Good afternoon, and welcome to the conference call of Entezza Sanpaolo for the presentation of the 2019 Half Year Results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Klinna, and I'll be your coordinator for today's conference. At the end of the presentation, there will be a Q and A session. Today's conference call is being recorded.
At this time, I'd like to hand the call over to Carlo Messina, sir, you may begin.
Good afternoon, ladies and gentlemen, and welcome to our first half results conference call. This is Carlo Messina, Chief Executive and I'm here with Stefano del Punta, CFO Marco Del Frate and Andrea Tamanini, Investor Relations Officers. Before diving into the details, let me highlight that we are very proud of the bank's performance in the first half of the year. ISP continues to deliver strong results despite an external environment that has been less supportive for revenues than expected, But we see signs of improvement in June July. Net income in the first half reached around €2,300,000,000 Driven by our core operating performance, including a solid increase in commissions in Q2.
While increasing profitability in the 1st 6 months, we have also further strengthened our balance sheet, improving our already solid Capital position and speeding up NPL deleveraging and increasing NPL coverage. During this semester, we have also triggered new actions that will accelerate business plan execution And that will further enhance our very resilient and well diversified business model, our high strategic flexibility in managing costs And our distinctive de risking capabilities. For all these reasons, we are firmly on track to deliver 2019 net income Slide number 2 sorry, slide number 1. The results we will Discuss in a few minutes are remarkable as they were achieved in a challenging operating environment for revenues. The Eurozone and Italy had a slowdown in GDP growth with Italian GDP flat after a slight decrease in the second half of twenty eighteen.
The 10 year BTP Bund Spread remained at around 2 50 basis points during the first half of the year. However, in July, it dropped below 200 basis points for the first time since April 2018. Slide number 2. Let's now look at the key highlights of the first half. The best first half net income since 2008.
Strong acceleration in operating income and operating margin in Q2 with commissions up 5.5% versus the previous quarter. Cost income down to 49.3 percent among the best in Europe with a 3.2% yearly decrease in operating costs. The lowest ever half yearly NPL inflow coupled with a 22% decrease in loan loss provisions. Including the Prelius agreement, we have deleveraged around €33,000,000,000 of NPL since the peak of September 20 €8,000,000,000 in the past 12 months at no cost to our shareholders. Our common equity ratio is at the rock solid 13.9 percent despite the negative impact of 20 basis points Since March last year, due to the Sovereign Boss brand and around 20 basis points from PRIM and IFRS 16 impact the registered in 1st quarter.
So I'm very proud of these results. And as always, I want to thank all Intelsa Amparo people for their hard work in helping Slide number 3. Let me bring your attention once again The pillars of our top performing delivery machine, which is accelerating the execution of the business plan through important We have distinctive de risking capabilities. The strategic partnership with Pelios will allow To focus its internal capabilities on proactive credit management In the early stages, mainly the PAS project, while leveraging a best in class external platform for late stages And dispose a UTP portfolio of EUR 3,000,000,000 gross exposure with evaluation in line with book value at no cost To shareholders. So through this agreement, we will reinforce our ability to manage the proactive Credit management of our portfolio loans.
2nd point, we enjoy strategic flexibility managing costs. As proof of this, on top of the 9,000 exits already agreed at the end of 2017, We will have 1,000 and 6 100 additional exits related to a new agreement signed at the end of May, and we received 1,000 Further application for voluntary exit to be evaluated. Also the partnership with Cisalpay will expand the bank To 1,000 additional branches on top of the business plan targets. We are a wealth management and protection company With sound and strong financial market activities, so related to revenue growth in our business plan, we decided to strengthen Our financial market activities to both capture market opportunities and to hedge the impact of volatility on our fee based business. To Exceeding this, ISP deployed an internal reorganization to focus the treasury on the management of the liquidity portfolio Embancaimi on the management of other securities portfolio.
This is one of the reason why in this semester profits Financial assets increased by almost 40% when excluding the NTV positive impact booked in the Q1 of last year. So also, the dimension and the volume on of securities portfolio increased on average between €15,000,000,000 20,000,000,000. This will remain more or less the amount of portfolio for the next years for Intesa Sanpaolo. So they will have a lot of room To work on other revenues coming from securities portfolio, both net interest income and profits Our wealth management machine following the recovery of the markets in June July He's now working at full speed to convert into assets under management part of the €170,000,000,000 of assets under administration And the €60,000,000,000 of household sites deposits collected in the last years, out of which €8,000,000,000 in the first half. Slide number 4.
Let's now deep dive into our results. First half net income was Our best since 2008, thanks to solid operating performance. And we entered the second half of the year As a stronger bank and firmly on track to deliver a 2019 net income that is higher than in 2018. Slide number 5. During the 1st 6 months, we continue to improve across all key In particular, net income was 4% higher than last year when we had the positive But of the NTV sale, the annualized cost of risk is down to 47 basis points.
NPL stock and NPL ratio reached the lowest level since 2009, and our capital position improved Significantly in Q2 at about 460 basis points above regulatory requirements. Slide number 6. Shareholders are not the only ones benefiting from our strong performance. During the 1st semester, employees received EUR 2.8 €1,000,000,000 in salaries and all our excess capacity of around 5,000 people is in the process of being reskilled, On which around 2,200 are already redeployed to priority projects. The public sector received 1,400,000,000 Households and businesses received EUR 26,000,000,000 in new medium long term lending of which over EUR 21,000,000,000 in Italy.
In addition, over the same period, we helped 10,000 companies to get back on track. Besides supporting the real economy, we are also a leader in Social economy. And on the next slide, I'll give you a sense of what Intesa Sanpaolo does to support Italian society and promote culture. Slide 7. As set out in our business plan, Intesa Sanpaolo is committed to becoming a global reference For social and cultural responsibility.
In this slide, you can see just a few example of our work to support Italian Society, let me comment on the most recent developments. So our EUR 5,000,000,000 circular economic credit On is evaluated around 150 projects, out of which 40 have been financed for EUR 540,000,000 Our Partnership with Generation, a global project to reduce youth unemployment, He's already delivering during the 1st semester and around 90 companies committed to the program and around 240 students were interviewed. So we are the engine of the Italian social economy. And in addition to our direct support to Italian The dividends that we pay now to the banking foundations that make up part of ISP Shareholding also provide support to Social and Cultural Projects. In fact, these foundations contributed more than half of the total charitable funds Donated by all Italian Banking Foundations.
Slide number 8, as a result of these efforts, It's been included in the main sustainability indexes and rankings. On Slide number 9, You can see the key highlights of our strong performance in the 1st semester, but let me take you to Page 10 and give you Some color on the P and L. Slide 10. The 1st 6 months of the year were very Strong despite a challenging environment for revenues, marked by low economic growth, low market interest rates and a persistent high sovereign In the first half, we delivered growth in profitability driven by reductions in operating costs and low loss provisions. Operating income was down just 1% when excluding NTV due to a decline in net interest income, driven in part by the Strong NPL reduction and in commission affected by less supportive market conditions.
Profits from financial assets were up nearly 40% when excluding MTV, confirming that our business model is naturally hedged because our financial Market activities offset the impact of market volatility on our fee based business. This result was Boosted following an internal reorganization to optimize the securities portfolio management leveraging on Bank AIMI know how and focusing the treasury liquidity and treasury management activities without increasing group total par limits. We have continued to be very effective Managing costs with personnel expenses down by 3% and administrative expenses down by 6%. Depreciation is up slightly We keep investing for growth. Our loan loss provision decreased by 22% on an annual basis.
Gross income was up 10% when Excluding NTV, our net income comes to €2,500,000,000 when excluding costs concerning the banking Slide number 11, talking about quarter. Q2 has been very strong with the best 2nd quarter net income since 2008. And on a quarterly basis, operating income was up 7% with commissions up 5.5%. Operating margin was up double digits and loan loss provision increased on a quarterly basis, We're down 20% on a yearly basis. And net income was up 16% to more than €1,200,000,000 or 1.3 €1,000,000,000 when excluding costs concerning the industry.
Slide number 12, net interest income. So the slight increase in net interest income versus Q1 was driven by positive dynamics on spread Despite the prolonged low interest rate environment and by financial components, on a yearly basis, net interest income decreased largely Due to the impact of accelerated NPL, deleveraging of financial components, the effects of hedging and the reimbursement of an acquisition financing loan in September 2018. Financing loan in September 2018. Net interest income was also affected by strong growth in direct deposits of around EUR 16,000,000,000 in the 1st semester excluding repos. That in a low interest rate environment impacts Net interest income in the short term that boosts our wealth management engine for the coming quarters.
We will continue to work hard to further boost the commercial component, while continuing to manage Our revenues in an integrated manner with a positive pretax and EVA strategy. During the remainder of the year, net interest income We'll also fully benefit from our decision not to replace any of the senior subordinated bonds expired or bought back in the first half. Also thanks to the €8,000,000,000 increase in retail clients' current accounts. Slide number 13. Despite the challenging environment, assets under management increased by more than €13,000,000,000 in the first half And family site deposit increased by €8,000,000,000 over the past 6 months and by nearly €5,000,000,000 on a quarterly basis.
So the so called the sleepy money collected in the past years together with the €170,000,000,000 of assets under administration will be the of our wealth management engine in the coming quarters, and we have seen the first signs of a switch into assets under management in June July. Overall, customer financial assets increased by more than €27,000,000,000 in the 1st semester, €35,000,000,000 With the repos to around €940,000,000,000 The recent market improvement is Starting to support the Wealth Management business again. June has been by far the best month of the year for net inflow The positive trend has continued in July. Slide 14. Once again, in this quarter, all our divisions Made a positive contribution to group results.
Close to half of our gross income comes from the Wealth Management and Protection Business, Making ISP a clear European leader in Wealth Management, even considering the excellent performance of our Corporate and Investment Banking divisions. Slide number 15. We continue to be very effective at managing costs, and we are extremely proud of the strong reduction achieved in the 1st 6 months. Operating costs were down by more than 3% on a yearly basis, while we continue to invest for growth In key areas such as training, IT, digital, property and casualty and wealth management and in incentives to trigger growth. The main sources of savings were workforce reduction, optimization of real estate, reduction of legal entities and reduction of other administrative We reduced the debt count by 3,500 on a yearly basis with room for further cost reduction.
We have already agreed with UNOS and fully provisioned for over 4,700 additional exit By June 2021, out of which around 1200 already exited at the beginning of July And around 1600 additional exit related to the new agreement signed in May. On top of this, we have received around 1,000 additional application for voluntary exits to Also further branch reductions on top of those embedded in the business plan are expected in line of the Banco Cachilco network scale up. Thanks to the strategic partnership with CesarPay. I believe that ISP can operate at the same level of commercial And customer satisfaction even with around 1,000 fewer branches. All of these underlines our ISP maintains high strategic flexibility in managing costs.
Slide number 16. We are very proud to have a best in class cost income ratio. This chart illustrates our leading position In Europe, we have a costincome ratio that is 13.2 percentage points lower than the peer average, but within the best Slide number 17. As you can see in this slide, loan loss provision declined to lowest Half yearly level since 2008, coupled with the lowest ever half yearly NPL inflow. As a result, the annualized Cost of risk is down to 47 basis points, well on track to meet and possibly exceed our business plan targets of 41 basis points by 2021.
The NPL coverage ratio increased to 56%, including the previous agreement, up Slide number 18. Our NPL stock is declining sharply, reaching the lowest level since 2,009. The gross NPL ratio, including the previous agreement, has decreased by around 10 percentage points since the peak of September 2015 to 7.7 percent and the net NPA ratio decreased by more than 6% down to 3.6%, the lowest level since 2009. As you know, ASP has been able to This impressive deleveraging at no cost to shareholders. And in order to our Slide 19.
In order to reach our targets for 2021, we need to deleverage around €500,000,000 gross NPL and around €200,000,000 net NPL per quarter over the next 10 quarters. It is more than manageable given that in the past 15 quarters, we deleveraged EUR 1,300,000,000 gross NPL and EUR 1,000,000,000 net NPL Quarter with the coverage that was much lower. Slide number 20. We recorded the lowest ever first half Gross NPL flow, inflow down 77% versus 7 years ago and down 19% on a yearly basis. Net inflows are at a historical low, thanks to our proactive credit management and to the solidity of the Italian corporate sector, which is much, Much stronger than in 2008.
The strategic partnership with Prelios. So following a very successful launch of the partnership with Intrum, today we announced that ISP signed an agreement with Prelius To form a strategic partnership with respect to unlikely to pay loans based on 3 pillars: a 10 year agreement for the servicing of a UTP The loan portfolio with a gross book value of €6,700,000,000 The disposal of a UTP portfolio of around €3,000,000,000 gross the valuation at €2,000,000,000 in line with book value at no cost to shareholders. And the vast majority of fees to previous Are linked to performance and a significant portion depends on loans returning to performing status. So I'm proud to say that this is the largest UTP transaction in the Italian market and the benchmark on how to manage this asset class With the highly specialized strategic partner. Slide number 22.
The agreement with The agreement with Prelios is a strong industrial And the clear benefit for ISP. We will improve the OTP loan management by leveraging the real The know how of Prelius and the support of its sectorial expert, further accelerating the digitalization of the UTP management dedicated investments in IT tools and leveraging Prelius network of specialized investor. Then we further accelerate NPS deleveraging, and we are now far ahead of schedule in delivering our To the 2021 target, which we expect to achieve 1 year in advance. We will redeploy a few 100 experienced People from UTP management to manage even more effective early delinquency portfolio and speed up the staffing of the Pulse That already has 250 people and is planned to grow to 1,000 by 2021. This agreement also benefits the real economy because many struggling companies will get back on track because they can access Additional specialized investors and profit from the solution jointly deployed by Intel Sao Paulo and the partner And deal with previous which has strong incentives to return the loans back to performing status.
Capital, slide number 23. In Q2, we strengthened our already solid capital base We maintain a significant buffer of 460 basis points versus regulatory requirement well above Our peers after having already accrued around €1,800,000,000 for dividends in the 1st 6 months Slide number 14, ISP continues to be a sector leader in Europe. Clearly support our generous dividend policy. Slide number 25, we have a best in class Risk profile in terms of the ratio of capital to financial liquid asset, and by this, I'm referring to net Level 2 and Level 3, and we are really a champion in this area. Slide I would like just to share some consideration, a few consideration regarding the Italian So despite the slowdown in the last months of 2018, Italian GDP recovered slightly in the first half of the year And is projected to recover further in the second half, in line with the eurozone trend.
Some key indicator are supportive, Anticipating the recovery and are really very important for our acceleration In recovery in Wealth Management and net inflows coming from Wealth Management, because unemployment Fell below 10% in May for the first time since early 2012. Gross disposable income of household increased around 1 percentage in Q1 after decreasing in the second half for twenty eighteen. Consumer confidence rebounded in July due to more optimistic expectations of Economy and its level is expansionary, 13% higher than in 2010. The trade surplus continues to Stronger and recovery in residential real estate transaction is ongoing since 2015. The recovery is based on Solid fundamentals of the country.
In fact, Italian companies are more profitable and better capitalized than before the 1,008 crisis and well positioned overall to benefit from the expected economic recovery. The wealth of Italian households stands above €10,000,000,000,000 out of which more than €4,000,000,000,000 are financial assets and the amount of debt held by Italian families The Italian government owes more than €1,000,000,000,000 in assets with around €600,000,000,000 in financial assets and around €300,000,000,000 in real €1,000,000,000 in financial assets and around €300,000,000,000 in real estate assets. So as already stated, in 2019, we expect Further growth in net income with a payout ratio of 80% is set out in our business And we are confirming this target is really easily achievable. Slide 28. To sum up, we are very satisfied with our performance In the first half and our delivery against the business plan targets, derisking, We have already achieved around 80% of the 4 year business plan deleveraging target and we increased coverage in just 18 months.
The strategic partnership with Prelius will allow us to redeploy a few 100 experienced people from UTP management To an even more effective management of the early states, implication is reduction of cost of risk in the next years And also in comparison with the business plan. Cost reduction. Operating costs are down by more than 3%, we cost income down to 49.3%, while still investing for growth. We demonstrated once again our flexibility managing cost We recent agreements for further headcount exits and with the CECL Pay Partnership, which will allow A further reduction of branches, remember for us, reduction of branches is the key drivers of reduction of costs. So another possible acceleration in terms of cost reduction in the next years.
Revenue growth, operating income increased by 7% on a quarterly basis despite a challenging environment and we strengthened our financial market to both capture market opportunities and to hedge the impact of volatility on fee based business. And we are working at full speed to convert To assets under management, part of the €170,000,000,000 of assets under administration and the €60,000,000,000 of household side deposit, The so called sleeping money collected in the past few years of which EUR 8,000,000,000 in the first half of this year. So Let me summarize. Wealth Management can continue to grow and accelerate in the speed. And in terms of Revenues from securities portfolio, we are now in a position to say that structurally we are increasing the contribution from this portfolio on a yearly basis By minimum €300,000,000 per year.
We are a sector leader in Europe when it comes to capital Which further improved in Q2. We are firmly on track to deliver a higher net income versus 2018 and a very generous cash dividend. All in all, we delivered strong performance in the 1st semester and maintained a positive outlook for 2019. ISP and myself personally are very proud of these results. And as always, I want to thank all Intesa Sanpaolo people For their hard work in helping achieve them.
Thank you for your time and attention, and I'm now happy to answer your questions.
Thank We will now take our first question from Andrea Unzweta from Credit Suisse. Please go ahead.
Hi, thank you for taking my questions. The first one is on NII. Given the rate outlook, considering, I guess, you have a negative impact from And the UTP portfolio that you're selling and that your loan book is declining. And how do you expect that line to progress Going forward, the second one is on costs, if you could quantify the additional cost savings that you have been suggesting in the call. And the third question is on the SPV with Prelius.
And just to understand I understand that you're retaining 70% of 25% of the risk, in fact, which allows you to deconsolidate The NPLs, but I would appreciate if you could give us more color on what is the risk weighting of the SPV, what sort What impact we should expect from a capital point of view? And also how would you be assessing the SPV going forward? Thank you.
Sorry. On net interest income, I will give You all my expectation line by line. So with this question, I can also Answer to a number of questions that all your other analysts can have on our net interest income that is The area of big interest from your side. And so I want to give you starting from Slide 12, So you can move volume spread, hedging, financial components and then can make a disclosure within financial components of But of the UTP transaction. So you can have all the information and with this answer, I can close on the net interest So on volumes, our expectation is to have an increase in the 2nd part of the year.
So contribution for volume in the 2nd part of We have already completed transaction at the end of June that would We accounted in beginning of July, so we are starting to increase volumes and second part of the year will We benefit in terms of volumes. On spread side, we have a negative impact coming from Such a significant deposits increase that we had. And I'm really surprised that a lot of analysts Cannot understand what is the significant impact for a bank like us to have such an EUR 16,000,000,000 in a semester of increase in deposits with a negative carry are by definition Reduction of net interest income, but it is only a short term negative because this means that you are increasing the value of the company, Especially if you are a wealth management company in a situation of market that is coming back to net inflows and to conversion from Deposits, so slipping money into Wealth Management. So this area of Increase in deposits can give us further negative if deposits will increase, Can give us benefit if we are able to convert into asset under management. But any case, from my side, it's positive and not negative also if we have a negative impact on net interest income.
Looking at medium term cost of funding, we add the benefit and we will have a further Benefit in the next quarters because we will have the full impact of the not replacing €8,000,000,000 of medium term funding that we had expiring in the 1st semester of 2019, So positive on spread. On markup, we had a positive slight positive in This semester, our expectation is to continue to have positive implication coming from markup. So net net spread And can increase in a significant way. On aging, we will continue to have a negative impact, not significant, but any case Negative. On financial components, there are 2 areas.
1 is portfolio securities portfolio will continue to give us Positive because we will maintain such a dimension of portfolio that is, As I told you, with an increase in comparison with last year of, on average, €15,000,000,000 and Well diversified because it is not concentrated in Italian government bonds, but we increased all the different asset classes. And the evidence is that in the profit From tradings, we made profits with 25 percent Italian Government Bond, 25% Spanish, 25% Core Europe and 20% U. S. A. Government bonds.
Just to give you the idea, well diversified increased dimension Volume of portfolio, this will be positive and increasing positive in the dynamics of net interest margin. On the NPL, we will have a negative coming from the unlikely to pay transaction with The prelios, they could range between €15,000,000 €25,000,000 in this semester. That is our best on the different items that make the composition on net interest income. So again, let me Make this comment because a lot of you are talking about as negative the dynamic of our net interest income. I'm really Despite of the progression of net interest income, especially because our deposits are increasing in such a significant way That for me is medium and long term value for Intesa Sanpaolo.
Moving on cost, We have really a massive potential in further reduction of cost because we can accept The 1,000 voluntary That's coming from our people. This will bring a limited amount of integration charges in the range of €50,000,000 €60,000,000 But at the end, we will have a positive capital gain from the transaction of Cisalpay That more than compensated the integration charges. So we are today in a condition to have to can account on 2,06 100 people that can leave the organization in excess on what we have considered the original business plan. And with the possibility and the real plan that we want to accelerate reduction of branches. Reduction of branches, As I told, is the key drivers for us of reduction of cost because we are able to reduce All the administrative costs that are related with the reduction of branches, so the IT and all the other Main costs that are related with branches in a short time.
So that's An important driver of reduction of cost from our side. So I'm not in a position to make a quantification of possible further benefit We can have, but it is for sure significant. On UTP Prellius, on the capital side, Our expectation is to have a slight positive within the end of 2019, so we can have a benefit terms of reduction, this weighted asset related to reduction of unlikely to pay net It will include extra recoveries that we expect in the historical series for the loss given default. But in any case, Our expectation is that we can have a minimum sorry, maximum negative impact of 10 basis points next year. But If we accelerate the recoveries, our expectation is that this impact can become positive, and we will check next year.
So for the time being, I'm not in a position to give you more disclosure on That by definition is a win win transaction for Intesa Sanpaolo.
The next Question comes from Adrian Gieh from RBC. Please go ahead.
Hi there. Thank you very
much for taking my question. Two questions, please. One follow-up on NII and one on the The rate environment is clearly getting more challenging now. Can you remind us what the sensitivity to a 10 basis points decline in Euribor is and how fast we could And on the asset management side, you mentioned that June was a very good month for inflows. And we can see this from the monthly statistics from the Fund In fact, Entesa is the only organization that has seen inflows of size.
What do you think explains this sort of Outperformance in the month, is there something you're doing on the pricing side? Or is this just a different incentive you're setting up for the people in the branches? Any color on that would very helpful.
Thank you. So looking at the sensitivity related to Euribor, It is clear that we can have a reduction in terms of markdown, that could be a negative. We will decide how to manage with our client base. But at the same time, I have to tell you that The increase in volume that we've made on securities portfolio is in such a dimension that 10 basis points, It is not a worry at all on the dynamic on our net interest income. Looking at the Asset under management area, there is a strong correlation between the spread, the BTP Bund and the amount So it is typically the dynamic of the spread that is the main driver that can allow acceleration In net inflows of assets under management, because we had such a significant decrease in In spread in this 1.5 months, that's the reason why we are Looking for acceleration in this area.
And my expectation is that looking at the negative environment, Negative interest rate environment, you can have some negative slight negative on net interest income, but at the end, it is such It's a positive in such positive dimension, the increase that you can have in assets under management and net net, we will have significant boost to our profitability. And this is also the evidence of the past years in which we had strong increase in fee and commissions.
Thank you very much.
The next question comes from Andrea Bertiloni from Exane. Please go ahead.
Good afternoon. Four questions. The first one is on trading. Given the spreads have tightened much further in July, would it be fair to assume That you have taken further advantage of this better environment also in July and not just in Q2 In light of the new organization that of the treasury that you have just highlighted. The second point is also on the Pralios agreement on the SPV.
Is it correct to assume that the mezzanine and junior tranches will be sold at par Or not? Because obviously that changes the price that you'll be getting for the loans if they are not. And the third question is if you can give us an idea of the change in valuation reserves quarter
So starting from the change in valuation reserve, we had a positive impact of 10 basis points on This coming from this impact on our common equity Tier one ratio. Looking at mezzanine junior, We are really in a situation which we will not have any kind of impact coming from the kind of prices Of the placement of the mezzanine and junior tranches, we will retain maximum 5% and that's all. So for us, it is not significant. Then my expectation is that they can be in a position to book it at par. But in any case, it is not an issue that can have an impact on On trading, absolutely, we are continuing to deliver very good performance.
That's reality. It is not only reduction of spread, but it's volatility because increasing the size of portfolio In the availability of Banca IMI, we are really giving them a possibility To put their ability in order to increase revenues on securities portfolio. So July has been And are there very good months for Intuit Sao Paulo?
Sorry, all clear. Just on the valuation reserve, my question Was if you can give us an update on the further change in the month of July as opposed to the Q2,
If you have that I would prefer to maintain as a reserve for the next quarter results, But it is positive and we hope that this can remain at this level. So I don't want to give Few figures, but it is for sure a good impact for us.
Okay. Thank you.
Okay. Thank you.
The next Question comes from Azura Guelfi from Citigroup. Please go ahead.
Hi, good afternoon. A couple of On the Pralios deal and one on MREL. When I look at Pralios, I understand the dynamics of lower NII, But we also will see potentially an improvement on the loan loss provision. Can you give us some indication on what do you expect this benefit to be And how quickly they can be realized. Also a little bit of color on which loans you have transferred because clearly the unlikely to pay are quite complex and very Asset class because there is like restructured loans and the one that are closer to a restructuring at the end or the one That has just become in Cali.
So which kind of loan have you transferred? And which one instead are, if you can give us Color in the servicing agreement with Prelius. And the other question is on MREL. You have a strong liquidity position, But MREL is something that banks will have to face as well.
Do you have any idea if
you have any Replacement cost for bond that is going to affect your NII in 2020? Thank you.
Sorry, Azul, I lost the question on servicing. Could you repeat, Yes.
The loans that you are giving to the service in the agreement for the services, the EUR 6,700,000,000 Which kind of loans are there? Have they just started the restructuring phase? Or they are in an advanced restructuring that has been unsuccessful? Just try to understand what could be the benefit for your cost of risk and the success in
terms of the cost?
Okay. So our expectation Obviously, to have from the €3,000,000,000 a significant benefit on cost In the future, that's for sure. So that's an area in which we are in a position to say that Also this year, we can have a benefit because all the provisions related to this area will not So I will start again with the answer So related to the benefits that we can have on this Transaction, there are 2 components. 1 is provisions. On the area of the That we reduced that is the €3,000,000,000 we will have for sure significant benefit in terms So, the lower provisions for the next semesters in the future.
So that's positive by definition. Also, On the other portion, the area of servicing, our expectation is that the combination of Intesa Sanpaolo and Praerios can accelerate The coming back in bonus of a significant portion of portfolio and also all The structure of fee and commissions of the deal is preferred in order to allow Better performance in comparison to the performance of ISP because Pralios We received a significant components of fee and commission variable, so related to delivery of coming back in bonus. This means that We will be in a position to reduce the future provisions that we will have Starting from the end of 2019, so this is another very important enabler for the reduction So the reason why the 2 transaction, 1, the Prelius and the other one with Cisalpay, very important to move on to areas that are different from revenues, but that are Under the control of management that are provisions because we will have lower volume and acceleration in recovery and The reduction of branches that is completely under our control. Looking at MREL, we do not see any significant Threats for 2020, so no impact that we can consider for the future.
It will be significant.
The next Question comes from Domenico Santoro from Haitia. Please
go ahead. Just a follow-up Today's question of the colleague on the loan loss provision. I mean, we all know what are the impact Of lower interest rates of NII, you have been very clear. But of course, there are some significant potential impact also on loan loss provision. You said before that you expect loan loss provision potentially to be below the level of 41 basis points.
I mean, this is an Environment with negative rates. So I was just wondering what's the way you look at the loan loss provision going forward, you can share with us also a number or a guidance for the next years. Everybody is focused on NII, but there is here A second side of the coin. And also on NPE, if you can share with us the impact The new definition of MP EBA, whether this is going to kick in, in the 3rd or in the 4th quarter? Thank you.
So looking at provisions, there is one point in this analysis of possible reduction And on cost of risk that is related to volume. So non performing loans volumes That we had originally in our business plan will be much, much More lower in reality because after the deal with Intrum and this one with this with Prelius, we will overperform The stock of non performing loans that we will have at the end of the business plan. So this will bring, By definition, lower cost of risk in comparison to the original business plan. Also the inflows are much better than our Original expectation. So that's one side.
And the other there is another point that we will have to wait for the 1st month Of the delivery of the agreement, because if we will receive an acceleration in terms of coming back From unlikely to pay into performing loans, that is our expectation, we will have possibility also to have other further reduction In terms of Costa Rica, so I'm not ready to give figures. But from a qualitative point of view, that's for sure that we are In a mood of exceeding the reduction of cost of risk in the next two years, And it would be not difficult for us to reduce this. Looking at MPE and APA guidelines, sorry, could you repeat your question? Sorry, what could be the impact for us in the new definitions from EBA, Our expectation is to have it in the 4th quarter and could be an amount More or less €500,000,000 so not significant expectation of significant impact for us.
We'll now take the next question from Andrea Filtri from Mediobanca. Please go ahead.
Yes, thank you. I wanted to ask what is the contribution from the bond portfolio to NII in Q2? And If looking at another potential cycle of QE, If I understood correctly that you're thinking of a rerun of the dynamics of the previous one, where the NII pressure is more than compensated by Growth in fees or if now the spreads are already tighter, the switch of client funds into AUM And just to know what has been the contribution from upfront fees in the Q2 print. Finally, you've already elaborated in part to this question, but the CET1 is up strongly in the quarter. If I calculate correctly, it's 10 basis Points from earnings, 10 basis points from risk weighted assets.
You have said that 10 basis points is from valuation reserves. I just wondered what the remaining 10 basis points were from and in your press release, you have explained that you have opened the start of the Adoption of the Danish Compromise, when should we expect the validation of this request? And finally, just a super quick one on tax rate. If taxes are particularly low in the quarter, is it because of the strong trading result? Or should there be A structural change.
Thank you.
On starting from capital, the impact that we had positively is something that I have already Disclosed in the conference call on the Q1, but probably no one of you has considered as reliable. My indication that was a rebound in risk weighted assets related to market risk because we had the peak of volatility in the historical series That entering the new quarter could have been reduced. So the main part of risk weighted asset reduction is Driven by a reduction in market risk risk weighted assets that more or less remain At this level, so it is something structural in the coming back. That was a peak, so a negative in the Q1, now a recovery In the Q2, then positive contribution on retained income and reduction of spread BTP bond. On Danish Compromise, our expectation is to have some answer from the regulators In the next 2 months and we will see what can happen.
Looking at the contribution of portfolio, The contribution of portfolio increased in this quarter by €20,000,000 in comparison with the other quarters. There has been obviously a change in the kind of securities because Banca Imi, as I told you, is now The leading managers of our portfolio is moving portfolio and realizing profit and putting also Areas in which they are delivering on net interest margin. I have to tell you that From my side, there is really a very, very low It is not so significant to talk about net interest income related to securities portfolio because the target that I gave to my people is revenue targets related to the volume of portfolio. So probably it is much better to concentrate on volume because If volume remains at this level, on a structural basis, we will have €300,000,000 more In comparison with the past, then I'm not in a position to allocate this EUR 300,000,000 between Net interest income and profit from trading, but by definition increasing EUR 50,000,000,000 they add The possibility to move a significant portion in excess and then also having responsibility On securities, they were originally under the responsibility of the Treasury Department with a different purpose.
Now The possibility to add to have another contribution from The implication on the single line. On the total revenue, so net interest income and profit from trading, my expectation is that they will continue To deliver a very good performance also in the future. On assets under management, the amount of upfront fee In this quarter, it's slightly an increase in comparison with the Q1 because We had entry fee that were superior to the Q1 because we had EUR 6 €100,000,000 of net inflows in comparison with the negative inflows Of the Q1, but we are talking in any case of not significant amount.
The next question comes from
Assume that you have kept your €30,000,000,000 of excess liquidity in ECB flatter compared with last And if this is not the case, can you update us with the actual amount?
Sorry, I didn't understand Your question, sir, because the line is not so good. So could you repeat and speak slowly, please?
Sure. Can you hear me now? Hello?
Yes, yes, absolutely. Now, yes.
Okay. Thank you. I was just my first question was, If you can update us on the amount of excess liquidity that you currently held in the ECB, that it was, If I'm not mistaken, it was around €30,000,000,000 as of June of last year. And then a Couple of clarifications on your comments. As a part of the Cisal deal, is it fair to assume that you are booking a €50,000,000 capital gains that you mentioned?
This is a clarification. And the second question, is there any Kind of impact in terms of additional extraordinary contribution to the funding term bank credit utility deposit for the Carriage deal? Thank you.
So looking at Carriage deal, if there would be an intervention from the Interbank Fund, we would not have Any kind of impact because on a voluntary scheme, we made all the devaluation of the intervention and on the interbank Fund, we will not have to devaluate the amount of intervention of the interbank fund. And that's our expectation. On the Caesarpay, we can make an accrual of a capital gain related To the season pay transaction and our intention is if we reach an agreement with the trade unions on these There are 1,000 voluntary exit. And in any case, it's people that is asking us to leave the organization. So my expectation is that There could be possibility to make an agreement, but we have great respects of trade unions.
And so we wait for the agreement. We can have A charge of between €50,000,000 €60,000,000 of extraordinary integration charges, and then It is possible to cover with this capital gain related to the Caesar transaction. Looking at excess liquidity, excess liquidity is more or less the same level, probably close to EUR 40,000,000,000 than €30,000,000,000 But if there's liquidity deposit with ECB, then we have A lot of excess liquidity in Nestle Group Aviation or the other area.
Okay. Yes. That's it. Thank you.
The next question comes from Alberto Cordara from Bank of America. Please go ahead.
Yes. Thank you very much. So I just wanted to get back to some of the points that have been discussed. The first one is in terms of recurrence of revenues. Now the way I look at you And comparing yourself to other banks, it seems to me that you have one of the lowest percentage of NII coming from treasuries and from hedging Of all the Italian banks and European banks.
And also in terms of a way to placing fees on the total amount of fees, You're certainly well below the Italian average. So this is from data that you released last year. Yet, when I look at yourself, I saw that other Italian banks are now telling us that they need to reduce the amount of BTPs that they own. They do have clearly much higher weight or regulatory capital than the one of Intesa. But the question to you is, is it a risk also for you that you may be called to Take down your BTP exposure because I noticed that you increased a bit the amount of BTP that you own in the past 3 quarters.
You're still well, well below the historic maximum that was €65,000,000,000 Now you're €34,000,000 So it's basically half of that. But I just wanted to make clear if there is some pressure also on you to reduce this concentration risk. Then the other issue is, I think it's very interesting the point that you made about the liquidity. So liquidity is A blessing, but at the same time, the strong increase in deposits is hurting your NII. Now I just want to see it from a positive standpoint.
The The point is when this liquidity will be finally used, you have a positive double whammy effect both on net interest income The issue that I have here is, however, that this liquidity has mainly come to you in the shape of So I think that you've been very successful in pushing people out of retail bonds and into asset management, but maybe it's more difficult to Get people out of current accounts. So the question for you is, am I right in saying that? Which are your strategies To push people out and then how long will it take to successfully Read the policy, liquidity. And I must apologize, I have a third question. The third question is, I think in the presentation you mentioned Quite high number of peoples that need to exit the bank, which is basically an issue that is common to all base these days, so everybody needs to restructure.
The only problem is that the cost of restructuring is pretty high and is going to our capital. So what are you going to do to face this restructuring cost that will be very sizable? If I understand correctly, The amount of people that are leaving the organization are in the order of the ones that you gave us. And then finally, a very, very final point is, Can you tell us about your guidance for the earnings of the year? Are they going to be still higher than the previous year or not?
Thank you.
Sorry Alberto, I didn't understand the last question.
Now the last question is that I think you gave a guidance in previous quarters that you were that you're confident to make Higher earnings in 2019 than in 2018. I just wanted to double check with you if this is still the case.
So on net income, I'm now pretty sure to deliver a net income in 2019 that will exceed the 2018. So that's That will exceed the 2018. So that's for sure. There's no doubt that we will deliver And net income exceeding the 1 of 2018 and no doubt that we will pay 80% Of this net income as dividend to our shareholders. So coming to the other areas that you you have considered, so starting from net interest income, the We decided to increase the size of the portfolios because we were in Such a situation due to the liquidity that it could have been crazy to maintain such an exposure to the ECB without any kind of On the other side, we started at the end of last year with the reorganization in order To have the merger of Banca Eimi within Intesa Sanpaolo and so making this reorganization of portfolios between the Treasury Department with Specialization on liquidity and Banca Eimi with specialization on securities portfolio.
Having said that, The increase in securities portfolio has been completed. The amount of Italian government bond It's absolutely in line with all the expectation of the regulators, The risk appetite framework of the group, so we have no kind of need to make reduction because we are Still well below the level that we can reach in terms of Italian government bonds. But at the end, As I told some minutes ago, the diversification of portfolio, it Important also for the people in Bancaise in order to better exploit profits from portfolio. And so the point on portfolio is that we have no need to reduce Italian government And at the same time, my expectation is that we can deliver again very good performance. And in July, we are still delivering very good performance.
On liquidity, That's for sure a significant point on coming from our clients To put the money within our accounts, but there is also a portion of this money that is coming from private banking clients. So that probably More or less 50% of this amount is coming from new money coming from private banking clients. So The kind of timing in which it is possible to move from an asset class into another, It is in the hands of my people and in the attitudes of the clients. But I have to tell you that my expectation is That a significant portion of these can be converted into asset under management for the Especially for the Private Banking client. For the personal affluent, there could be more solution related to insurance product They can be considered in order to move the money into Wealth Management products.
We are just looking to this Reduction of spread or stabilization of spread. And at the end, if you look at the trend of future Interest rate, there will be for sure in reduction. It will be the perfect environment in order To work with our clients in switching this money into wealth management product, insurance For the personal and affluent and asset under management for the private banking clients. Looking at the restructuring costs, We have all the business plans. So all the exit of people, the organizational branches has already All the restructuring charges already in our figures, what we can add It's only this amount of €50,000,000 €60,000,000 We are still making the final calculation that will allow us To accept this 1,000 further exit of people, but The 1000 X600 that were already agreed are at 0 cost in terms of restructuring charges.
So I have to tell you that we are in a unique position in comparison with all the other peers. Then also the reduction of branches is something that I don't want to tell you that it is business as usual for us. But at the end, we have such technology in order to reduce branches The cost is so limited and the benefits are so significant that we are really working in order to accelerate and increase the number of Branches that can be reduced during the next 2 years.
This is brilliant. I didn't know. So it's very interesting. Thanks a lot. Thank you very much.
Thank you.
The next question comes from Ignacio Cerezo from UBS. Please go ahead.
Yes. Hi, good afternoon. A couple of quick ones from me. If you can share with us the funding plan of the bank in the second half of twenty nineteen and twenty twenty? And if you can give us a number in terms of unrealized capital gains, which are left on the government bond portfolio.
Thank you.
On unrealized, I don't want to give you because I prefer to give you the realized quarter by quarter and to surprise What you called low quality EBIT and I called very important results because it is now strategic related to the dimension of the securities portfolio and it is structural net income that we will have year on year. But Believe me, it is something that will allow us to have very good performance in the Corporate Investment Banking division that are delivering Very good results. On funding plan, we I can leave the floor to Stefano del Punta, but it is again business as usual. But Stefan, if you want to elaborate on this point?
Yes. I mean, we have a lot of liquidity, as our CEO said. So I mean, Really, we don't need to go much in the market, certainly not on CML preferred. So we are okay with our We expect to be okay. We will receive the letter year end.
So we will be in the market, but don't expect us to
The next question comes from Benjie Creeland Sanford from Jefferies. Please go ahead.
Yes. Hi, good afternoon. First of
all, I just wanted to
ask on costs. Just beyond the cost savings, the original business plan did envisage about a €600,000,000 uplift by 2021 from investment. I was just wondering if you could update us on how much of that investment has been completed to date. The second question is just a follow-up on NPLs and asset Quality. I mean, the growth inflows were a bit higher in 2Q than they have been in the previous two quarters.
I was just wondering if there was any more color in terms of the trends there. And then the final question, it would be a shame not to ask about net
Excuse me, I lost the second question. Sorry, but the line is not good. So I'm pleased you to speak very slow because otherwise it is difficult to understand. So first question was on cost and it was clear. But the second question was on?
The second question was just on NPLs, because gross inflows in the second quarter We're higher than they have been for the previous two quarters. So I just wondered whether there was anything specific there We're on the thing that you could comment in terms of the inflow trends in terms of NPLs. And then the final question was just a quick one On net interest income, just putting together all the previous guidance that you've given, should we still expect net interest income to be higher Year on year in 2019, or does that guidance no longer apply? Thanks.
So on cost, it is clear that we are Reducing cost, but continuing to have a capital budget that is in the range of EUR 1,000,000,000 per year. So We are continuing to invest in a significant way, mainly on IT, digital and control function within the group and So to accelerate the engine for growth for the group. So what we are and our estimate is to continue to have a capital budget More or less in this range also in 2020, 2021. So when I talk about reduction of cost, I'm talking about reduction of Administrative expenses related mainly to reduction of branches, legal entity and The reduction of people that has embedded a significant reduction of administrative expenses. And if you consider that also in terms of Square meters that we have reduced, we have reduced in 18 months 15% of the square meters Of the total amount of square meters that we have in the group and reducing another 500 benches, we can reduce another 10% square meters that we use in the group.
So just to give you the sensitivity of what could be The dimension of the reduction of the cost that we can achieve without touching the amount of capital Investments that we are continuing to deliver. So the net net, I think that we are really In such a position to continue to invest on sustainability of results on the future of the company, but at the same time, Making the real efficiency that we need in order to improve profitability. On non performing loans, In the Q2, it is usual to have some seasonality, not Significant, but in any case, some seasonality. Then again, in 2021, our target is 41 Basis points in terms of cost of risk. In this semester, we are 47%.
So it is true that I'm pretty sure and I'm now Giving clear indication that we will exceed this cost of risk for 2021, but I have no intention to exceed in The first semester of 2019, especially because the kind of profitability that I'm delivering is Absolutely in line with my guidance with the outlook of delivering a net income in 2019 that is in excess of 2018. So if you have €50,000,000 of provisions that can be considered As something that you can put in such a very good quarter, I'm not absolutely surprised. Then Seasonality is there. You have to consider that we have 1,000,000 of clients, 1,000 and thousands of corporate clients, so difficult to say EUR 20,000,000 EUR 30,000,000 of provision or EUR 100 inflows more or less. So at the end, what is very important is the trend and the clear significant reduction in terms of stock and On a semester basis, on also on in comparison with last year.
So I have I'll tell you that I'm pretty confident on the results and I do not see any kind of threats, but all the Positive for the environment related on quality of credit and provisions for Intesa Sanpaolo. On net interest income, again, net interest income, I know that This is something very important for you and for all the investors in the market, but there are something that is called the commercial Interest margin and there are something that is financial interest margin. And financial interest margin It is made of such a significant component, especially if you give targets to your people that are only revenues and not Net interest margin and profit on securities portfolio, that is difficult to say that you can have a specific dynamic Maintaining €20,000,000 or €30,000,000 increase or reduction. For me, it is clear that on commercial, I'm Managing this organization in order to increase net interest income also on a year on year basis. On financial interest margin, I'm managing this organization in order to increase the total amount of revenues.
What I can tell you for sure is that in the 2nd semester, the total amount of net interest income can be in In comparison to the total amount of net interest income in the 1st semester, then on a yearly basis, let's wait for the next quarter because It is difficult for me to give you this guidance, but it is also related on the kind of management that I'm doing with the People within Corporate and Investment Banking division. So their incentive scheme is related to revenues, not to net interest income. So that's The clear point. And now a significant portion of these financial yield on financial assets It's in the end of Corporate and Investment Banking Division.
Thank you.
The next question comes from Antonio Rielly from Morgan Stanley. Please go ahead.
Hi, good afternoon. Thank you very much for taking the time. I've got two quick questions on my side. 1 on the dividend strategy, to some extent, a provocative question on that. And the second question is On margin and your strategy there in terms of growing the loan book.
So on the dividend strategy, you've been quite clear and firm in your strategy with respect to remunerating shareholders. My question is aimed at understanding under what circumstances you will consider doing share buybacks Instead of paying dividends given the level of valuations and the flexibility you will get when it comes to managing your capital base. Also a link to that, if you could share your thinking and any feedback conversations you've had with the regulator, That would be very, very useful. Second question, you talked about positive trends in the markup in the quarter. Can you just remind us of your strategy in terms of pursuing market share gains targets in certain products Versus margin preservation across products such as mortgages, corporates and personal loans?
Thank you.
So the increase in markup is mainly coming from repricing, not from the attitude of increasing market share. So we have such I think on market share and share wallet with strategic clients that our target is not market share, but it is VA revenues and the quality of credit. So but working with our clients, we were in a position to make A good repricing, so had positive on mark up. Looking at dividend strategy, I have to tell you that it is really not easy to receive the approval to make Yes, share buyback from the regulators. That's my expectation, my impression.
And So I will continue to work with a strong commitment to increase in a sustainable way the net income The organization in order to pay in any case a significant dividend because if you consider our strong capital position and already embedded €1,800,000,000 of dividend, also this amount that is already accrued is something that probably Best in class in comparison with all the other peers in the market.
Thank you.
The next question comes from Ana Ambo from Autonomous Research. Please go ahead.
Hi, good afternoon. I have only one question. What is your plan for repaying TLTRO 2? And do you have any interest in taking up TLTRO 3 in September. Thank you.
So on TLTRO 2, So from a liquidity point of view, we have 0 need to have TLTRO. So because we can remain with a significant positive net Staying for funding ratio position, also repaying all the TLTRO too. So just to make it clear, That's the evidence of our strengths in terms of liquidity. So if we repay all the EUR 60,000,000,000 of TLTRO2, we remain With a positive net stable funding ratio that is unique in the landscape in the market comparison with other European peers. Then coming back to pricing and to cost of funding and profitability, for sure, we can have some Positivity and some interest in continuing to have an access to the TLTRO market.
So it is likely that we can take also TLTRO III. We will see the conditions, but It is mainly a decision driven by pricing and profitability because looking at liquidity, we have 0 need on working on TLTRO.
Thank you.
Thank you.
As there
are no further questions signals, I'll now turn the call back Mr. Messina for any additional or closing remarks.
So thank you very much, and hope to see you in London. Bye.
That will conclude today's call. Thank you for your participation. You may now disconnect.