Good afternoon, ladies and gentlemen, welcome to our first half results conference call. This is Carlo Messina, Chief Executive, and I'm here with Stefano Del Punta, CFO, Marco Delfrate, and Andrea Tamagnini, investor relations officers. Before I get into our results, I want to express my sorrow for everyone suffering or who have lost someone because of the virus. As a group, we respond quickly to the COVID-19 emergency, immediately taking concrete actions to care for our people and our customers, supporting families and companies, and ensuring business continuity. We are successfully managing a very challenging environment. We delivered an excellent first half. In fact, we achieved the best first half since 2008 for net income at EUR 2.6 billion, with the best-ever Q2.
While increasing profitability and efficiency, we further strengthen our balance sheet, improving our rock-solid capital position and deleveraging NPLs to the lowest level since 2008. It is safe to say that we are very well positioned to continue delivering best-in-class profitability to maintain a rock-solid capital position, to deliver a payout ratio of 75% for 2020 and 70% for 2021, and potentially distribute part of the reserves in light of the 2019 net income allocated to reserves subject to ECB approval. We are also starting a new chapter in the ISP story. Last week, we successfully concluded our offer to UBI shareholders with more than 19% acceptances. I want to give a warm welcome to our new UBI colleagues, and I already consider them an important part of the group.
I hope that some of them are listening to this call, and it is a chance for them to see what drives us and better understand why I think ISP and UBI together are such a good fit. Bringing our UBI colleagues on board is now an absolute priority for our group and for me personally. ISP results have always been the outcome of our people's motivation and the pride that they take in our group. Recognizing and developing talents, giving them the chance to contribute to our collective success is a winning formula, is my winning formula. Our UBI colleagues can expect to be part of these opportunities. UBI is a very good bank. We recognize that. This is true for all the companies that make up the group with no exceptions, and we know that comes down to the quality of its people.
You are now a valuable part of Intesa Sanpaolo. I will personally lead the team dedicated to selecting UBI talent and including them in our career development and management succession plans together with ISP people. When I say that I mean all of them. Yes, some will eventually become part of the BPER family. To all those colleagues who will move outside of the ISP group perimeter, I want to say that we will work with BPER's management to do all that we can to ensure that they are treated as a valuable addition to the BPER team. This is our commitment to you and my commitment to you. I believe that in the current scenario, the combination with UBI Banca will create even more benefits for all stakeholders.
In fact, only banks that can leverage strong economies of scale, high efficiency, a solid capital position, and high asset quality will successfully navigate the times ahead. ISP and UBI Banca have similar business models and share similar corporate cultures and values. Together, we are stronger, and together, we have greater potential for growth. Let's now go through the presentation. At the end, I will be glad to take your questions. Slide number one. Looking at the first semester, we delivered excellent performance, EUR 2.6 billion in reported net income. This jumps to EUR 3.2 billion when you exclude provisions for future COVID impacts. We delivered the best-ever Q2 net income at EUR 1.4 billion. Our revenues are stable, thanks to resilient net interest income and significant growth in insurance revenues and financial market activities, which naturally hedge the impact of market volatility on our fee-based businesses.
June has been the best month of the year for commissions. We had an acceleration in assets under management inflows with EUR 2.2 billion in Q2. In the first half, we recorded a EUR 12.5 billion increase in household sight deposits, about EUR 20 billion in the past 12 months, which will fuel our wealth management engine in the coming quarters. Operating costs were down almost 3%, taking cost-to-income to 48.5%, one of the best in Europe, once again demonstrating our strategic flexibility in reducing costs. Operating margin increased by 2.8%. Cost of risk, excluding the EUR 880 million in provisions for future COVID impacts, is at 46 basis points. We further deleveraged EUR 1.8 billion of non-performing loans with the lowest-ever gross inflows. Overall, the excellent performance in the first half was fully in line with our 2020 pre-COVID targets.
More than ever, I want to thank all of Intesa Sanpaolo people for their hard work in achieving these excellent results in this very difficult environment that has tried us physically, emotionally, and professionally. Thanks to my people for their hard work. Slide number two. Thanks to our solid fundamentals built over time, we are fully equipped for a very challenging environment. Our fully loaded common equity ratio is 14.9%, equal to about EUR 18 billion of excess capital. We have leveraged around EUR 36 billion of NPLs, always at no cost to shareholders. We have distinctive internal capabilities for proactive credit management, coupled with our strategic partnership with leading industrial players for the late stages. We have already provisioned EUR 880 million for future COVID impacts, and we are an efficient wealth management and protection company with around EUR 1 trillion in customer financial assets.
We successfully evolved towards a light distribution model, with 1,000 branches rationalized since 2018 and significant room for further branch reduction. Our clients appreciate our strong digital proposition, and we already have around 10 million multi-channel clients and 6 million using our app, recognized as one of the best in Europe. Slide number three. For all the reasons I have just mentioned, Intesa Sanpaolo is also well equipped to succeed in the future. We have solid fundamentals, and we are very well positioned to continue delivering best-in-class profitability with minimum EUR 3 billion net income for 2020, assuming a cost of risk of 90 basis points, a minimum EUR 3.5 billion net income for 2021, assuming a cost of risk of 70 basis points. This is without considering the combination with UBI.
Maintain a solid capital position with a fully loaded common equity ratio at minimum 13%, that is 12% fully phase-in. This also takes into account the potential cash distribution from reserves in light of the 2019 net income allocated to reserve, obviously subject to ECB approval. Deliver a payout ratio of 75% in 2020, and a payout ratio of 70% in 2021. We have already deducted 75% of the first half net income from our capital ratios, so EUR 1.9 billion. UBI Banca will be now an important part of this future, and we believe that the combination adds significant value by improving asset quality and delivering synergies with no social cost and very low execution risk due to ISP's proven track record in managing integrations in Italy. We have always demonstrated our ability to fully deliver on our promises, activating all available managerial levers. Slide number 4.
The Italian economy remains resilient and can count on strong fundamentals backed by strong government intervention and significant EU financial support. In particular, the wealth of Italian households stands at EUR 10.7 trillion, and the amount of debt held by Italian families remains very low. Italian companies have stronger financial structures than pre-2008 crisis levels. They are more profitable and better capitalized, and the export-oriented firms have become powerhouses over the past few years. The banking system is by far stronger than in the previous crisis, with higher capital, less NPL stock, higher efficiency, and more diversified revenues. The Italian government and EU are providing game-changing support. As a sign of optimism, industrial production in May rebounded by as much as 42% compared to April, and also the last information on dynamics in Italy are positive. Slide number six.
Let's take a look at the points of strength that will sustain us in the challenging phase. In recent years, we have more than halved the NPL stock while increasing the coverage ratio. We have increased our rock-solid capital base with Common Equity ratio up 1.8 percentage points since 2015. We achieved this through internal capital management, while also paying EUR 13.4 billion in cash dividends over the past six years. We are very well-positioned to pay high and sustainable dividends. We continue to reduce our cost-to-income ratio, and overall, we have a very resilient business model, with 55% of our gross income for the first half coming from wealth management and protection activity. Slide seven. We are far better equipped than our peers to tackle the new environment. We have a best-in-class risk profile, NPL Level 2, Level 3 assets.
We have one of the highest capital buffers in Europe, and we are one of the cost-to-income leaders in Europe. We are also entering this extraordinary environment at full strength with the best first half net income since 2008, already delivering 86% of the minimum EUR 3 billion target for the year, and the best ever Q2 net income. Slide number nine, leveraging on our top-performing delivery machine, and we immediately responded to the COVID-19 emergency with a complete set of actions to care for our people and customers, supporting the real economy and society, and ensuring business continuity. Slide number 10. We ensure safe working condition for our people and business continuity for our customers through a large and effective set of actions. Slide number 11. We double down on our longstanding commitment to support society and the real economy, helping families and organization impacted by the COVID-19 emergency.
I'm very proud that our bank, our employees, our management and board donated more than EUR 10 million to help fight the COVID health emergency. Slide number 12. Our strong digital capabilities have been key to guaranteeing business continuity. Specifically, we more than tripled digital sales versus the same period last year, and we have strong cybersecurity capability, as demonstrated by the fact that we ranked first among Italian corporate in cyber resilience. Slide number 13. We are fully aware that this emergency is shaping new trends, and we are ready to leverage our competitive advantages. We are set to benefit from the growing demand for health, wealth, and business protection by leveraging our leading position in insurance as well in wealth management. The acquisition of RBM has been one of these key factor from a strategic point of view.
There are other items related to digital channels and payment system. I want just to focus the strategic partnership with Nexi in payment system, with ISP purchase of 9.9% of Nexi capital, that we consider a strategic stake through which we can participate in the upside of a fast-growing market. Slide number 14. Italian GDP will be hit significantly by the COVID-19 emergency. This forecast to decrease around 9%-10.5% this year, like all the European countries and the significant part of all the other countries. In 2021, we expect a rebound of 6%-7%, thanks to the solid fundamentals of the country and support packages from the government and EU to help businesses and households. This means a GDP loss of around 3%-3.5% over two years. Slide number 16.
Just to give you the evidence of the macro context in the first half, and this was clearly defined by the COVID-19 outbreak. Italy experienced a strong drop in GDP, market volatility reached all-time highs, and the 10-year BTP bund spread widened. In this difficult environment, we deliver excellent results, and we are fully equipped to successfully navigate the challenges ahead. On slide 17, you can see the highlights of our strong performance in the first half, and let me give you some color on the following pages. In the first half, we continued to improve across all key indicators.
In particular, net income was 39% higher than last year when excluding the COVID provisions, and we leveraged EUR 5 billion of NPL on a yearly basis, and our Common Equity ratio improved by one percentage point on a yearly basis after deducting EUR 1.9 billion for accrued dividends, and by 40 basis points in Q2, despite the impact of the acquisition of RBM Assicurazioni Salute and the 9% Nexi stake. Our slide 19. Our excellent performance allows us to create sustainable benefits for all our stakeholders. You can look in this slide. Slide number 20. The COVID focus initiatives are also part of our commitment to our stakeholders.
A call moderator has joined the conference.
ISP is strongly committed to its role as an engine for sustainable and inclusive growth. Slide number 21. In this slide, you know well, you can see a few examples of our work to support Italian society, and in particular, the acceleration of our support during the COVID emergency. I want to highlight that since 2018, we have delivered 11 million meals to people in need. Slide 22. As a result of our efforts, we are the only Italian bank rated at the top of all the main sustainability rankings, and we are very proud of this achievement. Slide 23.
Despite a challenging environment in the first half, with high market volatility and the country in lockdown from March to June, we increased profitability driven by a reduction in cost and steady revenues that would have increased more than 1% when adding the EUR 310 million related to the day one profit due to the increase in value of the 9.9% stake in Nexi held by ISP, booked in income from discontinued operations. Net interest income and commissions have been resilient despite lower interest rate and COVID impact. Profits on trading grew more than 15% compared to last year. Insurance income grew more than 70%, driven by solid growth in non-motor P&C revenues, up 85% when including the component booked in commissions. We have continued to be very effective at managing costs, with personal expenses down 2.5% and administrative expenses down more than 6%.
Depreciation is up as we keep investing for growth. Operating margin was up 2.8%, cost of risk excluding the EUR 880 million provision for future COVID impact down to 46 basis points. As mentioned during the Q1 results call, we used part of the Nexi capital gain as a buffer to offset provisions for future COVID impact. Net income is at EUR 2.6 billion and reaches EUR 3.4 billion when also excluding costs concerning the banking industry and the impact of provision for future COVID impacts. We have already achieved 86% of the EUR 3 billion minimum net income target for 2020. That means that delivering just EUR 200 million per quarter to meet our full year target. Slide 24. Q2 has been very strong, with the best ever second quarter for net income.
In comparison with the same quarter of last year, net interest income was stable despite decline in market interest rates. Profits on financial assets would have reached EUR 570 million when including the EUR 310 million day one profit of the Nexi stake. Net fee and commissions income was impacted by 2 months of country-wide lockdown in Q2, with strong recovery in June, the best month of the first half of the year. Insurance income increased by more than 20%, operating costs were down 2.9%. Gross income was up 4% versus last year, with part of the Nexi capital gain offset by provision for future COVID impact. Net income was up 16% to more than EUR 1.4 billion. Slide 25. In this slide, you can see that on a quarterly basis, net interest income increased by 0.2%, mainly due to positive dynamics on volumes.
On a yearly basis, the net interest income would have increased when excluding the impact of accelerated NPL deleveraging on financial component. Slide 26. Customer financial asset increased by EUR 43 billion in Q2 to almost 1 trillion, also thanks to a EUR 17 billion increase in asset under management. In asset under management, net inflows were positive by more than EUR 10 billion in the past 12 months. In the same period, family sight deposit increased by EUR 20 billion. Slide 27. We continue to be very effective at managing costs, and the main sources of saving were head count reduction, real estate optimization, legal entity reduction, and the decrease in other administrative costs. We reduced head count by more than 2,900 on a yearly basis. We have room for further cost reduction, and we had the lowest-ever administrative costs.
On top of that, I have just said the combination with UBI Banca will create significant cost synergies with zero social cost. Slide 28. We are proud to have a best-in-class cost-to-income ratio, and this chart illustrates our leading position in Europe. Slide 29. NPL stock has continued to decline sharply with 19 quarters of continuous deleveraging, and we deleveraged EUR 1.8 billion in the first half, out of which EUR 0.5 in Q2. Slide number 13. As you can see in this slide, loan loss provision declined by 0.4%, excluding provision for future COVID impacts. As a result, the annualized cost of risk, excluding provision for future COVID impact, is now down to 46 basis points. Slide number 31.
Our capital buffer versus regulatory requirement is 630 basis points, well above our peers, and this figure also includes a EUR 1.9 billion reduction for the 2020 dividends accrued in the first semester. Our fully phased-in Common Equity Tier 1 ratio is at 13.8%. Slide 32. Our best-in-class capital buffer versus regulatory requirement was further strengthening in this quarter with an increase of 40 basis points, despite the impact of the acquisition of RBM and the Nexi stake. Slide number 33. When it comes to capital strength, we continue to be a European leader. In addition, we continue to apply a deliberate strategy of low leverage with a leverage ratio of 6.6%, the best in Europe. Slide 34. Best in class in terms of risk profile, considering non-performing loans, Level 2 and Level 3 assets. Slide number 36. UBI transaction.
UBI will now become part of our group, further strengthening one of the strongest players in Europe, and the results of the exchange offer confirm the complete success of the deal. ISP has exceeded, by a huge margin, the threshold of two-thirds of UBI's total share capital, allowing us to hold control of UBI Banca EGM, launch the merger process to incorporate UBI into ISP, unlocking maximum value creation through the generation of pre-tax annual synergies of around EUR 700 million, once fully completed. Expedited the transfer of the branches to BPER to comply with the antitrust authority agreement, and used EUR 2.8 billion negative goodwill to fully cover integration charges and accelerate NPL reduction. Slide 37. Here you can see the key financial metrics of the combined entity. Let me highlight some of them.
NPL coverage at 57.2%, including EUR 1.8 billion of additional provisions thanks to the negative goodwill generated. This will bring UBI's coverage from being below average to best in class. Another benefit for the new ISP shareholders who join us from UBI. Let me also draw your attention to the more than EUR 1 trillion in customer financial assets we will have after the disposal of branches as part of the agreement with the antitrust authority. Slide 38. Following the combination with UBI, ISP footprint will expand and be stronger, especially in the wealthiest region of Italy. As you can see from the map, our market share of branches in Italy will increase from 15%-90%. This deal makes so much sense because it fully supports and feeds into our business model as wealth management and protection leader. Slide 39.
The combination strengthens our leading position across product segments in Italy. I also want to underline, as the agreement with BPER announced back in February clearly shows, we designed the operation with great care for the competitive dynamic of the market and the impact on customers. One of the benefits, we have a much stronger BPER, which can help shape the competitive landscape. Slide number 40. Many have said that this combination made strong industrial sense but wasn't transformational. I think a quick look at the jumps we make in these rankings show the strategic value of this move. We are establishing a national champion that can successfully compete at European level.
Now we can be considered close to the number one bank in Europe, BNP Paribas. We think that this is the clear evidence that this is a transformational move also in the European landscape. As ISP, this makes us very proud. I expect that our new UBI colleagues will also find a lot of satisfaction in building one of Europe's major banking groups, headquartered in Italy and leaded by an Italian. Slide number 41. The new group will offer an attractive value proposition to all its stakeholders. In particular, we will generate significant synergies with no social cost. Negative goodwill from the transaction, equal to EUR 2.8 billion, will fully cover integration costs and additional low loss provisions, meaning we can accelerate the NPL deleveraging. As always, we will do this only at no cost to shareholders.
We will pay high dividends with a payout ratio of 75% in 2020 and 70% in 2021. Our solid capital position will remain with a Common Equity Tier 1 ratio of minimum 13%, and net income will be above EUR 5 billion starting in 2022. Our proven track record in managing integration shows that execution risk is very low. Let me now turn to the next slide, where I would like to take a moment to review how we will provide strong support to UBI Banca's reference territories, and how UBI people will benefit from being part of the strongest group. ISP has always dedicated great attention to local communities, and UBI Banca people, customers, shareholders, and community can count on us to bring the same or even greater attention to the territories that matter most to them. You can see on the page our tangible 43.
As you can see from this slide, we fully respected the timing to complete the exchange offer, and we have already planned the next steps for UBI's integration. ISP is a delivery machine. Quarter after quarter, we meet our goals and our commitments. Our people make this look easy, but it isn't. Five months ago, we set out to combine UBI into our group. Some asked if we could succeed because it wasn't easy, and yet we did, right on schedule. I want to thank the team that made this vision a success. We will continue to update you on the timetable for the integration, and by the end of 2020 and 2021, we will provide the market with a detailed plan for the new combined group as soon as the macroeconomic scenario becomes clear.
In the meantime, we will execute all the managerial actions to manage the integration and extract the forecast synergies, and even more. Missing from this timetable are the opportunities ISP and UBI's people will have to begin sharing ideas over the next weeks and months. Slide 45. To sum up, we are very well equipped to succeed in this challenging environment. We are a leading bank in Europe when it comes to excess capital, low leverage, and strong liquidity. We have already provisioned almost EUR 900 million in the first half to tackle future COVID impact. We have continued deleveraging NPL to a low stock with robust coverage. We have a well-diversified and resilient business model, and we have one of the best cost-income ratios in Europe.
We delivered an excellent first half with highest first-half net income since 2008, already delivering 86% of the EUR 3 billion minimum net income target for 2020. Best ever Q2 net income, growth in operating margin, and lowest ever first half on Q2 gross NPL inflow. Significant strengthening of the capital position. We have something trying to call us to make the compliment for the result. Congratulations for the results. We delivered an excellent first half with highest first-half net income since 2008, already delivering 86% of the EUR 3 billion minimum net income target for 2020. Best ever Q2 net income growth in operating margin, lowest ever first half and Q2 gross NPL inflow. Significant strengthening of the capital position.
For this reason, in the future, we are very well positioned to continue delivering best-in-class profitability, with minimum EUR 3 billion net income for this year, minimum EUR 3.5 billion net income for next year, both without considering the combination with UBI. Maintaining a solid capital position with a minimum Common Equity ratio of 13%, even taking into account the potential cash distribution from reserves in light of the 2019 net income allocated to reserves. Deliver a payout ratio of 75% in 2020, with 75% of the first half net income already deducted from capital ratios, and 70% in 2021. On top of the cash dividend from 2020 net income, as I just said, we will seek ECB approval for a cash distribution to shareholders from reserves in light of the 2019 net income allocated to reserves.
Today, we reviewed an outstanding set of results, all the more impressive considering the COVID-19 backdrop. I can never thank our people enough for making all this possible. It really is impressive. In closing, let me say a word to our new UBI Banca colleagues. Together, we are building a new banking reality that will draw its strengths from the solid relationship that we have with the communities in which we operate. Together, we are creating something that I believe we can be proud of. I look forward to this. The first impact is that now we are exceeding Santander in terms of market cap. Thank you for your time and attention. I'm now happy to answer your questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will now take our first question from Antonio Reale, from Morgan Stanley. Please go ahead.
Hi. Good afternoon, everyone. It's Antonio Reale from Morgan Stanley. Thanks for the presentation and congrats on all the work done so far. I have three questions, please. The first two on guidance and the third on M&A. The first one is on the at least EUR 3 billion of net profit guidance for the year, which is clearly within easy reach. You've done EUR 2.6 billion so far, and you've put aside EUR 900 million for COVID-related losses. How much more of the EUR 3 billion do you think the bank can do? I'm thinking especially in the context of the commitment to pay dividends. Could you decide to set aside more provisions than the 90 basis points cost of risk guidance, or could you do more restructuring charges? I think given that you expect also to reach a trade union agreement with the exit by December.
I would just like to understand your thinking on these two points, please. The second one is on dividends. I've read your intentions to ECB to pay the 2019 full year dividend. I think it was EUR 3.4 billion as a special in 2021. If I do the math correctly, that's a significant amount, as you'd be paying at least EUR 5.6 billion-EUR 5.7 billion if I put the two together. That's between ordinary and special. Do I understand that correctly, first of all? Secondly, I remember you were going to move to a semi-annual dividend from next year. Is that still the case, despite UBI? Related to that scrip dividend, is this something you would consider until the ECB ban is lifted? The last one is on M&A. With UBI, you've clearly consolidated your position in Italy.
I look at slide 40, and I think I hear you loud and clear, perhaps also on the back of recent press reports. I think you've not been shying away from your growth ambitions outside of Italy. How should we think about European M&A? Is it fair to say that management capacity is now constrained with the integration of UBI? Thank you.
Starting from net income guidance. I want to be clear on this point. I think that we can easily achieve EUR 3 billion, that's the evidence of figures. I have to tell you that, in my perception, there could be some positive evolution in the next quarter. I'm not in the pessimistic mood of a significant number of players in the market. I'm telling this, I think that we can talk about not such a negative GDP evolution for the next quarters. My expectation is that we can start to have positive signs in the future. The EUR 3 billion could be conservative in our view. The point is that the uncertainty on provision is what I consider one of the point to remain with the guidance of minimum EUR 3 billion.
For the evidence that we have today, I think that we can remain below 90 basis points. That's my expectation. 90 basis points is conservative in our view. Expectation for the 2020 is that we can remain absolutely and easily within this guidance. For extra integration charges, we will see. It is likely that we will use, and we can use the goodwill deriving from the UBI transaction. For the real outlook on integration charges and the extra provision, it is likely that there will be a usage of goodwill embedded in the UBI transaction. We will see this in the next months. In September, November, when we make a presentation of third quarter results, we can give some more clear evidence to the market on this point. I'm really confident that we can continue to deliver very good profitability.
We are talking about delivering EUR 200 million-EUR 250 million per quarter, that is, in my view, a real worst case scenario. For the dividend, just give you my view on this point. We respect absolutely the decision of the ECB. It is clear that today there is a priority from the regulator and the supervisor. I'm not in the position of other CEO that consider that investors, medium, long-term investor can be happy not to receive dividends this year. I think that to pay dividends is a priority for a bank, especially for retail, for foundations, but also for mutual funds, because at the end, retail clients are investing in mutual funds. It's a way in which you can give support to real economy. That's my view on dividends.
Great and complete respect for the regulator, I think that there will be a timing in which the need to give support to the investors will be the clear priority for the future. At the timing, we will be in a position to have the 75% accrued for 2020 and to ask for a distribution of reserve relating to 2019. Obviously, it will be subject to ECB approval. We will respect, in any case, the decision of the ECB. It is my personal view, and my personal commitment is to try to work in order to give a significant amount of cash dividend to my shareholders, also because we have such a strong excess capital position that it will be fair to give this to investors. Scrip dividend is not a priority for me. Semiannual dividends, we can start again to work on this point.
As you know, we had other priorities in these months. On M&A, I think that in the next couple of years in Italy, there will be an acceleration in M&A. Not easy to say what can happen, but also in Europe, I think that there could be some cross-border consolidation. With this move, we can be sure not to be a weak part of this consolidation. I don't think that it could be easy for Intesa Sanpaolo to create value in combination with other European counterparties. European consolidation is not a priority for Intesa Sanpaolo, because I'm used to make transaction that can create value for my shareholders, in transaction in which I'm able to deliver results like an Italian integration.
Very clear. Thank you very much.
We will now take our next question from Delphine Lee from JP Morgan. Please go ahead.
Yes, good afternoon. Thanks for taking my question. I just want to come back on the dividend. Just wanted to clarify that the full year 2019 dividends that you intend to pay if you get the approval, that's EUR 3.4 billion, or is it EUR 0.197? Just to clarify. Also related to that, where do you get the confidence that you can get the approval from ECB early 2021? It does seem that other CEOs in Europe seem to think the contrary. If you could maybe elaborate a little bit on this, that would be very helpful. Also on the question of dividend, do you think there will be some scrutiny from the SSM on the payout ratio, and do you expect any issues on your 75% or 70% payout ratio targets or not at all? Just to go back on provisions.
Your guidance for this year, the 90 basis points, is quite clear. Would you rule out any additional provisioning by year-end if you include also UBI, even beyond the EUR 1.8 billion that you had already planned as part of the usage of badwill? Just to understand a little bit the outlook on what we should expect in terms of acceleration of the NPL stock. Lastly on net interest income, which we've seen some weak trends this quarter. If you could provide maybe some guidance on what we could expect for the rest of the year, including also the benefit from TLTRO, that would be great. Thank you.
Let me talk again about dividends. What I consider as a possible point of reference is the absolute term and not the percentage terms. On this point, I have to tell you that we will try all the best in order to have the ECB approval. For the time being, the position of ECB is clear. There is no opening point on the possibility of making distribution on 2019. I think that by the end of the year, also ECB will reconsider this situation, looking at the fundamental of real economy. We will see, because it is clear that if the GDP will be negative in all the European countries, there will be zero probability to have distribution of dividends.
If, as in our expectation, there could be a rebound in GDP, probably they can proceed to enter into some discussion to work with banks that have a clear excess capital in order to allow them to make the right remuneration to the investors in the market. Again, it is not a matter of paying a dividend just because it is the financial activities in the market that will benefit. It will be real economy benefiting from payment of dividends. It is also, in my view, instruments in order to give money to families they can use in terms of consumption, to give money to foundation that can invest for social purposes, to give money to mutual funds that can give performance to retail investors, to families.
It is also something that it is good for the real economy if the GDP will turn positive as in our expectation. In any case, we are talking about into absolute terms. On the payout ratio, again, I think that the real point on dividend, it is not a payout ratio. It is the excess capital. In any case, the attitude is not to have 90% payout ratio. I think that 75%, 70%, if you have the right excess capital, is absolutely acceptable. We are deducting 75% because we think that we will be in a position to pay this amount of dividend to our shareholders. My view is that there is too much emphasis on the level of payout ratio. What is important is the level of excess capital. Looking at provisions, I'm pretty confident on the estimates on cost of risk.
It is also true that if we will be in a position at the end of the year to allocate extra provision using the badwill on the non-performing loans, I will try to do. Obviously, we have to analyze, we have to enter into the figures of UBI Banca. We have to consider all the different value of the different asset classes in UBI balance sheet. My intention is to try to create condition to have the strongest rebound in profitability in 2021. The indication that we gave on badwills for negative goodwill is clear. I have to tell you that if I will have the possibility to make some extra provision using the badwill, I will consider this, but it is a matter of the end of this year. Let's give me the time to better understand the situation.
On net interest income, I have to tell you again that my expectation on net interest income just two months ago, three months ago, was more or less in line with what we realized in this quarter. It is, in any case, true that we can accelerate through benefits in TLTRO funding. There could be two significant levers, one volume, and the other one the TLTRO funding. We will see in the next quarters what kind of sides could be the increase in net interest income, but the expectation for net interest income is for sure positive for the next quarters.
Thank you very much.
We will now take our next question from Giovanni Razzoli from Equita. Please go ahead.
Good afternoon. Thank you for the presentation. I have a question which regards your trajectory for the cost of risk. You have been very clear for 2020 and 2021. I was wondering if you can share with us what are your thoughts on the moratoria at sector level and the possible impact of the expiration of the moratoria. Is this something that we should see as an issue for the sector as a whole, as they may imply a deviation vis-à-vis the trajectory that you have presented to us in terms of evolution of the cost of risk? Thank you.
The evolution is already considering the impact of the moratoria. In any case, this is a factor that all the system will have to monitor with attention, and also, in my view, the authorities in Italy, so the governments and the other authorities will have to consider with attention. It is absolutely true that there could be a component that can be reversed into past due and can have some impact in the non-performing loans and also in provision. Our forecast is already embedding the portion of moratoria. I hope that there could be a strategic view also from the government side in terms of what really is needed by clients and banks in the country.
Thank you.
We will now take our next question from Andrea Vercellone from Exane. Please go ahead.
Good afternoon. Two questions from me. One, provisions, the other one is on the TLTRO. On provisions, you talked a little bit already in answering the previous questions. In the official communication, you allocate the entire EUR 1.8 billion of extra special provision to UBI. This I read PPA. You plan to sell EUR 4 billion, you will do your valuation, and you write them down through the PPA process. I think it's a bit excessive on UBI standalone. I was wondering whether we should see this EUR 1.8 billion of extra provision just on UBI, or is for the group as a whole. The same with the NPL disposal, since now it's part of Intesa Sanpaolo, there may be even some NPL positions which are shared by the 2 banks. The same with the EUR 4 billion NPL disposals.
Is it UBI only, or is for the group as a whole? The second question, the TLTRO, you have taken about 71 billion EUR, you can take more than 90 billion EUR. Do you rule out taking some more in the next auctions, or you're kind of done? Thank you.
The allocation of badwill can be only on UBI portfolio, but it is true that there are a number of clients that I think will be in common, that can be shared. That is the reason why we need to enter more into the figures of UBI to better understand what it is possible to do with the badwill. The disposal will be on non-performing loans, and it is also clear that a portion of these non-performing loans will be in common with Intesa Sanpaolo. That is the reason why we need to better understand the position from inside. Having the full control of the figures of UBI, and then we will decide what can happen.
Let me say, this is an epic problem in the sense that having badwill, having areas in which it is possible to reinforce the coverage and accelerate the non-performing loans program, this will generate benefit at group level. On TLTRO, our intention is to have other participation, to increase the total amount roughly for another EUR 10 billion. We will see in the next futures, we can increase the amount.
Thank you.
We will now take our next question from Benjie Creelan-Sandford from Jefferies. Please go ahead.
Yes, good afternoon. Two questions from me, please. The first one was on asset quality. If I look at Stage 2 loans, they look to have increased quite a bit quarter on quarter from EUR 43 billion to EUR 63 billion. I'm just wondering if you could give us any more details on the driver and the nature of those loans. Do they include loans under moratorium already in Italy? The second question is on fee income. Asset management and insurance fees continued to drop this quarter, assets under management obviously rebounded quite strongly. Is your expectation that we should see much stronger momentum in terms of fee income in 3Q, in the second half of this year? Does more cautious product mix and approach from clients keep a lid on that fee performance? Thank you.
For sure, in fee income, we expect to have a rebound because June has been a good month. As I told you, the increase in asset under management has been massive in this respect. EUR 2.2 billion increase in net inflows is really significant. Also, July has been a very good month in this trend. We expect and what we are seeing with the private banking and Banca dei Territori is an increase in the volumes coming from both mutual funds and insurance business. Insurance is an area in which we are increasing, in a significant way, the contribution in the commissions area. This is another area in which we are accelerating. Net-net, my perception is that in the next quarters, we can see other significant step into the commissions area, provided that the market can remain with a positive trend.
This will bring also the Italian families towards wealth management, and also my people more in favor of suggesting to the client the investments into the product of wealth management. For what is related with the Stage 2 is also an impact related to the moratoria and to the reclassification, and that is a portion related to this new growth in terms of this portion of portfolio. All this combination is what we have considered in order to have the maximum cost of risk of 90 basis points during the next two quarters.
Okay. We will now take our next question from Patrick Lee from Santander. Please go ahead.
Hi, good afternoon. Thanks for taking my question and thanks for the interesting observation that Intesa is now bigger than Santander in market cap. I thought that was quite interesting. I just want to touch on a topic on M&A and a question on branch reduction and cost synergies. I think you mentioned that you are now obviously a national champion now, but how important is it for you and for Intesa to be more than just a national champion and given the valuation of European banks in general, would you consider taking a bigger step for cross-border M&A in order to gain the extra geographical diversification, for example? The second one is just a bit of a medium term in terms of what you think about cost synergies with UBI.
In the context that you mentioned under COVID-19, the increased use of digitalization has been forced onto the customers. I just wonder if, in the long term, do you think there can be even more branch closure than you envisaged at the beginning of the year, and whether it could bring more cost synergies to the picture. That's it. Thank you.
Looking at the geographical diversification. This is a point in which you have to consider geographical diversification in connection with possibility of creating value for your shareholders. There is a clear evidence that investors can create portfolio making geographical diversification, investing in an Italian company and in a French company. From our side, we want to create geographical diversification. We have to be sure to create value for our shareholders. Believe me, I think that I'm really able to create value to my shareholders through integration in Italy or through possible growth in terms of areas of wealth management. I don't think that there could be significant value in making a combination just for the sake of geographical diversification. Today, I do not see any kind of possibility to create value for our shareholders in making some kind of geographical diversification.
For digitalization and cost synergies, I think that we can continue to have a strong trend in terms of cost reduction, investing at the same time in digitalization. This will bring benefits to us also looking at the branch coverage, so the possibility to work in further reduction of branches, especially in the segment of mass market, because what I will do is to invest in reinforcement of personal affluent private banking branches and to try to work in order to have further reduction of branches. Digitalization will be a key driver and enabler in order to reduce other branches. Net-net, I think that we have other significant potential in terms of reduction of cost.
We will now take our next question from Andrea Filtri from Mediobanca. Please go ahead.
Yes, good afternoon. Two questions on cost and on cost of risk. On costs, could you quantify for us how many additional branches could you close at regime from the implementation of the Sisal Pay agreement and the digital channels, and what time frame you have in mind for this? COVID-19 clearly accelerates digital awareness among clients. How long do you think it will take for Italy to converge to Nordic standards? On asset quality, what sort of default rate within the moratoria loans have you assumed in the cost of risk guidance for 2020 and 2021? Thank you.
Looking at the extra branches, we have already disclosed to the market that with the Sisal Pay agreement, there could be theoretically 1,000 branches in excess that can be closed. It is clear that you need absolutely to have the analysis of the real impact deriving from the agreement. Now we have another point that we have to add to this analysis that is the UBI acquisition. I cannot give you any kind of time frame. I'm working in acceleration of possible analysis of branch closure, but this work will be part of the budget 2021, and we will start to work on this point in September with the UBI branch. Looking at the default rate for moratoria, depending on the mix of clients, because you have different kinds of clients involved in this scenario.
Our expectation is that the default rate will not be significant, because a significant number of these players that at the same time have the current account with us have significant liquidity in their current accounts. Our expectation is that there could be an impact, but will be limited by the availability of cash that these subjects have in their portfolio. Again, I have to add you that I will start also a request with the government to make a postponement on this point. This is in the interest not only of Intesa Sanpaolo, but also of the entire Italian banking system. We will see what can happen in the future.
Sorry, you mean the extension of moratoria?
Yes, that's right.
Okay. Thank you very much.
We will now take our next question from Ignacino Sasot from UBS. Please go ahead.
Hello, this is Ignacino from UBS. Several questions from me. The first one is on the loan yield evolution in the quarter, especially in the context of the guaranteed loans. If you can tell us how much of the volume in the quarter has been given with the government guarantee, and how does the markup compare with the Q1 number. The second one is on the business plan in the 2022 net profits. If you can share with us what kind of cost of risk might you be assuming. I remember actually pre-COVID, you were guiding for cost of risk in the medium term and heading towards 40, 45 basis points. Is that a good ballpark figure for you? The third one, if you can share with us what kind of RWA migration you're expecting in the second half of the year and in 2021.
Thank you.
The majority of the growth is guaranteed by government. I can tell you that it is probably the majority of the growth into the portfolio is guaranteed by the government. The short-term for sure is guaranteed. We have medium-term loans that are in the normal activity of the group. For the short-term is the majority. If you include also the medium-long-term, will be more or less 50% of the total amount of the loans granted. We have also a portion of international activities deriving from the corporate investment banking division. If you look at cost of risk, I can confirm that for 2021, 70 basis points can be a cost of risk reasonable.
On a normal trend, I can confirm you that 40 basis points is the trend in normal condition for a bank like Intesa Sanpaolo, with the right coverage of non-performing loans. Again, we are back on the point of being sure to make the right allocation of provisions in 2020 and the right allocation of badwill during the process of consolidation of UBI. If these two factor will be positive, I think that the medium long-term cost of risk of the group will be easily under control.
On the RWA migration coming from migration of internal ratings?
What we expect is the majority could be between the past due and the unlikely to pay. That's our expectation during 2021. The portion of bad loans in our expectation will be not so significant. Probably we need to have some more quarters, so the third and the fourth quarter in order to be sure to have the figures for 2021.
Thank you.
We will now take our next question from Britta Schmidt from Autonomous Research. Please go ahead.
Hi there, it's Britta from Autonomous. I've got two questions, one on capital and then one on the deal. Can you comment a little bit on the regulatory impacts that we've seen in the CET1 ratio in the second quarter, and whether there are any other benefits to come? Could you intend to use the potential filter, do you have any benefits from software intangibles that could still arise? The second one would be, could you clarify what CET1 impact you now expect from the UBI deal, given the update of the figures regarding the negative goodwill and also the final acceptance ratio? Thirdly, could you clarify the synergies for the UBI deal with regards to the 5,000 headcount reduction? Am I right in assuming that that includes the 1,000 voluntary exit at Intesa? Thank you.
Sorry, I didn't understand the second question. Sorry. Could you repeat, please?
The second question was on the CET1 ratio impact that you expect from the UBI deal. You give the range that you don't expect the fully loaded ratio to fall below 13% or to remain above 13%, but could you be a little bit more precise in terms of the basis points impact that you expect?
Looking at the benefits for the future derived from regulation, my expectation is that we will not have significant further benefits on the Common Equity. We will continue to have a strong work on guarantee and on collateral, so we will have some other potential benefits on Common Equity related to this item, but not significantly related to regulation. Looking at the UBI transaction, our expectation is that through this increase in cash that we made of the offer, we can have an impact of another 10 basis points on the Common Equity. The total amount of the Common Equity impacted in the transaction could be between 50 basis points and 80 basis points, depending on the final points. Looking at the results of UBI just announced yesterday, the capital position of the group could be better benefitting from a better position of the UBI Group.
Again, we will have to see in September, making the first consolidation of the two group.
We will now take our next question from Alberto Cordara from Bank of America. Please go ahead.
Hi, good afternoon. In the answer to the first question, you mentioned also the possibility of some extra integration charges. I think it is possible you take this year because it seems that you're running well ahead of your target for the year of EUR 3 billion of earnings. My question is, how would it change the outlook for next year? Specifically, if when you said extra integration charges, you mean that maybe the synergies that you think to extract from the UBI deal of EUR 700 million could be made even bigger. I think this is an ambitious target, but knowing you and looking at what you've done in previous integration, in my personal opinion, you can. The other question is related to asset quality.
On asset quality, if you can give us an idea of how many of these moratoria loans are in Stage 2?
Sorry, we lost you, Alberto.
Yeah, sorry. The moratoria loans, they moved from EUR 38 billion to EUR 47 billion in Q2. How these are evolving, I think this is the final number, how many of these are classed as Stage 2 loans?
Hello?
Yes. Can you hear me? Can you hear me?
Alberto, is he here?
Hello? Hello?
We will now take our next question from Domenico Santoro from HSBC. Please go ahead.
Hi. I think Alberto probably deserves some answer. Should I go ahead with my question in the meanwhile? Hello? Hello, can you hear me? Hello, shall I go ahead with my questions? Can you hear me? Okay, guys, I'm waiting for a go ahead from you. Thank you.
Please stand by. We're experiencing momentary interruption in today's conference. Please continue to hold. Please go ahead.
I'm still asking the questions. Maybe, I don't know if Alberto Cordara, we didn't hear the questions that Alberto made because the line was progressively deteriorating. I don't know if Alberto maybe can repeat the questions for Mr. Messina, would be appreciated.
Domenico Santoro, your line is open. Please state your question.
All right. Sorry. I will ask my. Hello?
Just a moment. We'll actually take the question first from Alberto Cordara. Just one moment. Alberto, your line is now open. Please state your question.
Yes. Can you hear me now? Hello? Can you hear me?
Yes, go on.
Hello.
Yes, go on, please.
Sorry for this. I do apologize.
We can hear you well.
Okay, good. My first question is, I know that this may be premature, you mentioned some extra integration charges. My question is, do we need to keep this EUR 700 million synergies as the only possible number, or can we start thinking of the possibility to go even higher? Looking at your previous experience in making deals and integrating companies, my impression is that things can be even better than what you originally evaluated for. The second question relates to asset quality. I don't know if you can give us an indication of how much of these moratoria loans are in stage 2, or if any is in stage 2. The third point relates again to asset quality. I was looking at the presentation. You lend EUR 7 billion through SACE, another EUR 10 billion through the PMI fund.
Shall we expect something more in the ensuing quarters, how this is evolving? Thank you.
Sorry, Alberto. I didn't understand the third question. Sorry. Could you repeat, please?
Yeah. The third question is with respect to state-backed guarantee loans. If you can give us a bit of an update on how the situation is evolving, both in terms of the SACE scheme and in terms of the scheme that is guaranteed by the PMI fund.
Okay. Starting from the first point. We need absolutely to enter into the figures of UBI. I need to have some months, probably in the next quarter, I will be in a position to give you a view on the extra synergies that we can create in the future and that you can find in the next business plan. It is typical that when you create a scheme, you maintain some reserves. I think that the integration charges can be increased. My expectation is that we will have this position for the beginning of November, ready to make some kind of disclosure at the presentation of the third quarter results.
You know me very well, and you know that I'm used to maintain, especially on cost side and on possibility to use the balance sheet in case of a merger with a significant number of reserves. My expectation is that the situation could be really positive for the generation of synergies related to the cost side and the quality of credit side, and also the possible disposal of non-performing loans. This means that the combination of lower cost base and lower cost of risk can accelerate the generation of net income starting from 2021. If we remain at a standalone basis net income of Intesa Sanpaolo, I can guarantee for a minimum of EUR 3.5 billion, again, in my expectation, with some degree of conservatism. That's reality. We need absolutely to enter into the figures.
It is premature to make this analysis, but my feeling is that there could be some positive upside.
Looking at the moratoria stage. The real point on Stage 2 is that if we want to make easy, there could be this impact related to moratoria. Reality is that, I didn't want to elaborate on this point, but if you want me to do it, I will do. Is a clear correlation between the amount that you have a moratoria, the amount, the guarantee, the scenario, and the implication on model of the scenario. This migration in Stage 2 is mainly driven by a combination of moratoria guarantee scenario. At the end, the impact deriving from model, we have to check quarter by quarter. The implication of the COVID assessment in our figure is related with a medium level, considering the stress of the scenario that we used.
The average could be 11% negative GDP because we use between 9% and 10% GDP with the stress on 13%. This can have an impact also in some form of reclassification. Looking at the evolution in terms of what is happening on the state guarantee, SACE and fund, there is an acceleration in this month. I think that we can also have some further increase deriving from this area in this quarter, and then we will comment in November also, this figure related, this acceleration. In any case, my expectation is that net interest income will have a boost coming from this and from the TLTRO proposition.
Brilliant. Many thanks. Thank you very much.
We will now take our next question from Domenico Santoro from HSBC. Please go ahead.
Yes. Hi, good afternoon. Thanks for the presentation. Three very quick question from my side. First of all, appreciate that you gave us the direction of the NII over the next quarters, that is going to be positive. Can you help us to work out how much is going to be the incremental contribution from the TLTRO? Shall we just apply the 1% on the total so we get the incremental contribution? Or like other banks are pointing out, in Europe, a lower percentage given that most of this liquidity is given back to the ECB. An absolute number would help. Second, on fees, I was wondering whether there is any pot of unrealized performance fees at Eurizon that might emerge in the fourth quarter as usual, assuming that the market doesn't collapse, of course.
Third, I see that you are going to integrate the IT system. The IT integration will be relatively quick at the beginning of 2021. For the benefit of our model, I was just wonder whether you can help us to understand what could be the phasing of the cost synergies and whether a chunk of cost synergies might be already front-loaded in 2021. Thank you very much.
It is clear that the component could be in 2021. I think that it could be the right thing to give this information in the next presentation, in which I will be sure to have the full evidence of the characteristic of the UBI situation, because we made a top-down exercise. In these two, three months, we will work with the UBI people and with the real UBI situation, and then I will be in a position to give all the evidence. My expectation is that we will have an acceleration in integration at the beginning of 2021, a portion of this benefit could be for sure into 2021. In terms of fees, we have limited number of performance fee this quarter, just EUR 11 million. There is some reserves in Eurizon, we have to check what can happen in the next months.
For the time being, the evolution is really positive. In terms of net interest income, the incremental contribution could be significant because we are talking about a benefit coming from minus 50 basis points to minus 100 basis points. The amount of the TLTRO is significant. We are talking about number that could be, in absolute terms, EUR 100, EUR 150 million. Again, let me check quarter by quarter the evolution of this figure.
Thank you.
That concludes today's question and answer session, Mr. Messina. At this time, I would like to turn the conference back to you for any additional or closing remarks.
Okay. Thank you very much. We will have the occasion to have the other meeting at the presentation of the results in beginning of November. At the timing, we will give you more disclosure on this presentation. Thank you very much, and see you in November.