Good afternoon, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2019 half-year results, hosted today by Mr Carlo Messina, Chief Executive Officer. My name is Clina, and I'll 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'd like to hand the call over to Mr Carlo Messina. Sir, you may begin.
Good afternoon, ladies and gentlemen, welcome to our first half results conference call. This is Carlo Messina, Chief Executive, and I'm here with Stefano Del Punta, CFO, Marco Del Frate and Andrea Tamagnini, 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 and July. Net income in the first half reached around EUR 2.3 billion, driven by our core operating performance, including a solid increase in commissions in Q2. While increasing profitability in the first six 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 a 2019 net income higher than the EUR 4 billion booked last year, and we confirm a payout ratio of 80% for this year with a very good cash dividend once again. At the end, I will be glad to take your questions. Slide number two. No, sorry, slide number one. 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 2018. The 10-year BTP bund spread remained at around 250 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 two. 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%, 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 previous agreement, we have deleveraged around EUR 33 billion of NPL since the peak of September 2019 and EUR 8 billion in the past 12 months at no cost to our shareholders. Our common equity ratio is at a rock solid 13.9%, despite the negative impact of 20 basis points since March last year due to the sovereign bond spread and around 20 basis points from TRIM and IFRS 16 impact registered in the first quarter. I'm very proud of this result, and as always, I want to thank all Intesa Sanpaolo people for their hard work in helping achieve them. Slide number three. Let me bring your attention once again to the pillars of our top-performing delivery machine, which is accelerating the execution of the business plan through important actions. We have distinctive de-risking capabilities.
The strategic partnership with Prelios will allow ISP to focus its internal capabilities on proactive credit management in the early stages, mainly the Pulse project, while leveraging a best-in-class external platform for late stages and dispose a UTP portfolio of EUR 3 billion gross exposure with evaluation in line with book value at no cost to shareholders. Through this agreement, we will reinforce our ability to manage the proactive credit management of our portfolio loans. Second point, we enjoy strategic flexibility in managing costs. As proof of this, on top of the 9,000 exits already agreed at the end of 2017, we will have 1,600 additional exits related to a new agreement signed at the end of May, and we received 1,000 further applications for voluntary exit to be evaluated.
The partnership with SisalPay will expand the Banca 5 network to more than 5,000 outlets, allowing a potential reduction of up to 1,000 additional branches on top of the business plan target. We are a wealth management and protection company with sound and strong financial market activities, 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 succeed in this, ISP deployed an internal reorganization to focus the treasury on the management of the liquidity portfolio and Banca IMI on the management of other securities portfolio. This is one of the reasons why in this semester, profits from financial assets increased by almost 40% when excluding the NTV positive impact booked in the first quarter of last year.
Also the dimension and the volume of securities portfolio increased on average between EUR 15 billion and EUR 20 billion, and this will remain more or less the amount of portfolio for the next years for Intesa Sanpaolo. They will have a lot of room to work on other revenues coming from securities portfolio, both net interest income and profits from trading. Our wealth management machine, following the recovery of the markets in June and July, is now working at full speed to convert into assets under management, part of the EUR 170 billion of assets under administration, and the EUR 60 billion of household sight deposits collected in the last years, out of which EUR 8 billion in the first half. As already highlighted, our sustainable profitability is also the result of a very strong capital and liquidity position. Slide number four. Let's now deep dive into our results.
First half net income was our best since 2008, thanks to solid operating performance. 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 five. During the first six months, we continued to prove across all key indicators. In particular, net income was 4% higher than last year, when we had the positive impact 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. Our capital position improved significantly in Q2 at about 460 basis points above regulatory requirements. Slide number six. Shareholders are not the only ones benefiting from our strong performance.
During the first semester, employees received EUR 2.8 billion in salaries, and all our excess capacity of around 5,000 people is in the process of being reskilled. Of which around 2,200 are already redeployed to priority projects. The public sector received EUR 1.4 billion in taxes. Households and businesses received EUR 26 billion in new medium long-term lending, of which over EUR 21 billion 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 will give you a sense of what Intesa Sanpaolo does to support Italian society and promote culture. Slide seven. 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 examples of our work to support Italian society, and let me comment on the most recent developments. Our EUR 5 billion Circular Economy Credit Plafond has evaluated around 150 projects, out of which 40 have been financed for EUR 540 million. Our partnership with Generation, a global project to reduce youth unemployment, is already delivering during the first semester, around 90 companies committed to the program, and around 240 students were interviewed. We are the engine of the Italian social economy, in addition to our direct support to Italian society, the dividends that we pay out 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 eight.
As a result of these efforts, ISP has been included in the main sustainability indexes and rankings. On slide number nine, you can see the key highlights of our strong performance in the first semester. Let me take you to page 10 and give you some color on the P&L. Slide 10. The first six 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 spread. 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 commissions affected by less supportive market conditions.
Profits from financial assets were up nearly 40% when excluding NTV, 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 Banca IMI know-how, and focusing the treasury on liquidity and treasury management activities without increasing group total VaR limits. We have continued to be very effective at managing costs, with personal expenses down by 3% and administrative expenses down by 6%. Depreciation is up slightly as we keep investing for growth. Our loan loss provision decreased by 22% on an annual basis. Gross income was up 10% when excluding NTV, and net income comes to EUR 2.5 billion when excluding costs concerning the banking industry. Slide number 11, talking about quarter.
Q2 has been very strong, with the best second quarter net income since 2008. On a quarterly basis, operating income was up 7%, with commissions up 5.5%. Operating margin was up double digits. Loan loss provision increased on a quarterly basis, but were down 20% on a yearly basis. Net income was up 16% to more than EUR 1.2 billion, or EUR 1.3 billion when excluding costs concerning the industry. Slide number 12, net interest income. 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, the deleveraging of financial components, the effects of aging, and the reimbursement of an acquisition financing loan in September 2018.
Net interest income was also affected by strong growth in direct deposits of around EUR 16 billion in the first semester, excluding repos. That, in a low interest rate environment, impacts the net interest income in the short term, but 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 will 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 EUR 8 billion increase in retail clients' current accounts. Slide number 13.
Despite the challenging environment, assets under management increased by more than EUR 13 billion in the first half, and family-side deposit increased by EUR 8 billion over the past six months, and by nearly EUR 5 billion on a quarterly basis. The so-called sleeping money collected in the past years, together with the EUR 170 billion of assets under administration, will be the fuel 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 and July. Overall, customer financial assets increased by more than EUR 27 billion in the first semester, EUR 35 billion excluding repos, to around EUR 940 billion. 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, and the positive trend has continued in July. Slide number 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 first six months. Operating costs were down by more than 3% on a yearly basis, while we continued 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 expenses.
We reduced head count by 3,500 on a yearly basis, with room for further cost reduction. We have already agreed with unions and fully provisioned for over 4,700 additional exits by June 2021, out of which around 1,200 already exited at the beginning of July, and around 1,600 additional exits related to the new agreement signed in May. On top of this, we have received around 1,000 additional applications for voluntary exits to be reviewed. Further branch reductions on top of those embedded in the business plan are expected in line of the Banca 5 network scale-up, thanks to the strategic partnership with SisalPay. We believe that ISP can operate at the same level of commercial effectiveness and customer satisfaction, even with around 1,000 fewer branches. All of this underlines how 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 cost-income ratio that is 13.2 percentage points lower than the peer average, but within the best in class. 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 analyzed 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 2.6 percentage points versus the same period last year, a level that will facilitate future deleveraging and will keep the cost of risk low. Slide number 18.
Our NPL stock is declining sharply, reaching the lowest level since 2009. The gross NPL ratio, including the previous agreement, has decreased by around 10 percentage points since the peak of September 2015 to 7.7%, and the net NPL ratio decreased by more than 6 percentage points, down to 3.6%, the lowest level since 2009. As you know, ISP has been able to deliver this impressive deleveraging at no cost to shareholders. Slide 19. In order to reach our targets for 2021, we need to deleverage around EUR 500 million gross NPL and around EUR 200 million net NPL per quarter over the next 10 quarters. It is more than manageable given that in the past 15 quarters, we deleveraged EUR 1.3 billion gross NPL and EUR 1 billion net NPL per quarter with a coverage that was much lower. Slide number 20.
We recorded the lowest ever first half gross NPE inflow, down 77% versus seven 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. Following a very successful launch of the partnership with Intrum, today we announced that ISP signed an agreement with Prelios to form a strategic partnership with respect to unlikely to pay loans based on three pillars. A 10-year agreement for the servicing of a UTP loan portfolio with a gross book value of EUR 6.7 billion. The disposal of a UTP portfolio of around EUR 3 billion gross and valuation at EUR 2 billion in line with book value at no cost to shareholders.
The vast majority of fees to Prelios are linked to performance, and a significant portion depends on loans returning to performing status. 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 a highly specialized strategic partner. Slide number 22. The agreement with Prelios has a strong industrial rationale and a clear benefit for ISP. We will improve the UTP loan management by leveraging the real estate know-how of Prelios and the support of its sectorial expert, further accelerating the digitalization of the UTP management process through dedicated investments in IT tools and leveraging Prelios' network of specialized investors. We further accelerate NPL deleveraging, and we are now far ahead of schedule in delivering our 2021 target, which we expect to achieve one year in advance.
We will redeploy a few hundred experienced people from UTP management to manage even more effective the early delinquency portfolio and speed up the staffing of the Pulse team 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 Intesa Sanpaolo and the partner, and deal with Prelios, which has strong incentives to return the loans back to performing status. Capital. Slide number 23. In Q2, we strengthen our already solid capital base, and we maintain a significant buffer of 460 basis points versus regulatory requirement well above our peers, after having already accrued around EUR 1.8 billion for dividends in the first six months of the year. Slide number 14.
ISP continues to be a sector leader in Europe, this clearly supports our generous dividend policy. Slide number 25. We have a best-in-class risk profile in terms of the ratio of capital to financially liquid asset, by this, I'm referring to net NPL level two and level three, we are really a champion in this area. Slide number 26. I would like just to share a few considerations regarding the Italian economy. 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 indicators 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% in Q1 after decreasing in the second half of 2018. Consumer confidence rebounded in July due to more optimistic expectations of the economy, and its level is expansionary, 13% higher than in 2010. The trade surplus continues to be strong, 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 2008 crisis, and well-positioned overall to benefit from the expected economic recovery.
The wealth of Italian households stands above EUR 10 trillion, out of which more than EUR 4 trillion are financial assets, and the amount of debt held by Italian families remains very low. The Italian government holds more than EUR 1 trillion in assets, with around EUR 600 billion in financial assets and around EUR 300 billion in real estate assets. As already stated, in 2019, we expect further growth in net income with a payout ratio of 80% as set out in our business plan, and we are confirming this target as 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. De-risking. We have already achieved around 80% of the four-year business plan deleveraging target, and we increased coverage in just 18 months.
The strategic partnership with Prelios will allow us to redeploy a few hundred experienced people from UTP management to an even more effective management of the early stages. Implication is reduction of cost of risks in the next years, also in comparison with the business plan. Cost reduction. Operating costs are down by more than 3%, with cost income down to 49.3% while still investing for growth. We demonstrated once again our flexibility in managing cost with recent agreements for further head count exits and with the SisalPay partnership, which will allow a further reduction of branches. Remember, for us, reduction of branches is the key drivers of reduction of cost. Another possible acceleration in terms of cost reduction in the next years. Revenue growth.
Operating income increased by almost 7% on a quarterly base despite a challenging environment, and we strengthen our financial market activities to both capture market opportunities and to hedge the impact of volatility on fee-based business. We are working at full speed to convert into asset under management, part of the EUR 170 billion of assets under administration and the EUR 60 billion of household sight deposit, the so-called sleeping money collected in the past few years, of which EUR 8 billion in the first half of this year. Let me summarize. Wealth management can continue to grow in accelerating 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 EUR 300 million per year.
We are a sector leader in Europe when it comes to capital strength, 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 deliver strong performance in the first semester and maintain 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 you. As a reminder, if you'd like to ask a question, please signal by pressing Star one on your telephone keypad. If you find your question has been answered, you may remove yourself from the queue by pressing Star two. Again, it is star one to ask a question. We will now take our first question from Andrea Unzueta 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 the UTP portfolio that you're selling and that your loan book is declining, 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. The third question is on the SPV with Prelios. Just I understand that you're retaining 75% of the risk, in fact, which allows you to deconsolidate the NPLs. I would appreciate if you could give us more color on what is the risk weighting of the SPV, what sort of 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. 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 really the area of big interest from your side. I want to give you, starting from slide 12, so you can move volume, spread, aging, financial components, and I can make a disclosure within financial components of impact of the UTP transaction. You can have all the information, and with this answer, I can close on the net interest income. On volumes, our expectation is to have an increase in the second part of the year. Contribution for volume in the second part of the year will increase.
We have already completed transaction at the end of June that will be accounted in beginning of July. We are starting to increase volumes. Second part of the year will reap benefits in terms of volumes. On spread side, we have a negative impact coming from such a significant deposits increase that we had. 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 increase. EUR 16 billion in a semester of increase in deposits with a negative carry are by definition, a reduction of Net Interest Income.
It is only a short-term negative because this means that you are increasing the value of a 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 sleeping money into wealth management. This area of increase in deposits can give us a further negative if deposits will increase, can give us benefit if we are able to convert into asset under management. In 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 had benefit, and we will have a further benefit in the next quarters because we will have the full impact of the not replacing the EUR 8 billion of medium-term funding that we had expiring in the first semester of 2019. Positive on spread. On markup, we had a positive, slight positive in this semester, and our expectation is to continue to have positive implication coming from markup. Net spread can increase, 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 two areas. One 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 EUR 15 billion and well-diversified because it is not concentrated in Italian government bonds, but we increased all the different asset classes. The evidence is that in the profit from tradings, we made profits with 25% Italian government bond, 25% Spanish, 25% core Europe, and 20% U.S. government bonds. Just to give you the idea, a well-diversified increase dimension of 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 Prelios. They could range between EUR 15 million and EUR 20 million in this semester.
That is our best expectation on the different items that make the composition on net interest income. 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 satisfied 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 a really massive potential in further reduction of cost because we can accept the 1,000 Voluntary exit that's coming from our people. This will bring a limited amount of integration charges in the range of EUR 50 million-EUR 60 million. At the end, we will have a positive capital gain from the transaction of the SisalPay that more than compensated the integration charges.
We are today in a condition to can account on 2,600 people that can leave the organization in excess of what we have considered at the original business plan. With the possibility and the real plan that we want to accelerate the reduction of branches. A reduction of branches, as I told, is the key drivers for us of reduction of cost, because we are able to reduce costs, all the administrative costs that are related with the reduction of branches. The IT and all the other main costs that are related with branches in a short time. That's an important driver of reduction of cost from our side. I'm not in a position to make a quantification of possible further benefit that we can have, but it is for sure significant.
On UTP previews, on the capital side, our expectation is to have a slight positive within the end of 2019, so we can have a benefit in terms of a reduction of risk-weighted assets related to reduction of unlikely to pay net, the subscription we will make on the senior tranches. In the next two years, will depend on the possibility to include extra recoveries that we expect in the historical series for the loss given default. In any case, our expectation is that we can have a maximum negative impact of 10 basis points next year. If we accelerate the recoveries, our expectation is that this impact can become positive, and we will check next year. For the time being, I'm not in a position to give you more disclosure on this point. By definition, is a win-win transaction for Intesa Sanpaolo.
The next question comes from Adrian Cighi from RBC. Please go ahead.
Hi there. Thank you very much for taking my question. Two questions, please. One, a follow-up on NII and one on the asset management side. 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 expect to see this? On the asset management side, you mentioned that June was a very good month for inflows. We can see this from the monthly statistics from the fund association. In fact, Intesa is the only organization that has seen inflows of a 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 be very helpful. Thank you.
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. 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 point 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 BTP Bond and the amount of wealth management that you can collect, or that you can convert from an asset class into an asset class. It is typically the dynamic of the spread that is the main driver that can allow acceleration in net inflows of asset under management.
We had such a significant decrease in spread in this one month and a half, that's the reason why we are looking for acceleration in this area. My expectation is that looking at the negative interest rate environment, you can have some slight negative on net interest income. At the end, it is such positive dimension, the increase that you can have in asset under management and net-net, we will have a significant boost to our profitability. This is also the evidence of the past years, in which we had a strong increase in fee and commissions.
Thank you very much.
The next question comes from Andrea Virtuoni from Exane. Please go ahead.
Good afternoon. Four questions. The first one is on trading. Given that 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 of the treasury that you have just highlighted? The second point is also on the Prelios agreement on the SPV. Is it correct to assume that the mezzanine and junior tranches will be sold at par or not? Obviously that changes the price that you'll be getting for the loans if they are not. The third question is if you can give us an idea of the change in valuation reserves quarter to date. Thank you.
Starting from the change in valuation reserve, we had a positive impact of 10 basis points coming from this impact on our Common Equity Tier 1 ratio. Looking at mezzanine junior, we are really in a situation in 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. For us, it is not significant. My expectation is that they can be in a position to book it at par. In any case, it is not an issue that can have an impact on ourselves. On trading, absolutely, we are continuing to deliver very good performance. That's the reality. It is not only reduction of spread, but is volatility.
Because increasing the size of portfolio in the availability of Banca IMI, we are really giving them possibility to put their ability in order to increase revenues on securities portfolio. July has been another very good month for Intesa Sanpaolo.
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. I don't want to give figures, but it is for sure a good impact for us.
Okay, thank you.
Okay, thank you.
The next question comes from Azzurra Guelfi from Citigroup. Please go ahead.
Hi, good afternoon. A couple of questions on the Prelios deal and one on MREL. When I look at Prelios, 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? A little bit of color on which loans you have transferred, because clearly the unlikely to pay are quite a complex and varied asset class, because there is restructure loans and the ones that are closer to a restructuring at the end, or the one that has just become in Cali. Which kind of loan have you transferred, and which one instead are, if you can give us some color, in the servicing agreement with Prelios? The other question is on MREL.
You have a strong liquidity position. 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, Azzurra, I lost the question on servicing. Could you repeat, please?
Yeah, the loans that you are giving in the agreement for the services, the EUR 6.7 billion, which kind of loans are they? 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. Our expectation is obviously to have, from the EUR 3 billion, a significant benefit on cost of risk in the future. That's for sure. 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 be more part of Intesa Sanpaolo starting from the beginning of March.
Ladies and gentlemen, please stand by. We're just experiencing a momentary interruption to today's conference call. Please go ahead.
I will start again with the answer to the Azzurra questions. Related to the benefits that we can have on this transaction, there are two components. One is provisions. On the area of the tranche that we reduced, that is the EUR 3 billion, we will have, for sure, significant benefit in terms of lower provisions for the next semesters in the future. That's positive by definition. Also, on the other portion, the area of servicing, our expectation is that the combination of Intesa Sanpaolo and Prelios 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 prepared in order to allow better performance in comparison to the performance of ISP. Because Prelios will receive 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. This is another very important enabler for the reduction of provision in 2020 and 2021. The reason why the two transaction, one, the Prelios, and the other one with SisalPay, are very important to move on two 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. No impact that we can consider for the future that could be significant.
The next question comes from Domenico Santoro from HSBC.
Hello. Hi, good afternoon. Thanks for the presentation. Just a follow-up to this question of the colleague on the loan loss provision. We all know what are the impact of lower interest rates of NII, you've been very clear. 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. This is an environment with negative rates. I was just wondering what the way you look at loan loss provision going forward, if you can share with us also a number or a guidance for the next years. Everybody's focused on NII. There is here a second side of the coin.
Also on NPE, if you can share with us the impact from the new definition of NPE EBA, whether this is going to kick in in the third or in the fourth quarter. Thank you.
Looking at provisions, there is one point in this analysis of possible reduction of cost of risk that is related to volume. 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 Prelios, we will over-perform the stock of non-performing loans that we will have at the end of the business plan. 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. That's one side.
The other, there is another point that we will have to wait for the first months 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 cost of risk. I am not ready to give figures, but from a qualitative point of view, that is for sure that we are in a mood of exceeding the reduction of cost of risk in the next two years, and it will be not difficult for us to reduce this. Looking at NPE and EBA 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 fourth quarter. could be an amount more or less EUR 500 million. 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? 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 NII pressure is more than compensated by growth in fees, or if now that spreads are already tighter, the switch of client funds into AUM should be more complex. 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, 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.
In your press release, you have explained that you have opened, started the adoption of the Danish Compromise. When should we expect the validation of this request? 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.
Starting from capital, the impact that we had positive is something that I have already disclosed in the conference call on the first quarter, 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 a peak of volatility in the historical series that entering the new quarter could have been reduced. The main part of risk-weighted asset reduction is driven by a reduction in market risk-weighted assets that more or less remain at this level. It is something structural in the coming back. That was a peak, so a negative in the first quarter, now a recovery in the second quarter, 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 two months. We will see what can happen. Looking at the contribution of portfolio, the contribution of portfolio increased in this quarter by EUR 20 million in comparison with the other quarters. There has been obviously a change in the kind of securities because Banca Intesa, 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, 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.
It probably is much better to concentrate on volume, because if volume remains at this level on a structural basis, we will have EUR 300 million more in comparison with the past. I'm not in a position to allocate these EUR 300 million between Net Interest Income and profit from trading. By definition, increasing EUR 50 billion, they had the possibility to move a significant portion in excess, and then also having responsibility on securities that were originally under the responsibility of the treasury department with a different purpose. Now they have possibility to have another contribution from portfolio, maintaining the same group VaR limit. Difficult to say what could be the implication on a single line. On the total revenue, 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 asset under management, the amount of upfront fee in this quarter is slightly in increase in comparison with the first quarter because we had entry fee that were superior to the first quarter because we had EUR 600 million of net inflows in comparison with the negative inflows of the first quarter. We are talking in any case of not significant amount.
The next question comes from Giovanni Razzoli from EQUITA. Please go ahead.
Good afternoon to everybody. A couple of questions on my side. The first one, is it fair to assume that you have kept your EUR 30 billion of excess liquidity in ECB flat compared with last year? If this is not the case, can you update us with the actual amount?
Sorry, I didn't understand your question, because the line is not so good. Could you repeat and speak slowly, please?
Sure. Can you hear me now? Hello?
Yes, absolutely. Now, yes.
Okay. Thank you. 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, around EUR 30 billion as of June of last year. Then a couple of clarifications on your comments. As a part of the Sisal deal, is it fair to assume that you are booking a EUR 50 million capital gains that you mentioned? This clarification. The second question, is there any kind of impact in terms of additional extraordinary contribution to the Fondo Interbancario di Tutela dei Depositi for the Carige deal? Thank you.
Looking at Carige deal, if there will be an intervention from the Interbank Fund, we will 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. That's our expectation. On the SisalPay, we can make an accrual of a capital gain related to the SisalPay transaction. Our intention is, if we reach an agreement with the trade unions on this extra 1,000 voluntary exit, in any case, people is asking us to leave the organization. My expectation is that there could be possibility to make an agreement, but we have great respects of trade unions. We wait for the agreement.
We can have a charge of between EUR 50 million and EUR 60 million of extraordinary integration charges. It is possible to cover with this capital gain related to the Sisal transaction. Looking at excess liquidity. Excess liquidity is more or less the same level, probably close to EUR 40 billion than to EUR 30 billion. Excess liquidity deposit with ECB. We have a lot of excess liquidity in Nestlé publication on 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. 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 Italian banks and European banks. Also in terms of weight of placing fees on the total amount of fees, you're certainly well below the Italian average. 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.
The question to you is it a risk also for you that you may be called to take down your BTP exposure? I noticed that you increased a bit the amount of BTP that you own in the past three quarters. You're still well below the historic maximum that was EUR 65 billion, now you have EUR 34 billion, so it's basically half of that. I just wanted to make clear if there is some pressure also on you to reduce this concentration risk. The other issue is, I think it's very interesting the point that you made about liquidity. Liquidity is a blessing, but at the same time, the strong increase in deposits is hurting your NII. I just want to see it from a positivist standpoint.
The positivist standpoint is when this liquidity will be finally used, you have a positive double-whammy effect, both on net interest income and fees. The issue that I have here is whether this liquidity has mainly come to you in the shape of current accounts. I think that you've been very successful in pushing people out of retail bonds and into asset management. Maybe it's more difficult to get people out of current accounts. The question for you is, am I right in saying that? Which are your strategies to push people out? How long will it take to successfully redeposit this liquidity? I must apologize, I have a third question.
The third question is, I think in the presentation you mentioned quite high number of people that need to exit the bank, which is basically an issue that is common to all banks these days. Everybody needs to restructure. The only problem is that the cost of restructuring is pretty high, and is going to hurt capital. Finally, a 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.
The last question is that I think you gave a guidance in previous quarters 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.
On net income, I'm now pretty sure to deliver a net income in 2019 that will exceed 2018. That's for sure. There's no doubt that we will deliver a net income exceeding the one of 2018, and no doubt that we will pay 80% of this net income as dividend to our shareholders. Coming to the other areas that you have considered. Starting from net interest income, we decided to increase the size of the portfolios because we were in such a situation due to liquidity that it could have been crazy to maintain such an exposure to the ECB without any kind of yield.
On the other side, we started at the end of last year with the reorganization in order to have the merger of Banca Intesa Sanpaolo, making this reorganization of portfolios between the treasury department, with specialization on liquidity, and Banca IMI, with specialization on securities portfolio. Having said that, the increase in securities portfolio has been completed. The amount of Italian government bond is absolutely in line with all the expectation of the regulators, the risk appetite framework of the group. 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. In the end, as I told some minutes ago, the diversification of portfolio, it is important also for the people in Banca IMI in order to better exploit profits from portfolio.
The point on portfolio is that we have no need to reduce Italian government bonds. 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 account. There is also a portion of this money that is coming from private banking clients. Probably more or less 50% of this amount is coming from new money coming from private banking clients. 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.
I have to tell you that my expectation is that a significant portion of this can be converted into asset under management, especially for the private banking client. For the personal affluent, there could be more solution related to insurance product that can be considered in order to move the money into wealth management product. 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, that 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 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, all the restructuring charges already in our figures. What we can add is only this amount of EUR 50 million, EUR 60 million. We are still making the final calculation that will allow us to accept this 1,000 further exit of people. The 1,600 that were already agreed are at zero cost in terms of restructuring charges. I have to tell you that we are in a unique position in comparison with all the other peers. Also the reduction of branches is something that I want to tell you that it is business as usual for us.
At the end, we have such technology in order to reduce branches that 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 two years.
Oh, 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.
Yeah. 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 2019 and 2020, 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 bit, 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. 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, I can leave the floor to Stefano Del Punta, it is again business as usual. Stefano, if you want to elaborate on this point.
Yeah, we have a lot of liquidity, as our CEO said. Really, we don't need to go much on the market, certainly not on senior preferred. We are okay with our subordination requirement. We expect to be okay. We will receive the letter year-end. We will be in the market, but don't expect us to issue much.
Thank you.
The next question comes from Benjie Creelan-Sandford from Jefferies. Please go ahead.
Yeah. 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 EUR 600 million 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 follow up on NPLs and asset quality. The growth inflows were a bit higher in Q2 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. The final question, it would be a shame not to ask about net interest income.
Sorry. Excuse me. I lost the second question. Sorry, the line is not good. I please you to speak very slow, because otherwise it is difficult to understand. First question was on cost, and it was clear. The second question was on?
The second question was just on NPLs, because growth inflows in the second quarter were higher than they have been for the previous two quarters. I just wondered whether there was anything specific there, or anything that you could comment in terms of the inflow trend in terms of NPLs. 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? Does that guidance no longer apply? Thanks.
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 billion per year. We are continuing to invest in a significant way, mainly on IT, digital, and control function within the group, and also to accelerate the engine for growth for the group. Our estimate is to continue to have a capital budget more or less in this range also 2020, 2021. When I talk about reduction of cost, I am talking about reduction of administrative expenses related mainly to reduction of branches, legal entities, and the reduction of people that has embedded a significant reduction of administrative expenses.
If you consider that also in terms of sq m that we have reduced, we have reduced in 18 months, 15% of the sq m of the total amount of sq m that we have in the group. Reducing another 500 branches, we can reduce another 10% sq m that we use in the group. 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 budget and investments that we are continuing to deliver. 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 profitabilities.
On non-performing loans, in the second quarter, it is usual to have some seasonality, not significant, but in any case, some seasonality. Again, in 2021, our target is 41 basis points in terms of cost risk. In this semester, we are 47, 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, 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. If you have EUR 50 million of provisions that can be considered as something that you can put in such a very good quarter. I'm not absolutely surprised. Seasonality is there.
You have to consider that we have million of clients, thousand and thousands of corporate clients. Difficult to say, EUR 20 million, EUR 30 million of provision or 100 inflows more or less. At the end, what is very important is the trend and the clear significant reduction in terms of stock and on a semester basis, also in comparison with last year. I have to tell you that I'm pretty confident on the results, and I do not see any kind of threats, but only 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 commercial interest margin, and there are something that is financial interest margin.
Financial interest margin 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 a EUR 20 million or EUR 30 million increase or reduction. 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. Financial interest margin, I'm managing this organization in order to increase the total amount of revenues. I can tell you for sure is that in the second semester, the total amount of net interest income can be in excess in comparison to the total amount of net interest income of the first semester.
On a yearly basis, let's wait for the next quarter because it is difficult for me to give you this guidance. It is also related on the kind of management that I'm doing with the people within Corporate and Investment Banking Division. Their incentive scheme is related to revenues, not to net interest income. That's the clear point. Now a significant portion of this financial yield on financial assets is in the end of Corporate and Investment Banking Division.
Thank you.
The next question comes from Antonio Reale 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. One on the dividend strategy, to some extent, a provocative question on that. The second question is on margin and your strategy there in terms of growing the loan book. 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 would 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, linked to that, if you could share your thinking, and any feedback conversations you've had with the regulator, that'd 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.
The increase in markup is mainly coming from repricing, not from the attitude of increasing market share. We have such a significant market share and share wallet with strategic clients that our target is not market share, but it is EVA revenues and quality of credit. Working with our client, we were in a position to make a good repricing, so at positive on markup. Looking at dividend strategy, I have to tell you that it is really not easy to receive the approval to make a share buyback from the regulators. That's my expectation, my impression. I will continue to work with a strong commitment to increase, in a sustainable way, the net income of the organization in order to pay, in any case, a significant dividend.
If you consider our strong capital position and already embedded EUR 1.8 billion 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.
Thank you.
The next question comes from Anna Adamo from Autonomous Research. Please go ahead.
Hi, good afternoon. I have only one question. What is your plan for repaying TLTRO II, and do you have any interest in taking up TLTRO III in September? Thank you.
On TLTRO II, from a liquidity point of view, we have zero need to have TLTRO. Because we can remain with a significant positive Net Stable Funding Ratio position, also repaying all the TLTRO II. Just to make it clear that the evidence of our strength in terms of liquidity. If we repay all the EUR 60 billion of TLTRO II, we remain with a positive Net Stable Funding Ratio that is unique in the landscape, in the market comparison with other European peers. 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 access to the TLTRO market. 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 zero need on working on TLTRO.
Thank you.
Thank you.
As there are no further questions signaled, I now turn the call back to Mr. Messina for any additional or closing remarks.
Thank you very much, and hope to see you in London. Bye.
That will conclude today's call. Thank you for participation. You may now disconnect.