Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2018 third quarter results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Holly, 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 results conference call for the first nine months of the year. This is Carlo Messina, Chief Executive, and I'm here with Stefano Del Punta, CFO, Marco Delfrate, and Andrea Tamagnini, investor relations officers. The first nine months have been solid and driven by ISP's top-performing delivery machine. Net income is up 26%, including the capital gain from the Intrum agreement, it stands at EUR 3.4 billion, corresponding to 90% of last year's net income. We are very confident that the net income for the full year will be higher than the EUR 3.8 billion booked in 2017. As communicated in our business plan, this year the payout ratio will be 85%, and we are well on track to deliver a very satisfactory cash dividend.
ISP and I personally are committed to remunerating our shareholders, and we have demonstrated the ability to do that over the past years. Our capital position continues to be very solid, and we are a clear winner of the EBA stress test. Our Common Equity Tier 1 ratio increased further, and they are well above 13%, despite the negative impact of 45 basis points due to the sovereign bond spread widening. Before going through the results, I would like to take a couple of minutes to provide some thoughts on the recent developments in the Italian economy and on the implication for our group. We continue to see Italy as very strong country. Italy's fundamentals continue to be very strong. Wealth of Italian households stands at EUR 10.5 trillion, of which 4.2 are financial assets, the highest level in Europe compared to GDP.
The Italian government holds more than EUR 1 trillion of assets, out of which EUR 300 billion in real estate. Italian companies are solid. They are export driven and both more profitable and better capitalized than before the 2008 crisis. Consumer and business confidence are at the high level, and this will support GDP growth. In this context, we confirm our 2018 targets for net income and payout. We also confirm our targets for the business plan, thanks to a very resilient and well-diversified business model. We are an efficient wealth management and protection company driven by a client-centric approach, and our business model is naturally hedged because our financial market activities offset any negative impact of market volatility on our fee-based business. We have a very strong capital and liquidity position with an excess of almost EUR 12 billion of capital and EUR 70 billion of medium long-term funding.
Strong flexibility in accessing the debt market. We don't want to pay excess cost of funding just because there is a spread BTP Bund in excess of 150 basis points. That is the right level of the Italian real economy. We have a proven flexibility in managing costs and the ability to de-risk the balance sheet, and we have already developed contingency plan mainly focused on net interest margin and operating costs to face any unexpected deterioration of the macroeconomic scenario impacting revenues. Slide number one. Let's now look at the key highlights for the first nine months. EUR 3 billion stated net income, the best first nine months since 2008. EUR 3.4 billion net income, including the Intrum capital gain. The best nine months ever for commissions, and the best nine months since 2008 for operating income.
Cost-to-income ratio down to 50.5%, among the best in Europe, with the decrease in operating costs of more than 3% while investing for growth. We deleveraged more than EUR 26 billion of NPL since the peak of September 2015, of which EUR 1.1 billion in Q3 at no cost to our shareholders. Common equity ratio is up to a rock solid 13.7%. In a nutshell, we have already achieved 90% of the 2017 net income and more than half of our business plan NPL deleveraging target for 2021. On top of that, action to deliver on the three pillars of our business plan, de-risking, cost reduction, and revenue growth, are up and running and delivering results. I'm very proud of these results, and as always, I want to thank all of Intesa Sanpaolo people for their hard work.
Let's now go through the presentation, and at the end, I will be glad to take your questions. Slide number two. These excellent results are powered by a combination of factors that ISP management has built over time, a top delivering and performing machine that works on business plan priorities, and a business model that is both resilient and well-diversified. We have a state-of-the-art credit recovery capability that allow proper management of the credit originated. We enjoy strategic flexibility in managing costs, just in case revenues do not match expectations. We are an efficient wealth management and protection company driven by a client-centric approach. In this challenging environment, we have confirmed once again our prudent approach in managing our clients' assets of around EUR 1 trillion. Our business model is naturally hedged, our financial market activities offset any negative impact of market volatility on our fee-based business.
We have a high sensitivity to an increase in market interest rate. Our sustainable profitability is also the result of a very strong capital and liquidity position. Slide number three. Overall, our performance in the first nine months has been solid, in particular in operating costs, revenues, net income, NPL deleveraging, and capital. We are well on track to deliver on our business plan commitment. Slide number four. The speed at which we are delivering our business plan is even more impressive if you compare our revenue growth performance to our European peers. In a very difficult operating environment, ISP is the best player in the Eurozone. Slide number five. During the first nine months, we continued to improve across all key indicators.
In particular, net income is up 26% higher than one year ago, gross NPL stock reached the lowest level since 2011, and the net NPL ratio declined to 4.5%. Our already strong capital position further improved around 440 basis points above regulatory requirements, and our capital buffer is 180 basis points above the average of our peers. This capital buffer already includes around 45 basis points of negative impact deriving from the sovereign bond spread widening since the end of March. Our capital position remains very strong even under stress conditions. Indeed, in the adverse scenario of the EBA stress test, we have a capital buffer of around 200 basis points on a pro forma basis. Slide number six. These are the best nine months since 2008 for net income. As already mentioned, we have now achieved around 90% of the 2017 net income. Slide number seven.
Shareholders are not the only ones benefiting from our strong performance. During the first, employees received EUR 4.3 billion in salaries, and all our excess capacity of around 5,000 people are in the process of being reskilled and redeployed on priority initiatives, of which 600 are already in new roles. The public sector received EUR 2.1 billion in taxes. Households and businesses received over EUR 44 billion in medium long-term lending, of which over EUR 30 in Italy. In addition, over the same period, we helped 13,000 companies to get back on track and preserved over 60,000 jobs. If we consider our social impact since 2014, the total number of companies helped has been above 86,000 and more than 400,000 jobs have been preserved. This means that we helped around 1 million people avoid the distress of economic uncertainty. We are not only a leader in supporting real economy, but also the social economy.
In the next slide, I will give you a sense of what Intesa Sanpaolo does to support Italian society and promote culture. Slide number eight. We are committed to becoming a global reference model for social and cultural responsibility. In this slide, you can see just a few example of our impact on Italian society during the first nine months. We have created new partnerships to support Italian people in need and reduce child poverty, and we will soon be able to deliver our business plan commitments, providing food, shelter, and medicines. We continue to support Italian families who were victims of earthquakes and other natural disasters, together with those affected by the Genoa bridge collapse. We are committed to supporting innovation and startup, as well as the circular economy.
We are promoting culture in Italy and internationally through the activities of our Gallerie d'Italia museum, and we have designed our Fund for Impact that will enable lending of more than EUR 1.2 billion to categories with difficulties accessing credit. This is set for launch in the coming weeks. In a nutshell, we are the engine of the Italian social economy. In addition to our direct support to Italian society, mainly thanks to our dividends, the foundations that are ISP's shareholders donated more than half of the total donated by all Italian banking foundations. Slide number nine. On this slide, you can see the key highlights of our strong performance in the first nine months. Since I already covered the main topics, let me take you to slide 10 and give you some color on the P&L. Slide 10. The first nine months of the year were very strong.
Revenues were up 4%. Operating margin was up 13% on an annual basis. Within our revenues, insurance income benefited from the property and casualty business growth of around 13% on a year. Net interest income is stable when excluding the impact of the Intrum agreement. We have continued to be very effective at managing costs, with personal expenses down 2.6% and administrative expenses down 5.3%. Depreciation is slightly up. We continue to make investments for growth. Our loan loss provisions went down by 18% on an annual basis, while coverage increased. Gross income was up 19%. Net income is around EUR 3.4 billion, when including the capital gain from the Intrum agreement. Slide 11. Q3 has been challenging, with several factors contributing to negative market performance and increased volatility in a prolonged low-interest rate environment.
In spite of this, we have performed solidly, with net income for the quarter above EUR 800 million, up 28% versus Q3 2017, demonstrating ISP capability to deliver even in a challenging environment. On a yearly basis, revenues are growing, with net interest income up around 1%, 2.7% excluding the impact of the Intrum agreement. Operating costs are down 3%. Gross income is up double digits, also thanks to the strong decline of loan loss provisions. Slide 12. In the third quarter, net interest income increased when compared to the second quarter, thanks to good performance in the commercial component. On a yearly basis, the nine-month net interest income decreased marginally due to the impact of the NPL disposal, despite a strong increase in the commercial component. We are in the process of repricing our loan book, and we will see the benefits from this in the coming quarters.
Let me highlight that ISP's net interest income is highly sensitive to an interest rate rise. Indeed, an interest rate increase of 100 basis points will generate a benefit of over EUR 1.6 billion in net interest income. Commissions. Despite the challenging environment with negative market performance in the main stock exchanges and high volatility, the first nine months of the year have been our best ever for commissions. Also, this is our second-best Q3 ever for commissions. Slide number 14. In spite of this challenging environment, these family side deposits by EUR 11.5 billion. Together with the relevant under administration currently at EUR 171 billion, these assets will be the fuel of our wealth management engine in the coming quarters. We managed to fully offset the negative impact of market performance on our assets under administration by gathering EUR 9 billion of net new money, of which EUR 2.7 billion came in Q3.
Overall customer financial assets are close to the one trillion mark. Slide 15. In the nine months, all our divisions made a positive contribution to group results. Half of our gross income comes from the wealth management and protection business, making Intesa Sanpaolo a clear European leader in wealth management, but with a natural edge from financial market activities in case of market volatility. Slide number 16. We continue to be very effective at managing cost. We are extremely proud of the strong reduction achieved in the nine months. Operating costs went down by more than 3% on a yearly basis, while strongly investing for growth in key areas such as training, IT, digital, property and casualty, and wealth management. ISP maintains high strategic flexibility in managing costs and remain a cost income leader at European level, as you can see in slide 17.
In slide 17, we are proud to have a top-tier cost-income ratio, and this chart illustrates our position among the best in Europe. Slide 18. Significant action in loan loss provision. As you can see in this slide, loan loss provisions declined to its nine-month level since 2008. While we also further increased our coverage level. As a result, cost of risk is now down to 57 basis points from 71 in the same period of 2017. Well on track to deliver on our business plan target of 41 basis points by 2021. Our NPL coverage ratio increased by 20 basis points in Q3, close to 54%, a level that will facilitate future additional deleveraging. Slide 19. Gross NPL decreased by EUR 1.1 billion in Q3, reaching the lowest level since 2009. This represents the 12th consecutive quarter of NPL reduction.
The gross NPL ratio has decreased by 8 percentage points since the peak of September 2015 to around 9%, and the net NPL ratio has more than halved to 4.5%. In the first 9 months of the year, we have already achieved 53% of the deleveraging target of the 2021 business plan. As already mentioned, ISP has been able to deliver this impressive deleveraging at no cost to shareholders. Slide number 20. As you can see in this slide, in order to reach our business plan NPL deleveraging target, we need to reduce the NPL stock by around EUR 12 billion over the next 13 quarters, which is EUR 4 billion less than the EUR 16 billion we already deleveraged in the past 12 quarters, when the coverage was far lower. Slide 21.
NPL inflows are close to an historical low. Thanks to our proactive credit management in Q3, gross NPL inflows decreased by 10% and net inflow by 23% compared to the previous quarter. Slide 21. Our strong capital base improved further in the 9 months, and we maintain a buffer of 440 basis points versus regulatory requirements, well above our peers. This capital buffer already includes the negative impact of around 45 basis points from the sovereign bond spread widening since the end of March. Slide 23. As you certainly know, last Friday, the EBA published the results of the stress test, which resulted in a very good outcome for ISP. Even in the adverse scenario, ISP's capital position is well above the requirements of the supervisory authorities. Slide 24.
If we compare ISP to the other top European banks, we rank second in the EBA stress test adverse scenario in terms of capital buffer. Let me highlight that we would have ranked first, considering the possible benefits from the Danish Compromise that, for us, would have counted for around 50 basis points. Another 50 basis points of possible excess capital. Slide 25. As you can see in this slide, the adverse scenario has a limited impact on ISP. Our excellent results come from a resilient business model, a best-in-class capital position, high-quality loan portfolio with a low-risk profile, good coverage, and valuable real guarantees. A well-diversified trading portfolio with low exposure to volatility risk and strong contribution from stable income. Limited operational losses driven by a cautious sales model, unexposed to legal risk, also relevant in stress scenarios.
On top of that, we are one of the few banks with no restriction on dividends in the three-year stress test period. In summary, we have a sound capital position, which becomes rock solid when needed. In other words, under stress test. The EBA stress test confirmed that ISP is a very low-risk bank, and in a rational market, we should have the benefit of a lower cost of capital compared to our peers. Slide 26. We continue to be a market leader in Europe, and this clearly help us to give very generous dividend. Slide 27. We also have a best-in-class risk profile in terms of capital on illiquid assets, net NPL, Level 2, Level 3, and net repossessed assets. Recently, even the IMF warned about the vulnerabilities that some banks have to face because of their holdings of opaque and less liquid assets.
According to the IMF, in many G-SIFI Level 2 and Level 3 assets still represent high multiples of capital, so big that even a modest valuation shock on these assets would have a significant impact on their capital buffer. IMF analysis shows that there are some European G-SIFI for which a lower-than-5% decline in the value of these assets would reduce their leverage ratio by as much as 100 basis points. Intesa Sanpaolo has a very low exposure to these kinds of financial assets. We also continue to maintain a very comfortable liquidity position, which means we do not have to access the debt market if conditions are not favorable for the bank. We don't want any kind of increase in our cost of funding. Slide 28. We confirm the 2018 outlook for ISP.
We expect growth in operating income versus the past year. This revenue increase, coupled with continued cost management, will drive operating margin growth. In addition, we continue to expect a decline in the cost of risk compared to 2017 that will trigger further growth in gross income. Our expectation of growth in net income this year is confirmed by the excellent results for the first nine months, with 90% of 2017 net income already achieved. Before I conclude, I would like to recap on my thoughts regarding the Italian economy. The Italian economy relies on solid fundamentals. The trend is also positive. Unemployment is at 10% in September, one of the lowest levels of the past 10 years, with employment and activity rates close to a 15-year high.
Consumer confidence was not affected by the recent turmoil in financial markets, as shown by the rise in September. Business confidence remained close to a 10-year record. Italian real estate transactions are experiencing a significant recovery in terms of volumes. The Italian economy is benefiting from this positive evolution. Italian GDP is projected to grow by about 1% in 2018 and in 2019. Slide 13. To sum up, we are very satisfied with our first nine months of 2018 and our excellent delivery against the business plan targets. De-risking, cost reduction, and revenue growth. We have reinforced even further our already solid capital position and successfully passed the stress test. We are firmly on track to deliver a net income higher than 2017 and a very generous cash dividend. All in all, solid performance and strong upside going forward, thanks to the contribution of all our people.
Thank you for your time and attention, now I'm happy to answer your questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We will take our first question from Delphine Lee from J.P. Morgan. Please go ahead.
Yes, good afternoon. Thank you for taking my questions. I got three, if you don't mind. First of all, could you just please remind us, in terms of the total for the EUR 60 billion, how much is actually, in terms of proceeds, deposited at ECB, in terms of strategy for replacing that amount, if you could remind us what your funding strategy is. Related to that, do you have any concerns about the higher bond maturities that you have in 2019 and the current market conditions? The second question relates to your revenue target of 4%. Given the environment for the first nine months, the core revenue seems to be flat to slightly down. How much cost offset is there, really? You talked about cost flexibility.
Just to get a little bit of an idea of what offsetting factors we could have if revenues are a little bit weaker. The last question is, do you mind sharing just some thoughts about the new fiscal measures for banks that were drafted in the Italian budget? Thank you very much.
We have EUR 40 billion deposited with the ECB, a lot of money that are -40 basis points, giving us negative contribution to our net interest margin. That is the reason why we are able not to issue medium-term bonds for the next period. We are really free to do what we do for the next year, minimum. Revenue target, 4%. Revenue target is something that is also depending on actions. We are not just waiting for situation and for impact deriving from the market. My job is also to manage the bank according to the different situation of the environment and trying to have opportunity in the different environments. Considering the situation in Italy, I can tell you that we can continue to give good performance in wealth management, but we can accelerate, in a significant way, our net interest income revenues.
On the other side, on the cost base, we are working on a number of contingency plan in order to accelerate cost reduction also in the next years. I'm not worried at all on the possibility to reach the targets of the business plan. I'm now concentrated on 2019. I have to tell you that we are working on the budget with the people within the organization. I'm really in a safe position, considering the possibility to deliver very good results in 2019 and also for the rest of the business plan. Considering what the budget law will have on banking sector, I'm not worried at all. All is absolutely manageable. I'm not worried at all.
Great. Thank you very much.
We will now take our next question from Adrian Tsiki from RBC. Please go ahead.
Hi there. This is Adrian Tsiki from RBC. I have a number of questions, if I may. Just going back to some of the remarks you made on net interest income acceleration. Can you maybe elaborate a bit more on which component you can accelerate? Is this sort of volume growth or is this spread? Talking about spread, have you been able to pass on the increase in the sort of cost of funding to your customers, or do you see some margin pressure? On fee income, you're showing a very good development in both increasing AUM and the mix towards equity funds. How do you see that mix development given the volatility of the markets, and do you see any pricing pressure on the retail product side now that the inflows might be slowing down at the industry level?
Lastly, on capital, if I may. Your risk-weighted assets declined quite meaningfully this quarter, more than offset pressure from spread widening. Can you give us some more color as to what the moving parts on this are? Thank you.
Net interest margin in 2019, our expectation is to have very positive results coming from repricing. That will be the main driver of growth in the asset side. In terms of volume, we will grow, and that's for sure. Cost of funding, we will have a significant benefit from the expiring of EUR 19 billion of bonds that used to have a cost in the range of 1.7%. We will use, and we are ready to use if market conditions will not change, we are ready to use our extra liquidity buffer. What we have placed with ECB, and this will bring us significant benefit on net interest income. On the other side, our expectation is that in the last part of 2019, there could be a movement in EURIBOR from -40 to -20 or zero, and this will bring us significant benefits also on markdown.
That's on net interest margin. We are also ready to consider some possible improvement in the volume side, but the main action is on spread deriving from repricing and lower cost of funding compared to the expiring bonds in 2019. Looking at fee income, our expectation is to continue to have a positive net inflow, but it is likely that they will be concentrated mainly in insurance product than in mutual funds. We will see what will be the conditions in 2019, but we are working hard on selecting the expiring amount on our wealth management clients. We are setting volumes, giving targets to our sales force. We will be ready for the starting of 2019 to have a clear proposal for each client that will have deposits, that will have asset under management, that will have asset under administration, that will expire during 2019.
Our delivery machine is in place in order to deliver good results also in 2019. Looking at capital. Capital on risk-weighted asset, we had a reduction related to the reimbursement of the transaction with Qatar and Glencore. We have also a benefit coming from internal model and recovery of guarantees and collateral. Optimization of risk-weighted assets. Volumes from our side, and the other side is a continuing work on optimization on collateral and guarantees. That is a never-ending work for my people in Intesa Sanpaolo.
Very helpful call. Thank you very much.
We will now take our next question from Azzurra Guelfi from Citi. Please go ahead.
Hi, good afternoon. Two quick questions from me, one on deposit and one on cost risk. When I look at deposit, I'm a bit surprised of the trend, because I would have expected, especially in the retail division, an increase in the deposit due to a flight quality of Italian savings to Intesa. If I look at the volume and the AUM, deposit and AUM together, I don't see this flight to quality. Maybe I'm missing something, if you can just elaborate a little bit on that. The second one, if we assume for a second that the political turmoil in Italy continue for a while and there is an impact on the real economy, with the new accounting role of IFRS 9, what are the major area of risk on the cost of risk?
It's a new accounting and we are all a bit confused about what could be the scenario in a worsening of the economic environment. Thank you.
Looking at the deposits, we had an increase in retail side deposits in this quarter, and a reduction in deposits due to the switch from retail into asset under management. The reduction is mainly concentrated in large corporate clients and corporate clients, mainly three or four clients. We are starting with a clear approach based on EVA and reduction of cost of funding, so we are not ready to pay euros to corporate clients, and that the reason why we have been a decline in the corporate clients deposits. Looking at real economy impact.
Azzurra, I'm really in a difficult situation, looking at what is the perception of the investors and analysts towards my country, because it is true that there is some situation in which probably communication is not the best communication that government can do, but also from the European Commission, we are probably not the best communication. On the other side, the fundamental of the country are solid. If we get back to fundamental, I don't see any kind of possibilities for our country to have a GDP that can grow in 2019 below 1%. Our expectation is that GDP can continue to be 1% in 2019. That is our expectation, looking at real economy. You know that in the accounts of Intesa Sanpaolo, you have the movements of real economy or Italian real economy.
A GDP growth between 0.5% and 1%, will have no impact on cost of risk. That's the real situation of Italy, that the real situation of Intesa Sanpaolo. If other analysts would like to make a stress test scenario in excess of the EBA stress test scenario is an exercise. Transforming this into reality, in my view, is really something that it is not correct. It is not correct also because the fundamental in the country are really strong. I have to tell you that my perception is that fundamental of Italy is much more related to a spread of 150 basis points and not 300 basis points.
I do emphasize that yes, is not a situation of concern. Unfortunately, the current market valuation reflects a bit of an Armageddon scenario. Just to see if this Armageddon scenario is more than priced in, it would be very helpful to have some guidance on what could be the different development. I'm not saying that that will happen. I hope it doesn't. I have an Italian passport.
Azzurra, I'm the CEO of a bank. My duty is to create value, first for my people, for people within the organization, second for my clients, and third for my shareholders, and then for the community. My duty is to give reality and not to give perception or Armageddon scenario. We are not in any kind of Armageddon scenario. If you want to have Armageddon, you can go to a TV movie and have Armageddon. Italy is in a completely different situation. You cannot have a positive view on populist, on a party or the other party. Reality in Italy is this. You can have a country that can grow at 1% GDP. Italy is probably a place that is really comparable with Japan. We have already discussed on this point a lot of times. Italy is not China, it is comparable with Japan.
You can have 1% GDP growth inertially. On the other side, you can question on the upside deriving from this budget law, could be 1.5%, could be 1%. My expectation is that in Italy, we will have minimum 1% GDP. I don't want to enter into valuation of budget law. For sure, we will not have an end of Italy in the next month just because embedded in investors and analysts, you can have an Armageddon scenario.
Thank you. We will now take our next question from Jean-Francois Neuez from Goldman Sachs. Please go ahead.
Hi there. Good afternoon. A lot of my questions have been answered, but I had one remaining, which was when you talked initially about some of the offsets that you might be activating, there was the NII one, which you have obviously explained already, and the second one was on cost, and I just wondered whether you could elaborate or quantify on some of the cost measures that you might be taking if need were to arise. Thank you very much.
We will give a clear disclosure on the point, if needed, at the beginning of the in which we will have a clear point of what can happen in the spread, in the real economy for 2019. It is clear that you can work on all different nature of the administrative costs. We can work on branch optimization because we can do a lot of work also in terms of extra reduction in our branch network, and we can accelerate a lot of efficiency program that we have considered in our business plan. We are able to do this because we have an analytic monitoring of our capital budget. Remember, we have a capital budget of EUR 1 billion per year. In this EUR 1 billion per year, you can find a lot of room in terms of possible cost reduction.
My expectation is that we can have increase in net interest income, we can have cost reduction in provision, and commissions giving us good satisfaction. That's my view for 2019 and also for the next years of the business plan.
Okay. Thank you very much.
Thank you.
We will now take our next question from Antonio Reale from Morgan Stanley. Please go ahead.
Hi, thank you. A lot of my questions have been already been taken. I've got two and one clarification, please. One, we are now 11 months into your business plan, and I was wondering if you could give us an update on where you stand versus your targets in the non-life insurance segment and what you're seeing from competition on that front. Second question is on asset management market share, because if I look at the new flows from Eurizon, there seems to be a reversal of a long-term trend versus your market positioning. Since Q4 of 2017, you seem no longer to be gaining market share and actually the contrary. Can you help me understand what's been driving that trend? More broadly, what are you seeing different from competition, please?
Lastly, a clarification on the fully loaded capital level, please, which are obviously very solid despite the tougher environment. If I look at the CET1 fully loaded number disclosed in the 2017 stress test last Friday, you were at 11.85% in 2017. That's obviously after the IFRS 9 adjustment. I know you had the LTIP and saving shares as well as other measures, so I can follow up with IR for the details, but it would be great if you could just help me understand the key moving parts versus the 13.7% pro forma you reported today. Thank you
Looking at non-life insurance business, we are delivering very good results, but we will make the full presentation at the end-year presentation. We want to use our end-year results in order to make clear disclosure, but we are delivering results completely in line with our business plan. On asset under management, you have to consider that the private banking division is mainly on open architecture. If you look at the results on asset under management, you have only the results related to the Banca dei Territori and not on private banking division. If we have an acceleration in our private banking division, you will not see in the figures of Intesa Sanpaolo. There is a contribution on insurance products, and this part is only partially in asset under management product.
Looking at capital, you have all the detail between the fully phased in, fully loaded, the phased in a specific slide, number 79 of our presentation. You can do by yourself your work.
Thank you.
We will now take our next question from Andrea Filtri from Mediobanca. Please go ahead.
Yes, good afternoon. First of all, on liquidity. There continue to be articles in the press talking about tensions on liquidity of some Italian banks and deposits going abroad. Are you seeing any of this? If the ECB will offer a new TLTRO window, will you roll maturities, or do you fear the market could attach a stigma to it? Secondly, on govies, you've been buying bonds, OATs and Bonos this quarter with flat BTP. Do you consider yourself already maxed out on the BTPs that the supervisor is happy for you to have? Thank you.
On deposit abroad, absolutely no. No inflows, no outflow, sorry, in our figures, in our client base abroad of Italy. Another big fake news on the Italian situation. TLTRO, LTRO, what can happen? We will see in 2019. For sure, we will not increase the exposure to the LTRO. That's for sure. That's our view. If the cost of funding is above the funding with ECB, we will consider also to have this funding in a smart way. What we have in our situation is a significant excess liquidity position, and we have not a problem also in considering other possibilities starting from 2019 or 2020, in terms of TLTRO funding. We will see. On government bonds, I have to tell you that we made a clear position to the market. Concentration 50%, we are below this concentration.
I have no appetite for investments that are above the two years, no appetite in investing above two years. Below two years is a decision that I leave to the CFO and the chief risk officer of the bank. We will see. Not a point that can be considered as the right level, the level that we have today. In any case, with a clear point on concentration.
Thank you very much.
Thank you.
You may press star two if you find your question has been answered, that will remove you from the queue. We will now take our next question from Alberto Cordara from Merrill Lynch. Please go ahead.
Hi, good afternoon. My first question, you may have gone through it, I'm not sure, but if it is realistic to see at least the same dividend as last year. The second question is related to the fee environment. Not so much asset management fees, but I would like to have a comment from you on what we can see next year on investment banking fees. The reason I'm asking this question is that, to me, there is a clear regulatory pressure for seeing mergers between banks or transitional mergers. On the equity side, I think the stress test has been quite wrongly underlooked by the market. You did very well, as you told us, and under the adverse scenario, 11% transitional put you in a very small group of banks.
Also, I read that there are some comments from Luis de Guindos, the vice president of ECB, saying that banks with core capital that in the adverse scenario is below 9% should enhance their capital position. These banks include 40% of total assets in Europe and include names like Erste, Deutsche Bank, BNP, Soc Gen. In Italy, UBI and BPM. I think that to me, I don't know, if I read these comments, it seems to me that we are going to see a lot of issuance next year, not from you, but maybe from other banks. In that respect, what would be the expectation that we can have on investment banking fees? Thank you.
I will start from fees. I have to tell you that working on our budget, we are concentrating not only in wealth management but also in investment banking. Investment banking can be really an area in which we can have a significant growth in terms of commissions, but also in commercial commissions, we can have a rebound due to some kind of repricing. We are working on all the different lines of fees, not only on wealth management. Investment banking is an area in which we think we can have very good, satisfactory results during 2019. For dividend, you know that I'm a lover of dividends, so we will see at the end of the year. I think that my shareholders will be very happy.
Thank you very much.
We will now take our next question from Christian Carrese from Intermonte. Please go ahead.
Yes, good afternoon. The first question is on capital and NPEs. Yes, you are ahead of the plan in terms of capital and NPE reduction. I was wondering, what is your best option for the future? We saw, for example, the EBA confirmed that the 5% threshold is an important level for NPE, the gross NPE ratio. Do you prefer to use the excess capital to speed up the process of reduction of NPEs or to fund the loans growth? The second question is on the commission. It seems to me that you are a little bit more bullish on net interest income for 2019 rather than fees. Maybe clients will look at the final statement 2018, and maybe there could be some impact from MiFID II regulation. I was wondering if you think that the fees could see a lower growth in 2019. Thank you.
In terms of NPL plan, I have to tell you that we can easily exceed our target without using any kind of our excess capital position. The trend is clear. We are continuing to reduce non-performing loans, and I think that with the agreement with Intrum, we can have also an acceleration in terms of recovery. My expectation is that for bad loans, we can have for sure an acceleration, but also we are working hard with a lot of project in terms of acceleration of recovery of unlikely to pay. We will see what could be the possible implication of this acceleration in 2009, but my expectation is that we do not need to use excess capital to have a best performance in our plan of reduction.
In any case, the 5% of EBA, due to the kind of classification of clients, is more or less 6%. It's perfectly in line with our targets. In any case, I want to accelerate, and I think that we can deliver much better than the plan. On commissions, I'm bullish on net interest income because we are accelerating, and in different environment, you have to consider what could be the best levers that you can use. In a scenario in which you have an acceleration in terms of possible increase in your EURIBOR, you have a possible increase in the spread, BTP Bund. You have expiring bonds, and you do not need to roll these bonds.
In an environment in which you can have volumes, I have to tell you that now is the timing in which we can deliver good performance also in net interest income during 2019. In terms of commissions, the real trend is that on net inflows, we can deliver very good performance. To be bullish, I will wait for the beginning of 2019. In any case, this remain a key driver of our sustainable profitability. The real point is that if we can deliver commissions that can grow 5%, 3%, 2%, but in any case, this is a key driver of success for Intesa Sanpaolo. The extra engine would be, in my expectation, the net interest income and the acceleration in reduction of cost.
Thank you.
We will now take our next question from Domenico Santoro from HSBC. Please go ahead.
Hello. Hi, good afternoon. Thanks for the presentation and all the comments. I have a number of questions. First of all, on your risk-weighted assets, we have seen again optimization in your risk-weighted assets. Is this going to continue, and where EBA guidelines will start to kick in the calculation of your core Tier 1? On fees, I agree with your colleague that you're more positive on NII than fees. I was wondering whether this might also include some sort of worry given the government plan to redirect much of the savings of the Italians into BTP, and if that happens, what could be the impact on the distribution of your asset management product? On the Net Stable Funding Ratio, I was wondering whether you might share with us the precise number with and without TLTRO, any impact from the sovereign rating downgrade on your risk-weighted assets.
On the TLTRO number 3, let's call it this way, my understanding is that there might be a discussion on this by the ECB sooner rather than later. I was just wondering what could be the terms, just to understand your minds on this TLTRO, if this is extended, considering that the second has caused massive asset compression in the sector. Thank you.
Sorry, I lost the last part of your question because you made some due diligence. I will answer to the first three question, then you can start with the other, please. Risk-weighted assets, I think that we will continue to have a positive from collateral guarantees and work that we are doing with the model. On EBA, the main concentration of impact will be in 2019. There could be a portion at the end of 2018, but we will see. The majority will be in 2019. Savings of the Italian families, our attitudes towards the Net Interest Income and commissions. Net Interest Income, in my view, is a source of potential extra delivery in comparison with the business plan.
I'm not worried at all with the possibility of the Italian savings moving into the Italian government bonds, because at the end, the volatility impacting on Italian government bond has been demonstrated, it could be high. Our clients are not pushing in order to increase their holding of Italian government bond. This can be marginal and not significant in what is our expectation. Looking at Net Stable Funding Ratio, our level is above EUR 70 billion, it remain very significant also not considering the TLTRO. If you can give me the other question, because I lost the other point.
Yeah, sorry about that. Risk-weighted assets in the fourth quarter, if you expect any inflation from the downgrade of the sovereign, and if a TLTRO number 3, let's call it this way, it happens, what do you think will be the terms attached?
I don't know. On risk-weighted assets, I don't see any kind of inflection deriving from the situation of the government bonds. On TLTRO, I think that will be more or less in line with the conditions that are in correlation with EURIBOR, then I cannot tell what could be the level. My expectation is that for the end of the year, we will have not -40, but zero in terms of EURIBOR, but we will see what can happen.
Okay. Thank you.
Thank you.
We will now take our next question from Giovanni Razzoli from Equita. Please go ahead.
Good afternoon to everybody. Two questions. The first one is on the comment on the stress test. You are clearly one of the best performer in Italy and in Europe as a result of the stress test. My reading is that your strength is related not only to the asset quality of the revenues, but to a much higher efficiency where compared with, at least with your domestic peers. If I look at the cost of risk or revenue reduction in the adverse scenario, your performance is average with the others, but you are much better in terms of profitability. My point is, shall we expect that the next focus of the regulators will be on pushing the banks to further increase the efficiency, to reduce the Cost-to-income ratio in order to compensate any further external shocks?
The second question, you have mentioned the potential benefits of the application from the Danish Compromise, which is 50 basis points, which is somehow higher than the previous guidance. I was wondering if you may consider in the future what are the pros and cons of considering the application for this treatment. Thank you.
I think that the focus will be on efficiency for sure, in order to have profitability from the different banks. I think also that a strong focus will be for the European banks on Level 3 and Level 2 assets, because a lot of performance of other European big players has been affected also from the starting point of some impact on Level 2 and Level 3 in terms of stress test. Efficiency will be a clear focus, and it will not be easy for other banks to reduce cost, because you need to have a clear attitudes and a machine that can allow you to reduce cost. When we talk about the Danish Compromise benefit, we are talking about the possibility in terms of stress test.
If you stress the capital position, you free possibility to have benefit from Danish Compromise for an amount that is 50 basis points. In normal condition, we have not significant benefits from Danish Compromise.
Thank you.
We will now take our next question from Hugo Cruz from KBW. Please go ahead.
Hi, thank you. Just one question. On a slide where you show gross inflow from performing loans, inflows are increasing year-over-year, both on a gross and a net basis. What's driving this?
If you look at the trend on a quarterly basis, we are improving. If you look on nine months, you have to consider that there is a different perimeter because in 2019, you had not the inclusion of the Venetian banks. In 2017, you had not the inclusion of the Venetian banks. You had not the pro forma. In terms of real trend, there is an improvement also year-over-year.
Okay, thank you.
We will now take our next question from Benjie Creelan-Sanford from Jefferies. Please go ahead.
Good afternoon. Just two quick questions from my side, please. Just on the Intrum deal, I wondered if there was any update on the closing date, or if there's any reason to believe that the Intrum capital gain associated could be either delayed or rather held back to 2019 profits rather than 2018. The second question is just going back to the Italian budget measures on banks, and the potential for reduced tax deductibility on provisions and IFRS 9 adoption. Can you give us any guidance on what the potential impact you would expect on your capital, either up front or on an ongoing basis, please? Thank you.
On the Intrum deal, we will close end of November, beginning of December. These are the possible optionality on the different dates. We are just defining what will be the date of the closing. For sure, will be within beginning of December. On budget law, we will see what will be the final position of the government, but we do not think to have a significant impact in any kind of different scenario. For this point, we have to wait until the end of this year.
Okay, thank you.
We will now take our next question from Andrea Vercellone from Exane. Please go ahead.
Just one question. In relation to long-term funding. You stated in the call that if you had to, if you're not satisfied with the level of spread and consequently funding cost, you could decide not to roll over any of the EUR 18 billion of medium long-term funding maturing next year. If you chose to do this, for whatever reason, can you just confirm to us that you would still be above your MREL requirement, whatever the requirement might be, because I don't think it's finalized yet. Thank you.
Yes.
Okay. Thank you.
We will now take our final question from Anna Adamo from Autonomous Research. Please go ahead.
Good afternoon. Three question from me. On NII, can you tell us what was the contribution to net interest income coming from the bond portfolio this quarter? How much do you expect this contribution to increase on the back of higher reinvestment yields on Italian sovereign? The second question is on fees. If I look on slide 74, fees from portfolio management were relatively resilient during the quarter, while you saw a large decline from the distribution of insurance products. This was despite growth in technical reserves over the period. Could you provide-
Sorry. Excuse me. Can I ask you to please repeat your question, because I lost you in the different questions. If you can start again from your first question, please. Sorry.
On NII, I would like to know the contribution from the bond portfolio, and how much do you expect this contribution to increase on the back of higher investment yields. The second question is on fees, if I look on slide 74, there was a decline in the fees coming from the distribution of insurance products. Could you give some color around the margin dynamics of this business to help us understanding the future evolution of this revenue item? Thank you.
On fees relating on distribution product, in this quarter, we decided to work on product that are more traditional, giving us more running than entry fees. That the reason why we had a slowdown in terms of commission. We decided it is also what the client prefer to have. In terms of net interest income, we do not see any kind of increase in terms of reinvestment. Probably I didn't understand well your question, but we are talking about some million euros, not significant for us.
What was the contribution from the bond portfolio to NII?
Are you talking in delta or in absolute terms?
In absolute terms.
In absolute terms, it could be EUR 250 million per quarter, that should be the contribution.
Okay. Thank you.
Okay. Thank you.
As there are no further questions at this time, Mr. Messina, I'd like to turn the conference back to you for any additional or closing remarks.
No. Thank you very much. See you, London. Bye.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.