Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM nine months 2017 results presentation. 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. Thank you very much, everybody, for attending this presentation of the third quarter results of Banco BPM Group. As usual, before starting, two technical indications. One, you can find the presentation in our website under the IR section. The second one, the Q&A section will follow the presentation of Mr. Castagna. It is reserved to the financial analysts. I leave the feed to Mr. Castagna for the presentation of the third quarter results. Thank you.
Hi. Good evening, everybody. Thank you for being with us for the third quarter presentation. Let me just state that, as you know, we have signed the memorandum of understanding for the sale of Aletti Gestielle to Anima. Frankly speaking, today, we have also made the official signing of the transaction, and for this reason, as you know, we have classified the contribution of Aletti Gestielle according to IFRS 5 as a discontinued operation. In my presentation, for the sake of ensuring coherence with historical reporting, I would still present the Aletti Gestielle contribution line by line. In any case, you would find both the representation, the line by line, in the slides from 46 to 51. Meanwhile, you will find the state presentation numbers in the slides from 52 to 57. Let's go on page five. This is the usual roadmap state of the art of our project.
As you know, we have completed many things exposed in dark blue. Let's just talk about things that we have recently completed, and we are ongoing in order to complete. As far as NPL, we are, during this week, dealing with many bidders, which presented a rated non-binding offer. We have selected some of them for both the transaction. As you know, the portfolio is split in two different portfolios of almost EUR 1 billion each, one for positions over EUR 1 million, the other one below. We are on a final stage in order to receive the binding offer in the next few weeks, so that we can complete, as promised, the EUR 2 billion sale of unsecured loans by the year-end.
Therefore, we have already started also to make some work on the EUR 3.5 billion disposal of a mixed portfolio, secured unsecured, which in the first part of next year will go on the market through a GACS securitization. Completing with that, the entire program of EUR 8 billion disposal agreed in September 2016 with ECB in order to make our merger. The second wave of branch closure will go ahead in the first part of next year. During the first six months, we will close the other 50% of branches, which we have forecasted in our business plan. The global number was 350. We have already closed 170. We think we can reach a number of around 200 branch by June next year. In doing that, we will finish the number of branch which we have forecasted during the business plan.
Of course, we will have room to further consolidate our network due to the overlap we are nowadays experiencing after that merger, which happened in July this year. I already told you that we signed today the Anima Gestielle final agreement for the sale of Gestielle. We are also, during these hours, closing, signing the Cattolica deal, which you know we have defined a few weeks ago, but the signing is still ongoing, and during this hour should be concluded. I will leave a couple of slides dedicated to this transaction for the end of this presentation. As far as private banking is concerned, we have already migrated more than 5,000 clients from former BPM into Aletti.
We are nowadays migrating the clients from Banco Popolare into Aletti, and this will be concluded by year-end in order to leave for the next first quarter of 2018, only 1,000 private client to be migrated from Banca Akros to Banca Aletti, and completing the entire portfolio of our private banking activity into Banca Aletti. We have already approved, in September, the new network organization for our commercial activity, which will go live from January next year. You know that we will have this new corporate division dedicated to companies, enterprise, starting from EUR 75 million turnover on up. Cost optimization. We are dealing with a project we announced maybe the last presentation. Nowadays, we are working with the first wave of this project, and we will soon see some further results, which is still strengthening the cost synergy contribution to our business plan.
As far as rollout of internal models, we have completed the on-site inspection from ECB. Nowadays, the authorization process, I would say, is in Frankfurt, and we should expect to receive the definitive approval, hopefully, by year-end. I already told you about the new corporate division. We are also integrating the corporate division with the new Akros activity in the investment banking. Maybe we can be more precise maybe in the next quarter in order to present also the new organization of Banca Akros, which will have, apart from the usual activity in capital markets, in ECM and DCM, also a further strengthening in the M&A business.
Finally, we have already started with our digital omni-channel transformation program, which in turn, will be presented to the market in the next quarter, and which is already doing some progress after the IT migration, which was, of course, a precondition in order to reorganize our digital business. Let's have a look, I hope, very interesting. Where we are vis-a-vis the business plan we presented last year for the merger. We have some well-developed areas, which is performing much better than the business plan. We would like to give you some news about these areas of improvement. First of all, cost savings and synergies. Cost of funding is doing very well.
Basically, we are one year ahead of the business plan results, so we have achieved by 2017 already the results which we projected for 2018, leading the way to a possible improvement of something like EUR 200 million-EUR 250 million on top of what we expected for cost of funding. Talking about cost synergies, both staff cost reduction, administrative cost reduction are doing better than expected. By 2018, we will reach the EUR 140 million, which we presented in our business plan for the three-year plan, leaving further room of something like EUR 30 million-EUR 40 million improvement for 2019. The same for cost optimization. We think we can get from our cost optimization program a further reduction in cost in the region of EUR 50 million, leaving the total cost synergies from EUR 320 million to something like EUR 400 million savings. Let's go to the de-risking.
Here, as you know, much more will be told you in the final part of this presentation. As you know, we are also in this field, very much ahead of the business plan. We will complete the global EUR 8 billion disposal plan by June 2018. The recovery rate is improving dramatically. We are getting results almost 30% better than the strategic plan. As much as the UTP, unlikely to pay stock, is already below the target of 2019. We are already at EUR 10 billion of unlikely to pay. Meanwhile, we have the projection of EUR 11.2 billion for 2019. Finally, just to stay on the major aspects of our roadmap, we have completed the group structure optimization with the partnership that you know, both in the asset management and in the bancassurance. Of course, as you know, both the transaction were done because of driven by industrial logics.
Of course, we cannot forget that these two transactions give us a very important boost in terms of capital strength, giving us The both deals, 130 basis point for Cattolica, and something between 90 and 105 basis point for the Anima deal, if we include or not the potential transfer of the insurance reserve management. After giving you this flash on the business plan, let's go to the results of the third quarter. Net profit, adjusted from the contribution to Atlante and the voluntary scheme for the three banks sold to CariParma amount to something like EUR 120 million. If we exclude this contribution, our net profit stand at EUR 143 million. Meanwhile, the stated result is EUR 53 million. Going to core revenues, we were up 5.3% stated, which in turn is 4.4% adjusted, and the same as operating costs went down 9.9% stated and 2.5% adjusted.
The majority of the difference comes from the provision last year for the early retirement scheme. Even not consider this, we are 2.5% below the plan. Let's go to some state balance sheet number. Current account and deposit went up 10% year-over-year, which is EUR 7 billion more than last year. Asset under management grew EUR 5 billion to EUR 62 billion, plus 9% year-over-year. As well the loan growth. Meanwhile, we are not registering an absolute growth because of the many maturities we are experiencing and the renegotiation we are experiencing on the market. We have grown in terms of new loan granted, both for corporate and SMEs, which grew 22%, standing at EUR 11.5 billion at September, and for mortgages and consumer loan, EUR 2.8 billion.
The capital position, of course, need to be discussed further ahead. You will see a very clear slide on page 34. Let's anticipate that the pro forma common equity Tier 1 stands at 12.5%, without considering yet the benefit from the IRB validation model. Let's go to risk profile, which is further improving. By year-end, with this EUR 2 billion, we will be completing 56% of the entire program, which as I told before, will be completed by June next year. The net NPLs are going down 17% year-over-year, with a massive decrease in unlikely to pay, almost EUR 2 billion, -20% year-over-year. The workout we already told is around EUR 500 million in nine months, something like 43% year-over-year, almost 30% more than the projection of the business plan. Net flows to NPLs are dramatically down 66%, EUR 1.3 billion year-over-year.
The level of coverage are still very strong, in line for as far as NPLs and made loans with the number agreed for the merger. Meanwhile, for unlikely to pay, we are 400 basis point above the 27%, which was the starting point, the agreed point for our transaction. I will skip page 10, in which you will see some representation of core revenues increase, operating cost decrease, net profit, as well as the asset quality, which I already mentioned before about the de-risking. I will skip to page 12, where you will find the increase and the representation of the fully loaded CET 1 ratio, which is stated 10.3%. Adding, we will come back on this further ahead on page 34. Nowadays stands at 12.5% on a pro forma basis, again, not including the benefit from IRB.
The phase-in common equity Tier 1 ratio is stated 11%. On a pro forma basis, 12.82%. The liquidity profile is very solid, standing at more than 150% as far LCR. 100% as far NSFR. To direct funding, some balance sheet figure. We are still proceeding with our strategy to reducing the more expensive source of funds like time deposit and bonds, which were down 30% year-over-year. Meanwhile, we grew 10% on sight deposit and current account. Bond reduction is very massive. We will come back on this, have, of course, a positive effect both on cost of funding and also on giving ammunition to grow in asset under management.
On page 15, you see the new distribution of different source of funding. You will see that the bonds reduction from 26% to 19% is exactly corresponding to the sight deposit and current account, which grew from 60% of the total funds to 69%. Indirect funding grew above EUR 100 billion. First time for our bank. We started the year at EUR 97 billion. Nowadays, we are at EUR 100.3 billion, especially experiencing a big growth in asset under management, EUR 5 billion year-on-year, which now represent 62% of indirect funding. Bond maturities. We are on page 17. Of course, I was mentioning the positive impact of our cost of funding reduction given by the transformation of bond maturity into current account. This effect was massive in 2017. Something like EUR 5 billion bond maturity expiring had a positive effect on this reduction of cost of funding.
We still have, during this quarter, EUR 1.5 billion to expire, added to the EUR 6.5 billion which will expire in 2018. The average spread of what is still to expire, both in this quarter and the next year, is an average spread of 2.8%. You will make your calculation about the reduction of cost of funding. Let's go to page 18. As you see, we can allow ourself also to have this reduction also in our bond, also because of the very strong liquidity position we are still experiencing. We have a buffer which is back at beginning of November at more than EUR 20 billion of unencumbered eligible asset, which of course is a very good buffer in terms of potential needs in liquidity.
On top of that, the share of GOVs of this unencumbered asset amounts to almost 90%, being, of course, the best part of our potential eligible assets. Just a quick look at our securities portfolio. I would say that prudent diversification came through the reduction of EUR 4.5 billion year-on-year of our Italian GOVs portfolio, went down from EUR 29.2 billion to EUR 24.6 billion. Good support to NII, better than expected in business plan. Of course, in reduction vis-à-vis the year before. As you may remember, we had a forecast of a final effect in the three-year plan of more than EUR 320 million of NII contribution from bond portfolio. We are experiencing a result which is better than we forecast, giving room for some recovering also on this aspect.
Let's say that the other jurisdiction bonds, which were 5% of our securities portfolio beginning of the year, nowadays represent 14% of our portfolio, being primarily France, U.S., Germany, and Spain. Will still grow at a figure around 20% by year-end in order to strengthen this diversification. The Italian GOVs portfolio, as you know, has a more prudent approach vis-à-vis last year. We have 50% of our portfolio in AFS and 42% held to maturity. The modified duration of the Italian GOVs in AFS is 2.8 years. A very good news is that we had, the 30th of September, a positive contribution from gross available for sale reserve, which amounted to EUR 85 million. This contribution grew at the 7th of November, at EUR 275 million, which of course are not embedded in the number I gave you of the common equity Tier 1.
Let's also add that the same positive contribution, more or less, come from held to maturity bonds, which of course, as you know, with IFRS 9, can be potentially switched back totally or in part to AFS. Let's go to the loans. Customer loans. As I said before, market is not growing. We are not growing as well. This is the only, I would say, unlikely experience that we are having during these nine months. The market is very slow, basically is flat. We are basically flat. The third quarter was a bit worse than the previous one, also because of the IT migration, which of course had some impact on the procedure in order to grant new loans, and we are still 1% below year-on-year.
Let's say that, of course, the majority of the reduction is not coming from the performing portfolio, but of course, is coming from the non-performing portfolio, which decreased 17% year-over-year. The good news, which I mentioned before, is that the new lending is growing better than expected because we are growing at a pace of EUR 11.5 billion for corporate and SMEs, which is more than 20% vis-à-vis last year, and EUR 2.8 billion as far as mortgages and consumer loans. Let's go page 21. On the net interest income figures, we have a contribution stated of 1.6% below last year. If we keep off the contribution of the TLTRO one-off and the PPA, we are 5% below last year. Meanwhile, the quarter comparison is positive, both in the stated and in like-for-like comparison.
Let's say that the good news is the third quarter consecutive that we have a better quarter vis-à-vis the previous one. We are on the road to increase progressively the contribution from NII, again, coming especially from reduction cost of funding rather than, as we would like to see, from the increase of the loan book and moreover, a better spread on loans, which is one of the problem we are facing, and we will talk about it in a minute. On page 22, you have the commercial spread. Here you can see that in the last nine months we had a reduction of mark-up of 13 basis points, 5 basis points only in the third quarter. Meanwhile, we have recovered 8 basis points year-on-year, 4 basis points quarter-on-quarter as cost of funding, as mark-down.
This is due to the difficulties we experience. The market is experiencing, trying to grow in loans. On top of that, is also driven by the maturity, by the expiry date in the 31st of January 2018 of the TLTRO threshold, in order to give the contribution from ECB to the banks, which have grown in terms of loans. This, as you know, is not calculated on the average growth, but unfortunately on the point-in-time growth and at the 31st of January 2018. This, of course, is causing a massive battle, competition amongst all the bank. Of course, is much more beneficial for client rather than for bank. Let's only say that luckily enough, this will terminate the 31st of January next year. Hopefully from then on, we will experience the real loan growth and mark-up on the market. Page 23.
This is maybe the best results from our bank is the growth in fees and commission. We are growing 13% year-on-year. We are growing almost 30% as far as commission from management, brokerage, and advisory. These, of course, come mostly from the growth of the asset under management we mentioned before of the EUR 5 billion growth. Also the other fees are having a good contribution, and we are particularly happy also of the third quarter results, which of course suffer from the seasonality of the third quarter, which of course with August normally perform worse than the other. If we add to this normal seasonality, also the effect of our IT migration, which, of course, took almost one and a half months from end of July to beginning of September to, of course, restate the full operation of our former BPM network.
I have to say that comparing the Q3 this year with the Q3 last year, we experienced +8%, which is really very comfortable for us. We also know that from Q4 we are recovering and trying to go back to the figure we've shown in the first two quarters. On page 24, we have the contribution from NFR. As I mentioned many other times, although we have a reduction year-on-year of more than EUR 200 million, the results of these nine months is better than we expected. I have to say that this is, as I mentioned, the new normal for NFR contribution to the bank. Last year was, of course, determined by a strong one-off gains of almost EUR 200 million, which we got from the sale of the AFS portfolio of former BPM before the merger. Let's go to operating costs, page 25.
Many extraordinary items, both in 2016 and 2017. As you can see, as far as 2016, the main item is the EUR 166 million contribution to early retirement plan, and the anticipation of DTA fees. On the opposite, in 2017, we had EUR 43 million of integration cost offset by a positive contribution of the DTA recovery from 2016. All in all, is almost 10% reduction. If you eliminate the one-off, the reduction is still very comfortable at 2.5%. Also on a quarterly basis, we have like-for-like, basically a result which is the same of the previous quarter. Of course, the year-on-year comparison and the stated number are affected by the EUR 37 million of deposit guarantee scheme we put on our balance sheet in the third quarter. Personnel expenses, again, EUR 166 million last year, exceptional one-off, which bring to a 13% reduction.
If you eliminate this, we have still a 3.5% reduction in cost of personnel, which is consistent with the quarterly reduction we are experiencing. As you can see, it is -1.3% quarter-on-quarter. In order to see the evolution of that account, I will bring you to page 27. In the 31st of December last year, we had the first exit from the early retirement scheme of 300 people. This year, we will complete with the final exit in December, almost 1,200 people leaving the bank. Next year, we will remain with the final 700 people. This is the reason why I was mentioning that we are ahead of the plan, we will recover the full EUR 140 million of the business plan by 2018. The global reduction from 2015 to 2019 will be 2,570 people, including the turnover. I will skip page 28 because it is again on administrative expenses.
We explained before, reduction both on a yearly basis and on a quarterly basis. On page 29, we have the comparison, very difficult to compare, frankly speaking, of loan loss provision. As you know, last year we started in the third quarter to provision the amount needed, related to the share issue made by Banco Popolare. We have EUR 1 billion more of provision. Quarter-over-quarter, we are keeping on having a very strong provision, for two reasons. First of all, because we want to accelerate, as I mentioned, the de-risking plan, and we want to keep the coverage at very high level. Let's consider that as far as the nine months this year, we had also the tail of the final On-site inspection of last year in both banks. It's not a number which is comparable to a normal situation.
Page 30, strong reduction in NPL stock, 17% year-over-year, EUR 3 billion net. Net flows decrease of 66% year-over-year. Internal workout, +43% year-over-year. Increase in coverage, 244 basis points. Particularly well, the Unlikely To Pay, down EUR 1.7 billion, almost 20%, with an organic reduction, which is going ahead quarter-by-quarter. Again, let's go on page 31 to some very consistent numbers, which will allow us to make some further disclosure about our forecast on Non-Performing Loan decrease. This is, of course, very much helped by these flows we are experiencing. Net flows to NPLs, -66%. Inflows from UTP to bad loans, -55%. Outflows from UTP to performing loans, +66%. As far as coverage, again, we compare with the nominal one, which is much more comparable with the last year results.
We are experiencing 400 basis points on a nominal comparison year-over-year on total NPLs, 250 basis points on bad loans, 550 basis points on Unlikely To Pay, 590 basis points on the coverage of past due. Let's have a focus on Unlikely To Pay, which I already told you are very much performing, and reach EUR 10.1 billion of gross exposure, covered at 31%. As I mentioned before, we had a forecast in the business plan, which would lead to EUR 11.2 billion, because we were still considering the inflows at the level of last year. Once we stretch the figure we are experiencing this year, we have, of course, reduced this year to EUR 10 billion and projecting further reduction of almost EUR 1 billion per year of NPL in the next two years.
Without the provision, the net book value is EUR 6.9 billion, and it was, 31st of December, EUR 8.3 billion, down 17%, of which EUR 1.6 billion unsecured, covered 45%, and EUR 5.3 billion secured, provisioned at 25%. Let's have a look to what are these Unlikely To Pay. Almost half of them, EUR 3 billion out of EUR 6.9 billion, are restructured loans. This means that our transaction formalized underlying restructuring plans under the new credit protection rules procedures, well known as Law 67 or Law 182. This means that our interbank agreement with restructuring plans, which are almost all performing, both in terms of capital and interest. Out of these, EUR 2 billion are secured, EUR 1 billion is unsecured. Again, from time to time, we will be able to switch this restructured loan back to performing loans once the consistency of the business plan shows that they are performing again better.
Of the other unlikely to pay, which amount to a global net book value of EUR 3.9 billion, EUR 3.3 billion are secured and EUR 0.6 billion are unsecured. This is just to give you a broad idea also of what is inside these unlikely to pay figures, which is difficult to compare from bank to bank if you don't have many of these evidence very transparent. All in all, page 34, the common equity tier one ratio evolution. We started in December 2016 with 11.4% fully loaded. As you know, we have one of the few, I think one of the two, frankly speaking, banks which already have an impact on RWA defaulted asset and EAD retail of 52 basis points, which we already deducted from our common equity tier one. The business development amounts to 31 basis points positive.
The final Aviva put option, already calculated with the final number of the agreement done with Aviva, grew to 37 basis points. Meanwhile, we have left the Unipol put option with the estimated impact on common equity tier one. As you know, as far as this transaction, we still are waiting for the arbiter to give the final numbers, we'll give evidence of this as soon as we have the final answer from the arbiter. All considering, the stated common equity tier one goes down to 10.32%. On top of that, of course, we have to add the two transactions. Basically, I can also confirm that we have signed today also the Cattolica deal. Both deals, Anima and Cattolica, have been signed today.
We have a contribution from Anima deal going from 91 basis points, which we consider for this figure, but growing potentially to 106 basis points if we add on the insurance reserve management, and 126 basis points, which is the impact from the Cattolica deal. All in all, we will grow to perform a common equity tier one of 12.5%, without considering, again, the effect of the validation of our model. On top of that, I can say that we have a number of small capital management activities. One of these, of course, is already mentioned in the 15 basis points, coming eventually from Anima for the insurance management, but also coming from other assets we can manage, but without having any material decrease in the contribution of our business plan.
Without considering massive sales of important assets, which contribute to our profit and loss, which could be in the range of more than 50 basis points. On top of that, there is still the validation. Of course, we should deduct the part related to the Unipol final transaction, which could amount to something, I don't know how much. Leave me the possibility not to say anything until we don't have the final number. Let's have a very quick but very interesting deep dive into bad loans. This is a slide that you know well, I will go very quick on that. We are now at EUR 18.1 billion out of EUR 19.6 billion beginning of the year. By year-end, we will be at EUR 16 billion of gross exposure, of which, after the sale of the two unsecured EUR billion, 66% will be represented by secured NPL, and 34% by unsecured.
Let's remind that the industry average is 48% secured, 52% unsecured. This is another important assumption in order to make forecast on the recovery on this asset. On the right part of the page, you see the usual coverage with the collateral compared to nominal value and net value, which leave a lot of room in order to make good recovery. I will skip page 37. We already mentioned the recovery, 43% better than last year, and the final definition of the EUR 8 billion by June. Let's make some further consideration about the workout activities. I would call this slide on page 38, Workout versus Disposals. You can see that from the workout activity, we had EUR 498 million in nine months of recoveries, which leave to further EUR 928 million of cancellation related to the cash-in we had for this GBV. The global was EUR 1,423,000,000.
This means that we grew 28% in cash-in, but also 48% in cancellation. If we compare this figure to what we recoveries, EUR 498, and the existing provision, which were EUR 905 million, you will see that the cost of this workout activity amounting to EUR 1.5 billion is only EUR 20 million, which of course you can compare to whatever disposal transaction you will see on the market or even our own disposal transaction, which are amongst the most successful in the market. This means that again, we have, of course, the willingness to further dispose asset as much as we can, but we still would like to point out that the workout is bringing very satisfactory results and very few sacrifice for the profit and loss of our bank. Let's have a final look on page 39 on the projection. In this page, we are not giving you any new plan.
We are only basing our assumption on the inertial results we are experiencing, both in terms of recovery, reduction in inflows, reduction in UTP, outflow to performing loans. If we add on the EUR 8 billion of disposal plan, which should terminate by June, and we still stretch the inertial assumption experiencing in these nine months through the three year of the plan, we will end up with final results which are much better than the results announced in our business plan. Without doing any other action, which of course, is not an assumption we are telling you right now.
We really hope that once by year-end, we will have more clarity about our excess of capital due to the IRB validation, the termination of the process of bancassurance purchase, the further maneuver on capital, we can have the final picture in order to determine how much excess of capital we will have in order to accelerate the disposal. Nowadays, we are just saying, also if we don't do any other disposal, the reduction is quite impressive. In billion, in the first box on top of the right page, you will see that we were in the plan assuming EUR 31 billion of non-performing exposure, going down to EUR 24 billion end of the plan. With the current performing and trend, we should go down EUR 5 billion more, reducing to EUR 19 billion, the non-performing exposure stock.
In terms of course of ratios, without doing any further disposal, we should go down from 24.8%, not to 17.9% as we envisaged in the plan, but 16.1%. As far as net NPE ratio, from 15.9% to 9.1%, and not anymore to 11%. The strong capital position, which I tried to explain before, already reached nowadays, but that we are very consistent in saying that we will reach in the next couple of months, will allow us to make some further disclosure about the excess of capital and the potentiality to utilize excess of capital in order to further reduce the backlog or to increase further our provision. I hope that this is enough clear to make everybody understand that we don't need any capital issue.
We have capital management and performing so well in many aspects of the plan, and potentially utilizing also IFRS 9, taking advantage also in terms of profit and loss accountability, and we are pretty sure that we can give you quite comfortable numbers as soon as we have a definitive comprehension of the final common equity Tier 1 end of the year. On page 41, I did just some few lines about the strategic rationale of the Cattolica deal. As you know, we have maintained a significant pro-rata contribution from the 35% participation to the earnings of the new company. We are confident that the two business, life and non-life together, can give some strength to the potential performance of the new joint venture, which before was separated.
On top of that, we deem that the capital buffer we have created with this deal is well above the potential contribution for the purchase of the two companies. Going into the transaction, you know that we have sold 65% of both companies. The total consideration for 65% is EUR 853 million, of which EUR 544 for Popolare Vita, including almost EUR 90 million as an extraordinary dividend paid by Popolare Vita to Banco ahead of the closing, and EUR 308 million for the non-life insurance. Will be 15 years. The management control of the insurance company will be transferred to Cattolica. Banco will keep holding veto powers on significant strategic matter. As I told you before, I can announce you that we have signed today the legal documentation. Everything is subject to the purchase from Aviva and Unipol of the 50% and to the authorization from IVASS.
On page 44, I can say that we have achieved most of the target we envisaged when we presented the new transaction to the market. Integration, rationalization, simplification, de-risking, well ahead of business plan, improvement in dealing and workout in NPL, cost efficiency action, bringing further advantage on the synergy we presented for the plan, capital strengthening, reaching already 12.5% before the IRB impact, consolidation and new profitability and revenues coming from the reorganization of our new private bank concentrated in Aletti, of the synergies between Banca Akros corporate investment banking with our corporate division, and the new reorganization of our network, very close to the client, very focalized on our territory, on our legacy, on the different territory in the north of Italy, which we are very much involved. The group positioning itself as a strong domestic player.
We think we have a sound risk profile, a solid capital base, and on top of that, the potentiality to bring back to profitability, in the terms we already presented in our business plan, and I already told you the number of potential bettering vis-à-vis also the number of the business plan. Thank you.
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 Fabrizio Bernardi with Fidentiis. Please go ahead.
Hi, everybody. My first question is about obviously the gross NPE ratio. If I look at the last pages of this presentation, it seems that you are very proud about the ability of your bank to recover bad loans. My question is very direct, let's say, do you have any reason to expect or believe that the regulator may not be that happy and thus change your NPLs plan to make it more aligned to the gross NPE targets that were unveiled by other banks very recently? My second question is on page 34, you do not assume any reversal of the 52 basis points related to the impact of RWA on defaulted assets and so on. Is this because the reversal is related somehow to the adoption of advanced model for Pop Milano? Thank you.
Okay. Thank you very much, Mr. Bernardi. First of all, I don't know if regulator will be happy or not. I know the plan we presented to ECB last year. I am saying today that also not bettering, which of course is not our intention, because if we can realize a plan in 18 months and not in 36 months, if we are reaching results which are already better than the plan in three times, of course, we will better also our plan. Today, what I was saying is with the results that we have already done, we can further better the original plan, which is reducing to 16%.
If you say 16% will be enough or not, I am saying that I already have, but materially and formally, I will have by year-end, the clear situation of my capital strengthen and capital buffer to be utilized to further improve the de-risking of the bank. I'm just saying that for the final figure, just to be very clear, to reach the figure we have mentioned during this day by other banks, we feel we don't have any problem to reach that figure with the capital buffer we will have by year-end. Also because of the IFRS 9 opportunity year-end. Of course, in order to give you some precise amount, we have to wait the final validation for IRB. Which lead us to the second question, which if I understood well, was related to impact of RWA defaulted asset and EAD retail.
These, as I mentioned sometime before, will disappear with the validation of the model, of course, will be part of the validation of the model. We will be the first bank to be validated considering also this safety net, which as far as I know, for other banks is still not considered. We will be the first one, maybe with another bank, which has been already impacted by this RWA defaulted asset and EAD retail impact. In a way, when we will announce in January, the impact of the common equity tier one, we will be a bit below other banks because we will be already given the cut related to this new approach of ECB.
Thank you. Very clear.
The next question is from Giovanni Razzoli with Equita Group. Please go ahead.
Good afternoon to everybody. A couple of questions on my side as well. Again, on the potential for reducing the NPL ratio. I would like to be very straightforward with my question. Let's assume that the ECB takes a never more severe stance in terms of NPE compared with what the other banks are targeting, that is 13%-10% NPE ratio. What is your plan B in terms of capital resources? I was wondering whether your preference would be for the release of internal resources like, the disposal of assets or for a capital increase. In this context, I was wondering whether you can share with us what is the amount of capital gains in your held to maturity government bond portfolio, because I've seen that you had a quite significant growing AFS reserve in Q3.
I expect that the held to maturity gains on the government bond portfolio may also produce a material impact on your capital. The second question, again, on your, let's say, inertial 16% NPE ratio target for 2019. Just want to understand whether I got your target and indication properly. What you are saying is that if you do assume the inertial trend in terms of workout units, in terms of workout operations, you assume it to be in the condition to reduce the gross NPE from 23.9 billion EUR to 19.1 billion EUR of gross NPEs. Is that my understanding correct? The final question about the bancassurance rationalization. I've seen here that you assume 126 basis points of positive impact from the rationalization while you had a capital absorption of 74 basis points in the Sorry, 84 basis points, if I sum the Aviva put option and the Unipol.
I was wondering whether this difference, which is quite significant, is something like 30-40 basis points of more capital generated out of the rationalization comes from the different terms of the Cattolica deal or if there is something else. Thank you.
Thank you, Mr. Razzoli. Let's go question by question. First of all, if by B plan you imagine capital increase, this could be maybe a Z plan, I would say, because it's so far from my expectation, which is quite impossible to imagine. As I said before, we have this already impact from the CET 1 due the transaction we have done this year. We have potentially many other transactions, but very small. You were mentioning some of them. You were mentioning, if I got well, the insurance reserve management. You didn't mention the AFS. Again, is more or less 200 million EUR more than in September, so is already another, let's say 20 basis points. You mentioned held to maturity could be another 25 basis points.
I could mention on top of, just to make some examples, is not something that we are right now envisaging, the custodian bank. As you know, we could reduce the Anima stake from 15% to 9.9%. These are many aspects that without giving any material danger to our future profitability, could lead to consistent growth in our Common Equity Tier 1, not mentioning, of course, what we are expecting from IRB model. I don't know what is your idea of a sound Common Equity Tier 1, but I think that we will lead on a very sound Common Equity Tier 1, maybe with some excess of capital, especially if we have to utilize this in order to reduce dramatically the NPL or to increase dramatically the provision. I am quite confident that I have many other actions to do, before considering any other perspective.
The 16% is not only because of the workout, but of course, as I mentioned in the presentation, because of a much better default rate, of a much better deterioration rate, of a much better cure rate. It's not only the recovery rate, but it's also the inflow and the outflow, which is performing so better than we thought one and a half years ago, when we presented our business plan during, of course, a situation in which the economics, the macro was very different from nowadays. Watching these numbers we are experiencing right now through the plan, give us this positive lending at 16%, which is not yet comparable with 17.9%, because 16% is done with the denominator, which is much lower than what we envisaged in the business plan.
Because, of course, it's very clear for us that the loan growth is materially lower than we expected. If we should utilize the denominator of the business plan, this 16% will be lower than the figure, in the region of 15-something percent. That's why we say it's an inertial reduction, because we don't add on any other disposal. This does not mean that we will not do any other disposal. It means that we have to understand what we can do depending on the capital buffer. Third, bancassurance. Roberto Peronaglio was telling me that it's very difficult, the understanding of this transaction, I will try to be more precise. First of all, it's not 70 basis points, because today we already said that the sum of Aviva and Unipol amount to 89 basis points. Of course, for Aviva is a definitive number.
For Unipol, it's still an estimation, because we don't know what the arbitration will end up. Having said that 89 basis points is this figure in reduction, we have 126 basis points, which is the correspondent contribution to Common Equity Tier 1 of the EUR 853 million, which we cashed in the Cattolica transaction. Just to be clear, we have 37 basis points of buffer. We don't know yet how much we can utilize. You know better than me, speculation from newspapers, make some calculations. I still think that there is room for having more caution than the potential impact.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Yes, good evening. Back to the capital position. I would like to understand what is the minimum level of common equity tier one that you have in mind to run the bank. What do you think, looking at the numbers, the common equity tier one could end up by year-end in the area of 13.5%, because I've got 25 basis points from IFRS reserve, 15 basis points from held to maturity reserve, 15 basis points from Aletti reserve disposal. On the add-on, it's not clear to me what are you assuming in terms of IRB model validation. We were talking about 100 basis points, plus the possibility to see risk-weighted assets add-on elimination, if you can clarify on that.
Anyway, if the number will be around 13.5% common equity tier one by year-end, that means that assuming 12% common equity fully loaded, you have some EUR 1.1 billion of extra provisioning to increase the coverage ratio by year-end. Just to understand if my calculation is correct, and if you are taking the opportunity of IFRS 9 first-time adoption to do this kind of provisioning. That should help to maybe speed up the NPE disposal because the coverage ratio on NPE would go up to almost 67%. As far as cost of risk, take into account the calendar provisioning and also the recovery rates that you are experiencing. You are still confirming your guidance for 2019. Finally, on top line, you are one of the few banks that show a net interest income increase quarter-on-quarter. Good numbers.
Take into account the expired maturities in the fourth quarter. Should we assume a further increase in the fourth quarter of net interest income? Also a clarification on commission. There was some disruption in the third quarter due to IT migration. Shall we assume the commission to be at the same level as the first 2 quarters for the fourth quarter? Thank you.
Thank you, Mr. Carrese. For the first part of our question, I would do only mathematics, because I don't want to give any guidance. I already said that I will give guidance next quarter, when I will be more sure of which capital I will have. Let's say that your assumption is a good one. I would have at least, I would say 100 basis points, but to say the least, of room to allocate to either further provision or disposal. Let's say 100 basis points is a gross GBV value of Sorry, a gross value of EUR 700 million, which gross is EUR 1 billion. If I work out, if I am very consistent with EUR 20 million for EUR 1.5 billion, I can do this work for the rest of the banking system, I will have enough room.
If I have to sell, of course, the amount I have to spend is a bit more than EUR 20 million. It's a multiple of this, let's say in the region of EUR 150 million. Make some calculation, you will have a sum of EUR 5 billion-EUR 6 billion for each 100 basis points of common equity Tier 1. Of course, we are hoping that we can deal a lot with this workout, because it's very much more profitable than sales. Of course, we understand, as far as we have done up to now, that we have to split between sales and workout. Cost of risk, frankly speaking, there are these new IFRS 9 implication, which could massively bring down potentially the cost of risk through the capital absorption. We have not done any assumption about reducing yet in 2019.
Again, once we will have the new number clear in our mind, we can also review the projection for 2019. NII increase, again, the consistency and the amount of maturity we have also in the fourth quarter, give us confidence in saying that we will have a very good fourth quarter, better than the third one, will be also during next year. Meanwhile, for commission, again, we have passed saved through the difficulties of the IT migration with the sound results in terms of commission, we are quite sure that we can go back towards the first and second quarter results, even though you know that also the fourth quarter have some seasonality vis-à-vis the first two quarters.
On top of that, there are the performance fees from Gestielle, which of course, were very much relevant in the first two quarters and most probably will have some lower effect in the fourth quarter.
Just a clarification on 2019 guidance. You're saying that you're not going to revise upwards, to increase the cost of risk for 2019 due to calendar provisioning and so on, but maybe there could be some positive surprise in terms of lower cost of risk, thanks to the IFRS 9 first-time adoption and the extra provisioning you're going to do.
Well, as you did, I heard the new declaration from ECB. Let's wait for understanding better what the definitive assumption of the calendar will be. I gave you already in this presentation some figure about the real amount of what could be the unsecured amount. Of course, we have to wait for some more consistency in understanding what to do.
Thank you.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good evening. I'm not going to ask you about NPLs or capital. I agree with everything you said, and it's all clear. Just three boring questions. The first one is on operating costs. The former Banco Popolare used to have, almost every year, a drop-down in administrative expenses in Q4, and sometimes it occurred as well for personnel costs due to accrual practices that they had throughout the year. Obviously, this is the first year of the new company. What should we expect for these two lines? In which direction, at least, should we see them in Q4? The second question is on the maturing bonds on the funding side. Far, you have not replaced them, because you have excess liquidity. You probably have still a lot of excess liquidity to deal with not replacing those maturing next year and improving NII in the process.
What will your strategy be in light of this? Finally, on the bank assurance agreement, were the terms changed relative what you currently have with Unipol and Aviva vis-à-vis the split between the distribution and the manufacturer, or everything stays the same? Thank you.
Thank you, Mr. Vercellone, especially for not asking about NPLs. As far as the first question, if you consider both operating costs and personnel costs, we should be able to keep an average of the same amount we experienced in the 2Q. This is because, of course, personnel is going down, unlikely what you were mentioning for administrative, because this year there is still some accrual to be done for IT system integration cost. There is something still to be brought to the cost side. I feel that we will have a result in line with the 2Q. As far as maturity bond, let's say that we are, in considering the results I was mentioning beginning of this presentation, we feel that we cannot replace, as a senior bond, of course, this maturity.
This does not mean that we cannot go ahead with some covered bond next year, as well as we will replace the subordinated EUR 500 million maturing next year. All in all, waiting, of course, for further understanding of the MREL situation , we should be able also for next year to reduce dramatically the consistency of our bonds and in so doing, reducing furtherly the cost of funding and again, increasing asset under management and commission. Bank insurance, the terms we have proposed to both the final bidder in order to compare them, were exactly the same we had from the two previous insurance. Basically, we don't have any change in commission from the two different agreement before. Of course, we hope on top that being now only one insurance company, we can have some synergies and some opportunity to exploit further production and new field of cooperation.
Okay, thank you.
The next question is from Alberto Cordara with Merrill Lynch. Please go ahead.
Yes, good evening. Just coming back to some of the points you were making before. If I understand correctly, you are telling us that based on the current capital situation, you should be able to get to an inter-ratio 16.1% in 2018, but if at the end of the year, you are going to get an additional buffer, thanks to IRB or thanks to disposals and whatnot, the target could be even lower, and realistically, you're expecting to have at least 100 basis points. Now, thinking about the 100 basis points, if I'm correct, sorry, I'm just reasoning around it. Looking at your NPE, you have a portion of secured and a portion of unsecured. The unsecured read is EUR 7.2 billion.
If I want to bring down this value to EUR 0.05, which is more or less close to the minimum that we see now in the market for unsecured, that would cost me less than 100 basis points of capital. If you get rid of the unsecured, which is frankly easy to do because the unsecured you can sell it just depends on the price, that's it. You will improve your NPE ratio by an additional 6%. Instead of being 16%, you're going to be 10%. I just want to, particularly in the first part, to check with you whether my understanding is correct. The 16.1% is given the current situation. You can do better if at the end of the year, your capital buffer is going to be higher.
The second point is still related to this NPE, apologize if I go back to this. You are the first bank to be given the authorization to merge in Europe under the European Banking Union by the SSM. As a condition of the merger, you were asked to do a capital increase to satisfy a plan of reduction in NPE, which is the one you agree with the regulator. Now you are 6 months into the merger. I'm just thinking whether it makes sense for the regulator to ask you to become even more aggressive at this stage, particularly when you are delivering. Sorry for the question, but it looks like there is a bit of a fatwa against Italian banks.
The question is, do you have any piece of paper with a signature on it where you're told that your plan is okay? Thank you.
Okay, Mr. Cordara, thank you. I am a bit embarrassed, let me say, for the first part of your question, I was saying that we will end up having a mix of bad loans, which will be 66% end of the year secured and 34% unsecured. Let's say for, again, just not having done any particular consideration, just talking about what we are experiencing on the market, this is normally the percentage that you experience in the securitization, this mix, 65/35, 70/30, more or less is this average. You know how much end up the value of this securitization because of the market, you could do some consideration in what is the further top-up we will have to do if we decide also, or even to sell all our portfolio. Of course, I am not saying this.
I want to mention that your assumption were right as far as the declaration I made this evening in terms of capital, in terms of buffer, I didn't say anything about how much I want to dispose. I want just to leave with you the consideration that there is room, in any case, both if I want to sell or if I want to work out, in order to have plenty of room to either reduce the impact on profit and loss, or having all the market happy because we will sell everything without further sacrifice. This brings me to the second part. It's not because of ECB that we are saying that maybe we can present you with a better plan. We are saying this for two consideration. The first one is we want to update you about our progress.
Because we have nine months of experience nowadays, we can tell that the plan is bettering, so we are doing better results than we expected, which in turn change and better also the final business plan number. The second is, let's say, not because of ECB again, but I read many papers from everybody. Everybody is very confused about this situation. The market is also confused. Yesterday we had -7%. I really don't understand why today +4%, tomorrow, I don't know.
If the problem for the market is to have a clear figure pointed out in order to say what we will do, and because of the consistency, I hope we are gaining on the market for the delivering we are doing on our business plan, is maybe good for us when we will have a total and sure consideration of our capital buffer to volunteer to declare new number. It's not because ECB is making any fatwa or is asking us to improve the plan. I think ECB is appreciating the effort we are doing. They are very happy, I hope, in knowing that we are bettering the plan.
I think they will be very happy also in knowing without any other action plan that we will reach 40% of reduction in gross GB, gross book value exposure, even without any other sales, because from 31 to 19 is already 40% reduction, which I think is the maximum they expect from the bank. We have only say to the market more than to ECB, we have enough capital and enough room to do even better. Now is for my shareholders and my board to decide going ahead, if we want to make more provision and try to exploit the good recovery rate and saving some money rather than decide to give a boost, possibly, to our stock and dispose everything one-off. This is something that we are still to consider.
Okay, very clear. Thank you.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Yes, good evening to everybody. Just a couple of questions from my side. Mr. Castagna, when you mentioned the capital that you will have at the end of the year, most of the actions that you mentioned are actually within your decision, such as transferring the held to maturity to reclassifying held to maturity to AFS, reducing the stake in Anima. All these things are in your hands and in your decision. I just wanted to better understand whether you are willing to do that. This is my first question. The second question I have is on, again, on IRB model. Would you be in the position to share with us what is the impact, the net impact that you would expect from the approval possibly at year-end? I think, at least personally, I'm a bit confused. Thanks.
Again, the two question are very much linked. For any managerial decision, I think that the best way to make a decision is to have every aspect of the question in your hands. I'm very happy to have most of the aspect in my hands. Unfortunately, the missing part is the one you are asking me in the second part, which is the amount of the common equity, one contribution for the validation. We are all experiencing a new kind, I would say expectation, validation from IRB. Leave me, please, look in few months, whatever could be the decision from ECB. We of course have high expectation. I think they will try to be very strict, as usual, because they are prudent, and they are cautious.
I will try, once I will have all the aspect, and not the majority of the aspect in my hands, to make the right decision. You understand that if I make a decision not understanding an important part, like the IRB validation, I could run the risk to sell something which give me profitability in the next year without any scope for the capital excess.
Very clear. I understand that. If I can turn the question another way, let's assume that the approval of IRB models is unfortunately, once again delayed, and let's assume it comes in the first half of 2018. Would you still be keen on activating the other buffers that you were mentioning? IFRS 9 is going to happen on the 1st of January, that's it. It's not going to happen no more except from that day.
Mr. Rovere, I am as much curious as you are. Unfortunately, in the life, we have to wait for certainty. I mentioned to you, if I would have told you a few months ago that today we would have a 12.5%, would have been a guess. Nowadays, is reality, as much as is not yet reality, the further capital management maneuver we could do. Let's consider everything, also taking in account the timing, which of course is an important component as much as the global value. Let's wait. We have a discussion. I mentioned many times that I don't want to talk for ECB. ECB can talk for herself. I can talk for myself. I have only told you that we have done all the approval procedure. We are waiting for their answer.
We are confident, of course, we talk to them, we are confident we can reach some results by the presentation of the FY results. We can give some scope also to the next presentation. Otherwise, we discover everything today. Let's wait until February.
Okay, thank you.
The next question is from Victor Galliano with Barclays. Please go ahead.
Hi. Yes, I just have one follow-up question really on the bancassurance side. Clearly you've signed with Cattolica, which is great news. In the old BPM perimeter, you still have the partnership with Covéa. Can you just remind us when does that expire, and how do you see perhaps that developing after that expires? Do you see potential for Cattolica wishing to take on that business as well? Just a curiosity on my part there, how you could maybe rationalize and better structure and get economies from the overall bancassurance business of the whole merged unit. Thank you.
Thank you, Mr. Galliano. Yes, for us in the new situation of having two insurer partner. Which is quite frequent for many other banks. In the next few months, we will understand better how to deal. It's quite easy because as you know, Covéa has an agreement with the former BPM network. Meanwhile, Cattolica signed for the former Banco Popolare. The scope of the agreement is quite clear. Of course, we hope that both of them will run so fast to make very hard the choose in 2021, I think it's September or December 2021, when will expire the Covéa agreement with BPM. For the time being, we don't think to the expiry date. We think to have two very good insurer that can, in a way, informally compete to give us always better product in order to allow us to put them both in competition.
Thank you.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi. Apologies, there are a few questions, but they're all small, I think. First, PPA guidance, initially you started at EUR 40 million-EUR 45 million a quarter, then you went to EUR 30 million. Last quarter was EUR 24 million. Do you have new guidance? The potential net NPL target of 9%. How is that calculated? Is it net NPLs over gross loans? Third question, do you have any views on the potential ongoing impact of IFRS 9 in both NII and cost of risk? Finally, when you talk about the buffer of capital, obviously, we don't know exactly how much capital it will be. When you talk about buffer, is over what target? Is it 12%? 11%? 13% CET1. What's the level of capital where you don't want to go below that level? That's it. Thank you very much.
Thank you, Mr. Cruz. I will start from the last question. Buffer capital was a question, in a way, I tried to answer before exactly. We have to understand where we stand end of the year in order to understand better the position. Again, if I had the possibility to have clear the situation right now, I would have given you a final plan on what we want to do in terms of capital, excess of capital, and potential further disposal. Unfortunately, up to now, I don't have the final situation, so it's difficult to say how much we would like to be. I think somewhere between 11.5%-12% for somebody who reduced so dramatically the risking of the bank is something which could be considered safe enough.
As far as IFRS 9, there is a performing impact which we already told could be in the region of 25-30 basis points. Of course, there is the part of IFRS 9 linked to the non-performing, to the stage 3. In this respect, again we have to understand the capital buffer in order to devote an amount good enough, and as much big enough in order to try to solve once and forever the problem of the risking, taking into account the opportunity that IFRS 9 give us, not going through profit and loss. The PPA effect on the quarter on the net profit, NII net profit globally is EUR 25 million-EUR 27 million. The last question was on net NPL target.
It was just a result of stretching the assumption of the reduction of inflows, increase of outflow from UTP to performing, and cash recoveries that bring us with the same consideration we did in the presentation of the business plan, but with better assumption to have a reduction which bring us EUR 5 billion lower than the expected results. This EUR 5 billion became 1.8 reduction in terms of nominal NPE ratio and 200 basis points in term of net Non-Performing Exposure ratio.
Holding steady coverage.
Holding, of course, the coverage at the same level.
Okay. That's fine. Thank you very much.
Gentlemen, there are no more questions registered at this time.
Okay. Thank you very much, everybody, and lots of new news by the next presentation. I am sure we will have the opportunity to meet in between. Thank you and good evening.