Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo For the presentation of the 2019 First Quarter Results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Luba, and I will be your coordinator for today's conference. Today's conference call is being recorded. At this time, I would like to hand the call over to Mr.
Carlo Messina. Sir, you may begin.
Good evening, ladies and gentlemen, and welcome to our Q1 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 details, let me highlight that we are very proud of the performance of the bank in the 1st 3 months of the year. ISP continues to deliver despite an external environment that so far has been less supportive for revenues than expected. We are firmly on track to deliver a 2019 net income higher than the €4,000,000,000 booked last year.
Q1 net income reached EUR 1,050,000,000 fully driven by our core operating performance. Net income comes to EUR 1,200,000,000 when excluding costs concerning the banking industry. We confirm a payout ratio of 80% for this year as stated in our business plan. And we are well on track to deliver a very good cash dividend again this year. ISP and myself personally are committed remunerating our shareholders, and we have demonstrated the ability to do so over many years.
We have also further strengthened our balance sheet. We reduced our NPL portfolio by more than €15,000,000,000 in the past 12 months and by €29,000,000,000 since September 2015 peak at no cost to our shareholders, leading to the lowest NPL stock since 2,009 and the lowest net NPL ratio since 2,008. We recorded the lowest ever Q1 NPL inflow, thanks to our proactive credit management and our ability to serve stronger Italian companies, which are more profitable and better capitalized than before the 2,008 crisis. We increased NPL coverage, which is now above 54%, a level that will facilitate additional deleveraging in the future. Our capital position continued to be very solid and our common equity TR1 ratios are well above 13%.
Customer financial assets increased by EUR 30,000,000,000 in Q1 with a EUR 10,600,000,000 increase in assets under management and EUR 12,000,000,000 growth in direct customer deposits. Let me emphasize once again our managerial approach, which and will continue to be focused on value creation and distribution with high and sustainable dividends. And we have demonstrated our ability to fully deliver on our promises, activating all available managerial levers, including contingency plans if needed. Therefore, we confirm our 2019 targets for net income and payout rooted in our very resilient and well diversified business model. We have activities underway that are delivering high quality earnings and will boost profitability into the future.
Let's now go through the presentation. And at the end, I will be glad to take your questions. Slide number 1. Let's now look at the key highlights for the quarter. 1 of the best first quarter net incomes of the past decade, 4.4% higher than 1 year ago when excluding the positive impact deriving from the sale of the NTV stake.
4.6% growth in revenues and more than 30% growth in gross income on a quarterly basis, With net interest income growing versus the last quarter of 2018, 3% adjusted for the different number of days in the quarters. Cost income down to 50%, among the best in Europe, with a 4.5% yearly decrease in operating costs, The lowest ever 1st quarter NPL inflow, coupled with a 24% decrease in loan loss provisions and increased NPL coverage. EUR 1,000,000,000 NPL deleveraging in the quarter and more than EUR 15,000,000,000 on a yearly basis. Our common equity ratio is at a solid 13.5 percent despite the negative impact of 30 basis points Over the past 12 months, due to the sovereign bond spread and around 20 basis points from TRIM and IFRS impacts registered as expected in the Q1. In a nutshell, we are firmly on track To deliver a higher net income versus 2018, we have already achieved 64% of our 4 year deleveraging target.
I'm very proud of these results. And as always, I want to thank all Intesa Sanpaolo's people for their hard work in helping achieve them. Slide number 2, I'm even prouder of our results since they were achieved in a challenging operating environment for revenues. The Eurozone and Italy experienced a slowdown in GDP growth with Italian GDP flat year on year after 2 quarters of minus 1% growth. The 10 year BTP boom spread has almost doubled on a yearly basis.
Slide number 3. Q1 2019 was one of our best first quarters since 2008 in terms of net income, And this was achieved thanks to solid core operating performance with no one offs. In Q1, we achieved a net income above the average quarterly net income recorded in 2018. And as I have already said, we are firmly on track to deliver a 2019 net income that is higher Then in 2018, Slide number 4. During these 1st 3 months, we continued to improve across all key indicators.
In particular, costincome down by almost 3 percentage points, loan loss provisions down 24% on a yearly basis and The annualized cost of risk is down to 37 basis points. The effort made last year to increase our coverage, Also leveraging on extraordinary gains used to strengthen our balance sheet will give additional flexibility to our NPL deleveraging plan. NPL stock reached the lowest level since 2009 The net NPL ratio dropped to 4.1%, the lowest level since 2,008. Our capital position remains very strong, 420 basis points above regulatory requirements, and our capital buffer is 160 basis points above the average of our peers. Slide number 5.
These solid results are powered by a combination of factors that ISP management has built over time, a top performing delivery machine focused on business priorities and a business model that is both resilient and well diversified. We have state of the art successfully applied to our bad loans are now being used on the UTP portfolio, which will be the priority for 2019. We enjoy strategic flexibility in managing costs while still investing for growth. We are an efficient wealth management and protection company driven by a client centric approach. In this challenging environment, we have confirmed our prudent approach in managing our clients' assets.
In addition, our business model is naturally hedged because our Financial market activities offset the impact of market volatility on our fee based businesses. Profit trading more than doubled on a quarterly basis and is up 32% on a yearly basis when excluding the MTV positive impact booked In the Q1 of 2018, as already highlighted, our sustainable profitability is also the result of a very strong capital and liquidity position. Slide number 6, all stakeholders benefit from our solid performance And shareholders are not the only ones benefiting from our strong performance. In Q1, employees received €1,400,000,000 in salaries And though our excess capacity of around 5,000 people is in the process of being reskilled, of which around 1500 are already redeployed to priority projects. The public sector received €800,000,000 in households and businesses received EUR 12,500,000,000 in new medium long term lending, of which EUR 10,500,000,000 in Italy.
In addition, over the same period, we helped 5,000 companies to get back on track, thus preserving around 25,000 jobs. If we consider our social impact since 2014, the total number of companies helped has been around 100,000 and around 500,000 jobs have been saved. 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 examples of our work to support Italian society.
Let me comment on Let me comment on the most recent developments. Our EUR 5,000,000,000 circular economy credit Ceflon has evaluated more than 100 projects, of which 13 have been financed for €300,000,000 We launched a partnership with Generation, a global project to reduce youth unemployment that will train, introduce 5,000 young people To the Italian labor market over the next 3 years and the romanticismo exhibit held in our Galleria Italia Art Museum was one of the most visited exhibitions in Italy with almost 200,000 visitors. We are the engine of the Italian social economy. And in addition to our direct support to the Italian society, the dividends that we pay out The banking foundations that make up part of ISP's shareholding also provides support to social and cultural projects. Slide number 8.
As a result of these efforts, ISBN has been included in the main sustainability indexes rankings, And we are the only Italian bank included in the Dow Jones World and Europe Sustainability Indexes in the CDP Climate Change A List 2018. And we are the only Italian bank listed in the 2019 Corporate Knights Global 100 Most Sustainable Corporations in the World Index. Slide number 9. On Slide number 9, you can see the key highlights of our strong Q1 performance. And let me take you to Page 10 and give you some color on the P and L.
Q1 performance was solid despite a challenging environment for revenues marked by low economic growth, low market interest rate and consistent high sovereign spread. On a quarterly basis, net interest income grew by 3% when adjusting For the different number of days in the two quarters, insurance income increased by 22% and profits financial assets and liabilities at the trade value more than doubled. The decline in commissions on a quarterly basis was largely due to Q4 seasonality of commissions from loans granted and from collection and payment services and debit and credit cards and the decline of commissions coming from corporate and investment banking activities. Commissions from Wealth Management and Protection have been resilient on a quarterly basis. And in Q1, customer financial assets increased by €30,000,000,000 also thanks to a €10,600,000,000 increase in assets under management.
Operating income was up 4.6%, and operating margin was up 33% on a quarterly basis. We have continued to be very effective at managing costs, which are down 4.5% on a yearly basis. Our loan loss provisions went down by 24% on an annual basis. Gross income was up more than 30%, driven by the strong reduction in costs and provisions. Net income comes to EUR 1,200,000,000 When excluding costs concerning the banking industry, which largely consist of around €150,000,000 full year charge for the resolution Fund.
Slide number 11. The net interest income increased versus Q4 2018 and was driven by positive dynamics on spread despite the prolonged low interest rate environment. In particular, when adjusting for the different number of days versus Q4, we would have registered a solid 3% increase. On a yearly basis, net interest income decreased largely due to accelerated NPL deleveraging, the effect of the hedging and of the reimbursement of an acquisition financing loan in September 2018 that we are replacing with other loans. Net interest income was also affected by strong growth in direct deposit, EUR 12,000,000,000 in Q1.
Debt in a low interest rate environment impacts net interest income in the short term, but boosts our wealth management engine in the coming quarters. We will continue to work hard to further boost the commercial component While continuing to manage in an integrated manner our financial components vis a vis loan loss provisions and profit from trading with a pretax neutral EBA positive 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 in Q1, €5,500,000,000 and to buy back €2,100,000,000 of U. S. Dollar denominated bonds, Supported by the increase in retail client customer's current accounts in the past quarter, we will certainly not replace Any of the EUR 3,500,000,000 senior subordinated bonds expiring in Q2.
So EUR 7,000,000,000 1st quarter EUR 3,500,000,000 2nd quarter. Let me highlight that ISP net interest income is Highly sensitive to an interest rate rise. Indeed, an interest rate increase of 100 basis points will generate a benefit of €1,900,000,000 in net interest income. Commissions. Despite this challenging environment, assets under management increased by EUR 10,600,000,000 in Q1, And we have confirmed once again our prudent approach in managing our clients' assets with family side deposit increasing by EUR 3,400,000,000 over the past 3 months and by EUR 9,500,000,000 on a yearly basis.
Together with the relevant stock of assets under administration currently above €172,000,000,000 these assets will be the fuel of our wealth management engine in the coming quarters. Overall, customer financial assets increased by €30,000,000,000 in Q1 to more than €940,000,000,000 In addition, let me highlight that Pengua Fund Management in China, in which we have a 49% stake, increased the assets under management in Q1 by almost EUR 12,000,000,000 to EUR 77,000,000,000 with a net positive inflow of more than €6,000,000,000 In March, Penguin Fund Management ranked 13 within the Chinese mutual fund industry with a 2.8% market share. Slide number 13. Once again, in this quarter, all our divisions made a positive contribution to group results. So we are a well diversified business unit group.
Around half of our gross income comes from the Wealth Management and Protection Business, making ISP a clear European leader in Wealth Management, but with a natural hedge from financial market activities in case of market volatility. Cost. We continue to be very effective at managing costs, and we are extremely proud of the strong reduction achieved in Q1. The main source of savings were workforce reduction, optimization of real estate, reduction of legal entities A reduction of other administrative costs. Depreciation is up due to significant investment for growth in key areas such as training, IT, Digital Property and Casualty and Wealth Management.
We reduced headcount by 4,500 on a yearly basis, of which around 1300 in the first quarter and over 3,000 additional exit by June 2020 already agreed with the labor unions. ISP maintains high strategic flexibility in managing costs He remains a costincomeleader in Europe with a 50% ratio. Slide number 15. We are very proud to be a best in class costincome ratio, and this chart illustrates our leading position in Europe. Slide number 16.
As you can see in this slide, in Q1, loan loss provision declined the lowest quarterly level since 2008, coupled with the lowest ever Q1 NPL inflow. As a result, The annualized cost of risk is now down to 37 basis points, well on track to meet and possibly exceed our business plan target of 41 basis points by 2021. Our NPL coverage ratio increased by 1.4 percentage point versus the same period last year, a level that will facilitate additional deleveraging in the future and we'll keep the cost of risk low. Slide 17. Our NPL stock is declining quickly, reaching the lowest level since 2,009.
Gross NPL decreased by EUR 1,000,000,000 in the quarter by €15,000,000,000 in the past 12 months and by €29,000,000,000 since the peak of September 2015. In just 15 months, we have already achieved 64% of the business plans full year deleveraging target. And as already mentioned, ISP has been able to deliver this impressive deleveraging at no cost to shareholders. Slide 18. As you can see in this slide, in order to reach our target for 2021, we need to deleverage around €800,000,000 per quarter over the next 11 quarters totaling €9,000,000,000 which is less than half of the deleveraging we in the past 14 quarters when we deleveraged €1,400,000,000 per quarter with a coverage that was by far lower.
We are ahead of schedule in delivering our NPL plan, and we expect to achieve our target earlier than originally planned. Slide number 19. We recorded the lowest ever Q1 gross NPL inflow down 65 percent versus 7 years ago and down 23% on a yearly basis. NPL inflows are at Thanks to our proactive credit management and to the solidity of the Italian corporate sector, which is much stronger than in 2,008. Slide 20.
Our capital base is strong, And we maintain a buffer of 4 20 basis points versus regulatory requirements. We have one of the highest capital buffers in Europe, to more than €11,000,000,000 which has been built entirely through internal capital generation with no capital increase in recent years and while having paid €13,400,000,000 in cash dividends in the past 5 years. Slide number 21. When it comes to capital strength, ASP continue to be a sector leader in Europe. This clearly helps our generous dividend policy.
Slide 22, we have a best in class risk profile in terms of the ratio of capital to financial liquid assets. And by this, I'm referring to net NPL level 2, level 3 and net repossessed asset. We also enjoy a strong liquidity position We bought the liquidity coverage ratio, the net stable fund duration well above 100% With €80,000,000,000 of excess medium long term liquidity, €80,000,000,000 Slide number 23, Italian economy. I would like to share a few consideration regarding the Italian economy. Despite a slowdown in the last months of 2018, Italian GDP recovered in Q1 and is projected to further recover in the second half of twenty in line with the Eurozone trend.
Major Italian indicators are supportive. Employment is at 15 year high and continue to increase in March. Consumer confidence remains at expansionary levels. The trade surplus net of energy continued to be strong. Industrial production rebounded strongly in the 1st 2 months of 2019 more than in any other Eurozone country.
And the evidence with our client base is that There is an increase in momentum of growth in the country. Italian companies are more solid, more profitable and better capitalized than before the 2,008 crisis and well positioned overall to benefit from the expected economy recovery. Export oriented companies, highly diversified in terms of industry and size, have become international trade powerhouses over the past few years, and they will benefit from a rebound in Germany and other European countries. Domestic oriented companies will benefit from resilient consumptions driven also by the Italian government expansionary fiscal policy. The wealth of Italian households stands above €10,000,000,000,000 of which more than €4,000,000,000,000 are financial assets And the amount of debt held by Italian families remains very low.
The Italian government holds more 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 estate Assets. Slide 24. As already said, in 2019, we expect Further growth in net income with a payout ratio of 80% is set out in our business plan. Slide 25. To sum up, we are very satisfied with our Q1 performance and our delivery operating costs are down significantly while still investing for growth.
Revenue growth, operating income has increased quarterly despite a Challenging environment. We are a sector leader in Europe when it comes to capital strength despite the higher sovereign bond spread increased by €30,000,000,000 and this will support growth in the coming months. We have a highly resilient business model that will facilitate further growth and productivity gains. All in all, we delivered strong performance in the Q1 and maintain A positive outlook for 2019, thanks to the contribution of all our people committed to increase our net income in Italy and abroad. We are firmly on track so to deliver a higher net income 2018 and a very generous cash dividend.
So thank you for your time and attention, and I'm now happy to answer your Questions?
Thank you. Your first question is coming from the line of Antonio Reales from Morgan Stanley. Please go ahead.
Hi, this is Antonio Ale from Ruxanli. Thank you for taking my questions. I've got 2. 1 on your guidance to grow the net profit and the second one Capital. So you've reiterated your guidance to grow the net profit year on year from the €4,000,000,000 level that you booked last Earnings for the rest of 2019 with a focus perhaps on what you have budgeted for fees, please, and also any flexibility or contingency plans you may have?
The second question is on capital. The quarter was affected by about 20 basis points related to TRIM and IFRS 16. What else do you expect to come on capital that could affect your CET1 ratio both positively and negatively? And please, could you remind us what are the headwinds you're taking upfront this year from a regulatory perspective and next year? Thank you.
So looking at net income, I have to tell you that I'm pretty sure deliver a net income in 2019 that will be much higher than 2018. So if you look at Recurrent profitability, we delivered €1,200,000,000 It is driven by cost reduction, loan loss provision. So Let me start from cost, and I will elaborate on provision, and then I will elaborate on revenue. So you can have the idea of what could be Our ability to deliver on our net income increase during 2019 costs. The real secret of our ability to reduce cost is that we have been able to make a strong correlation between reduction of people, a reduction of administrative expenses.
So starting from the end of 2017, we reduced by 7,000 people the workforce of Intesa Sanpaolo in the last year, 4,500 in the last quarter, 1300. Then we will have another 1900 person. To reduce the computer of the people, to reduce all the expenses that are related with people. So a reduction of 10% in work Force now is the clear result of this reduction is an increase in reduction of Administrative expenses, because we were really able to close the timing from the exit of people and the impact on the administrative So in a nutshell, we will be able to reduce the scale of our bank, maintaining our ability to generate So it is easy to understand that reducing people, if you are so smart and so able to create this correlation between reduction of branches, reduction of legal entities, reduction of IT system, reduction of all the costs that are related with people, we are now in a process of having created a strong delivery machine, not only to negotiate with our supplier prices and so reducing costs through negotiation of prices, but reduction of scale deriving from reduction of people. So I'm really confident that on cost, we can deliver very significant performance, continuing to invest for growth.
But believe me, we have significant potential for cost reduction. We can use as contingent in France. We can use to accelerate The investment, if we have very good performance in revenue, but cost is the clear lever of success of Intesa Sanpaolo is and will remain this best in practice management Of course, that is our top performing results. If you look at cost of risk, The reduction of the nonperforming loan stock has been impressive from 20 So just because you have €15,000,000,000 of non performing loans lower 2019 compared with 2018, you have the equivalent in percentage terms reduction of provisions. Then inflows are today at a minimum level, and it is likely to remain at this level because we are not in a recession.
We are in a growth not significant, but growth mood in the country. And this is enough due to the high quality Of the Italian companies survived to the crisis of 2018, 'eleven that today are best in class, and we can continue to deliver very good performance in terms of inflow. So also on provisions, I'm pretty sure We were at a very good performance with a significant reduction in comparison to 2018. So cost and revenues are 2 areas in which we can continue to have very good and significant performance, really creating condition to have core operating results in excess in 2019 in comparison to 2018. If we move into revenues, net interest income will benefit from a reduction in cost of funding Because in the Q1, we had only a minimum part of the reduction in cost of funding that is related with the not replacement of the €5,500,000,000 medium term fundings and the buyback of the $2,000,000,000 that we made in the Q1.
Then we have €3,500,000,000 that not reprise in the Q2. So we are talking about €100,000,000 of net interest income that can increase during 20 2019 in comparison with 2018. And if you move into commissions, this is the very minimum level of commission in this due to, from one side, Corporate Investment Banking Division Commissions that are mainly related with Investment banking with commercial activities, and we will have a recover in the second quarter and in the second of 2019, there are also a part of seasonality that we will recover in the end of 2019. And if you look At asset under management, we have no impact from the increasing volumes deriving from performance that we will have in the next quarters. Then we have €1,000,000,000 of increase in deposits that are ready As soon as the wait and see approach of the Italian families will come to an end To moving to our Wealth Management area.
At the same time, property and casualty business is getting momentum because we move from $80,000,000 of premium Q1 2018 to €130,000,000 premium in the Q1 2019, no motor property and casualties. So with a significant increase. We trained 30,000 people within the organization, and they are increasing The property casualties business contribution to our results. So my expectation is that we can continue to give very good performance of profit from tradings. So I have to tell you, I cannot understand why I cannot have the Clear expectation that net income can increase in comparison to 2018.
At the end, if you consider EUR 1,200,000,000 is the core operating performance, $140,000,000 due to the single resolution fund. Then in the last in the quarter, we will have another €100,000,000 due to the positive guarantee scheme, but at the end, some seasonality, positive and negative, But we will be closer, to my expectation, also in a worst case scenario. So that's our view on all different areas. And also on commissions this quarter, we decided not to push on commissions because we had such an amount of net income that I don't want to give the expectation in the market that they can deliver EUR 5,000,000,000 of net income. So that's the way in which we are managing the figures in Intero Sao Paulo.
We rely on the recovery commission for the next quarters. But in any case, what we want is to increase efficiency, to increase quality of results to increase sustainable net income and paying the right dividend. Moving into capital. Capital has been affected In this quarter by not only TRIM and IFRS 16 because also on risk weighted Asset related to market risk, we had a spike, so an increase of risk weighted assets related to this increasing activity in profit and trading and also in the volume of bonds that we increased during the quarter, but our expectation is that we can have a reduction in risk weighted assets related to market risk in the next and we do not see any significant threats coming from other regulatory impacts. So my expectation also on Capital is to have and to maintain a very good position in capital.
And also looking at the so called fully phased in, our expectation is to be in a position to have also significant benefit from damage compromise, so to realize a close relation between the fully loaded, considering the TPA and the fully phased in. So you have the budget of Intesa Sanpaolo.
Thank you.
Thank you. Your next question is coming from the line of Adrian Cighi from RBC. Please go ahead.
Hi, there. Thank you very much for taking my questions. One question following up on your previous answer and one Question on cost to risk. On the business plan, obviously, you've outlined a plan to reach the €4,000,000,000 or higher $4,000,000,000 number last year. But should the revenue sort of environment continue to disappoint, could you maybe offset that with even more cost reduction?
And then the second question on cost of risk, the 37 basis points this quarter is below your end End point 40 basis points target. Do you have anything of a one off nature this quarter? Or do you see it remaining around these levels and for the rest of the year? Thank you very much.
So cost reduction, we will exceed for sure our target. Looking at the cost of risk, we have no one off, and the evidence is clear. If you the Q1 of last year with the Q1 of this year, and you go to slide The additional information, the slides, sorry. And you see, in any case, the cost of risk was 48 basis points in the Q1 of last year and €37,000,000 this quarter, the impact is the clear reduction of non performing loans. So in the Q1 of 2018, you had €15,000,000,000 non performing loans in excess to the Q1 of 2019.
So this is mathematical. So there is to continue to have good performance in terms of provision on a yearly basis. So I don't want to elaborate on a quarterly basis. It is too difficult. But on a yearly basis, my expectation is to have a significant reduction in terms of cost of risk correlated with the reduction in terms of in terms of nonperforming loans.
Excellent. Thank you very much.
Thank you.
Thank you. Your next question is coming from the line of Andrea Filtre from Mediobanca. Please go ahead.
Good afternoon. One question on the bond portfolio, which seems to have grown Sizably quarter on quarter, not only in the ownership of GOVIS, but also in bank exposure. Could you please provide the contribution to NII in Q1 and the expected contribution for this year from this change? And could you also provide us with an idea of the type of assets that you have purchased? And just a follow-up on the risk weighted asset trends.
The reduction in market risk going forward that you have indicated previously, Is it because you have already been selling some of these bonds? Thank you.
So the bond portfolio contribution in this quarter, so the extra bond portfolio contribution is in the range of €20,000,000 and our expectation that could be €100,000,000 on a yearly basis. The majority of portfolio increased is Gubi's portfolio, not only Looking at risk weighted assets, the market risk reduction is something that is embedded in a reduction of portfolio, but also a reduction of volatility Looking at 12 months from a spike that we had after the elections in Italy last year. So our expectation is that we can have a reduction that could be significant during the Q2 due to market risk.
Thank you.
Thank you. Your next question is coming from the line of Jean Francois Nuez from Goldman Sachs. Please go ahead.
Hello, good afternoon. I just wanted to ask with Prelios on unlikely to pay loans. I just wanted to ask you whether you could shed more colors of what you intend to do, Whether there would there could be some portfolio disposals of loans and or platforms similarly to what you did With the previous big tranche of last year? Thank you very much. And whether that would have any capital impact in your opinion?
So we are working on unlikely to pay because this is the area in which we want to Accelerate reduction of unlikely to pay, this means that the majority of impact should be in coming back to bonus. That's main target to move into performing. Then there could be also evaluation of possible disposal. The evaluation that we are making with a possible partner will end within the end of June, beginning of July, there could be a timing in which we can understand if we'll accelerate by ourselves or if we can enter into a partnership. Then we will see what kind of partnership we can create with this pattern.
And looking at capital impact, we will manage in such a way to have no significant impact on capital and in any case, all will be at book value. And so with no impact on our strategy on net income profitability and capital, and so delivering continue to deliver all our main targets of The business plan. The point is to accelerate reduction on nonperforming loans and to be ready to reach our targets in advance in the next year.
Can I ask a quick follow-up on this? If the in the group that you would be looking at as you did in the past to offset net income potential one off effects?
No, no, no. We will consider only the nonperforming loans portfolio. So now On this, I have to tell you that we decided to use in the past some asset to be disposal In order to increase the coverage ratio, so that was the main strategy in having capital gain and using in order to increase coverage, but this level of coverage is absolutely the right one and also probably in excess to what we need in order to make deleveraging. Hello. Can I continue to my answer?
Yes, it's now on. Thank you. Carry on.
Okay. That's right. So I don't know if you lost the answer on the possible disposal, but What I can confirm is that we are working only on a likely to pay. All our strategy in the past to make disposal of Other assets of the groups making capital gains were mainly focused in order to increase the coverage of Our non performing loans today, my expectation is that we are at the right level of coverage. So we do not need any Other increase in coverage and all our core operating performance is in the condition to be used to increase net income and then to pay dividend.
We do not see significant Impact from any kind of possible disposal.
Thank you. Your next question is coming from the line of Jean Francois Neuez from Goldman Sachs.
Sorry, I missed the previous question. I think that's a mistake.
Thank you. We have the next question coming from the line of Ignacio Ferrezo from UBS. Please go ahead.
Yeah. Hi, good afternoon. Three questions from me, if I may. First one is detail on the secure and secure mix on the UTP portfolio, if you can give it to us. And two follow ups on net interest income.
The first one is your best approximation to the MREL requirement, both in terms of the timing of announcement and the amount. And the second one net interest income is where you can give us some color on the lending repricing dynamics in the quarter? Thank you.
On net interest income, our repricing In terms of markup, give us some basis points positive during this quarter. So a possible contribution that we had in the range of 20 €1,000,000 increase quarter by quarter. On BRL, I didn't understand Your question, but I asked Stefano del Punta to give you the answer because he is in a position to Okay. Yes.
In terms of the requirement, of course, we have to wait for the final letter that we will receive in the second half of the year from the SRB. But looking at the new policy and looking also at the new legislation, We are comfortable that we will not need to issue any additional subordinated bonds to meet the MREL requirements. So we can do we are okay with the subordination we have, and we are okay also the total brand requirements. So even in the scenario where we are not issuing anything in the second half or in the first part of the year, we are absolutely okay with our own rate requirement. I don't know if this answer your question because it was not very easy to catch your question.
Yes, yes. I was referring to the amount, your best approximation in terms of in terms of which kind of ratio as a percentage of risk weighted assets you're going to be asked to have?
The best approximation is that the subordination is The request is being lower than our total capital ratio.
And the unlikely to pay mix, that was the last one.
So it's 70% secured and 30
Thank you very much.
Thank you. Your next question is coming from the line of Alberto Cordara, Bank of America Merrill Lynch. Please go ahead.
Hi, good afternoon. My first question related to excess liquidity that you have. You still have I'm looking at the file online, some €49,000,000,000 of cash and deposits with central banks. So the question is why do you have such high liquidity left in Central Bank deposits? And if there is a way you can deploy this in future quarters.
Then another question also related to commissions. Sir, I mean, you have been quite clear on why we saw some weakness in the quarter. But just getting back to one of the point you were making, if I understand correctly, The Q1 level is the trough that we expect on commission level for the year. Correct me if I'm wrong, please. And then on the another question related to cost.
We saw a pretty sharp reduction in operating cost, minus 4.5. It's something that on a pro form a basis we saw in the previous quarter. So I'm wondering whether this could approximate a run rate for the year. And finally, and getting back to a point made by a previous colleague of mine, It seems to me that you are one of the few banking group that still have a lot of staff inside, the valuable staff like an insurance business, a very successful private banking business, Asset Gathering Business, also a JV with Intrum in NPL Management. All this stuff in the market will be quite worthwhile.
So I'm just wondering whether There may not present a case where you may valorize some of these assets via listing. Thank you.
So no plan to make listing of these activities. So we want to remain as we are with very successful operational business unit. But For the time being, this is the best way to proceed. And we think that we can have a lot of value in These companies as they are, we do not need to make any capital increase through disposal of assets Looking at operational cost run rate, for sure, the correlation with people means that we can accelerate in terms of reduction on a yearly basis. On a quarterly basis, there will be for sure seasonality in the second and the last quarter.
But on a yearly basis, I can tell you that my expectation is that we can have very good performance considering the of real estate, reduction of legal entity and so reduction of administrative expenses. Looking at commissions, I can confirm you that this is for sure the minimum level of commissions and this Q1 is really the minimum level of commissions. So we can all increase. Excess liquidity, we have €80,000,000,000 medium term excess liquidity and with €49,000,000,000 Cash, it is true that the reason why we want not to replace some medium term funding. That's the clear position of maintaining extra liquidity.
In my view, now we are in excess of conservative approach. So we can reduce these extra liquidity buffer also in the next quarters. This is one of the levers that can be considered a contingency plans in case of lack of revenues for the next quarters, but we will see quarter by quarter.
Thank you.
Thank you. Your next question is coming from the line of Giovanni Razzoli from Equita. Please go ahead.
Good afternoon to everybody. Two questions on my side. You've been pretty much clear in terms of guidance in the cost of risk, which is definitely better than expected. I was wondering, looking at the divisional levels, whether we can assume some further deceleration in the cost of risk at the bank the territory level and a little bit of pickup at the international subsidiary banks level or Whether there was some one offs there, deflating a little bit at the international subsidiary level, the cost of risk that was even positive, if not mistaken, in the Q1, that's my first question. The second one, you mentioned that you had some €20,000,000 of positive impact from the The pricing in the Q1, you've been pretty much vocal in the Q3 in saying that you would have started a significant repricing actions.
I would like to know what is the state of the art there? Do you still see room in terms of contracts that you can reprice? And shall we see additional benefits, incremental benefits compared with what you have mentioned In the Q1 and the very last comment, do you see more discipline in terms of competitive behavior among your peers also in light of the renewal of the TLTRO that has been announced at the end of Q1? Thank you.
So in my view, not discipline from competitors. So that's for sure A situation that is not safe looking at the EBA conditions of the Italian Banking sectors. So this is a correlation with our ability to deliver Extra significant repricing. So our expectation is to be in a position to continue this level of repricing. To accelerate Another tranche of significant repricing, we will have to see what could be the impact of the next TLTRO on the other competitors in the market.
But I have to tell you, we will continue to maintain a strict discipline on pricing and we will continue to make repricing. But we have to consider that the attitude in the market, it is not So fair looking at pricing. The deceleration in cost of risk in Baccarat territory in comparison with last Here, for sure, they will deliver significant reduction. So that's for sure. On a quarterly basis, difficult to tell.
But on a yearly basis, there could be significant reduction. On a quarterly basis, the international subsidiary had a spike of positive recoveries and so it is likely there could be a marginal increase in provision in the next quarters. But net net, our expectation is on a yearly basis to have a reduction in provisions also in these divisions.
Thank you.
Thank you. Your next question is coming from the line of Domenica Santoro from HSBC. Please go ahead.
Hello. Hi. Thanks for the presentation. Just a couple of questions on my side. First of all, on funding, You said clearly that you don't want to replace any maturities this year.
But what about beyond 2019? I mean, the banking package hasn't been approved and all the banks will receive MRL target in the 2nd part of the year, including also the Super initial requirements. So my question is, what will happen given that your colleagues, your Spanish colleagues, for example, and other banks are interpreting The MREL in the most conservative way and they will issue mainly subordinate in order to fill up the requirement? And the second follow-up on the capital. You said before that you don't expect any headwinds, regulatory headwinds going forward filtering into the capital.
But I remember that you said In the business plan, mentioning an 80 bps negative from the EBA guidelines. I'm just wondering whether this will be offset by the LGD waiver given that the package has been also approved. Thank you very much.
So looking at the funding, I don't know if Other competitors are making a conservative approach or they need to do the approach. I have no information on competitors, but It is difficult that you play subordinated if you can play senior. So that's my expectation in case You can probably it is better to play senior than subordinated. Our position is completely different and we can do A tactical approach. Our it is not a strategic approach because it is an approach that will use during a period of what we consider excess of spread BTP bond because My expectation, the spread BTP bond is 100 basis point in excess to the fundamental of the country.
And so I have no intention to pay extra bill just for the sake of Giving extra spread to other players in the market, we can stay In a very safe position, then in 2020, it is likely that we will enter again in the market, this can happen also in the 2nd part of the year if condition can improve. So it is only a tactical approach. Sorry, on EBA guidance, we have already had 46 Basis points impact in 2018 out of the 80 basis points. During 2019, 10 basis points are already embedded in this result of Q1. And the remaining part It will be in 2020, 2021.
Thank you.
Thank you. We seem to have no further questions at this time. Mr. Messina, Please go ahead.
Thank you very much and see you in the roadshow. Thank you. Bye.