Good evening. This is the conference call operator. Welcome to the presentation of fiscal year 2016 of Banco BPM Group. I wish to remind you that all participants are in listen-only mode. Official presentation is in Italian. After the initial presentation, you will have the opportunity to ask questions. If you need assistance by an operator during the conference call, you can press star zero. I hand it over to Mr. Peronaglio, IR manager. Mr. Peronaglio, you have the floor.
Thank you, ladies and gentlemen, thank you for participating in this first presentation of the 2016 results of Banco BPM, despite the fact that it is Friday evening and late in the evening. Before handing it over to Mr. Castagna, please remember that you will find the presentation on the corporate website, bancobpm.it, and that the conference call is reserved to financial analysts. Thank you. Mr. Castagna, please.
Thank you, Roberto. Thank you for being here with us on a Friday evening, and late at that. Of course, since we have a whole queue of banks reporting their results, we end up at Friday night. We have the presentation of the two separate results of the two banks which have merged together. This will be a peculiar presentation.
There will be an introductory part where we are going to talk about the state of the art of the integration, the next steps. We are going to talk about the specific financial statements or annual reports that have been approved today by Banco Popolare and by BPM separately. We are going to give you an overview of the pro forma aggregate results of the two banks, again, 2016 results. As we had promised last time we talked together, we are going to give you an update and more details with respect to our NPL unit and the findings we were able to put together up to now. I believe this part will be particularly interesting for you. On page four, you know that we've been the first bank to seize the consolidation opportunity offered by the Italian banking sector result.
We were also the first bank to undergo the ECB supervisory action with respect to the approval, which we received on the 16th of September. In October, our shareholders meetings could approve the proposal, and here we go with the bank on the 1st of January. Of course, this is based on very important cost and revenue synergies. Of course, this is possible only thanks to the fact that we are both operating in the wealthiest region of Northern Italy, and by the fact that we had a clear de-risking plan that had been approved by the ECB. As to the objectives we already met, you know that Banco carried out a EUR 1 billion capital issue, a capital increase in a very challenging market environment. This was obtained even without having already rolled out the IRB models to the former BPM.
This very important goal is going to be implemented and achieved by 2017. From a timeline point of view, I would like to remind you that the new bank has a number of product factories that comes within the merger. Sometimes they overlap in the single markets like bank assurance, asset management, and consumer credit. In this case, of course, we are going to design our strategy as soon as possible. Of course, this is going to give us a lot of visibility and also a stronger capital effect. The capital increase was very effective. We already talked about this in March when announcing this operation, and then in May. This was helpful to increase the provisions by 60%, which allowed us to meet the first part of the plan, referring to the sale of non-performing loans.
You might remember that the NPL sale plan of EUR 8 billion has been authorized. We have already sold EUR 1.7 billion, so EUR 6.3 billion are still due to be sold. This year's plan with respect to the NPL sale is EUR 3.4 billion, EUR 600 million are part of the EUR 1.7 billion that have already been sold January this year. We still have EUR 2.8 billion to be sold, of which EUR 800-EUR 900 are secured non-performing loans, and the residual part is made up of unsecured loans. Again, another target that we reached is an increase in NPL coverage, which went from 44%-48% in 2016. Bad loans went from 57%-60%. The expected top up at 62% is going to be achieved already in this quarter, in the current quarter, by adopting the IFRS 3 to the BPM loans that have been conferred to Banco.
NPL coverage, cash plus collateral, is 135% if we value the collateral at fair value, 99% with collateral capped at loan residual value. This data, of course, refer to total non-performing loan. As I already said, at the end of the presentation, I'm going to get more into detail with respect to bad loans, standalone bad loans, which of course are going to give you an even rosier picture. Again, reached targets. We talked about a strong reduction in non-performing loans. Net, they went down by 8.4% year-on-year, gross 2.7%. Even new NPL flows this month amounting to 17% are encouraging, because compared to the same period, they went down by some 20% compared to last year. Financial targets have also been reached, despite the complex and challenging background and context, and despite the thousands of activities we had to carry out to implement the merger.
We're talking about negotiations also with respect to market requirements. You see that in any case, we have a EUR 1.6 billion profit from operations, this is the base one from which the bank is starting this year. We have initiated and completed a number of trade union agreements with a number of positive results. We had announced 1,800 exits, now we have entered an agreement for 2,100 redundancies. They have already all signed, in the coming weeks, we will be able to give timeline of the exits as it is phased in along the plan. If we include also natural turnover in 2016, total reduction over the plan is 2,500 resources. With respect to personnel expenses, the two banks have already provided for these expenses amounting to EUR 364 million, together with integration costs of EUR 56 million that have already been charged to income to 2016. Group strengths.
It's a very strong group in the wealthiest regions, not only in Northern Italy, but in Europe. More than 75% of branches are in Northern Italy. Market share in Northern Italy amounts to 11%, close to the two leading competitors at national level. We are number one in Lombardy with a market share of 15%, and a very good footprint and coverage in Northern Italy. This is complemented by a multi-channel model that is really full-fledged, but we are really focusing on this characteristic in order to accelerate the net branch disposal plan, and probably we will be able to exceed what we have planned. We have already said that a number of provisions have been set aside already, both with respect to loan loss provisions, also with respect to personnel expenses. The Common Equity Tier 1 fully loaded is at 11.42%.
Liquidity is solid and robust and should allow us to reduce the cost of funding. EUR 21 billion worth of unencumbered eligible assets that really provide us with a very good flexibility with respect to funding sources management and the decline, a strong decline in the cost of funding, which we are going to achieve right from the start. LCR is high, it's above 180%, and even NSFR is above 100%. As to synergies, we go from EUR 460 million-EUR 400 million in terms of full-fledged synergies, EUR 30 million more thanks to the voluntary exits. Additional synergies from the revenue side are expected from the fact that during the year, we are going to implement the various plans with respect to our product factories, Banca Akros and Banca Aletti, one for corporate investment banking, and the other focusing on private banking.
The NPL reduction plan that has been asked by the ECB has already been cleared and authorized by the ECB. We will create an NPL unit reporting directly to the CEO with 300-350 employees dedicated to maximizing the recovery success rate and implementing the NPL reduction plan. As we said, at the end of the presentation, we are going to focus on this aspect specifically. Next steps. Within the first quarter, we are going to see exactly how the various exits are going to be timelined, so that we will see exactly how many people are going to leave, and we are going to understand where we are going to be in 2017. You know that the timeline spans through 2017 and 2018. The NPL unit finalization should be achieved by the end of April.
Cost optimization, practically closure of 50% of branches envisaged under the plan by April. Again, here we have a specific slide that is going to cover this. In 2016, we have already closed 120 branches out of the 340 envisaged under the plan. An additional 48 have been decided in January by the board of directors, the rest will be carried out in April, so that 160-170 branches are going to be closed by that date. Half of what planned in three, four months, as planned between 2017 and 2019. Definition of asset management partnerships and in bank assurance, both as you have seen were developed in 2016 with respect to asset management. The postponement is due to the fact that Anima was involved in the Pioneer operation, everything was completed by the end of December.
This, of course, did not allow us to talk or to work on the full-fledged asset management situation, this is going to be completed in the following months. Together with our longstanding partner, Unipol, with respect to bank assurance and life insurance, we are going to postpone to the 30th of June, a deadline that had been set for the 31st of December 2016, so as to verify all the possible assumptions on how to keep this very strong and important partnership going on. The first project that started was the IT system integration. We believe we are going to close it by July this year. This would allow us to further accelerate the model validation process that is Banco Popolare Milano risk-weighted assets to be switched over to the Banco model.
Once the systems are integrated, we should be able to have an integration of corporate investment banking and private banking with Aletti and Akros. This was what we could say with respect to the merger. Only 40 days away from the start of the merger, we are now going to talk about the 2016 results of the two banks separately. Let's start with Banco Popolare. Banco reported a decline in loans from EUR 78 billion to EUR 75 billion, due to the actions that have been taken with respect to non-performing loans and the reclassification of loans from gross to net in non-performing loans. Instead, it reported a strong increase in some very important data in order to be able to implement the plan. For example, I'm talking about site deposits that go from EUR 40.6 billion to EUR 46.3 billion, then asset under management that goes from EUR 35.4 billion to EUR 36.4 billion.
As we said, we have been working on changing our funding sources to go for less expensive funding sources. In addition to this, we also focused on asset under management, increasing assets under management. These are really two key issues on which we're working for our 2017 results, these are very two significant starting points for the activity of the new bank. Net income, including the non-recurring impairment linked to the capital increase of EUR 1 billion, should be EUR 1.5 billion, is a minus EUR 1.4 billion. Then we have EUR 280 million worth of Banca Aletti's impairment. An impairment which we decided to implement due to the fact that Banca Aletti is going to switch, so to speak, its focus from a corporate investment banking, so from actually designing and developing structured products and certificates for the group, is now going to be the bank's private bank.
Therefore we believe this was the right time to carry out this impairment with respect to our bank's profitability. Now the adjusted income statement to account for non-recurring items, I'm talking about slide number 13. We see that the stated number of minus EUR 1.68, including the impairment, is a EUR 12.6 million when adjusted. The greater negative data is EUR 198.6 million for the early retirement plan, EUR 147.8 billion of extraordinary systemic charges. I'm not talking about the regular annual contributions, but the non-recurring ones. EUR 1.6 billion is the figure we decided was necessary in order to carry out the EUR 1 billion capital increase and EUR 279 million, which is goodwill impairment. There are a number of minor adjustments, both with a plus or a minus sign, but these are the main elements that really contributed to bring Banco's income statement at breakeven.
With respect to BPM, we can say the same as we did with Banco. With respect to the migration of our funding towards less expensive sources, this is something we have started a few years ago. We further increased our site deposits from EUR 22 billion to EUR 24.5 billion. Also, assets under management went from EUR 20.9 to EUR 22.1. BPM, compared to Banco, sees an increase in loans. You're used to this, because this is the third year in a row that we report an increase in loans and customer loans, in spite of the fact that actually the market is reporting a flat performance. BPM's standalone result is EUR 72.7 million. This is a net income. Again, we carried out a pro forma adjusted income statement by eliminating non-recurring items, both with a plus or a minus.
On the right, on page 16, you see the most important ones, minus EUR 168 million for early return planned and exit incentives. -EUR 52.7 is extraordinary systemic changes, -EUR 75.6 is software amortization. Because as you know, since BPM's software is migrating over to Banco BPM's group, we had to amortize part of it, and another part of the amortization is going to be carried out in 2017 because for seven months, this software is in any case going to operate in BPM branches. Minus EUR 42 million for AFS adjustment, EUR 40 million more or less on Atlante, I'm sorry, EUR 20 on Yes, EUR 40 million on Atlante and EUR 20 by Banco. We have the reclassification of Anima Holding, which is in the AFS portfolio compared to the fact that we had carried it to income before. This led to a plus EUR 120 million.
Net income is minus EUR 122 million. If we add this to the EUR 72.7 million, we get to EUR 195.2 million worth of net income adjusted. We've talked about these two separate financial statements, now we would like to share with you the opening figures for the new group as at the end of December 2016. I will not dwell on the balance sheet items because it's just a combination of the two things we have seen before with the same characteristics. A slight decline in loans and a significant increase in sight deposits and assets under management. Rather, I would go straight to page 19 where you can see the income statement for both banks on an adjusted basis.
The total is EUR 207.3 million net income, which you have already seen in the presentation of the individual bank's accounts, which I have presented earlier when illustrating the two standalone income statements. As far as the most significant differences, these two banks developed and went down a very special path in 2016. We have financial income declining over 2015 by EUR 280 million. Net fees decreasing by about EUR 100 million. Costs are stable all in all. In general, we can see that profit from operations is in the negative territory by about EUR 200 million compared to 2015. I will drill deeper into this data by analyzing the individual income statement items with you. Let's concentrate now on page 21, where you can see the aggregate direct funding. As you can see here, we have a clear strategy. We are going for a less costly type of funding.
In fact, we have increased the current account and sight deposits from EUR 62.5 billion to EUR 70.9 billion, which moves hand in hand with a decline of EUR 10 billion on the bonds side, be they retail and wholesale. Funding is steadily growing. The sight deposits are increasing by 13%, while bonds are declining by 29%, and term deposits by 11%. As far as sticking to this trend in the future, I'd like to say that both in 2017 and 2018, we will have EUR 7 billion more of bonds, both retail and wholesale, coming to maturity, coming due, and thus the path will be the same. We will take advantage of the fact that these bonds are actually coming due to leverage more our sight deposits, and essentially to grow in assets under management, where we have focused most of our growth efforts.
To replace this form of funding, we will use a top-up of EUR 3.5 billion of an additional TLTRO, and an additional EUR 4 billion or EUR 5 billion will instead be provided by our eligible assets, and equal to about EUR 21 billion at the end of 2016. In fact, on page 23, you can see our liquidity position, EUR 20.9 billion of eligible assets. They are excellent assets. As you can see on the right bottom part of the page, you see that 88% of these assets are government bonds and 6% are covered bonds. So far we have used all sorts of activity, retained securitization, retained covered bond. We still have
portion of assets that is still very good in quality and still available for use. As far as the increase in indirect funding, you can see there has been an increase already in 2016. In fact, it went up by EUR 2.3 billion in terms of assets under management, with an increase of 4.1% year-on-year. If you look at the pie chart, you see that 60% is made up of funds in SICAV, 29% is bank assurance products, 12% is instead GPM and GPF. As far as the funds under administration, they are going down by a few billions. EUR 4 billion, if I'm not wrong. Please consider the EUR 2 billion are represented by the fact that we decided that the certain publicly listed companies that were generated limited margins refocused in 2016. Focus on Banco BPM and securities portfolio.
You can see here we have EUR 26.7 billion as at the end of December 2016, plus other bonds, be they corporate bonds or equity investments. The total of the portfolio was EUR 33.8 billion. Out of EUR 26.7 billion worth of Italian govvis at the end of December, EUR 17 billion were in AFS, EUR 8 billion in held to maturity, and EUR 1.4 billion in held for trading. We have already repositioned EUR 2 billion from AFS to held to maturity so as to bolster our interest income on our government bonds portfolio. We have also approved a further diversification by country instead of just concentrating on almost exclusively Italian government bonds. As to duration for AFS securities, it's equal to 1.8 years, or at least that was the duration at December 31st. Currently, it's slightly longer, but it's still at a very good and safe level. Let's move on to loans now.
We have already said we have recorded a reduction from EUR 112.5 billion to EUR 110.6 billion, putting together the two banks. The reduction is just due to NPLs, which declined by 8.4%, as I said earlier, while performing loans are stable, displaying a minus 0.5%. EUR 14 billion or EUR 15 billion worth of new loans were reported, EUR 4.2 billion of which were given to households and EUR 10.6 billion to corporate clients. Let's now move on to our aggregate income items. I think that the item that gave us a headache is the decline in net interest income, which is partly due to aggregates that were rolled into bad loans, then a reduction in spreads. In general, lower contribution by the government bonds portfolio, which was only partly offset by the reduction in the cost of funding, which started with a switch to sight deposits and less costly types of funding in 2016.
The effects will be perceived as of 2017 and onward. Net fees went down by 6.3%. If you're familiar with our organization, probably you remember that the first quarter in 2015 was extraordinary for Banco compared to the historical performance of its fees and commissions, and that historical performance continue on during the year. The year-on-year comparison is sort of penalized by these excellent results by Banco. Also, we have to consider that Banco and Banco's colleagues were committed to raising EUR 1 billion in the market for the capital increase. Their activities were really especially focused on this, and also they had to organize three meetings of Banco Popolare, and as you know, to organize the shareholders meetings, it takes a lot of activity by the various branches.
Now that they are fully concentrated on results, on income, I'm sure we will be able to turn around the situation. In fact, budget expectations for 2017 have a positive sign for both fees and commissions, as well as interest income. Main cost items relate to personnel, other administrative expenses, amortization and depreciation, I have already mentioned. Extraordinary costs concerning personnel, for instance, where we had to set aside money for the redundancy fund or the early retirement fund. Also, we had integration costs. If you look at the adjusted numbers, you see we have a reduction in personnel by 3.4% in terms of costs. Other adjusted administrative costs, a slight increase, which is plus 0.6%. If you calculate, we gave a greater contribution to the resolution fund in 2016 compared to 2015, we would only have a minus 5.6% on a like-for-like basis.
I have already mentioned how personnel would change during the business plan period. 390 people have already left the bank compared to 25,000 personnel in 2015. 2,100 people have already left the company. It's a planned net reduction, but we think that we can already achieve 2,500 exits. This redundancy fund will give a positive contribution from EUR 140 million to EUR 170 million with no costs, because the same number of exits will be achieved for having 2,100 people or 2,500 people leaving the bank. Branches on page 30, 121 branches were already closed in 2016, 48 have already been authorized by the board for the first half of 2016. We will then take a pause so that IT systems can be fully integrated, and then we will start working on combined brands.
It is obvious, but these 122 branches were closed only in the scope of former Banco, and the 48 expected closures will only affect former BPM scope. Once the IT systems have been fully merged, we will start cross-closures, so to speak. Currently, we have already halfway through the closures plan. As you may remember, the strategic plan has a subset of objectives, which is still at the top of our mind. That's to say, we don't just want to be happy with 2,050 branches, but we want to reduce the number to 1,700 or 1,800, because the digitalization process will help us accelerate this reduction, and we believe our customers will be more and more willing to be served by a multi-channel platform.
This is still an objective, even though you know that the cost to close additional branches in addition to the ones that we have already planned, would represent an additional saving. Page 31, credit quality. Let's talk about NPLs. We've already said at the beginning of the presentation that the NPL stock is going to go down by 8.4%. In particular, with an impact on unlikely to pay, which go down by 12.5%, whereas past due by 1.6%. You see here the breakdown by nominal bad loans and gross bad loans. You see the difference is given by write-offs. In the first column on the right, you see the write-offs out of the total of bad loans amount to EUR 5.1 billion.
We are working to prepare the half report for Banco BPM to give you an integrated data so as to include write-off within the aggregate data, so as to avoid any type of misinterpretations or problems when calculating ratios. In order with the EUR 600 million that were sold at the beginning of the year, we were able to bring our NPLs further down, especially with respect to nominal bad loans that went down to EUR 30.5 billion. Gross bad loans declined by 2.7% and net by 8.4%. Let's see the impact of a capital increase on coverage, which led to an increase in provisions. We had already announced this in March, but let's repeat it. We went from 33.8% to 47.9%.
We're talking about total NPL coverage from 57%-60% is bad loan coverage from 24.7%-27.2% is unlikely to pay coverage, and from 17.6%-18.2% is past due coverage. On the right, you see excluding write-offs. As I said, we hope that next time we will be able to give you a presentation that will include already write-offs, which will lead to no misinterpretation. At the beginning, I told you that 62% further increase of coverage for bad loans and 42% with respect to total NPLs is going to be achieved by adopting IFRS 3, and at the time being, no specific capital impacts are going to take place. No material capital impact is expected, thanks to offsetting items.
As we said when presenting the plan. Net loan loss provisions, EUR 2.158 billion. EUR 1.6 billion is impact from the alignment of NPL coverage to plan. EUR 900 million is the ordinary provisions for Banco, EUR 419 million is the ordinary provisions for BPM. Of course, also BPM took advantage of the fact that there was ECB inspection together with the need to carry out these adjustments so as to be extremely impactful on the coverage that had to be obtained. We actually exceeded our budget target. Cost of credit, 268 basis points when considering this non-recurring impact. Whereas it goes to 123 basis points with respect to the restated figure. By the way, I really wanted to add one more thing with respect to new inflows.
Thanks to these adjustments and with respect to the business plan, in third quarter, Banco has already talked about this, the combined flows are 2.17%. Capital adequacy. Both the phase-in CET1 and fully loaded CET1 is 12.3% and 11.4% respectively. Of course, the latter has been affected by the provisions that have been set aside and by the coupon stripping of the associates. The impact will be 10 basis points on the fully loaded CET1. Of course, also the rolling out of IRB models to BPM is expected by 2017. DTAs are not included in the calculation of the common equity Tier 1 fully loaded since they are associated to tax losses amounting to EUR 624 million, and the expected profitability should be recovered under the plan, which of course is going to bring the CET1 up.
At the beginning, I promised you to give you a little bit of an update and an in-depth analysis on this new startup we created with the NPL unit. Let's start with an interesting overview. On day one after the merger, we started with this recovery machine with 220 professionals, and the target is 300-350 employees. This is a focused internal organization that is going to work on well-defined objectives. One part is going to focus on the workout network, and within this segment, we are going to have specific specializations into secured and unsecured. Another arm that is going to focus on portfolio disposals and the creation of clusters that can be used to further valorize the sale. Performance management. This unit is going to be assessed based on the recovery rates.
The operational support, this unit is going to manage something like EUR 20 billion worth of assets. Then a real estate advisory desk or unit, because as you well know, we believe that this activity is really based on real estate. We'll see this in a minute why. We are really hiring specialized people that can really lead to a value maximization. Let's talk about a positive aspect. I'm talking again about page 36. The Bank of Italy talked about the very good average between 2006 and 2015 with respect to the banking industry system. The Italian banks average is 46.9%, as the ECB governor said. The combined result for the two banks is 53.5% over the same period, not taking the NPL unit into consideration. This is due to a number of factors that we are now going to examine.
That is the geographical location, the courts where these auctions are, or these assets are discussed, and so on and so forth. On page 37, I talked about some EUR 20 billion worth of assets, EUR 19.6 billion to be precise, of which 11.8% are covered by provisions. The net book value is EUR 7.8 billion, of which EUR 1.3 billion are unsecured loans and EUR 6.5 billion are secured. The secured loans themselves are backed up by EUR 14.8 billion worth of fair valued coverage. We have residential real estate, commercial real estate, and industrial real estate, and then other, which might be properties where the specific destination has not been specified. You see the breakdown in the pie chart. The other two information is the 170% and the 228%. The first one is the fair value collateral plus coverage over the nominal book value of the loan itself, of the bad loan.
If we add the fair value of the collateral to the coverage, we get to 170%. The other item is even more important. If to the collateral fair value over the net book value, minus coverage, we get a coverage rate of 228% from almost three times. On the next page, we can see the breakdown of this figure on the various collaterals. 228% is the collateral fair value over net book value. You see that the most interesting part has a higher net fair value over net book value. You see 2.1 times residential, 1.9 commercial, and the industrial real estate has a 2.4% coverage, and with respect to land and any other type of use, three times the net value. We have collaterals that depend on the asset quality and its marketability.
The 228% being the average value, if we break it down over the entire secured loan book, 85% of volumes, it covers more than 100%. With respect to the remaining 15% collateral have a 53% coverage, but they are backed by other guarantees, for example, personal guarantees. Of course, even though their value may not be as that high, however, they are going to cover more than 100%. The same goes with the 170% I was talking about before, that is fair value plus coverage over the nominal book value. Here again, we see that this increases as less valuable the assets are. The more attractive the assets are, the lower this figure is, this excess is. Whereas the less attractive these assets are, of course, then the coverage value is going to be raised.
Another information we believe to be rather interesting also with respect to the statements made by some of our competitors with respect to vintage, you see that the total net book value of our bad loans is EUR 7.8 billion. More than 50% is less than three years. More than 25% goes between three and five years, and 24% vintage above five years, of which only 9% have a vintage above seven years. We can say that through the sales we made, we really eliminated the older loans. By following the same process, we hope we will be able to update by vintage our bad loans. Another figure that reflects the fact that this bank is really having a better recovery than other is the breakdown by geographical area of our bad loans.
Both when talking about nominal and when talking about net book value, the figures we are showing are almost similar. 70% of our assets are based in Northern Italy, about 21% in the central of Italy, of which 42% in Rome. Only 8.7% in Southern Italy or in the islands. Why am I specifying this? Because recovery rates provided by Moody's recently attach a 52% success rate for assets located in Northern Italy, 41% for Central Italy, and 26% for assets located in the south. Also from this point of view, I may say that we have a very good positioning. And then workout historical recovery curves, 53.5%. From a historical point of view, our recovery rate can really attain the highest success between the 4 to 6 or the 3 to 5 years.
You know very well that courts are rather slow, but you see that despite this, percentages are quite high, and the recovery rate in 10 years over the net book value is in excess of 120%. In summing it up, we are once again saying that managing these bad loans that have more than adequate provisions backing them may become an opportunity to retain a very high value within the company to thus To the benefit of our shareholders. Whereas selling them at a lower value, a lower price is not always the best choice to go for. Again, we have a plan, we're going to stick to the plan, but we certainly can make a distinction between the various assets we have, and we're going to sell those that we believe are less prone to obtain better results.
Last slide, the internal reorganization also with respect to our portfolios, you see that our EUR 8 billion plan on the left of page 42, out of these EUR 8 billion, EUR 1.7 billion have already been completed of 21%, EUR 6.3 are residual disposal program. We have already clustered our portfolios so that EUR 7.3 billion are already devoted to work out activities. We believe that it is not the case to dispose these loans, whereas the cluster from which we're going to choose the EUR 11.6 residual billion are going to be part of the potential disposal candidates you see on the right. To make a long story shorter, we believe that from these preliminary findings, of course, we can go even into greater detail, but today we just wanted to give you an overview and to keep on repeating what we have been saying for a long time.
Non-performing loans, and specifically bad loans, are not all the same across the various banks. Each bank has its own loans, its own recovery rates, and its own geographical allocation. We gave you our narrative, and we'll be always very transparent and clear, both with investors and analysts, with Mr. Ginevra, who is the head of the non-performing loan unit. We're going to dedicate specific presentations to this activity. This led me to the end of my presentation. I do apologize for being so long-winded, but it took time to explain what we did in the 40 days. I now open it up for questions.
This is the conference call operator. We can now open the Q&A session. If you want to ask a question, please press star one on your telephone keypad. If you want to leave the list of booked question, press star two. Anyone who wants to ask a question is kindly requested to press star one now. First question comes from the Italian line by Alberto Cordara, Merrill Lynch. Please go ahead. Well, good evening. I have a couple of questions. The first one is on capital. You have a common equity fully loaded of 11.4 and 42, and a pro forma of 11.5, which is what I expected for the quarter. You gave us two indications. You talked about the facts generated by the switch of RWA of BPM to the IRB model of Banco.
You have the IT system, and we have seen three banks, I'm sorry, and the DTA fees and the DTA recovery. Many banks have talked about the cost that can be saved by using DTAs rule and what kind of positive impact this will have on common equity. The same thing is also the transition to the internal model of BPM. Shall we expect a negative effect for an increase in risk-weighted assets because you will have to get in line with the harmonized European levels? During the presentation, you provide details about asset quality with specific references to the collateralization of your NPLs. Earlier, another bank called me up. They are cleaning up their portfolios too. I have to say that other banks have not provided that much disclosure about their collaterals or no disclosure at all.
I would like to understand, well, I'm trying to benchmark you against others. I would like to understand whether you are faring better or not compared to others. What do you think in terms of comparing your collateral and coverage level to other banks that are engaged in these so-called cleanup operations because they are cleaning up their portfolios? Bad loans, EUR 8 billion reduction. Apparently, you are on track. I don't think this is out of your reach as an objective. Reducing the net NPL ratio to 11.1 by 2019 seems to me a more challenging target. Where are you laying the emphasis? What's your priority? Reducing NPL EUR 8 billion, as we were saying, or are you aiming at achieving this NPL ratio that I have mentioned?
Let me take the common equity tier one question first, and the implication of rolling out models to be BPM as well, and DTAs. Well, one of these two things is more short-term as an activity, most likely will be completed within this year. We are steadily talking with the ECB. I don't like to talk about what the ECB is expected to do or is to do, because they are the regulators. Nonetheless, we are committed to submitting our application for rollout by March 30th, and within 180 days maximum, that should be validated. As you can see in the business plan, we have calculated the overall validation benefit and the extension to 90 days of the past due loan. The definition of default is from 180 to 90 days, which is a benefit for us.
On the other side, we have the disadvantage of risk-weighted defaulted assets and DTAs. Everything had been included in the initial plan, I just want to give you an additional information. I cannot specify the timeline for all these events. I cannot speak on behalf of the regulator, but I'm sure that by the end of the year, we will receive all the beneficial effects. We will make our part. The common equity tier one expected for 2017 should be higher than 12%, even though all of the negative effects that I have mentioned materialize in the year. As far as about this, are you talking about a fully loaded case? Yes, in terms of phased in, we are already at 12.3%, so fully loaded would be above 12. This is the expectation based on the current situation. DTAs, I cannot focus on this short-term horizon.
As you know, they move hand-in-hand with the initial computation based on which we are paying the infamous annual fee. As income accrues, and hopefully we will accrue profit and income in the short term, in addition to EUR 600 million, we have over EUR 600 million that must be amortized during the year. I cannot be sure that this will happen within the business plan time, this is an important ammunition or reserve we have available. Collaterals. I'm pleased by your question, as you can see, we are making ripples if you wish, because I committed with investors during my road shows together with Mr. Cerrone.
I gave my word saying that we would disclose all the findings we would find, because opaque communication or being just a black box and not communicating to investors or the regulators is totally unproductive, especially if you think you are working well. We are the very first to be so open, and we are very happy to be so open and disclose all this information. We're taking a few risks because somebody may mull over this data and draw different conclusions. We believe that the data we are sharing with you are quite encouraging. The recovery rate that we have stated, for instance, compared to the public domain information in this sector seem to be saying that we are right.
If you combine collaterals, the regional areas in which we are active, and a very comprehensive database of these assets is all pointing in the direction of easier sales. As you know, there is no single number for coverage that would fit all banks. It all depends on the underlying assets, and we are just putting the numbers out there in the clear. It would be up to you to ask other banks. As far as bad loans are concerned, we have already started with these EUR 600 million. We have a secured portfolio of about EUR 800 million-EUR 900 million. It's practically ready for sale. We will decide early when we want to sell it. We rest assured we can really deliver on our promises. As far as NPL sales, we have an objective, the NPL ratio. We have an objective, which essentially is based on disposing of the NPLs.
The ECB's target concerns the gross NPL ratio. Gross NPLs on gross loans has got to go down from 28.8% to 19%, but in our business plan, we expect to go down to 18%. 11% net is our business plan target, our own target. This is not the ECB's target, but that is a target which is embedded into our business plan.
Next question, Giovanni Razzoli, Equita SIM. Good evening. I have three shorter questions. The first is, since this year, I mean, 2016, closed with a rather big loss
As far as I'm concerned, it's important to understand what might be net income in 2017 so as to have a target for 2019. Can you give us a guidance and share with us a guidance? With respect to net interest income, Mr. Saviotti talked about EUR 200 million worth of beneficial impact on Banco by 2017. I would like to know whether this figure is confirmed. CET1, can you give us a sort of guidance again, or sensitivity as to where common equity Tier 1 fully weighted would be, considering the sovereign spread we reported in September? NPL ratio, the reduction rate you mentioned is quite strong. You talked about 17%. I believe the market is really below this percentage in Banco BPM talking about a 10.5% target in two years, less than -8% with respect to UniCredit.
The 16.7% target you mentioned, can it go lower without impacting on common equity Tier 1? The NPL unit might go through strategic operations like a spin-off without harming shareholders. What might happen should you decide to further accelerate the de-risking plan? Thank you.
Thank you, Mr. Azzoli. Of course, with respect to net income by 2017, I'm not going to give you much of a disclosure because we approved our budget, this is not something we would disclose just as anybody else. What can I say is that we have a 2017 target that is fully in line with our strategic plan. Of course, there might be slightly different components attached to it, but it's fully in line. As far as the second question is concerned, you were asking about the reduction in the cost of funding. Let me confirm once again that under the plan, we are envisaging a very important reduction from EUR 200 million to EUR 300 million in terms of cost of funding. Of course, it cannot be achieved only in 2017. We would be very happy if this were the case.
Again, all the various maturities are replaced with a different funding strategy, so that within this timeline, we're going to reach the target. Again, by repositioning our funding sources, these being the building blocks upon which we are building our plan, these seem to be rather encouraging. Our NPL unit is a sort of experiment. For the time being, we want to start understanding what we can get from it. It's not just a matter of having a database or by stating a number of historical or data sets that we may think that this is an asset that can be shared. Again, our objective is to leave it in the hands of our shareholders.
If this can be done by having a higher recovery rate, if we see that workout actions are encouraging right from the beginning, or whether once the NPL unit is fully operational, whether to go through a spin-off, we will see. We are really vetting all the possible options and possibilities. Again, we will make a decision only when we have hard evidence as to which is the best way to go and which are the strategic phases. With respect to AFS, of course, we have reached a higher element, but at present, we are at 15 basis points that are included in the projections of our CET1 with respect to full year. Thank you.
Christian Carrese, Intermonte, has the next question.
Good evening, everybody. Thank you for being so generous with details on asset quality. As far as unlikely to pay loans are concerned, do you have information you can share with us concerning the vintage of this type of loans? Also, as far as coverage represented by cash plus collateral seems to be pretty high. Could you say something, please, about adjustments for collaterals? So something about appraisals, give us some color as to how updated they are. CET1 ratio, during the presentation, you talked about the fact that you have overlappings concerning product factories, but you also have synergies, so equity holdings, et cetera. Are you going to maybe rationalize some of these equity holdings? Will this be guided or driven by capital requirements or the need to rationalize the portfolio in general?
Once again, about capital, has the ECB given you indication concerning SREP in light of the recently disclosed 2016 results?
Well, I would talk about unlikely to pay as the last. The NPL unit will manage only.
Non-performing loans, while you are likely to pay, will still be under the responsibility of the chief lending officer, while the NPL unit will just take care of bad loans. When we talk about unlikely to pay and past due, I would like to tell you that we are talking to real customers and real companies who are trying to stay afloat and keep doing their business. We'll try and help them in an attempt, nonetheless, not to lose our money. When we talk about bad loans instead, we are talking about assets. We talk about the fact that we have already started maybe some legal proceedings. I will try and provide you with plenty of information concerning unlikely to pay as well, even though in this case, for this type of loan, we have a different strategy.
As far as our product companies are concerned, we have already said repeatedly that we don't want to change the situation, because both now and looking forward, we think we have enough capital to pursuing our business without sacrificing profitability and thus potential dividends for our investors. Our strategy is maximizing profits generated by our product operating companies. Obviously, if the bank is managed in a wise way, we have to also think about what we may do in case of further capital requirements in the future, because we want to reassure everybody that we do not need to raise this capital in the market.
Should we need further capital in the future, I wish to remind people that we have lots of operating companies that currently are bolstering our profits, but which could be used in the future in a form of capital management transaction so as to generate additional capital for the bank. As far as equity holdings in companies that are not consolidated in our accounts and that go above the 10% threshold are equal to about EUR 1 billion worth of capital management that can be pursued should we need further capital. SREP, we have not been given one by the ECB because as you know, as soon as the SREP process been completed, we are immediately informed because also Consob asks for this disclosure. We are still talking to the ECB.
They said that in the first half of the year, they would have come up with a combined SREP for both banks. Hopefully, in the first two weeks, we will be able to know about this. Vintage for my unlikely-to-pay loans, it's about 2.5 year. I'm told it's about 2.5 years, but I don't have the same degree of detail which I had for bad loans. Can I talk about equity holdings, specifically bank insurance? You postponed by six months the decision concerning partnership with Unipol. Could you please give us an update on your Unipol partnership? Well, Mr. Cimbri and I are working. We are in sync. We knew each other, but we had no partnership in place because the partnership was with Banco. We have given each other six months time to explore all possibilities.
We are really looking forward to doing business together, we have given ourselves some time to assess this opportunity and leave all doors open. Thank you very much.
Next question from the English channel, Jean-Yves, Goldman Sachs.
Hey, good afternoon, good evening, rather. I just wanted to ask you one thing. In the presentation of UniCredit that they invested there, you might have seen that they have included for the portfolios in Italy, which are under advanced approach, a huge increase in risk weight due to LGDs in particular, and changes in parameters, even outside of LGDs from Project TRIM in the SSM project and so on. I just wanted to know whether there was anything specific that you could share at this stage with us on this particular topic.
Very technical, very specific. Frankly speaking, we don't have any issue related to the update of LGD. They are very updated. They have been reviewed recently by the regulator. Of course, we will start with the new regulation once we will have indication by ECB. We don't had any problems in this respect.
Okay, thank you very much.
Next question, Domenico Santoro, Autonomous.
Good evening, Mr. Castagna. It's nice to hear from you again. One question on page 42 where you show the bad loan bucket that could be sold. Can you show us also coverage excluding write-offs of this bad loan stock, secured and unsecured? Of course, if you don't have it at hand, I can talk about this with Roberto. Then another question with respect to provisions. You gave an indication for next year for fees and NII. I was wondering whether for the cost of risk instead, we can take as a reference what you showed adjusted on page 33, 173 basis points, or whether you are more optimistic with respect to this level.
Good evening, Mr. Santoro.
No, as far as your first question is concerned, I already said that the secured portfolio is from EUR 800 million to EUR 900 million, and the coverage is in line with secured loans. Unsecured loans, of course, we did not focus specifically on unsecured because they have a 100% or a higher coverage, so there are no more updates we can give to you. Second question is on the cost of credit. We expect them to be in line with, or to develop along our business line. 2017 is, of course, a break. It's a new year, so provisions carried out by the bank at the end of 2016 were quite hefty in the first month. With respect to new inflows, we have a positive result. For the next quarter, we might make the necessary considerations.
On page 37, Mr. Santoro, I would like to remind you that the cost of credit of 2017 is going to be affected not only by provisions for new bad loan inflows or new NPL flows, but also by the fact that we are going to restore the coverage levels that we presented. They had already been included in our business plan along the plan period. Of course, I'm not going to disclose more than that, but we are going to stick to the targets included in the business plan, with respect also to the cost of credit, also in case of NPL disposals. What you're saying that in 2016, the increase in coverage has not been completed yet, but it's going to still keep going? The coverage increase has been fully completed.
Of course, it is clear that if there is a change in mix, if we sell EUR 2 billion worth of unsecured loans, we have to carry out coverage top-ups in order to bring them in line. This is the reason why I was asking whether you could disclose your coverage rates with respect to the NPL sales.
Coverage you are showing on page 37, they include write-offs, right? The 33.45%.
Yes. They always include write-offs. As I told you, we are considering to always include write-offs, so having practically no write-offs and not considering them as such.
Do you have these two figures excluding write-offs?
I'm sorry, I do not have it.
Okay. That's okay. Thank you.
A follow-up question by Alberto Cordara of Merrill Lynch. Sorry for asking another question, but earlier they asked you the kind of impact the widening of government bond spreads is having on your AFS. I'd like to know whether the wider spread of Italian govies would beneficially impact your interest margin during the business plan time, and if you can quantify the positive effect.
Let me recap quickly because I am not sure I remember all of the business plan numbers. The negative contribution given to the business plan would be generated by lower profits from trading activity and a lower contribution by the security portfolio to total income. If you look at the business plan, you can find the number. I think that in total it's about EUR 300 million.
As I was saying earlier to Mr. Azzoli, under the plan, this will be offset by a significant reduction in the cost of funding. Every time we have an additional trading opportunity, or if there is more volatility on the securities portfolio that provides us with some volatility opportunity, if we can thus bolster our interest income, that would, of course, be a positive for us. Also the negative impact given to the spread, for instance, would be reduced. To what number? You want me to give you a hypothetical impact of trading income to NII? Well, it's very difficult. If I were that good, I would engage in direct trading myself, proprietary trading. Of course, these are two offsetting items. It could be also a source of opportunity.
This could give us a possibility of having a higher trading income, which would bolster NII, but also in general, would contribute to our total income.
Next question from Andrea Vercellone.
Good evening. I have a lot of questions. Some are really detailed questions, but we all have to update our models. I do apologize beforehand. Let's start with clarifications, and then I'm going to get deep into detailed questions. The first clarification, IFRS 3, did I get it right when you said that the estimated impact, the expected impact, including 1% of top-up coverage on bad loans from Popolare di Milano, is going to be completely offset by other items, so the capital impact is going to be neutral? This is what I understood based on what you said, and if you can give us some color, but I'm really interested in your answer. Again, with respect to IFRS 3, I would like to know whether you can give us any indications with respect to the recurring P&L impact, i.e., not only with respect to 2017.
On page 37 where you show bad loan collateral, it's capped at 100 at the loan nominal value, or is this the appraisal value? Talking about the personnel, did I get it right that all 2,100 people are going to exit by 2018? In detail, restructuring costs. Based on my calculations, still EUR 60 million should be expensed yet or yet to be expensed. As to the previous question, possible coverage top-ups. I did not fully grasp that because within the business plan you have given coverage rates for secured loans and given coverage rates for unsecured loans. Say I'd sell only unsecured loans, it's obvious that the aggregate coverage would go down. But when you referred to the fact that you top-up coverage, you mean by bucket and not as an average of all the bad loans. Last questions, I'll be good.
In order to calculate whether you may use past DTAs, can you tell us what is the turnover, so to speak, of DTAs that can be used in the following years? You should have this because it's automatic. How many DTAs will be transformed into tax credits in 2017? Thank you.
Let's start with what I already have in mind, or something I already know, and then as to the technical questions, I'll ask my people to provide me with the information. December 2018 is the ultimate window, so to speak. We're talking about personnel. The entire exit plan is going to be completed by 2018. Restructuring costs, it depends on cost and amortization because costs maybe are slightly lower than EUR 60, and total cost, you talked about the software amortization, EUR 75 million have already been achieved. I believe that we still have to include what is residual until June, because until June, the software is still going to run. I think that adding everything together, it should go from EUR 80 to EUR 90.
Coverage top up, you got it perfectly well. These are per bucket. Of course, it is not possible to mix things together. The value of unsecured loans is one thing, and secured loans is other. You cannot play tricks here and selling one side and pretending to have a coverage also on the other side. We have the right coverage, 48% and 86% respectively. This is what we take into consideration for coverage top up or replenishment. As to IFRS 3, the recurring impact for the time being is negligible. I believe we talked about this also when carrying out estimates. We carried out all the necessary considerations, but really what we got were negligible amounts, negligible numbers. DTAs?
I'm sorry. With respect to IFRS 3, is it right that it's capital neutral?
Right. It's from 1%-2%. Of course, we are still in work in progress. In 40 days we had to close the annual reports, two of them. This is what we were working on. Right now we have not completed the entire impairment process yet. We expect that no significant impact is going to come from there. With respect to DTAs, I really cannot be of any help there, because today it's impossible to answer to your question. My chief financial officer is here with me. What about collateral? With respect to collaterals, the aim is slightly different. We apply haircuts. Even though we might talk about appraisals, these appraisals are really up to date, to the spot. Again, this is not an actual data, but it's an estimate, and it should be around 130%.
Capped at 100?
Yes, capped at 100.
Ladies and gentlemen, we have no other questions so far. Well, thank you then for having waited until 8:05 P.M. Hopefully it was worthwhile. Talk again in the next meeting. Thank you and good evening, everybody