Good morning, ladies and gentlemen. Today's conference call will be hosted by UniCredit's CEO, Mr. Andre O'Cel 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. Andre O'Cel. Sir, you may begin.
Thank you very much. Good morning to you all and welcome to the analyst call for our 2nd 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 Monterrey Vasque Riciana. 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 and 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 Monteri 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 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. So 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 Q2 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 Q2. 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 2nd highest quarterly level in many years, while net interest income is starting to stabilize. Underlying net profit reached EUR 1,100,000,000 in the quarter, up 24.7 percent quarter on quarter and EUR 2,000,000,000 in the first half, equivalent to an underlying first half twenty twenty one return on tangible equity of 7 0.7%. 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 3 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 and 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 3 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, but working together amounts to much more than just the sum of its parts. With 16,000,000 clients, the distribution power of our commercial network has been demonstrated once again. In the Q2, we delivered another record fee performance, thanks to strong gross sales of €15,500,000,000 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. But 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 3 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 peer 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. And at the heart of everything, we do are our clients and the communities that we are part of. They are the reason we exist.
Let's turn to slide 7. 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, evidence 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 3 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 decisions making across decision making across the organization. Within the SPA, we have more than halved the number of committees and our spending them. This is now being replicated across the rest of the group. Together with a simplified organizational structure, this will increase The proportion of decision taken locally closer to plant, always within a clear framework. UniCredit Italy has been established managerially as a standalone fully empowered geography, combining all our Italian commercial operation under the leadership of Niccolo Bertaldi, alongside Newly configured activities in Germany, Central Europe and Eastern Europe.
The removal of unnecessary structure will love 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 delivery. Let me be clear, digital and data 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. But 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 3 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. But 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 central, 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 forgot 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 2nd quarter results. The bank delivered a robust Commercial performance in Q2 2021 with signs of recovery throughout the bank's franchise. Net interest income shown 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 Q1. 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 Q1. 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 Q2 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 costincome ratio improved by 4 percentage points to 53.7% in the first half of twenty twenty one, demonstrating the operating leverage within the business. But 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 6 47 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 twenty twenty one of 7.7%. I will now hand over to Stefano, who will take you through the Q2 of 2021 results in more detail. Stefano, the floor is yours. Thank you, Andrea, and good morning, everyone. Let's turn to Slide 11.
In Q2 2021, UniCredit delivered a sound underlying net profit of €1,100,000,000 up 24.7 percent quarter on quarter. Revenues reached EUR 4,400,000,000 in 2nd 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 efficiencies and strong cost discipline resulted in Q2 2021 costs equal to €2,500,000,000 almost flat year on year. Our stated cost of risk reached 33 basis points in the Q2 of 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 €1,800,000,000 The strength of the balance sheet can be seen in our extremely healthy capital position.
We closed the quarter with fully loaded CET1 ratio of 15.5%, implying an NDA buffer of 6 47 basis points. The key financial events of the Q2 2021 include the following: conclusion of the 1st share buyback program 2021, Where UniCredit purchased in aggregate around 17,000,000 shares for a total consideration of €179,000,000 equivalent to 0.8% of the share capital. These shares will be canceled in accordance the resolution passed at the AGM in April. A combined ordinary capital distribution of EUR 447,000,000 For full year 2020, that was equal to a total yield of around 2%. Issuance of our annual CR preferred green bond for €1,000,000,000 was a very attractive book upgrade from Sander and Poor's that changed UniCredit's SPA outlook to stable from negative.
And the issuance of $750,000,000 of additional Tier 1 and of $2,000,000,000 of dual tranche Senior Preferred. Let's now look at the P and 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, but 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 CAB this quarter. Customer loan rates remain under pressure. Continued competition arising from excess liquidity contributed to lower customer loan rates in all divisions by Corporate Investment Banking. Typically, front book pricing remains below the back book. Most of the impact Orchel.
Lower customer rates in the quarter was concentrated in Commercial Banking Italy, which also saw for their growth in its guaranteed loan book. There was an incremental contribution from Tier 3. As previously announced, we took an additional €12,700,000,000 of TL3 at the very end of March. This contributed EUR 15,000,000 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 the investment following the quarter. Our outlook remains unchanged. An economic upswing will drive with some delay recovering the demand for credit, a progressive reduction of the excess liquidity in clients' accounts as deposit gets spent on 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 an NII until the sustained economic recovery takes hold.
Let's turn to slide 13. Please deliver another very strong performance as economies began to slowly open up to the quarter. Fees in Q2 2021 were only 0.8% below the level of the prior quarter, which remember, was our highest quarterly fee income in over 5 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 Q1 and nearly 50% higher than a year ago. Asset Management upfront Please continue to perform well, albeit 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 in the Q2 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 margin is 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 gross sale performance investment for the insurance product to be sustained. The recovery in transaction fees will continue into the second half as the restriction is, although the rate of Easing remains dependent on the vaccine campaign.
Financing fees can benefit in the second half twenty twenty one from cross selling opportunities connected with the better lending dynamic. With the ongoing rollout Orchel. Of the MAX vaccination program across our key geographies, we remain cautiously optimistic that the worst of the impact of lockdowns on client EVP is now behind us. Let's turn to Slide 14. Trading income in first half 2021 was very strong, reaching €1,100,000,000 double the level of first half 2020, mainly thanks to the high quality of their recurring client activity and also to a positive contribution from XBA.
Client driven trading was excellent, contributing EUR 733,000,000 in First half 2021, up 27.7 percent 1st half from 1st half, excluding the volatile ex way component. The strong performance came mainly from fixed income and currency, which did particularly well in the Q1 of the year. Non client driven trading income was up 21.9 percent first half on first half, mainly thanks to treasury. Trading income excluding Exway in the quarter was above our quarterly run rate of around EUR 350,000,000 on average per quarter is expected to normalize at that level in the second half of the year. The higher contribution from dividends in Q2 2021 more than doubled the level of Q2 2020, was thanks to the other equity and financial investment as well as Yape.
Let me remind you that the dividend line also includes the contribution from the insurance joint venture in Italy. In Q2 2021, this amounted to EUR 32,000,000 Let's turn to Slide 15. Our continued focus on cost efficiency and strong cost discipline led to first half 21 cost of €4,900,000,000 down 1.2% for staff on first half. This resulted in significant operating leverage with a costincome ratio of 53.7%, an improvement of 4 percentage points versus first half twenty twenty. HR costs were 1.9% lower for sale from first sale, thanks to faster than expected FTE reductions with STs down 3.4% compared to first half twenty twenty.
These reductions were mainly in Commercio Banking Italy. Non HR costs were flat first half from first half, with lower credit recovery expenses and real estate costs, partially offsetting higher IT expenses and depreciation. 2nd quarter 2021 total cost amounted to EUR 2,500,000,000 2% higher than the previous quarter, mainly due to a one off Lower pension cost in Commercial Banking Austria in Q1 2021. COVID-nineteen has had a limited impact on our cost base year to date. In the first half of the year, we had EUR 25,000,000 of COVID-nineteen related costs, mainly for security and real estate expenses.
This was EUR 45,000,000 less than in first half twenty twenty. For full year 2021, we confirm our guidance of flat costs relative to full year 2019 €9,900,000,000 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 Sure. The future cost of defaults in the loan portfolio and properly reflect the forward looking economic impact of COVID-nineteen.
Orchel. Loss loss provisions therefore included overlays as well as specific provision and regulatory headwinds. As a result, you should always look at the softer risk for full year 2020 and full year 2021 together, just as you should for the underlying macroeconomic assumptions. Our stated capital risk reached 33 basis points in Q2 2021, reflecting a better portfolio experience than expected and the moreatory 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 3 basis points of specific provisions. Therefore, our underlying cost of risk was 20 basis points in 2nd quarter 2021 and 17 basis points in the first half twenty twenty one. Benefiting from product underwriting, for a looking provision in prior quarters and the better macro scenario than expected thanks to the successful vaccine rollout, who 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 underlying cost of risk of below 40 basis points, equivalent to underlying loss loss provision of less Then EUR 1,800,000,000 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 is included in 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 Q2 2021, both Gross NPEs and the gross NPE ratio decreased to €21,500,000,000 and 4.7 percent respectively, Thanks mainly to further disposals.
Based on the EBITDA 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 percent in Q2 2021, mainly due to a mix effect with a 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-nineteen yet. At the end of the quarter, a large part of the Moratoria portfolio expired with only EUR 6,000,000,000 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 MBA buffer of 6 47 basis points. This was despite absorbing 49 basis points of regulatory headwinds including profitability, 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 here to date, this implies the remaining headwinds in the second half of the year will be below 0.8 percentage points. Our MBA buffer in full year 2021 is expected to remain above 400 basis points.
In the quarter, we completed the 1st buyback program 2021, Where UniCredit purchased in aggregate around 17,000,000 shares for a total consideration of 179,000,000. This is equivalent to 0.8% of the share capital. This share 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 the rate of 30%.
In addition for 2021, An extraordinary capital distribution of €652,000,000 fully in the form of share buybacks was approved by the GGM in April. Execution will be later in the year subject to supervisor approval. The total capital distribution for 2021 would be EUR 1,100,000,000 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 17,100,000,000. Net interest income can be affected by headwinds in second half twenty twenty one, while transactional fees will likely benefit from tailwinds. Full year 2021 costs are expected to be in line with full year 2019 levels at €9,900,000,000 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 €1,800,000,000 Our recent asset quality experience, including moratorium expirations, suggests that the outturn for the cost of risk may be even better than our revised expectations.
As a consequence, The underlying net profit for full year 2021 is now expected to be above EUR 3,000,000,000. 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 3 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 Q4 when we intend to present the new strategic plan in detail at our Investor Day. Now we'll hand over to Jorg Pitzner, Head of Group Investor Relations for the Q and 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 2 each. Many thanks. Moderator?
Thank you, Mr. Piznat. Orchel.
Orchel.
Orchel. The first question is from Antonio Reale with Morgan Stanley. Please go ahead.
Thanks for the presentation and the divisional data base. Good morning, everyone, also from my side. A lot to digest. I'll try to stick to 2 questions, 2.5 maybe actually. The first one is on M and A.
The last quarter, you said M and A deals Need to show not only financial discipline, but also have a strategic fit. And yesterday as well, if I remember correctly, Andrea, you mentioned You don't think market shares are the reason behind UniCredit's profitability gap in Italy, which we agree with, by the way. But what do you think is the driver of the gap Then is my question. What's the commercial rationale for buying Motepaski's assets here? I ask you this, don't get me wrong, Please, 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. Secondly, related to it really, Will you be able to do share buybacks as you integrate multitasking? Do you think the execution risk is something the ECB will be comfortable with? And lastly, it seems like NII is starting to stabilize also in Commercial Bank in 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. But I still struggle to understand While you've reiterated your revenue guidance at €17,100,000,000 for the full year, you seem to be implying a significant slowdown. And 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. And those are all my questions. Thank you.
Thank you, Antonio. So we'll have the NII done by Stefano and obviously the ones in share buyback and 1 to passkey by Andrea. Andre? Okay. Thank you, Antonio.
So strategic rationale, I guess. I think the as I said, the M and A is an accelerator at the right terms. Do we absolutely need to do a transaction in Italy? We do not. And 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 Monteri Passchi would come at the right terms, the terms that either the principle we have agreed are upheld, but Also and most importantly, help us rebalance our presence in Italy to Center North. Monte Pascchi 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. And that is healthy. Just as you know, Italy is not a uniform country in terms of economic performance, in terms of characteristics.
So the ability to rebalance towards certain north 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. And those actions obviously benefit from being applied to a larger scale. We have 7,600,000 clients within UniCredit, Potentially, acquiring another 4,000,000 clients would greatly benefit the scale we have in rolling out these initiatives for the benefits both of our clients and our core efficiency. So 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, well, 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 the 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 the franchise And obviously parts that we select. And by purchasing what is complementary and by purchasing what is fits with us And by excluding what doesn't, obviously, the integration becomes much simpler Than otherwise. So these are my 2 answer on the matter. I think Antonio 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. But as a principle, I think you can expect that capital returns Our 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.
So as I was highlighting before, so the 652,000,000 shares buyback Has been already approved by the AGM. And so taking consideration that ECB repeal there given distribution policy, We'll then expecting to fill the authorization process and then to execute the buyback later in the year. In relation to your questions, as a matter of fact, we have 2, 1 in relation to DNI stabilization 1, Arwen, in relation to the previous guidance, I will start from the NII stabilization. If you look at the dynamic of the net Interesting. I mean, the quarter, I mean, not only Commercial Banking in Italy, but also Commercial Banking, Germany and CE, were up slightly around €10,000,000 Quarter on quarter.
Then 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 Digital are on average in the increase in the stock of €2,600,000,000 The point is that on the client's perspective, we are down 4 basis points on the group And 10 basis points in Italy, you also do the combination of state guaranteed loans and a reduction in the rates of short term loans And overdraft. So that's why in relation to the dynamic of the net interest income, we are liking that we might have further Headwinds, they are having from depression 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 €17,100,000,000 that it means that we can be slightly below or Above 17.1 percent also for a few 100 of millions.
And as we were analyzing before, we are Expecting on one end to have headwinds on D and I. But on the other end, on fees, we are expecting to have tailwinds, especially on transactional fees.
Thank you.
Thank you. I think that's not so bad, Antonio, getting 4.5 answers and 2.5 questions. Next question, please.
The next question is from Andrea Filtri with Mediobanca. Please go ahead.
Yes. Good morning. And first of all, thank you for returning to the XL publication. I have two questions. One is On your cost of risk guidance and another one is on M and A.
On your cost of risk guidance, is it implying Any usage of overlay provisions? And if so, how much? And could you explain us the mechanics And the timing of when, for instance, auditors could require you to either use or release overlay provisions. And the question on M and A is if an eventual MPS transaction Would imply that there is no room for another industrial deal. Thank you.
Thank you, Andrea. Orchel. So 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 Q2 2021, we had overlays fundamentally Connected with the performing portfolio, more specifically connected with the increase of coverage on The loans under moratorium, whose clients decided to opt in. The overlays are of Fundamentally, two apologies.
1 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 to us per year. So one was just for the Q2 and we will update In the second half, so in Q4, in relation to the macro scenario, we've updated macroeconomic conditions. In relation to the 2nd, apology, overlay.
There's more connect, 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 and considering the amount of position that are under moratorium In order to understand which position will migrate to Stage 1 and which position will migrate to Stage 3. The timing of this will be by the end of 2021 and first half of twenty twenty two. Thank you, Stefano. Andrea, thank you.
And Let me remind everybody what I say. I do not consider M and A to be a strategy nor a purpose in I always consider it to be an accelerator or potential improver of our strategic outcome. So in the case of MPS, the timing is right. The condition would be Right, in my opinion. And 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 combined that integration with the rollout of a broader plan for Italy. And so 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 of the plans that bring the lion's share of the value here. With respect to doing our 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. 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 and A and cost of risk. On the M and A, you mentioned the prerequisites of capital neutrality. Should we assume that debt neutrality would be pro form a for future regulatory headwinds, which could be substantial for both banks? I remind that most banks have given guidance for substantial regulatory headwinds to come.
And then on the cost of risk, it's been very low. I see that the specific cost of risk in Q2 is actually negative. And you said to look at 2020, 2021 together. So clearly, there's some benefit from the cost of risk in 2020. So what should you Can you please the actual underlying cost of risk this year net of excluding the benefits of 2020?
Or to put it another way, what should we think is the underlying cost of risk post the COVID crisis in 2022? Thank you. Thank you, Gubo. Of course, first, Stefano will answer and then Andrea, on the capital neutrality of the deal with our great headwinds. Maybe Stefano first.
So in relation to cost of risk, Karla, you are right. So as we were commenting, we need to look at Kostowirzka in combination 202021. Within that, we will have A normalization during 2022 at lower level in comparison with the Sum up of the cumulative cost of risk of 2021. More specifically, we are expecting an increase in relation 2021 of the underlying cost of risk during the course of the second half also considering In higher migration to NPEs, especially in connection with a portion of the portfolio under moratorium in Italy. Thank you.
Andre? So 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 in 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.
So what I'm going to say now is my expectation. But obviously, as you go through the diligence and negotiation, such expectation May vary. So for us and I believe the other side, the capital neutrality means UniCredit does not want to have a transaction, but putting the financing aside and all of that dilutes The capital strengths of UniCredit. Probably 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 a stress test and other headwinds.
Now everything has not been mapped up. I would Highlight that our counterparty is the controlling shareholder of Monterrey Paslicena. It is not the bank. So in these interactions, we have not gone in that detail. We just said 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 Basinger. Please go ahead.
Hi, everybody. Unfortunately, just two questions because I couldn't take part to the call of yesterday. So I would have 10 probably. So first of all, I'm a little lost about the part of Monterey Pasque you may buy. You mentioned, for example, €80,000,000,000 of loans of Monterey Pasque in the perimeter, Which is actually their entire lending portfolio.
So 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. I mean, what do you have in mind about the way the protection may work? NPEs and or legal risk are expected to Be they consolidated before you get the control of Monterrey Pascchi or UniCredit will get the protection once and if the risk Materialise.
Sorry, not a question, but maybe you can add something about the distress 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. So, Fabrizio, again, the in terms of I think the message we're giving with the principles with With respect to the perimeter is that we won't be buying the entirety of Monterrey Pascaisena.
This is No. An acquisition of Monte de Paris Cariciena is an acquisition of a subset. So 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. But 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. With respect to And 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 be made makes sense for both parties. And I can't say much more than that at this juncture on this. The second thing that you're asking is about protection.
So I think the way we look at risks is the following. Number 1, we have NPEs. The NPEs of Monterrey Pascchi are excluded in full from the transaction. So we're not getting protected. We're not getting covered.
They're not included in the perimeter. As such, If you do a pro form a of some sort, you should assume that you take the 2 banks together and 1 bank comes with 0 NP, diluting the NPE ratio of the overall. The second topic is performing exposure But 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. Those are exposures, 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.
The 3rd point of risk is legal. And 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 €10,000,000,000 and are clocking down at the moment. So all those will remain behind. Hope that that gives you enough answer on your question.
Thank you. Stefano and Stresses? Yes. On the full set, the assumption are conservative, as you know. So the capital depletion would be important taking in 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. There was asset quality that we have taken to consideration all the action That we did so far and also the reduced cost base. So 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 results 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 Montepassky presentations out of the €10,000,000,000 of legal risk and the U. S. Like that they are trending down.
Can I assume that those which are not company specifics are Those excluding the €500,500,000 relating to the financial disclosure? So you would be left with an ordinary Legal risk in the tune of €4,000,000,000 Is that a figure that is completely out of discussion or is something that is more or less reasonable? Then the other question, also taking into account of what you've said yesterday, you have mentioned that you do expect a double digit EPS A creation from the deal in 2023, if I'm not mistaken, shall we take then, I guess, the 2021 net profit of more than €3,000,000,000 has a starting base, which Squares to an EPS of €1.6 per share as starting base where to buy Well, to create that double digit EPS accretion after the deal. Thank you.
Thank you, Giovanni. I think they are both for Andrea. Okay. So the first one is which So 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.
So 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 at strong risk and in particular, Several billions 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 a 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 insured 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 in what is the subset But we buy and what those impacts are. But in approaching the negotiation, We will the parties have agreed to have an outcome of this nature. So 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. Hello. Hi. Good morning. Thanks for the presentation and the call.
And of course, good luck for the next 40 days. I do have a couple of questions, especially on the Slide number 8, 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 A target in terms of uplift in terms of RoTE that you would like basically to achieve by a merger with Orchel. Of course, here there is a trade off between complexity of the deal and potential impact in terms of In terms of return on the capital that is invested, that will be very helpful for us to square up everything. The second is more on the way organic and you want to push return on tangible.
I mean the former management strategy was very clear, Selling, unfortunately, some very precious business to gain capital and to derisk The balance sheet and also the volume the book has been cut significantly in the loan book over the last couple of years. So I mean Q2 shows already some sign, encouraging sign in terms of inflation 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. You very much for your answer.
I appreciate it. Thanks, Domenico. They're both for Andrea, so one is concretely what is the MPS deal 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.
So 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 relinquish is to make that value appear and crystallize it. We would not be doing a deal unless the deal has 2 characteristics. It's significant Value enhancing enough for us to take on the additional Complexity as you defined it, to integrate the 2 franchises. And so 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. So that's a general statement on that. So we believe that as a 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. So 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. So 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 It is quite good. It is time to move the emphasis and the focus I'm doing what any organization should do, which is grow profitably, grow sustainably and grow at a cost That exceed the cost of equity. I mean, we are here to reward the capital above this cost or at least right.
So this is the emphasis. As we look at that emphasis, we have, as you refer to Page 8, 3 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 provision.
So net of risk, that's the important number. So 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 But 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. But I don't know which side of the He's going to start at 4 because we don't 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. Obviously, any business where it's 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 2 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.
But most importantly, the earnings that are capital light. So 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 exceeds the cost of equity. That is phenomenal.
We will be focusing on those in a very granular fashion. They are capital heavy businesses that are not meeting the cost of equity, and we will need to review them 1 by 1 And answer the question of those businesses we want to be in, we don't want to be in, we want to deemphasize because they have an effect on the better businesses. But otherwise, there will be a lot more discipline on that topic. And therefore, what we are trying to do is exactly what I said, get every unit of capital that we use, Use it with a view, but we need to exceed our cost of equity. And if we don't, reassess.
Thank you so much. Next question?
The next question is from Azura Gualsi with Citi. Please go ahead.
Carl, 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 Q4?
And 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. And if I may, very, very quick clarification on the deal. You said that the counterparty for your discussion is the main controlling shareholder of Monte Pascchi.
Do you assume that in the negotiation, there is no additional need of approval from the EU Commission. Thank you.
Thank you, Artura. 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 with you, Andre. Stefano? Thank you, Georg.
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 Commercio Bank Italy had the default rate of 3.4%, I mean excluding the EOD asset 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. But Italy, we are expecting a higher default rate in comparison with the level of 2020, Also following the immigration of some of the position to Stage 3, the one in relation to the loan under the moratorium, But not a significant increase of the fall rate being compared with 2020.
Thank you, Andre. So I'm not going to go very far on digital strategy because He 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. But what we 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, but develop jointly the project. So that means embedding IT in every division, in every area with a digital and information officer embedded In every business and in every area, yes, the group maintains architecture, framework, direction of travel, But then digital and data inform and are embedded in everything we do from day 1 We've been the team in every business. I think that's the philosophy that we're going to apply and we're expecting quite a little quite a lot of impact from that.
Beyond that, I'll leave it for the Investor Day. I think you raised the question also On Monterrey Pasquicena and the and whether there were Approval from the European Commission, etcetera, etcetera. I 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 regulatory 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 Motepassky deal, you have been very clear about your strategy, but 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. And then 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 Motepassky.
And I think you mentioned this, but I just wanted to get back on the point because I think it's very important. So you exclude NEMP and also you are going to have adequate protection from other potential trade risk, which means, If I understand correctly, that you're going to require some guarantees on high risk performing loans. Then in terms of the operational performance of the quarter, I just wanted to have a bit more clarity on NII. So on the slide where you show NII progression Q on Q, there are EUR 25,000,000 which are related to other. So just wanted to, If possible to have a bit more clarity on what other means.
And then there is an €11,000,000 plus, which is coming from volumes. But then when I look at the performing volumes, these were down by another 2% quarter on quarter. So you had a negative progression on volumes, which doesn't seem to abate. So first of all, I don't understand why we're talking about positive Orchel. And then 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 5 questions, but we have a good day today Or maybe 6. So Stefano will do the one on NII, the other and then volumes and the outlook for that and then we give it to And therefore, the 3 deal related questions. Maybe Stefano, you want to start? Yes.
So I will start In relation to the NII work at Page 12 of the market presentation, in other, yes, It's positive EUR 25,000,000 in there. We are fundamentally including the effect that are being from the day effect. So the difference between Q1 and Q2 is around €13,000,000 and the other Reclassifications are connected to the impact they're having from the DoD reclassification in Q1, so these are the 2 elements that are having 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.
So 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. That we are looking the average because the average is contributing to the NII of the quarter. And as I was alluding to you, We are up fundamentally in all the division. So Commercial Banking Italy more than €2,000,000,000 Germany Around €1,000,000,000 Centra and Eastern Europe around €600,000,000 Barcorp Investment Banking that is down Around €1,600,000,000 in relation to the average. With regards the dynamic and the expectation, will park aside 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 would be more long term.
So within the deposit effect would be more in '23, 'twenty four in comparison with, let's say, 'twenty one and 'twenty two in relation to the dynamic That we are seeing and as we are expecting, we'll see an accelerate an higher acceleration on the retail side, for example, Mostly in Italy both on Raizy Mortgage and also Consumer Financing, while still on the corporate, It will take a while because the liquidity that is in the system is huge. And so with the NetPay corporate before, They utilize their weekly rate for working capital, then we will have the growth. So in relation to the growth on corporates, we think that it will be more in the final part of 2021. Thank you so much. So quickly, I'd add to that.
There was just one thing I don't know if that And the other component on top of the 30,000,000 days effect, the DoD reclassification increases the amount of nonperforming loans And that is the NII related component relating to these nonperforming loans. Now on the three questions you had for The transaction back to Andrea. The first was the subset of what we are going to buy. The second was the capital neutrality, including restructuring. And the third one was protection mechanism on the risky performing parts.
Andre? Okay. So with respect to the perimeter that we're going to buy, I would say that, say, as an intention, One of the reasons 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. And 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 ambition. Then you touched on exclude NPs and protections, etcetera, etcetera.
So 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 In CARTI of the related NPE exposure. In CARTI. So 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 Monteri Pasque, obviously more negatively.
And 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. So that's for the NPEs And that's for the performing exposures where our risk appetite may differ with a risk appetite of Monterey Paschicena or where there could be excessive concentration. For the other risks, You're left with extraordinary legal risks and we have this touched on that before, I. E, we will leave them behind.
Thank you. And next question is Thank you very clear.
The next question is from Delphine Lee with JPMorgan. Please go ahead.
Hi. Thank you for taking my questions. So just 2 from me. The first one is going back to the transaction. So I mean, Montipasco is not the only M and A option that you have given your excess capital.
So you But I've thought about the alternatives. Just wanted to understand a little bit, why not Bank of BPM and Relative, what is Multi bringing to the table beyond the valuation and The financials, just if you could just elaborate a little bit on that and if you would exclude I mean, would Rule out completely Venco BPM if this Monti transaction doesn't go ahead. The second question is, to go back on your net profit guidance of about 3,000,000,000 You've just revised your cost of risk guidance by 20 basis points from 60 basis points 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 we are if there are things that we who hasn't that has been forgotten in the process. So thanks for giving a bit of color. Thank you.
Thank you, Delfin. I mean we did change, but I'll let Andre comment on the substance. But on the form, we did change the underlying net profit guidance. We were Around €3,000,000,000 and we say now above €3,000,000,000 Now that may be subtle, but and for the less more I'll give to Andre also on the BPM versus Monter. Yes.
So I confirm what Jorg just said. We have slightly reviewed the guidance from around, which means below or slightly above Definitely above. So 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 and 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 and 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 on 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, Montelepanski 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 Noyes with Goldman Sachs. Please go ahead.
Hi, good morning. I wanted to ask about on reflection about Montepasquia. So 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. So I just wanted to understand what you thought you can do better With the Monte Pascchi 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. And my second question was with regards to the levers that you are talking about with regards improving the return on equity business, the capital headwinds that had been lined up in the past and continue to be a feature, 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. And 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 with at the end net headwinds, which wouldn't be the same because obviously this for the return on tangible equity is an Orchel. Extremely strong way to carry. Thank you.
Thank you, Jean Francois. I think both of them are for Andrea. So Jean Francois, so Monte Pascchi, minimal overlap. Let's look at cost for a second. There are 2 ways of looking at it.
1, you buy something greater, You pay for something greater. You then reduce the cost and you get the synergies. You're just reducing the cost base at that point. Well, the other one Is you just don't include those costs. So 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.
So the value creation, and this is why I insist, do not look at Banca Monterrey Pasquiliciana 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 and then you apply to that general objectives that will obviously have a read across On what our EPS should do, on our tangible book per share should do, on what our return on investment should be. And with an attention to the fact that what we would be bringing in is a franchise that has been Completely cleaned in as much as we leave behind the risks. Now that does not mean that the performing portfolio is without risk.
It will need to perform and we will need to adapt to that. But we are bringing in something that starts from 0 risk. And that will be blended in what we're doing in Italy. So that so the valuation for us is sorry, the impact for us is, 1, the principle and the structuring of the transaction. And 2, as we roll out our plan, our digital initiatives, our multichannel approach, etcetera, etcetera, instead of rolling it out on 7,600,000 clients With the same investment, with the same approach, we're going to roll it out on almost 12,000,000 of clients.
And that makes a significant difference on the efficiency of those investments. With respect to capital headwinds and there being a big burden for RWA density And that we already have a higher RWA density and how we mitigate that. So I totally agree with you. We have a high, In my opinion, excessive RW density. And we have, like every other bank, Significant headwinds.
However, and I believe and I have some experience in that, 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.
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 the risk. So 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 Robert, you take a step back and you say, what is it that has that results in the highest return on tangible equity risk adjusted.
And therefore, you're going to prioritize either the products that are capital light. We're spending more time in driving those products. And I think you will find that we have quite a bit of capacity on that. Or 2, when you put when you drive when you are on the Products that are more capital heavy, either they use capital, a loan. Within the mix of those loans, You're going to prioritize the loans that either have the higher return on tangible or are lighter.
And you're going to deemphasize Was that the one? 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 but results in the highest RoTE. Because if tomorrow I were to do 100% of my growth In the highest density products and the ones that obviously have the 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 higher return on tangible or 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. And 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 the change in mix, which will affect your density. Sorry for the long answer. Now we will stop because we want Jean Francois to come to our Investor Day.
Next question, please.
The next question is from Christian Carreze 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 math of 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 Paschi this year. The second question is on capital.
Let's see what's going to happen with the stress test this Orchel. I assume there will be a capital deficit for Montepass in Siena. We had EUR 1,500,000,000, EUR 2,500,000,000 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 merger or the regulator will ask for a proper life issue. And 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 you will go above 30 Thanks in a few provinces. So apart from that, I was wondering the headquarter cost in Sienna, Just not to replicate what were the problems with the Capitalia merger when there were some Our heads in C3. So if you can elaborate on that. And finally, on asset quality, You show a slide that you still have a 4.7% gross NPE ratio, still above the On average, you are going to dilute the number through Monte Paski merger, but still You will be above the average. I was wondering if the deal is clear that you're not going to get NPE from multi tasking.
You're going to get only performing loans, but is it possible that in the deal, you could do some additional derisking On the UniCredit loan book NPE. Thank you.
Thank you, Christian. We'll start with the Asset quality one, I would argue it's an improvement, not a dilution of the NPE ratio. But I'll give that to Stefano and then the 3 On the deals including the beautiful area of CCT culture, Andrea. But maybe Stefano first on asset quality. Thank you, Jaap.
So in relation to the 2nd 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 are losing the EDA methodology, The group excluding the non core is at 2.7%. That is fundamentally in line with the EBA average.
So if we are factoring an increase of the loans, arriving from the potential NPS transaction that is contributing only Performing loan, the NPE ratio will be lower than 2.7%. Thank you, Andre. So just about governance and shareholder structure. And again, I acknowledge that this It's 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. So 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 the deal that fulfills those expectations on all aspects. So 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 Now I'm pleased to comment on Monterrey Pascchi.
What I would say is the following. The foundational principle states So 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.
Copy do that. He's still open for negotiation And for the next few weeks. The important is that the effect in visibly and substance Is what we have determined. And I think the last one was on perimeter with certain region being included or not For certain parts of the business being included or not, I would say I would go back to what I said at the beginning. We're not buying Monterrey Pasquisena.
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 2, but 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.
Hi, good morning. Thank you for taking my questions. I'm going to 2 probably slightly different ways, 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? And then on the deal around the funding basically of the deal, Is the full cash delever priority for you, given the capital neutrality you're agnostic you have to issue for some paper? Thank you. Sorry, can you say the second one again? The line was a bit bad.
You talked about the funding for the deal? Yes. The funding of the deal, If it is a full cash deal is a priority or if basically you are agnostic to having to use 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, Jan.
So I will differentiate between commercial component and non commercial component. So for the non commercial component, meaning Repetarian portfolio, investment portfolio and term funding, we are not expecting meaningful dynamic in 2021 in compared 2020, so some of the effects are compensating out, for example, slightly decreasing the contribution of investment portfolio is compensated by the better Funding costs from this standpoint and on the eradicating 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 divisions, we are adding an increase in net interest income this quarter. I will differentiate between Western Europe and Central and Central Europe. In Central and Western Europe, we are expecting a progressive increase in the net interest income following the increase in the volumes.
We have 2 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 realizing 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 that are going from a more sustained and progressive Economic Ground. So it will take a while more in the second half of the year. Thank you. Andre, quickly on the on our view of the funding of the deal cash versus shares.
So again premature. Depending on the perimeter, the components, We don't know. Is the funding necessary? Or and 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 you do, that is the base of the calculation for the capital neutrality. I hope I'm here. Thank you. Next question, please.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Questions on Slide number 8. And then just a clarification on the comment you just made. Actually, I'll ask this one first. You said that to guarantee capital net neutrality, if there is a price to be paid, You assume it will be shares. Just a small caveat to this, in Salute value, it may well be neutral.
But on a per share basis, it wouldn't be if you issue shares. So if you can just comment on that. And then on Slide number 8, capital efficiency and operational efficiency. So on capital efficiency, you mentioned before a little bit about your thoughts on capital light Initiatives, you mentioned bank assurance, several insurance, actually not bank assurance, several times. However, you don't start from a capital light business model.
And given that there are contracts in place, You can't build 1 overnight. So I'm just wondering whether the sentence there, reallocate capital to Orchel. Business could also mean M and A in Capital Life Businesses, given your other comments that M and A is an enabler to profitable growth and so on. On the operational efficiency side, the way I see this 2 I'm talking about costs. Sir, there's 2 contrasting elements.
On the one hand, you have simplification, Delayering digitalization sorry, just delayer and simplification that should reduce costs. On the other hand, you have digitalization, which may require investments. And you mentioned decentralization or part of the business to boost growth. This could increase costs. So if you can comment on which one of these 2 wins essentially?
Thank you, Andre. Okay. So 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 the transaction and indeed its financing.
So everything is possible. Foundationally, we have principle that are there to tackle exactly your doubts. So the transaction needs to balance capital neutrality with earning per share enhancement, and I said yesterday in the double digits, And tangible book per share enhancement and a return on investment of a significant nature. So if you combine those 2, you are going to have the outcome that you're saying, because you can always pay in share And achieve exactly both three things because that's what foundation. For me, the structure of a transaction, share cash of our instrument in any transaction It's 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. So the way to look at them comparing apples with apples is to look at them on a Fully embedded capital based. So that's so 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 per share, is not having a return on investment. If you follow my comments, it needs to be significantly in excess of our cost of equity or it wouldn't be considered. With respect to so the other one is basically on slide 8 and we'll go back to that.
So capital efficiency and cost efficiency. So I don't fully agree with your statement that we don't Start with a business model that has capitalized 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?
And when you look at any fee based business, insurance, asset management, indeed anything, There are 2 ways of looking at it. First way is, if you vertically integrate and you have a factory In house, you obviously keep the entire P and 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 You have the entire P and L because 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.
So if I sell an insurance policy, I can only charge the fees or I can charge the fees, Take the P and L from underwriting the insurance risk, but then I have an insurance risk, which cannot be underestimated. So 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'm not. 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. And over time, that may become a disadvantage. So 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. But M and A at the moment is not even on the table on that topic. Thank you.
And the last one was quickly simplification versus digitalization and Okay. So 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, what we said is my intention today, both on absolute level of cost And on cost income ratio. Thank you. Thank you.
Next question, please.
The next question is from Adrian Chigi with Credit Please go ahead.
Hi there. Thank you very much for the call and taking my questions. I have a few follow-up, one on the Orchel. 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 One of the three 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. And if I understood Mr.
Porch correctly, you expect to end the year with an NDA 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 5.50 basis points, what should the delta be between 5.50 And above €400,000,000 And maybe one last one potentially related to this is, You took action on the coupons of cash earlier this quarter. Can I confirm that you did not change your view in terms of Contribution of cash is to UniCredit CET1? Thank you.
Thank you, Adrian. So the one on the CET1 level will be answered by Stefano. And just a mathematical remark, EUR 647 million is also greater than EUR 400 And then the other 2 on cash and is the return achievable in the current rate environment to Antrian? Stefan O'Fluz. Yes.
So as we were commenting in relation to the net profit guidance, so we will be above €1,000,000,000 and for the same reason, I mean, 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. Then we have the share buyback to be taken 20 basis points, we are commenting in relation then to the headwinds.
Regulatory headwinds are below 120,000,000,000. 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 and the only remaining part fundamentally connected with the risk weighted after deriving from business volumes. In relation to the cash regulatory treatment, the current regulatory 320 is €2,400,000,000 common equity Tier 1. The remaining part is the grandfather additional Tier 1.
Next year will be Tier 2. And this regulatory 2020 is in line with the regular regulation, and 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 cash is the one Stefano just Answered or was it has our stance on the payment of coupon changed?
That was the one, next power answered. So thank you.
Okay, perfect. Perfect. Then just on so Andre, if we can achieve above cost of equity in the current rate environment? So you also mentioned interest rate level. I mean, does anybody on this line believe interest rates are going to Be materially better in the next decade or next 5 years.
We have had this interest rate environment for a long time. And my belief is that the job of the management team is to of the bank is to adapt To what is a reality and try to reward the shareholders about the cost of equity. So if we have headwinds, we have headwinds. Our job is to try to counter them. And I don't think that counting on helps from markets Create any alpha, but beta.
So 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. So 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 try to be short. Actually, I'm because you always talk about beta per share accretion, I'd like to know regarding the EPS if you are using as a base the target of Monte Pappe in terms of earnings for 2023 Well, you are making your own calculation on the perimeter that you have in mind. Other than saying that, because they talk about €300,000,000 profit, and I think Maybe I'm too conservative, they could be at best at Blokkeben.
The second question regards They think of subordinated bonds of Montepafsky. In the first release, you mentioned that the level of Deposits excluding Eddie and Don from Mentor Paksi. So just trying to understand if that could be In the perimeter or not. More in general, I hear what you say about A cash or paper deal or mixed deal, obviously, the more we hear you talking about per share, the more we think Sure. UniCredit will be issued before.
That's why we are trying to Understand a bit better to make the right assumption at least. And the thing was about who is going to take The cost of redundancies and the eventual cost for penalties with partnership that currently member parties having. Thank you very much.
Thank you, Anna. I think all of these questions go to Andre. Yes. Thank you, Anna. So okay.
So how do we assess the, I guess, profitability of the perimeter. I think at the moment, we have our views, But those views need to be refined with the due diligence. I think the assessments The profitability of the perimeter that we would be taking on would be evaluated on the basis of the due diligence And a more granular view on their numbers that we're trying to develop over the next few weeks. So on the base of that, There will be negotiations and that's on the base of and that will form the base of the possible deal that could emerge. With respect to subordinated bond, level of deposit, etcetera, etcetera, of course, the balance sheet is Parts of the 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. And then I think you talked about A per mix deal, a bar per share, etcetera, etcetera. Obviously, as I said before, the perimeter does not exist today. The valuation of that perimeter does not exist today and it's very much dependent on what we take and what we don't take and what is The reality of Aperimeter's potential profitability and so on and so forth.
So that's why I continue to say it's premature to discuss How are you 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 For contract terminations or things like that. So we have our foundational principles, but NIO needs to have those outcomes. And those outcomes are going to be evaluated after all the variables that can affect them.
And so that's the way we are looking at it. And also, as I have said separately, Our intention as an institution is to avoid unnecessary redundancies. And therefore, the perimeters We've also tried to achieve that and optimize that variable. Thank you. Next question please.
The next question is from Andrea Lizzi with Equita. Please go ahead.
Hi, good morning. Just back to the Montepassky deal. You mentioned the importance of strategic fit for For M and 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 you want to passkey as in asset management and insurance? And In case which synergies do you think you are able to extract from them?
And second question is, And if you purchase that's a going concern of Montepasque and not the entity as a whole, do you think there can be concerns on the conversion of the He is referred to Monte Pascchi. Thank you.
Thank you, Andrea. So both of them go to Andrea. So let me maybe thank you, Andrea, but let me maybe start from the second question on the DTAs and the concerns, etcetera. 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. So that's my answer on this question. On the BMCS, on the multi passkey Focused on asset management, insurance and etcetera. So for us, It's important to develop our fee income in a way that, As I said, it's 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 asset management that fulfill certain criteria. We will look at the deal we will look at the partners And what agreements there are and we will take a decision at that point. And 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. So 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 and A session from the call. The floor is back to you for any closing remarks.
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