Good morning, ladies and gentlemen. Today's conference call will be hosted by UniCredit's CEO, Mr. Jean Pierre Muncieres and CFO, Mr. Stefano Poirot. 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. Jean Pierre Musier. Sir, you may begin.
Thank you very much, and good morning and welcome to the analyst call for our Q3 results. These are unprecedented times and the emerging second wave of the pandemic mean that many of our countries since it's a challenging period. On behalf of all of us at UniCredit, I would like to express our sympathies for anyone impacted by COVID-nineteen. We will continue to do everything we can to protect the health and safety of our colleagues, and we will continue to support our clients, The real economy and our communities in the countries where we are present. Just as during the first wave, we are committed to being part of the solution.
As you will have all heard, Pierre Karloupard 1 was recently co opted to our Board of Directors as Chairman Designate. So before we start, I would like to warmly welcome Professor Fadwan. His extraordinary professional experience and Chief Manager of Ciora and its regulatory environment as well as the outstanding public service record We will be of great value to our group. I very much look forward to working with you. I would like as well to thank Nico Bianchi for his hard work and dedication as Co CFO.
Nico was instrumental in the from Transform 2019, 'twenty three and will bring substantial experience to his new role as CEO of the Group Wealth Management and Private performance recovery in underlying net profit this quarter, up 31% quarter on quarter, thanks to lower loan loss provisions and higher revenues. The pickup in revenues was driven by increased customer activity and higher fees following the easing of lockdown restrictions towards the end of the Q2. At the same time, we maintain our strict cost discipline leading to positive operating jaws that gave us a more than 3% point improvement in our costincome ratio over the quarter. Our commitment to cost discipline meaning that we are always looking to further optimize our cost base. Following the substantial reduction delivered during Transform 2019, We committed to further growth savings of EUR 1,000,000,000 as part of TIM 23 last December.
Thanks To our continued cost control and the acceleration of changes in our business model, these growth savings are now expected to reach €1,250,000,000 from €250,000,000 better than the original TIM23 target. As a result, we expect costs to be flat between 2020 2021. Our stated cost of risk guidance for 2020 is confirmed at 100 to 120 basis points due to our willingness to anticipate conservatively Future impacts, including increased overlays, proactive classification and regulatory headwinds. The combination of this conservative approach and seasonality mean that the stated cost of risk in the Q4 will be materially higher and the 53 basis points in the Q3. In the face of the emerging COVID-nineteen second wave, Having a solid balance sheet and a conservative approach to risk are very important.
With record levels of capital, Our fully loaded CET1 ratio is at 14.4% and our fully loaded NDA buffer is at 538 basis points. Our liquidity coverage ratio is at 183%. Was therefore in a strong position to continue supporting the economy while returning capital to our shareholders. Our culture and values are fundamental part of how we run the bank. Our commitment is and remains to do the right thing for all our stakeholders, favoring long term sustainable outcomes over short term solution.
This means doing the right thing for employees for whom we want to be not only the best place to work, but also, As I have already said, a safe place to work. The health and safety of our colleagues and our customers will always come first. Our ongoing commitment to sustainability received further recognition this quarter. We are ranked number 1 globally for sustainability linked Loans by Bloomberg and were awarded Best Social Impact Bank in Europe by Capital Finance International. Let's turn to our key financials on Slide 5.
Stefano will take you through this in more detail later, I wanted to highlight a few key points. Revenues for the quarter were up 4.4% compared to the 2nd quarter and broadly in line with our performance in the Q1. This progress is being a flat done across many of our core markets At positive effect from client activity, where we were primed and ready to capitalize on. Of particular note, the recovery is investment fees up 20% quarter on quarter. Thanks to robust AUM Sand, Currently in Commercial Banking Italy, we delivered a strong quarter despite seasonality and the comparison against a particular strong period last Yes.
Our Q3 2020 underlying return on intangible liquidity reached 5.4 percentage points, an improvement of 1.3% inch point quarter on quarter in spite of the extraordinary macroeconomic backdrop, This reflects our continued conservative approach to running the bank, our tight cost control and our strict underwriting discipline. The reduction in gross NPEs continued at a brief pace with a further reduction of €1,000,000,000 over the quarter, done more than €6,000,000,000 over the past 6 months. This reflects continuing hard work and disposals within non core. As a result, our gross NPE ratio for the group improved further to 4.7%. If we focus on the figure for the group excluding non core And using the EBA definition, our NPE ratio remains at 2.7%, below the average of other European banks.
Our capital position strengthened further in the quarter with the fully loaded CET1 NDA buffer reaching 5 38 basis points. This represents an increase of 58 basis points over the quarter and is 286 basis points higher than a year ago. This improvement is thanks to lower risk weighted asset, mainly resulting from lower overall loan volumes in CIB and the increase of guaranteed loans in Commercial Banking in Italy. Now it's my great pleasure to hand over to our CFO, Stefano Poe, will take you through the details of the quarter. Stefano, all yours.
Thank you, Jean Pierre, and good morning, everyone. Revenues to debt EUR 4,400,000,000, reflecting the recovery in client activity after the easing of lockdowns, up 4.4% quarter on quarter. This recovery was supported by stronger fees, up 6.4% quarter on quarter. Costs were lower than 1.4% quarter on quarter, reflecting our strict cost discipline and continued focus on further efficiency gains, which more than offset COVID-nineteen related expenses. I will comment on revenue and cost components in more detail in the following slides.
But I would like to make 3 specific comments on items below the net operating profit line. Systemic charges in the quarter increased by 36.4% year on year, mainly due to additional contribution to the deposit guarantee scheme in per quarter 'twenty for 2 single names in Austria and in Italy. As a result, we have resolved up our full year 2020 outlook for fixed income charges guidance from EUR 0.9000000000 to EUR 0.95000000000. Profit on investment in the quarter was affected by mark to market losses of BRL126,000,000 on our remaining stake in Yabi. The stated group tax rate of 12.4% in pre quarter 2020 was positively impacted by tax credit recognition in Italy, Thanks to NPE disposal executed in the quarter, in line with the Coricaria decree.
Let's turn to Slide 8. This quarter saw limited non operating items and the line net profit stood at EUR 692,000,000. For further details, please see the IMX on Page 40. If you look at the distribution of underlying net profit across the group in the quarter, You can see that our diversified business model underpins our performance at group level. In the 3rd quarter, All business divisions were profitable, with standout contribution from CIB and CB.
CIB benefited from higher revenue growth in the 3rd quarter, mainly thanks to XBA, which led to underlying net profit of EUR 394 million, up 87.2% quarter on quarter. Since the quarter under underlying net profit of BRL 22,000,000 up 2.4% quarter on quarter was underpinned by lower LPs and continued cost discipline. Let's turn to Slide 9. Before looking at net interest income in detail, let me remind you our commitment to generate long term Sustainable return. This means that we do not do volume lending nor categories.
We will not compromise our future asset quality to boost net interest income in the short term. Focusing on the quarter, net interest income was down 3.8% quarter on quarter. This can be attributed to 3 factors. 1st, loan volumes. Just under half of the reduction in the contribution from loan volumes came out from the repayment of revolving credit facility within CIB, reversing some of the benefits seen in Q2 2020, the rest of the reduction being CE.
German corporate clients refinance liquidity lines in Capital Markets and are run down working capital financing as their sales I cover. 2nd, guaranteed business. Guaranteed loans are good business opportunities, given their low risk and capital consumption. Such loans, however, are not only written at lower spread than normal loans an equivalent maturity, they also substituted higher yielding short term loans in the quarter. This mix effect was a particularly important driver for Comercio Bank in Italy.
3rd, 3 months' arrival. This fell almost continuously throughout the quarter, reaching the historic lows by the end. Its average value dropped by 17 basis points compared to a prior quarter, impacting all floating rate euro assets and liabilities. While fee continues to feel the impact from reduction in base rates, the net impact On group net interest income in this quarter was limited. The successful repricing on deposit offset The lower contribution from both customer loan volumes and rates.
With further deposit repricing becoming more difficult, Net interest income in NCE is not expected to pass until Q2 'twenty one. The quarter also saw an initial contribution from TLTRO3 of +18000000. As a reminder, we have accounted for the net benefit in a conservative manner, assuming that investment at the ECB deposit facility rate and amortizing the benefits across the full year maturity. Looking forward, assuming 3 months your EIBOR remains at current levels, we expect net interest income for the group in the Q4 2020 To be broadly in line with the Q3 2020. For full year 2021, we confirm our guidance of EUR 9,500,000,000.
Let's turn to Slide 10. While we normally discuss fees year on year, I want to focus my remarks today on a quarter on quarter basis to better capture the underlying dynamics. Fees were up 6.4% quarter on quarter as client activity increased despite the Q3 being seasonally weak. Please remember that if you do make year on year comparison, Q3 2019 was an exceptionally strong quarter, characterized by an indirect lack of seasonality. Once again, we have seen a variety of increase in commercial activity in terms of geographies and fee categories.
In part, this reflected where Market was in terms of lockdown cycle. While our Western European market had exited lockdown, in Some countries only enter lockdown during the 2 quarter. JanEx, on Page 34, to provide a detailed managerial breakdown of monthly fee trends by geography and product. I would therefore like to limit my remarks to the following. As Jean Pierre already said, investment fees delivered strong performance, up 12% quarter on quarter.
This reflected robust growth in under management sales as client activity shifted away from Asset Under Castaway Products, especially in Commercial Banking Italy, driving the material increase in upfront fees. We expect the recovery in investment fees to continue into Q4 2020. Financing fees were impacted primarily by lower activity in Corporate Investment Banking. While Debt Capital Market has had an outstanding year, It could not match the activity of the prior quarter due to usual seasonal slowdown in August, which also impacted Structure of Finance. Financing fees are expected to enjoy the usual seasonal pickup in 4th quarter.
Transactional fees, recovery in Q3 2020 as expected. GDP sensitive transactional fees, such as cards and payment services laws. Overall, October saw a continued positive performance for fees at the group level. For full year 2021, we confirm our guidance of EUR 6,400,000,000. Let's turn to Slide 11.
Credit income in the 3rd quarter was up 27.7% quarter on quarter at EUR 455,000,000, Thanks to a significant increase in Exway. Client driven trading income, excluding Exway, to that BRL 246,000,000 in the 3rd quarter, down 33.6% quarter on quarter. This was mainly due to the Equities and Commodities business, where there was less structural certificates as client activity shifted more towards assets under management products, a move which, as previously mentioned, has supported our investment fees. There was also an impact from lower flows in fixed income and currency due to over seasonality. Non client driven credit income was down 31% quarter on quarter, mainly due to fair value adjustments.
Credit income excluding Exway is normalizing, in line with our quarterly guidance of around EUR 350,000,000 on average. For full year 2021, We confirm our guidance for trading income of €1,400,000,000 The lower contribution from dividends Year on year was driven by the strategic disposals of stakes in YAPI and Nubanca over the last 12 months. However, the trend quarter on quarter showed an increase mainly thanks to a recovery in the profitability of financial investment in Austria. For YAPI, intra group funding fell to EUR 1,100,000,000 in the quarter, 58% below the level of Q1 2018 and thus delivering on our target Set back then of housing our Intergroup exposure. Let's turn to Slide 12.
On cost, I would first like to remind you of the scale of cost cutting done during Transform 2019 And what is underway in Tier 23? In transfer 2019, we decreased FTEs by over 14,000 and branches by more than €900,000,000 This led to net cost savings of more than €2,000,000,000 materially beating the original target. In 2023, we plan to decrease total FTEs by a further 8,000 and branches by an additional €500,000,000 As we explained at the Capital Market Day in 2019, this would generate gross cost savings of around EUR 1,000,000,000 equivalent to 12% of our 2018 Western Europe cost base. Between the two plants, we'll have delivered a 24% reduction in NFTs and a 38% reduction in branches. And yet, in addition to the sizable plan reductions, we have reduced cost both year on year and quarter on quarter and now expect to beat our original TIM 'twenty three target for full year 2020 by more than EUR 250,000,000.
As a result, we are targeting updated gross cost savings of EUR 1,250,000,000, 25% better than our initial plan. Our continued cost discipline allowed us to fully offset COVID-nineteen related costs in quarter full year 2020. Total COVID-nineteen related costs amounted to EUR 18,000,000 in the quarter and €88,000,000 in the 9 months. For the full year, such costs will be around €100,000,000 and will be fully absorbed by savings made elsewhere. These include a significant reduction in variable compensation equal to around EUR 100,000,000 less compared to last year.
Please remember that we expect higher costs in Q4 2020 due to seasonality, both in terms of HR and non HR. For the full year 2020 overall, But also for full year 2021, we confirm our guidance of flat costs related to full year 2019. Let's turn to Slide 13. First, let me remind you of our approach to provisioning that we introduced during 2020. The aim is to proactively capture the future cost of default in the loan portfolio and properly reflect the forward looking economic component of COVID-nineteen.
Loan loss provisions, therefore, include overlays as well as specific Provisions and regulatory headwinds. We also explained that since part of the loan portfolio is likely to be under moratorium For a large part of full year 2020, specific L and P will likely lower than would have otherwise been. This has been the case with the moratorium on Italian semi loans having been extended January next year. For further details of our approach, please see Page 49 in the earnings. We also provide further disclosures on the staging of our loan portfolio on Page 4, P8.
Let me now turn to our performance in the 1st 9 months and explain how we expect provisioning to roll for the rest of this year into next year. Our cost of risk in 9 months 'twenty to that 81 basis points. Within this, 33 basis points were accounted for by specific LPs for loans that were in Stage 3 or moved to Stage 3 during the 1st 9 months. This is better and what we have reported in the past and it is aligned with the cost of risk guidance that we gave in last December's Capital Market Day. Despite a Q3 2020 cost of risk of 63 basis points, we expect a significant quarter on quarter increase in LRP in Q4 2020, driven by a number of factors.
As well as the usual seasonality, these include Musier. The latter, mainly connected to the new definition of default, are estimated at around 10 basis points, forming the balance of the expected regulatory headwind LPs in full year 2020. Our stated cost of risk guidance For full year 2020, it's confirmed at 100, 120 basis points with lower PECI provision of 40 to 50 basis points and higher 50 to 60 basis points overlaid as well as and the disappoint of regulatory headwinds. The higher level of overlay provisions we are taking this year underlines the credibility of our full year 2021 cost of risk guidance, as some of these overlay provisions would be used next year when higher defaults should materialize. Full year 2021 Stated cost of risk guidance is confirmed at the bottom end of the 70 to 90 basis point range with the underlying cost of risk close to 60 basis points.
Let's turn to the balance sheet starting with asset quality on Slide 15. In the 3rd quarter, our gross NPE ratio for the group, excluding noncore, was stable at 3.5%. Using EBITDA's definition, the group NPE ratio excluding noncore at 2.7% continues to be better than the average of other European banks. The reduction in the coverage ratio of 0 point 8 percentage points in the quarter compared to Q2 'twenty was driven by 3 factors. 1st, Disposals of bad loans.
Excluding such disposal, the coverage ratio of bad loans would have been higher than in Q2 2020, above 71%. 2nd, the classification into UTP of a single name government guaranteed loan, where LPs apply only to the uncovered part. And the coverage duration, the full loan appears below the portfolio average. Excluding such impact, The coverage ratio of UTPs would have been well above Q2 2020 at over 50%. And 3rd, an increase in our likelihood to pay loans from precaution classification, leading to a different mix effect.
Let's turn to Slide 16. We continue to work hard on the non core rundown and the process remains well on track. We confirm our target of gross NPE below €4,300,000,000 by year end as well as the full rundown of the non core in 2021. In the Q3, we carried out a successful transaction with Elimiti, selling an intaglia SME secured non performing loan portfolio, a testament to our ability to execute deals in the current economic environment. As a result, gross NPEs in the non core were down EUR 1,100,000,000 in the quarter to EUR 5,900,000,000.
The CMD19 P and L guidance is confirmed and we also confirm that the overall non core portfolio is provisioned to sell. The remaining financial impact of non core On group performance for full year 2020 and full year 2021 is minimal. And the net economic risk embedded in noncore and bank is close to 0. Let's turn to Slide 17. Our CET1 capital fully loaded It's at 538 basis points buffer over our NDA level.
To put this into context, Our MGA buffer is now significantly larger than our current market cap. The 58 basis point increase in the NDA buffer over the quarter was thanks to a reduction in risk weighted asset of more than EUR 10,000,000,000 repeating the pattern we saw in the Q1. Lower reported assets were driven mainly by lower overall loan volumes in CIB and changes in the percentage of our overall loan book. The latter was mainly driven by changes in the mixed mix in CIB and increasing guaranteed loans in Comercio Bank in Italy. In line with the economic recovery anticipated in 2021, we expect a loan growth of at least €10,000,000,000 for the next year.
As a result of this and further procyclicality, a large Part of the positive risk weighted asset dynamics this quarter should reverse next year. Please note That the procyclicality effect in the quarter came mainly from PD rating migration. We continue to acquire cash dividend in the 3rd quarter, equivalent to 30% of underlying net profit. Note that the planned share buyback, which makes up the balance of the 50% capital distribution in full year 2020 and only be deducted from capital once we have the approval from the regulator and the AGM. The change in the regular recruitment of software assets introduced in the so called CRM Quick Fix We'll take a 13th quarter.
The benefit is expected to be around the mid teens in terms of the this point. Regulatory headwinds are expected to be less than 0.2 percentage points in full year 2020, Musier. Net of the chain software treatment and less than 1.4 percentage points in full year 2021. This includes both RIM and PVR rating migration. The latter Total 0.7 percentage points in full year 2020 and full year 2021 combined, of which 0.40 percentage points were taken in 9 months 2020.
Please remember The deave rate in migration will revert over time as GDP recover through the cycle. Looking forward, We expect our NDA buffer in full year 2020 and full year 2021 to be well above 300 basis points, which is above our target range of 200 to 2 50 basis points. We remain committed to gradually returning excess capital once regulators allow. This will be the date on the sustained excess capital of our target NDA buffer. Let's turn to Slide 18.
In line with the strong increase of our CET1 MGA buffer, our TLAC MGA buffer has increased to 648 basis points, well above our target range. The prefunding carried out for our 2021 subordinated TLAC needs contributed positively as well. Despite a tough environment, we executed €1,250,000,000 Of senior non preferred in July and another $1,000,000,000 in September, raising money at attractive strikes. For the rest of the year, we are not planning any further public issuance other than MREL eligible products. Let's turn to Slide 19.
And finally, a quick look at our tangible equity, which was stable quarter on quarter at EUR 50,900,000,000. Retained earnings were offset by a decline and the FX valuation reserves of EUR 0,500,000,000 mainly due to depreciation of the Russian ruble, Czech Corona and Turkish Lira. Let's turn to Slide 21. Jean Pierre, back to you.
Thank you, Sebastien, and well done for your Q1 quarterly presentation. As I said at the start, this quarter was characterized by a pronounced recovery in underlying net profit, driven by low and under provisions as well as a rebound in revenues as customer activity picked up. The robust performance of investment fees was not wasted. Thanks to our strong balance sheet and commitment of our team members, We are very well placed to keep supporting our clients whatever the environment. As always, we will continue to run and manage the bank in a conservative and disciplined way and prepared for all eventualities.
And as always, the health and safety of our employees and customers comes first. While mindful of the potential impact of the second COVID-nineteen wave, We confirm our underlying net profit target of above €800,000,000 for financial year 2020 and of EUR 3,000,000,000 to EUR 3,500,000,000 for financial year 2025 as well as our 2023 underlying return on tangible equity of 8%. We have also improved our gross cost saving target for the plan by 25% to EUR 1,250,000,000. We also confirm our stated financial 1 'twenty Cost of risk guidance of 100 to 120 basis points as well as our stated financial year 2021 guidance at the bottom end of the 70 to 90 basis point range. Both years include around 10 basis points of regulatory headwinds.
This is why we confirm our 2021 underlying cost of risk at close to 60 basis points. Remember, these regulatory headwinds need to be deducted when calculating the underlying net profit. That is the basis for our capital distribution. Our balance sheet remains very strong with our fully loaded CET1 MD Aduffer at 538 basis points. We expect this buffer to remain well above 300 basis points in both financial year 2020 and financial year 2021 and first above our target range of 200 to 2 50 basis points.
We remain fully committed to reinstating our TIM23 distribution policy, a cornerstone of the plan. Subject to the regulatory green light, we expect to resume distribution from calendar year 2021 onwards. Our policy remains a combination of an ordinary distribution of 50% of underlying net profit and, In addition, an extraordinary distribution of excess capital. These distributions will be a mixture of cash dividends and share buybacks, acknowledging the divergence wishes of our shareholders. For the return of excess capital, Share buybacks are the preproduction as they make the most financial sense at current share price levels.
We have also been very clear on what we mean by excess capital. This is the sustained excess over our 200 basis points to 250 basis points, 51 and D above front. As such, we will pay careful attention to all We expect regulatory headwinds and we will update this at our Capital Market Day to be held in the first half of twenty twenty one. A date to be confirmed. We want to draw the lesson of the pandemic and show the concrete progress of the acceleration towards more remote banking.
It also means any excess capital will be returned gradually. However, while maintaining a very strong balance sheet is important, we will not keep excess capital for the sake of it. The efficient allocation of capital is at the heart of how we run the bank. Before we finish, let me explain my sincere thanks and Appreciation to all UniCredit team members whose commitment, resilience and continuing hard work in this unique and continue developing situation has allowed UniCredit to prosper and to do the right thing for all our stakeholders. One final housekeeping item before taking your question.
It's to note that our virtual team this quarter will be complemented with Arthur der Rand, our Head of Finance and Control. We very much look forward to seeing you all and continuing our dialogue. Now, Stefano, the rest of the team and I are ready to take your questions. If you would be pleased to be so kind Musier. I have to limit your question to a maximum of 2 each.
Many thanks. Operator?
Thank you. Mr. Musier, we will now begin the question and answer session. Moustier. Please pick up the receiver when asking questions.
Musier. The first question is from Antonio Reali with Morgan Stanley. Please go ahead.
Good morning, everyone, and thank you for taking my questions. And before that, I also wanted to wish my best to Professor Pavan for his new role. I'm sure I'm confident he will be A great Chairman for the bank. So two questions. First one on net interest income.
I understand you're confirming the guidance of EUR 9,500,000,000 next year. However, some of the headwinds you've mentioned seem that likely to stay. I'm thinking about Euribor, which has now hit new lows in Q4 And Central Energy in Europe activity, which was probably affected more than any other region by the second wave. Now how do you expect to cover for the difference? If I annualize your Q3, Q4, you are at EUR 9,200,000,000 Versus the €9,500,000,000?
That's my first question. And my second question is on dividends. You've always been open and transparent on regulatory matters. UniCredit has an NDA buffer now of more than double your target. That leaves obviously a significant excess.
You talked about it. Some of the excess, if I look at it today, it's €10,000,000,000 almost will cover for regulatory headwinds, as you said, but some of it will go to shareholders Gradually. And if I understand correctly, I think you've said already in 2021, of course, the ECB allows it. That's on top of the 50% Ordinary dividend. Now appreciate it's all very fluid, but can you help us understand what you think Are the key criteria for the ECB to assess the bank's distribution capacity?
And how much of that excess you think you could Realistically paid in 2021. So that's my second question. And if I may, just very quickly on the On a clarification on the TAB Holding project, because if I understood correctly, the project came up first as part of the Capital Markets Day last year, Which was very consistent with your derisking efforts at the bank. The idea of this evolving was not much to see improvements on funding cost, Correct me if I'm wrong, but rather to sort of limit the capital volatility and reduce the payer discount in Italian sovereign. Now this was also in line with target to reduce the GDP.
Since then, things have changed quite a lot. I mean, ECB has a strong commitment to QE. It could be extended in December. The Southern Bank Nexus is Probably stronger than it's ever been, I mean, with all the government support measures in place. So maybe just to help understand what would be the rationale of accepting as a holding company in this environment.
Thank you.
Thank you very much. Well, just Let me take your questions 1 by 1, and I will let Stephane if necessary comments with more detail. On the NII side, we confirm our guidance for €9,500,000,000 in 2021. And the main reason It's the same across all our main markets, which is the strong rebound of the economies and the resulting growth in loan volume. We have said during the presentation that we expect a €10,000,000,000 increase of loan volume, which will be supporting More fixed investment by your clients next year.
Every crisis has one thing in common that they all end Actually, and our economists are forecasting a 5% rebound in the European economies next year. And this will mean more borrowing, more fixed investment and that we will be supporting our clients for that. So That's important because the higher loan volume will be, of course, one of the driver in terms of improvement of the NII Versus the trend that you can see in Q2 and Q3 basically. Second thing is that we expect base rate to stay at the current level. On the CEE side, we expect a rate stabilization on the loan side in the course of the year.
Musier. And we will see a still positive even a diminishing contribution from deposit repricing. We had a very strong deposit repricing this quarter, As you have seen, as a result on the CE side, the NII will trough in the end of the Q1, Q2 2021. And then we expect the NII for the CECI in FY 2021 to be up year on year. And in Western Europe, we have a higher loan volume, as I Which will compensate the tighter client rate because of the increased government guaranteed loan.
And we will, as well, as the economy rebound, Normalize the underwriting guidelines for the loans to individuals, mostly consumer and mortgage. We have taken so far A conservative risk approach, which is important when we have such a shortfall in the GDP. And we're already, as soon as the economy turns, to actually increase our loan volume, as I said, and resume more normal underwriting for consumers mortgage. So all this reason mean that we expect our NII for 2021 to be very equivalent to what we have in 2020, €19,500,000,000 As far as the dividend is concerned, we have, as we said, an excess capital. Musier.
This excess capital allows us on one side to finance the economy. And Stefano mentioned that the improvement we've seen In the CET1 ratio this quarter of 58 basis points, it's mostly due to the fact that we had clients paying back The revolvers, the revolving facilities. And we will have, I mean, these benefits being returned next year as we have increased loan volume, for instance. So you have to look at the CET1 buffer in light of risk weighted asset inflation, And we should have increase of loans, as I just said. In terms of regulatory headwinds, we have To the market that we should have next year less than 140 basis points of regulatory headwinds.
We have had a translation of regulatory headwinds from 2020 to 2021, we are planning to have 100 basis point combined regulatory headwind between 2020 2021 Before we add the rating migration before the crisis, these regulatory headwinds transfer to 2021. On top of that, there is a rating migration of 70 basis points, as mentioned by Stefano, between 202021, 45 basis points Taken in 2020 and the balance in 2021. This rating migration will reverse over time when the rating improve basically. So we have a rating migration, which we will, I mean, take as well in 2021. And regulatory wins are placed on 140 Musier.
Basis points including rating migration, regulatory in green and TRIM next year. And beyond that, We communicated at the Capital Market Day in 2019 the difference with the migration. So when we take into account the projection of the regulatory headwind of the risk weighted asset inflation because of annual loans. We can look at the excess capital. We have above our 200 to 2 50 basis points basically target.
And we intend over time to return all our excess capital above our target to our shareholders. We will update all these projection at our Capital Market Day, but we have substantial excess capital when you look at it over time In the way I just described, the ECB, we look probably and I cannot speak on behalf of the ECB, When we apply, for instance, for share buyback, it looks at the projection of capital over time To define what is the excess capital above the NDA. So we expect that the ECB will apply exactly the same policy basically and that we will apply for share buyback Moustier. Next year, not only coming from our regulatory dividend payment from the net income, but also for our excess capital. But we expect ECB to only allow banks to gradually pay their excess capital next year, which is why we said that we will pay our excess capital gradually next And over the coming years, specifically.
But I think what is important is to look at the excess buffer Above our 200 to 2 50 basis points over time or duration of the timing being. Sorry for the explanation, but I think it's important for everybody to understand the way we look at our excess capital projection. As far as the international holding is concerned, We announced last year that we were looking at the creation of an international holding in order to see if we could improve our cost For funding and or our Envel and TLAC constraints. With the ECB extended quantitative easing And the client Sovereign Spread, a business this project, which has always been a project, is still a project. And because of the macro environment and the ECB action, we don't intend to move on the project because there's no reason to do it With the credit and service line being very tight.
Thank you. Next question.
The next question is from Adrian Cighi with Credit Suisse. Please go ahead.
Hi, there. Adrian Cighi from Credit Suisse. Thank you for the presentation. Thank you Moustier. I have a question on M and A and a follow-up on capital.
On the M and A front, we've seen continued noise around potential M and A sort of opportunities in Italy. And we've seen other banks provide a different stance on their intention, noting that shareholder value Musier. Creation is their only criteria. Should they judge M and A's value accretive, they'll pursue it. If previously ruled out M and A outright, Would there be any conditions where that would make sense?
And on the capital, sorry, just a clarification from your previous sort of And sir, can I just make sure that I fully understand the headwinds next year? So you mentioned 20 basis points headwind On a net basis, including software intangible this year and next year, 140 basis points between TRIM and credit risk migration, Is that sort of outside of that headwind? This is sort of above and beyond that's already Musier? Is that correct? Thank you.
Thank you very much. I will let Stephane now confirm the regulatory headwinds. On the M and A side, let me reiterate the fact that our TIM23 plan It's based on no M and A assumptions, only organic growth. And it is even more true, let me say, with the current environment where our clients are shifting to more remote banking. So while in team 23, we had a transformation Musier.
Jean Pierre Muncier. Jean Pierre Muncier, which is one of our 4 pillars. What we are doing today is to accelerate the transformation to more remote banking Musier. To do what we were planning to do in 4 years, in 2 years. For instance, today in Italy, thanks to the transformation we did in the acceleration And to have a people less branch and ability of the client to sign digitally, I mean, most of our product can be signed by our clients remotely, So which allows us to handle much more remote banking.
And so we will debrief everybody at the Capital Market Day next year The acceleration of the transformation. So we prefer to transform rather than integrate, and this is driven last part by the behavior of our clients. And the second reason why we have a no M and A stance is that we want to use our excess capital, As mentioned before, in order on one side to finance the economy, we see a rebound of the loan and the financing activity next year With a strong rebound of GDP to be expected, on the other side, to return capital to our shareholders. So no M and A assumptions 14/23. Stephane, I'll let you confirm the figures of regulatory headwinds for this year and next year.
Thank you, Jean Pierre. So your summary is correct. So minus 20 basis Musier. Point from a commodity ratio basis points impact from regulatory headwinds in the full year 2020 and less Then 1.4, so 140 basis points in 2021. Important to mention that In definition of regulatory headwinds, we're including both the effect that are in front models, change in regulation And PD Procyterite as well.
So we are including all the better effects.
Thank you, Mike. So gentlemen, the 70 basis points impact of prosecutability coming from the rating migrations are included in these figures. And clearly, we're not included in our initial projection when we presented the plan as we didn't plan for the COVID pandemic, basically. And once again, the rating migration impact the 70 basis points will afterwards be compensated when the GDP rebounds, the rating will And we will get back Mr. Vitter over time.
We also said, Adrian, that the 70 for the 2 years, 4.4 of that we've already taken year to date. Next question please.
The next question is from Giovanni Rapuoli with Equita. Please go ahead.
Good morning to everybody. A clarification on the regulatory wind, specifically on the PD migration, the 70 basis points. Can you share with us what geographies are mostly hit by This migration, question number 1. Question number 2, regards the cost of risk guidance for 2021, if I'm not mistaken, the guidance for Italy should be in the region of 100 basis points for next year, if I'm not mistaken, if you can clarify this. And I was wondering whether you have not Recording any improvement in the risk profile because of the increased contribution from the state guaranteed loans.
So I was wondering whether you've kept the margin of safety vis a vis the improvement in the risk profile because of the contribution of state guaranteed loans. Thank you.
Thank you very much. I will let Bart give the breakdown of the projection for the cost of risk next year. TJ give the breakdown of fluids by country and the PD migration. So but on the evolution of our cost of risk this year and breakdown of between specific overlay and next year. Okay.
Thank you. First of all, important to repeat that we confirm the forecast that we have given for this year and next year. So I clarify that for our full year, we confirm the cost of risk, the stated cost of risk guidance of 100 basis points to 120 basis points. And for 2021, we confirm the underlying cost of risk close to 60 basis points. The composition of our cost of risk, our stated cost of risk for this year is composed of 3 components.
It's overlays at specific and regulatory headwinds. The specific cost of risk for the year 2020 It's 40 to 50 basis points, overlays 50 to 60 basis points and 10 basis points for regulatory headwinds. It's important to clarify that there's 50 to 60 basis points over rates that is an anticipation of future impacts. We have explained that in our methodology before, but it is important to highlight that it is very different from the specifics. When we go to next year, what we do is we confirm our stated cost of risk Between 70 90 basis points.
And when we correct that, for the regulatory headwinds, that is the underlying cost of risk, which we confirm Close with 60 basis points. That is a very important number because that is also what we use to calculate our underlying Net profits for 2021, that has been confirmed in the range of EUR 3,000,000,000 to EUR 3,500,000,000 and that is also the number that we use for our dividend policy. Thank you very much for your particular breakdown of cost of risk for Italy in 2021 Projection and the PD migration by geography.
For 2021, we Confirm our cost of risk overall at the bottom end of the range of 70% to 90% and close to 60%. This is for entire group. We have not given the breakdown by division. In terms of The so called PV migration for the group already mentioned by Jean Pierre, 45 basis points is taken in 2020 and the remainder will be 25 basis points in 2021. Most of it is in Italy and as well as in Germany.
In Germany, primarily because we have A lot of the CIB businesses and you expect a waiting migration drift from there with some in Austria Musier. And very important to see you at this point in time.
Thank you,
Musier. Jean Pierre, there was one question in relation to the state guaranteed.
Yes, yes, go ahead, Stephen.
In relation to this, as a matter of fact, Already in this quarter, we had if we look at the dynamic of the risk weighted asset, a positive contribution EBITDA of around €4,200,000,000 that are in from the state guaranteed exposure And we have a positive impact on the expected loss perspective as well. So you can see at Page 40 For one of the presentation that our expected loss on the new business is moving down of a couple of basis points. This is also due to the benefit related to the escape guarantee contribution that is Two basis points when we look the contribution to the stock expected loss. If we look to the new business Expected loss, when we look, the contribution for Italy is even higher because it's 13 positive FX 13 basis points to the expected loss of the new business of Commercial Banking in Italy.
Thank you. And also, Giovanni, the number Stefano mentioned on the state guarantees on RWAs on Page 51. Next question please.
The next question is from Andrea Filtri with Mediobanca. Please go ahead.
Yes, good morning. Two questions. Musier. 1 on asset quality and one on capital. On asset quality, we continue to hear banks in Q3 Experiencing very benign asset quality trends and no worrying signs from expiring moratoria.
While economies are getting back into some sort of lockdown and GDP expectations are deteriorating, Can you share with us your latest thoughts and anecdotal evidence on what's happening on the ground on expiring moratoria and what are really the forward looking signs That we should be careful about or that you're seeing to gauge what real NPL creation is going to be next year. And how will BCB look at this in conjunction with capital return for 2021? Thank you. And the second on capital return, as has been said before, your NDA buffer is Two times your target at the moment. If the ECB maintains the handbrake on capital return, How could you accelerate the usage of excess capital to boost your share price In a sluggish macroeconomic environment where loan growth is limited, also given your no M and A Policy.
And have you considered the possibility of buying back some of your JVs or other businesses within the group? Thank you.
Thank you very much, Andrea. First, on asset quality. If we go to slide 13 of the presentation, you can see that For the 9 months to date, our specific cost of risk is at 33 basis points, which is below The specific cost of risk that we had last year. So clearly, in the current figures, there is no sign of a worsening of the credit environment. And for a large part, because of the moratorium and the fact that the Different countries and governments have extended a very massive government guaranteed loan.
If you go to Slide 44 of the presentation, We gave the breakdown of our moratorium exposure and of the expired volume of moratorium. So we have today €29,000,000,000 of loans under Moab, sorry, EUR 22,400,000,000 in Italy with EUR 1,600,000,000 which have just expired. The loans in Italy have just expired. So it's way too early to say there could be any impact. At this stage, when the loan expired in Italy, we have 0 NPE reclassification.
So I would say that's a very positive impact, but I mean, it's way too early to draw any conclusion. We have EUR 3,800,000,000 of loans expired on the moratorium in the CEE side. We are now we have a total amount of EUR 5,800,000,000. Yes, they've expired a little bit earlier than Italy. And then we have seen a default rate, which is bigger than what we were expecting.
I mean, let's say, on the 2% 2% to 3% depending on the country. But it's, yes, as well too early to draw a conclusion about where will be the default rate of the loans under Moatou, we are be lending, basically. So I think it's Musier. Let's look at the situation step by step and not draw early conclusions about what can happen. But Nevertheless, the early indications are more positive than negative, Mercedes.
So you asked the question about Musier. What would the ECB do and how would the ECB look at the evolution of capital in the ECB and I cannot comment Musier. On their behalf, the only thing I can say is that when D ECB looks for instance at share buyback, they look at the projection of capital under adverse scenario. And on our side, we are always conservative. This is why we want to take additional provision in the Q4 to reach the 100 basis points to 100 basis points cost of free.
So if you do the math and the calculation, it's an initial €2,000,000,000 of provision in the Q4 to reach this amount, which is in anticipation, as we said, of regulatory headwinds as well as Future defaults are not this overlay provision can be used against the provision next year. And I'm convinced that the regulator will do exactly the same. They will look at what should be the impact of banks and if banks are properly provisioned or not, Their future regulatory headwinds or their future specific cost of risk. So for that, we are very well prepared as we have a conservative approach. And you can absolutely project what should be our capital evolution.
On the NDA buffer, it is Hi, that's very clear. It has never been so high at 4 38 basis points. As we said, to project the excess capital above our 200 to Musier. 50 basis points. You have to take into account with weighted asset inflation.
We plan to have our loans increasing by €10,000,000,000 next year, which will support our NII And that has to deliver €9,500,000,000 NII. We have to take into account the regulatory headwinds, next year 140 Musier. This is points basically as well and just to project that. We know the ECB will allow banks To pay dividends. So it's not a question of if, it's a question of when.
So it will happen. We are convinced it will happen next year For the dividends on the 2020 net income, but also for excess capital. But for excess capital, We think that the ECB will only allow for a gradual return of excess capital. This is why we plan only a gradual return on excess capital. We are not looking to do anything else.
As we said, our business plan is based on organic assumptions, Musier. No, I mean, in that the no, I mean, includes and I'm not doing anything on some of the joint ventures. Musier. Thank you. Next question please.
The next question is from Dominico Santoro with HSBC. Please go ahead.
Musier. Hello. Hi. Good morning. Thanks for the presentation.
Just a couple of clarifications. First of all, my understanding, if my calculation is correct, is that Your guidance on net profit for this year, the €800,000,000 which is €100,000,000 for Q4 implies another provision that Probably in the mid of your range, 100, 120 or even less, Around €100,000,000 if we have to take some seasonality on cost, which is usual in the Q4. So I'm just wondering whether Something can be better actually in terms of revenues or if you might Consider booking any capital gain in the case of a level of provision of 120. The second question is on the NII in Italy. Nobody asked, but it's down more than 10% If we have to include also the PIACIERO III impact.
So apart from the business evolution on which you commented very well. I just wonder whether there is any one off here because the decline is significant. And then a clarification on capital. Can you just mention what is left to book in the Q4 in terms of regulatory headwinds or positive In the case of the software intangible, anything which is not business related? Thank you very much.
Thank you very much. So just on your first question for the €800,000,000 guidance for the full year, I mean, that's the guidance we're looking at our 100 to 120 basis points cost of risk for the year. And Musier. We should land on the middle of the range basically. So that's the safest assumptions you could have, But that does include regulatory headwinds basically of 10 basis points, okay?
So as such, the 101120 Includes 10 basis points of regulatory headwinds, which are not included into the underlying cost of risk. So if we land on the middle of the range for the stated cost The underlying one should be at the bottom of the range of 100 basis points. It's exactly the same way that you have to use when you look at the 2021 cost of risk. You said the stated EBIT at the lowest lower end of the 70 to 90, which include 10 basis points of headwinds. So this is why we confirm the underlying cost of risk of close to 60 basis points for 2021.
And once again, the underlying net income We confirm for 2021 of €3,000,000,000 to €3,500,000,000 which is the base for our dividend calculation. For EMEA in Italy, Musier. We have some regular impact and one off impact. I will let Stefano give you the detail of that. And Afterwards, T.
J, can you comment on the last question on the regulatory equity capital. But Stefano For the NII in Italy.
In Italy, so Commercio Bank in Italy was mainly 3 elements We'll be taking to consideration. So we experienced an overall customer rate reduction on the lending stock of 12 basis points quarter on quarter, down to 226 basis points. It is the average client rate on all the stock. This was due to effect. 1 was connected with Dioribo that was affecting all the You are borrowing assets.
And second is a substitution effect because we have a higher Share of term guaranteed loans. The term guaranteed loans on average has a client rate above 100, which were substituting the higher yielding short term loans during this quarter. The second effect was a lower internal remuneration to the deposit due to the movement of the arrival that was negative in the quarter for 2017 basis point on the average. The sum of these two effects, you're explaining the delta of the net interest income of Conventional Bank in Italy during the
quarter. And then more or less, the answer for the context for half of the impact.
Yes, the first one, yes. The first one is Equal to €38,000,000 so the sum of the client rate effects, so the revenue From both Yolai Board and the mix, and the second one is explaining the other delta.
Okay. PJ, on the question on regulatory headwinds.
On the regulatory headwinds, as we have mentioned sort of earlier, For 2020, it's 20 basis points. And for next year, it's 140 basis points, No worse than that. And that includes PD scenarios, trends and all of the effects in terms of models And for cyclicality. So this is already everything that is factored in that was mentioned sort of earlier. Musier.
I think on this, you are asking for some more detail later on to the 4Q. The most relevant item, as I was highlighting before, is the software So the change of the software treatment is going to be in the 4th quarter, and then we are estimating the impact in Lindt's Positive impact innovation to the common equity ratio, while the other one that is a negative, It's going to be some other effect from PD Procyclicality perspective. The sum of all the effect, as I said before, We'll bring the overall impact full year to less than 20 basis points.
Thank you. Next question.
The next question is from Prita Schmidt with Autonomous Research. Please go ahead. Yes.
Hi there. Good morning. Two questions, please. The first one, just picking your brain again on the wording regarding M and A. The statement that Team 23 does not include M and A is not necessarily the same as not being interested in M and A.
Under what conditions would you be interested Are there deals to be struck where you could maintain your payout policy, for example? And then the second one will be just on the Stage 2 loans. It sounded like there were some single names in there. Can you just explain a little bit more what drove the Q on Q increase? And maybe also the single name, what sort of sector it was in and what division you will do in?
Thank you.
So I will let TJ answer for the second question. On the first one, Musier. And I just want to repeat what we said and we always said is TIM 23 is based on no M and A assumptions. We prefer to transform rather than integrate, and we use our excess capital to finance the economy and to return capital to shareholders. Difficult for me to be clear on that basically and don't try to find any certainty in any of the wording.
And Musier. We never comment on reimbursement speculation. It's not today, but I will start to do that. In no M and A assumptions, We prefer to transform and integrate, and we use excess capital to finance the economy and to return capital to shareholders. Musier.
One second question, C. J.
Thank you, Jean Pierre. On the Stage 2 increase, This is primarily driven by our proactive classification, a hit at the moderate to expiration in 2021. We have basically gone through the portfolio, assessed the riskiness of the specific industry on forward looking basis as well as the early portfolio warning. So in Italy, we have roughly about €5,000,000,000 increase. Overall, Stage 2 for the group is about 14% And Italy is still 9.3%.
So we are already looking at forward looking anticipating Just to avoid the cliff effect of the military. You were mentioning Single ticket. During the presentation, we were highlighting a single ticket contribution in relation to the coverage of the NPE. So from this perspective, the effect was on the UTP. So we experienced A shift of a position and a state guaranteed position in Germany that will move to from performing to non performing Let me explain the majority of the delta of the NPE related to UTP during this quarter.
This is what I was referring to during the presentation. And this is why we need to adjust the coverage On the Q3 to take into consideration the fact that the contribution of this classification is diluting the coverage of the utility pay.
Musier. But there will be a feature going forward for all banks. It's absolutely not UniCredit specific, which mean that when you have a State guarantee loan, which is reclassified under stage 3 basically. We were going to provision only For the part which is non guaranteed, but because of the way the ratio, a coverage ratio is calculated, You take the full nominal of the loan, so it mechanically lowers the coverage ratio. So this is why we said that Musier.
If we were not looking excluding this German credit, which was reclassified in UTP, Our coverage for UTV would actually be above 50%, so higher than the coverage of the Q2. And we will give The two figures going forward for and that is to understand what is the true evolution of the coverage ratio. And maybe just a more clarification as well or detail On the Stage 2, on the Stage 2, we have a group coverage of 4.1% and we have for Italy The coverage of the Stage 2 loan of 6.8%. So Stage 2 loan in Italy represents 9.3%, as TJ mentioned, of our portfolio in Italy and are covered at 6.8%. So the reclassification of €5,000,000,000 of loan in Italy Musier.
From Stage 1 to Stage 2, and our included additional L and Ps of €200,000,000 Gustier. Thank you. Next question please.
The next question is from Jean Noyes with Goldman Sachs. Please go ahead.
Hi, good morning and thanks for the call. I had a question on business development. You mentioned in your prepared that you prefer to transform and you have a high priority to remote banking, paperless, etcetera. I just wanted to know whether you could or you had anecdotes or Evident All that has so far or not, we guarantee it yourself from your competitors in the various geographies Where you operate either in terms of volume, speed or pricing advantage? And my second question was again maybe on some of the regulatory developments, which was sub question 1, Whether there is any correlation between the cost of risk that you anticipate and The procyclicality impact on the risk weighted assets that you anticipate, meaning that it's your early read on the anecdotal evidence On asset quality development, which you said yourself had been so far behind even though it's very early, would have also an impact On the possibility, if they ended up having positive impact on asset on loan loss rates.
And secondly, whether your TLAC excess, But whether in your NII projection, there was what assumptions were there on your excess of TLAC and whether you plan to maintain such a buffer over and above your TLAC requirement, which is quite costly, obviously, at Group Life. Thank you very much.
Thank you very much, Jean Francois. Just on the remote banking side or transformation, Moustier. We'll give much more detail at the Capital Market Day to be held next year. And we actually the reason why we want to have In the first half of the year, not early in the year, is to show concrete acceleration of the remote banking measures That's what
we have been taking.
So the teams are working very hard on that. And to give you one example, we have many, but We told the market that we wanted to be paperless in Italy from the beginning of Q3, which Moustier. But to do that, we have put in place what we call a digital mailbox, which allows the client to receive all the information on their UniCredit mailbox. And using the digital mailbox, We can have the client today signing for remotely for most of the contract they can transact with us. So basically, Moving from paperless in the board using digital mailbox allows us to accelerate the remote banking activity by putting a lot of the contract into Remote signing, for instance.
So that's very important specifically when we look at the second wave and we roll out The paperless process and digital mailbox in all our geographies. More detail at the Capital Market Day. On your second question, we're quite sure to have gotten everything, but The procyclicality impact that we are seeing, it's something which will impact all the banks because the In the rating migration in the current environment when you have GDP going down that much is mechanical basically, so it's not a UniCredit specific. You know that we are always anticipating regulatory impact to put them behind us. So this is why we are targeting Musier.
An overall impact of profitability of around 70 basis points. We are taking 45 basis points of that this year And the balance, sir, next year, basically. And as I said, this profitability will reverse starting from 2022, 2023 and beyond And will be almost fully offset when the economy rebounds basically. Jean Francois, do you want to clarify, was it about the Correlation between the cost of risk impact for work headwinds and the capital impact for work headwinds? Or have we answered your question With what you just said.
That's right. So for example, you said 70 bps, for example, next year of provisions at the bottom end of the range. If you see, for example, 10 gips left of cost of risk for as you might say, is there a mechanical effect on the right headwinds with regards to Pacific ality that I was trying to see whether there was what was embedded in the situation
Musier. Just I will let Stephane to give you the details, but the procyclicality is a risk weighted asset Moustier. Inflation is not a provisional LLP. But Stefano will give you more detail there and of course, we'll comment on the TLAC issuance, Musier. What we pre funded this year and how we manage the best response to the audience?
Yes. So in this moment, we have effect from PD The CAIT impacting the risk weighted assets and clearly also the expected loss. This is the application of the internal holders where we have 2 components, a qualitative one and then a quantitative one. Looking to the quantitative one, we need to take into consideration the evolution not only of the macroeconomic situation, but also the single obligor. This is not translating in the same approach that we are doing from the cost of risk perspective.
And as a matter of fact, You are not highlighting to you relevant effect on the cost of risk that I have been from regulated headwinds because as we have communicated, The effect that I'm hearing from regulatory headwinds in the RFP is going to be around 10 basis points for the full year, mainly in Q4 and another 10 basis points in the next year. So as a matter of fact, there is no A direct correlation between the calculation of the risk weighted asset effect due to PD pro cyclicality And the cost of risk. For sure, the expected loss is going to be impacted accordingly. As a matter of fact, the vast majority of the cost of risk that we are having this year is due to overlay That are done looking to the specific sector and the specific position, especially one under moratorium.
If you look if you go to 51 of the presentation, you have the risk weighted asset rules basically and you have on the regulation a €3,300,000,000 increase of risk weighted asset. This is €3,800,000,000 coming from Prostate Utility. We have Musier. Some benefit from SME Energy. But the profit utility impact the risk weighted asset.
Musier. And as I said, it will be reversed over time when the economy will be born and the rating of the clients improve.
Of course,
I mean, some of these clients might default in the future. That's part of the probability of default, which is a component of the expected growth. But procyclicality, the 70 basis points are purely risk weighted asset driven. Stefano, on TLAC,
broadly on TLAC, Currently, as we can see at Page 18, we do have an important buffer on Pillar Petit 648 basis points due to different reasons. So primarily is the common equity Tier 1 ratio Level that we have already commented is very high. 2nd, the delta between the fully loaded and transitional that is equal to 74 basis points. A portion of this is going to fading away over time in the next year. 3rd, was anticipated the 2021 TLAC funding plan for a couple of €1,000,000,000 already during 2020.
So what we are expecting in the next year Is an increase of the risk weighted assets also there having found the regulatory headwinds that the fact that we were commenting before to the increase also of the requirement because nowadays the requirement is 19.5% when we're going to move 221.5. So as a consequence of that, we are expecting to have a reduction over time of the buffer. The buffer will be higher than our target one, that is the range between €50,000,000 €100,000,000 during 2021, We'll move more to the upper part of the range, €5,000,000,000 in 2022 and 2023. So it's
a combination, if you want, for compression of the buffer of the fact that we have regulatory headwinds to a certain extent, plus the transitional phase, which is fading in. And so we land towards the target at the end of the target, and we have been prefunding as we always look for windows in order to present when we are doing those. Thank you.
Next question, please. Okay. Thanks.
The next question is from Delphine Lee with JPMorgan. Please go ahead.
Hi, good morning. Thanks for the presentation. So just two questions as Follow-up. First of all, I mean, actually, I wanted to ask on fees. Your guidance basically for full year Implies an increase in the 4th quarter.
So I heard you comment on the financing fee seasonality, but if you just would Musier. You might give us a little bit more color on the other components. And also for next year, because your €6,400,000,000 implies An increase which is actually larger than the GDP assumption that you have of last year. So just wondering if there are any drivers that we should be Looking for. The second question is just sorry to come back on capital and distribution, but So your comments are very clear on the 50% total distribution.
But I'm just wondering, are you concerned that the excess capital Potential buybacks that you could do next year could be at risk because of if you know what's going on, on the lockdowns and the macro in Q4. Thank you.
Thank you, Delphine. Just on so the field, we had for Q4, we had an extremely good October basically. And so we are very comfortable that we'll deliver the fees for basically being able to reach the The end of which is around €6,000,000,000 this year, slightly below €6,000,000,000 So the level of fees for the Q4, which will not be very different from what we had on the Q3, basically. A very good October. And as you know, I mean, the new lockdown that we could have are more, let's say, pragmatic.
And so we don't expect the dramatic impact We are during the Q2. Stephane, a bit more detail.
Yes. In relation to 2021, we are guiding EUR 6,400,000,000. I think it's important to look at full year 'nineteen as well because 2020 is a really good year. So if you look 2019, our absolute level of fees was EUR 6,300,000,000. We are guiding EUR 6,400,000,000.
It is an increase of just below 1 percentage point. Within the split of the fees, we are expecting to have In comparison 2019, related higher growth on investment and transactional fees That again on financing fees. Also due to the fact that the financing fees are connected to the Growth rate of the lending that we think is going to follow, the rebound on the economy And as a matter of fact, it's going to be pronounced starting from the Q2 next year.
On the capital side, Your question on is the dissolution of excess capital at risk. As I said, I'm convinced that the ECB policy No, of allowing banks to return capital to shareholders, a mix of dividend or share buyback, it's not an if, but a when. So we are Comfortable that this will allow the bank to pay back capital basically to shareholders and the timing will have to be fine tuned. We're very confident that it will start in 2021. Thank you.
The next question is from Patrick Lee with Santander. Please go ahead.
Hi, good morning, everyone. Thanks for Musier. I just have a couple of follow-up on the cost of risk guidance. I think for the full year guidance, As you mentioned, you are expecting a sharp increase in the Q4. But if I just look at the specific component of it, I think on
a year to date basis,
you are running at around 33 basis points. And if I am arithmetically putting it together with your 40 to 50 basis points specific After the full year, we are talking about a
specific risk of maybe 60 to 80 basis points in the 4th quarter.
Now in the context of 2nd lockdown but also extension of moratorium, is there
any other specificness you see already that we see such a sharp increase from 1 quarter To another. And on the
other hand, if the specific is lower out
of prudence, is it right that you'll still top it up to around 100 basis points for the group basis?
And I think relating to that, looking into 2021, your current overlay, let's say, is around SEK 1,700,000,000, probably more 2,000,000,000 by the
end of the year. What is the actual mechanics of turning this overlay provisions into specific release?
I mean, Do you take
it on a loan specific loan by loan basis or do you take a more portfolio approach or strategically tapping into it? And within the to 70 basis points, are
you canceling in any further overlays in that guidance? Thanks.
Thank you very much. I will let Musier. As what I mentioned earlier, we target for the full year 2020, the level of specific cost of risk from the 100 to 120 of 40 to 50 basis points and for the overlay of 50 to 60 while we have a 10 basis point of regulatory headwinds. For the specific cost of risk, we have a proactive reclassification on a certain number of loans on which we will work in order to anticipate potential degradation of the credit. So the increase you will have on the specific We'll be coming from a proactive reclassification into Leclercetupil.
And mostly after we did, for instance, this quarter On the CEE side, we have the proactive reclassification under UTP of a certain number of credit as we want to be conservative And anticipate an effect on the future. So we always take conservative assumptions, and we always want anticipate the pain. And so that's what we will be doing in the Q4 in order to have a quarter on quarter cleaner, if you want, for 2021. On the reclassification, Stefano, on the mechanics to move from overlay to specific basically.
Yes. First of all, in the overlay, as highlighted, we are including all the FedConnect with capturing the forward looking dynamic of our portfolios. So we are including the change in the macroeconomic assumption that we already Musier. In the Q1, it is 20 basis points out of the 48 basis points of the rate that was in the 9 months. And then we have movement to Stage 2 portfolios, deriving from analysis in relation to Riskier sectors than others, taking into consideration the impact arising from COVID-nineteen and single obligor Analysis, especially the one under moratorium.
As a consequence of these two analysis, we are moving position from Stage 1 to Stage 2. To give you the flavor of the magnitude of the provision, If you look the slide in at Page 48, where there is the breakdown by stages, You can also see that the overall provision that we have in relation to performing portfolio, stage 1 to stage 2, It's €3,800,000,000 And if you look 1 year ago, it was €2,600,000,000 So it's €1,200,000,000 more in the year. I was going to work. He's going to work that a portion of the Stage 2 portfolio is going to migrate to Stage 3, Not all the portfolio, but a portion of the portfolio. When the portfolio is going to migrate, clearly, A portion of this is already provisioned and another portion has to be brought to the leverage of coverage Either UTP or bad loans.
We are going to have also the other way around. So a portion of the portfolio can Also migrate to stage 1. The combination among the 2 is going to let us rising The guidance of 2021 cost of risk that it is close to 60 basis points Underlying cost of risk.
Okay. Thank you, Stefano. And just to maybe summarize the overlay provisions under the black So, but we are extremely careful to make sure that we can write them back if you want to reassign the 3 documents into specific provision and that requires a very fine accounting approach as Stefano has outlined. If you want more detail, feel free to call the IR team or have a direct discussion with Stefano. But that's for us in anticipation and then you can give me
a call.
Next question?
The next question is from Alberto Cordara with Bank of America. Please go ahead.
Hi, good afternoon. My question is, first of all, on the cost of risk. We talked about the fact that these new state guarantee loans have a negative Musier. But clearly, they will have a positive impact on loan losses. So my question is what would Your cost of risk next year without the state guarantee loans, particularly in Italy.
And connected to that, What rate of default on a multiyear basis should we assume on these loans? And then I'm going back to a question that was Very much discussed in the quarter this 140 bps regulatory headwinds in 2021. This is not new news because it is the same guidance that you gave in Q2. So we've been talking a lot about it, but You basically confirmed previous guidance. So the question to you would be provided that you have a very high MDA buffer, You may not necessarily need to take any action, but is there anything that you can do to mitigate This negative headwinds.
And then connected to that, I remember that you also mentioned a 60 bps Negative headwinds for 2022. And if I remember correctly, around 30 bps for 2023. So is this still in place in terms of your guidance or not? And then the very final question means can you remind us what is the impact on NII from your reputed portfolio in the quarter? And how should we expect this to evolve?
Thank you.
So I mean, I think that the IR team will need to come back to you for some of the details you're requesting Musier. Because we can deal with it in too much detail with everybody, but I will try to address the comment on a more qualitative basis. I don't know if TJ can give more detail on why we let you call the IR team here. On the I mean, if they're guaranteed loans, you're absolutely correct. It's NII negative to large extent, These loans are a tight spread, but as outlined by Stefano during the presentation, we have seen in Italy, for instance, that The clients taking the term loans, state guaranteed, have been paying back some of their short term borrowings.
And so there has been A substitution effect, which is a negative in the sense that the short term borrowings were at a spread, which was almost twice higher And the spread of the long term loan specifically. So it could improve the loan loss provision. I would say that And that's the qualitative comment I wanted to make. If you had listened to Finance Minister, Bois Thierry, Earlier this week, I think over the weekend, you mentioned that it was likely that the moratorium in Italy Will be extended from the end of January to the end of June this year as well as the state guarantee. So we might have More state guaranteed loan.
And clearly, there could be more substitution effect between the bank loan and the state guarantee loan specifically for the sectors which are the most impacted by COVID-nineteen. And We gave you the breakdown of the sectors of the segmentation for high impact to low impact. And Musier. If we have more time, basically, some of these clients in the high impact sector might go for more state guarantee loan, Which will de facto reduce potential loan loss provision for the bank. So that should be a positive, difficult to quantify, but I will hand over to TJ and if he can give you a bit more detail on that.
Yes, on the state guarantees, clearly, The impact, IR will get back, but our expectation for this year is quite not a lot, Few basis points. But clearly, we have assumed in the default rate assumption this is artificially suppressed. As I said before, In Q2, that was roughly 3.5%, but you've shown Our observation is 2.2 percent, so it's up to a shrinkage surprise. So we expect that all of this Future impact for cliff effect is really being articulated earlier and Stefano's mentioned in terms of the overlay, The macro assumption and also the proactive classification. In relation to the eradicating portfolio, In the quarter, we had a net benefit contribution to the NII from the replicating portfolio.
We have the Futurian deposit for EUR 315,000,000. This is EUR 10,000,000 better Than the previous quarter, reason being the dynamic of the rates, especially the floating rates because it is a net benefit. So it's a difference between the fixed rate and the floating rate. In future, especially in 2021, we are expecting A lower contribution because they are expecting that the floating rates are going to remain the same, while doing the rolling When we do the holding, we are going to achieve lower fixed rate. The margin of the FET That in 2021 could be ranging between €80,000,000 €100,000,000 in comparison To the assumption of TIM 'twenty three.
However, such a delta is going to be reduced over time in 2022 and 2023 following the dynamic of the volume invested and the rates. And we are not expecting a significant difference in Musier. And of the contribution in 2023 versus 2023 plan.
Alberto, we have hidden the exact details Then on Page 55, that's the footnote 1 to Page 9. So there you have the replicating portfolio Stefano just mentioned. On the other ones, so the remaining open points on the guarantees will come back to you. And that's a promise, not a threat. Just on we'll update on the chemical market next year the regulatory headwinds.
But as you said, And we're planning in the communication we gave in December last year, we want 60 basis points of organic revenue in 2022, 139 in 23. And we will have afterwards, you have to take into account the mitigating impact of The rating migration, which will be a positive in 2022 and 2023, we'll give you the detailed nature, but which will mitigate basically the plan regulator headwind as The rating of the portfolio will improve and so the profitability will play positively starting from 2022. But we'll give you that Later next year during the Capital Marketing.
Okay. I appreciate it.
Thank you very much. Thank you.
Musier. Next question, please.
The next question is from Jackie Emeka with Morgan Stanley. Please go ahead.
Hello there. I have a question from the credit side. First, thank you for your comments about treating stakeholders fairly earlier on. And bondholders certainly appreciated you paying the coupon on the cash this year. I've got a question on these bonds.
The EBA recently came out with guidance on aspects of legacy instruments. And at the moment, nearly 3,000,000,000 Yours has said cash is at a value of 80% as core equity. But the EBA guidance might suggests that after 2021, the other 20% might have limited regulatory value. I think even if we take the worst case and assign 0 value to that 20%. I think the other 80% appears to be still very cost effective core equity compared to traditional equity.
I was just wondering if the EBA opinion has prompted a review of Cashes or if you're now thinking about them differently in any way? Thank you.
No, we don't think but Then differently, Stefano can comment about it. Just to say that the cash is when the grandfathering ends will be considered as tier 2 for €600,000,000 And that's it basically. And there is no question mark. I repeat, no question mark About the regulatory treatment of the cash is at Tier 2 when the grandfathering ends. I think the only point for clarification, you mentioned €3,000,000,000 That was the original issued volume.
So we're talking now only about the €600,000,000 That has not been converted with the restructuring in 2011 into equity. So there's currently €600,000,000 grandfather €81,000,000 that Jean Pierre was saying will turn into Musier. Right. Thank you. Next question please.
I'm sorry.
Sorry, just in terms of
what the EBA gave us an opinion, it would suggest that, that cannot count as Tier 2 after the end of 2021. That was really
No, but I said No, but I said there's no question mark. I cannot comment publicly about what the regulator tells us. But if I'm telling you there's no question mark, Musier. No question mark. And the cash is will be converted into Tier 2.
Great.
And we've got Musier. We are absolutely certain of the regulatory treatment.
Perfect. Thank you.
Thank you, Justin.
The The next question is from Ignacio Cerezo with UBS. Please go ahead.
Hello, good morning and thank you
for the presentation. A couple of ones for me. 1 on NII, if you can give us the calendar of maturities of your treasury portfolio in the next couple of years and possible the yield Of those loans expiring? And the second one on the capital return, sorry to come back to that. There's been some chatter around the possibility of a payout cap Imposed by our regulators, that's something actually reconciled with your conversations with them?
Thank you.
Well, no, we never comment on rumors and speculation about UniCredit. I will certainly not comment about Musier. There was some speculation about the regulator. The only thing I can say on the last question is that we are highly confident that The ECB will allow bank to return capital to shareholders.
It's
not an if, it's a when, and we're highly confident that It will happen sometime in 2021. Also on the NII and On the portfolio. There are maturities in the portfolio, I'll let Musier.
Yes. The Rolle liquid portfolio is at €136,000,000,000 at the end of the quarter. The duration of the portfolio is around 3.5 if we look at the overall portfolio. If we look at the Italian component For the portfolio, the exposure is around EUR 43,000,000,000 Yes, at the duration of EUR 3,300,000,000. In relation to the maturities of this exposure, so the Italian one, We are expecting to have maturity around €9,000,000,000 in the next year and another €14,000,000,000 in the year 2 and you have 3 coherent with the average duration.
I was writing to you that is €3,300,000,000 of the overall Italian Huawei portfolio.
And just a bit Italian portfolio, EUR 43,000,000,000. We have EUR 22,000,000,000 in the L2 Connect, basically, in the balance in the Musier.
Thank you very much.
Thank you. Next question please.
Musier.
Okay. Looks like there is no more questions. So we'd like to thank you very much Sure. For your question, we will meet digitally with many of you in the next few days. But let me summarize Some of the key points that we've been mentioning during this presentation.
1st, UniCredit is in a very strong position to face the future with confidence. Our management philosophy is very simple. We run the bank with a conservative approach, maintaining a tight control of cost and a strict underwriting discipline. We give priority to long term sustainable outcome over short term solution. So it does mean in practice that In terms of net interest income, we will not compromise our future asset quality for short term net interest income fixed fee.
We therefore will not do volume lending, nor will we do carry trade. In terms of cost, controlling cost is in our DNA. As Stefano pointed out, TIM 23 is based on substantial and additional cost cutting over and above what we successfully delivered in France for 'nineteen, including further reduction of both FTE and branches. Less than a year ago into the plan, we have taken decisive actions on course. And I've first been able to improve our cost guidance by a further 2% in financial year 2020 2021.
And as a result, we have improved our TIM23 gross cost cutting reduction target by 25% to EUR 1,250,000,000. In risk, we have a conservative provisioning and a strict underwriting discipline, which are the group trademarks. Our cost of risk guidance is based on realistic and not optimistic assumption, and we always anticipate future impact. As a consequence, we are not changing our target because of the second wave. Instead, we confirm our financial year With stated cost of risk guidance at 100 to 120 basis points, thanks to this anticipation for future impact as well as seasonality next quarter.
So this approach puts us in a very strong position to face the uncertainty created by the 2nd wave. We have an extremely strong capital position underpinned by a record 538 basis points 51 and the above floor and a very strong liquidity position with a point in time liquidity coverage ratio of 183 percent. We have derisked our balance sheet, have been materially run down our gross NPE, sold nonstrategic assets and reduced our BTP exposure. At the successful execution of Transformative Show, we have confirmed track record of delivering on our commitment to investor, whatever the environment. And we confirm our 2021 underwriting net income of €3,000,000,000 to €3,500,000,000 and our 2023 underlying return on tangible equity of 8%.
So from this position of strength, we will continue to support the economy and distribute capital to our shareholders. We confirm the reinstatement of our capital distribution policy based on an ordinary distribution of 50% our funding net profit and the gradual distribution of excess capital when the regulator will give its green light. It will comprise a mixture of cash and share buybacks, and we plan to make both ordinary and extraordinary distribution from calendar year 2021 onwards. This completes our Q3 results presentation. So I look forward to talking digitally with you all again in 3 months' time, if not before.
Stay safe and thank you very much. Bye
bye then.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.