Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Banco BPM Full Year twenty seventeen Results Presentation. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions.
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, to attending the presentation of the full year result Before leaving the seat 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. And the Q and A section is reserved to only financial analysts. Thank you.
I leave the field to Mr. Castagna.
Hello, good evening, Thanks to be with us for the presentation of the full year results. I will start with an executive summary a bit longer than normally in order to focus on the main target we reached during this first year of since our merger. We call this executive summary Banco BPM delivers because we feel that apart from the results we will announce shortly, we are very proud to have been able to deliver everything we promised starting since the strategic plan one point five years ago. Quarter by quarter, we were able to both in capital management action and operating results, to be very, very close to what we announced to the market. Let's just start from the where we stand right now.
Fast track merger program, very much on target. We concluded, as you know, an active migration in a bit more than six months. We have started since the January 1, 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 Letti only, Wealth Management and Private Banking and Banca Agras in Corporate and Investment Banking. Strong operating performance, we will see that vis a vis the three years business plan, we are ahead of what we expected, both in terms of revenues and in costs saving as much as our derisking 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 nine first time adoption. We will announce today the new NPL reduction due to the IFRS nine, which will brought down will bring down the NPL stocks since the beginning of the merger of almost 60%, 57% by 2020. We will have all the details in 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 bank assurance.
Today, we will announce the closing of the insurance business, which we already knew was due to be delivered to Anima. And 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 Justehle transaction. All in all, is a global maneuver of almost two fifty basis points of common equity Tier one. On top of that, we can announce that we have also received the final draft for the LB model validation.
And so we will go through also through this in order to give you some details about that. All in all, we end we can announce that we have a pro form a for the beginning of the year of common equity Tier one fully loaded at twelve point zero two percent or net of the impact of IFRS nine, which we estimate in 175 basis points. Let's go back to the capital strengthening. Again, it's almost two fifty basis points through asset management, the transfer of insurance reserve to ANIMA, which accounts to almost 20 basis points. The extension, again, of the RB model, which in our estimates account to 80 basis points, taking in account the evolution also of our common equity Tier one capital impact provision and 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 faster optimization, which will account to almost 20 basis points. The original plan of disposal has been achieved with will be achieved with half of the time we forecasted in our plan. By June, we will have sold not only the EUR 8,000,000,000 of the global real plan, but with the improvement due to the IFRS nine 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 11,500,000,000.0 to EUR 9,600,000,000.0, well ahead of the final target of the business plan, which was around EUR 11,000,000,000. 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 well as far as Banco Macro specialization and Banca Letti. Let's say that in terms of advance vis a vis the business plan, we are in terms of cost of funding, one year ahead of the target. So we think we can reach the €320,000,000 of saving of the business plan by 2018 as well as we are ahead in terms of reduction of headcount and closing on branch.
The global cost synergies, which in our original plan were EUR $320,000,000, are due to grow to around €400,000,000 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 Agros, Banca Letti, the disposal of NPL, but still have to be finalized, so we put still in gray. But most of them are already in due course as well as digital harmonization transformation and cost optimization, which is something that is going 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 division, retail division, which grow from five to eight division 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 in line 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 50,000,000, 75,000,000 of turnover going up. In the corporate, we have 18 corporate centers. And the corporate center will be helped by an organization an origination structure, which is specialized by industry and of course, by the new structure of investment banking of Bank Aacros. On top of defined markets, we have also divisions specialized in large corporate.
As far as operating performance, we feel we have achieved all the target we had for the first year. We feel to be one of the few banks with positive net interest income, even though slightly positive, EUR 300,000,000.0 year on year and EUR $07,000,000,000 quarter on quarter. Very good core revenues, 5% year on year. Operating costs down 18%, and we will see also like for like when we will go to the slide dedicated to operating costs, have very good results in terms of reduction of costs. Profit from operation grew 60% year on year, 40% quarter on quarter.
In terms of banking volumes, we grew 9% in terms of current account, 7.5% in terms of assets under management and around 1% in terms of performing customer loans. On Page 11, you see the different piece 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 that last year, we had almost EUR 300,000,000 of extraordinary results from NFR due to the merger and the opportunity to realize capital gain before the merger on the January 1.
Very good performance also from the dividends, one from our participation, one subsidiary, 166,000,000. And reduction for complex global reduction of 19% of operating cost, evenly split between personnel costs and administrative costs, bringing to 1,600,000,000.0 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 hint about the new the old 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 5,000,000,000 of gross NPL, which grow to EUR 5.5 if we consider nominal. On the up right side, you see how we reached this EUR 5,000,000,000.
This comes apart from, of course, the disposal, which was EUR 3,500,000,000.0, but also from a much better performance, 30% better than last year in recoveries and cancellation and a big reduction of gross inflow from performing to nonperforming, 45% than last year. The total amount of these three ingredients brought to the 5,000,000,000 reduction. The EUR 5,000,000,000 reduction has been concentrated mainly in unsecured loans, which brings on the bottom left side of the slide, in which you see that we grew in our nonperforming loans portfolio to 66% of secured NPL vis a 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 has to have to be analyzed, taking account this better position that we have vis a vis the Italian market. Talking about coverage, notwithstanding the opportunity of IFRS nine first time adoption, also in 2017, we were we gave a lot of attention to keep the coverage at a very high level.
We kept around 60% of embedded loans, 50% in total NPS, 32% in terms of unlikely to pay. These are nominal figure. 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 nine, which will make coverage grew from these are gross figure, not nominal, grew from 49% to 54% in terms of total NPS and from 59% to 67% in terms of bad loans. If you consider the nominal coverage, this will go up to 55.569%.
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 into in December 2016, where we stand as of December 2017, the target 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 a vis 2016, 17,000,000,000 almost in total NPL reduction, EUR 10,000,000,000 more than the approved plan of the merger, bringing down from EUR 30,000,000,000 to EUR 13,000,000,000. In terms of ratio, we will go down from EUR 24,100,000,000.0 to EUR 11,500,000,000.0 compared with the target in the regional business plan of EUR 17,300,000,000.0.
It was 17.9% because we consider the nominal one, if we consider growth, was 17.3%, down six full point 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 7,000,000,000 net of global NPLs. Meanwhile, bad loans will go down from EUR 7,100,000,000.0 to EUR 2,300,000,000.0 vis a vis EUR 4,200,000,000.0 of the original plan, corresponding to 2,500,000,000.0 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 nine, first time adoption, which will allow us to increase up to EUR 13,000,000,000 the cumulative disposal from EUR 16,000,000,000 to EUR 20,000,000,000, 5,000,000,000 more than the agreed plan with ECB. But on top of that, we have further reduction coming from the lower inflows from performing to nonperforming and the 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 one grew to 12.36%, taking in account only the Alethe Justeile transaction.
As you know, since 2018, we will have the phase in will be fully phased. And so we have 11.92% of stated common equity Tier one, fully loaded. We announced 175 basis point of impact on the FDA. Of course, you know that this impact will come fully in five years' time. For the first year, of course, is 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. So 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 point, mainly split in around 80 basis point, of course, calculated when the decision will be in place, which is 03/31/2018.
And what bring up to 80 basis point, 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 point of the reorganization of Bancassurance business, which you know we have already signed. We have considered the 20 basis point coming from the insurance reserve management sold to ANIMA, which is the transaction we announced today. We have dividends from associates from our participation of amounting from 19 basis points and again, the disposal of custodian bank for 33 basis points and other optimization action in the first quarter twenty eighteen. This will bring the total capital position already net of the 175 basis point to 12% to a comfortable 12.02% of common negative Tier one fully loaded.
I think this gave 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 net income, of course, results of EUR $558,000,000, but we know that this come also from some adjusted and extraordinary transaction. The adjusted profit and loss was positive for EUR 40,000,000, which we consider a very good result, taking account that we made almost EUR 400,000,000 more of provision on top of what we consider at the beginning of this year. Again, I already spoke about operating cost or revenues, so I won't go through that.
Let's go through the different items. Net interest income, positive for the fourth quarter consecutive this year. So since we merged, we already always grew in terms of net interest income. Of course, it's a slight growth. It's only EUR 300,000,000.0 and EUR 0.7 but it's very consistent quarter by quarter.
And 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 contribution from the IFS portfolio, which was reduced of 91,000,000 this year vis a vis last year. On Page 18, I think it's a very interesting slide, which explain 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 point. 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 come mainly from commission on asset management, brokerage and advisory services. But all the main figure trading foreign trading guarantee and so on went very well. In the last quarter, we were able to keep a good pace, both vis a 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 300,000,000 of extraordinary effects coming from the FX portfolio sale before the merger. This year, of course, the contribution has been lower. But still, we think this figure of €150,000,000 could be considered a sort of normal standard for what we expect from our IFS reserve. Also quarter on quarter, of course, here, the results are more spread out. There is not a consistency because this come mostly from the different trading that we do during the quarter.
Operating cost, down almost 19 percent year on year. Like for like is a reduction of 3.6%. Last quarter was very good, 7.3%, which shows our meanwhile, we go through the early retirement scheme and the cost optimization strategy will 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%, but of course, this was affected by the early retirement scheme amount accounted last year for $360,000,000. This year, 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, but most of them were in the third and fourth quarter of this year. So most of the result will come out during 2018. You can see from the quarterly comparison, you can see already how the reduction apply to this cost, 5.5% in the last quarter.
The total headcount, 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. But 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 at 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 nine 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 nine.
So we decided to put everything in the fourth quarter amounting to a total of more or less EUR 300,000,000 due mainly to unlikely to pay time value consideration, conservative help 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 1,800,000,000.0 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 OTP coverage, we grew in the last quarter 144 basis points, and we also have reconstituted a lot of coverage in order to replaying the bad loans disposal, which for 75% in 2017 were due to unsecured, so very well covered NPLs. Of course, the what I explained about UTP value and conservatiel are to be considered one off expenses because, of course, will not apply quarter by quarter, but was due to the rechanging 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 a 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 runoff on the core customer loans, we grew 1.6% in the last twelve months and 1% in the last quarter. In terms of total new lending, we had a very good result, EUR 18,000,000,000 of new lending, which EUR 14,500,000,000.0 to corporates, plus 12% vis a vis last year and a slightly decrease in the household lending, 3,600,000,000.0, minus 6%. In terms of direct funding, also here, we see a reduction from EUR 110,000,000,000 to EUR 107 but it's something that was announced by us.
This is following the strategy we are having for reducing the more expensing source of funding in favor of the free source of funding. Basically, we grew 9% in terms of current account and side deposit. Meanwhile, we decreased 25%, both deposit and in bonds. So this is the strategy that more or less will go ahead also for this year. During the 2018, we will start reissuing some of the bond expiring, But of course, the price of the bond we are going to issue will be much lower than the ones are going to expire, but we will see that in the next slide.
I have only to mention that in the last quarter and this first quarter, we started again to be on the market because in September, we went out with EUR 500,000,000 Tier two subordinated bond. And January year, we had EUR $750,000,000 of covered bond. On Page 28, bond maturities. I was mentioning, we had almost EUR 7,000,000,000 expiring in 2017. We will have almost another EUR 7,000,000,000, 6,500,000,000.0 expiring in 2018, EUR 2,200,000,000.0 institutional and EUR 4,400,000,000.0 retail.
For sure, we will not renew the retail bond, but 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 500,000,082 million 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 assets under management, which has been quite successfully during 2017. In terms of again, we were talking about that on Page 29. Indirect funding were up year on year 2.2%, EUR 4,400,000,000.0 of more assets under management and minus €2,200,000,000 in terms of assets under custody.
We have enhanced the percentage of assets 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 2,000,000,000 of assets under management related to non captive network of Alethi Gestial, which, of course, from the first of January twenty eighteen, we will not see anymore due to the disposal of Jestiale into Anima. The liquidity position continued to be very strong. We had a slight reduction the December 31, but was promptly reconsidered in going up again to EUR 49,000,000,000, out of which EUR 20,000,000,000 are eligible unencumbered assets, which were present in our book as of February 2. LCR is higher than 125% as much as NSFR is higher than 100%.
Page 31, securities portfolio. Of course, this is due to support diversification, we were very cautious in as we announced during 2017 in replacing a part, a consistent part of Italian govies, which went down from EUR 26,700,000,000.0 to EUR 20,700,000,000.0. 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 FX reserve were 170,000,000, thanks mainly to the improvement of the reserve in December with Dalyan Goviz.
The February 1, they were down to EUR 140,000,000. Today, I think we are up again to EUR 190,000,000. Let's go to the credit quality and the derisking situation. We have a strong NPL reduction already announced before, 3,200,000,000.0 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%, workout up 40 sorry, work out up 40% and increasing coverage 94 basis points year on year. Apart from bad loans, also TP were down by EUR 1,800,000,000.0, much more than we envisaged 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 1,100,000,000.0. Cash recoveries on bad loans, 48%, up to EUR $780,000,000 inflows from UTP to bad loans, down almost 50%, 1,500,000,000.0 Outflows from UTP to performing loans, up better performance, 30% from EUR $690,000,000 to EUR $895,000,000.
These last one are managerial figures. Meanwhile, all the others are on the balance sheet. We already mentioned the increase of cover leverage, both year on year. We went up dramatically in all the aspects year on year. But of course, we started the new year with NPL coverage pro form a 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 19,600,000,000.0, down to EUR 16,400,000,000.0, of which EUR 10,000,000,000 provisioned. The net is going down 17% to 6.5%, of which only EUR 1,100,000,000.0 seventeen percent of the total net are unsecured. Meanwhile, EUR 5,400,000,000.0, 83% are secured. You will see in the box that the coverage ratio pre IFRS nine were 82% for unsecured and 50% for secured.
Post IFRS nine application, they grow to 87% for unsecured and 59% for secured. Let's still remember that this coverage has 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, EUR 3,100,000,000.0 is the coverage. So bringing down total unlikely to pay to EUR 6,500,000,000.0, down 22, of which €1,600,000,000 equal to 25% are unsecured, net unsecured and almost €5,750,000,000 are net secured.
The coverage ratio for the unsecured is 47%. Out of the EUR 6,500,000,000.0 of net UTP, EUR 2,800,000,000.0 are restructured. As you know, the new the net restructuring loans, which account again 44% of total UTP, they are related to formalized restructuring plan and procedures, which are performing and paying installment capital and interest. Net unsecured UTP other than restructured are only EUR 500,000,000.0. Let's go back to our workout activity, which, of course, is only concerned bad loans.
On Page 38, we have our operational plan was 1,400,000,000.0 of reduction, $550,000,000 EUR of recoveries, EUR $880,000,000 of cancellation, we ended up with a much better result, almost 40% better, almost EUR 2,000,000,000 between cancellation and recoveries, of which EUR $780,000,000 of recoveries, EUR 1,200,000,000.0 of cancellation. On the right side of the slide, you see the total cost of the workout. And you can imagine how much is worth vis a vis the disposal of assets. In order to reduce by EUR 2,000,000,000 the GBP and bad loans, we were able to have an impact to profit and loss of only EUR 28,000,000. You know that more or less, for every €1,000,000,000 of disposal, the cost is between 130,000,000 €140,000,000 So you can see, it's basically one 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 one. We already spoke about that. Here, you have all the evolution starting since September. So you can see 10,300,000,000.0 adding up the sale of Justiel and considering already the capital increase, which we will underwrite for ANIMA, the 90 basis points more or less of the elimination of Aviva Univolt put option due to the sale of Catolica, 20 basis point low minus for performance of fourth quarter because, of course, it doesn't take into consideration the sale of Alletti, which is already considered and taking consideration the EUR 400,000,000 of extra provision we have done in the last during the year, EUR 300,000,000 of which in the last quarter.
The starting point the stated, they became 11.92%, on which we applied the reduction coming from the IFRS nine, one hundred and seventy five basis points, adding then the impact we estimate from the new validation of the model to the March 31, the bank reorganization of insurance management reserves, the dividends from associate capital management, I already mentioned, related mainly to the custodian banks. So net of the 175 basis points, the fully phased CET1 pro form a will be 12.02%. On Page 41, you see the different impacts, which we calculated IFRS nine impact. Basically, the new impairment model to nonperforming exposure count amounted to EUR 1,300,000,000.0, the to performing exposure EUR 100,000,000 and negative and in terms of financial activity, 100,000,000 positive. So all in all, almost EUR 1,300,000,000.0, which again come out to 175 basis points.
The group, of course, as I mentioned before, has already communicated the decision to adopt the transitional arrangement to phase in five years. And so I already explained that if we consider the phase in, we have still the correspondent of 175 basis point in our common equity Tier one 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 the new target that we announced today.
So I will leave the floor to the questions.
Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session, which is reserved to analysts only. The first question is from Andrea Vircellone with Exane. Please go ahead.
Evening. Three questions. The first one is a comment on capital going forward. So we know your starting point post IFRS nine 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 procyclicality since you are selling even more nonperforming loans and your view on whether you would potentially get an SGD waiver. And if there's anything you can share with us vis a vis EBA guidelines, 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 so that you can put forward your view as to whether or as to how the ECB will receive or what commentary they've made to you already this new more aggressive NPL derisking plan? And the third question is on provisions.
So lots of cleanup already done, some provisions booked through IFRS nine, FTA in Q1. Are you in a position to give us some guidance on the cost of risk 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 Justyael, of course, went into Anima, of which we are the first shareholders. So a part of that will come back in terms of dividends to us. In terms of retaining the earnings, of course, having massive increase of coverage, we don't envisage for this year further extraordinary items. We think that this 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 still have a 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.
But 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 many times that the GACs most probably will not be only for EUR 3,500,000,000.0, but we will grow to EUR 5,000,000,000, 6,000,000,000.
The immediate effect from this, apart from the reduction, is also some reduction, consistent reduction in RWA now that we have validated. So 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. So this strategy has been now announced to the market and to ECB.
And so we will see. I expect that they, having agreed last year to a reduction much less stronger than what we are giving now, I imagine they can be satisfied. We are going down EUR 10,000,000,000 from what was agreed only one year ago and seven full points of what was agreed only one year ago. So let's 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.
But again, the market are still 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 expect some normalization in 2018 in terms of cost of risk. But looking at the disposals you have in mind to do in 2018, 2019 and 2020 and the provision done with IFRS nine first time adoption, do you expect top up in 2018 for the disposal you have in place you're going to do? So net of the disposal, what do see as a normal cost of risk for 2018, look at the inflows of NPEs and so on?
The second question is on IRB model migration, that 80 basis points are now certain or there could be some difference March, so still to be clarified if it's the final number. And 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, so higher diversification? And what do you expect the competition to be in 2018? Take into account that the TLTRO, the deadline of January now has passed. So do you expect some lower competition on asset spreads?
And in terms of loans, what is what are your expectation for 2018? And 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. Carrizell. I want to be very clear on that. For the plan, I announced today, we don't have no needs for further top up.
So we will have further top up only if we decide that the plan is not enough. And so of course, we'll have to do something more. But all the figures are into the IFRS nine 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 March 31 when the RB will be applied.
We think right now that, of course, you know that is not we simplify in having basis point, but you know that it's a matter of RWA, capital shortfall and so on. So our estimates right now are 80 basis points. 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 30,000,000.
Meanwhile, the sensitivity on 100 basis point of increase of spread amount to around EUR $330,000,000 of higher NII.
Thank you.
The next question is from Fabrizio Bernardo with Fidentis. Please go ahead, sir.
Hi, everybody. I got a question on obviously, on the ARB model. When you say about the adoption, you mentioned model extension and the review. I would like to understand what does review mean? Is it something related to the RWA or former Banco Popular?
I mean, we have a benefit for PMI alone in gross terms that may be, let's say, diluted by any possible change in the weightings of the former Banco Popular? And my second question is about disposal. If you can give us any guidance about what we may expect in terms of NPLs disposals in the 2018 and in the second half because the press has been very chatty about the amount of NPLs that you may sell. So 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 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 remodelization 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 Banca Popular Milan to former Banca Popular Milan. So 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 sides of our GACS transaction.
I already mentioned 5,000,000,000 to €6,000,000,000 could be any of the two or something in the middle. If we consider even 5,000,000,000 we will now we say that we will do €5,000,000,000 more than the EUR billion we expected. So if we consider that EUR 1,520,000,000.00 will be done immediately, of course, the other EUR 3,000,000,000 will take the time and the opportunity to have the better window possible in order to make specific transaction. For the EUR 4,000,000,000 remaining due to the workout and not to disposal, in order to top up to EUR 17,000,000,000 reduction, we announced today, having done EUR 2,000,000,000 basically, 1,700,000,000.0 in the first year, we think that in the next three years, it's easily understanding that we can reach this target. So 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. Again, a clarification on your additional €5,000,000,000 of NPL disposals. So you just mentioned that you have you're going to have another EUR 2,000,000,000, let's say, as of June via GACS, which I presume will be represented by secured loans. So my first question is my understanding correct. The remaining €3,000,000,000 split in 2019, 2019 and 2020, do you have an idea of what kind of asset class are you about to sell?
Are these going to be secured or unsecured loans? And then a clarification again on your capital structure. Is it fair to assume that whatever is going to be the I mean, this is going to be the disposal plan that you have in mind, the common equity Tier one will remain anyway above 12%. And so 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 'eighteen and 'nineteen.
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 not mistaken in the region of EUR $9.00 1,000,000,000. We are more or less in between. We are two years down the road from there. So shall we assume for that for 2018 net income in the region of EUR 500,000,000 or so to approach the EUR 1,000,000,000 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, So that for sure, we will have the further EUR 2,000,000,000 more or less in the GACS. This will be done by June year.
The split between the Siguiri and Siguiri, this is a normal one in the GACS transaction, two third, one third, seventy-thirty, more or less. For the further EUR 3,000,000,000, frankly speaking, I cannot say, depends on the market condition, and we will exploit all the opportunity. For sure, we will not go to 2020. So everything will be done by this year or next year. And for the capital structure, 12%, I said already one point five years ago that with this current situation is a safe level of common equity.
Of course, it's much safer reducing further 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. So 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.
So it's very easy for you waiting to consider how much this apply to the net final results. But 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.
So if I can I add sorry, a follow-up on my question? So you said to clarify that the EUR 5,000,000,000 extra NPL sales will be completed by twenty eighteen, twenty nineteen. So you don't you want to wait 2020. Did I get it correctly?
Yes, you are correct. Our foregas are done in order to sell these in the first two years, half of them basically in the first six months and the remaining, we will leave 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 Vercelona. I think that I haven't talked really an answer. The EBA guidelines, we are the couple of Italian banks that are giving numbers out. To which extent these are incorporated in these 80 bps on the adoption of ARB and to which extent there are still some numbers out on this?
Then the other question is, when I look at your 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 NPL sales? Because I don't see any particular impact coming from that. And also if you can clarify what are the other optimization actions that you're referring to in the slide? And then the final question is when do you expect to receive a green light from ECB on your new NPL 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 questions 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 won't make it public.
So EBITDA guidance, again, I feel that having so if you want to tell expressly, I can tell you. But I think you can imagine that if we terminated an inspection with a report in December, I think many of the EBA guidance could be incorporated in our results. But again, this is something that we have to understand better. I am very optimistic. I prefer to be in this bank as 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 almost 60% of reduction is a considerable amount, both in terms of percentage and in terms of numbers, 17,000,000,000. So I will apply and then let's wait. Optimization is, of course, what we do every day. So 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. So we are already working and we will still work not only up to the March 31, 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. If I mean, you said that you are expecting ECB to agree with your plan, which
is no. Have to agree you.
If you don't know the date No,
We still have to make the submission. As you know, the submission will be done in March for all the banks. So today, I just wanted to give my new strategy, which, of course, I can still work on for some details up to March. And March, we will apply submitting this application to ECB. Then I don't know how long they will take in order to authorize or not.
I feel that the reaction for somebody who had the plan of EUR 8,000,000,000 reduction going to EUR 17,000,000,000 should be a good reaction. But unfortunately, I don't want to talk for others.
That is very clear. Look, I take advantage to ask you another very brief question. When I look at just for a clarification, I mean, this is the first time that you are looking at this at banks or I mean personally, I'm not fully clear how it works. I look at the IFRS nine impact of 175 bps, for the purpose of common equity, this 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? And then if you can confirm to me that if I apply €175,000,000 to the current risk weighted asset, I come to a number of about 1,300,000,000.0
So both yes. So the tangible impact is on Q1. And the EUR 175 exactly 1,300,000.0 which I mentioned, I think, in the last slide, The five
next question is from Riccardo Rovre with Mediobanca. Please go ahead.
Good evening to everybody. Just sorry to get back one second to the internal models. If I correct me if I get it wrong. The way I understand it is that the former Popular de Milano has been rolled over to IRB. And in the meantime, the existing models of the former Banco Popular have been reviewed by the ECB.
You say if I understand it correctly, you said that the review include most of or at least partially DBA 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 nine.
When you mentioned 1,200,000,000.0 or €1,300,000,000 your last slide says that this is a pretax number. So if I tax it 33%, I would get to a lower impact. So I have a little bit of a problem in reconciling the impact unless you tell me that the pretax 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.
And if you can share with us with regard to risk cost in Q4, you mentioned, if I got it correctly, 300,000,000 of, let's call it, one off related to the time value of OTPs and some other things. You also mentioned that, obviously, the sale of €1,800,000,000 gross NPL had an impact. Would you be could you share with us what is the impact on the sale of the NPLs in order to have for us to have any idea or better view what's the underlying risk cost in the quarter? And 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 of what is the operating profits or revenues and costs allocated to these two business units?
Okay. Many questions. So and also not very easy, but I'll try to give you an answer. So of course, it was not only the rollout of Banco Popular in Milan, this is for sure. So we have been reviewed the model authorized years ago by Banco Populari with the new criteria that ECB settled in order to validate banks.
So if you say, but so 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. But again, it's not something I can tell you right now. We will start the inspection three, I think, in the second quarter, somewhere between the first and the second quarter, and I will tell you something more as much as soon as I can.
IFRS nine, one point three, no, unfortunately, it doesn't work for us, the gross and net, because we cannot have any more DTA. So 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 EUR 300,000,000, I can say that the effect of this new criteria amounted to something more than EUR 300,000,000. The normal cost of credit, as you know, for our this year was around EUR 300,000,000, $330,000,000. So 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 bank, 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, we will come from the new bank assurance and our participation in ANIMA, we think, could be around EUR 50,000,060 million.
Euros Thank you very much, Mr. Kertani. I'm not particularly interested in the pricing of the €1,800,000,000 Did I get it right that you said that the underlying risk cost, net of the NPL, net of the UTP time value is 300 you think is €330,000,000 in the quarter? Is the number I got it right?
Yes, more or less.
Okay, okay, okay. That's okay. Thanks. Thank you.
Thank you.
The next question is from Victor Galliano with Barclays. Please go ahead.
Hello. Yes. My main questions have been answered. But I just wanted to ask a little bit 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 Alethi Justiele?
And in terms of 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. Gagliano. Frankly speaking, we have already disclosed every aspect when we announced the transaction. But it is for me to give you some hint about the details. We announced a twenty year commercial agreement with Anima, so which, of course, was also considering the renewal of the agreement vis a vis former Banca Popular Milano.
The fees were in line with the former Popular Milano agreement, which were higher, eight, nine basis points vis a vis the Alexis Jacelle contribution to Banco Popular, sorry 89%, sorry. What else? We were advised by Barclays. I understand you have Chinese wall, but 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, a lot of attention was placed in order to have compliance for all the decision in order to be an arm 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 don't have 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. So first a clarification. Did you say that with the two deals announced today, the custodian banks and ARIMA reserve deal, that's a loss of EUR 50,000,000 to 60,000,000 of profit a year? That's what I understood.
So if you could clarify. Then the second question on interest rate sensitivity. People usually ask about 100 bps parallel shift. I'm more interested to know what would be what you think would be the increase in NII if we would move to a zero interest rate environment, I. E.
LIBOR goes from minus 40 to zero or around zero? Then third question, what do you actually mean by normalized cost of risk? Because the business plan had 63 basis points, but I understand that was 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 300,000,000 to €330,000,000 which is, I understand, something around 120 basis points. So what 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. Krutz. No, I want to be clear on the first question. I think I was asked by Mr. Rovare about all the global effect of all the four disposals, and I say between EUR 50,000,000 and EUR 60,000,000.
The one we have just closed would amount around EUR 50,000,000, I would say. NII sensitivity, as I was mentioning, in terms of 100 basis point is around 17%, so EUR $3.33 40,000,000. If you consider 40 basis point, which is going to zero, would be EUR 100,000,000, 110,000,000. Normalized course of risk, I would like to know what is normalized. If we go to the plan, of course, the 63 basis points is much lower than the 300 we are mentioning right now.
If we were talking as before, I was asked what would have been normalized cost of credit for the fourth quarter, I answered at €330,000,000 That is, 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 nine are all for the bad loans of Ferenc or also UTP? And if you can give us the split.
Then do you expect to keep the workout like in the range of €2,000,000,000 per year as you did in 2017? Because if you clearly add the €2,000,000,000 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? Then 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 at project next year?
Thank you.
Thank you, Ms. Sabione. IFRS nine, take it easy because it's only bad loans, so we don't have to make any split. Work out, of course, this year was, I would say, the first year bringing from one side the buildup of capability and the experience for our team. But on the other side, the possibility to work on EUR 30,000,000,000 almost EUR 20,000,000,000 of bad loans.
So of course, we cannot say that EUR 2,000,000,000 per year is really what we expect in the future forever. But 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 4,000,000,000 for the up to the maturity of the plan, so in the next three years. If you were asking about if you want to keep the workout unit, you asked also that.
No, but 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 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 this on this field, we could be the best option. So 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 a reduction, but the fourth quarter was a bit more aggressive than others. So 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 Syed 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?
And 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 €13,000,000,000 disposal. Do you have the flexibility to do that earlier than your guideline? And then my second question was around your issuance plans. I think you alluded to issuing Tier two in the second half. You also have a legacy Tier one, which is coming to its first call date in June.
Are you able to give any guidance on how you're thinking about this instrument given that it will lose its capital value? Do you intend to replace it? And would you potentially consider issuing an AT1 this year? Thank you.
Meanwhile, I get some assistance on the Tier one. Let's talk about NPL disposal. I think I said as much as I could, I say that we will upfront at least a couple of billion, more or less, in terms of GACS. The further EUR 3,000,000,000, I say that will not be in 2020. So it's I think it's quite easy to understand that it will be in between second half twenty eighteen and 2019.
But 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 2,000,000,000, we only have to add EUR 28,000,000 to our profit and loss. So there is a big difference between disposal and workout. Let's look at 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. But mostly, we'll be concentrated in the next eighteen months. Just a minute for the Tier one. Of course, we cannot anticipate too much what we will do, but 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.
So we'll be happy to make also to take in consideration what are the needs and the attention of our investors.
Okay. Thank you.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Yes. Hi. Good evening. Sorry for this. I'm going to be asking similar question in a different way.
But 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 form a fully loaded number?
So the question is, if we are happy with 12% and if we think to generate further capital in 2018. Now of course, we are working, of course, in order to make a very profitable year. But again, there are so many 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 that we can make profits. Otherwise, we will have the opportunity to increase our derisking.
I was sort of thinking as well whether any potential inflation of RWAs can compensate the earnings progression you can show this year? Or those I mean, that inflation can be a little bit more back loaded into 2019 and 2020 as well? I'm thinking of procyclicality back to the first question on the call. So 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? Or 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%. So it's not such to determine a growth of RWA.
So we think that profitability will come will be producing 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. So if the question 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.