. We were able to maintain, during the five quarters of our activity, basically the same spread, from 1.55 to 1.54. Again, leveraging on the bettering of liability spread and the decrease of asset spread. On page 19, net fees and commission. Again, we register a slowdown in the first quarter activity compared with the first quarter activity of 2018. This is the result of two effect, one of which I already mentioned is the reorganization.
The secondly was the peak that we had, as you can see on the right part of the slide, in the first quarter in 2017, which, as you know, was the first quarter of the merged bank, and most possibly gained an effort from some prudent approach before the merger, which allowed to start better 2017. As you see, 2017 was quarter by quarter decrease in the effect of the fee. Another important effect is also the change in that, as you know, we are already having in our advisory strategy vis-à-vis asset under management. As you know, we are applying since January an advisory by portfolio rather than an advisory by product. This is bringing, of course, from one side, a decrease of the upfront fees.
On the other side, a constant increase in recurring fee that we are sure that in the next quarter will give a lot of strength to our fee-driven business. On page 20, net financial results. We have a slight reduction vis-à-vis the first quarter last year, mainly due to EUR 5 million related to IFRS 9 accounting principle, the valuation. Let's say that mainly this result was affected by some prudent approach that the group decided to have vis-à-vis an aging strategy approaching the electoral day, the 4th of March this year, which of course, mark-to-market give us some disadvantages, which we are already recovering, and I can announce that the guidance for the second quarter is very much in line due to the recovery of this performing in line with 2017. All in all, we think we are very much in line with the 2017 numbers.
Let's pass to the cost on page 21. Basically excluding the one-off effect, the like-for-like results is a reduction of 3.4% vis-à-vis first quarter last year. Is not very much comparable, the first quarter of this year with the last quarter last year, because of some recovery, both in personnel cost and in other administrative costs that we gained in the first quarter last year. We gave you some indication about the average of the cost, because this is something that is going to be applied quarter by quarter. As you can see, the reduction is stable and consistent and is in the region of 2%, also with the average of the previous quarter.
I wouldn't comment personnel and other administrative expenses, because you can see exactly the same effect, like-for-like reduction from 3% to 2.5% in the yearly comparison, and a reduction of about 1% with the average of 2017 quarters. Let's go directly to page 24. Again, we have this target to continue to be very prudent, and trying to put our portfolio at a level in which we can take advantage for any occasion available in order to dispose further our asset. We will continue to have a cost of credit in line with the guidance we gave for this year. Of course, we have only split the difference between the pre-IFRS 9 and after IFRS 9.
Let's only say that apart from the willingness of maintaining solid NPL coverage, we have also to say that the major effect of this policy will be more in the first half of 2018, rather than in the second part of the year. Meanwhile, we are going to have the risk of the bank, the effect of the risk. Let's go back to some figure on the volume. Basically, we have no major change, both in terms of loans. As you can see, there is a slight increase. We put also the reference with the 1st of January because it's already affected by the reduction as a result of the FTA application. The performing loans are growing 0.3%, having in account that the leasing and runoff is decreasing 2.5%, and the NPLs for the first quarter were decreasing around 2%.
The same, I would say, unchanged situation comes from the direct funding. Our policy to change less expensive source of funding, like current account inside deposit, is still continuing. There is almost EUR 1 billion more of free deposit in the first quarter with a corresponding reduction of bonds and certificates. The bond maturing this year are still very consistent. We gave you some guidance about the different maturity. As you can see at page 28, we have still EUR 4.5 billion of bond maturing this year, with an average spread of around 2.93%. As you know, we are not going to substitute completely this bond, in any case, the part that you are going to substitute is at a very different and lower interest rate, enabling us to continue the reduction of cost of funding.
This is also thanks to the strong liquidity position we will examine in a minute, which is really largely allowing us to leverage on this situation in order to make funding reserves. Here we are on page 29. As you see, the use of eligible asset, the unencumbered eligible asset, standard in 31st of March at EUR 19 billion versus EUR 16 billion of December. The EUR 19 billion nowadays are already EUR 24 billion, showing you the large amount of liquidity we could deploy to refinance the asset of the bank. The quality of an unencumbered asset is also very good, as you can see on the cake on the low right side of the slide, which is 95% composed by Govts. Indirect funding, here we have two different situation.
I would say a good increase of assets under management, especially as far as concern funds and SICAR, which are growing EUR 400 million in the last quarter, EUR 3.5 billion year-on-year. Meanwhile, we are having an offset in the growth of especially bancassurance. As you know, we have now, since the 1st of April, the new joint venture with Cattolica, which again started the 1st of April. Of course, both for the reorganization and also for allowing a good start of the new bancassurance joint venture, we expect this amount to grow in the next quarter. There was also some, I would say, market effect, which amount for about EUR 1 billion. As far as assets under custody, you see a decrease of around EUR 4 billion-EUR 5 billion.
This is due to only one consistent big ticket of an institutional client, which I would say anticipating the custodian bank disposal to BNP, switched to BNP before the effect of the disposal of the activity that we will finalize by the next quarter. During this portfolio, we are going to pursue our strategy to reduce the Italian GOVs weight on our portfolio. Italian GOVs from the 1st of January decrease around EUR 2 billion, EUR 1.8 billion. Compared with last year, Italian GOVs now represent 55% of the total GOVs. Last year, they were 76% of total GOVs. The portfolio has been reshaped during the last months. We have now a modified duration of the Italian GOVs, which is below two years.
As I was mentioning before, the maneuver on the profit and loss allowed us to increase, at 31st of March, the debt reserve held to collect and sale to EUR 2,207 million, coupled with other EUR 200 million coming from held to collect. As I was mentioning, I was talking about profit and loss, a good part, a consistent part of this reserve has been realized during April this year. Let's go back to what we were talking since the beginning about the potential and ongoing reduction of NPLs. Again, we have the net NPLs numbers. Starting from the numbers we showed one and a half years ago, we end up in 15 months to reducing EUR 6 billion of net NPLs in total, more than three and a half billion of UTP and almost EUR 3 billion of NPL.
Starting from the EUR 11.3 billion of net NPLs, we are going to reduce below EUR 10 billion during this quarter due to the Exodus transaction. Of course, as you know, this will not have any effect on the profit and loss due to the first-time adoption, which again has been devoted all to bad loans disposal. Coverage level is still very conservative. We mentioned before, you can see at page 34, the increase of 500 basis points in NPLs coverage at 750 basis points, completely due to the IFRS 9 first-time adoption for bad loans with a composition of bad loans split, the coverage of the bad loans split 84% for unsecured and 58% for secured. Another very important part of our strategy, as you know, is the performance of our NPL activity. This allow us to show the market the capability of our workout activity.
As you can see, the first quarter, vis-à-vis first quarter last year is running much better, is EUR 484 million vis-à-vis EUR 394 in the first quarter last year, splitted between recoveries and cancellation. Again, pointing on the low effect on profit and loss, low impact on further provision when we are able to work out our NPL. Only 2% of total GDP reduction is the impact on NPL, EUR 10 million in all. Last, again, Common Equity Tier 1, you have the split with the different effect of the undergoing the capital management action and the First-Time Adoption, both for stated and pro forma numbers as of 31st of March 2018. In the upside of the slide, you have the fully loaded, and on the lower part of the slide, you see the phase in with the impact of the IFRS 9 First-Time Adoption.
I would say that I will leave the floor to your question in order to give you some more detail on what I presented to you.
Excuse me.
Thank you.
Excuse me, this is the coastal conference 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 touch-tone 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 Christian Carrese with Intermonte. Please go ahead.
Hi. Good evening. Christian Carrese, Intermonte. The first question is on net interest income and the loss provision. The IFRS 9 impact in the quarter was quite important on net interest income and provision. I was wondering if you can give us a guidance of the impact of the EUR 5 billion NPE disposals that will be carried out by the first half 2018. What will be the impact on P&L of this item? The second question is on the coverage ratio. You pointed out that after the disposal with GACS, the coverage ratio of the remaining portfolio will go up. If you can elaborate on this item. Finally, on the servicer, Intesa Sanpaolo said that they could be interested in buying other services through the joint venture with Intrum Justitia.
If you can give us an update on the work in progress for your servicer business, if you are planning to maybe sell or to make a partnership in the coming quarters. Thank you.
Okay. Thank you, Mr. Carrese. I would say that as far as the IFRS 9, of course, it's difficult to give you some proper guidance. For sure, for a bank who makes at the center of their target, the de-risking, it's difficult to tell you that this will be stable, because of course, meanwhile, we are going to sell NPLs the effect on both NII and, of course, cost of credit are going to be reduced. It's difficult to give you how much, also because, as I was mentioning before, we don't know yet if it's only on the second quarter or this will continue also for the further quarter, depending, I would say, on the third part of your question. The coverage is going to go up because, again, we are going to consider very with some cautious the portfolio.
We want to give the idea that we are going not to pick up the best that we have in our portfolio. We want to give a sort of indication about the quality of the total portfolio. Of course, the mix between secured and unsecured and the different coverage of secured, unsecured give a difference on the remaining part of NPLs. In our opinion, also differently from what we thought when we were at first time thinking about GACS, we thought that this was going to reduce our coverage. Instead, we ended up with a good, solid consistency of our coverage. Third, NPL platform.
I think that from my word and from the numbers that you have seen in our first quarter results, the willingness to pursue any potential opportunity and a very, I would say, favorable situation that a bank like ours, we started one and a half years ago with EUR 30 billion of NPLs with a market which was not there, with difficulties in giving some indication about potential disposal because of lack of markets, and with the consistent results with quarter by quarter, we are going to deliver in terms of recoveries and cancellation, I think, and I can affirm that is very much appreciated by the market. Of course, we are going to have a lot of reverse inquiry from different competitors in this activity, and we will see what to do.
For sure, if we take in mind the price of a recent transaction, that's why we showed net and the coverage after GACS, you can see that the effects on our capital are going to be really negligible if we take in mind further NPL reduction. We want to be really very prudent in order to approach any possible opportunity. Not to mention that, again, after the validation, we are going to have a very sound effect also from the release and the reduction of RWA.
Thank you.
The next question is from Giovanni Razzoli with Equita SIM. Please go ahead.
Good afternoon. Very quick question on my side. After the IFRS 9 First-Time Adoption, we have seen one of your nearest competitor, BPER, guiding us in 2019, for a 60 basis point cost of risk for 2018. You have a 63 basis point in 2019, in your business plan. I was wondering how and if this level will be impacted in terms of timing or amount, following the IFRS 9 First-Time Adoption. A couple of clarifications, if you can elaborate on the fee income. You've mentioned something about the change in the commercial strategy in terms of fee income, but I apologize if I missed your comments. The third and the last question, what was the impact of the PPA on the P&L in this quarter? Thank you.
Okay. Thank you, Mr. Razzoli. Frankly speaking, I don't know exactly the strategy of my competitor and other banks, I can talk only for my banks. Again, we feel that when you still have, even though with a clear risk in strategy, but not yet delivered, like in our case, we have the duty of being very consistent in coverage and in provision, because, again, we want to take opportunity not to have problem in selling if there is any opportunity of disposing or accelerating our assets. Because in this year, as you know, starting from the first quarter, but I already announced the other one-off effect on the profit and loss this year due to the insurance, the reserve, and the custodian bank. We have also room to be very consistent in provisioning.
Basically, we feel that the more we can reduce our backlog in our NPLs, the lower can be the cost of risk going forward. I would say that if we said 63 when we forecasted to reduce only EUR 8 billion of NPL in our original plan, the possibility, the opportunity to reduce furthermore, as we announced EUR 17 billion with the already presented NPL plan. The possible opportunity also to accelerate and potentially increase this target, of course, should bring to some cost of risk lower than the one we forecasted in 2019. As far as fee income, I was just mentioning two effect. One was, again, that the first quarter last year is a bit uncomparable with the first quarter this year for two reason. One is first quarter last year was the peak of our quarters.
I have not explained that the bank were going to merge since January. Basically, most probably in December 16th, there was not such an activity and a focus on fee income, which in turn gave us a lot of boost in the first quarter 2017. Which, of course, is the opposite this year. This year, we had the branch network reorganization, lot of people changing activity. We feel that this year is going the other way around. We start more prudent due to this situation, and we will increase quarter by quarter the fee income production. Because this is the third part of my talking, because we are switching from one-off fees to recurrent fees due to our advisory strategy, which took the pace of former BPM, giving an advising by portafoglio and not an advising by product, which was in place for former Banco Popolare.
This, of course, gave a lot of opportunity in term of one-off, but of course, a need for selling every month in order to have a stable and possibly increasing result. We are switching this to fee generation. We will see much more recurring fee in the next quarter, and already in the first quarter, there is an effect of this switch, which will allow us to be, first of all, giving a better service to our client, being more MiFID compliant, and also having, for our network, the possibility to deal with fee income commission, without any stress, with some consistent recurrent fee which allow to perform stable results. As far as the PPA is concerned, we have given, I think on page 21 of our press release, the total effect of the PPA. Is in the region of EUR 30 million.
We are not going to give, for the second year, any other details, just because otherwise we have PPA, IFRS 9, the disposal, and the de-risking, which is going to affect this number. We should do two or three comparison for each quarter.
Thank you.
The next question is from Jean Neuez with Goldman Sachs. Please go ahead.
Hi. Good evening. Questions from my side on the targets of NPE ratio by 2020. I guess the transaction Exodus today is more detailed than it was, but just wanted to know whether the EUR 13 billion gross NPE ratio was still the number to look at for 2020, or does that come further down with this quarterly release? My second question is related to the cost of risk question of my friendly competitor before. When you will finish your plan in 2020, the ratio is still low double-digit, but still double-digit, when larger peers are going to be essentially half of your level. I wonder to what extent you wouldn't be incentivized to continue to provision highly in order to decrease that ratio beyond the target that you've already published, maybe faster as you get to that number.
Whether really the cost of risk target for next year is a relevant number in your opinion, or whether de-risking faster is more relevant in your opinion. I would like to see your opinion on that. Lastly, on performing loan growth, obviously part of the ratio is driven by the performing loan growth, and this hasn't taken place maybe as much as you might have wanted in the first place. I just wondered whether you felt constrained to grow loans right now by the de-risking efforts, or whether you just don't see enough demand to execute on the plans that you had already disclosed in the past. Thanks a lot.
Thank you, Mr. Neuez. I would say, I think I gave you, with our presentation, some idea of what we can forecast for the future. We really are convinced that we performed a very aggressive plan, when we talked about EUR 13 billion of reduction and of disposal. We still feel that is very ambitious. Again, the market and the evidence that we can check, thanks to the many reverse inquiry, make us think that it's possible also to go beyond. Of course, it's not something that we can state right now. It's an opportunity that we want to exploit. Once we have reached the solid capital base, now we are in the better position to exploit any potential opportunity to increase this target.
I would say, maybe after the GACS, in the next quarter, we could be also a bit more explicit on what will be the scenario that we have in front of us. Of course, we are not in a hurry because we are still performing the EUR 13 billion, but as we were doing for the first EUR 8 billion plan, we were already thinking to what possibly we could have done better than that. Still double digit. This is exactly the point, Mr. Noie. We feel that maybe it's better to try to understand if there are good opportunity on the market to try not to be still at double digit. Because of course, otherwise you still have the carry provisioning to do, and this wouldn't allow to decrease with the pace we expect the cost of risk.
Having said that, I can also say that it's complicated nowadays to make a strong opinion on that, because we can see that other banks are already reducing loan provision, also having double-digit NPL ratio. This is my opinion, it's better to be focused on reducing in order to make the market sure that we wouldn't be any more affected by high cost of risk. Third question, performing loan could be a constraint, the growth of performing loans by the de-risking. Not at all. Unfortunately, the evidence of the market is that the market is not growing. I can assure you that we are deploying a lot of building up opportunities to grow into the loan market. With the new reorganization, we have in place the new corporate division, which has already granted a massive increase for the first year client of potential opportunity.
Of course, nothing happened in few months, we have only to be patient in order to see the fruits of this effort to be concrete on our number. There is absolutely no constraint, the strategy is to grow, the ammunition that we have, also in term of liquidity and unencumbered asset eligible, show you that we are providing for having enough ammunition to foster loan growth.
Okay. I just wanted to ask about the Exodus. The securitization means the equity stake of that will be sold by more than 50%, yeah? To a third-party investor to achieve full deconsolidation.
Yeah. Of course, it's a prerequisite in order to deconsolidate.
Excellent. Thanks a lot.
Okay. Thank you.
The next question is from Alberto Cordara with Merrill Lynch. Please go ahead.
Good afternoon. The first question is related to a question that you received before about the PPA. I'm reading from your press release that the impact has been positive for EUR 30.6 million. If you can give us the details line by line as you have always been doing. The second question is on the government bonds. I read the modified duration is 1.85 years. If you can let us have an idea of the average maturities of Italian Treasury bonds. Finally on Exodus, if you can give us an idea at which stage you are in the process, how many counterparties have you already started talking with? Generally speaking, a bit more background about this transaction. Thank you.
Okay. Let me start from the tail of your questions. We are already in talk with 10, 15 potential buyer of our junior mezzanine. The data room will open Sorry?
Is already open.
Is already open. We will be able, of course, to give some more information as soon as we have the rating agency to give us the final rating and numbers and tranching of our Exodus activity. Let me say about the securities, the average maturity. Okay, is a bit below six year for held to collect, and a bit below four year held to collect and sell. For PPA, frankly speaking, we didn't give details, but we of course have all the details. It's EUR 30 million all in all. I'm sure Mr. Peronaglio will be able to give you all the details, going on.
Perfect. Many thanks. Thank you very much.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good evening. Couple of questions of detail. First, I'd like to reemphasize again, how important is to give the details on the PPA. You may not understand it, but it's very important for us because it moves up and down every quarter, and we can't analyze the results. We do need to know at least, what's in NII, if any, and what's on provision, if any. The questions are: I didn't understand your comment about monetizing bonds in April. Were those bonds classified as held to collect and sale or held to collect? The second question is on the capital. Can you let us know if there is any deduction for expected loss in your core Tier 1 capital? That was it, actually, just these two.
Okay. Of course, we want to be able to give you all the details about PPA. The only problem is that, frankly speaking, if you were in our shoes with IFRS 9, with PPA, again, with the very volatile aspect of these numbers coming from the de-risking, would be impossible to prepare slides for any possible confrontation. Of course, again, our colleagues of IR are available for give you line by line all the details. PPA, for the first quarter, was not that volatile. It's volatile by definition, but not so material in terms of numbers, and was more or less in line with the first quarter last year. The bond, I was mentioning two things. We had a hedging strategy which penalized mark to mark the 31st of March, the profit and loss for the first quarter.
The same effect we're penalizing gave us a reverse positive effect in the second quarter. On top of that, because the positive effect was also in the EUR 227 million of [all the collection and sales], we monetize a part of this [all collection and sale] for around EUR 40 million-EUR 50 million. Is a bit more technical, the last one. Okay. I have the number. On Common Equity Tier 1 capital, we have a shortfall only on performing loans in the region of EUR 190 million.
Okay, thank you.
The next question is from Victor Galliano with Barclays. Please go ahead.
Hi. Thank you for the call. Yeah, two questions from me. Just on UTP coverage. Clearly, I think if you think in terms of ahead beyond Exodus and potentially increasing your NPL disposal plan, I would imagine you would increase or include in there perhaps the UTP coverage, the UTP portfolio. Do you feel the level of coverage that you're at there, it looks like about 32%, would be sufficient for you not to need significant top-ups on disposals? Or is that an area where perhaps, you may need to top up coverage, going forward if you're looking to dispose of some of those? That's point 1. Question 2, just on Exodus. Is there any update you can give us on a potential LGD waiver for that disposal? That's pretty much it. My question on fees has been answered. Thank you.
Thank you, Mr. Galliano. Of course, we know that once we will be freed by bad loans, the attention will go to UTP. As you know, we are giving lots of details. Also in this occasion, you can find the slide 48 in the annexes of our presentation, in which we give you all the details of the de-risking. As I was mentioning before, we are going to recover a lot also from unlikely to pay, more than EUR 2.5 billion since the start of our activity. A big part of the EUR 6 billion of the net book value remaining is what we call restructured loans, which means agreement mostly with other banks in order to help financial difficulties, which very often are already in due course to be solved. For this restructuring, we have not only in place the normal repayment of installment included interest and capital.
Frankly speaking, we are not that concerned about this activity. The remaining part of net unlikely to pay is EUR 3.5 billion, of which EUR 3 billion are secured and only EUR 500 million unsecured. The coverage for these unsecured of this EUR 500 million is 47%. Of course we will have all the possible attention. We'll dedicate all the possible attention to UTP, but for the time being, we have the task of reducing fartherly the bad loans in order to also devote more people and more activity to UTP. We don't have, in any case, currently, we don't have any idea, and this is reflected in our first time adoption, which was not devoted to UTP. We don't have any disposal plan on UTP. Yes, it was mentioned, the decline of EUR 2 billion.
As far as Exodus related to LGD waiver, I would say that, as I was mentioning very clearly, we are applying for a waiver on LGD. This was due also to the current risk in plan of EUR 13 billion. Basically, we are waiting for the decision from ECB. What we feel is that a bank which has showed up to now to be so aggressive and capable to reduce with enough capital self-generated, our non-performing loan portfolio, of course, has to reflect in the new portfolio remaining after the sale, the real quality of the portfolio. I can assure that the quality of our portfolio is very good, and we really are waiting for an answer on that.
Thank you very much.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi. Thank you. A few questions. First, you've talked a lot about beating your plans for cost-cutting, branches, staff, et cetera. Do you have a new target for your operating costs for 2019 or for 2020? I'm looking at consensus, not that far from your original target, which was to be below EUR 3 billion, I think. On capital. I don't think you gave an RWA for the 12.1% Q1 pro forma. Can you give that RWA number? And what would be the RWA pro forma for the Exodus as well? Is it just removing the EUR 1.3 billion that you mentioned on the Exodus slide, or is there something else? And how do you think about your very basic question, what do you think is your Q1 target? Is it going to be the 12%, 12.5%? If you could be a bit detailed there, it'd be helpful.
I think that's it. Thank you.
I am not sure I got the last question, Maybe I answer and then you can reply if I didn't get exactly what would you like to ask. As far as for cost-cutting, of course, we are already running better than the forecast in cost-cutting. You know that we already announced the increase from EUR 320 million of cost optimization to EUR 400 million for 2019. We are well on track on this new achievement. Possibly, there could be further optimization because we are running faster than we expected. We want also, of course, not try to push very hard further than that on cost, because we have also to invest. Of course, we never talk about digitalization and so on, but there are a lot of investment that we have in mind to do in order to offset a bit of saving with some new investment.
The number that I can confirm is the switch from EUR 320 million to EUR 400 million of cost saving. Again, this means that end of the plan, we are confident to terminate in 2019 instead of the EUR 3 billion which we forecasted in 2016, at around EUR 2.8 billion. A consistent reduction year by year compared with the previous plan. The capital, if I understood, is written on page 37, the reduction of RWA, which was going down from EUR 75 billion to EUR 65 billion, almost EUR 10 billion of reduction. Sorry, maybe you asked about a further reduction in NPL ratio?
No. The pro forma, EUR 65 billion would be the RWAs for the 12.1% Q1 pro forma, is that correct? Will it decline by another EUR 1.3 billion once Exodus is completed?
EUR 1.3, exactly. That was the guidance we gave. More or less, we expect a reduction of EUR 1.3 billion due to the EUR 5 billion Exodus transaction.
When you're talking about, for example, potentially cleaning up your NPLs further, what kind of Q1 targets do you have in mind? Is it a 12%? Is it 12.0% or 12.5%?
Of course, we didn't change our target in Common Equity Tier 1. We are in the region 12.10%. This was what we aimed to achieve with the capital management and the IRB validation. We are confirming that this is a good and solid Common Equity Tier 1 position. Of course, this gives us the possibility to further exploit the opportunity of further de-risking, especially with the coverage and the freezing of RWA that is embedded in de-risking furtherly. We still expect a number in this region.
Thank you very much.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Hi, good evening, and thank you for the presentation. Two quick things from me. First one on NPL inflow rate, if you can give us that number actually for Q1. The second one is the net interest income impact of those bond disposals you have hinted, basically, you have done in the second quarter of the year. Thank you.
Sorry, I'm taking the data because we didn't mention the data. Just a minute. The inflows is EUR 284 million. Basically, we don't have material impact from the bond disposal on NII.
Okay. Thank you.
Okay.
The next question is from Anna Benassi with Kepler Cheuvreux. Please go ahead.
Yes, good evening. My question relates to your comment about having filed for the waiver on LGD and waiting an answer from ECB. Would that mean the 12.1% pro forma Common Equity Tier 1 you are given with also the current transactions does not include any risk-weighted asset inflation because of the NPL disposals? Can you eventually give us an idea in case the waiver will not be obtained, what the pro forma level of the capital could be? My second question relates to the consumer credit business. We know that the commercial agreement and the shareholders' agreement on Agos will end this year, and we also understand that in the contract, you have said that in case of merger, the existing platform, other existing platform of consumer credit, like you have with ProFamily, had to be offered to Agos as a first step.
Can you let us know what are your thoughts on that? What are your targets, if you prefer to have ProFamily with Agos? Give us an idea what you expect to happen in that important business area for the bank. Thank you.
We are, of course, managing. Of course, you know that there is a trade-off between LGD and disposal. Of course, up to now, we have been able to manage disposal without impacting as much the LGD effect. Of course, in order to enable the acceleration of the plan, further potential disposal, and so on, of course, we have to know clearly and exactly what will be our position in terms of potential waiver. That's why I cannot give you the exact number what we'll do in disposing before having a better, clear idea on LGD. As far as consumer credit, basically, as I mentioned many times, this is not strategic basically in order to make capital. This could be a good, efficient path in order to terminate the rationalization of our product factory.
Of course, everybody knows that does not make so much sense to have two different consumer finance activity, especially in the light of the upcoming merger of BPM into Banco BPM. Of course, we are talking with our partner. Basically, we don't have yet any either agenda or any upcoming news about that. I think that there are possibility that we are going sooner or later to decide which of the two parts we want to invest in order to enhance our consumer finance activity and profitability.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For further questions, you may press star and one on your telephone. The next question is from Domenico Santoro with HSBC. Please go ahead.
Yes, hi. Good evening. Thank you for the presentation. Just a few questions on my side. First of all, if I can sum up what you said before. You said basically that cost of risk might be better in the future compared to the Industrial Plan target because the risk, of course, is doing better. You are a bit reluctant to give some positive outlook for loan loss provision over the next couple of quarters. I was just wondering whether this might include also the losses from this disposal because you were hinted at some limited impact on capital from disposal. This might probably not be considered by competitors that have been probably more positive or more optimistic compared to you in giving us the outlook on provision. Also some comment on Exodus, whether you expect some losses from the disposal. The second regards trading.
I was just wondering whether the outlook for trading was related to the second quarter when you said compared to last year or was for the full year. My understanding is that you reported the IFRS First Adoption impact on capital gross of taxes. I was just wondering whether there are any DTAs that you might write up because of this and any tax benefits in the future. On this EUR 3.5 billion remaining, I was just wondering whether those might be bundled with the disposal of the servicing company, and we might see in one shot, basically, all the target for 2020 to be realized, hypothetically, I mean. Thank you.
Okay. Many question I was still writing. Thank you, Mr. Santoro. No, we do not expect the cost of credit to grow because of the disposal. We already announced that as far as the EUR 13 billion de-risking plan, we have already provisioned through FTA, First-Time Adoption. All we think is due in order to realize the complete de-risking plan for the EUR 13 billion, and of course, this is worth as much for the first transaction, which will be Exodus. Second, the trading. No, my guidance was only on the second Q. As I was mentioning before, it's not because I want to give you some news about the second quarter, but because it's a related effect to the first quarter results. The materialization of lower profit gave us an increase in unrealized gains, which we in part realized and cash in April.
That's why I was going to give you the guidance for the second quarter related to second quarter last year. Further disposal of NPLs, this is the question. If I can give you, as I was mentioning to Ms. Benassi, the timing of further disposal in the plan, within the plan or on top of the plan, we need to understand exactly how it works also with the waiver on the LGD. I cannot give you any guidance because we are, in turn, trying to understand the potential impact of accelerating or increasing the disposal plan. For the FTA impact on taxes, I would say that all the tax effects related to the IFRS 9 impact is not accounted in our Common Equity Tier 1 because it's related to DTA that are referred to tax losses to be carried forward.
The next question is from Anna Adamo with Autonomous Research. Please go ahead.
Hi. Thank you for taking my question. I have only one follow-up question on the GACS securitization. You mentioned earlier that you are planning to sell the mezzanine and junior tranches of the securitization in order to deconsolidate the NPLs. What is your plan with regards to the senior tranche of the GACS? Is this going to be retained by the bank? If this is the case, do you expect to reclassify this stake into performing loans, which basically means that there will be positive loan growth as a result? Thank you very much.
A very precise question. Thank you, Ms. Adamo. At this stage, frankly speaking, but this is before having a clear idea on the tranching, we forecast to keep the senior tranche because, of course, it's compatible with a GACS investment. We think we can keep it. At this stage, again, because there are not much transaction done in this field, we feel that we can keep it in the loans activity, yes.
Okay. Thank you.
The next question is a follow-up from Victor Galliano with Barclays. Please go ahead.
Yeah, just a very quick follow-up from me, if I may. That NPL inflow rate, the EUR 284 million for Q1, is that gross or net?
Sorry, Mr. Galliano, could you repeat the question, please?
Oh, I'm sorry. It's just a very quick follow-up on the NPL inflow rate of EUR 284 million. Is that number gross or net? Thank you.
Sorry, Mr. Galliano. This is net. I have to be more precise, my colleagues tell me that is in the region of, is a bit in that region, is the net inflows.
Perfect. Thank you.
Gentlemen, there are no more questions registered at this time.
For the make you conclude happy this meeting, I would ask Mr. Peronaggio to give you some details about the PPA. Please, Mr. Peronaggio, go ahead.
Thank you very much. As Mr. Castagna said before, more or less at the bottom level, we had around EUR 30 million at the bottom level. You find page 21 of our press release, which is more or less in line with the contribution we had in the quarter of 2017. In terms of single line, compared with the full quarter of last year, we have around EUR 6 million more on interest margin compared with the same level, around EUR 6 million less in terms of cost of credit. At the end of the day, the weight on the result is EUR 30 million with EUR 6 million more on interest margin, and EUR 6 million less on cost of credit.
Thank you very much, everybody, I hope to see you soon in a potential hour meeting in the next few weeks. Thank you and good evening.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.