Good afternoon. This is the course call conference operator. Welcome, and thank you for joining the Banco BPM full year 2017 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. Good afternoon, everybody, attending the presentation of the full year result. Before leaving the field to our CEO, Mr. Castagna, for the presentation, let me remind that you can find the presentation on the website on the page Investor Relations. The Q&A section is reserved to only financial analysts. Thank you. I leave the field to Mr. Castagna.
Hello. Good evening, everybody. Thanks to be with us for the presentation of the full year results. I will start with an executive summary a bit longer than normal in order to focalize on the main target we reached during this first year since our merger. We call this executive summary Banco BPM Delivers because we feel that apart from the result we will announce shortly, we are very proud to have been able to deliver everything we promised starting since the strategic plan one and a half years ago. Quarter by quarter, we were able to, both in capital management action and operating results, to be very close to what we announced to the market. Let's just start from where we stand right now. Fast-track merger program, very much on target. We conclude, as you know, an IT migration in a bit more than six months.
We have started, since the 1st of January, the new commercial reorganization of our network and the split between the retail and corporate division. We have already started also with the specialization of Banca Aletti, only wealth management, private banking, and Banca Akros in corporate and investment banking. Strong operating performance. We will see that vis-à-vis the 3 years business plan, we are ahead of what we expected, both in terms of revenues and in cost saving, as much as our de-risking plan, which, as you well know, for the time being, has reached more than 50% of what we announced in the strategic plan. This put us in a situation for which we now are ready to face new challenges, which will be dedicated expressly to the opportunity that has been given to us by the IFRS 9 first-time adoption.
We will announce today the new NPL reduction due to the IFRS 9, which will bring down the NPL stocks since the beginning of the merger of almost 60%, 57%, by 2020. We will have all the details on page 13. Of course, all this has been enabled by our capital position, our capital management transaction. As you know, we have been performing already two capital management action related to asset management and bancassurance. Today, we will announce the closing of the insurance business, which you already knew was due to be delivered to Anima. Also, we will announce the custodian bank sale to BNP Paribas. This brought us something like 150 basis points, excluding what we already have in September, which was the Gestielle transaction. All in all, it's a global maneuver of almost 250 basis points of common equity Tier 1.
On top of that, we can announce that we have also received the final draft for the IRB model validation, and so we will go also through this in order to give you some details about that. All in all, we can announce that we have a pro forma for the beginning of the year of common equity Tier 1 fully loaded at 12.02%, or net of the impact of IFRS 9, which we estimate in 175 basis points. Let's go back to the capital strengthening. Again, it's almost 250 basis points through asset management, the transfer and insurance reserve to Anima, which accounts to almost 20 basis points. The extension, again, of the IRB model, which in our estimates account to 80 basis points, taking into account the evolution also of our common equity Tier 1 capital impact provision and RWA reduction. Further capital action have been finalized.
I already told you about the custodian bank, which amounts to 33 basis points, and still we are in the process to concluding further optimization, which will account to almost 20 basis points. The original plan of disposal will be achieved with half of the time we forecasted in our plan. By June, we will have sold not only the EUR 8 billion of the global three-year plan, but with the improvement due to the IFRS 9 first time adoption. Very good was also the workout, both from our NPL unit and as well as the UTP stock went down from EUR 11.5 billion to EUR 9.6 billion. Well ahead of the final target of the business plan, which was around EUR 11 billion. On page seven, let's go through just the lower part of the slide.
We already talked about the different action in our simplified group structure, as far as Banca Akros specialisation and Banca Aletti. Let's say that in terms of advance vis-à-vis the business plan, we are, in terms of cost of funding, one year ahead of the target. We think we can reach the EUR 320 million of saving of the business plan by 2018. As well as we are ahead in terms of reduction of head count and closing on branch. The global cost synergies, which now in regional plan were EUR 320 million, are due to grow to around EUR 400 million. On page eight, you will see the different action that we have done during this first year of activity. The one you see in green are already completed.
Most of the one in gray are almost completed, like Banca Akros, Banca Aletti, the disposal of NPL, still have to be finalized, so we put still in gray. Most of them are already in due course, as well as digital organization transformation and cost optimization, which is something that is undergoing for the full year of the plan. I announced the new commercial network. Just a quick note about that. We have reorganized our network into two different divisions. Retail division, which grew from five to eight divisions in order to be much more focused on our client with a closer territorial proximity, with the potentiality of giving them fast decision making and high service quality.
Out of these eight divisions, three of them are in Lombardy, and as you know, most of them are in north of Italy, apart from only one division, which is from the center south of Italy, based in Rome. We also have some reorganization of the areas, which of course, are below the line from the division. The areas are responsible for both retail and SMEs activity. Meanwhile, the corporate is split in five markets, starting more or less from EUR 50 million-EUR 75 million of turnover going up. In the corporate, we have 18 corporate centers, and the corporate center will be helped by an origination structure which is specialized by industry, and of course, by the new structure of investment banking of Banca Akros. On top of the five markets, we have also divisions specialized in large corporate.
As far as operating performance, we feel we have achieved all the targets we had for the first year. We feel to be one of the few banks with a positive net interest income, even though slightly positive, 0.3% year-on-year, and 0.7% quarter-on-quarter. Very good core revenues, 5% year-on-year. Operating cost down 18%, and we will see also like for like, when we will go to the slide dedicated to operating cost, we have very good results in terms of reduction of cost. Profit from operation grew 60% year-on-year, 40% quarter-on-quarter. In terms of banking volumes, we grew 9% in terms of current accounts, 7.5% in terms of assets under management, and around 1% in terms of performing customer loans. On page 11, you see the different pieces of revenues and costs split by different areas.
You can see the very good performance from net fees, which reached almost 50% of NII. NFR is, as I mentioned last time, in the new normal region. Of course, you can remember last year, we had almost EUR 300 million of extraordinary results from NFR due to the merger and opportunity to realize capital gain before the merger on the 1st of January. Very good performance also from the dividends from our participations, subsidiaries, EUR 166 million. Global reduction of 19% of operating costs, evenly split between personnel costs and administrative costs, bringing to EUR 1.6 billion of operating profit, which is 60% more than last year and well above the projection of the first year of the budget. Let's go to the de-risking, giving you some hints about the results of this year and the new strategy.
We see on page 12, we have realized in the first year of the plan, a reduction of EUR 5 billion of gross NPL, which grow to EUR 5.5 if we consider nominal. On the upper right side, you see how we reach this EUR 5 billion. This comes apart from, of course, the disposal, which was EUR 3.5 billion, but also from a much better performance, 30% better than last year in recoveries and cancellation. A big reduction of gross inflow from performing to non-performing, lower 45% than last year. The total amount of these three ingredients brought to the EUR 5 billion reduction.
The EUR 5 billion reduction is being concentrated mainly in unsecured loans, which brings on the bottom left side of the slide, in which you see that we grew in our non-performing loans portfolio to 66% of secured NPL, vis-à-vis an Italian market, which in June was 49% secured, 51% unsecured. This means that, of course, all the consideration about the coverage and the potentiality of recovery have to be analyzed, taking account this better position that we have vis-à-vis the Italian market. Talking about coverage, notwithstanding the opportunity of IFRS 9 first-time adoption, also in 2017, we gave a lot of attention to keep the coverage at a very high level. We kept around 60% of bad loans, 50% in total NPLs, 32% in terms of unlikely to pay. These are nominal figures. If we go to the gross, they are 49% total, 59% bad loans, 32% UTP.
The further improvement will come from the adoption of IFRS 9, which will make coverage grow from, these are gross figures, not nominal, grew from 49%-54% in terms of total NPLs, and from 59%-67% in terms of bad loans. If you consider the nominal coverage, this will go up to 55.5% and 69%. On page 13, we will go through the further NPL strong reduction we can announce today, thanks to the capital we build up during this year. You will see for each of these categories, the starting point in December 2016, where we stand as of December 2017, the original target of the merger plan, and the new projection. Let's start from gross NPLs.
We will reduce gross NPLs of 57% vis-à-vis 2016, EUR 17 billion almost in total NPL reduction, EUR 10 billion more than the approved plan of the merger, bringing down from EUR 30 billion-EUR 13 billion. In terms of ratio, we will go down from 24.1%-11.5%, compared with the target in the original business plan of 17.3%. It was 17.9% because we considered the nominal one, if we consider gross was 17.3%, down six full points to 11.5%. In terms of net NPL ratio, we had the starting point at almost 14.7%. The target was 11%. We will bring the target down to 6.3%, corresponding to EUR 7 billion net of global NPLs. Meanwhile, bad loans will go down from EUR 7.1 billion-EUR 2.3 billion vis-à-vis EUR 4.2 billion of the original plan, corresponding to EUR 2.5 billion of net bad loans.
These are, in our view, very considerable achievement due to different action and lever. One, of course, is the opportunity to increase disposal due to the IFRS 9 first-time adoption, which will allow us to increase up to EUR 13 billion the cumulative disposal from 2016 to 2020, EUR 5 billion more than the agreed plan with ECB. On top of that, we have further reduction coming from the lower inflows from performing to non-performing and stronger performance in NPL workout and cure rate. Again, the enabler of this target comes from the capital management action we're performing during the first year of our merger. Our common equity Tier 1 grew to 12.36%, taking in account only the Aletti Gestielle transaction. As you know, since 2018, the phase-in will be fully phased, we have 11.92% of stated common equity Tier 1, fully loaded.
We announced 175 basis points of impact on the DTA. Of course, you know that this impact will come fully in five years' time. For the first year, of course, it's 5%. We have done some simulation. We think that in our book will not count at all because we have some different performing on these numbers. In the first year, this will not count at all. On top of that, we have the new capital management action and the validation of the model. This accounts for 185 basis points, mainly split in around 80 basis points, of course, calculated when the decision will be in place, which is 31st of March 2018.
What bring up to 80 basis points this impact is due from the capital management action, because we, of course, increased our capital base in order to emphasize the impact of the ratio between capital and RWA. We have also assumed the 12 basis points of the reorganization of bank insurance business, which you know we have already signed. We have considered the 20 basis points coming from the insurance reserve management sold to Anima, which is the transaction we announced today. We have dividends from associates from our participation amounting from 19 basis points, and again, the disposal of a custodian bank for 33 basis points and other optimization action in the first quarter 2018. This will bring the total capital position already net of the 175 basis points to a comfortable 12.02% of common equity Tier 1 fully loaded.
I think this give you already a sound idea of the main target we wanted to reach in this first year. Of course, this come from different action. The most important also because it was not extraordinary, but was the demonstration of the focus we still have on our commercial network and comes from the operating results. We reached the net income, of course, results of EUR 558 million, we know that this come also from some adjusted and extraordinary transaction. The adjusted profit and loss was positive for EUR 14 million, which we consider a very good result, taking account that we made almost EUR 400 million more of provision on top of what we consider at the beginning of this year. I already spoke about operating cost, core revenue, I won't go through that. Let's go through the different items.
Net interest income positive for the fourth quarter consecutive this year. Since we merged, we always grew in terms of net interest income. Of course, it's a slight growth, it's only 0.3 and 0.7, but it's very consistent quarter by quarter. Of course, it's due mainly to the saving and the cost of funding, which we know we could operate during the first three years of the plan. As you know, we have also something offsetting the cost of funding, which is mainly due to the lower contribution from the IFRS portfolio, which was reduced of EUR 91 million this year vis-à-vis last year. On page 18, I think is a very interesting slide which explains our result in terms of NII.
You see that we were able to manage the fighting in the asset spread with a very good job done in the liability spread, where we had a consistent reduction, 12 basis points. Meanwhile, we had 17 basis points of reduction in terms of asset spread. It's good to consider that the spread during the whole fourth quarter of the year was stable, 154 basis points, 153 end of the year. Net fees and commission grew 10% year-on-year, 6.1% last quarter. This comes mainly from commission on asset management, brokerage, and advisory services. All the main figures, foreign trading, guarantee, and so on, went very well. In the last quarter, we were able to keep a good pace both vis-à-vis the last third quarter and the last quarter of the last year.
Net financial result, I already mentioned that last year we had almost EUR 300 million of extraordinary effects coming from the AFS portfolio sale before the merger. This year, of course, the contribution has been lower, but still we think this figure of EUR 150 million could be considered a sort of normal standard for what we expect from our AFS reserve. Also quarter-on-quarter, of course, here the results are more spread out. There is not a consistency because this comes mostly from the different trading that we do during the quarter. Operating cost, down almost 19% year-on-year. Like-for-like is a reduction of 3.6%. Last quarter was very good, 7.3%, which shows how meanwhile we go through the early retirement scheme and the cost optimization strategy, we reach always better results quarter by quarter. Of course, there are still a lot of extraordinary items.
We mentioned all of them in order for you to make a proper comparison. Let's go to personnel. Down 20%, of course this was affected by the early retirement scheme amount accounted last year for EUR 360 million. This year, like-for-like is a reduction of 4.4%. Of course, it's only a small reduction considering the almost 1,500 people who left the bank during the year, most of them were in the third and fourth quarter of this year. Most of this result will come out during 2018. You can see from the quarterly comparison, you can see already how the reduction applies to this cost, 5.5% in the last quarter. The total head count again went down to 23,300 and are due to go down at least another 700 people due to go in the early retirement scheme by the end of this year.
This is a detail of the administrative expenses. Also for this item, we are having still some extraordinary impact both last year and this year, mainly due to integration costs. You see that the reduction of almost 3% is very consistent and is even more impressive if you consider last quarter, where we had a reduction like for like of 12%. We also put some ordinary systemic charge in order to have you the opportunity to look the effect of the different contribution to solidarity funds on guarantee scheme. Loan loss provision. The fourth quarter was very special, of course. We prepared to the big IFRS 9 opportunity, so we consider to devote a big part of our revenues in order to enhance the coverage of the bank.
We also went through some change in estimate, which was not possible to be applied in terms of IFRS 9. We decide to put everything in the fourth quarter amounting to a total of more or less EUR 300 million, due mainly to unlikely to pay time value consideration, conservative ELBE applied to higher threshold, which we increased by 2017, which will give us some potential advantage in the year after. We also have to consider that in the last quarter, we had the sale of the disposal of EUR 1.8 billion of unsecured loans, which of course consider some effect also on our cost of credit. We also were very attentive in leaving the coverage at a high level.
You see that both in terms of UTP coverage, we grew in the last quarter 144 basis point, and we also have reconstituted a lot of coverage in order to replace the bad loans disposal, which for 75% in 2017 were due to unsecured, so very well-covered NPLs. Of course, what I explained about UTP value and conservative ELBE are to be considered one-off expenses because, of course, will not apply the quarter by quarter, but was due to the re-changing in model of these items. In terms of balance sheet, very quickly, customer loans, again, maybe is the figure we grew less in term of expected vis-à-vis the business plan. In any case, if we do not consider the NPL reduction, which amount to almost 20%, you will see that on the upper right side of the slides on page 26.
If you do not consider NPLs disposal reduction and leasing, which is in run-off on the core customer loans, we grew 1.6% in the last 12 months and 1% in the last quarter. In terms of total new lending, we had a very good result, EUR 18 billion of new lending, which EUR 14.5 billion to corporates, +12% vis-à-vis last year, and a slightly decrease in the household lending, EUR 3.6 billion, -6%. In terms of direct funding, also here we see a reduction from EUR 110 billion to EUR 107 billion. It's something that was announced by us. This is following the strategy we are having for reducing the more expensive source of funding in favor of the free source of funding. Basically, we grew 9% in terms of current account and sight deposit. Meanwhile, we decreased 25%, both in time deposit and in bonds.
This is the strategy that more or less will go ahead also for this year. During 2018, we will start reissuing some of the bond expiring. Of course, the price of the bond we are going to issue will be much lower than the ones are going to expire. We will see that in the next slide. I have only to mention that in the last quarter, in this first quarter, we started again to be on the market, because in September we went out with a EUR 500 million Tier 2 subordinated bond, and January this year, we had EUR 750 million of covered bond. On page 28, bond maturities, I was mentioning we had almost EUR 7 billion expiring in 2017. We will have almost another EUR 7 billion, EUR 6.5 billion expiring in 2018, EUR 2.2 institutional and EUR 4.4 retail.
For sure, we will not renew the retail bond, we will be on the market with some further covered bond issuing, and for sure, we will be also present again, both in the senior issuing and in the second step of the EUR 500 million AT2 that we already announced in the business plan. Thanks to this reduction in the bond portfolio and bond maturities not fully replaced, we will still feed the growth of our asset under management, which has been quite successfully during 2017. We were talking about that on page 29. Indirect funding were up year-over-year 2.2%, EUR 4.4 billion of more asset under management and minus EUR 2.2 billion in terms of asset under custody. We have enhanced the percentage of asset under management share out in the total indirect funding, growing from 60% to 63%.
I have only to mention that in this figure, you still see EUR 2 billion of asset under management related to non-captive network of Aletti Gestielle, which of course, from the 1st of January 2018, we will not see anymore due to the disposal of Gestielle into Anima. The liquidity position continued to be very strong. We had a slight reduction the 31st of December, was promptly reconstituted, going up again to EUR 49 billion, out of which EUR 20 billion are eligible unencumbered assets, which were present in our book as of 2 February this year. The LCR is higher than 125%, as much as NSFR is higher than 100%. Page 31, securities portfolio. Of course, this is due to support NII and diversification.
We were very cautious, as we announced during 2017, in replacing a consistent part of Italian Govies, which went down from EUR 26.7 billion to EUR 20.7 billion in favor of further diversification in terms of geography. We grew from 1% to 18% in non-Italian Govies, mainly French and U.S. Gross AFS reserve were EUR 170 million, thanks mainly to the improvement of the reserve in December with Italian Govies. The 1st of February, they were down to EUR 140 million. Today, I think we are up again to EUR 190 million. Let's go to the credit quality and the de-risking situation. We have a strong NPL reduction already announced before, EUR 3.2 billion in terms of net NPLs. Again, most of them unsecured. The total stock was down, thanks to the three aspects, three levers we already mentioned. Decrease in net flows, down 55%.
Work out, up 40% and increase in coverage, 94 basis points year-on-year. Apart from bad loans, also UTP were down by EUR 1.8 billion, much more that we envisage in our business plan, confirming a normalization in asset quality trends. Let's see some figure about the different flows and recoveries. Again, net flows down 55% to EUR 1.1 billion. Cash recoveries on bad loans, 48%, up to EUR 780 million. Inflows from UTP to bad loans, down almost 50%, EUR 1.5 billion. Outflows from UTP to performing loans, up, better performance, 30% from EUR 690 to EUR 895. These last ones are managerial figures. All the others are on the balance sheet. We already mentioned the increase of coverage leverage both year-on-year.
We went up dramatically in all the aspects year-on-year. Of course, we start the new year with NPL coverage pro forma for first-time adoption, which is 54% for NPLs and 67% on gross bad loans. On page 36, you will see the evolution and the composition of bad loans. Starting from 2016, we were at EUR 19.6 billion, down to EUR 16.4 billion, of which EUR 10 billion provisioned. The net is going down 17% to 6.5%, of which only EUR 1.1 billion, 17% of the total net are unsecured. EUR 5.4 billion, 83% are secured. You will see in the box that the coverage ratio pre IFRS 9 were 82 for unsecured and 50 for secured. Post IFRS 9 application, they grow to 87% for unsecured and 59% for secured. Let's still remember that this coverage is to be considered having in mind that we have 66% of secured composition.
Almost the same apply for unlikely to pay. There was a 16% reduction year-on-year. 3.1 is the coverage. Bringing down total unlikely to pay to EUR 6.5 billion, down 22%, of which 1.6, equal to 25%, are net unsecured, and almost EUR 5 billion, 75%, are net secured. The coverage ratio for the unsecured is 47%. Out of the EUR 6.5 billion of net UTP, EUR 2.8 billion are restructured. As you know, the net restructured loans, which account again 44% of total UTP, they are related to formalized restructuring plan and procedure, which are performing and paying installment capital and interest. Net unsecured UTP other than restructured are only the EUR 0.5 billion. Let's go back to our workout activity, which of course is only concerned bad loans. On page 38, our operational plan was EUR 1.4 billion of reduction, EUR 550 million of recoveries, 880 of cancellation.
We ended up with a much better result, almost 40% better, almost EUR 2 billion between cancellation and recoveries, of which EUR 780 million of recoveries, EUR 1.2 billion of cancellation. On the right side of the slide, you see the total cost of the workout. You can imagine how much is worth vis-à-vis the disposal of asset. In order to reduce by EUR 2 billion the GBL bad loans, we were able to have an impact to profit and loss of only EUR 28 million. You know that more or less for every EUR billion of disposal, the cost is between EUR 130 million-EUR 140 million. You can see it's basically 1 to 10 the cost. That's why we are using both the lever of disposal and workout. Final slides are related to Common Equity Tier 1. We already spoke about that.
Here you have all the evolution starting since September. You can see 10.3, adding up the sale of Gestielle and considering already the capital increase, which we will underwrite for Anima. The 90 basis points more or less of the elimination of Aviva and Unipol put option due to the sale of Cattolica. 20 basis point low minus for performance of fourth quarter because, of course, it doesn't take into consideration the sale of Aletti, which is already considered, and take in consideration the EUR 400 million of extra provision we have done during the year, EUR 300 of which in the last quarter.
The state became 11.92, on which we applied the reduction coming from the IFRS 9 175 basis point, adding then the impact we estimate from the new validation of the model to the 31st of March, the bank reorganization of insurance management reserve, the dividends from associate and other capital management I already mentioned related mainly to the custodian banks. Net of 175 basis point, the fully phased CET1 pro forma will be 12.02. On page 41, you see the different impacts on which we calculated IFRS 9 impact. Basically, the new impairment model to non-performing exposure amounted to EUR 1.3 billion, to performing exposure EUR 100 million and on negative, and in terms of financial activity, EUR 100 million positive. All in all, almost EUR 1.3 billion, which again amount to 175 basis point.
The group, of course, as I mentioned before, has already communicated the decision to adopt the transitional arrangement to phase in in five years. I already explained that if we consider the phase in, we have still the correspondent of 175 basis point in our common equity Tier 1 since the first quarter of this year. Okay, I won't go to the conclusion. I think we have already been very clear about the results achieved and new target that we announced today. I will leave the floor to the question.
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 Andrea Vercellone with Exane. Please go ahead.
Good evening. Three questions. The first one is a comment on capital going forward. We know your starting point post IFRS 9 and post additionally already closed, already announced, the capital management initiative is 12%. Going forward, obviously you have the retained earnings. My question, however, relates to what we cannot externally model, i.e., the impact of pro-cyclicality since you are selling even more non-performing loans, and your view on whether you would potentially get an LGD waiver. If there's anything you can share with us vis-a-vis EBA guidelines, which have to apply by 2021, and both two of your largest peers have given guidance on this.
The second question is just asking you for a commentary on your NPL strategy, that you can put forward your view as to how the ECB will receive or what commentary they've made to you already, this new, more aggressive NPL de-risking plan. The third question is on provisions. Lots of cleanup already done. Some provisions booked through IFRS 9, FTA in Q1. Are you in a position to give us some guidance on the cost of risk for 2018 ideally excluding PPA unwinding? Thank you.
Thank you, Mr. Vercellone. Good evening. Let's say that we think we have done the most in terms of capital management action. As you know, everybody was exercising themselves in terms of capital maneuver our bank could have done. We feel we have delivered four very important transaction, which from one point of view, gave us a lot of capital improvement, from another point of view, minimized the impact on future revenues for our bank. Let's just consider that Gestielle, of course, went into Anima, of which we are the first shareholders, a part of that will come back in terms of dividends to us. In terms of retained earnings, of course, having done a so massive increase of coverage, we don't envisage for this year further extraordinary items. We will see also how this number we announced today will be taken.
Of course, we know that only one bank has already gave some hint about their plan. We will see what happen. We are ready, of course, with the profitability we will have during this year, to decide what to do, if we can finally have a normal year or if we need to further increase other reduction. Frankly speaking, I don't think this can easily happen because I think we are now in a position to work seriously on making profit from the bank. For sure, we will be able to produce a profitability before provision that allow us to make any decision. We expect a normalization, of course, of our cost of risk.
As far as the procyclicality, we think that, of course, having in mind such enormous disposal, which I don't think in percentage can be even by others, we can be seriously taken in account in order to apply for LGD waiver. We will, of course, make some gain in term of capital also reducing the volume of NPLs. If you only consider, I already announced it many times that the GACS most probably will not be only for EUR 3.5 billion, but we will grow to EUR 5 billion-EUR 6 billion. The immediate effect from this, apart from the reduction, is also some consistent reduction in RWA now that we are validated. We get many ammunition, I would say, in order to still consider growth in terms of capital without considering other capital action, but having in mind that we have many other ammunition, if needed, to deploy.
In terms of comments from ECB, you are basically the first one. We have already just terminated our board, this strategy has been now announced to the market and to ECB. We will see. I expect that they, having agreed last year to a reduction much less strong than what we are giving now. I imagine they can be satisfied. We are going down EUR 10 billion from what was agreed only one year ago, and seven full point what was agreed only one year ago. I don't want to talk for others, but I hope that they will be very satisfied. Provision, again, I already said to you before that we think we can have finally, eventually, a normalization of cost of risk. Again, let's wait at least this quarter to make some forecast a bit more precise.
Thank you.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Yes, good evening. The first question is on cost of risk. You clarified also in the presentation, you are expecting some normalization in 2018 in terms of cost of risk. Looking at the disposals you have in mind to do in 2018, 2019, and 2020, and the provision done with IFRS 9 first-time adoption, do you expect top-up in 2018 for the disposal you have in play, you are going to do? Net of the disposal, what do you see as a normal cost of risk for 2018, looking at the inflows of NPEs and so on? The second question is on the IRB model migration, that 80 basis points are now certain, or there could be some difference in March. Still to be clarified if it is the final number.
Finally, on the net interest income, the financial portfolio 2018, do you expect to do some diversification of the portfolio to sell some Italian govies and buy other European govies as you did in the past, a higher diversification? What do you expect the competition to be in 2018, taking into account that the TLTRO, the deadline of January now has passed, do you expect some lower competition on asset spreads? In terms of loans, what are your expectations for 2018? Finally, the sensitivity to the shift of the yield curve, 100 basis points shift to your net interest income. Thank you.
Okay, thank you, Mr. Carrese. I want to be very clear on that. For the plan I announced today, we don't have no needs for further top-up. We will have further top-up only if we decide that the plan is not enough, of course, we will have to do something more. All the figure are into the IFRS 9 and the normal cost of risk. For IRB model, again, I have to admit, we just received the draft of the authorization. We have to make all the calculation vis-a-vis the 31st of March, when IRB will be applied. We think right now that, of course, you know that we simplify in having basis point, but you know that is a matter of RWA, capital shortfall, and so on. Our estimates right now are 80 basis point. We are still working on that.
We can optimistically feel that maybe we can do even better than that. NII, due to diversification in other jurisdiction, which we want to grow from 18% to 30% during 2018, will produce a lower contribution of around EUR 30 million. Meanwhile, the sensitivity on 100 basis point of increase of spread amount to around EUR 330 million of higher NII.
Thank you.
The next question is from Fabrizio Bernardi with Fidentiis. Please go ahead, sir.
Hi, everybody. I've got a question on the IRB model. When you say about the adoption, you mentioned model extension and review. I would like to understand what does review mean. Is it something related to the RWA of former Banco Popolare? Do we have an IRB benefit for a PMI lone in gross terms that may be, let's say, diluted by any possible change in the weightings of the former Banco Popolare? My second question is about a disposal, if you can give us any guidance about what we may expect in terms of NPL disposals in the first half of 2018 and in the second half, because the press has been very chatty about the amount of NPLs that you may sell. Maybe you can clarify a little bit the amount that we may see going forward. Thank you.
Okay. Thank you, Mr. Bernardi. What can I say? I feel really that due to the stricter criteria that ECB is applying, I think, to all the banks already validated. For sure, they took the occasion to have a rollout and a revalidation in order to consider most of the issue. I think they will come out in the next future, but it's not for me to say. I think you can easily imagine that without the remodelling of the former Banco, the increase for the normal rollout of BPM would have been, of course, much higher than that. You have some reference of other bank validators similar to former Banca Popolare Milan. For sure, I feel that the criteria, as we all know, are stricter than they were when the banks were validated.
As far as if I understand well the progression in NPL disposal, I already mentioned that we are, of course, in the process to decide the right size of our GACS transaction. I already mentioned five to six. Could be any of the two or something in the middle. We say that we will do EUR 5 billion more than the EUR 8 we expected. If we consider that EUR 1.52 billion will be done immediately, of course, the other EUR 3 billion will take the time and the opportunity to have the better window possible in order to make specific transaction.
For the EUR 4 billion remaining due to the workout and not to disposal, in order to top up to EUR 17 reduction we announced today, having done EUR 2 billion, basically EUR 1.7 billion, in the first year, we think that in the next 3 years is easily understanding that we can reach this target. For sure, we will go for the GACS and then we will decide on an opportunistic situation.
Okay, thank you.
The next question is from Giovanni Razzoli with Equita. Please go ahead.
Good afternoon to everybody. A clarification on your additional EUR 5 billion of NPL disposals. You just mentioned that you are going to have another EUR 2 billion, let's say, as of June, via GACS, which I presume will be represented by secured loans. My first question is, my understanding correct? The remaining EUR 3 billion split in 2019 and 2020, do you have an idea of what kind of asset class are you about to sell? Is it going to be secured or unsecured loans? A clarification, again, on your capital structure. Is it fair to assume that if this is going to be the disposal plan that you have in mind, the common equity Tier 1 will remain anyway above 12%? This is my first question.
The second question is more generic, and has to a certain extent, to do with the possible outlook for the cost of risk for 2018 and 2019. You have front-loaded a lot of one-offs in 2017. In a recent interview, you have mentioned that you do confirm the merger plan targets for the net income, which is, if I'm not mistaken, in the region of EUR 900 million-EUR 1 billion. We are more or less in between. We are two years down the road from there. Shall we assume for that for 2018, net income in the region of EUR 500 million or so to approach the EUR 1 billion that you have just confirmed? Is it a rough and reliable estimate? Thank you.
Thank you, Mr. Razzoli. Frankly speaking, I can answer for what I, in a way, already mentioned. For sure we will have the further EUR 2 billion, more or less, in the GACS. This will be done by June this year. The split between secured and unsecured is the normal one in the GACS transaction, two-thirds, one-third, 70/30, more or less. For the further EUR 3 billion, frankly speaking, I cannot say. It depends on the market condition, and we will exploit all the opportunity. For sure, we will not go to 2020. Everything will be done by this year or next year. For the capital structure, 12%, I said already one and a half years ago that with this current situation is a safe level of common equity. Of course, it's much safer reducing furtherly this NPL burden.
Let's still keep in mind that, of course, I know that we have the habit to consider the fully phased, but in this case, five years is a very long time. We have to start to consider that maybe some of the potential offset coming will be again offset by the phasing process. Cost of risk, which was, I think, the mean in order to get some profit results, I would say that we can confirm our forecast in the business plan, provided that, of course We have done some disposal, as you know. It's very easy for you, I think, to consider how much this apply to the net final results. We feel very confident that 2018, with a normal cost of risk, could be a very important and satisfying year in terms of net results.
Can I add a follow-up on my question? You said, to clarify, that the EUR 5 billion extra NPL sales will be completed by 2018-2019, so you won't wait 2020. Did I get it correctly?
Yes, you are correct. Our forecasts are done in order to sell this in the first two year, half of them, basically, in the first six months. The remaining, we will keep some room in order to accommodate the better solution possible.
Thank you very much.
The next question is from Alberto Cordara with Bank of America Merrill Lynch. Please go ahead.
Hi, good afternoon. I just want to go back to the first question that you were asked by Mr. Vercellone. I think that Alberto really didn't answer. The EBA guidelines. We heard a couple of Italian banks that are giving numbers out. To which extent these are incorporated in this 80 basis points on the adoption of IRB, and to which extent there are still some numbers out on this. The other question is, and again, I'm referring to questions that you were asked before. When you look at your capital evolution, are you assuming that there is a waiver on your NPE sales? Because I don't see any particular impact coming from that. Also, if you can clarify what are the other optimization actions that you're referring to in the slide.
The final question is, when do you expect to receive a green light from the ECB on your new NPE sales plan? Thank you.
Hello, Mr. Cordara. You know that I don't like to answer to questions you should do to ECB, and most of the question you made are mostly referred to ECB. I can only say what I will do, but not what will be the reaction or what they expect until they would make it public. EBA guidance, again, if you want I to tell expressly, I can tell you, but I think you can imagine that if we terminated an inspection with a report in December last year, I think many of the EBA guidance could be incorporated in our results. Again, this is something that we have to understand better. I am very optimistic. I prefer to be in this bank than in other, let's say that. The same for the waiver.
I can tell you that I will apply for the waiver because I think with this almost 60% of reduction is a considerable amount, both in terms of percentage and in terms of numbers, EUR 17 billion. I will apply, and then let's wait. Optimization is, of course, what we do every day. Of course, as you know, it's not simple as that to say the validation. There is something that ECB authorized, something that they gave us some guidance. We are already working, and we will still work not only up to the 31st of March, but also later on in order to maximize the guidance we received from ECB. Green light on what was the fourth question was a green light on?
No. You said that you are expecting the ECB to agree with your plan, which is.
No. Actually, again.
If you don't know the date on they will be asking.
We still have to make the submission. As you know, the submission will be done in end of March for all the banks. Today I just wanted to give my new strategy, which of course I can still work on for some details up to end of March, and end of March, we will apply submitting this application to ECB. I don't know how long they will take in order to authorize or not. I feel that the reaction for somebody who had a plan of EUR 8 billion reduction going to EUR 17 billion should be a good reaction, unfortunately, I don't want to talk for others.
That is very clear. I take advantage for to ask you another very brief question. Just for clarification, this is the first time that we are looking this at banks, or personally, I'm not fully clear how it works. When I look at the IFRS 9 impact of 175 basis points. Common equity is phased out in five years. For the purpose of tangible equity, shall we assume that this is going to be netted against tangible equity in Q1, or is it going to be phased out in five years as well? If you can confirm to me that if I apply 175 to the current respected asset, I come to a number of about EUR 1.3 billion.
Yes. The tangible impact is on Q1 and the 175 is exactly EUR 1.3 billion, which I mentioned, I think, in the last slide I presented.
Okay. Thank you very much.
Thank you.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Good evening to everybody. Just sorry to get back one second to the internal models. Correct me if I get it wrong. The way I understand it is that the former Popolare di Milano has been rolled over to IRB, and in the meantime, the existing models of the former Banco Popolare have been reviewed by ECB. If I understand it correctly, you said that the review include most of, or at least partially EBA guidelines, or you think those are more or less at least partially included. Does the review include also RWA on defaulted assets, or should we expect further review of internal models, maybe due to TRIM in the coming quarters? This is my first question. The second question, sorry to get back once again on IFRS 9. When you mention EUR 1.2 billion or EUR 1.3 billion, your last slide says that this is a pre-tax number.
If I tax it 33%, I would get to a lower impact. I have a little bit of a problem in reconciling the impact, unless you tell me that the pre-tax is actually the same number of the post-tax. The other question I have is on risk-weighted assets. I've seen they've gone down a bit in this quarter, and I was wondering why, because the loan book is actually a bit up. If you can share with us, with regard to risk cost in Q4, you mentioned, if I got it correctly, EUR 300 million of, let's call it one-off, related to the time value of TPs and some other things. You also mentioned that obviously the sale of EUR 1.8 billion gross NPEs had an impact.
Could you share with us what is the impact on the sale of the NPEs in order for us to have a better idea what's the underlying risk cost in the quarter? If I may finally, you're selling the depository bank, and you are also giving away the management of the life technical reserves. Do you have an idea what is the operating profits or revenues and costs allocated to these two business units? Thanks.
Okay, many questions. Also not very easy, but I'll try to give you an answer. Of course, it was not only the rollout of Banca Popolare di Milano, this is for sure. We have been reviewed the model, authorized years ago by Banco Popolare with the new criteria that ECB settled in order to validate banks. If you say, "You are not going to have the TRIM inspection?" No, we are going to have the inspection as much as all the other banks. We only think that most of the potential criteria that they want to apply should have been already applied. Again, it's not something I can tell you right now. We will start the inspection TRIM, I think, in the second quarter, somewhere between the first and the second quarter, and I will tell you something more as soon as I can.
IFRS 9. Unfortunately, it doesn't work for us, the gross and net, because we cannot have any more DTA, the net is net. It's not grossed up like other banks, which didn't make all the DTA we have in our balance. As far as the EUR 300 million, I can say that the effect of this new criteria amounted to something more than EUR 300 million. The normal cost of credit, as you know, for our this year was around EUR 300 million-EUR 330 million. You can make the difference in order to understand how much was the impact of the Sun sale. We normally don't give disclosure on that. Custodian Bank and all the other banks, as I mentioned before, we try to make everything in order to have the lower impact as possible on profitability, but for sure, a profitability impact will be there.
We, frankly speaking, have terminated this night all the transaction, but we feel that globally, also considering the profit will come from the new bancassurance and our participation in Anima, we think could be around EUR 50 million-EUR 60 million.
Thank you very much, Mr. Castagna. I'm not particularly interested in the pricing of the EUR 1.8 billion. Did I get it right that you said that the underlying risk cost net of the NPL, net of the UTP time value, you think is EUR 330 million in the quarter? Is the number I got it right?
Yes, more or less.
Okay. That's okay. Thanks. Thank you.
Thank you.
The next question is from Victor Galliano with Barclays. Please go ahead.
Hello. Yeah, my main questions have been answered. I just wanted to change tack a little bit and ask a bit about your prospects in terms of the agreement with Anima going forward. Is there anything you can share with us in terms of the distribution agreement going forward now that you've sold off Aletti Gestielle, really just in terms of how long the agreement is, how exclusive, any sort of idea on commissions, that would be helpful. Thank you.
Thank you, Mr. Galliano. Frankly speaking, we have already disclosed every aspect when we announced the transaction. It is for me to give you some hint about the details. We announced the 20-year commercial agreement with Anima, which of course, was also considering the renewal of the agreement vis-a-vis former Banca Popolare di Milano. The fees were in line with the former Popolare di Milano agreement, which were higher 89 basis points vis-a-vis the Aletti Gestielle contribution to Banco Popolare. Sorry?
89%.
89%, sorry. What else? We were advised by Barclays. I understand you have Chinese wall. They know everything about that. Of course, there are some guarantee, I would say, in terms of standard guarantee in terms of production. Let's say that being the first shareholders of Anima, lots of attention was placed in order to have compliance for all the decisions in order to be an arm's length transaction. Still, again, we are not obliged, of course, to only utilize Anima. First of all, the private banking activity is out from the commercial agreement, and second, also for the commercial agreement, of course, we have the possibility to work with other houses.
Great. Thank you very much.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi, thanks. Few questions. First, a clarification. Did you say that with the two deals announced today, the custodian banks and Anima reserve deal, that's a loss of EUR 50 million-EUR 60 million of profit a year? That's what I understood. If you could clarify. The second question on interest rate sensitivity. People usually ask about 100 basis points parallel shift. I'm more interested to know what you think would be the increase in NII if we would move to a zero interest rate environment, i.e., EURIBOR goes from -40 to zero or around zero. Third question, what do you actually mean by normalized cost of risk? Because the business plan had 63 basis points, but I understand that had the benefit of the PPA, which I don't know how long that will continue for.
I think you said the normalized cost of risk in this quarter was around EUR 300 million-EUR 330 million, which is, I understand, something around 120 basis points. What do you actually think would be a normalized cost of risk, in millions in 2018 or 2019, would be very helpful. Thank you.
Thank you, Mr. Cruz. I want to be clear on the first question. I think I was asked by Mr. Rovere about all the global effect of all the four disposal, and I said between EUR 50 million and EUR 60 million. The one we have just closed would amount around EUR 50 million, I would say.
Sorry.
NII sensitivity, as I was mentioning, in terms of 100 basis point is around 17%, so EUR 330 million, EUR 340 million. If you consider 40 basis point, which is going to zero, would be EUR 100 million, EUR 110 million. Normalized cost of risk. I would like to know what is normalized. If we go to the plan, of course, the 63 basis point is much lower than the 300 basis point we are mentioning right now. If we were talking as before I was asked, what would have been normalized cost of risk for the fourth quarter, I answer EUR 330 million. It's of course not our guidance.
Okay. All right. Thank you.
Thank you.
The next question is from Paola Sabbione with Deutsche Bank. Please go ahead.
Yes, good evening. Three questions from me. One is the additional provision with the IFRS 9 are all for the bad loans or sofferenze or or also UTP? If you can give us the split. Do you expect to keep the workout, like in the range of EUR 2 billion per year as you did in 2017? If you clearly add the EUR 2 billion workout per year and the sale, unless you assume some important inflow in the total NPL, you can maybe even a bit, do better than your NPL guidance. Final question on cost. The quarter was really solid, better than expected. Maybe you mentioned that already, but I missed that. Should we take the quarter as a reference or better to take as a reference 2017 to project next year? Thank you.
Thank you, Ms. Sabbione. IFRS 9, take it easy because it's only bad loans. We don't have to make any split. Workout. This year was, I would say, the first year bringing from one side, the build up of capability and the experience for our team, but on the other side, the possibility to work on EUR 30 billion, almost EUR 20 billion of bad loans. We cannot say that EUR 2 billion per year is really what we expect in the future forever. Let's say that already in the business plan that we presented this evening, we have a lower contribution from workout in terms of reduction, because it's in the region of almost EUR 4 billion up to the maturity of the plan, so in the next three years.
If you were asking about if we want to keep the workout unit, you asked also that?
No. If you can add, it's interesting.
It's interesting. I imagine. Let's say that, of course, we are working on everything as we showed today with these other two transactions. We are not at the stage that Intesa is in already having decided to do that. We would be very happy if they do that because basically, after for whoever want to come to Italy to play on this field, we could be the best option. Let's examine all the opportunity, but it's not in our target right now. Third question, cost. Yes, I mentioned that. Of course, we are experiencing quarter by quarter reduction, but the fourth quarter was a bit more aggressive than others. I say that the normal would be more like in between, but more on the side of the fourth quarter than on the third quarter.
Okay. Thank you.
The next question is from Ibrahim Said with Deutsche Bank. Please go ahead.
Hi. Sorry about the double questions from Deutsche. On the credit side, just a couple of questions, if I may. On the NPL disposal plan, could I just ask that if you could give any guidance on whether the disposal will be linear over the time horizon, or will some of that disposal be front-loaded? The reason I ask is that, let's say, I appreciate that you don't have clarity on what the ECB might do or say, but let's say they ask you to accelerate this EUR 13 billion disposal. Do you have the flexibility to do that earlier than your guideline? My second question was around your issuance plans. I think you alluded to issuing Tier 2 in the second half. You also have a legacy Tier 1, which is coming to its first call date, in June this year.
Are you able to give any guidance on how you're thinking about this instrument, given that it'll lose its capital value? Do you intend to replace it? Would you potentially consider issuing an AT1 this year? Thank you.
Meanwhile, I get some assistance on the Tier 1. Let's talk about NPL disposal. I think I said as much as I could. I said that we will upfront at least a couple of billion, more or less in terms of GACS. The further EUR 3 billion, I say that will not be in 2020. I think it's quite easy to understand that it will be in between second half 2018 and first part of 2019. We don't have real plan because again, this is a market in which we understood during this year there are different opportunity. We are working very hard in order to keep the value for our shareholders.
I mentioned when I explained the slide over the workout that in order to work out EUR 2 billion, we only have to add EUR 28 million to our profit and loss. There is a big difference between disposal and workout. Let's look this year if we are still going to perform so well in the workout and we will still take all the opportunity in order to take the better disposal plan possible. Mostly will be concentrated in the next 18 months. Just a minute for the Tier 1. Of course, we cannot anticipate too much what we will do. We will communicate in time in order to pay all the needed attention to the market player. You know that we will come back to the market, generally speaking. We will be happy to take into consideration what are the needs and the attention of our investors.
Thank you.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Yeah. Good evening. Sorry for this, I'm going to be asking similar question in a different way. In that scenario you drew before around sort of a normalized environment in 2018 in terms of earnings, do you think without having to dispose of additional assets or NPLs because of the ECB, do you think you can generate capital from the 12% pro forma fully loaded number? Thank you.
The question is, if we are happy with 12% and if we think to generate further capital in 2018.
Yeah.
Of course, we are working, of course, in order to make a very profitable year. Again, the market is so volatile that we have to understand if our shareholders, and of course also ECB, but mainly our shareholders, are happy with our consistent business plan. In this case, I think there is room in order to improve the capital base and to show the shareholders we can make profits. Otherwise, we will have the opportunity to increase our de-risking.
I was sort of thinking as well whether any potential inflation of RWAs can compensate the earnings progression you can show this year. Or that inflation can be a little bit more backloaded into 2019 and 2020 as well. I'm thinking of pro-cyclicality back to the first question on the call. Any potential inflation you can have on RWAs, assuming that, for example, you don't get the waiver, if that inflation actually can again offset any increase of the core capital number itself without an improvement on the ratio. What do you think, actually, you can generate capital and then you will face some additional inflation in 2019 and 2020?
No, basically, again, we don't give so much guidance on the budget. We don't think we can grow so much in RWA. We are optimizing our RWA. Loan growth will be in line or a bit better, we expect, than the market, but still in the region 2.5%-3%. It's not such to determine a growth of RWA. We think the profitability will be produced in order to make earnings to increase capital, apart from the distribution policy that we still don't have, of course.
Okay. Thank you. Very clear.
Gentlemen, there are no more questions registered at this time.
Okay. If the questions are out, I thank you all for the patience in order to wait up to this time in the evening, and I wait to see you in the next occasion. Thank you very much.