Good morning, ladies and gentlemen. Today's conference call will be hosted by UniCredit CEO, Mr. Andrea Orcel, and CFO, Mr. Stefano Porro. At the end of the presentation, there will be a question and answer session. Today's conference call is being recorded. At this time, I would like to hand the call over to Mr. Andrea Orcel. Sir, you may begin.
Thank you very much. Good morning to you all. Welcome to the analyst call for our second quarter results. Before we turn to the presentation, I would like to start by making a few comments on the announcement we made last night. As you will have read, we have entered exclusive negotiation with the Italian government to assess the feasibility of acquiring selected parts of Banca Monte dei Paschi di Siena.
My ambition for UniCredit has been clear from the start: to deliver risk-adjusted profitable growth with the overriding goal of sustainable returns above the cost of equity across the cycle. There is enormous value to be unlocked internally, which I will come back to later. I have also been clear about the role that M&A can play in the bank's new strategy. It is not a purpose in itself.
Rather, it can be an accelerator and a potential improver of our strategic outcomes. It must be in the best interest of our shareholders, in line with our goal of value creation, and we must be fully confident in our ability to execute the transaction. The potential acquisition of a growing concern based on the commercial operation of Banca Monte dei Paschi di Siena with a carefully defined perimeter and appropriate risk mitigation is just such an opportunity.
It will materially strengthen our competitive position in Italy, especially in the economically important central and northern regions, and will allow us to generate material synergies. We have agreed with the government the main prerequisite to be met for a successful transaction. These include capital neutrality, significant EPS accretion, protection from legacy litigation risks, as well as the exclusion of all existing NPEs, and appropriate protection on performing loans from any loan book that we might acquire.
On the basis of the agreed prerequisites, a potential transaction is expected to be both tangible book value per share and value accretive. During the next few weeks, we will perform detailed due diligence, as well as assess the ability of a transaction to meet the agreed prerequisites. This will allow us to define the detailed structures, terms, and perimeter of any potential transaction, and then, and only then, we will decide whether to proceed.
I know you will have many questions on this, and it will likely be the focus this morning, but please remember that this is just the start of a normal due diligence process, albeit framed by clear principles. With that, I would now like to update you on the progress we have made in recent weeks, as well as to share some of the thinking behind our new strategic plan. After that, Stefano will then take you through the second quarter 2021 results in detail.
My initial goal has been to ensure that UniCredit, as an organization, is operating as efficiently and effectively as possible to achieve our ambitions under a new strategic plan. This meant initially focusing on the internal to unlock the phenomenal value that lies there. Our first step is doing this to create a new, more decentralized organization that provides greater empowerment, albeit with clear control and oversight from the center, and accountability to the first line of management. The team that will deliver the plan.
With this new structure in place, our focus now shifts to translating the guiding principle that underpin our strategy into the financial levers that will guide the organization. These are the levers that will deliver our overarching goal of sustainable returns above the cost of equity over the cycle. Remember that we're not doing this to create a business that is simply fit for purpose.
We're doing this so to create a business that can compete against the very best, a business which over time can be the very best. Let me briefly summarize the second quarter. The bank delivered a strong quarter driven by a robust commercial performance, reflecting the strengths of UniCredit's franchise, as well as a low cost of risk.
Fees, a key driver of these results, delivered the second highest quarterly level in many years, while net interest income is starting to stabilize. Underlying net profit reached EUR 1.1 billion in the quarter, up 24.7% quarter-on-quarter, and EUR 2 billion in the first half, equivalent to an underlying first half 2021 return on tangible equity of 7.7%. Our balance sheet remains resilient with a CET1 ratio of 15.5% at the end of the quarter, despite absorbing 49 basis points of regulatory headwinds.
Let's turn to slide 5. When we last met three months ago, just after I had joined the bank as CEO, I said that I would spend my first 100 days getting to know my colleagues and the business strengths and weaknesses. This I have done. It has been fascinating. The bank has many strengths. Our unique pan-European footprint, the distribution power of our commercial network, the strength of our balance sheet, and not least, some exceptional talent.
This unique geographic footprint is very important to us. With roots and heritage firmly anchored in Italy, our network spans 13 core markets with top three ranking in Italy, Germany, Austria, and Central and Eastern Europe. Our knowledge of these diverse markets mean we can leverage their unique strengths in building a truly pan-European bank. We can take the best of cultures, practices, and perspectives to form 1 group. Working together amounts to much more than just the sum of its parts. With 16 million clients, the distribution power of our commercial network has been demonstrated once again.
In the second quarter, we delivered another record fee performance, thanks to strong gross sales of EUR 15.5 billion of investment funds and insurance products. We also benefited from our broad product range and our ability to adapt to our customer needs. We also have a strong balance sheet to leverage on. Our gross NPE ratio is in line with the average of other European banks. Our CET1 ratio stands at 15.5%. We also have a solid and healthy liquidity position. There are areas where we can do better as a bank.
These include a rebalancing of our risk appetite and addressing our lengthy decision-making processes and capital efficiency. Changing these, which we have already begun to work on, will form an important part of our new strategic plan. Let's turn to slide 6. My priority since I joined the bank has been developing a new strategy for UniCredit. This will be based around three core themes, namely simplification, digitalization, and client centricity. As I have said already, the real opportunity lies internally.
These core themes will help us unlock the significant value inherent in the UniCredit business. Simplification involves reducing complexity, eliminating bureaucracy, and empowering colleagues while retaining clear lines of control and oversight from the center. This brings a number of clear benefits. There will be greater accountability, so decision-making and execution will be much faster. By getting closer to our clients, we will be able to serve them more effectively.
If we get this right, it will not only grow our revenues, but also generate further cost efficiencies. We want to make digitalization part of UniCredit's DNA, incorporating technology and data into every decision we take. It will enhance our service to clients and reinforce the simplification of our business. At the heart of everything we do are our clients and the communities that they are part of. They are the reason we exist. Let's turn to slide seven.
We have moved fast since we last met, delivering on my promise that one of my first priorities would be to reduce complexity and simplify UniCredit's structure, evidenced in the establishment of a new group executive committee and in a restructuring of the organization. Let me illustrate the changes we're making with three actions we have already put in place. Bureaucracy has been and will continue to be reduced across the group.
We continue to tackle unnecessary complexity, increasing individual responsibility within a strong control framework. This will speed up decision-making across the organization. Within the S.p.A., we have more than halved the number of committees and hours spent in them. This is now being replicated across the rest of the group. Together with a simplified organizational structure, this will increase the proportion of decisions taken locally closer to clients, always within a clear framework.
UniCredit Italy has been established managerially as a standalone, fully empowered geography, combining all our Italian commercial operations under the leadership of Niccolò Berti, alongside newly configured activities in Germany, Central Europe and Eastern Europe. The removal of unnecessary structure will allow faster decision-making and execution, providing closer links between management and the clients and community within which they operate. Digital and Data have been established as a new division that will elevate technology, digitalization, and data to the Group Executive Committee.
By removing Digital and Data as a silo and working across all businesses, this will ensure they will be embedded in every strategic deliverable. Let me be clear, Digital and Data are of critical importance to the future of our bank. Taken together, the actions will increase ownership and accountability, reduce complexity, and ultimately allow the organization to refocus its energy on our clients.
This lays a strong foundation for the delivery of a new strategic plan. Let's turn to slide 8. Our strategy will be underpinned by the pillars of simplification, digitalization, and client centricity. How will we deliver? To deliver sustainable returns above our cost of equity, our overriding objective, we will manage the bank by optimizing a combination of three levers, revenue growth, operating efficiency, and capital efficiency.
Revenue growth will be enhanced by getting closer to clients and normalizing our risk appetite. Risk management is the bedrock of best-in-class banking, and we will not surrender the risk discipline we have worked so hard to acquire in the last few years. We can get better at achieving a more efficient trade-off between risk and return, moving closer to the risk efficiency frontier. Operating efficiencies will be a result of reduced complexities and increased digitalization.
Capital efficiencies has not been a priority during the restructuring of the last few years. Going forward, it will be a central element of the bank's plans. This will include more effective capital allocation and targeting capital efficiencies, including a focus on risk-weighted asset densities. This should allow us to better manage the regulatory headwinds in the years ahead. Optimizing the outcome of these three levers will involve making trade-offs at times.
It might be that we forgo some revenue to release capital, leading to higher return, or we invest in the business, increasing cost to generate a capital-light revenue stream. Each and every measure we take will be to achieve our singular objective, delivering sustainable returns above the cost of equity over the cycle. Let's turn to slide 9. Finally, I would like to share some thoughts on the second quarter results.
The bank delivered a robust commercial performance in second quarter 2021, with signs of recovery throughout the bank's franchise. Net interest income showed signs of stabilizing in the quarter, supported by an emerging demand for credit. Fees delivered another very strong quarterly performance, almost matching the record performance of the first quarter. Italy was a standout feature, with new production of mortgages accelerating and gross sales of investment funds and insurance almost matching the high level we saw in the first quarter.
This is testament to the power of our distribution network and one of the reasons why UniCredit Italy was established managerially as a standalone, fully empowered geography. The bank's cost discipline remained evident in the second quarter, with total costs almost flat versus a year earlier. This leaves us on track to deliver on our guidance of flat cost for full year 2021 relative to full year 2019. The cost income ratio improved by 4 percentage points to 53.7% in the first half of 2021, demonstrating the operating leverage within the business.
As I have already said, we can and we will deliver further operating efficiencies. Our strong balance sheet was maintained in the quarter with a CET1 ratio of 15.5%, equivalent to an MDA buffer of 647 basis points. This was despite absorbing 49 basis points of regulatory headwinds, thanks to our organic capital generation in the quarter. Capturing capital efficiency where we know we can do better will form a central part of our new strategic plan.
Combined, a robust commercial performance, cost discipline, and our strong balance sheet underpinned a solid profitability with an underlying return on tangible equity for the first half of 2021 of 7.7%. I will now hand over to Stefano, who will take you through the second quarter 2021 results in more detail. Stefano, the floor is yours.
Thank you, Andrea. Good morning, everyone. Let's turn to slide 11. In second quarter 2021, UniCredit delivered a sound underlying profit of EUR 1.1 billion, up 24.7% quarter-on-quarter. Revenues reached EUR 4.4 billion in second quarter 2021, up 5.5% year-on-year, reflecting very strong commercial revenues with net interest income plus fees up 2.8% year-on-year. The group's continued focus on cost efficiency and strong cost discipline resulted in second quarter 2021 cost equal to EUR 2.5 billion, almost flat year-on-year.
Our stated cost of risk reached 33 basis points in the second quarter 2021, benefiting from better than expected asset quality experience, including moratoria, partially offset by regulatory headwinds. As a consequence, we have decided to significantly improve our underlying cost of risk guidance to below 40 basis points, equivalent to underlying loss provision of less than EUR 1.8 billion. The strength of the balance sheet can be seen in our extremely healthy capital position. We closed the quarter with a fully loaded CET1 ratio of 15.5%, implying an MDA buffer of 647 basis points.
The key financial events of the second quarter 2021 include the following. Conclusion of the first share buyback program 2021, where UniCredit purchased, in aggregate, around 17 million shares for a total consideration of EUR 179 million, equivalent to 0.8% of the share capital. These shares will be canceled in accordance with the resolution passed at the AGM in April. A combined ordinary capital distribution of EUR 447 million for full year 2020 that was equal to a total yield of around 2%. Issuance of our inaugural senior preferred Green Bond for EUR 1 billion with a very attractive book.
Upgrade from Standard & Poor's that changed UniCredit S.p.A.'s outlook to stable from negative. The issuance of EUR 750 million of additional Tier 1 and of $2 billion of dual tranche senior preferred. Let's now look at the P&L in more detail, starting with the group net interest income on slide 12. Net interest income is showing sign of stabilizing and was up 1% quarter-on-quarter. Even if we adjust for the extra day in the quarter, net interest income was still up by 0.4% over the quarter.
Once again, this quarter, like prior ones, was characterized by massive excess liquidity in the system. Market rates, however, were relatively stable. Let me make a few brief comments. Demand for credit is showing a sign of recovery. All divisions bar Corporate & Investment Banking delivered growth in average volumes in the quarter.
We are starting to see the first sign of economic recovery feeding through the demand for credit. The picture remain mixed. While new Italian residential mortgage production is accelerating, new production in corporates continues to be offset by client repayments, a notable feature of CIB this quarter. Customer loan rates remain under pressure. Continued competition arising from excess liquidity contributed to lower customer loan rates in all divisions bar Corporate & Investment Banking.
Typically, front book pricing remains below the back book. Most of the impact from lower customer rates in the quarter was concentrated in Commercial Banking Italy, which also saw further growth in its guaranteed loan book. There was an incremental contribution from TLTRO III. As previously announced, we took an additional EUR 12.7 billion of TLTRO III at the very end of March. This contributed EUR 15 million to the net interest income in the quarter. Market rates were stable.
This can be seen, amongst other items, in the stability of the contribution from deposits and the minimal contribution from term funding and investment portfolio in the quarter. Our outlook remains unchanged. An economic upswing will drive, with some delay, a recovery in the demand for credit, a progressive reduction of the excess liquidity in client accounts as deposit gets spent or investment, as well as an improvement in our lending mix as we normalize our credit risk appetite.
However, until the system-wide excess liquidity is drained, customer lending rates will likely remain under pressure. Looking forward, as we move through the remainder of full year 2021, some headwinds can still affect NII until a sustained economic recovery takes hold. Let's turn to slide 13. Fees deliver another very strong performance as economies began to slowly open up through the quarter. Fees in second quarter 2021 were only 0.8% below the level of the prior quarter, which remember, was our highest quarterly fee income in over five years.
Year-on-year, there was a pronounced increase of over 20%, reflecting the initial material impact of the pandemic and lockdowns a year ago. Let's look at the component parts of fees in more detail. Investment fees generated another standout performance, matching the level of the first quarter and nearly 50% higher than a year ago. Asset management upfront fees continued to perform well, although not quite matching the high level of the prior quarter, thanks again to robust sale activity across the network.
Assets under management fees were up 6.9% quarter-on-quarter, a combination of both higher volumes and better pricing. Financing fees have continued their recovery from the lows seen in the through quarter 2020, and are now 2.7% above the level of a year ago. This was thanks to a strong rebound in credit protection insurance sales, which benefited from the recovery in residential mortgages production in Italy.
Transactional fees were up 10.9% year-on-year, and marginally up on the quarter, thanks to a recovery in cards and payment services, as these GDP-sensitive subcategories responded to a pickup in economic activity. In terms of outlook, let me make some general remarks. In terms of investment fees, we expect a normalization in the second half of the year. We do not expect the exceptional growth sale performance investment fund and insurance product to be sustained.
The recovery in transaction fees will continue into the second half as the restriction eases, although the rate of easing remains dependent on the vaccine campaigns. Financing fees can benefit in the second half 2021 from cross-selling opportunities connected with the better lending dynamics. With the ongoing rollout of the mass vaccination program across our key geographies, we remain cautiously optimistic that the worst of the impact of lockdowns on client activity is now behind us.
Let's turn to slide 14. Trading income in first half 2021 was very strong, reaching EUR 1.1 billion, double the level of first half 2020, mainly thanks to the high quality of the recurring client activity and also to a positive contribution from XVA. Client-driven trading was excellent, contributing EUR 733 million in first half 2021, up 27.7% first half on first half, excluding the volatile XVA component.
This strong performance came mainly from fixed income and currency, which did particularly well in the first quarter of the year. Non-client-driven trading income was up 21.9% first half on first half, mainly thanks to Treasury. Trading income, excluding XVA in the quarter, was above our quarterly run rate of around EUR 350 million on average per quarter, and is expected to normalize at that level in the second half of the year.
The higher contribution from dividends in second quarter 2021, more than double the level of second quarter 2020, was thanks to the other equity and financial investment as well as Yapı Kredi. Let me remind you that the dividend line also includes the contribution from the insurance joint venture in Italy. In second quarter 2021, this amounted to EUR 32 million. Let's turn to slide 15.
Our continued focus on cost efficiency and strong cost discipline led to first half 2021 costs of EUR 4.9 billion, down 1.2% first half on first half. This resulted in significant operating leverage with a cost income ratio of 53.7%, an improvement of four percentage points versus first half 2020. HR costs were 1.9% lower first half on first half, thanks to faster than expected FTE reductions, with FTEs down 3.4% compared to first half 2020.
These reductions were mainly in Commercial Banking Italy. Non-HR costs were flat first half on first half, with lower credit recovery expenses and real estate costs partially offsetting higher IT expenses and depreciation. Second quarter 2021 total costs amounted to EUR 2.5 billion, 2% higher than the previous quarter, mainly due to a one-off lower pension cost in Commercial Banking Austria in first quarter 2021.
COVID-19 has had a limited impact on our cost base year to date. In the first half of the year, we had EUR 25 million of COVID-19 related costs, mainly for security and real estate expenses. This was EUR 45 million less than in first half 2020. For full year 2021, we confirm our guidance of flat costs relative to full year 2019 and EUR 9.9 billion. Let's turn to slide 16. Before looking at the quarter and our revised cost of risk guidance, let me once again remind you of our approach to provisioning that we introduced during 2020, given the pandemic.
We did not change our provisioning approach in general, but rather, the aim was to proactively capture the future cost of defaults in the loan portfolio and properly reflect the forward-looking economic impact of COVID-19. Non-NPE provisions, therefore, included overlays as well as specific provision and regulatory headwinds.
As a result, you should always look at the cost of risk for full year 2020 and full year 2021 together, just as you should for the underlying macroeconomic assumptions. Our stated cost of risk reached 33 basis points in second quarter 2021, reflecting a better portfolio experience than expected and the moratoria extensions. This was only partially offset by regulatory headwinds. Specifically, the quarterly cost of risk was made up of 22 basis points of overlay provisions, 13 basis points of regulatory headwinds, less three basis points of specific provisions.
Our underlying cost of risk was 20 basis points in second quarter 2021, and 17 basis points in the first half of 2021. Benefiting from prudent underwriting, forward-looking provision in prior quarters, and the better macro scenario than expected, thanks to the successful vaccine rollout, we have had a better portfolio experience.
This has resulted in an improved cost of risk guidance for full year 2021. We now expect a stated cost of risk in full year 2021 of below 50 basis points, and an underlying cost of risk of below 40 basis points, equivalent to underlying loss provision of less than EUR 1.8 billion in full year 2021. Let's turn to slide 17. This quarter, we have changed the presentation of asset quality in this slide, moving to a full group view that has included the non-core.
This is consistent with our goal of fully running off the non-core by the end of 2021. Further details on our non-core can be found on page 35 in the annex. In second quarter 2021, both gross NPEs and the gross NPE ratio decreased to EUR 21.5 billion and 4.7%, respectively, thanks mainly to further disposals. Based on the EBA definition, the gross NPE ratio for the group, excluding the non-core, remains in line with the average of other European banks.
The coverage ratio decreased 0.6 percentage points to 57.6% in second quarter 2021, mainly due to a mix effect with greater proportional reduction in bad loans, which naturally have higher levels of coverage. Our underlying asset quality remains sound with no material impact from COVID-19 yet. At the end of the quarter, a large part of the moratoria portfolio expired, with only EUR 6 billion in Italy choosing to opt in to an extension.
Let's turn to slide 18. Our fully loaded CET1 ratio sits at 15.5%, equivalent to an MDA buffer of 647 basis points. This was despite absorbing 49 basis points of regulatory headwinds, including procyclicality, thanks to our organic capital generation in the quarter. We now expect regulatory headwinds to be below 1.2 percentage points for full year 2021 overall. Given the regulatory headwinds year to date, this implies the remaining headwinds in the second half of the year will be below 0.8 percentage points.
Our MDA buffer in full year 2021 is expected to remain above 400 basis points. In the quarter, we completed the first buyback program 2021, where UniCredit purchased in aggregate around 17 million shares for a total consideration of EUR 179 million. This is equivalent to 0.8% of the share capital. These shares will be canceled in accordance with the resolution passed at the AGM in April. Our capital distribution policy is confirmed with an ordinary distribution of 50% of underlying net profit, comprising cash dividends and share buybacks. We are currently accruing for the cash dividend at a rate of 30%.
In addition, for 2021, an extraordinary capital distribution of EUR 652 million, fully in the form of share buybacks, was approved by the AGM in April. Execution will be later in the year, subject to supervisory approval. The total capital distribution for 2021 will be EUR 1.1 billion, equivalent to a yield of around 5%. I will now hand over to Andrea.
Thank you, Stefano. Let me start by updating our guidance for full year 2021. Assuming a progressive economic recovery over the remaining months of the year, the pace of which will be determined by the rate at which mass vaccination programs allow restrictions to ease, and subject to stability in interest rates, full-year 2021 revenues are expected to be in line with previous guidance at circa EUR 17.1 billion. Net interest income can be affected by headwinds in the second half of 2021, while transactional fees will likely benefit from tailwinds.
Full-year 2021 costs are expected to be in line with full-year 2019 levels at EUR 9.9 billion, consistent with previous guidance. Our full-year 2021 underlying cost of risk guidance, however, is now expected to be below 40 basis points, equivalent to loan loss provision of less than EUR 1.8 billion. Our recent asset quality experience, including moratoria expirations, suggests that the outturn for the cost of risk may be even better than our revised expectations. Consequently, the underlying net profit for full year 2021 is now expected to be above EUR 3 billion.
At the start of today's presentation, I updated you on some of the thinking behind our new strategic plan. It will be based on three guiding principles, namely simplification, digitalization, and client centricity. The overriding objective of the plan is to deliver sustainable returns above our cost of equity. To do this, we will manage the bank by optimizing a combination of 3 levers, risk-adjusted revenue growth, operating efficiency, and capital efficiency. My first 100 days has been focused on putting in place the team and organizational structure to deliver that plan.
I very much look forward to doing so and to seeing you all in the fourth quarter, when we intend to present the new strategic plan in detail at our Investor Day. I will hand over to Jörg Pietzner, Head of Group Investor Relations, for the Q&A session. Thank you, everyone.
Good morning, everyone. Before we go to questions, let me make a small announcement that I hope will make your life a bit easier. By popular demand, we have now published our divisional database back in Excel. As usual, if you would be so kind as to limit your questions to a maximum of two each. Many thanks. Moderator.
Thank you, Mr. Pietzner. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. To ensure better audio quality, please make sure you are not on loudspeaker. Anyone who has a question may press star and one at this time. The first question is from Antonio Reale with Morgan Stanley. Please go ahead.
Thanks for the presentation and the divisional database. Good morning, everyone, also from my side. A lot to digest. I'll try to stick to two questions, two and a half maybe, actually. The first one is on M&A. The last quarter you said M&A deals need to show not only financial discipline, but also have a strategic fit. Yesterday as well, if I remember correctly, Andrea, you mentioned you don't think market share the reason behind UniCredit's profitability gap in Italy, which we agree with, by the way.
What do you think is the driver of the gap then, is my question. What's the commercial rationale for buying Monte Paschi's assets here? I ask you this, don't get me wrong, please, but you participated yourself in your previous life in deals that were accretive on paper and turned out to be not as good in practice.
How can you assure us that the franchise is worthwhile? That's my first question. Related to it really, will you be able to do share buybacks as you integrate Monte Paschi? Do you think the executional risk is something the ECB will be comfortable with? It seems like NII is starting to stabilize also in Commercial Banking Italy, which is good to see. Fees have been strong. I've heard your comments on the second half of the year for investment fees.
I still struggle to understand why you've reiterated your revenue guidance at EUR 17.1 billion for the full year. You seem to be implying a significant slowdown, I wonder how to square that with your previous guidance, which was always for second half to be better than first half, consistent with reopening. Those are all my questions. Thank you.
Thank you, Antonio. We'll have the NII done by Stefano and obviously the ones on share buyback and Monte Paschi by Andrea. Andrea?
Okay. Thank you, Antonio. Strategic rationale, I guess. I think, as I said, the M&A is an accelerator at the right terms. Do we absolutely need to do a transaction in Italy? We do not. I stand by my statement that the franchise is fully capable of growing profitably, and we will explain exactly how during the presentation of the business plan.
Having said that, we believe that not only Monte dei Paschi would come at the right terms, if the principle we have agreed are held, but also, and most importantly, help us rebalance our presence in Italy to center north. Monte dei Paschi brings about 17.7 points of market share in Tuscany for us, about 4.5 in Emilia-Romagna, about 4.5 in Lombardy, and about 8 points in Veneto.
That, for us, means that within the entire network of UniCredit, we rebalance our center towards center north, away from center south. That is healthy. Just as you know, Italy is not a uniform country in terms of economic performance, in terms of characteristics. The ability to rebalance towards center north at, let's say, adequate terms, is a clear benefit of this transaction.
The other clear benefit of the transaction is our plan looking forward is predicated on a number of actions on digitalization and multiple access to clients. Those actions obviously benefit from being applied to a larger scale. We have 7.6 million clients within UniCredit. Potentially acquiring another 4 million clients would greatly benefit the scale we have in rolling out these initiatives for the benefits both of our clients and our core efficiency. This is the industrial logic that we see.
Obviously, within the principles that we have set. No deviation. Separately, you asked also about integration and about ECB. Obviously, I cannot comment on the ECB, and the ECB will obviously have to sign off on the transaction if and when it is there to be signed off for. At the moment, we're just entering due diligence, so it's premature. In terms of integration, all integrations are complicated.
This one, I would say, would be simplified to a great extent by the fact that we would be purchasing only parts of a franchise, and obviously parts that we select. By purchasing what is complementary, and by purchasing what fits with us, and by excluding what doesn't, obviously the integration becomes much simpler than otherwise. These are my two answers on the matter.
I think, Antonio, you had also the slight twist on the integration. If it's capital neutral, will this have any impact on any planned share buyback or not?
For the time being, I'm only commenting on the plans that we have at present, and obviously we stick by them. I think with respect to looking forward, we will discuss and debate with you our new plans, which will be grounded on the new business plan when we present it. As a principle, I think you can expect that capital returns are center pillar of any plan we would roll out.
Antonio, in relation to the shares buyback, if you are referring to the buyback of this year, as I was highlighting before, the 652 million shares buyback has been already approved by the AGM, take in consideration that ECB repealed their dividend distribution policy, we will then expecting to file the authorization process and then to execute the buyback later in the year. In relation to your questions, as a matter of fact, were 2, 1 in relation to the NII stabilization, the other 1 in relation to the previous guidance. I will start from the NII stabilization.
If you look the dynamic of the net interest income in the quarter, I mean, not only Commercial Banking Italy, but also Commercial Banking Germany and CIB, were up slightly above EUR 10 million quarter-on-quarter. As a matter of fact, if we are looking at page 23 of our market presentation, you can see the commercial loan dynamic in relation to both volumes and rates. In relation to volumes, all the division but Corporate & Investment Banking are growing.
More specifically, Commercial Banking Italy on averaging is increasing the stock of EUR 2.6 billion. The point is that on the client's rates perspective, we are down 4 basis points on the group and 10 basis points in Italy, due also to the combination of state guaranteeing loans and a reduction in the rates of short-term loans and overdraft.
That's why, in relation to the dynamic of the net interest income, we are highlighting that we might have further headwinds deriving from the pressure on the customer loan side, because the front book pricing is lower than the back book pricing, until the dynamic of the volume is more sustained. In relation to the guidance, yes, we are in line with the previous guidance, meaning be broadly in line with EUR 17.1 billion.
That means that we can be slightly below or above EUR 17.1 or so for a few hundreds of millions. As we were highlighting before, we are expecting on one end to have headwinds on the NII, but on the other end, on fees, we are expecting to have tailwinds, especially on transactional fees.
Thank you.
Thank you. I think it is not so bad, Antonio, getting four and a half answers on two and a half questions. Next question, please.
The next question is from Andrea Filtri with Mediobanca. Please go ahead.
Yes, good morning. First of all, thank you for returning to the Excel publication. I have two questions. One is on your cost of risk guidance, and another one is on M&A. On your cost of risk guidance, is it implying any usage of overlay provisions, and if so, how much? Could you explain us the mechanics and the timing of when, for instance, auditors could require you to either use or release overlay provisions? The question on M&A is, if an eventual MPS transaction would imply that there is no room for another industrial deal. Thank you.
Thank you, Andrea. Cost of risk will be done by Stefano and then M&A by Andrea. Stefano.
Yes. In relation to overlays, as we shared, we did have overlays in 2020, but also during 2021. As a matter of fact, when we are looking the second quarter 2021, we had overlays fundamentally connected with the performing portfolio, more specifically connected with the increase of coverage on the loans under moratoria, whose clients decided to opt in.
The overlays are of fundamentally two typologies. One is connected with the macro scenario, the second one is connected with the movement of position to Stage 1 to Stage 2. We are updating the macroeconomic scenario twice per year. One was just for the second quarter, and we will update in the second half. In the Q4, in relation to the macro scenario, we've updated macroeconomic conditions.
In relation to the second typology of overlays, that's more connected, let's say, with migration of Stage 2, it will be dependent on the moment when we will have changes in the key parameters and also the timing necessary in order to look the dynamic of the Stage 2 portfolio, especially in Italy, following also the In considering the amount of position that are under moratoria in order to understand which position will migrate to Stage 1 and which position will migrate to Stage 3. The timing of these will be by the end of 2021 and first half of 2022.
Thank you, Stefano. Andrea.
Andrea, thank you. Let me remind everybody what I say. I do not consider M&A to be a strategy nor a purpose in itself. I always consider it to be an accelerator or potential improver of our strategic outcome. In the case of MPS, the timing is right. The condition would be right, in my opinion. The position between the parties is aligned. Because of these reasons, we considered moving forward on it on an accelerated pace as we can, at this juncture, combine that integration with the roll-up of a broader plan for Italy.
As such, it is an accelerator, it is an improver, and it is something that we can do without delaying too much the plans that we have for the broader franchise, which I insist are the plans that bring the lion's share of the value here. With respect to doing other deals, again, I can't comment, but honestly, there is no such focus, and I do not anticipate any conditions such as this one to be available elsewhere.
Thank you.
Thank you Andrea. Next question, please.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi. Thank you. I also had two questions on M&A and cost of risk. On the M&A, you mentioned the prerequisite of capital neutrality. Should we assume that that neutrality will be pro forma for future regulatory headwinds, which could be substantial for both banks, bearing in mind that both banks have given guidance for substantial regulatory headwinds to come? Then on the cost of risk, it's been very low. I see that the specific cost of risk in Q2 is actually negative.
You said to look at 2020 to 2021 together, so clearly there's some benefit from the cost of risk in 2020. What should we think is the actual underlying cost of risk this year, net of excluding the benefits from 2020? Or to put it another way, what should we think is the underlying cost of risk, post the COVID-19 crisis, in 2022? Thank you.
Thank you, Hugo. Cost of risk, Stefano will answer and then Andrea on the capital neutrality of the deal with or without great headwinds. Maybe Stefano first.
In relation to cost of risk, you are right. As we were commenting, we need to look at cost of risk in combination 2020 and 2021. Within that, we will have a normalization during 2022 at lower level in comparison with the sum up of and the cumulative cost of risk of 2020 and 2021. More specifically, we are expecting an increase in relation to 2021 of the underlying cost of risk during the course of the second half, also considering a higher migration to NPEs, especially in connection with a portion of the portfolio under moratorium in Italy.
Thank you. Andrea.
With respect to capital neutrality, maybe a more general comment first. On this transaction, we have taken a relatively unusual stance of defining guiding principles before entering into due diligence and in negotiations. That makes the expectation of both parties transparent and allow us to comment to you on which terms we would agree to a deal. Having said that, we have not entered into detailed negotiations, and we have not entered into due diligence.
What I'm going to say now is my expectation, but obviously, as you go through due diligence and negotiation, such expectation may vary. For us, and I believe the other side, the capital neutrality means UniCredit does not want to have a transaction that, putting the financing aside and all of that, dilutes the capital strengths of UniCredit. How is the capital strengths of UniCredit defined?
It is defined by the last available CET1. It is also defined by taking into considerations other regulatory factors, such as stress test and other headwinds. Now, everything has not been mapped up. I would highlight that our counterparty is the controlling shareholder of Monte dei Paschi di Siena. It is not the bank, so in this interaction, we have not gone into that detail. We just set the principle, and the next few weeks, due diligence and negotiation will lend the exact answer to that question, but those are my expectations.
Thank you. Next question, please.
The next question is from Fabrizio Bernardi with Bestinver. Please go ahead.
Hi, everybody. Unfortunately, just a few questions because I couldn't take part to the call of yesterday, so I would have 10 probably. First of all, I'm a little lost about the part of Monte Paschi you may buy. You mentioned, for example, EUR 80 billion of loans of Monte dei Paschi in the perimeter, which is actually their entire lending portfolio. Actually, the question is, if you want to buy only the commercial franchise or maybe just a part of it and/or also the corporate center.
I understand that the due diligence has not started yet, but maybe you can drive us through the, let's say, the building block of this deal. Secondly, a general question about the protection that the government may give you. What do you have in mind about the way the protection may work?
NPEs and/or legal risk are expected to be deconsolidated before you get the control of Monte dei Paschi, or UniCredit will get the protection once and if the risk materialize. Sorry, not a question, but maybe you can add something about the stress test, whose results should be out today. Maybe you can give us any color about this. Thank you.
Thank you, Fabrizio. Maybe the first two on the perimeter and the potential protection by Andrea, and then on the stress test with Stefano. Andrea.
Okay. Fabrizio, again, I think the message we're giving with the principles with respect to the perimeter is that we won't be buying the entirety of Monte dei Paschi di Siena. This is not an acquisition of Monte dei Paschi di Siena, it's an acquisition of a subset. That's the first point. The second point is, at most, and I underline at most, the subset will include the entire commercial franchise and some other activities on the side. That at most perimeter will then be, let's say, refined by the results of the due diligence. I'll give you an example.
On lending, we may find that there is a level of loan concentration, or there may indeed be some exposures that we are less optimistic about than the bank, in which case, we will either get protection or leave them behind. Obviously, as I said yesterday, we would define the perimeter in a way that the level of complementarity and the simplicity and the speed of integration is maximized. Within the obvious restrictions, the transaction needs to make sense for both parties.
I can't say much more than that at this juncture on this. The second thing that you're asking is about protection. I think the way we look at risks is the following. Number 1, we have NPEs. The NPEs of Monte dei Paschi are excluded in full from the transaction. We're not getting protected, we're not getting covered, they're not included in the perimeters. As such, if you do a pro forma of some sort, you should assume that you take the two banks together, and one bank comes with 0 NPE, diluting the NPE ratio of the overall.
The second topic is performing exposure, that are within the perimeter that we are buying, but as I said before, we may have a different view on, or may have an excessive concentration of some kind. Depending, we would either leave behind in the same way as the NPEs or see what we do within a reasonable short period of time to have the ability to put them back.
While we are ready to take the normal legal risks of operating banking activity in Italy, obviously not getting any protection on that, and we will examine that during the due diligence, we would be excluding all the extraordinary legal risks, the ones that started at EUR 10 billion and are clocking down at the moment. All those will remain behind. Hope that gives you enough answer on your question.
Thank you. Stefano, on stress tests?
Yeah, on the stress tests, the assumption are conservative as you know, so, the capital depletion would be important taking into consideration the assumption. Having said that, this will be counterbalanced by the high capital ratio because the starting point in our case is above 15. The vast asset quality that we have take into consideration all the action that we did so far and also the reduced cost base.
You will see the resilience of the group from this standpoint. For more details, you need to wait, however, the official publication that is today, so in the afternoon, and you will see more specifically the result and the related resilience.
Okay. Thank you very much, and also thank you for the database again.
You're welcome. Next question, please.
The next question is from Giovanni Razzoli with Deutsche Bank. Please go ahead.
Good morning to everybody. Two questions on the deal. A clarification on the legal risks that you have just mentioned. If I look at the Monte dei Paschi presentations out of the EUR 10 billion of legal risk, and you have flagged that they are trending down, can I assume that those which are not company specifics are those excluding the EUR 5.5 billion, relating to the financial disclosure?
So you would be left with an ordinary legal risk in the tune of EUR 4 billion. Is that a figure that is completely out of discussion or is something that is more or less reasonable? The other question, also taking into account of what you've said yesterday, you have mentioned that you do expect a double-digit EPS accretion from the deal in 2023, if I'm not mistaken.
Shall we take, I guess, the 2021 net profit of more than EUR 3 billion as a starting base, which squares to an EPS of €1.6 per share as a starting base where to create that double-digit EPS accretion after the deal? Thank you.
Thank you, Giovanni. I think they are both for Andrea.
Okay. The first one is which risk we take. I repeat one thing, and sorry for that, but at the moment what we have is outside-in guiding principles, agreed with the controlling shareholder. We don't have granularity, we haven't had access to numbers, and we have not entered in any other negotiation beyond establishing the way we will look at the next steps of this transaction, i.e., the guiding principle. A lot of that is going to be part of what we do in the next few weeks.
Now, from our point of view, all the risks that are extraordinary, and in particular, several EUR billion that stay in legal lawsuits at the side, stay behind. The normalized legal risk that the franchise always take in doing banking activity, and subject to what comes out in the due diligence, it is fair that moves with the selected perimeter. With respect to the EPS accretion, again, we set a principle. We wanted to have a transaction that was double-digit EPS accretive, and hence ensured a tangible book per share enhancement of a significant nature and an appropriate return on investment.
That is why we have set that pillar. How we get to that pillar is very premature to discuss, because a lot will depend on what is the subset that we buy, and what those impacts are. In approaching the negotiation, the parties have agreed to have an outcome of this nature. That's all I can say for the moment.
Thank you.
Next question, please.
The next question is from Domenico Santoro with HSBC. Please go ahead.
Hello. Hi, good morning. Thanks for the presentation and the call, of course, good luck for the next 40 days. I do have a couple of questions, especially on the slide number eight, where you show clearly some discontinuity, I think, with the previous management. First of all, to reason with the answer that you just gave to the colleague, is there any target in terms of uplift, in terms of RoTE that you would like basically to achieve by a merger with Monte dei Paschi?
Of course, here there is a trade-off between complexity of the deal and potential impact in terms of return on the capital that is invested. That would be very helpful for us to square up everything. The second is more on the way organically you want to push return on tangible. The former management strategy was very clear, selling, unfortunately, some very precious business to gain capital and to de-risk the balance sheet and also the book has been cut significantly, the loan book, over the last couple of years. Q2 shows already some encouraging sign in terms of inflection point, loan growth.
I'm just wondering whether you are changing a little bit the risk appetite already across the board on the franchise, and if you have already thought about reinvesting the capital into the product companies, especially if you have any plans at the moment to rethink a little bit the strategy in the asset management, in the insurance, where potentially now the return on tangible is probably the highest in the sector. Thank you very much for your answer. Appreciate it.
Thanks, Domenico. They're both for Andrea. One is concretely, what does the MPS deal do to return on tangible, and then organically, how do you get the return on tangible up, and does it have to do with product factories and risk-taking?
Thank you, Domenico. Obviously, to be consistent with what I've said, that most of the value is within our franchise, and most of our focus is to make that value appear and crystallize it. We would not be doing a deal unless the deal has two characteristics. It's significant value-enhancing enough for us to take on the additional complexity, as you defined it, to integrate the two franchises.
You should expect that any deal that we present would, and this is how we try to address it with the EPS enhancement and the rest, would improve our return on tangible equity. Otherwise, there is no point. That's a general statement on that. We believe that at this juncture, because our plans are ready and they affect how we approach the client and a number of other elements of our strategy, we're in a good position to roll out on an expanded perimeter.
Timing is very important, and perimeter is very important because it simplifies and it accelerates the integration to minimize the disruption that it could have to our franchise. It's a trade-off, but we believe that the trade-off at these terms is worth taking. The second thing that you said is the approach. As I think I said at the beginning, I think UniCredit underwent a phase of rationalization and restructuring. As of today, or as of my arrival, it has a solid capital position, and it does have solid liquidity and solid risk management, and our position in NPEs is quite good.
It is time to move the emphasis and the focus on doing what any organization should do, which is grow profitably, grow sustainably, and grow at a cost that exceeds the cost of equity. We're here to reward the capital above this cost, or at least try. This is the emphasis. As we look at that emphasis, we have, as you refer to page 8, three levers. One is revenue growth, or in my opinion, maybe in part answering the question, net revenue growth.
For me, revenue growth in a bank has relatively little meaning. What is important is revenue growth net of loan loss provisions, so net of risk. Important number. We want to grow that sustainably, and therefore there are trade-offs on the risk-efficient frontier that we may take, but always with a view that the net revenue growth needs to be healthy and growing.
With respect to the risk appetite, which linked to this portion, we have only normalized. What does normalized mean? We went back and reviewed our risk appetite and went back to what it was in 2019, and obviously adjusting for a new environment, but to what it was in 2019. We are not expecting a significant increase in risk-taking from the plan. Actually, it may even be the opposite. I don't know which side of the fence is going to fall because we haven't finalized the plan.
The places where we can make significantly better return is to focus much more keenly on capital efficiency. Capital efficiency, you may look at it in this way. Any business that is capital light, as you mentioned, insurance, particularly if it's distribution only and you don't have insurance tail risk, asset management, and all of these kind of products are obviously capital light. The more I increase that part of my revenue base, the more I do two things.
I grow the revenue line, but I also de-risk my net revenue growth because I have earnings that are, let's say risk light. Most importantly, they're earnings that are capital light. I'm earning releasing more capital than if I was earning by lending. The second part is when instead we have capital-heavy businesses, in my mind, I bifurcate. There are capital-heavy businesses that exceed the cost of equity, and that is phenomenal. We will be focusing on those in a very granular fashion.
There are capital-heavy businesses that are not meeting the cost of equity, and we will need to review them one by one and answer the question, are those businesses we want to be in, we don't want to be in, we want to de-emphasize because they have an effect on the better businesses. Otherwise, there will be a lot more discipline on that topic. Therefore, what we are trying to do is exactly what I said, get every unit of capital that we use it with a view that we need to exceed our cost of equity. If we don't, reassess.
Thank you so much. Next question.
The next question is from Azzurra Guelfi with Citi. Please go ahead.
Ciao. Good morning from my side as well. A couple of questions. One is on your default rate. We have not seen any deterioration yet, and the loan loss provision are still very good. Is it fair to assume that you expect this to peak, especially in Italy, in the fourth quarter? How do you think over the medium term this will evolve? The other one is on your digital strategy. Can you give us some example on what are the main action and processes that you would like to change, if it's not too early to ask?
If I may, very quick clarification on the deal. You said that the counterparty for your discussion is the main controlling shareholder of Monte dei Paschi. Do you assume that in the negotiation there is no additional need of approval from the European Commission? Thank you.
Thank you, Azzurra. The default rate will be done by Stefano, and then on the digital strategy, if we can say anything, and on the counterparty for the deal will be Andrea. Stefano?
Thank you. Azzurra, the default rate for the group was 1.5%. All the division, but Italy had the default rate so far lower than 2020. As a matter of fact, also Commercial Banking Italy had a default rate of 3.4%, I mean, excluding the DoD effect is 2%. What we are expecting is fundamentally for the rest of the year, a default rate of all the division, fundamentally in line or slightly below the one of 2020.
Italy, we are expecting a higher default rate in comparison with the level of 2020, also following the migration of some of the position to Stage 3, the one in relation to the loan under the moratoria, but not a significant increase of default rate in comparison with 2020.
Thank you. Andrea?
I'm not going to go very far on digital strategy because it is probably one of the core pillars of the plan. I would just highlight what it means in my head. What it means in my head is that usually in a bank today, when people come with plans or they look at their businesses, they look at revenue, they look at cost, and now they will look at capital, employment.
What they need to understand is that in a bank, IT, digital, data, are absolutely critical and need to be embedded in any thought process, in any project, in any initiative they do from the beginning. It is not I have this great initiative and IT will digitalize it. It is a joint team effort as a platform, as a team, that develop jointly the project.
That means embedding IT in every division, in every area, with a digital and information officer embedded in every business and in every area. The group maintains architecture, framework, direction of travel, then digital and data inform and are embedded in everything we do from day one within the team in every business. That's the philosophy that we're going to apply, and we're expecting quite a lot of impact from that.
Beyond that, I'll leave it for the Investor Day. You raised a question also on Monte dei Paschi di Siena and whether there were approval from the European Commission, et cetera. Absolutely think that there will be a number of parties that need to approve this transaction. At this point in time, what we have done is just set the principles for having our due diligence and our negotiation. As the deal takes place, if it moves to conclusion, we will obviously have to clear all the regulatories and other approvals that we need to clear.
Thank you. Next question, please.
The next question is from Alberto Cordara with Bank of America. Please go ahead.
Thank you very much. Just going back to the Monte Paschi deal. You've been very clear about your strategy. Just wanted to clarify a few issues. The first one is that the acquisition most likely will involve a subset of Monte. I don't know if you can give us a bit more clarity on the size of the potential subset. In terms of the transaction being capital neutral, does this definition of capital neutral include also the restructuring cost that you need to take on to integrate Monte Paschi?
I think you mentioned this. I just wanted to get back on the point because I think it's very important. You exclude any NPE. You are going to have adequate protection from other potential credit risk, which means, if I understand correctly, that you're going to require some guarantees on high-risk performing loans.
In terms of the operational performance of the quarter, I just wanted to have a bit more clarity on NII. On the slide where you show NII progression Q on Q, there are EUR 25 million which are related to other, I just wanted to, if possible, to have a bit more clarity on what other means. There is an EUR 11 million plus, which is coming from volumes. When I look at the performing volumes, these were down by another 2% quarter on quarter.
You had a negative progression of volumes, which doesn't seem to abate. First of all, I don't understand why we're talking about positive impact on volume if they're down. As a broader question, when we should expect to see loan growth to start again, and how the recovery fund can help in that respect. Thank you.
Thank you, Alberto. I was counting five questions, but we have a good day today. Maybe six. Stefano will do the one on NII, the other, and then volumes and the outlook for that, and then we give it to Andrea for the three deal-related questions. Maybe Stefano, you want to start?
I will start. In relation to the NII walk at page 12 of the market presentation. In other, yes, it's positive, EUR 25 million in there. We are fundamentally including the effect deriving from the day effect. The day effect difference between Q1 and Q2 is around EUR 13 million. The other reclassification are connected to the impact deriving from the DoD reclassification in Q1.
These are the two elements deriving that effect. In relation to the performing volumes, I think it's worthwhile to differentiate between the average customer volumes that we have. Okay? The average customer volumes were up in the quarter. If you look at page 23, as a matter of fact, you can see that we closed the quarter with average commercial performing loans of 391.
We are looking the average because the average is contributing to the NII of the quarter. As I was alerting to you, we are up fundamentally in all the divisions. Commercial Banking Italy more than EUR 2 billion, Commercial Banking Germany around EUR 1 billion, Central and Eastern Europe around EUR 600 million, bar Corporate & Investment Banking that is down around EUR 1.6 billion in relation to the average.
With regards the dynamic and the expectation, I will park aside a little bit the recovery fund, because the recovery fund will be GDP accretive and will be accretive also in relation to the banking lending, but the effect will be more long-term. Within that positive effect will be more in 2023, 2024, in comparison with, let's say, 2021 and 2022, in relation to the dynamic that we are seeing and that we are expecting, we'll see an higher acceleration on the retail side.
For example, both in Italy, both on raising mortgage and also consumer financing, while still on the corporate, it will take a while because the liquidity in the system is huge. We think that the corporate, before they utilize their liquidity for working capital, we will have the growth. In relation to the growth on corporates, we think that it will be more in the final part of 2021.
Thank you so much. Quickly, Alberto, there was just one thing I don't know if that was clear, in the other component on top of the 30 million days effect, the DoD reclassification increases the amount of non-performing loans, and that is the NII-related component relating to these non-performing loans. On the three questions you had for the transaction, back to Andrea. The first was the subset of what we're going to buy. The second was the capital neutrality, including restructuring. The third one was protection mechanism on the risky performing parts. Andrea?
Okay. with respect to the perimeter that we're going to buy. I would say as an intention, 1 of the reason why this transaction works with UniCredit is because the high complementarity of the networks and of the client franchises mean that we are able to combine the 2 franchises with minimal overlap. Therefore, subject to, let's say, the quality and the effect of the due diligence, we will try to maximize the commercial network that we would be bringing over.
We'll be excluding what does not make sense, and that would be overlapping anyway. I don't have much more than that to say on the topic because it's just a principle, and once we are granular, we will have a much better idea, but that's what we have agreed. In terms of capital neutral, our interpretation of capital neutral is including everything. You touched on exclude NPEs and protections, et cetera. The way, at least I look at it, is the following. We have a loan book.
We eliminate from the loan book that we are purchasing the entirety of the related NP exposure. Entirety. We just don't bring it over. It's not covered, it's not protected, it's not guaranteed. We don't bring it over. At the same time, during due diligence, there may or may not be performing exposures that we view differently from Monte dei Paschi, obviously more negatively. If that were to be the case, we'll find the appropriate form to either exclude them immediately from the perimeter or exclude them over time, over the perimeter. When I say exclude, give them back.
That's for the NPEs, and that's for the performing exposures where our risk appetite may differ with the risk appetite of Monte dei Paschi di Siena, or where there could be excessive concentration. For the other risks, you're left with extremely legal risks, and we have this touched on that before, i.e., we will leave them behind.
Thank you. Next question.
Thank you very clear.
The next question is from Delphine Lee with JPMorgan. Please go ahead.
Hi. Thank you for taking my questions. Just two from me. The first one is going back to the transaction. Monte dei Paschi is not the only M&A option that you have, given your excess capital. You must have thought about the alternatives. Just wanted to understand a little bit, why not Banco BPM and relative, what is Monte bringing to the table, beyond the valuation and the financials? If you could just elaborate a little bit on that, and if you would rule out completely Banco BPM if this Monte transaction doesn't go ahead?
The second question is to go back on your net profit guidance of above EUR 3 billion. You've just revised your cost of risk guidance by 20 basis points from 60 to 40 basis points, and your net profit guidance doesn't seem to have changed. Are you just being conservative or what are we missing? If you could just maybe comment on this, if there are things that has been forgotten in the process. Thanks for giving a bit of color. Thank you.
Thank you, Delphine. We did change, but I'll let Andrea comment on the substance, but on the form, we did change the underlying net profit guidance. We were around EUR 3 billion, and we say now above EUR 3 billion. Now that may be subtle, but, and for the less more subtle part, I'll give to Andrea, also on the BPM versus Monte.
Yes. I confirm what Jörg just said. We have slightly reviewed the guidance from around, which means below or slightly above, to definitely above. We are more positive on what we will achieve by the end of the year. We believe we are realistic but conservative in the way we state our expectations. With respect to the transaction and other M&A options, I'm not going to comment on any specific transaction. It wouldn't be appropriate. What I will say is that, as I said, while M&A is not the purpose, it's an accelerator. It has the objective of adding and enhancing the performance of what we have.
I believe strongly, probably, given my background, that it is the duty of management to analyze every option that is available and keep an eye on it, be ready if that option was an option that is positive for the bank. At this point in time, we feel strongly that at the principles we have highlighted, and given the timing and given the ability to carve the perimeter, Monte dei Paschi is the best option and the only option on the table at this point.
Thank you. Next question, please.
The next question is from Jean-François Neuez with Goldman Sachs. Please go ahead.
Hi, good morning. I wanted to ask, on reflection about Monte dei Paschi after yesterday. I realized that you were talking about minimal overlap, which made me think that probably the cost synergies are there to be expected, but maybe not necessarily the main driver of accretion over the base accretion, which you expect to be neutral before synergies. I just wanted to understand what you thought you can do better with the Monte dei Paschi client base once inside UniCredit, and for example, either fund it better or penetrate or cross-sell it better, and if you have already an idea about that. That was my first question.
My second question was, with regards to the levels that you are talking about with regards to improving the return on equity business, the capital headwinds that had been lined up in the past and continue to be a feature, for example, this quarter and also the guidance for the rest of the year, are an extremely strong burden from a density which is already quite high.
I just wanted to know whether you could share your early thoughts about those headwinds in the future or ways to mitigate the growth headwinds with maybe at the end net headwinds, which wouldn't be the same. Obviously for the return on tangible equity, it's an extremely strong weight to carry. Thank you.
Thank you, Jean-François. I think both of them are for Andrea.
Jean-François, Monte dei Paschi, minimal overlap. Let's look at cost for a second. There are two ways of looking at it. One, you buy something greater, you pay for something greater, you then reduce the cost and you get the synergies. You're just reducing your cost base at that point. The other one is you just don't include those costs. As you redefine the perimeter, you have almost, if you want to look at it that way, a perimeter that comes with a more efficient cost base directly as you have carved it out.
The value creation, and this is why I insist, do not look at Banca Monte dei Paschi di Siena as it is. Look at what the perimeter could be. Once you look at our perimeter, their perimeter, what is complementary and what we can bring over, you apply to that a general objective that will obviously have a read across on valuation on what our EPS should do, on our tangible book per share should do, on what our return on investment should be.
With an attention to the fact that what we would be bringing in is a franchise that has been completely cleaned inasmuch as we leave behind the risks. That does not mean that the performing portfolio is without risk. It will need to perform, and we will need to adapt to that. We are bringing in something that starts from 0 risk, and that will be blended in what we're doing in Italy.
The impact for us is, one, the principle and the structuring of the transaction, and two, as we roll out our plan, our digital initiatives, our multi-channel approach, et cetera. Instead of rolling it out on 7.6 million clients, with the same investment, with the same approach, we're going to roll it out on almost 12 million clients. That makes a significant difference on the efficiency of those investments.
With respect to capital headwinds, there being a big burden for RWA density, and that we already have a higher RWA density, and how we mitigate that. I totally agree with you. We have a high, in my opinion, excessive RWA density. We have, like every other bank, significant headwinds.
However, I believe, and I have some experience in that if you go really granular on the business you're doing, and you prioritize how you're deploying your capital on the basis of the return on that capital, you can make a lot of progress in improving the density. What do I mean? On a blended basis, of course. What do I mean? A corporate loan will not have the same density as a mortgage. A mortgage will not have the same density as a consumer loan. A consumer loan will not have the same density as an insurance product, with or without a risk.
If as you design the plan, you don't say, "I'm going to grow without a differentiation in all of these, and whatever the market takes, I do," but rather you take a step back and you say, "What is it that results in the highest return on tangible equity risk-adjusted?" Therefore you're going to prioritize either the products that are capital light. We are spending more time in driving those products, and I think you will find that we have quite a bit of capacity on that.
2, when you are on the products that are more capital heavy, A, that they use capital, a loan, within the mix of those loans, you're going to prioritize the loans that either have a higher return on tangible or are lighter, and you're going to de-emphasize those other ones. That is why I said we all are, and have been always that way, looking at, I need to maximize revenue growth. That is not exactly right. I need to maximize revenue growth of a mix of products that results in the highest RoTE.
If tomorrow I were to do 100% of my growth in the highest density products, and the ones that obviously have a RoTE which is very low, you would look at my density and say, "Your density is increasing and your return on tangible is increasing because as you're growing, you're absorbing more capital than the returns you're generating." If instead I do that in other products that either have a very high return on tangible, or a higher return on tangible, or are capital light, my growth will not use as much capital, and the return from that growth will feed out much more capital than they use.
If you start thinking about those concepts, and you're able, over time, to steer the mix of your franchise, you can offset some, hopefully all, but some of your headwinds by a change in mix, which will affect your density. Sorry for the long answer.
No, I think we'll stop because we want Jean-François to come to our investor day. Next question, please.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Thank you for taking my question. The first one is on governance and the shareholder structure. I was wondering if you would be happy to have the government into your shareholder structure. In other words, I'm asking you if you prefer to make a cash deal or a share swap in case of a deal with Monte dei Paschi di Siena. The second question is on capital. Let's see what's going to happen with the stress test this afternoon.
I assume there will be a capital deficit for Monte dei Paschi di Siena. We read EUR 1.5 billion-EUR 2.5 billion capital deficit. I was wondering, what do you expect from the regulator, from the SSM? Do you think that it would be possible to close the capital gap through DTA in case of a merger, or the regulator will ask for a proper right issue?
On the perimeter, now it's clear to me that the branches in Sicily will not be part of the deal because UniCredit has already a quite high market share, more than 20% market share in Sicily, and there you will go above 30% in a few provinces. Apart from that, I was wondering the headquarter cost in Siena, just not to replicate what were the problems with the Capitalia merger when there were some overheads in Sicily.
Finally, on asset quality, you show a slide. You still have a 4.7% gross NPL ratio, still above the European average. You are going to dilute this number through Monte Paschi merger, but still, you will be above the average. I was wondering if the deal is clear that you are not going to get NPL from Monte Paschi, you are going to get only performing loans. Is it possible that in the deal you could do some additional de-risking on the UniCredit loan book NPL? Thank you.
Thank you, Christian. We'll start with the asset quality 1. I would argue it's an improvement, not a dilution of the NPE ratio, but I give that to Stefano and then the three on the deals, including the beautiful area of 16 go to Andrea. Maybe Stefano first on asset quality.
Thank you, Jörg. In relation to the second quarter figures, we are at 4.7% in terms of gross NPE ratio for the group. If we are excluding the non-core, we are at 4%. This is our methodology. If we're using the EBA methodology, the group excluding the non-core is at 2.7%. That is fundamentally in line with the EBA average. If we are factoring an increase of the loans deriving from the potential MPS transaction that is contributing only performing loan, the NPE ratio will be lower than 2.7%.
Thank you. Andrea?
Just about governance and shareholder structure, and again, I acknowledge that this is an unusual situation given that we're giving you foundational principles that are pre-agreed, but actually we haven't done due diligence, and we haven't done negotiation. Honestly, it is premature to discuss of any governance implications or any deal structure.
I believe we know pretty clearly what the views of the market, the views of our shareholders are, and we're committed to delivering a deal that fulfills those expectations on all aspects. I would leave it at that for the moment. With respect to capital stress test, BMPS deficit and so forth, and how it will be filled, I think number 1, it's not my place to comment on Monte dei Paschi. What I would say is the following, the foundational principle states that we will get capital neutrality.
Capital neutrality means that we will have a perimeter that is capitalized in such a way that when combined with us, will keep us capital neutral. From my standpoint, the rest is not something I need to focus on. It is something that the other party has to bring to the table. How they do that is still open for negotiation and for the next few weeks. The important is that the effect in visibly and in substance is what we have determined.
I think the last one was on perimeter with a certain region being included or not, or certain parts of the business being included or not. I would go back to what I said at the beginning. We're not buying Monte dei Paschi di Siena. We're buying a subset, where the aim is to maximize the perimeter that we're buying because there is an enormous complementarity between the two. At the same time limiting the areas that are either overlapping or unnecessary to continue running the business. What that means in substance, I cannot tell you now because we haven't done due diligence, and we need the negotiations.
Thank you. Next question please.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Yeah. Hi, good morning. Thank you for taking my questions. I'm going to ask two probably slightly different way, same question that has been asked before. First one is on NII. Stefano has been mentioning some headwinds into the second half. Can I ask you if you can commit to Q1 being the floor of NII for the year? On the deal, around the funding basically of the deal, is a full cash deal a priority for you given the capital neutrality, you're agnostic, you have to issue some paper. Thank you.
Sorry, Ignacio, can you say the second one again? The line was a bit bad. You talked about the funding for the deal?
Yeah. The funding of the deal. If you can explain, full cash deal is a priority or if basically you are agnostic to having to issue paper given that you have capital neutrality binding constraint?
Okay. Thank you. I think on the NII headwinds and has the second quarter been the bottom, Stefano will answer that, and then Andrea will talk about the funding and are we agnostic to the sources of funds. Stefano?
Thank you, Jörg. I will differentiate between commercial component, non-commercial component. For the non-commercial component, meaning a replicating portfolio, investment portfolio, and term funding, we are not expecting meaningful dynamic in 2021 in comparison to 2020. Some of the effects are compensating out. For example, slightly decreasing the contribution on investment portfolio is compensated by the better funding cost from this standpoint.
On the replicating portfolio side, the net benefit contributed to the net interest income in 2021 will be fundamentally in line with 2020. In relation to the commercial side, as I was highlighting before, in some of the decision, we are having an increase in the net interest income this quarter. I would differentiate between Western Europe and Central and Eastern Europe. In Central and Western Europe, we are expecting a progressive increase in the net interest income following the increase in the volumes.
We are two quarters, Q1 and Q2, where we have a slight increase in the net interest income. Still, we are seeing headwinds, both in Commercial Banking Germany and Commercial Banking Italy, in relation to the rollover, because as we were highlighting, the front book pricing is lower than the back book pricing, and this will continue until we will have a more sustained improvement in the lending deriving from a more sustained and progressive economic rebound. It will take a while, more in the second half of the year.
Thank you. Andrea, quickly on a view of the funding of the deal, cash versus shares.
Again, premature. Depending on the perimeter, the components, we don't know, is the funding necessary? If it's necessary, what is the base? What I would, however, highlight is that the capital neutrality is based that in the event there is a price to be paid, the capital neutrality starts from the assumption that we would be paying in shares. That does not mean we would. It just means that if we do, that that is the base of a calculation for the capital neutrality. I hope I'm clear.
Thank you. Next question, please.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Questions on slide 8, just a clarification on the comment you just made. Actually, I'll ask this one first. You said that to guarantee capital neutrality, if there is a price to be paid, you assume it will be shares. Just a small caveat to this. In absolute value, it may well be neutral, on a per share basis, it wouldn't be if you issue shares. If you can just comment on that.
On slide 8, capital efficiency and operational efficiency. On capital efficiency, you mentioned before a little bit about your thoughts on capital light initiatives. You mentioned bancassurance , insurance, actually, not bancassurance , several times. However, you don't start from a capital light business model. Given that there are contracts in place, you can't build one overnight.
I'm just wondering whether the sentence there, reallocate capital to high return business, could also mean M&A in capital light businesses, given your other comments that M&A is an enabler to profitable growth and so on. On the operational efficiency side, the way I see this too, I'm talking about costs. There's two contrasting elements.
On the one hand, you have just delayering and simplification, that should reduce costs. On the other hand, you have digitalization, which may require investments, and you mentioned decentralization of parts of the business to boost growth. This could increase costs. If you can comment on which one of these two wins, essentially.
Thank you, Andrea.
Okay. Capital and how does it impact the potential transaction? Again, let me first say that we don't know what the transaction perimeter is. We don't know the structure of a transaction and indeed, its financing. Everything is possible. Foundationally, we have principles that are there to tackle exactly your doubts. The transaction needs to balance capital neutrality with earning per share enhancement, and I said yesterday in the double digits, and tangible book value per share enhancement, and a return on investment of a significant nature.
If you combine those two, you are going to have the outcome that you're saying, because you can always pay in share and achieve exactly those three things, because that's what foundational. For me, the structure of a transaction, share, cash, other instruments, in any transaction, is not the way you evaluate a transaction. Of course, the more leverage you put in something, the more you're going to increase some of those parameters.
The way to look at them, comparing apples with apples, is to look at them on a fully bedded capital base. I don't think, and I hope I've been clear, that with these foundational principles, we could have a transaction that financed with equity, is not enhancing to EPS, is not enhancing to tangible book for share, is not having a return on investment, that if you follow my comments, needs to be significantly in excess of our cost of equity, or it wouldn't be considered.
The other one is basically on slide 8, and we'll go back to that.
Capital efficiency and cost efficiency.
Yeah.
I don't fully agree with your statement that we don't start with a business model that has capital light businesses. We start with a business model that has capitalized businesses. The problem is that we do not embed the factory. We will discuss at the investor day how much of our business is fee based. When you look at any fee-based business, insurance, asset management, indeed anything, there are two ways of looking at it.
The first way is if you vertically integrate and you have a factory in-house, you obviously keep the entire P&L of that business. If you do not vertically integrate, you obviously only keep the distribution in inverted commas side of that business. The first question you need to ask yourself is, how much do I keep if I only distribute, and is it worth it for me to go and vertically integrate to have the entire P&L? Obviously, if you vertically integrate, as you mentioned, you have either acquisition cost or organic development cost.
You also have another aspect that is often forgotten in good times. You have tail risk. If I sell an insurance policy, I can only charge my fees, or I can charge my fees, take the P&L from underwriting the insurance risk, but then I have an insurance risk, which cannot be underestimated. It is absolutely possible by rationalizing the business we do on the capital light side to extract more value from those agreements and to do more without the need to really go and buy. I will add another point.
I think in a world of MiFID and in a world of best execution and best product, internalizing a factory for a bank like us means implicitly that we're not offering the best product to a client. Over time, that may become a disadvantage. When I put all this together, the objective is to develop the agreement we have, to improve them, but to work with those, probably complemented with other things. M&A at the moment is not even on the table on that topic.
Thank you. The last one was quickly simplification versus digitalization.
Okay. Which one will win premature, or I would give you the business plan. I will only add this, that when we present the business plan, we will focus most probably, at least that is my intention today, both on absolute level of cost and on cost income ratio.
Thank you. Next question, please.
The next question is from Azzurra Guelfi with Credit Suisse. Please go ahead.
Hi there. Thank you very much for the call and taking my questions. I have a few follow-ups, one on the sustainability return target and one on capital. On the sustainability return target, you've mentioned above the cost of equity. You've highlighted the 3 levers on cost on slide 8. What is not mentioned in the slide on the 3 levers is the interest rate level.
Do you believe that this above cost of equity return is achievable in the current interest rate environment? The second one is on capital. If I understood Mr. Porro correctly, you expect to end the year with an MDA buffer of over 400 basis points, now close to 650. You have 80 basis points regulatory headwinds and 20 basis points in buyback, and that's before any capital generation in the second half, over 550 basis points.
What should the delta be between 550 and above 400? Maybe one last one potentially related to this is, you took action on the coupons of CASHES earlier this quarter. Can I confirm that you did not change your view in terms of the contribution of CASHES to UniCredit CET1? Thank you.
Thank you, Adrian. The one on the CET1 level will be answered by Stefano. Just a mathematical remark, 647 is also greater than 400. The other two on CASHES and is the return achievable in the current rate environment too, and Stefano.
As we were commenting in relation to the net profit guidance, so we will be above EUR 3 billion. For the same reason, we have mentioned that we will not be close to 400 basis points. We have highlighted that we will be above 400 basis points. Maybe commenting a little bit in relation to the key elements that will drive the dynamic of the capital in the second half, we have net profit, net of the accrual of dividends. We have the share buyback to be taken in consideration, 20 basis points.
We were commenting in relation then to the headwinds. Regulatory headwinds are below 120, take in consideration that in the first half, we had already around 40 basis points. We will be below 80 basis points in relation to the impact on capital from regulatory headwinds. The only remaining part is fundamentally connected with the risk-weighted assets deriving from business volumes.
In relation to the CASHES regulatory treatment, the current regulatory treatment is EUR 2.4 billion Common Equity Tier 1. The remaining part is grandfather additional Tier 1. Next year will be Tier 2. This regulatory treatment is in line with the regular regulation. We are not expecting any change.
Just a quick one before I give it to Andrea on the return achievable in the current rate environment. Was your question on CASHES the one Stefano just answered, or was it has our stance on the payment of coupon changed?
No, it was the one Mr. Porro answered. Thank you.
Okay, perfect. Just on to Andrea, if we can achieve above cost of equity in the current rate environment.
You also mentioned interest rate level. Does anybody on this line believe interest rates are going to be materially better in the next decade or next five years? We have had this interest rate environment for a long time, and my belief is that the job of a management team of a bank is to adapt to what is a reality and try to reward the shareholders above the cost of equity.
If we have headwinds, we have headwinds. Our job is to try to counter them. I don't think that counting on helps from markets creates any alpha, that's beta. Given that this is a reality that I believe is here to stay, we need to strive to do everything we can do to bring our organization to the right level of mix, efficiency, and other things to try and exceed the cost of equity. Do I think we will get there? We'll see in the plan, but, I will not stop until I do.
Thank you. Next question, please.
The next question is from Anna Benassi with Kepler. Please go ahead.
Good morning, all. It's been a very long conference call. I'll try to be short. Because you always talk about DTA per share accretion, I'd like to know regarding the EPS, if you are using as a base the target of Monte Paschi in terms of earnings for 2023, or you are making your own calculation on the perimeter you have in mind. Obviously, I'm saying that because they talk about EUR 300 million profits, and I think maybe I'm too conservative, they could be at best at breakeven.
The second question regards the take of subordinated bonds of Monte Paschi. In the press release, you mentioned that the level of deposits excluding any end bonds from Monte Paschi. Just trying to understand if that could be in the perimeter or not.
In general, I hear what you say about a cash or paper deal or mix deal. Obviously, the more we hear you talking about per share, the more we think shares of UniCredit will be issued. So that's why we are trying to understand a bit better to make the right assumption, at least. The thing is about who is going to take the cost of redundancies and the eventual cost of penalties with partnership that currently Monte Paschi is having. Thank you very much.
Thank you, Anna. I think all of these questions go to Andrea.
Yes. Thank you, Anna. How do we assess the profitability of the perimeter? I think at the moment we have our views, but those views need to be refined with due diligence. I think the assessments of the profitability of the perimeter that we would be taking on, would be evaluated on the basis of the due diligence and the more granular view on their numbers that we're trying to develop over the next few weeks.
On the base of that, there will be negotiations, and that will form the base of the possible deal that could emerge. With respect to subordinated bond, level of deposit, et cetera. Of course, the balance sheet is part of a deal. We can't just take the commercial activity without the balance sheet. What is the exact mix of that balance sheet is all to be determined, and it depends on the negotiations, but we have some obvious principles on how all these cross together to deliver the outcomes that we have set as principles.
Then I think you talked about paper mix deal about per share, et cetera. Obviously, as I said before, the perimeter does not exist today. The valuation of that perimeter does not exist today. It's very much dependent on what we take and what we don't take, and what is the reality of that perimeter, its potential profitability, and so on and so forth. That's why I continue to say it's premature to discuss how you're going to fund this, because depending on how it is cut and what it contains, valuations and funding may differ.
The cost penalty for redundancies or contract terminations or things like that. We have our foundational principles. The deal needs to have those outcomes, and those outcomes are going to be evaluated after all the variables that can affect. That the way we're looking at it. As I have said separately, our intention as an institution is to avoid unnecessary redundancies, and therefore the perimeters will also try to achieve that, and optimize that variable.
Thank you. Next question, please.
The next question is from Andrea Lisi with Equita. Please go ahead.
Hi, good morning. Just back to the Monte Paschi deal. You mentioned the importance of a strategic fit for M&A and the importance of increasing, improving the focus on asset management insurance. Just to understand, how do you plan to manage the existing agreements that Monte Paschi has in asset management and insurance and in case with synergies, do you think you are able to extract from them?
Second question is, just to understand, if you purchase just a going concern of Monte Paschi and not the entity as a whole, do you think there can be concerns on the conversion of the DTAs referred to Monte Paschi? Thank you.
Thank you, Andrea. Both of them go to Andrea.
Let me maybe Thank you, Andrea, but let me maybe start from the 2nd question on the DTAs and the concerns, et cetera. Look, in a way, I'm neutral on it. The important point is, does the transaction fulfill the capital neutrality principle or not? If it does, how we achieve it is really beyond the point. It can be in any way that is the most effective way to achieve it.
That's my answer on this question. On the Monte Paschi focus on asset management, insurance, and et cetera. For us, it's important to develop our fee income in a way that, as I said, is probably not the same way as everybody else looks at it and demonstrate it to you. Clearly, we have our views with respect to how to do that with partners in insurance and in asset management that fulfill certain criteria.
We will look at the partners and what agreements there are, and we will take a decision at that point. That's why we need a due diligence, and we need a negotiation. If there were issues with respect to cost or others, again, you go back to the foundational principles. The deal needs to be capital neutral, need to enhance EPS, needs to have a return on investment of a certain sort and be tangible book per share enhancing. On that basis, we will evaluate the impact on anything that we do or that we select.
Thank you. Next question, please.
This concludes the Q&A session from the call. The floor is back to you for any closing remarks.
No, just thank you everyone for your time. If there's any questions that come up in the future, you know where to find your favorite IR team. Have a good day.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.