Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2018 full year results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Christina, and I will be your coordinator for today's conference. At the end of the presentation, there will be a Q&A session. To enter the queue for questions, please dial star one at any time. Today's conference call is being recorded. At this time, I would like to hand the call over to Mr. Carlo Messina. Sir, you may begin.
Good afternoon, ladies and gentlemen, and welcome to our 2018 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. We are very proud of the performance of the bank that continues to deliver despite an external environment that has expected. In 2018, we fully delivered all our commitments. In particular, net income increased more than 6% and stands at over EUR 4 billion, fully driven by our core operating performance. We confirmed the payout ratio of 85%, as communicated in our business plan, resulting in cash dividends of more than EUR 3.4 billion. At the same time, we further strengthened our balance sheet. In 2018, we reduced our NPL portfolio by EUR 16 billion. That is a 30% reduction, leading to the lowest net NPL stock since 2009, at no cost to our shareholders.
We recorded the lowest-ever NPL inflow, thanks to our proactive credit management and to the healthy Italian companies, which are now more profitable and better capitalized than before the 2008 crisis. We increased NPL coverage, which now stands at 54.5%, a level that will facilitate additional deleveraging in the future. Our capital position continues to be rock solid. Common Equity Tier 1 ratio increased further, and they are well above 13%. Let me emphasize once again our managerial approach, which is and will continue to be focused on value creation and distribution for our shareholders with high and sustainable dividends. First of all, we have demonstrated that we are strongly committed and able to fully deliver on our promises, activating all the available managerial levers, including, if needed, contingency plans.
On top of that, when we can count on extraordinary gains, we use them to strengthen our balance sheet by increasing NPL coverage and other conservative buffers. While delivering all our commitments, we have been conservative in 2018, so that we enter into 2019 as a stronger bank. We confirm our business plan targets, also thanks to our very resilient and well-diversified business model, and we expect net income to grow further, and a payout ratio of 80% in 2019. Let's now go to the presentation, and at the end, I would be glad to take your questions. Slide number one. Let's now look at the key highlights for 2018. This is the best net income of the past decade. More than EUR 3.4 billion cash dividends, equal to a dividend yield of 10%.
Operating costs down 3.6%, highlighting our strategic flexibility and dynamic cost management, leading to 4.8% growth in operating margin. Cost income down to 53%, among the best in Europe. We have deleveraged EUR 28 billion of NPLs since the peak of September 2015. That means an almost 50% reduction, of which around EUR 2 billion in Q4. In one year, we have already achieved more than 60% of our full-year business plan deleveraging target, while at the same time further increasing NPL coverage by 3.4 percentage points. Common Equity ratio is up to 13.6%. In addition, actions to deliver on the three pillars of our business plan, derisking, cost reduction, and revenue growth, are up and running and delivering good results. I'm very proud of these results, and as always, I want to thank all of Intesa Sanpaolo people in Italy and abroad for their hard work. Slide number two.
I'm even prouder of our results since they were achieved in a challenging operating environment. Italian GDP grew at 0.8% in 2018 compared to 1.6% in 2017. Market volatility was significantly higher in 2018 than the previous year, with negative stock and bond market performance. The 10-year BTP bund spread has widened since the end of March. Slide number three. Despite this challenging external context, we fully delivered all our commitments for 2018, and let me add, as usual. We registered 6% growth in net income, driven by 5% growth in operating margin, thanks to resilient operating income and strong cost management, 28% decrease in loan loss provisions, triggering further growth in gross income up 11%. As a result, we will pay a dividend yield of 10%, outperforming all our European peers. Slide number four.
We have been able to achieve five consecutive years of growth in net income, delivering the best net income of the past decade, and in 2019, we will grow again. Slide number five. In addition, in 2018, we significantly strengthened our balance sheet. In particular, NPL stock has decreased by almost 50% since the peak in September 2015, with the net NPL ratio declining to around 4%, the lowest level since 2008. We are already close to the EBA target. The reduction in NPL stock has been coupled with a 7.5% percentage point increase in NPL coverage since September 2015, of which almost half in 2018. Our already strong capital position further improved with a fully loaded Common Equity Tier 1 ratio at 13.6%, around 430 basis points above regulatory requirements, and our capital buffer is 170 basis points above the average of our peers.
This capital buffer already includes around 30 basis points of negative impact deriving from the sovereign bond spread widening since the end of March 2018. Slide number six. These excellent results are powered by a combination of factors that ISP management has built over time, a top-performing delivery machine that focuses on business plan priorities and a business model that is both resilient and well-diversified. We have state-of-the-art credit recovery capabilities that allow proper management of the credit originated. These capabilities, so far successfully applied to our bad loans, are now focused on the unlikely-to-pay portfolio, which will constitute the priority for 2019. We enjoy strategic flexibility in managing costs, and 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 helped because our financial market activity offset the impact of market volatility on our fee-based business. As said many times, our sustainable profitability is also the result of a strong capital and liquidity position. Slide number seven, and I'm very proud of this slide.
While further strengthening capital well above the business plan forecast for 2021, in 2018, we delivered EUR 0.20 cash dividend per share. Rewarding shareholders with high and sustainable dividend is and will remain my personal priority and the priority of all ISP management team. Slide number eight. Shareholders are not the only ones benefiting from our strong performance. In 2018, employees received EUR 5.8 billion in salaries, and all our excess capacity of around 5,000 people is in the process of being reskilled, of which 1,000 are already redeployed to priority projects. The public sector received EUR 2.5 billion in taxes.
Households and businesses received around EUR 60 billion in new medium long-term lending, of which around EUR 50 billion in Italy, in line with 2017. In addition, over the same period, we helped 20,000 companies to get back on track, thus preserving around 1,000 jobs. If we consider our social impact since 2014, the total number of companies helped has been above 93,000, and more than 450,000 jobs have been saved. This means that we helped more than 1 million people avoid the distress of economic uncertainty. We are not only a leader in supporting the real economy, but also the social economy. On the next slide, I will give you a sense of what Intesa Sanpaolo does to support Italian society and promote culture. Slide number nine.
As set out in our business plan, Intesa Sanpaolo is committed to becoming a global reference for social and cultural responsibility. This was underlined by the success of our recent Social Day. In this slide, you can see just a few example of our impact on Italian society during the past year, and let me comment on the most recent developments. In addition to our Fund for Impact, we recently launched per Merito, the first line of credit without collateral dedicated to all Italian university students. This support is already provided in other European countries by the public sectors or financial institution with low default rates. ISP is proud to be the pioneer in Italy. We have launched a partnership with Generation, a global project to reduce youth unemployment, aimed at training and introducing 5,000 young people to Italian labor market over the next three years.
Simply put, 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's shareholding, are also provide support to social and cultural projects. In fact, these foundations donated more than half of the total donated by all Italian banking foundations. Slide number ten. As a result of these efforts, ISP has been recognized in the main sustainability indexes and rankings. We are the only Italian bank listed in the Dow Jones World Europe Sustainability Indices, and in the CDP Climate Change A List 2018. We are the only Italian bank listed in 2019 Global 100 Most Sustainable Corporations in the World Index by Corporate Knights. Slide eleven. On slide eleven, you can see the key highlights of our strong performance in 2018.
Since I've already covered the main topics, let me take you to slide 13 and give you some color on the P&L. Slide 13. Despite a challenging environment in 2018 for revenues marked by lower economic growth, higher market volatility, and a widened sovereign bond spread, we delivered solid performance and strengthened buffers. Operating income was up 0.2% despite the decline in net interest income due to financial components, including the strong NPL reduction, and in commissions affected by negative market performance and high volatility. Insurance income saw 16% growth versus 2017, benefiting from the property and casualty business growth of more than 30% year-over-year. Operating margin was up 5%, thanks to the impressive decrease in operating costs, down by 4%. Our loan loss provisions went down by almost 28% on an annual basis, while coverage increased.
Gross income was up 11%, and net income was up more than 6% at over EUR 4 billion. Slide 14. Our performance in Q4 was also solid, with net income for the quarter above EUR 1 billion, aligned with our full year commitment and up almost 25% versus Q3, demonstrating once again ISP capability to deliver even in a challenging environment. As already mentioned, in Q4, also in light of the interim capital gain, we have been very conservative with respect to the loan loss provisions, considering the NPL portfolio reduction and the lowest ever NPL inflow. We also strengthened buffers, for example, by booking the full impairment on the Carige subordinated bond. Slide 15. A lot of interest on net interest income from the market.
In this slide, you can see that on a quarterly basis, the net interest income decrease is mainly due to the reimbursement of an acquisition financing loan in September 2018, that we are replacing with other loans, affecting the quarterly contribution on the commercial component. Non-commercial components, largely due to the accelerated NPL deleveraging and the dynamic management of our trading portfolio. Both these actions had a neutral impact on pre-tax income, considering they improve loan loss provision and profits from trading, respectively. Let me now focus on the yearly result. In 2018, the commercial component increased by around EUR 350 million, almost hedging the negative impact from the financial components.
In 2019, we will continue to work hard to further boost the commercial component, while we continue to manage, in an integrated manner, our financial component vis-à-vis loan loss provision and profits from trading, with a pre-tax neutral EVA positive strategy. Let me also highlight that ISP net interest income is highly sensitive to an interest rate rise. Indeed, an increase of 100 basis points would generate a benefit of EUR 1.8 billion in net interest income. Slide 16. In 2018, all our divisions made a positive contribution to group results. Half of our gross income comes from the wealth management and protection businesses, making Intesa Sanpaolo a clear European leader in wealth management, but with a natural edge from financial market activities in case of market volatility.
Despite a challenging environment, we were able to collect more than EUR 8 billion of net new assets under management in 2018, partially offsetting the negative impact of market performance. On top of that, we were able to increase family side deposits by EUR 11 billion, together with a significant stock of assets under administration, currently at EUR 165 billion. These assets will be the fuel for our wealth management engine in the coming quarter. Slide 17. We continue to be very effective at managing costs. We are extremely proud of the strong reduction achieved in 2018. Operating costs went down by 3.6% on a yearly basis, while we invested significantly for growth in key areas such as training, IT, property and casualty, and wealth management, with an overall reduction in depreciation due to the ongoing rationalization of the real estate portfolio.
We reduced head count by 4,900 in 2018, including the interim agreement, with over 4,000 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 53% ratio. Slide 18. As you can see in this slide, loan loss provisions declined to the lowest level since 2007, while we significantly increased our coverage level. As a result, cost of risk is now down to 61 basis points from 81 in 2017, well on track to deliver on our business plan targets of 41 basis points by 2021. Our NPL coverage ratio increased by 3.4 percentage points in 2018, of which 0.9 percentage points in Q4, and stands at 54.5%, a level that will further facilitate additional deleveraging in the future. Slide 20.
Gross NPL stock decreased by almost EUR 16 billion in 2018, of which EUR 2 billion in Q4, reaching the lowest level since 2010. Our Q4 performance represents the 13th consecutive quarter of NPL reduction. Net NPL stock reached the lowest level since 2009, down more 50% since the peak of September 2015. In this year, we have already achieved over 60% of the leveraging target of the four-year business plan. As already mentioned, ISP has been able to deliver this impressive deleveraging at no cost to shareholders. Slide 21. As you can see in this slide, in order to reach our target for 2021, we need to reduce the NPL stock by around EUR 10 billion over the next 12 quarters, which is EUR 8 billion less than EUR 18 billion we have already deleveraged in the past 13 quarters, excluding interim, when the coverage was far lower.
We can safely claim that we are ahead of schedule in delivering our NPL plan. We expect to achieve our target earlier than announced. Slide 22. NPL inflows are at a historical low, thanks to our proactive credit management and to the strength of the Italian corporate sector, which is now much healthier than in 2008. In Q4, gross inflow decreased by 43% year-on-year. Net inflow was at around zero. Slide 23. Our strong capital base improved further in 2018. We maintain a buffer of 430 basis points versus regulatory requirements, well above our peer. This capital buffer already includes the negative impact of around 30 basis points from the sovereign bond spread widening since the end of March 2018. Finally, let me highlight that we have launched the process for the recognition of the Danish Compromise. Slide 24.
When it comes to capital strength, ISP continues to be a market leader in Europe and was a clear winner of the EBA's stress test. We have one of the highest capital buffers in Europe, equivalent to around EUR 12 billion. In addition, we continue to apply a deliberate strategy of low leverage with a leverage ratio of 6.3%, which is among the best in Europe. Slide 25. We have a best-in-class risk profile in terms of capital on illiquid assets, by which I'm referring to net NPL, level 2, level 3, and net repossessed assets. The following pages highlight the main business plan actions that are all up and running thanks to the contribution of our people. In the interest of time, I will spend just a few minutes to give you an update only on the projects related to our property and casualty insurance business.
Let's move to slide 29. Property and casualty insurance recorded strong performance in 2018. Revenues stands at EUR 255 million, up 18% on a yearly basis. Combined ratio is 73%, 20 percentage points lower than the Italian market average. These results have been achieved through a strong focus on the non-motor offer, with penetration of the ISP client base up to 7.7% and gross written premiums in home and health segments almost doubling versus 2017. The introduction of around 220 property and casualty specialists in the branches and dedicated trainings with 30,000 employees who obtained the license to sell property and casualty products from the Italian Insurance Authority. All ISP branches rebranded as Banca Assicurazione. We have just started, and we have a huge potential in this business going forward. Slide number 33. Before I conclude, I would like to share a few considerations regarding the Italian economy.
Despite a challenging environment with an expected slowdown, like in all Europe, Italy's fundamentals continue to be strong. Italian companies are now more solid, more profitable, and better capitalized than before the 2008 crisis and well-positioned overall to cope with a domestic economic slowdown. Export-oriented companies, highly diversified in terms of industry and size, have become international trade powerhouses over the past few years, and domestic-oriented companies will benefit from resilient consumption driven by the Italian government's expansionary fiscal policy.
The wealth of Italian households stands above EUR 10 trillion, of which more than EUR 4 trillion are financial assets, and the level of debt held by Italian families is 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. Italian GDP is projected to grow by 0.6% in 2019 and 0.9% in 2020.
This may not seem like high growth, but it is in line with Italy's past trend. Intesa Sanpaolo has always delivered very solid results, even in a slow-growth environment. Slide 34. We have a positive outlook for 2019. Also thanks to expected growth in loan volume, repricing, and lower cost of funding. Switch from assets under administration, current accounts, and expiring time deposits to assets under management, and further growth in the property and casualty insurance business. This revenue increase, coupled with continued cost reduction, will drive operating margin growth. In addition, we expect a further decrease in the cost of risk compared to 2018. As a result, we expect further growth in net income. Finally, the payout ratio for 2019 will be 80%, as set out in our business plan. Slide 35.
To sum up, we are very satisfied with our performance in 2018 and our delivery against the business plan targets. Derisking, number one, we have already achieved more than 60% of the business plan deleveraging target. Cost reduction, number two, operating costs are down 3.6% while still investing for growth. Number three, revenue growth. Operating income was in line with 2017, despite a challenging environment. We have reinforced even further our already solid capital position and our buffers, and we have successfully passed the stress test. Finally, we have remunerated our shareholders with cash dividends of more than EUR 3.4 billion, one percentage point higher than last year. All in all, we delivered strong performance in 2018 and maintain a positive outlook for 2019, thanks to the contribution of all our people in Italy and abroad.
Thank you for your time and attention. Now I'm happy to answer your questions.
Thank you. Ladies and gentlemen, we will now begin the question answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Azzurra Guelfi from Citi. Please go ahead.
Hi, good morning. I have two question. One is on the NII, and one is on capital and dividend. On NII, this disappointment seems to come mostly on the financial side because the other two were more something that the market was aware of. Can you explain to us what has been the main driver for this internal composition of the financial asset, and how this will affect 2019? The other component on the NII is the funding cost, which, if I understand well, you expect this to improve in 2019. Why do you expect so, and also how do you square it with the fact that deposit decrease quarter-on-quarter, not just on the repo market, but also on the other component?
The second question is, probably you're not going to answer this, but I'm going to ask you anyway, the capital position of the group is solid. There is a bit of regulatory uncertainty about NPLs and some trend in the liquidity asset still. Let's fast-forward to 12 months, and assume for a second, I'm not saying it will happen, but assume for a second that the net profit will not grow year-on-year. Would you still be happy to propose a dividend that is flat, meaning compromise on the payout ratio? Or is it too much of a stretch, assuming that you still have a very solid capital position? Thank you.
It should be the first time that I will not deliver on a promises. It is something that I cannot accept also theoretically. Please, Azzurra, let me continue to say that I'm pretty sure that we will increase our net income, and we can pay an 80% payout ratio on the increased net income in 2019. Let me elaborate on net interest income, because I know that is something probably not expected by the market, especially in the financial components. I will also elaborate on 2019 outlook on net interest income. I will give a clear view on what is our expectation on net interest income. Starting from On deposits, sorry, the reduction in deposits is mainly repos, also institutional clients and corporate clients. We are not following increasing deposits.
We care about retail deposits and not institutional corporate clients, because what we consider strategic is to be in a position to work for increasing commissions and wealth management in 2019. Looking at the position of 2018, you know that my focus is to deliver on promises, and my promises was a clear net income growth and to pay 85% dividend payout ratio in 2018. We reached the target of this dividend commitment. We decided to take some positive rooms also for 2019. The reason why we decided to make the full devaluation of the subordinated bond with Carige. We decided also to look in a very conservative way also our net interest margin.
The financial component is mainly related not to government bond portfolio, but to non-performing loans, and especially the area of interest margin related to the Intrum transaction in which we made all the analysis, the final analysis in November, allocating to the provisions and net interest income, the right conservative approach that we decided to take in order to be sure not to have other impact during 2019. There is EUR 30 million in this EUR 70 million that is related to non-performing loans acceleration in reduction. We accelerated in our reduction on non-performing loans in the last semester, and this resulted into a reduction of net interest margin that is much higher than expectation, but it's also much higher the reduction in non-performing loans. At the same time, we had a significant reduction in provision related to this area of reduction on non-performing loans.
At the same time, we made another EUR 20 million of conservative approach in analysis of the non-performing loans reduction that can have an impact in 2019. The remaining EUR 20 million is related to the government portfolio because we continue to make disposal and increasing profit from tradings. To give you the view on 2019. I consider 2018 there, because we delivered what I consider strategic, that is Net Income, reinforcing the quality and sustainability of results. Reinforcing, strengthening our balance sheets, not delivering Net Income and dividend at expenses of lower quality for the future results. For 2019, our expectation is to have a significant rebound in Net Interest Income. First of all, due to financial components related to government bond portfolio.
We increased our portfolio starting from the last quarter, December and January, we increased our portfolio by more than EUR 10 billion of govies that we are now holding in our portfolio. We are in a position of having EUR 80 billion of Net Stable Funding Ratio excess in terms of medium long-term funding. We will not make the renewal of at least EUR 8 billion, between EUR 8 billion and EUR 10 billion of medium-term funding expiring during 2019. Due to the fact that this funding has a cost embedded of 2.5%, we will have significant reduction of cost of funding during 2019. We have expectation, and we already are increasing our loan book, especially in Corporate Investment Banking division, mainly with international clients. We expect an increase in Net Interest Income coming from volume, mainly in Corporate Investment Banking divisions.
On aging, we do not expect to have negative impact and probably some positive impact. We will have a reduction in contribution coming from an acceleration in the reduction of non-performing loans we will deliver during 2019. Net-net, our expectation is that on a yearly basis, we can easily increase Net Interest Income. I'm not talking about on a quarterly basis in comparison with last year, but quarter by quarter, we will deliver increase in Net Interest Income. That will be our priority and is priority also of the ISP management team, because we closed the budget, including this assumption, and it is the commitment of all the Intesa Sanpaolo organization. I hope that you get happy with the answer.
Thank you. We will now take our next question, and it comes from the line of Delphine Lee from JPMorgan Chase & Co. Please go ahead.
Yes, thank you for taking my questions. First of all, I just wanted to ask about capital, just a very quick one around the decline of 10 basis points quarter-over-quarter. It looks like you have slightly higher DTA deductions. I just wanted to understand the moving parts and if there has been any changes related to the new proposals from the government around the DTAs on IFRS 9 or any comment that you could provide to just understand a little bit the impact and the trends. The second question is on the regulatory impacts which are coming. I guess you still have the bulk of the EBA guidelines, if that hasn't changed. Also, if you have any comments around anything around TRIM or IFRS 16, anything that we should be aware of. Thank you very much.
10 basis points reduction in Common Equity is net-net, apart from a lot of mixed impact, but it is net-net impact of the Intrum transaction. You have to consider that I think that it is really something unbelievable that we delivered such a significant reduction with only 10 basis points impact on our capital structure. The main driver of reduction is the need to increase the risk-weighted assets related to this transaction. It's 10 basis points net impact coming from the Intrum transaction. Looking at the future, on TRIM and IFRS 16, we expect very limited impact. We are talking about less than 10 basis points for each item. Not something that can change our capital position in any way.
I do not expect to have any significant impact during the next years, and I can easily confirm that we will exceed 13% Common Equity, fully loaded capital, also in the next years.
The EBA guideline is still coming in, I guess, sometime in 2019. The bulk of the 80 basis points as well?
Yes, I can confirm that this could be the total amount. Consider a portion that we have already embedded in 2018 figures, a portion that we will have in 2019, and the portion in 2020, but no more than this, and that's absolutely manageable, remaining above 13% common equity.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Adrian Cighi from RBC Royal Bank of Canada. Please ask your question.
Hi there. Thank you very much for your presentation. I have several questions I will ask two, one on NII and one on fee income. Just to clarify on NII, do you expect the further UTP deleveraging to cause headwinds to NII into 2019? Does your outlook assume a TLTRO renewal, or do you assume a sort of different base case scenario? On fee income. Fee income from investment management declined some 5% year-on-year, despite inflows of EUR 8 billion in AUM. Can you give us any indication of how much of the fees this year were due to upfront fees, and how you see fee income developing into 2019, if inflows, say, remain at full year 2018 levels? Thank you very much.
Starting from fee income, our expectation is that we can grow in terms of fee income in 2019. Our expectation is to have a net inflow that can exceed, in a significant way, the net inflow that we had in 2018, because we have a significant amount of asset under administration, and time deposits, and retail deposits expiring, retail bonds expiring during 2019. My management team is working with the list of clients in order to start with the usual work that they used to do with our clients. What is strategic is that the spread BTP bond can remain more or less at this level. In this condition, I think that we can achieve an increase in fee and commission.
We have also another boost coming from corporate investment banking business, because we have a number of deals embedded in their work, and this can provide also for increase in fee and commissions in 2019. Looking at net interest income, our expectation during 2019 is to have an increase with a marginal decrease due to reduction of unlikely to pay that we realized in the last quarter of this year, and that we will realize during 2019. That is for sure there will be a negative coming from unlikely to pay, but not in such a dimension to change the speed and the growth of the total amount of net interest income.
Thank you very much. Very helpful.
Thank you.
Thank you. Your next question comes from the line of Jean-Francois Neuez from Goldman Sachs Group, Inc. Please go ahead.
Hi, good afternoon. I just wanted to ask firstly on the outlook statement with regards to loan losses for lower loan loss provisions. Obviously the NPLs fell very sharply throughout 2018, I just wanted to know whether you'd have a sense as to what level you could already achieve in 2019, in particular compared to the business plan target. As per the previous quarters, you've shown a strong decline in the line of expenses, 5% year-over-year. I wanted to try to understand whether you think that will give you headroom to meet or beat the cost target with regards to the 2021 target, or whether it's only getting to that level of the future faster than was maybe expected in the first place. Thank you very much.
Looking at the expenses, I can tell you that we think to easily beat the target in 2021. We are working in order to accelerate the program of cost reduction, I have to tell you that we think that we can exceed the target in 2021. We will continue to work in this area, accelerating reduction, but at the same time investing on strategic projects. On NPL, cost of risk will decline by definition, because if you split in two parts, the component of the cost of risk, you have one that is related with the stock and the other one that is related with inflow, with the flow. The part of the stock will move. The starting point is EUR 16 billion lower than 2018. By definition, we will have a significant amount of provision related to EUR 16 billion that we will not consider in 2019.
Looking to inflow, I have to tell you that we have no evidence of any kind of deterioration in the quality of credit of the Italian companies. That, as I told in my presentation, we continue to see very strong. The work that companies made during this year has been really fantastic, and they made an extraordinary job increasing their net equity, increasing the medium long-term funding, so they are really resilient. The portion of performing loans in our expectation is safe and sound with no significant threats from the external conditions. My expectation is for sure to have a very good performance in terms of cost risk during 2019, and also during the next years, and hopefully, beating also the targets in the plan.
Would you be willing to share a level for 2019, or is it maybe too early?
No. It's the only part that I want to share because I want to surprise positively the market. Let me just one part in which I can surprise in a positive way.
Thank you very much.
Thank you.
Bye-bye.
Thank you. Your next question comes from the line of Christian Carrese from Intermonte. Please go ahead. Your line is open.
Yes. Good afternoon. You show a very good improvement in terms of NPLs. You are saying that you are going to be the 2021 target in terms of gross NP ratio, but you are not revising the target. I would like to know if you can share with us if there is any change in SSM approach on NPs, after some speculation on the new SREP targets and the new focus on NP reduction. This is the first question. The second question is on fees. You said that there was some market volatility in 2018, you think that the environment could improve maybe in the second part of the year? If you can share with us your budget on fees. Thank you.
On fees, I can just repeat that we think that there could be a clear stabilization in the market conditions. In this stabilization, we can take advantage from a lot of expiring money in the hands of our clients, and it is possible to move this money into mainly insurance product and asset under management product. Having said that, our expectation is that this can increase the total amount year-over-year. If you compare in the first and second quarter of last year, we made the best first second quarter ever. It is clear that I'm talking about quarter by quarter. If you compare with last year, you have to wait until the third quarter to have the change in sign in terms of possible growth in revenues. What I consider strategic is to work on net income.
Having said that, I think that net income can really give us very good results in 2019. On non-performing loans, we think that it is absolutely possible to anticipate our target in 2020. Our expectation, and my expectation, is that I can deliver the target of 2021 in 2020. That's what I'm really working on. It is not related with any kind of pressure coming from the ECB, because ECB is making their job. The job is to try to have a safe and sound environment. The possible recommendation is something that will not have any kind of impact on economic figures, can have impact on ICAAP. It is likely on ICAAP. There could be some negotiation in order to make analysis if to have impact on common equity.
Due to our strong capital position, it is absolutely not significant, the impact that we can have from this possible new approach on calendar provisioning on the stock. I'm not worried at all.
Thank you.
Thank you. Your next question comes from Giovanni Razzoli from EQUITA. Please go ahead.
Good afternoon to everybody. Sorry to bother you with a question on NII again. I think in Q4 that you had the EUR 25 million of positive impact from spreads, which I assume is mostly related to the repricing action that you've mentioned that have been enacted since the Q3. Can you update us with what are the in progress of these actions? Can we annualize this figure going forward, and what is the market reaction to this? I would have expected that as a part of at the end of the year, the competitive behavior of your peers has become more rational. Is it the case? This is my first question. The second one, can you share with us what's your position in terms of MREL? Are you in a position of surplus or deficit?
If you can share with us briefly, on the funding plan, you've mentioned that you plan not to roll EUR 8 billion-EUR 10 billion of medium- and long-term loans. What kind of instruments are you expecting to issue in 2019? Thank you.
For the first part of 2019, we will not issue medium-term wholesale bonds. That's our view. At a spread of 250 basis points, having EUR 80 billion of excess medium long-term funding in excess of medium long-term lending, I have no intention to tap the market. That will bring us to have a significant reduction in terms of cost of funding. Due to our significant medium-term funding position, our MREL is in surplus, so we do not see any kind of threats looking to MREL. In Net Interest Income, our expectation is to deliver other repricing and a minimum level of 20 basis points on an average of EUR 50 billion is something that we consider achievable also in 2019. Other competitors are moving into a repricing mode, but it is difficult for me to tell you what is the final position.
Our expectation is that minimum, we can deliver an extra 20 basis points for 2019.
Thank you.
Thank you. Your next question comes from the line of Alberto Cordara from Bank of America Corporation
Hi, good afternoon. I understood correctly that the 2019 NII can easily beat the 2018. I just wanted to ask you the question again because I think this is an important point. Connected to that, my second question is, if you created some additional buffers in Q4, why you are so confident that 2019 results are going to be better than 2018? Another issue, my third question is related to NPE flows. I'm looking at the slide where you show the NPE flows, and actually, I note that this is the best quarter of the year with very low gross inflows and quite extraordinarily, zero net inflows. We know that Q4 has been a tough quarter on business confidence. In Italy, we had high sovereign spreads.
Can you please help me to understand a bit why that was a good quarter, such a good quarter in terms of NPE flows? Is it something specific to Intesa, or maybe Italian companies are more resilient than in the past? I don't know. Then also regarding cost cutting, we saw quite a significant drop in cost on a pro forma basis. This is the first year of the plan. This is a year where probably you made some investment to push new lines of business and whatnot. Shall I expect that the next year drop in cost could be even higher than what we have seen this year? Thank you.
Starting from net interest income, I can confirm that my expectation is to have a net interest income in 2019 that could be much higher than the one that we had in 2018. That's our expectation. A main driver will be reduction in cost of funding, increase in volume, increase in spread, increase in government bond portfolio, and increase in hedging and reduction in contribution from unlikely to pay. That's the main driver. At the end, net this will bring us to a positive, and in my expectation, extremely positive contribution for 2019. NPE flows, for sure that's a company specific trend because we are very good in making active credit management, but it is also something related to the Italian system.
That is why I think that is really too much negative, the perception of what can happen in Italy with a slowdown, because companies are in a completely different shape compared to 2018. If you compare 2018 with 2017, we had a reduction in turnover in the companies by 5%. The number of companies reduced by 20%, but at the same time, the remaining part of this company is now stronger with an equity component that, if you look at SMEs and medium company, equity represent 35% of total liabilities in comparison versus 27%, that was the composition of equity in 2008. A significant increase in the equity component. If you look at the medium long-term funding for these companies, SMEs and medium companies, in 2008, the composition, the mix was 20% in the total amount of financial debt. Today is 35% medium long-term funding.
This means that these companies are no more exposed to possible financial crisis. They can be exposed at operative negative conditions. They can have reduction in revenues if you have reduction in demands, but without any kind of threats looking financial conditions. This means that if you have a slowdown, this will not be at all a significant negative impact on companies in Italy, and that the reason why the inflows are coming at so very low level in the country. That's a point that will reinforce the outlook of a reduction in cost of risk, also in a condition of slowdown in our real economy. Looking at cost-cutting, we are investing in a lot of strategic areas, digital, property, and casualty insurance. We are investing in China. We are investing in a lot of areas of potential growth.
We will continue to invest in 2019, but at the same time, we have already embedded the number of reduction that are related with the reduction of number of people already agreed. 3,000 on average, a reduction in 2019, and also reduction of branches will reduce 450 in 2018, and we will have the full impact in 2019. We will reduce in 2019 another 250 branches. We are continuing to reduce consultancies expenses, IT system expenses, real estate expenses. Our expectation is to be in a position to continue to deliver on cost-cutting, both as a strategic driver or a contingency plan in case of need. We think that we can have really strategic flexibility in cost management.
Sorry if I ask you an additional question related to NII. This guidance that you're given, does it include any particular level of EURIBOR? Or put it differently, if the EURIBOR stay at current level, you still believe that 2019 can beat 2018?
Yes, absolutely. In this approach, in my opinion, we are conservative because we are betting on a possible slight increase of 15 basis points, but in the last month of 2019. In reality, looking at 2020. This assumption is absolutely with no benefit coming from increasing EURIBOR.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Andrea Filtri from Mediobanca. Please go ahead.
Good afternoon. If I go back to the business plan, I recall you included 90 basis points of negative regulatory impacts to CET1 from loss given default, EBA guidelines. Could you please update us on those 90 basis points in light of the Intrum transaction and your indications on IFRS 16 and TRIM previously? Do you stand by those 90 basis points, or they go up, or they go down? Second question regards provisions. You've given a very confident message on the outlook for provisions and on the strength of the Italian corporates. Yet the market is in the dark on the actual mechanical impact from macro deterioration under the new IFRS 9 regime. Could you give us any idea of a theoretical impact to P&L and cost of risk from a 1% GDP deterioration?
How large and increasing provisions would happen, and when it would happen in the P&L of the bank. Finally, are you planning any additional meaningful asset disposals in the coming years? Thank you.
Looking at the EBA guidance, I can tell you that the split between the impact in 2018, 2019, and 2020, I can confirm 90 basis points, out of which probably roughly 50% of these 90 basis points we have already accounted in 2018. We remain with a very low, limited amount to be split between 2019 and 2020. Looking at the IFRS 9 cost of risk reduction of 1% in the GDP, I have to tell you that due to the financial conditions of the companies in our country, our expectation is that if you reduce 1% GDP in 2019, maintaining a very low negative GDP in 2019 as a stress test scenario, the impact is not significant on our provision.
The quality of our portfolio and the rating embedded in the area of corporate clients is so good that our expectation is not to have significant impact coming from 1% reduction in GDP. Sorry, the last question, I forget the last one. A disposal, this is something that I will maintain in the pocket and make no disclosure to the market.
Thank you. We will now take our next question. This comes from the line of Domenico Santoro from HSBC. Please go ahead.
Hi, good afternoon. Thanks for giving us all this visibility on the NII. Just a couple of comments left, if I may. First of all, just to help us to model the NII going forward, I was just wondering whether you can give us the contribution from UTP and the time reversal also non-performing loans on your NII in Q4. A question on the marginal rate that you at this moment pay on your excess reserve, which is deposit back to the ECB. I was just wondering whether this is now at this point accrued in your NII, and whether the introduction of the two-tier system or reduction in marginal rate will have a positive impact on your NII. To come back to the question of Andrea on IFRS 9.
Sorry to come back on this, for us, it's really obscure the way it can work, especially in the first year, if there is an increase in stage 2 loans, and stage 3, the same that we have seen in the stress test. Was just wondering the below 60 basis points, on which level of GDP growth is estimated for 2019. Thank you.
Sorry, what is the level of GDP that we estimate for 2019, or the level that can have an impact for IFRS 9?
The level of GDP, which is implied in your guidance for 2019.
In the guidance for 2019 is 0.6%. Also if you reduce this GDP, going to a negative GDP, we will not have significant impact on our provisions. That's the results of our sensitivity. I cannot elaborate on theoretical IFRS 9. I can talk about reality of Intesa Sanpaolo. If you want to make what-if analysis, you can do in theory. I can tell you what we have, our sensitivity will bring us not to have significant impact on provision. Looking at the amount we have deposited with ECB, we have EUR 40 billion, so we have negative interest on this amount. Reducing the recourse on the medium-term facility, we can also reduce this excess reserve and have positive impact.
On net interest margin, I think that I give you enough disclosure, and now I will not take any kind of other question on net interest income. Allow me to be in a position to tell you stop with question on net interest income. Thank you very much.
Okay. Thank you.
Thank you. Your next question comes from the line of Andrea Vercellone from Exane. Please go ahead.
Good afternoon. I've got three questions. The first one is on the Danish Compromise. In the press release, you indicate a benefit of 50 basis points deriving from the Danish Compromise. This is calculated on the fully loaded core Tier 1, excluding IFRS 9 first-time adoption transitioning period, in a different way from the way you report it in the presentation. Can you give us an idea whether this 50 basis points would be a similar number also in the way you reported in your presentations, or it's a different number? I imagine could be slightly lower, but I'd just like you to comment on that. The second question is related to the calendar provisioning. Are you willing to provide any disclosure on your non-performing loans? By disclosure, I mean the split between secured and unsecured, and ideally some idea on vintages.
The third question relates to your outlook, where you indicate revenues are going to go up, costs are going to go down, provisions are going to go down, and ultimately, the net income in 2019 will be higher than in 2018. However, 2018 included a significant number of positive one-offs, only partially offset by a number of negative one-offs. The net was somewhere around EUR 600 million positive of my calculation. Obviously you will not speculate as to possible capital gains that you may or may not make in the future. All the commentaries you're making on the operating performance of the bank in 2019, are you implying that the bulk of these sizable, in my opinion, positive one-offs that you booked in 2018 can be significantly reduced or not significantly reduced?
You use a very complex way of giving the position that our results are mainly driven by extraordinary results. I have to tell you that we increased the coverage for an amount that is 3.4 percentage points in our non-performing loans. This is due to the fact that we had enough room in order to increase the coverage of our non-performing loans, we made a devaluation of the subordinated debt of Carige, we take also other conservative stance on our figures. Believe me, the operative condition are close to the total, excluding the extraordinary items. I don't need any kind of extraordinary to deliver a net income exceeding in 2019 the 2018 results. Looking at calendar provisioning, the majority of our non-performing loans is deriving from the negative conditions starting from 2013, 2014.
Our vintage is in good shape from our side, and the secured part is between 70% and 80%. That's the total condition of our portfolio. Looking at Danish Compromise on the fully loaded, on 13.6%, the impact is zero. The impact of 50 basis point is related to the figures that I have to disclose due to the IFRS 9 impact on the capital. With deduction of the DTA, in that case, with any compromise, we will have a benefit of 50 basis points.
Thank you very much.
Thank you. Your next question comes from the line of Hugo Cruz from KBW. Please go ahead.
Apologies, I don't have any further questions. Thanks.
Thank you. Your next question comes from the line of Will Boardman from Soros. Please go ahead.
Hi, thanks for taking my question. I was just wondering if you could talk about just a little bit on the funding costs, and sort of where you see the interplay of the dividend payout ratio that you have versus where your credit spreads are currently trading, and sort of what you see for the back half in terms of issuance in the second half.
Excuse me, I didn't understand your question. Could you repeat, please?
Sorry, I apologize. I am just wondering if you could talk a little bit more about funding costs and what you see in the back half of 2019 on issuance, and from a credit perspective, where your spreads are currently trading for senior preferred debt, despite a lot of the positive improvements you've made on the balance sheet, and that you are now going to be paying out a ratio of 80%. Just how do you see this disconnect with where your credit spreads are trading versus how much you are paying out to equity holders?
Looking at senior preferred, we have no expectation to make any kind of issue. We do not play the game of making comparison between the credit spread and the senior preferred because our funding position is so strong that we do not need to make a senior preferred for the best of our information of today. Looking at the condition in the cost of funding for 2019, as I told you, we will stay away from the market for the first semester at minimum at least, and then we will see what can happen at the spread condition, and then we will decide if to tap the market in the second part of the year.
Okay, thanks for taking my question. That's all I have.
Thank you. We will now take our next question from the line of Anna Adamo from Autonomous Research. Please go ahead.
Hi, good afternoon. I have three questions, please. Going back to the question on the capital evolution, the CET1 ratio excluding the mitigation of IFRS 9 has dropped by 40 basis points to 30% in the quarter. 10 basis points is driven by the Intrum deal. Can you explain what is driving the remaining 30 basis points? That's my first question. The second question on disposals. Are you still planning to sell a minority stake in Eurizon? Thank you very much.
Looking at capital evolution, you have two sets of information. One is phased in and fully loaded, that is with a slight reduction of 10 basis points. If you move into the configuration of fully loaded minus DTA, we had an impact of 50 basis points due to increase in DTA resulting from the new legislation related to the financial law in Italy. That bring us to have a reduction in the fully phased in. That the reason why we are going to start to ask Danish Compromise that will compensate absolutely this impact. Sorry, the second part of your question was on?
Disposals. The minority stake in Eurizon.
Sorry, on Eurizon. Yes. In this moment, looking at the situation of the spread BTP bund, is a clear situation of disruption in the evaluation of the Italian assets. I have no intention to make any kind of analysis of possible combination of future growth for our asset under management companies. Until the recovery of the market, is something that is in absolute standby.
Okay, very clear. Thank you.
Thank you very much.
Thank you. This was our last question for today. I will now hand you over to Mr. Carlo Messina for his closing remarks.
I thank you very much, and I will see you in London. Thank you.
Thank you, ladies and gentlemen, that does conclude our conference call today. Thank you all for participating. You may all disconnect.