Good afternoon, ladies and gentlemen. 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. At the end of the presentation, there will be a Q&A session. To enter the queue for questions, please press star one at any time. You can cancel your request by pressing the hash key. 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. Welcome to our first quarter results conference call. This is Carlo Messina, Chief Executive, and I'm here with Stefano Del Punta, CFO, Marco Delfrate, and Andrea Tamagnini, investor relations officers. Before diving into details, let me highlight that we are very proud of the performance of the bank in the first three 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 EUR 4 billion booked last year. Q1 net income reached EUR 1 billion and 50 million, fully driven by our core operating performance. Net income comes to EUR 1.2 billion when excluding costs concerning the banking industry.
We confirm a payout ratio of 80% for this year, as stated in our business plan. We are well on track to deliver a very good cash dividend again this year. ISP and myself personally are committed to remunerating our shareholders. 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 EUR 15 billion in the past 12 months and by EUR 29 billion since September 2015 peak, at no cost to our shareholders, leading to the lowest NPL stock since 2009 and the lowest net NPL ratio since 2008. 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 2008 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. Our Common Equity Tier 1 ratios are well above 13%. Customer financial assets increased by EUR 30 billion in Q1, with a EUR 10.6 billion increase in assets under management and EUR 12 billion growth in direct customer deposits. Let me emphasize once again our managerial approach, which is and will continue to be focused on value creation and distribution, with high and sustainable dividends. 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 one. Let's now look at the key highlights for the quarter. One of the best first quarter net incomes of the past decade, 4.4% higher than one 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 first quarter NPL inflow coupled with a 24% decrease in loan loss provisions and increased NPL coverage.
1 billion NPL deleveraging in the quarter and more than EUR 15 billion on a yearly basis. Our common equity ratio is at a solid 13.5%, 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 16 impacts registered as expected in the first quarter. In a nutshell, we are firmly on track to deliver a higher net income versus 2018, and we have already achieved 64% of our four-year deleveraging target. I am 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 two. I am 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 two quarters of -1% growth. The 10-year BTP bund spread has almost doubled on a yearly basis. Slide number three. 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 than in 2018. Slide number four. During these first three months, we continued to improve across all key indicators.
In particular, Cost income down by almost 3 percentage points, loan loss provisions down 24% on a yearly basis, and the analyzed 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, and the net NPL ratio dropped to 4.1%, the lowest level since 2008. 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 five. The solid results are powered by a combination of factors that ISP management has built over time, a top-performing delivery machine focused on business plan priorities, and a business model that is both resilient and well-diversified.
We have state-of-the-art credit recovery capabilities that allow proper management of the credit originated. These capabilities, already 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 edged because our financial market activities offset the impact of market volatility on our fee-based businesses. Profits on trading more than doubled on a quarterly basis and is up 32% on a yearly basis when excluding the NTV positive impact booked in the first quarter of 2018.
As already highlighted, our sustainable profitability is also the result of a very strong capital and liquidity position. Slide number six. All stakeholders benefit from our solid performance, and shareholders are not the only ones benefiting from our strong performance. In Q1, employees received EUR 1.4 billion in salaries, and all our excess capacity of around 5,000 people is in the process of being reskilled, of which around 1,500 are already redeployed to priority projects. The public sector received EUR 0.8 billion in taxes. Households and businesses received EUR 12.5 billion in new middle- and long-term lending, of which EUR 10.5 billion 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 half a million jobs have been saved. Slide number 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. Let me comment on the most recent developments. Our EUR 5 billion circular economy credit plafond has evaluated more than 100 projects, of which 13 have been financed for EUR 300 million. We launched a partnership with Generation, a global project to reduce youth unemployment that will train and introduce 5,000 young people to the Italian labor market over the next three years, and the Romanticismo exhibit held in our Gallerie d'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 to the banking foundations that make up part of ISP shareholding also provide support to social and cultural projects. Slide number eight. As a result of these efforts, ISP has been included in the main sustainability indexes rankings, and we are the only Italian bank included in the Dow Jones Sustainability World and Europe Indexes and in the CDP Climate Change A List 2018. We are the only Italian bank listed in the 2019 Corporate Knights Global 100 Most Sustainable Corporations in the World Index. Slide number nine. On slide number nine, you can see the key highlights of our strong Q1 performance. Let me take you to page 10 and give you some color on the P&L.
Q1 performance was solid despite a challenging environment for revenues marked by low economic growth, low market interest rate, and a persistent 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 from financial assets and liabilities at fair 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 EUR 30 billion. EUR 30 billion. Also, thanks to a EUR 10.6 billion 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 1.2 billion when excluding costs concerning the banking industry, which largely consists of around EUR 150 million full-year charge for the Single 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 billion in Q1. That, 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-à-vis loan loss provisions and profit from trading, with a pre-tax neutral EVA 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, EUR 5.5 billion, and to buy back $2.1 billion of US dollar-denominated bonds. Supported by the increase in retail client current accounts in the past quarter, we will certainly not replace any of the EUR 3.5 billion senior subordinated bonds expiring in Q2. So EUR 7 billion first quarter, EUR 3.5 billion second 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 would generate a benefit of EUR 1.9 billion in net interest income. Commissions.
Despite this challenging environment, assets under management increased by EUR 10.6 billion in Q1, and we have confirmed once again our prudent approach in managing our clients' assets, with family side deposits increasing by EUR 3.4 billion over the past three months and by EUR 9.5 billion on a yearly basis. Together with the relevant stock of assets under administration, currently above EUR 172 billion, these assets will be the fuel of our wealth management engine in the coming quarters. Overall, customer financial assets increased by EUR 30 billion in Q1 to more than EUR 940 billion.
In addition, let me highlight that Penghua Fund Management in China, in which we have a 49% stake, increased the assets under management in Q1 by almost EUR 12 billion to EUR 77 billion, with a net positive inflow of more than EUR 6 billion. In March, Penghua Fund Management ranked 13th 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. 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 edge from financial market activities in case of market volatility. 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, and 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 1,300 in the first quarter, and over 3,000 additional exits by June 2020 already agreed with labor unions. ISP maintains high strategic flexibility in managing costs and remains a cost-income leader in Europe with a 50% ratio. Slide number 15. We are very proud to be a best-in-class cost-income 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 to the lowest quarterly level since 2008, coupled with the lowest ever Q1 NPL inflow.
As a result, the analyzed 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 points versus the same period last year, a level that will facilitate additional deleveraging in the future and will keep the cost of risk low. Slide number 17. Our NPL stock is declining quickly, reaching the lowest level since 2009. Gross NPL decreased by EUR 1 billion in the past quarter, by EUR 15 billion in the past 12 months, and by EUR 29 billion since the peak of September 2015. In just 15 months, we have already achieved 64% of the business plan's four-year deleveraging target. 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 EUR 0.8 billion per quarter over the next 11 quarters, totaling EUR 9 billion, which is less than half of the deleveraging we achieved in the past 14 quarters, when we deleveraged EUR 1.4 billion 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% versus seven years ago and down 23% on a yearly basis. NPL inflows are at a historical low, thanks to our proactive credit management and to the solidity of the Italian corporate sector, which is much stronger than in 2008. Slide number 20.
Our capital base is strong. We maintain a buffer of 420 basis points versus regulatory requirements. We have one of the highest capital buffers in Europe, equivalent to more than EUR 11 billion, which has been built entirely through internal capital generation with no capital increase in recent years and while having paid EUR 13.4 billion in cash dividends in the past five years. Slide number 21. When it comes to capital strength, ISP 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 with both the Liquidity Coverage Ratio and the Net Stable Funding Ratio well above 100%, with EUR 80 billion of excess medium long-term liquidity. EUR 80 billion. Slide number 23. Italian economy. I would like to share a few considerations 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 2019, in line with the Eurozone trend. Major Italian indicators are supportive. Employment is at a 15-year high and continued 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 first two months of 2019, more than in any other Eurozone country.
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 2008 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. 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 EUR 10 trillion, of which more than EUR 4 trillion are financial assets. 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.
Slide number 24. As already said, in 2019, we expect further growth in net income with a payout ratio of 80% as set out in our business plan. Slide number 25. To sum up, we are very satisfied with our Q1 performance and our delivery against the business plan targets. De-risking, we have already achieved 64% of the four-year business plan deleveraging target. Cost reduction, 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 and TRIM and IFRS 16 impact. In Q1, customer financial assets increased by EUR 30 billion, 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 first quarter 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 to deliver a higher net income versus 2018 and a very generous cash dividend. Thank you for your time and attention, and I'm now happy to answer your questions.
Thank you. Ladies and gentlemen, as a reminder, it is star and one on your telephone if you wish to ask a question. Your first question is coming from the line of Antonio Reale from Morgan Stanley. Please go ahead.
Hi, this is Antonio Reale from Morgan Stanley. Thank you for taking my questions. I've got two. One on your guidance to grow the net profit, and the second one on capital. You've reiterated your guidance to grow the net profit year-on-year from the EUR 4 billion level that you booked last year, which was also affected by some one-offs. Can you remind us of what the levers are for you to grow 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?
Please, could you remind us what other headwinds you're taking upfront this year from a regulatory perspective and next year? Thank you.
Looking at net income, I have to tell you that I'm pretty sure to deliver a net income in 2019 that will be much higher than 2018. If you look at recurrent profitability, we delivered EUR 1.2 billion. It is driven by cost reduction, loan loss provision. Let me start from cost, then I will elaborate on provision, then I will elaborate on revenue, you can have the idea of what could be our ability to deliver on our net income increase during 2019. Cost. The real secret of our ability to reduce cost is that we have been able to make a strong correlation between reduction of people and reduction of administrative expenses. 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, 1,300, we will have another 1,900 person. What we were able to do is to close branches, to reduce real estate, to reduce IT platform, to reduce the computer of the people, to reduce all the expenses that are related with people. A reduction of 10% in workforce, 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 expenses. In a nutshell, we will be able to reduce the scale of our bank, maintaining our ability to generate revenue.
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, reducing costs through negotiation of prices, but reduction of scale deriving from reduction of people. I'm really confident that on cost, we can deliver very significant performance, continuing to invest for growth. Believe me, we have significant potential for cost reduction. We can use as contingency plan.
We can use to accelerate the investment if we have very good performance in revenue, cost is the clear lever of success of Intesa Sanpaolo, is and will remain this best in practice management of cost that is our top-performing results. If you look at cost of risk, the reduction of the non-performing loan stock has been impressive from 2018. Just because you have EUR 15 billion of non-performing loans lower in 2019 compared with 2018, you have the equivalent in percentage terms in reduction of provisions. Inflows are today at a minimal 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.
This is enough due to the high quality of the Italian companies survived to the crisis of 2018 and 2011, that today are best in class, and we can continue to deliver very good performance in terms of inflow. Also on provisions, I'm pretty sure that we will have a very good performance with a significant reduction in comparison to 2018. Cost and revenues are two 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 first quarter, we had only a minimum part of the reduction in cost of funding that is related with the not replacement of the EUR 5.5 billion medium-term fundings, and the buyback of the $2 billion that we made in the first quarter. We have EUR 3.5 billion that we'll not replace in the second quarter. We are talking about EUR 100 million of net interest income that can increase during 2019 in comparison with 2018.
If you move into commissions, this is the very minimal level of commission in this quarter 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 half of 2019. There are also a part of seasonality that we will recover in the end of 2019. If you look at asset under management, we have no impact from the increase in volumes deriving from performance that we will have in the next quarters. We have billions EUR 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 move into our wealth management area.
At the same time, property and casualty business is getting momentum because we move from EUR 80 million of premium first quarter 2018 to EUR 130 million premium in the first quarter 2019, no motor, property and casualty. With a significant increase, we trained 30,000 people within the organization, and they are increasing the property and casualty business contribution to our results. My expectation is that we can continue to give very good performance of profit from trading. 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 1.2 billion is the core operating performance, EUR 140 million due to the Single Resolution Fund, in the third quarter, we will have another EUR 100 million due to Deposit Guarantee Scheme.
At the end, some seasonality, positive and negative, we will be close to my expectation also in a worst case scenario. That's our view on all the different areas. 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 billion of net income. That's the way in which we are managing the figures in Intesa Sanpaolo. We rely on a recovery commission for the next quarters, in any case, what we want is to increase efficiency, to increase quality of results, and 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, an increase of risk-weighted assets related to this increasing activity in profit from trading, and also in the volume of bonds that we increased during the quarter. Our expectation is that we can have a reduction in risk-weighted asset related to market risk in the next quarters, and we do not see any significant threats coming from other regulatory impacts. My expectation also on capital is to have and to maintain a very good position in capital. Also looking at the so-called fully phased-in, our expectation is to be in a position to have also significant benefit from Danish compromise. To realize a close relation between the fully loaded, considering the PPA, and the fully phased-in.
Thank you very much.
You have all 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 risk. On the business plan, obviously you've outlined a plan to reach the EUR 4 billion or higher than the EUR 4 billion number last year. Should the revenue sort of environment continue to disappoint, could you maybe offset that with even more cost reductions? Then the second question on cost risk, the 37 basis points this quarter is below your endpoint 40 basis points target. Do you have anything of a one-off nature this quarter, or do you see it remaining around these levels for the rest of the year? Thank you very much.
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 compare the first quarter of last year with the first quarter of this year, you go to slide of the additional information. The slide, sorry. There you are, slide. You see in any case that the cost of risk was 48 basis points in the first quarter of last year, and 37 this quarter. The impact is the clear reduction of non-performing loans. In the first quarter of 2018, you had EUR 15 billion non-performing loans in excess to the first quarter of 2019. This is mathematical. There is no one-off. It is the clear trend of reduction deriving from non-performing loans.
During the next quarter, our expectation is to continue to have good performance in terms of provision on a yearly basis. I don't want to elaborate on a quarterly basis. It is too difficult. 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 non-performing loans.
Excellent. Thank you very much.
Thank you.
Thank you. Your next question is coming from the line of Andrea Filtri 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 govies 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? Could you also provide us with an idea of the type of assets that you have purchased? 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.
The bond portfolio contribution in this quarter, the extra bond portfolio contribution, is in the range of EUR 20 million. Our expectation that could be EUR 100 million on a yearly basis. The majority of portfolio increased is govies portfolio, not only Italian, but also Spanish and France and German. Looking at financial, these are top financial players in the market. Very high-quality financials bonds of other players in the market, but top quality. 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. Our expectation is that we can have a reduction that could be significant during the second quarter due to market risk.
Thank you.
Thank you. Your next question is coming from the line of Jean-Francois Neuez from Goldman Sachs. Please go ahead.
Hello. Good afternoon. I just wanted to ask on the press release, which was issued in the course of the first quarter about a potential partnership 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 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. Whether that would have any capital impact, in your opinion.
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 in bonis. That's our main target, to move into performing. 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. That could be a timing in which we can understand if we will accelerate by ourselves or if we can enter into a partnership. We will see what kind of partnership we can create with this partner. Looking at capital impact, we will manage in such a way to have no significant impact on capital, in any case, all will be at book value.
With no impact on our strategy on net income profitability and capital. Continue to deliver all our main targets of the business plan. The point is to accelerate the reduction on non-performing 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 opportunity was such that you could have a really big portfolio sale and really put everything behind you, is there any other asset in the group that you would be looking at, as you did in the past, to offset net income potential, one-off effects?
No. We will consider only the non-performing loans portfolio. 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. That was the main strategy in having capital gain and using in order to increase coverage. This level of coverage is absolutely the right one, and also probably in excess to what we need in order to make the leveraging.
Please continue to hold. Your conference will resume shortly.
Hello. Can I continue to my answer or?
Yes, it's now on. Thank you. Carry on.
Okay. That's right. I don't know if you lost the answer on the possible disposal, 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, we do not need any other increase in coverage, 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 a 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 was the previous question. I think that's a mistake.
Thank you. We have the next question coming from the line of Ignacio Cerezo from UBS. Please go ahead.
Yeah. Hi, good afternoon. Three questions from me, if I may. The first one is detail on the secure and secure mix on the UTP portfolio, if you can give it to us. 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 the announcement and the amount. The second one, net interest income, is whether 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. A possible contribution that we had in the range of EUR 20 million increase quarter by quarter. On MREL, I didn't understand your question, I ask Stefano Del Punta to give you the answer because he is in a position to understand-
Okay. Yes. In terms of MREL 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. 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. We are okay with the subordination we have, and we are okay also on the total MREL requirements. 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 MREL requirement. I don't know if this answer your question because it was not very easy to catch your question.
Yeah. I was referring to the amount, your best approximation in terms of which kind of ratio as a percentage of risk-weighted asset you're going to be asked to have.
The best approximation is that the subordination, the request is being lower than our total capital ratio.
The unlikely to pay mix, that was the last one.
It's 70% secured and 30% unsecured, if this was your question.
Thank you very much.
Thank you.
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 EUR 49 billion of cash and deposit with central banks. 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? Another question related to commissions. You've been quite clear on why we saw some weakness in the quarter, but just getting back to one of the points 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. Another question related to cost. We saw a pretty sharp reduction in operating cost, minus 4.5%. It's something that on a pro forma basis, we saw also in the previous quarter.
I'm wondering whether this could approximate a run rate for the year. Finally, 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, 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 staff in the market would be quite worthwhile. I'm just wondering whether there may not present a case where you may valorize some of these assets via listing. Thank you.
No plan to make listing of these activities. We want to remain as we are, with very successful operational business unit. For the time being, this is the best way to proceed, and we think that we can have a lot of value in maintaining these companies as they are. We do not need to make any capital increase through disposal of assets, because our capital position is so strong that we do not need to make any kind of listing or flotation. 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.
On a yearly basis, I can tell you that my expectation is that we can have very good performance, considering the significant reduction of people and our ability to connect reduction of people, reduction of branches, reduction of real estate, reduction of legal entity, 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. We can only increase. Excess liquidity, we have EUR 80 billion medium-term excess liquidity, and with EUR 49 billion 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, we can reduce this 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, 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 Banca dei Territori 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 I'm not mistaken, in the Q1. That's my first question. The second one, you mentioned that you had some EUR 20 million of positive impact from the repricing 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. Shall we see additional benefits, incremental benefits, compared with what you have mentioned in the Q1? 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.
In my view, no discipline from competitors. That's for sure a situation that is not safe looking at the EVA conditions of the Italian banking sectors. This has a correlation with our ability to deliver extra significant repricing. 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 will be the impact of the next TLTRO on the other competitors in the market. I have to tell you, we will continue to maintain a strict discipline on pricing, and we will continue to make repricing. We have to consider that the attitude in the market is not so fair looking at pricing. The deceleration in cost of risk in Banca dei Territori in comparison with last year, for sure, they will deliver significant reduction. 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. 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 Domenico 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. What about beyond 2019? The banking package has been approved. All the banks will receive MREL targeting in the second part of the year, including also the subordination requirements. My question is, what will happen given that 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? The second follow-up on the capital, where you said before that you don't expect any regulatory headwinds going forward filtering into the capital. I remember that you said in the business plan, mentioning 80 basis points 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.
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. It is difficult that you place subordinated if you can place senior. That's my expectation in case you can, probably it is better to place senior than subordinated. Our position is completely different. We can do a tactical approach. It is not a strategic approach, because it is an approach that we will use during a period of what we consider excess of spread BTP Bund, because today, in my expectation, the spread BTP Bund is 100 basis points in excess to the fundamental of the country. 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. In 2020, it is likely that we will enter again in the market. This can happen also in the second part of the year if condition can improve. It is only a tactical approach. 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 first quarter, and the remaining part 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. See you in the roadshow. Thank you. Bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.