Good day, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2019 full year results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Gaelle, and I will be your coordinator for today's conference. At the end of the presentation, there will be a Q&A session. To enter the queue for questions, please dial star one at any time. Today's conference call is being recorded. At this time, I would like to hand the call over to Mr. Carlo Messina. Sir, you may now begin.
Good afternoon, ladies and gentlemen, and welcome to our 2019 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 diving into the detail, let me say that we are very proud that the bank continues to deliver strong results despite an external environment that has been less supportive than expected for revenues, and we continue to invest for sustainable growth.
Low interest rates, while penalizing net interest income, are favorable for our wealth management business, as is the declining sovereign spread. Our wealth management and protection business is working at full speed to convert into assets under management, part of the EUR 176 billion of assets under administration and the EUR 70 billion of household side deposits collected in the past few years.
The first positive results were visible in Q3 and Q4, the outlook is even more positive. In 2019, we fully delivered on all our commitments, in particular, revenue growth, with commissions in strong acceleration in the second semester and reaching an historical peak in Q4, one of the best quarters ever the past few years for assets under management net inflows.
Continued cost reduction with decreasing cost of risk, with loan loss provision at the lowest level since 2007, increase in net income that is up 24% when excluding the capital gains from NTV and Intrum booked in 2018, reaching EUR 4.2 billion, driven by core operating performance. We confirmed a payout ratio of 80%, resulting in cash dividends of EUR 3.4 billion. That likely means the highest dividend yield in the sector.
At the same time, we further strengthened our balance sheet. We reduced our NPL portfolio by EUR 6 billion, leading to the lowest NPL stock and NPL ratio since 2008, at no cost to our shareholders. Our capital positions continue to be rock solid. Fully loaded common equity ratio increased to 14.1% and fully phased in to 13%. Therefore, we commit to delivering a net income in 2020 above that in 2019, even when excluding the Nexi capital gain, and of course, well above 2019 when including the capital gain. A payout ratio of 75% with a very high and sustainable dividend once again.
During 2019, customer financial assets, excluding repos, increased by EUR 70 billion, and we have also made multiple strategic moves, like the acquisition of RBM, a specialized health insurance company, and the strategic partnership with Nexi that will boost future sustainable growth, accelerate business plan execution, and further enhance our very resilient and well-diversified business model. Let's now go through the presentation, and at the end, I will be glad to take your questions. Slide number one.
Let's now look at the key highlights for 2019. The best net income since 2007. EUR 3.4 billion cash dividend, equal to a dividend yield of 8.4% with common equity Tier 1 ratio of 14.1%. 6% growth in operating margin and cost income down to 51.4%, among the best in Europe. In Q4, we registered the best-ever quarter for commissions and quarterly growth in net interest income and insurance income. The lowest-ever gross NPL inflow, coupled with a 13% decrease in loan loss provisions.
We have deleveraged around EUR 34 billion of NPLs since the peak of September 2015. That means a more than 50% reduction at no cost to shareholders. We have already achieved 83% of our 2021 business plan NPL deleveraging target. As always, I want to thank all Intesa Sanpaolo people for their hard work in helping achieve these excellent results.
Slide number two. I'm even prouder of our results since they were achieved in a challenging operating environment. The Eurozone and Italy experienced a slowdown in GDP growth. Three months EURIBOR was strongly negative in 2019 and even lower than in 2018, and the 10-year BTP-Bund spread remained at around 150 basis points in the first semester, starting to decrease only in Q3.
Slide number three. Despite the challenging context, we fully delivered on all our commitments: revenue growth, cost reduction, decreasing cost of risk, and net income growth. We also further strengthened our already solid capital position with a common equity ratio up 50 basis points.
S lide number four. We have been able to achieve the best net income ever, excluding 2007, which was strongly affected by capital gains due to the merger. Delivering six consecutive years of growth. Slide number five. As you can see from this slide, in 2019, we continued to improve across all key indicators. Slide number six. In 2019, we delivered, for the third consecutive year, a cash dividend of EUR 3.5 billion while further strengthening capital. Rewarding shareholders with high and sustainable dividends is, and will remain, a management priority, and my personal priority. Slide number seven.
These excellent results are powered by a combination of factors that ISP management has built over time. A top-performing delivery machine that focuses on business plan priorities and a business model that is both resilient and well-diversified. We have proven our excellent de-risking capability. Thanks to the partnership with Prelios, ISP is now focusing its internal capabilities on proactive credit management while leveraging a best-in-class external platform for late stages.
We have also strategic flexibility in managing costs. We will have 3,100 additional voluntary exits by June 2021, and we have received 1,000 further applications. We are a wealth management and protection company with sound and strong financial market activities that we made stronger by focusing treasury on management of the liquidity portfolio and Banca IMI on the integrated management of the other securities portfolio. As a result, we are able to both take market opportunities and hedge the impact of volatility on our fee-based business.
This is one of the reasons for the strong growth in profits from financial assets in 2019 and for the positive outlook for 2020. Our wealth management machine is working at full speed to convert into assets under management part of the EUR 176 billion of assets under administration and EUR 70 billion of household sight deposits collected in the past few years, of which EUR 15.3 billion collected in 2019. We strengthened the product offering and the commercial reach of our non-motor insurance business, with revenues up 65% on a yearly basis.
Slide number eight. During the past year, we also started building our future growth through multiple strategic actions. We further strengthened our position as a wealth management and protection company by acquiring RBM, the independent leader in the Italian health insurance market, and by completing the setup of our Chinese Fideuram to fully capture the opportunity of Chinese's fast-growing wealthy household market.
At the same time, we secured upside from scale-intensive businesses by partnering with leading players, Nexi in payment system and SisalPay for proximity banking. Let me give you some detail of these four important actions. Slide number 9.
As announced in December, by July 2020, we will acquire 50% plus one share of RBM Assicurazioni Salute, Italy's independent leader in health insurance, and we will progressively increase our stake to 100%. At the same time, we will sign an agreement with Previmedical and RBM Assicurazione Salute to give our customers access to the largest private medical network in Italy, counting on a network of over 100,000 medical facilities.
This deal is fully in line with our strategy with clear benefits for ISP. We will strengthen our domestic positioning in the high value-added and fast-growing health insurance sector, becoming the second largest player in the Italian market so w e are now the second largest player in the Italian market. We will enhance our offering through the inclusion of RBM collective health policies in our product portfolio for large corporates, SMEs, and small businesses, and through the improvement of the health insurance offering to our retail customers.
Slide number 10. During 2019, we also took concrete steps forward in Chinese fast-growing wealthy household market, strengthening an already material presence. For our Chinese Fideuram, we completed the organizational setup, put in place around 40 people, received our first license to distribute funds. At the same time, we received authorization from the ECB and Bank of Italy to apply for a license to set up our securities business in China, which will provide our Chinese Fideuram with tailored products and services.
Slide number 11. Also in December, we signed a strategic partnership with Nexi in payment systems, involving the transfer to Nexi of the ISP acquiring activities for EUR 1 billion cash consideration, with ISP retaining the client-facing resources. ISP purchase of 9.9% of Nexi capital, that we consider a strategic stake through which we can participate in the upside of fast-growing market. Then a long-term distribution agreement for Nexi products through ISP channels. As a result, the deal will generate a net capital gain for ISP of around EUR 900 million in 2020, and a clear stake of roughly 10% in Nexi capital.
Slide number 12. In 2019, we established a strategic partnership with SisalPay to create the first Italian proximity banking network, which is based on the creation of a new co-controlled by Banca 5 and SisalPay. Thanks to this agreement, we expanded our product offering and increased our outreach to 30 million SisalPay retail and small business customers, and scaled up our network to over 50,000 points of sale, enabling us to accelerate our branch closure plan beyond our business plan targets.
Slide 13. Our sustainable performance allow us to create sustainable benefits for all our stakeholders in 2019 e mployees received EUR 5.7 billion in salaries, and all our excess capacity of around 5,000 people is in the process of being reskilled. The public sector received EUR 2.7 billion in taxes, and household and businesses received more than EUR 58 billion in new medium long-term lending.
Slide number 14. Our remarkable financial results allow us to contribute with impact to the society we belong to. ISP is strongly committed to its role as an engine for sustainable and inclusive growth, to reduce inequalities and encourage social inclusion, preserve art and culture, invest in young people and promote employment, promote and develop a circular economy, drive innovation, and support families. Regarding Europe's Green Deal, Intesa Sanpaolo is ready to contribute with EUR 50 billion. Slide number 15 i n this slide, you can see just a few example of our work to support Italian society.
Let me comment just on a couple of recent developments. In January 2020, we launched two new fund for impact projects, one for working mothers and women entrepreneurs, and one for people over the age of 50 who have lost their jobs or have difficulty accessing pensions.
We are the engine of the Italian social economy, and in addition to our direct support to Italian society, the EUR 700 million in dividends that we paid out in 2019 to the banking foundations that make up part of ISP shareholding, also provide support to social and cultural project. In fact, these foundations alone contributed more than half of the total charitable funds donated by all Italian banking foundation. Slide 16. As a result, we are the only Italian bank rated at the top of the main sustainability rankings, and we are very proud of these achievements.
Slide 17. In this slide, you can see the key highlights of our strong performance in 2019. Let me take you to page 18 and give you some color on the P&L. Despite a challenging environment in 2019, marked by lower economic growth, lower interest rates, and the first semester with a BTP-Bund spread at around 150 basis points, we delivered growth in profitability driven by an increase in revenues, a reduction in operating costs, and lower loan loss provision.
Operating income was up 3% when excluding the positive impact in 2018 of the NTV stake disposal, despite a decline in net interest income, mainly driven by strong NPL reduction. Commissions were up slightly with strong acceleration in the second semester and a good tailwind for 2020. Profits from financial assets were up 31%, confirming that our business model is naturally hedged because our financial market activities offset the impact of market volatility on our fee-based businesses.
We have continued to be very effective at managing costs, with personnel expenses down by 1.2% and administrative expenses down by 55%. Depreciation is up slightly as we keep investing for growth. Our loan loss provision decreased by 13%. Gross income and net income were up 17% and 24% when excluding Intrum and NTV. Net income comes to EUR 4.5 billion when excluding costs concerning the banking industry.
Slide number 19. Our performance in Q4 was also very solid, with the best-ever quarter for commissions. In comparison with the same quarter last year, net interest income is up around 1% and commission are up 8%. Profits on trading increased strongly. Operating income was up more than 9%. Operating margin was up 26%. Loan loss provisions were down around 1%, despite the EUR 60 million one-off impact of the adoption of the new definition of default since November 2019. Net income was up more than 45% when excluding the interim capital gain.
Slide number 20. In this slide, you can see that on a quarterly basis, net interest income increased slightly despite the further reduction in interest rates, thanks to positive dynamics on commercial components. On a yearly basis, net interest income decreased mainly due to the impact of accelerated NPL deleveraging on financial components, the effect of hedging, and the reimbursement of an acquisition financing loan in September 2018.
Net interest income was also affected by EUR 30 billion growth in direct deposits, excluding repos, that in a low rate environment impacts net interest income in the short term, but boosts our wealth management engine for the coming quarters. We will continue to work hard to improve the commercial component while continuing to manage our revenues in an integrated manner and with the aim of delivering positive EVA strategy.
Despite the challenging environment, slide 21, customer financial assets increased by EUR 69 billion in 2019, excluding repos. We are near the EUR 1 trillion mark. Assets under management increased by EUR 27 billion in 2019. In the same period, family side deposit increased by EUR 15.3 billion, out of which EUR 4.5 billion in Q4.
This so-called sleeping money collected so far, together with the EUR 176 billion in assets under administration, will become the fuel of our wealth management engine. We continue to see a shift in assets with more than EUR 5 billion of assets under management net inflow in Q4, one of the best quarter of the past few years.
Slide 22. Once again, in Q4, all our division made a positive contribution to group results. Around half of our gross income comes from the wealth management and protection business, making ISP a clear European leader in wealth management. This sits alongside the continued excellent performance of our corporate and investment banking division.
Slide 23. Operating costs declined by 2% while we continue to invest for growth in all key areas. Our cost base is already below EUR 9.3 billion against a business plan target of EUR 9.5 billion in 2021. It includes significant incentives for the results achieved in 2019 and to trigger growth, and does not yet include the full benefit from people who left the bank in the past few months. The main sources of savings were headcount reduction, real estate optimization, legal entities reduction, and the decrease in other administrative costs.
We reduced headcount by more than 3,100 on a yearly basis, with room for further cost reduction, and we have already agreed and fully provisioned 3,100 additional voluntary exit by June 2021, of which 850 at January 2020. On top of this, we have received 1,000 additional application to be reviewed.
Further branch reduction in the range of 1,000 branches on top of the 1,100 abandoned in business plan are expected in light of the Banca 5 network scale-ups, thanks to the strategic partnership with SisalPay. ISP maintains high strategic flexibility in managing costs and remains a cost income leader in Europe with a 51% ratio.
Slide number 24. As you can see in this slide, loan loss provisions declined to the lowest levels since 2007. As a result, cost of risk is now down to 53 basis points, well on track to achieve our business plan target of 41 basis points by 2021. The NPL coverage ratio increased well above 55% when excluding the effect of the new definition of default. Slide 25, our masterpiece. Our NPL stock is declining sharply, reaching the lowest level since 2008, with a leverage around EUR 6 billion in the last year and EUR 1 billion in Q4 when excluding the impact from the adoption of the new definition of default.
The gross NPL ratio has decreased by around 10 percentage points since the peak of September 2015 to 7.6%, and the net NPL ratio decreased by more than six percentage points, down to 3.6%, the lowest level since 2008. As you know, ISP has been able to deliver this impressive deleveraging at no cost to shareholders.
Slide number 26. In order to reach our targets for 2021, we need to deleverage around EUR 600 million gross NPL and around EUR 300 million net per quarter over the next eight quarter. This is more than manageable given that in the past 17 quarters, we organically deleveraged EUR 1.2 billion gross NPL and EUR 0.9 billion net per quarter with a coverage that was much lower. That is why we confirm our business plan targets, even considering the new definition of default.
Slide 27. Our proactive credit management contributed to the reduction in gross NPL inflows, down 76% versus seven years ago. The increase of net NPL inflows depends on fewer exits from the NPL status and is concentrated in unlikely to pay, where in the last six months, 200 of our best UTP specialists were focused on delivering the previous deal by supporting the portfolio selection and due diligence activities.
Let me also underline that this run rate will easily achieve our NPL plan targets, and that Q4 inflows were significantly lower than those in Q3 when excluding the impact of the new definition of default. Slide 28. In 2019, we strengthened our already solid capital base, and we increased the buffer to 460 basis points versus regulatory requirements, well above our peers after paying out EUR 3.4 billion in dividends.
We have one of the highest capital buffers in Europe, equivalent to EUR 13 billion that has been built entirely through internal capital generation, and while having paid EUR 17 billion in cash dividends over the past three year. Our fully phasing common equity ratio is at 13%. The decrease in Q4 common equity ratio is due to the change in regulatory treatment of Tier 2 instrument issued by our insurance subsidiary. That should be also for other European players benefiting from Danish Compromise.
Slide 29. When it comes to capital strength, ISP continues to be a sector leader in Europe and t his clearly supports our generous dividend policy. In addition, we continue to apply a deliberate strategy of low leverage with a leverage ratio of 6.7% among the best in Europe.
Slide number 30. We have a best-in-class risk profile in terms of the ratio of capital to financially liquid assets b y this, I'm referring to net NPL Level 2 and Level 3. Slide number. Sorry. In the interest of time, I will spend just a few minutes to give you an update only on the projects related to our P&C insurance business, and I will leave for you the main business plan actions that are all up and running thanks to the contribution of my people. If we can move to slide 33.
Just to give you some focus on Property and Casualty insurance, we recorded strong performance in 2019 with combined ratio at 76%, 12, 15 percentage points lower than the Italian market average, and a 65% increase in non-motor business revenues, which is the focus of our growth strategy with a strong acceleration in Q4, 43% increase versus Q3, 85% on a yearly basis.
These results have been achieved through a strong focus on the non-motor offering, with penetration of our client base above 10% and gross written premiums up 40% to more than EUR 550 million. The introduction of around 220 Property and Casualty specialists in our branches and dedicated training with 30,000 employees obtaining a license to sell Property and Casualty products from the Italian Insurance Authority, and 12,000 who have completed advanced training since 2018.
Let me remind you once again that the announced acquisition of RBM Assicurazioni Salute will further strengthen our positioning in the fast-growing health insurance market. Let's now turn to slide 37. At this point, I would like to share a few consideration regarding the resilience and solidity of the Italian economy.
Despite the flattening trend in Italian GDP growth over the past years, some key indicators are strong and will trigger a recovery. In particular, unemployment fell below 10% for the first time since 2012, and in November, the number of employed people reached the highest level since 1977, a lso t hanks to the strong increase in employment of women.
The growth of gross disposable income of household is exceeding GDP growth, and therefore accelerating the recovery. This reflects the solid fundamentals of the country. In fact, Italian companies are more profitable and better capitalized than before 2008 crisis, and well-positioned to benefit from the expected economic improvement.
Let me say that the mix of persistent low interest rate, a stable Italian sovereign spread below 200 basis points, GDP recovery, and more than EUR 10 trillion of household wealth, is a positive scenario for a wealth management and protection company like ISP. Slide 38. Just to give you my view on Italian real economy, especially if you make a comparison with the other European country. Italian macroeconomic fundamental are solid, especially when compared to other European countries.
The Italian spread is double that of Spain and Portugal. We expect the Italian spread to decrease further from the current level and to reduce the gap versus those countries. The major reason of this gap is the political situation in our country. I think that stability can only improve this, and with stability, Italian spread can easily go close to the Spain level.
Slide number 39. We have a positive outlook for 2020. We expect growth in operating income versus the past year, also thanks to loan growth and security portfolio contribution growth, while preserving adequate diversification and risk control. Switch from assets under administration and sleeping money to assets under management. Q4 was one of the best quarters for asset under management net inflows of the past few years.
Strong growth in Property and Casualty insurance business at full speed. A further boost in the second semester from the acquisition of RBM. Further growth in corporate banking commissions. Robust performance in profits from financial assets. Thanks also to the strengthening of financial market activities implemented in 2019, where we also enjoyed a good start to the year. January has been a very good month.
This revenue increase, coupled with continued cost reduction that will benefit from the 2019 staff reduction and the additional reduction of branches, will drive operating margin growth. In addition, we expect a further decrease in cost of risk, thanks also to the lower NPL stock and the previous agreement that we work at full speed.
As a result, we expect a substantial growth in net income, with the 2020 net income above 2019, even when excluding the Nexi capital gain. Finally, the payout ratio for 2020 will be 75% as set up in our business plan, with another year of high and sustainable cash dividend distribution, while preserving a rock-solid capital base. Obviously, with the Nexi capital gain, the net income 2020 will be well above 2019.
Slide number 40. To sum up, we have a very satisfied performance in 2019, and our delivery against the business plan targets are: de-risking, we have already achieved 83% of the full year NPL business plan deleveraging target. Cost reduction, operating costs are down 2% while still investing for growth and r evenue growth, operating income is growing despite a challenging environment.
We strengthen our financial market activities to both capture market opportunities and to hedge the impact of volatility on our fee-based business. We are working at full speed to convert into assets under management both assets currently under administration and the so-called sleeping money collected in the past few years. We also made new strategic moves that will support our future growth. We are a sector leader in Europe when it comes to capital strength, which further improved in 2019.
Last but not least, we have remunerated our shareholders with cash dividends of EUR 3.4 billion. All in all, we delivered strong performance in 2019 while investing for sustainable growth, and we maintain a positive outlook for 2020, thanks to the contribution of all our people. Thank you for your time and attention, and I'm now happy to answer your questions.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Please make sure that the mute function on your telephone is switched off to allow your signal to reach our equipment. When you are asking your question, if possible, we kindly ask you to pick up your headset. Once again, please press star one to ask a question. Our first question is coming from Azzurra Guelfi from Citi. Please go ahead, your line is open.
Hi, good afternoon. A couple of questions on cost and dividend. I am not focusing on revenue because they were the positive surprise this time. If I look at cost, the outlook for 2020 is still a reduction, and would it be mostly on the staff cost? given that you have headcount reduction still coming? or would have some impact also on the other admin? If you can give some color on investment that are needed on compliance cost or IT.
When you look at the additional 1,000 people that have expressed interest, are they previously provision or would it need additional provision for this? On dividend, can you update us on the potential of an interim dividend for 2020? Thank you.
On cost. Staff costs, by definition, are the main sources of reduction due to the embedded reduction that we have already with the full impact of the exit in 2019 so m ore or less 50% of the exit has been in the second part of the year, so we will have full benefit in 2020 then, there is a portion of the new exit in which we have already had exit at the beginning of January, so this will have full impact during 2020. We will have other exit during 2020 so n et-net staff costs, initially due to the reduction of people, will have a reduction during 2020.
Looking at administrative expenses, our expectation is to manage in the right way in order also to have a reduction in these areas, continuing to invest for growth. There are significant investments in capital budget due to IT digital compliance, but also due to the acceleration in the Property and Casualty business and also our growth in Chinese in order to reinforce our Chinese Fideuram. There are a lot of combination of plus in terms of investments and reduction in terms of efficiency n et-net, our expectation is that we can have another year of good performance in terms of cost.
Due to dividend, so interim dividend is an item in which we need to change the bylaw so t hat's the only point of attention that I have, because I'm fully positive on this item. I need to prepare the right process within the governance of the bank so w orking with the committee, with the Board of Directors, then asking for the authorization of the ECB, but I have a very positive view on the interim dividend so w e're just waiting for the closure of the figures on 2019, and then we will start for the formal process in terms of working for interim dividend.
On the extra people, would they have a cost? Sorry.
Sorry. Yes. On the extra exit, we will have a cost if we decide to accept this request that is in the order of EUR 50 million. EUR 50 million-EUR 60 million, not more than this.
Thank you.
Our next question is coming from Delphine Lee from J.P. Morgan. Please go ahead. Your line is open.
Good afternoon t hank you for taking my questions. Just a few small quick questions and then one on net interest income. Maybe just on my quick questions, just wondering, the 10 basis point CET1 decrease, if you just can explain it just very briefly.
Secondly, on the P&L impact, is there any P&L impact actually from the RBM acquisition? I assume it's all goodwill and goes directly through equity, but just wanted to check. Thirdly, just on the tax rate, which for 2019 has been maybe slightly lower than expected. If you could just provide an update of what you consider the normal run rate for 2020 and 2021.
Just on net interest income, would you mind just giving us, for 2020, the amount of expiring bonds, and issuances that you intend to make? If you don't mind, on the expiring bonds, just an average rate of how much they cost. Just trying to get a better feel of the outlook for NII, and particularly on the spread component. Thank you very much.
Starting from the reduction in common equity, as I told, the major reason with an input of 15 basis points is the change in the treatment of the Tier 2 instruments issued by insurance company. Net of this, we had an improvement of common equity and not a reduction of common equity i n any case, we remain in such a very good capital position that also with this change in regulatory condition, there's no point of attention from our side.
In P&L, we will not have an impact coming from RBM w e had no impact, and for the first semester, we will have not an impact coming from the acquisition, and on the other side, we will have just a goodwill implication, but not so significant.
Tax rate, our run rate could be in the range of 28% so w e think that this could be more or less a likely view on our future tax rate. On net interest income, if you allow me so, I will avoid the 100 questions on net interest income i will give you colors on all the items on net interest income that we expect for 2020. We can just give all of you our view on what we have in our budget for the net interest income so i f you look at bond expiring, they are not so significant during 2020. These are EUR 11 billion, out of which EUR 2 billion from retail.
We expect a contribution in terms of reduction of cost of funding on the medium term. The main benefit that we think to have during 2020 is a volume effect, so a growth in loan book and also a growth in portfolio, so in government portfolio, with a well-diversified proposition.
On the other side, on hedging, we do not expect a significant reduction during 2020, and growth in revenues coming from portfolio is enough to compensate for further reduction on NPL, so on de-risking, that can have an impact on net interest income i mpact will be by definition much lower than the one that we had in 2019.
Net- net, our expectation for net interest income is a growth of net interest income in 2020 i want just to remember you that looking at the spread impact, we will have also a benefit from tiering that could be in range of EUR 70 million during 2020, more or less could be the impact for this special item so n et- net, the combination of all these items bring us to have confidence that net interest income can grow on a yearly basis. Not looking on a quarterly basis, but on a yearly basis, our expectation is a growth in net interest income.
Great. Thank you very much.
Our next question is coming from Antonio Reale from Morgan Stanley. Please go ahead. Our friend participant just stepped away. We will now take our next question from Andrea Unzue-Fleischer from Credit Suisse. Please go ahead.
Hi t hank you for taking my questions. If you go to slide 11, you mentioned that the capital gains from Nexi might be partly allocated in a scenario in which you identify that that can strengthen sustainable profitability. Could you walk us through what you are planning to do with the gains? Is that increasing provisions? I don't know if you can give us more color on what that could be.
Also, it'd be really helpful if you could walk us through the regulatory impacts that we should expect, both on capital but also on the P&L. Is this reclassification of EUR 700 million of NPLs that we saw in the quarter it? or should we expect more provisions or more balance sheet changes? Thank you.
Not more provisions so t he impact is one-off in 2019, so we do not expect any increase in provisions. On capital future evolution, we still remain with 35 basis points on EBA guidelines in the next two years. This is all what we expect to have looking at these items on our capital position in the next two years.
I don't see any kind of threats on capital and absolutely not on P&L for new definitions on non-performing loans. Looking at Nexi capital gain, we want to work during 2020 with a very relaxed approach. so i'm fully relaxed on 2020. I made a clear outlook to the market that we can generate, and we will generate, a net income in 2020, well above 2019.
Due to the payout ratio of 75%, my expectation is to be in a position to increase dividend in 2020 in comparison to 2019. That's all my indication then i will maintain my freedom to work during 2020 and to allocate what I consider strategic in terms of sustainability of growth for my company.
Thank you.
Our next question is coming from Christian Carrese from Intermonte. Please go ahead. Your line is open.
Yes, good afternoon. The first question is on, you clarified on net interest income, just a clarification on govies portfolio y ou increased the govies portfolio year-over-year, but the weight of Italian govies was much lower, in the area of 45% at the end of this year so i was wondering if you are planning to go back to around 50% in terms of weight of Italian govies on total portfolio.
Still on revenues, one on fees, I saw the mutual fund mix a little bit down the equity component in 2019. Do you see room to increase the weight of equity? On real estate portfolio, do you see any room to see some write-backs in 2020? we saw, for example, in Milan, investments were higher, in real estate were higher than 2015 at the time of Expo so i f you can give some color on that t hank you.
Real estate market in Milan is clearly booming so i t's the area in which we have probably the most important concentration of investors in Europe so t he greater Milan, as it is defined by the majority of investors, is an area in which we have a clear boom.
I don't think that we will work to have some benefits looking at our figures so a t the end, in any case, the improvement of the condition in the market is only positive for the condition of the quality of our exposure and for the sustainability of our coverage in this sector. If we look at fees, the mix is for sure also affected by insurance products but i n my view, we have room to increase also equity component.
Looking at the government portfolio, we, as you know, want to maintain a well-diversified portfolio. The mix until the 50% is in the availability of our managers in the Banca IMI department, the treasury department so i have to tell you that I have no clear point on this so u ntil 50%, they can move w hat I want is-
-to have an optimization in terms of revenue. This is only what I want from this sector, especially because we decided to avoid to have the usual extra liquidity that we used to have in the past, and to reallocate a portion of this liquidity into the government portfolio, like all the international banks.
That's what we want our people, Corporate Investment Banking division, to do. I have no kind of target in terms of Italian government portfolio, and they can reach also 50%. The reduction in this quarter is due to the increase in German bonds so w e increased the AAA contribution of our portfolio but i t is something that can change according to the view of our people in the business.
Thank you.
Our next question is coming from Andrea Filtri from Mediobanca. Please go ahead. Your line is open.
Yes, good afternoon, thank you for taking my questions. The first is on fees. Are you planning any repricing of fees for 2020? If so, how much do you think this action could bring to the line? On regulation, and following up from Andrea's questions, do you intend, if any, to adopt Article 104a of CRD V, which has been recently confirmed by President Enria.
Finally, still on the government bonds angle, there is continued press around the EuroGroup, working on a limitation for banks on government bond ownership, with a multitude of different proposals, admittedly. How do you approach this topic? and could this be the stick of a package with a bigger carrot, not yet clear? On the side, could you guide us on the contribution from the securities portfolio going forward? Thank you.
On government bond limitation, I have to tell you that I'm in favor of concentration limit so t hat's, in my view, the right way to approach this problem from a risk-reward point of view so l ooking also to a factor that is the concentration risk. That is why we think that we will not exceed, in any case, 50%, but we are ready also to reduce this concentration if needed.
The evidence of the management of the total portfolio in 2019 is that my people is in the condition to increase revenues, both net interest income and trading income, through an increase of portfolio, also in asset class different from the Italian one. The majority of the revenue in 2019 derived from the international portfolio and not from the Italian portfolio.
Regulation Article 104a, we don't have a significant point on this so i have to tell you that this is not a strong point from our side. On fees, repricing fees, our expectation is not to enter into a massive process of repricing. It is clear that during the year, you have a usual work on working on the right combination between the costs and the revenues that you received from your client.
There is no massive repricing process in course during the year t he speed of growth that we will have in terms of commission will derive mainly from commissions in wealth management t he second contributor will be commissions in Property and Casualty insurance business. Third contributor will be global corporate business. These are the main areas in which we expect to have very good growth of revenues during 2020.
We will now take our next question coming from Domenico Santoro from HSBC. Please go ahead.
Yes. Hi, good afternoon t hanks for the presentation and for taking my question. Just a clarification on the dividend side. You already kind of answered to my question, but it's difficult to envisage any particular transformation or top-up on provision this year t he upside risk, of course, is that the dividend for 2020 will be way above the level of 2019 so i m just wondering whether we should apply this 75% payout to a sort of an adjusted net profit? or you confirm this is to apply to stated net profit?
On the tier reserve system, I was just wondering whether the pro rata for this quarter was already accrued in the NII. Again, on provision, I was just wondering whether you will confirm the EUR 1.8 billion provision level for 2021 t his is probably the number which the consensus is a bit more cautious, or there is any impact from calendar provisioning of the new definition of defaulted by EBA.
Excuse me.
Yes.
Excuse me i didn't understand the last question s orry, because I lost you at the beginning of the phrase, so I lost the last part of your question so i f you can repeat the third question, please.
Sure. I beg your pardon.
On provisions.
It was just on provision. I was just wondering whether you would confirm the level for 2021, which was EUR 1.8 billion. This is probably the number on which the consensus is a bit more cautious. There is any change, which is calendar provisioning? or EBA guideline that might change this number.
Just to follow up on the capital. You're very close to the level that you set as a target for 2021 y ou don't expect any negative apart from the EBA guideline? If I understood correctly, which is 35 basis points. There might be some positive from DTA next year that you might want to comment on. Just wondering with this level of capital, which you, of course, you're very confident, if there is any initial talk about buyback of shares going into the end of the plan. Thank you very much.
Dividends, you know that is my favorite item. We are talking about stated net income, so 75%, you apply on the stated net income. The result will be the dividend that we will pay in 2020. That's the reason why I'm fully confident that my shareholders can be happy during 2020 also.
Tier 1, a portion has been accrued in figures of last quarter, so it's close to EUR 50 million. Provisions for 2020, 2021, I can confirm you that our expectation is absolutely to easily reach 41 basis points in 2021. Looking capital, the evolution of capital from my side is another happy problem, in the sense that we will have some negative impact from the EBA guidelines, but in the range that I described to the market.
We are well above what we have considered in the business plan as a running rate in terms of our capital position so i don't see any kind of issue on this point. We will manage easily this capital position during next years.
We'll now take our next question from Hugo Cruz from KBW. Please go ahead. Your line is open.
Hi. Just a quick question on AT1 c an you quantify your plans to issue in the next two years? Thank you.
On this point, I will leave the floor to Stefano Del Punta, so he can give you all the details on this point.
Yes. Definitely, we have plans to issue. By the way, we are now fully appreciating, or better appreciating the new guidelines from SRB on the subordination requirements. We will issue additional Tier 1. We have a call coming in January 2021, which is EUR 1.25 billion, and probably we also have something to fill up the 1.5 buckets.
Most probably, we also will issue already in 2020, the sub-senior non-preferred, so that we can optimize our subordination layers, also decrease significantly the amount of senior preferred bonds that we will issue in the next couple of years. We expect more or less in the next two years to issue between EUR 5 billion and EUR 7 billion of senior preferred, in addition to these additional Tier 1 that I was saying before. This is more or less the framework for subordinated issuances in the next two years.
Okay, thank you very much.
Our next question is coming from Benjie Creelan-Sandford from Jefferies. Please go ahead. Your line is open.
Yes, good afternoon, everyone. Just looking at slide 73, going back to the trading side of the business. The average Value at Risk doubled year-over-year. If we look, the investment banking profits are actually now over 30% of the group profits relative to less than 20% in 2018.
Sorry. Excuse me. I lost you at the beginning of your question c ould you repeat and speak slowly because I need absolutely to be in a position to understand well what you are telling me. Thank you.
Sure. No problem. Looking at slide 73 on Banca IMI, the average value at risk was EUR 136 million in 2019. It was EUR 62 million in 2018. The investment banking profits were obviously up very strongly year-over-year and represented over 30% of the group profit. I was just wondering from a strategic point of view, do we or should we expect greater capital allocation to the investment bank going forward? From a risk management point of view, is there a limit to how high you would like that value at risk number to remain going forward?
My second question, which was partly related to that as well, was that if we look at the balance sheet, the total balance sheet grew over EUR 60 billion in the first nine months of the year, and then shrank by over EUR 30 billion in the Q4. Could you just give us a little bit more detail behind the drivers of that? Should we expect a rebound in the size of the balance sheet in 2020? Thank you.
In the dynamics of the balance sheet, you have a dynamic related to the repos. The repos had a massive reduction during this year and especially this quarter. This is something related to the MREL position so t hat the reason why you have this reduction n ow we are close to the minimum of the repo, you should have also stability from this point of view. Interbank financing toward banks, positive interbank financing was reduced, especially with the ECB so t hat the reason why you have such a reduction in the figures of the balance sheet.
Coming Corporate Investment Banking division, that is for sure an area in which we had a positive performance during 2019. I can confirm you that with a level of Value at Risk, that is absolutely the one that we consider the right one for a company like us.
I can confirm you that in this area, we will have significant, very good contribution also in the next year. We had a structural change in the dynamic of the Banca IMI performance due to the increase of government portfolio, well-diversified government portfolio, because we decided to concentrate all the treasury activity into Banca IMI. This has allowed us to have a much more engine, a much more ability for the Banca IMI people to work with the government portfolio.
Our expectation is that from a structural point of view, we can count on an increase in revenues in comparison with the past, between EUR 300 million and EUR 400 million on a yearly basis. This means that probably in 2020, the total figures from profit of tradings can be reduced so t his is our expectation, but will remain, in any case, good contributors to our results.
The main driver of growth in 2020, in our expectation, can be net interest income, as I described before. Commissions, they will be a clear engine for growth at this level of spread. We have more than EUR 50 billion that are workable by the people within the organization i can just remember you that in-
-2019, we had a net inflow of between EUR 7 billion and EUR 8 billion just working in six months so j ust considering the spread, the level as it is, we can easily double the number of net inflows coming from our asset under management areas a t the same time, Property and Casualties will increase acceleration. Corporate Investment Banking is an important area for our group, as it is in all the international group.
Intesa Sanpaolo was underestimated because we used to have a portfolio of EUR 60 billion and an extra liquidity placed to the ECB of EUR 60 billion, the unique case in Europe. Now we have EUR 20 billion placed with ECB as it is normal, and the ability to increase portfolio for until a maximum of EUR 40 billion w e increased by EUR 20 billion, and it is usual that when you have an increase of such a dimension in portfolio, you have the ability to work and increase revenues coming from these areas.
Not working like a Goldman Sachs with the risk of Goldman Sachs company w e are a normal commercial banks working in terms of this activity with a very good team, but in a normal way, in a normal range. That's reality in Intesa Sanpaolo.
Okay. Thank you very much.
Our next question is coming from Alberto Cordara from Bank of America. Please go ahead.
Yes, good afternoon. A lot of my questions have been answered. Basically, I just wanted to ask your opinion, because if I hear what you've been saying, essentially things are moving in the right directions everywhere in every single P&L line. It's difficult to believe that you're going to achieve the business plan target that you have of EUR 6 billion because this was predicated on a very different interest rate environment.
When I look at Bloomberg consensus, the Street is thinking that you're going to reach an average of EUR 3.9 billion, which is 35% below. In light of these numbers, to me, it doesn't make any particular sense i t didn't make sense before, even more today.
I don't know if you feel to give us some idea w e've been talking about, you've been confirming your cost of credit guidelines. Actually, you may do better than the 41 basis points t o some level of approximation, what is the kind of earnings that we can hope to achieve in 2021? On a separate point, I ask you a question that I haven't heard, so it's relatively minor. You said that you've been issuing more Tier 2 in the insurance business. If you can give us an update of the solvency ratio for your insurance division and also the unrealized capital gains that you have in the insurance business. Thank you.
Alberto, you are talking about 2021. Let me leave 2021 as the last part of our conversation so f irst point is that on the insurance business, we have a solvency ratio above 230%. At the end, this Tier 2 instrument that are intragroup are not strategic and fundamental to maintain a solvency ratio above 200%. That's reality.
Due to our significant capital position, we do not need to make any kind of optimization within the insurance business activity so t hey have solid solvency ratio. Also, the plan of increasing the Property and Casualty business will not affect this extra capital position of our insurance company so i m totally confident that this is and will remain a significant ratio for the company t hey have more than EUR 7 billion of capital gain in the portfolio. It's really a significant amount.
Looking at the insurance business, this is a clear point of strength of Intesa Sanpaolo. Coming back on the point of 2021, because 2020 is clear, we will deliver good performance in terms of operating income or in terms of net income due to core business. Again, in our view, net interest income will increase, commission will increase, insurance will increase in a significant way. Profit from tradings can be reduced. Net revenues will increase, cost will go down, cost of risk down, net income will increase t hat is our expectation for 2020.
We have the next capital gain that is something that we can use in a portion in order to accelerate sustainability for the future, we will see what could be the best way of accelerating sustainability for the future so l ooking at 2021, that is we have two years before reaching the end of 2021. In this environment is medium long-term due to the conditions in the market. If you look at cost side.
We are in such a good position that this will be something that will deliver with a significant amount of extra performance a ll the actions in this area are there, and also with a number of contingency plan that we can use in case of need.
Looking at cost of risk, we are in a position that is absolutely comfortable in reaching the 41 basis points due to the massive reduction that we had in non-performing loans o n revenues, there are areas in which we can accelerate t here are areas that are depending on market conditions but a t the end, if the implication of the consensus is the one that you told me, we have significant possibility to give very good performance. At the end, in terms of net income and in terms of dividends, in which I can tell you that looking at 2021, also dividend in 2021 can be in excess of the dividends of 2019.
That's expectation. We will work during 2020 w e will take condition of interest rate, spread between Bund, macro condition, and the real point could be the wealth management that's in our bank and in Italy is the real transformational lever that we can consider for the future and if stability can remain in terms of spread, and my expectation is the spread can-
-be below 100 basis points, that my expectation, as I told, the only point is the stability from a political point of view, we can try to work hard in order to give very good satisfaction to our shareholders. Looking at the actions, so the plan is also made by number of action w e are well above the timing that we have considered in our original business plan.
Many thanks. Thank you very much.
Our next question is coming from Ignacio Cerezo from UBS. Please go ahead. Your line is open.
Yeah h i, good afternoon. It's just a couple of quick clarifications for me. The 41 basis points cost of risk in 2021, if that doesn't imply any additional NPL sales. The second one, if you can summarize the regulatory headwinds you're expecting in capital over the next two years, putting together EBA guidelines, calendar provision in TRIM anything before Basel IV. Thank you.
41 basis points are without NPL sales, but we do not need to have any kind of NPL sales in 2021 so i can confirm you that I don't see any kind of threats on this level of provisions for the future. Looking at the regulatory headwinds, our expectation is that we can have these 35 basis points of EBA guidelines in two year times, but no more than this t hat's our expectation.
Thank you.
Thank you.
Our next question is coming from Christian Careste from Intermonte. Please go ahead.
Yes. Thank you for taking my question j ust a follow-up on interim dividend. You said that you are going to work on potential change in by law with maybe the AGM in April. I was wondering, in that case, if it would be possible to pay an interim dividend already in November 2020.
The second question is on loans. You said that you're expecting net interest income to go up in 2020. If you can just clarify, because we saw loans quite flattish in the last few quarters, also at the system level. I don't know if you can share with us also your thoughts on the Corona virus impact in the Q1 in terms of loans demand t hank you.
Q1, I don't know i 'm talking about on a yearly basis. Sorry about that but I would like to stress that I'm talking on a yearly basis, because on a quarter by quarter, it's really difficult to give any kind of guidance on an amount of loans that is reaching a level close to EUR 400 billion so b elieve me, on a quarterly basis, not easy i n any case, in this quarter, we had a small increase in commercial loan book.
The expectation is that during 2020, we can have an improvement in terms of the loan book that can give us an increase in terms of net interest income. Looking at interim dividend, it will be mission impossible to go to this AGM so f or 2020, there is no possibility to have interim dividend.
Thank you very much.
It appears that there are no further question at this time. Mr. Messina, I would like to turn the conference back to you for any additional or closing remarks.
Thank you very much for your question, and I can confirm you that we see 2020, there could be with very good positive results for Intesa Sanpaolo t hank you very much.
Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation. You may now disconnect.