Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Banco BPM Nine Months twenty seventeen 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 Bernalio, IR Manager. Please go ahead, sir.
Thank you very much. Thank you very much everybody to attend this presentation of the third quarter results of Banco Vipieme Group. As usual, we first started to technical indication. One, you can find the presentation in our website on the IR section. And the second one, the Q and A section will follow the presentation of Mr.
Castagna is reserved to the financial analyst. Now 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 a memorandum of understanding for the sale of Valletti GCL to Anima. Frankly speaking, today, we have also signed in made the signing, the official signing of the transaction. And for this reason, as you know, we have classified the contribution of Alecti Juste L according to IFRS five as a discontinued operation. But in my presentation for the sake of ensuring a coherence with historical reporting, I would still present the Aleti Gesiele contribution line by line.
In any case, you would find both the representation, the line by line in the slide from 46 to 51. Meanwhile, you will find the state of the 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 blue, 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 bidder, which presented already non binding offer. We have selectioned many of them some of them for both the transaction. As you know, the portfolio is split in two different portfolio of almost EUR 1,000,000,000 each, one for position over €1,000,000 the other one below. And 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 €2,000,000,000 sale of unsecured loan by the year end.
Therefore, we will we have already started also to make some work on the €3,500,000,000 disposal of a mixed portfolio secured and secured, which in the first part of next year will go on the market through a GACS securitization. Completing with that the entire program of €8,000,000,000 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 three fifty.
We have already closed 170. We think we can reach a number of around 200 branch by June year. In doing that, we will finish the number of branch, which we have forecasted during the business plan. But of course, we will have room to further consolidate our network due to the overlap we are nowadays experiencing after the IT migration, which you know happened in July. I already told you that we signed today the Anima Gestielle final agreement for the sale of Jestiel.
We are also during these hours closing, signing the Catolic deal, which 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 Banco former BPM into Aletti. We are nowadays migrating the clients from Banco Popular into Alethi and this will be concluded by year end. In order to leave for the next 2018, only 1,000 private client to be migrated from Banca across to Banca Letti and completing the entire portfolio of our private banking activity into Banca Letti.
We have already approved in September the new network organization for our commercial activity, which will go live into from January year. And you know that we will have this new corporate division dedicated to companies enterprise starting from €75,000,000 turnover on up. Cost optimization, we are dealing with the 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 ACROS activity in the investment banking. Are maybe we can be more precise maybe next in the next quarter in order to present also the new organization Banca Actros, which will have apart from the usual activity in capital markets in ECM and DCM also a factor strengthening in the M and A business. Finally, we have already started with our digital omni channel and 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. So 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. And we would like to give you some news about these areas of improved. 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 200,000,000, EUR $250,000,000 on top of what we expected for cost funding for cost of funding. Talking about cost synergies, both staff cost reduction and administrative cost reduction are doing better than expected. By 2018, we will reach the EUR 140,000,000, which we presented in our business plan for the three year plan, leaving further room of something like EUR 30,000,000, 40,000,000 improvement for 2019.
The same for cost optimization, we think we can get from our cost optimization program further reduction in cost in the region of €50,000,000 leaving the total cost synergies from $320,000,000 to something like EUR 400,000,000 savings. Let's go to the de risking. As you know, much more and much more will be told you in the final part of this presentation. But as you know, we are also in this field very much ahead of the business plan. We will complete the global €8,000,000,000 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 10,000,000,000 of unlikely to pay. Meanwhile, we had a projection of EUR 11,200,000,000.0 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 bank assurance. Of course, as you know, both the transaction were done because of driven by industrial logic. But of course, we cannot forget that these two transaction give us a very important boost in terms of capital strengthen giving us both the deals 130 basis points for Catolica and something between 9,105 basis points for the ANIMA deal if we include or not the potential transfer of the insurance reserve management. Let's go 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 three banks sorry, the voluntary scheme for the three banks sold to Cariparma amount to something like €120,000,000 So if we exclude this contribution, our net profit stand at €143,000,000 Meanwhile, the stated result is €53,000,000 Going to core revenues, we were up 5.3% stated, 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. But 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 on year, which is EUR 7,000,000,000 more than last year. Assets under management grew EUR 5,000,000,000 to EUR 62,000,000,000 plus 9% year on year.
And as well the loan growth meanwhile, we are not registering growth 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 loan new loan granted both for corporate and SMEs, which grew 22% standing at €11,500,000,000 September at September and for mortgages and consumer loan €2,800,000,000 The capital position of course need to be discussed further ahead and you will see a very clear slide on Page 34, but let's anticipate that the pro form a common equity Tier one stands at 12.5% without considering yet the benefit from the RB validation model. Let's go to risk profile, which is further improving. By year end with this EUR 2,000,000,000, we will be completing 56% of the entire program, which as I told before will be completed by June year. The net NPLs are going down 17% year on year with a massive decrease in unlikely to pay almost EUR 2,000,000,000, minus 20% year on year. The workout we already told is around €500,000,000 in nine months, something like 43% year on year, almost 30% more than the projection of the business plan.
Net flows to NPLs are dramatically down 66, 1,300,000,000.0 year on year. The level of coverage are still very strong in line for as far as MPS and Med loans with the number agreed for the merger. Meanwhile, for unlikely to pay, we are 400 basis points 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 and net profit as well as the asset quality, which I already mentioned before about the de risking. And I will skip to Page 12, where you will find the increase and the representation of the fully loaded CET1 ratio, which is stated 10.3%, but adding we will come back on these further ahead on Page 34, but nowadays stands at 12.5% on a pro form a basis, again, not including the beneficial from IRB.
The phase in common equity Tier one ratio is stated 11% and on a pro form a basis 12.82%. Also the liquidity profile is very solid standing at more than 150 as far LCR and 100% as far NSFR. Let's go ahead to direct funding some balance sheet figure. We are still proceeding with our strategy to reducing the more expensing source of funds like time deposit and bonds, which were down 30% year on year. Meanwhile, we grew 10% on side deposit and current account.
Bond reduction is very massive. We'll come back on this and 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 and you will see that the bonds reduction from 26% to 19% is exactly corresponding to the current to the site, the Brazilian current account, which grew from 60% over the total funds to 69%. Also indirect funding, we grew very above EUR 100,000,000,000 first time for our bank. We started the year EUR 97,000,000,000.
Nowadays, we are at EUR 100,300,000,000.0, especially experiencing a big growth in asset under management, EUR 5,000,000,000 year on year, which now represent 62 of indirect funding. Bond maturity, 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. These effect was massive in 2017, something like EUR 5,000,000,000 bond maturity expiring had a positive effect on this reduction on cost of funding. We still have during this quarter EUR 1,500,000,000.0 to expire added to the EUR 6,500,000,000.0, 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%. So we will make your calculation about the reduction of cost of funding. Let's go to Page 18. As you'll see, we can allow ourselves 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 November at more than €20,000,000,000 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 GOVIS of these unencumbered assets amounts to almost 90% and 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 4,500,000,000.0 year on year of our Italian govies portfolio went down from EUR 29,200,000,000.0 to EUR 24,600,000,000.0. Good support to NII, better than expected in business plan, of course, reduction vis a vis the year before. But as you may remember, we had a forecast of a final effect in the three year plan of more than €320,000,000 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 last year beginning of the year, nowadays represent 14% of our portfolio being primarily France, U. S, Germany and Spain. And we still grew at a figure around 20% by year end in order to strengthen this diversification. The Italian govies portfolio as you know has a more prudent approach vis a vis last year, we have 50% of our portfolio in AFS and 42% H2M HL2 maturity. The modified duration of the Dallium gov is in AFS is two point eight years.
A very good news is that we had the September 30, a positive contribution from gross available for sale reserve, which amounted to €85,000,000 This contribution grew at the November 7 at $275,000,000 which of course are not embedded in the number I gave you over the common equity Tier one. 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 nine can be potentially switched back totally in part to AFS. Let's go to the loans, customer loans. As I said before, market is not growing and we are not growing as well. And 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 by 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 €11,000,000,000 €5 for corporate and SMEs, which is more than 20% vis a vis last year and EUR 2,800,000,000.0 as far as mortgages and consumer loans.
Let's go Page 21 on the net interest income figures. We have a contribution stated 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 a vis the previous one.
So we are on the road to increase progressively the contribution from NII, again coming especially from reduction of 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 the reduction of the markup of 13 basis points, five basis points only in the third quarter. Meanwhile, we have recovered eight basis points year on year, four basis points quarter on quarter as cost of funding has marked down. This is due to the difficulties we experienced in the market is experiencing trying to grow in loans.
But on top of that is also driven by the maturity, by the expiry date in the 01/31/2018 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 after the 01/31/2018 and this of course is causing a massive battle competition for all amongst all the bank and of course is much more beneficial for client rather than for bank. Let's only say that luckily enough this will terminate the January 31 next year. And hopefully from then on, we will experience the real loan growth and markup on the market. Page 23, this is maybe the best results from our bank is the grow 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 assets under management we mentioned before of the EUR 5,000,000,000 growth. But 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 seasonability of the third quarter, which of course with August normally perform worse than the other. But if we add to this normal seasonality, also the effect of our IT migration, which of course took almost one point five months from July to 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 plus 8%, which is really very comfortable for us.
And we also know that from Q4, we are recovering and trying to go back to the figure we shown in the first two quarter. 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 €200,000,000 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 200,000,000 which we got from the sale of the AFS portfolio of former BPM before the merger.
Let's go to operating cost, Page 25. Many extraordinary items both in 2016 and 2017. As you can see as far as 2016, the main item is the €166,000,000 contribution to early retirement plan and the anticipation of DTA fees. On the opposite in 2017, we had €43,000,000 of integration cost offset by a positive contribution of the DTA recovery from 2016. Globe 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 results, which is the same of the previous quarter. Of course, the year on year comparison and the stated number are affected by the EUR 37,000,000 of deposit guarantee scheme we put on our balance sheet in the third quarter. Personnel expenses, again, 166,000,000 last year, exceptional one off, which bring to a 13% reduction. If you eliminate these, 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's minus 1.210.3% quarter on quarter. In order to see the evolution of that account, I will bring you to Page 27. We have by in the December 31 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 1000 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 they are we are ahead of the plan and we will recover the full EUR 140,000,000 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's 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 a loan loss provision.
As you know, last year, we had we started in the third quarter to provision the amount needed related to the share issue made by Banco Popular. And so we have EUR 1,000,000,000 more of provision. Quarter on 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 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.
So it's not a number which is comparable to a normal situation. Page 30, strong reduction in NPL stock, 17% year on year EUR 3,000,000,000 net net flows decrease of 66% year on year, internal workout plus 43% year on year, increasing coverage went two forty four basis point, particularly well unlikely to pay down €1,700,000,000 almost 20 with an organic reduction, which is going ahead quarter by quarter. Again, let's go on Page 31 to some very consistent number, 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 minus 66%, inflows from UTP to bad loans minus 55%, outflows from UTP to performing loans plus 66%.
As far as coverage, again, we compare with the nominal one, which is much more comparable with the last year results. So we are experiencing 400 basis points on a nominal comparison year on year on total NPLs, two fifty basis points on bad loans, five fifty basis points on unlikely to pay, five ninety basis points on the coverage of past due. Let's say, focus on likely to pay, which I already told you are very much performing and reached EUR 10,100,000,000.0 of gross exposure covered at 31%. As I mentioned before, we had a forecast in the business plan, which would lead to EUR 11,000,000,000, 11,200,000,000.0, 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 10,000,000,000 and projecting further reduction of almost EUR 1,000,000,000 per year of NPL in the next two year.
Without the provision, the net book value is €6,900,000,000 and it was December 31 €8,300,000,000 so down 17%, of which €1,600,000,000 unsecured covered forty five percent and €5,300,000,000 secured provision at 25%. Let's have a look to what is what are these unlikely to pay. Almost half of them EUR 3,000,000,000 out of 6,900,000,000.0 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 plan, which are almost all performing both in terms of capital and interest.
Out of these €2,000,000,000 are secured, 1,000,000,000 is unsecured. And again, from time to time, we will be able to switch this restructuring loan back to performing loans once the consistency of the business plan shows that they are performing again better. Of the other or non performing likely to pay, which amount to a global net book value of EUR 3,900,000,000.0, 3,300,000,000.0 are secured and EUR 600,000,000.0 are unsecured. This is just to give you a broad idea also of the what is inside these unlikely to pay figures, which are is difficult to compare from bank to bank if don't have many of these evidence very transparent. All in all, Page 34, the common equity Tier one ratio evolution.
We started in twenty sixteen December twenty sixteen 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 our reported asset and E and D 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 point. Meanwhile, we have left the Uniper 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 arbitrator to give the final numbers. And so we'll give evidence of these as soon as we have the final answer from the arbitrator. All considering the stated common with Tier one goes down to 10.32%. On top of that, of course, we have to add the two transaction. We basically, I can also confirm that we have signed today also the Catolica deal.
So both the deals, Anima and Catolica have been signed today. And we have a contribution from Anima deal going from 91 basis points, which we consider for this figure, but growing potentially to $1,600 basis points if we had done the insurance reserve management and 126 basis points, which is the impact from the Catolica deal. All in all, we will grow to a pro form 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 activity. 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 asset that we can manage, but without having any material decrease in the contribution of our business plan.
So without considering massive sales of important asset, which contribute to our profit and loss, which are 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 Uniper final transaction, which could amount to something, I don't know how much, leaving 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, so I will go very quick on that.
We are now at €18,100,000,000 out of 19,600,000,000.0 beginning of the year. By year end, we will be at €16,000,000,000 of gross exposure, of which after the sale of the two unsecured billion euros 66% will be represented by secured NPL and 34% by unsecured. Let's remind that the industry average is 48% secured, 52% unsecured. So this is another important assumption in order to make forecast on the recovery on these assets. On the right part of the page, you see the usual coverage with collateral compared to nominal value and net value, which leave a lot of room in order to make good recovery.
We already mentioned, I will skip Page 37. We already mentioned the recovery 43% better than last year and the final definition of the 8,000,000,000 by June. Let's make some further consideration about the workout activities. This I would call this slide on Page 38, workout versus disposals. You can see that from the workout activity, we had €498,000,000 in nine months of recoveries, which leave to further €928,000,000 of cancellation related to the cash in we had for this GBV.
The global was €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 $498,000,000 the existing provision, which were $9.00 €5,000,000 you will see that the cost of this workout activity amounting to €1,500,000,000 is only 20,000,000 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. So 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 initial 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 8,000,000,000 of disposal plan, which should terminate by June. And we still stretch the initial 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 RB validation, the termination of the process of bank assurance 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. But nowadays, we are just saying, also if we don't do any other disposal, the reduction is quite impressive.
On in billion in the first box on top of the right page, you will see that we were in the plan assuming €31,000,000,000 of non performing exposure going down to €24,000,000,000 end of the plan with the current performing and trend, we should go down EUR 5,000,000,000 more, reducing to EUR 19,000,000,000 the nonperforming exposure stock. Also in terms of course of ratios without doing any other any further disposal, we should go down from 24.8% not to 17.9% as we envisaged in the plan, but 16.1%. And as far as net NPL ratio from 15.9% to 9.1% and not anymore to 11%. Of course, 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 nine, 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 one end of the year. On Page 41, I did just some few lines about the strategic rationale of the Catolica deal. Of course, as you know, we have maintained a significant pro rata contribution from the 35% participation to the earnings of the new company. We hope that 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.
And on top of that, we deem that the capital buffer we have created with this deal is well above the potential contribution to the further 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 €853,000,000 of which $544,000,000 for Popular Evita, including almost €90,000,000 as an extraordinary dividend paid by Popular Evita to Banco ahead of the closing and $3.00 €8,000,000 for the non life insurance. The tenure will be fifteen years. The management control of the insurance company will be transferred to Catolica.
A bank who will keep holding Vito powers on significant strategic matter. As I told you before, I can announce you that we have signed today the legal documentation. Of course, everything is subject to the purchase from AVEVA and UNIPOL of the 50% and to the authorization from EVAS. All in all, 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 in Alethi concentrated in Alethi of the synergies between Banca Agros 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. So the group positioning itself as a strong domestic player.
We think we have a sound risk profile, a solid capital base and more 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 a 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. And my question is, I mean, 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? And my second question is on Page 34.
And you do not assume any reversal of the 62 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 Popmilano? 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 the plan in eighteen months and not in thirty six months, and if we are reaching results, which are already better than the plan in three times, of course, we will better also our plan. But today, what I was saying is with already the results that we have already done, we can further better the original plan, which is reducing to 16%. If you say 60% will be enough or not, I am saying that I will have 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. And so 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 nine opportunity year end.
Of course, in order to give you some precise amount, we have to wait to 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 E and D 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. So we will be the first bank to be validated considering also this safety net, which as far as I know for other bank is still not considered. So we will be the first one maybe with another bank, which has been already impacted by these RWA defaulted asset and the retail impact. So 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 NPE ratio, I would like to be very straightforward with my question. Let's assume that the ECB takes a nearer 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. And in this context, 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 the Q3. So I expect that held to maturity gains on the government bond portfolio may also produce a material impact on your capital. The second question, again, 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 to be in the condition to reduce the gross NPE from EUR 23,900,000,000.0 to EUR 19,100,000,000.0 of gross NPEs. Is that my understanding correct? And the final question about the bank assurance 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 if I sorry, 84 basis points if I sum the AVEVA put option and the UNIPOL. I was wondering whether this difference, which is quite significant, is something like thirty, forty basis points of more capital generated out of the rationalization comes from the different terms of the Catolica deal or if there is something else?
Thank you.
Thank you, Mr. Verzzoli. So let's go question by question. First of all, if by the 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 these already impact from the common equity Tier one due to transaction we have done this year.
We have potentially many other transaction, 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 €200,000,000 more than in September. So it's already another, let's say, 20 basis points.
You mentioned L2 maturity could be another 25 basis points. I could mention on top of that, just to make some example, is not something that we have right now envisaging the custodian bank. As you know, we could reduce the ANIMA stake from 15% to 10% to 9.9%. These are many aspects that without giving any danger, any material danger to our future profitability could lead to consistent growth in our Common Equity Tier one, not mentioning, of course, what we are expecting from ASB model. So basically, I don't know what is your idea of a sound common equity Tier one, but I think that we will be on a very sound common equity Tier one 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.
So I am quite confident that they have many other action 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 danger rate, of a much better cure rate. So it's not only the recovery rate, but it's also the inflow and outflow, which is performing so better than we thought one and a half year ago when we presented our business plan during, of course, a situation in which the economics, the macro was very different from nowadays. The stretching, 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, are very 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.
So it's quite that's why we say is an inertial reduction because we don't add on any other disposal. This does not mean that we will not do any other disposal, means that we have to understand what we can do depending on the capital buffer. Third, bank assurance, Roberto Bernanjo was telling me that is very difficult the understanding of this transaction. And so I will try to be more precise. First of all, it's not 70 basis points because today we already said that the add on the sum of Raviva and Unipol amount to 89 basis points.
Of course, for AVINVA is a definitive number. For Lunipol is still an estimation, because we don't know what the arbitrate will end up. Having said that 89 is this figure in reduction, We have €126,000,000 which is the correspondent contribution to common equity Tier one of the €853,000,000 which we cashed in the Catolica transaction. So 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 newspaper make some calculation, 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? And what do you think I mean, look 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 L2 maturity reserve, 15 basis points from the Alethi reserve disposal. Then 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 and then plus the possibility to see risk weighted assets add on elimination, if you can clarify on that.
But anyway, it seems to be if the number will be around 13.5 common equity year one by year end, that means that assuming 12% common equity fully loaded, you have some €1,100,000,000 of extra provisioning to increase the coverage ratio by year end. So just to understand if my calculation is correct and if you taking the opportunity of IFRS nine first time adoption to do this kind of provision. That should help, I mean, to maybe speed up the NPL disposal because the coverage ratio on NPS would go up to almost 67%. On the as far as cost of risk, taking into account the calendar provisioning and also the recovery rates that you are experiencing, you are still confirming your guidance for 2019. And finally, on top line, you are one of the few banks that show a net interest income increase quarter on quarter, good numbers.
Taking into account the expiry maturities in the fourth quarter, should we assume a further increase in the fourth quarter of net interest income? And also a clarification on commission, there was some disruption in the third quarter due to IT immigration. Should we assume shall we assume the commission to be at the same level that the first two quarters for the fourth quarter? Thank you.
Thank you, Mr. Carveza. For the first part of our question, I would do only mathematics because I don't want to give any guidance. I already say that I will give guidance next quarter when I will be more sure of which capital I will have. But let's say that your assumption is a good one.
In this respect, I would have at least, I would say, 100 basis point, but to say the least of room to allocate to either further provision or disposal. Let's say 100 basis point is a gross GBV value of sorry, a gross value of EUR700 million, which gross is EUR1 billion. If I work out and if I am very consistent with €20,000,000 for €1,500,000,000 I can do this work for the rest of the banking system and I will have enough room. If I have to sell, course, the amount I have to spend is a bit more than €20,000,000 is some multiple of these, let's say in the region of 150,000,000 make some calculation and you will get some EUR 5,000,000,000 to 6,000,000,000 for each 100 basis point of common equity Tier one. Then of course, we are hoping that we can deal a lot with this workout because it's very much more profitable than sales.
But 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 implication, which could massively bring down potentially the cost of risk through the capital absorption. So we have not done any assumption about reducing yet in 2019. But 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 and so will be also during next year.
Meanwhile, for commission, again, we have past saved through the difficulties over the IT migration with the sound results in terms of commission. So 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 a vis the first two quarter. On top of that, there are the performance fees from Jestiel, which of course were very much relevant in the first two quarters and most probably will have some lower effect in the fourth quarter.
And just a clarification on 2018 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 surprises in terms of lower cost of risk. Thanks to the IFRS nine first time adoption and the extra provision you're going to do?
Well, as you did, I heard the new declaration from ECB. Let's wait for understanding better what the definite of 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. But 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. So just three boring questions. The first one is on operating costs.
Former Banco Popular 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. So 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. So 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. But what will your strategy be in light of this? And finally, on the bank assurance agreement, were the terms changed relative what you currently have with Unipol and Aviva vis a vis the split between the distribution and the manufacturer or everything stays the same?
Thank you.
So as far as thank you, Mr. Vercello. As far as especially if I'm not asking you about NPLs. As far as the first question, if you consider both operating costs and the personnel costs, we should be able to keep an average of the same amount we experienced in the second Q. This is because, of course, personnel is going down, unlikely what you were mentioning for administrative costs this year, there is still some accrual to be done for IT system integration cost.
And so there is something still to be brought to the cost side. So I feel that we will have a result in line with the second quarter. 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 500,000,000 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 the fatherly the cost of funding and again increasing asset under management and commission.
Bank Assurance, the terms we had we have proposed to the both the final bid in order to compare them where exactly the same we had from the two previous insurance. So 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're telling us that without I mean, based on the current capital situation, you should be able to get to an EBITDA ratio of 16.1% in 2018. But if at the end of the year, you're 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 bps. Now thinking about the 100 bps, mean, I'm correct, sorry, I'm just reasoning around it. I mean, we're looking at your NPS. You have a portion of secured and a portion of unsecured. The unsecured rate is $7,200,000,000 If I want to bring down this value to 5%, 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 bps of capital. And if you get rid of the unsecured, which is frankly easy to do because the unsecured you can sell it, it just depends on the price and the set, you will improve your NPL ratio by an additional 6%. So instead of 16%, you're going to be 10%. But I just want to, particularly on the first part, to check with you whether my understanding is correct. So 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. And then the second point is still related to this NPR, so do apologize if I go back to this. But basically, you are the first bank to be given the authorization to merge in Europe under the European Banking Union by the SSM. And I think as a condition of the merger, you were asked to do a capital increase to satisfy a plan of reduction in NPEs, which is the one you agree with the regulator. And now you are six months into the merger.
So 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. And sorry for the question, but it looks like there is a bit of a factor against Italian banks. So 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'm a bit embarrassed, but 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, but 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. So 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 these. I want to mention that your assumption were right as far as the declaration I did I made this evening in terms of capital, in terms of buffer, but I didn't say anything about how much I want 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.
And this brings me to the second part, is 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. And because we have nine months of experience nowadays, we can tell that the plan is bettering and 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 paper from everybody.
Everybody is very confused about this situation. The market is also confused. Yesterday, we had minus 7%. I really don't understand why today plus 4% tomorrow, I don't know. But 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 our business plan is maybe good for us when we will have a total and sure consideration of our capital buffer to declare to volunteer to declare new number. It's not because ECB is making any factor 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 better in the plan. I think they will be very happy also 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 Rovieri 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 in within your decision such as transferring the healthy maturity to reclassifying healthy 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. And 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? Because I thought it's I think I mean, at this this person I'm a bit confused.
Thanks.
Again, the two questions are very much linked. For any managerial decision, I think the best way to make a decision is to have every aspect of the question in your hands. So 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 Tier one contribution for the validation. And we are all experiencing a new kind, I would say, of expectation validation from ARB.
So leave me please look in few months whatever could be the decision from ECB. We of course have a high expectation. I think they will try to be very strict as usual, I mean, because they are prudent and they are cautious. And I will try once I will have all the aspects 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 B 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, 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 2018. Would you still be keen on activating the other buffers that you were mentioning because IFRS nine is going to happen on the January 1 and that's it's not going to happen anymore except from that day?
Mr. Robert, I am as much curious as you are. But unfortunately in the life, we have to wait for certainty. So 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.
So let's consider everything also taking in account the timing, which of course is an important component as much as the global value. So 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 said 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 and we are confident we can reach some results by the presentation of the end year results. And so we can give some scope also to the next presentation. Otherwise, we discover everything today.
So 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 bank assurance side. So clearly, you've signed with Catolico, which is great news. In the old BPM perimeter, you still have the partnership with Covia. 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 Catolica wishing to take on that business as well? Or just a curiosity on my part there, how you could maybe rationalize and better structure and get economies from the overall Bank Assurance business of the whole merged unit? Thank you.
Thank you, Mr. Gagliano. Yes, we will be for us in the new situation of having two insurer partner, but which is quite frequent for many other banks. We will in the next few months, we will understand better how to deal is quite easy because as you know, Covera has an agreement with the former BPM network meanwhile, Catolic assigned for the former Banco Popular. So 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 we'll expire the COBRA agreement with BPM. But for the time being, we don't think to the expiry date. We think to have two very good insurance 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, thanks for taking the call and apologies, I have a few questions, but they're all small I think. So first PPA guidance, initially you started 40,000,045 million dollars a quarter, then you went to $30,000,000 Last quarter, it was $24,000,000 Do you have new guidance? Then 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 nine in both NII and cost of risk?
And finally, when you talk about the buffer of capital, obviously, we don't know exactly how much capital it will be. But when you talk about buffer is over what target? Is it 12%, 11%, 13% core Tier one? 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 or capital was some was a question in a way I tried to answer before. Exactly, we have to understand where we stand up end of the year, where we stand end of the year in order to understand better the position.
I am just making again, if I had the possibility to have clear the situation right now, I would have give you a final plan on what we want to do in terms of capital, excess of capital and potential further disposal. Unfortunately, to now, I don't have the final situation. So it's difficult to say how much we would like to be. I think some way between 11.5%, 12% for somebody who reduced so dramatically the risking of the bank is something which could be considered safer enough. As far as IFRS nine, this of course there is a performing impact, which we already told could be in the range of 25, 30 basis points.
Then of course, there is the part of IFRS nine linked to the non performing to the Stage three. 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 de risking, taking in account the opportunity that IFRS nine give us not going through profit and loss. The PPI effect on the quarter on the net profit NII, net profit globally is 25,000,000, 27,000,000. And 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 the 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 5,000,000,000 lower than the expected results.
This EUR 5,000,000,000 became 1.8 reduction in terms of nominal NPE ratio and a couple of 200 basis points in term of net non performing exposure ratio. Holding steady coverage. Holding of course the coverage at the same level.
Okay. Okay, that's fine. Thank you very much.
Gentlemen, there are no more questions registered at this time.
Okay. So thank you very much everybody. And lots of new news by the next presentation, but I am sure we will have the opportunity to meet in between. Thank you and good evening.