Good morning, ladies and gentlemen. Today's conference call will be hosted by UniCredit CEO, Mr. Jean- Pierre Mustier, and the co-CFO, Mr. Mirko Bianchi. 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 Mustier. Sir, you may begin.
Thank you very much, and good morning to all of you, and welcome to the analyst call for our second quarter results. While we continue to face the challenges of the ongoing COVID-19 pandemic during the period, we finished the quarter in a strong position. We are ready to seize the opportunity that lies ahead, thanks to our effective business continuity measures, our accelerated digitalization, and our stable cost base. As lockdowns began to ease across most of our core markets, we are seeing the first signs of commercial recovery. This can be seen more clearly in our monthly fee performance, with group fees for June now slightly higher than the level of a year earlier, demonstrating the resilience of our commercial franchise. We are ready and open for business and in a strong position to capture commercial opportunities.
We have maintained our disciplined risk management, the hallmark of Transform 2019, and we confirm our financial year 2020 and 2021 cost of risk guidance. The full rundown of the non-core by 2021 is also confirmed. With our very strong balance sheets, we can continue to finance the economy and support all our stakeholders. We have committed to reinstating our Team 23 capital distribution policy in 2021, including returning excess capital to shareholders. Let's turn to Slide five. I would like to remind you of what UniCredit stands for. Our performance this quarter reflects not just the conservative way we manage the bank and our diversified business model, it also reflects our culture. This culture is best sum up as doing the right thing for all our stakeholders, favoring long-term sustainable outcomes over short-term solution.
This commitment to sustainability was recognized in June by MSCI, who upgraded our ESG rating to A, after many years with a BBB rating. We have further reinforced this commitment with the appointment of a new head of Group ESG Strategy and Impact Banking. This week, we have updated our coal policy to industry-leading standards. We have made a direct commitment to fully exit all coal sector financing by 2020 worldwide. We will have zero exposure to thermal coal mining and coal power plant projects by 2023. Further details on the new coal policy can be found in the annex on Page 24. Sustainability is fully embedded in how we run the bank. Let's turn to Slide six. Revenues in the quarter were down 4.8% compared to the first quarter.
Lockdowns were in place for much of the period across our core markets, with a significantly lower economic activity and lower fees as a consequence. We are now seeing a recovery in activity. While Mirko will provide more color shortly, I would like to highlight the performance of Commercial Banking Italy and Germany, where fees in June were higher than the same month a year ago. At the group level, overall fees were slightly higher in June than the year earlier. In the annex on Page 36, we have provided a detailed managerial breakdown of our monthly fee performance with both geography and broad product. Gross NPEs are more than EUR 10 billion lower than a year ago. This is thanks to further hard work and disposals in our non-core. As a result, our gross NPE ratio improved further to 4.8%. Our capital position continues to strengthen.
Our fully loaded CET1 in the buffer at the end of the quarter was 481 basis points, an increase of 44 basis points over the quarter and 218 basis points higher than the year-over-year. This is thanks to the proactive decisions we took to strengthen our balance sheet over the pandemic. The strength of our balance sheet also allowed us to absorb significant provisions over the last three quarters to prepare for Team 23, and subsequently, for the effect of COVID-19. These provisions total EUR 4.3 billion pre-tax and include EUR 1.2 billion for our updated Team 23 non-core rundown strategy by 2021, EUR 1.4 billion for forward-looking IFRS 9 macro provision, and EUR 1.8 billion for restructuring costs,
which allow us to accelerate further the transformation of our business model. Notwithstanding the substantial provision, our tangible equity is stable year-over-year. Let me hand over to our co-Chief Financial Officer, Mirko Bianchi. Mirko, over to you.
Thank you, Jean-Pierre, and good morning to everyone. We are on Slide eight. Revenues were down EUR 208 million or 4.8% quarter-on-quarter. As Jean-Pierre already noted, we felt the full effect of lockdown in this quarter. The lower revenues were particularly offset by lower costs as we maintained our strategic discipline and focus on efficiency, with operating costs down EUR 49 million or 2% on the first quarter. I will comment on revenues and cost trend in more detail in the following slide. I would like to make three specific comments on items below the net operating profit line. Systemic charges in the quarter increased by 40% year-on-year, mainly due to an additional contribution to the Single Resolution Fund in the second Q20.
As a result, we have revised up our fiscal year 2020 outlook for systemic charges guidance from EUR 850 million to EUR 900 million. Profit on investment in the quarter included a charge due to the accelerated rundown of non-core and an impairment in Austria, partially offset by mark-to-market gains on our remaining stake in Yapı. The group tax rate of 14.4% in the second Q2 2020 was driven by the geographic mix of taxable profit, mainly in CEE, and a tax credit recognition in Italy. Let's turn to Slide nine. If we look at our profit distribution across the group in the quarter, you can see that our diversified business model underpins our stability at group level, notwithstanding the varied timing of lockdowns across our markets. The contribution of CEE and CIB stands out in this quarter.
As you can recall, we introduced underlying net profit at our Capital Markets Day last December to create a relevant and true measure of profitability, one that provides a better reflection of income that can be distributed to shareholders. To calculate underlying net profit, we exclude after-tax non-operating items from stated net profit. This quarter, we had limited non-operating items. The underlying net profit was therefore EUR 528 million. Please see the annex on Page 42 for all adjustments in Q1 and in Q2. I would also like to comment on our return on allocated capital year to date.
To put things into perspective, if we adjust for the IFRS 9 macro provisions, the impairments in Austria, and spread the systemic charges equally through the year, the underlying return on allocated capital in the first half would have been 7% in Italy, over 8% in Germany, and above 5% in Austria.
Given the macroeconomic background, this is a good performance underpinning our FY 2021 guidance of EUR 3 billion-EUR 3.5 billion underlying net profit and 6%-7% underlying ROTE. Let's turn to Slide 10. Net Interest Income was down 4% quarter-over-quarter. I would like to remind you, however, of the tax-related one-off item in Germany in the first quarter that contributed a EUR +50 million. Adjusting for this one-off, Net Interest Income was down by only 2.1%. Loan volumes contributed positively to the Net Interest Income in the quarter. This contribution is based on the average volume of performing commercial loans, which were up 2.4% quarter-over-quarter. The contribution from customer loan rates was impacted by both lower rates and a mix effect. Lower base rates in CEE and U.S. were partially offset by a positive impact on the contribution from deposits.
Please bear in mind, however, that the closer interest rates get to zero, the harder it is to offset pressure on the asset side with liabilities. The mix effect reflected our prudent risk appetite. We maintained our cautious stance on consumer finance, a strategy that predates on COVID-19 crisis. We continue to focus on higher-rated clients more generally. The second quarter also included the first loans issued under government guarantee schemes. These accounted for 16% of the group's overall new production in the quarter and 30% in Italy. Such loans are naturally at lower rates. Finally, let me now address the topic of TLTRO. As you know, we repaid all TLTRO outstandings in June 2020. At the same time, we took the maximum allotment of TLTRO III of EUR 94.3 billion.
We do not do carry trades, rather deposit the excess unused liquidity back to the ECB, the nominal gross benefit is around EUR 300 million per annum. At the same time, however, we lose the benefit of the previous TLTRO programs. The incremental net NII benefit from these transactions combined is, therefore, expected to be around EUR 75 million per annum throughout the three-year life of TLTRO III. Our IR team is happy to take your calls on the details. Let's turn to Slide 11. Fees were down 11.8% year-over-year. That was with signs of commercial recovery towards the end of the period. We saw the full effect of lockdown this quarter. In contrast, the first quarter was only affected from mid-March onwards and included a very strong commercial performance in January and February. As Jean-Pierre said, we have seen clear signs of recovery in June.
This rebound in fee income as lockdowns were lifted demonstrates the resilience of our commercial franchise. We are, however, seeing a variety of commercial recovery in terms of geographies and fee categories. In part, this reflects where each market is in terms of the easing of lockdown restrictions. Austria and Germany opened up first, followed by Italy, while CEE, some countries are still in lockdown or in the process of tightening restrictions. The annex on Page 36 provides a detailed managerial breakdown of monthly fee trends by geography and product. I will limit my comments to the following. Investment fees are rebounding well, driven by a strong performance in Commercial Banking Italy towards the end of the period. By June, investment fees for the group were 9% higher than June last year, which, this being said, was a low month. We expect this to recover to be sustained.
Initial data from the first few weeks of July also confirmed that. The relative stability in financing fees in the quarter reflect two trends: a very strong demand in debt capital markets across CIB and lower credit protection insurance sales in Italy. The latter are expected to remain subdued, in line with our cautious stance on consumer finance. Transactional fees in the quarter were impacted by the effect of lockdowns on economic activity. GDP-sensitive transactional fees, such as cards, payment services, and non-life insurance, were all lower. Encouragingly, in June, we saw transaction volumes of issued cards match the same levels seen a year ago across Italy, Germany, and Austria. As economic activity resumes, we expect these GDP-sensitive transactional fees to partially recover through the second half, following the expected recovery in GDP in the markets where we're present.
Current account fees were stable in the quarter compared to last year. Overall, we would expect total fees in the second half to be broadly consistent with the first half. Let's turn to Slide 12. Trading income in the second quarter was very strong at EUR 357 million, up EUR 184 million quarter-on-quarter. Client-driven trading was solid, contributing EUR 372 million, up 79% quarter-on-quarter, excluding the volatile XVA component. The strong performance came from fixed income as well as equities and commodities, the latter benefiting from strong sales of certificates in the network. Non-client driven trading income also performed well, up EUR 113 million quarter-on-quarter. As we said in the first quarter, we expected the mark-to-market losses in our treasury portfolio to recover. I am sure many of you compare the trading income performance of banks across Europe and beyond.
Please note that unlike some banks, we take own credit spread adjustments straight to equity and not through the P&L in the group trading income line. If instead, we had taken these adjustments to the P&L, our trading income would have been EUR 210 million higher in the first quarter and EUR 133 million lower in the second quarter than reported. The lower contribution from dividends year-on-year was driven by the lower profitability in some financial investments in Austria and the impact of strategic disposals of stakes in Yapı and Mediobanca. Let's turn to Slide 13. Our continued cost discipline allowed us to offset increased COVID-19 related costs in the quarter. These included additional expenditures on real estate, security, and personal protective equipment following the easing of the lockdown. The total COVID-19 related cost amounted to EUR 50 million in the quarter and EUR 69 million in the first half.
For the full-year, such costs will be in the region of EUR 100 million, will be fully absorbed by savings made elsewhere, including lower variable compensation. The decrease in cost year-on-year in the second quarter is mainly thanks to lower FTEs and lower bonuses. The decrease comes despite a tough comparison with the second Q 2019, which benefited from a +EUR 24 million DBO release in Commercial Banking Austria. For fiscal year 2020 overall, also for 2021, we expect costs to be broadly in line with fiscal year 2019 and well below Team 23 guidance. Let's turn to Slide 14. Let me start by explaining our way of looking at cost of risk from now on. We have split loan loss provisions into specifics, regulatory headwinds, and overlays. Specific provisions, which relate to non-performing loans, i.e., those classified as Stage 3.
Regulatory headwinds, which include the impact, as usual, on loan loss provisions from models and the new definition of default, and overlays, which represent all loan loss provisions that are neither specific nor regulatory headwinds. These include IFRS 9 macro-scenario provisions, sector-related provisions, and provisions arising from preemptive classifications as Stage 2. These additional provisions are on performing loans, i.e. Stage 1 and Stage 2, and aim to proactively capture future default dynamics in the loan portfolio. In the future, some of these overlays will be set against specific provisions when defaults materialize and the loans are classified as Stage 3. This is how we will be looking at cost of risk going forward. For future details of our approach, please see Page 51 in the annex.
In the annex, we also provide further disclosure on our loan portfolio, including classification as Stage 2 by popular demand from analysts and investors.
Let me now turn to our performance in the first half and explain how we expect provisioning to evolve through the rest of the year and into the next. Our cost of risk in the first half of 2020 stood at 91 basis points. Within this, 32 basis points was accounted for by specific loan loss provisions for loans that were in Stage 3 or moved to Stage 3 during the first half. It is a low number and lower than the 43 basis points in the first half 2019, reflecting our conservative approach to loan origination. Since part of the loan portfolio is likely to be under moratoria for a large part of fiscal year 2020, specific loan loss provisions will likely be lower, and they would otherwise have been, given the economic environment.
We will have additional overlay loan loss provisions in the second half 2020, as we had in the first half 2020, to properly reflect the forward-looking economic impact of COVID-19 on our portfolio. The 100-120 basis point cost of risk for fiscal year 2020, as per our guidance, is therefore confirmed. Some of these overlays will be set against specific provisions, with the share of loans being classified as Stage 3 expected to rise more significantly in 2021 once the moratoria expires. Considering these assumptions, we also confirm our fiscal year 2021 guidance of 70 basis points-90 basis points. Finally, please note that there were essentially no loan loss provisions from regulatory headwinds in this quarter. Let's turn to Slide 16. In the second quarter, our gross NPE ratio for the group, excluding non-core, was stable at 3.4%, demonstrating our good underlying asset quality.
Using the EBA definition, the group NPE ratio, excluding non-core, is at 2.7%, now below the average of other European banks for the first time. As a pan-European bank, that is the peer group that we should be compared to. As we look ahead, consistent with the underlying assumptions of our projected cost of risk, we expect the NPE ratio to rise as moratoria expire and the default rate increases. The coverage ratio was down by 2% percentage points in the quarter. It is largely a mechanical effect resulting from the disposal of unsecured NPE portfolios, where naturally, the coverage was much higher than average. The quarter-on-quarter increase in UTPs was mainly due to Italy and the proactive management of flows to default. Let's turn to Slide 17. Throughout COVID-19 lockdowns, we have continued to work hard on the non-core rundown, and the process remains well on track.
As you will have seen last month, we were the first, and we remain the only bank to close multiple market-based transactions this year. The sale of three unsecured non-performing loan portfolios were all accounted for in the second Q 2020. As a result, gross NPE in the non-core were down EUR 1.1 billion in the quarter to EUR 7 billion. The NPE market was effectively closed during lockdown. Our strategy and processes, however, remained in place. It allowed us to quickly re-enter the market as the outlook became clearer to investors. The Italian NPE market for unsecured asset classes was the first to reopen. Prices in such transactions are largely driven by timing effects on expected cash flows. They are therefore less affected by the macroeconomic environment. We are now in the market with secured and UTP portfolios. This market was slow to reopen.
Investors required more time to conduct on-site due diligence and became comfortable with the timing of the legal processes. We are confident that our disposal program will be successful. We expect a further reduction of the non-core portfolio, reaching our initial target of below EUR 4.3 billion by year-end. The full rundown of the non-core in 2021 is confirmed. Let's turn to Slide 18. Our CET1 capital, fully loaded, is at a very strong 481 basis points buffer over our MDA level. To give this number some context, our MDA buffer is of the same order of magnitude as our current market cap. Please note that this quarter, we started to report transitional CET1 values again, following ECB guidance on certain items. Our MDA buffer on a transitional basis is 549 basis points at the end of the second quarter.
We will disclose it for as long as the guidance remains, but we will, as always, continue to manage the bank on a fully loaded basis. Please see the annex on Pages 54 and following for additional disclosure. The 44 basis points increase in the MDA buffer over the quarter was largely thanks to a reduction in risk-weighted assets of more than 10 billion in the quarter. Lower risk-weighted assets were driven mainly by the early adoption of the SME supporting factor, lower loan volumes at the quarter end, as well as the increase in guaranteed loans. The directional contribution of loan volumes to risk-weighted assets this quarter diverges from the directional contribution made to NII. This is primarily because NII is linked to average volumes, which were up quarter-on-quarter, while the risk-weighted assets are based on end-of-period volumes, which were slightly down in the quarter.
This mainly reflects the timing of when corporates drew down on and subsequently partially reimbursed liquidity facilities. The change in the regulatory treatment of software assets, also introduced in the so-called CRR quick fix, takes effect in the third quarter. It is expected to have a positive impact of around 10 basis points. Looking forward, we expect our MDA buffer in fiscal year 2020 and fiscal year 2021 to remain above 300 basis points, which is well above our target range of 200 basis points-250 basis points. As confirmed in our announcement last week, if the ECB does not prolong its payout recommendations, we are committed to gradually returning excess capital. This will be based on the sustained excess capital over our target MDA buffer. Let's turn to Slide 19.
In line with the strong increase of our CET1 MDA buffer, our TLAC MDA buffer has increased to 534 basis points, well above our target range. It was driven by the successful completion of our subordinated TLAC funding plan for fiscal year 2020, raising EUR 8.1 billion of eligible instruments at very attractive levels. In July, we executed EUR 1.25 billion of senior non-preferred as pre-funding of the fiscal year 2021 TLAC needs. For the remainder of the year, we will be ready for potential additional 2021 pre-funding subject to market conditions. Let's turn to Slide 20. Finally, a quick look at our tangible equity, which was stable quarter-over-quarter at EUR 51.1 billion for the second quarter. For the remainder of the year, we expect a steady increase in tangible equity and tangible book value per share. Let's turn to Slide 22, and Jean-Pierre, back to you.
Thank you very much, Mirko. As I said at the start, this quarter has been characterized by the early signs of commercial recovery. We are ready and open for business. As always, we will continue to run and manage the bank in a conservative and disciplined way and prepare for all eventualities. We confirm our underlying net profit target for 2021 of EUR 3 billion- EUR 3.5 billion. We also confirm our financial year '20 cost of risk guidance of 100 to 120 basis points, as well as our financial year 2021 guidance of 70 basis points- 90 basis points. Our balance sheet will remain strong. We expect our fully loaded CET1 MDA buffer to remain above 300 basis points in both full fiscal year 2020 and 2021, which is well above our target range of 200 basis points- 250 basis points.
We have committed to reinstating our Team 23 distribution policy in 2021, subject to the ECB dividend recommendation not being extended. This means a payout of 50% of underlying net profit in the mixture of cash dividend and share buyback. It also means gradually returning excess capital to shareholders through extraordinary capital distributions. As of 2021, and for the remainder of Team 23, the excess capital will be based on the sustained excess over the target fully loaded CET1 MDA buffer of 200 basis points -250 basis points. Before taking the questions, let me extend my deepest thanks and appreciation to all of UniCredit team members whose commitment, resilience, and continued hard work in this unique situation has allowed UniCredit to prosper and to do the right thing for all our stakeholders. Now Mirko, the rest of the team and I are ready to take your questions.
If you please be so kind and limit your question to two each. Many thanks. Operator.
Thank you, Mr. Mustier. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. To ensure better audio quality, please make sure you are not on loudspeaker. Anyone who has a question may press Star and one at this time. The first question is from Adrian Cighi with Credit Suisse. Please go ahead.
Hi there. This is Adrian Cighi from Credit Suisse. Thank you for your presentation, for taking my questions. Two questions, one on capital return and one on cost of risk, please. On capital, can you please give us a bridge from today's MDA buffer of 481 basis points to the sustained 200 basis points- 250 basis points target range? over what period would you expect to get there? on the cost of risk outlook, you reiterate the full-year sort of cost of risk guidance of 100 -1 20. What explains the expected increase from the H1 levels in light of the front-loading of IFRS 9 environment and the full effect of the lockdown in Q2? Do you expect things to get worse, or is this sort of additional overlay that you're expecting to take based on additional information to be received in the second half? Thank you.
Thank you very much. On the capital return, as you pointed out, we have a very strong MDA buffer on a fully loaded basis of 481 basis points. We said we expect the buffer to be well above 400 basis points in both the end of 2020 and 2021. Bear in mind that we had regulatory headwinds in 2020, which have been partially shifted to 2021. The target regulatory headwinds, which would be in 2021, are around - 140 basis points, and then for the net change in 2022 and 2023. Basically, the capital MDA buffer will, on one side, go with the net earnings.
On the other side, we negatively are affected in 2021 by the - 140 basis points, which is 100 basis points above the initial target, as we have more than 60 basis points time translation from 2020, + 20 basis points of impact of basically the impact of the higher expected loss, and 20 basis points of positive impact of CRR which has been taken in 2020. Overall, 200 basis points above for our MDA buffer in 2020, 2021, which is partially compensating the net earnings backed by the regulatory environment. For the cost of risk outlook, I will hand over to TJ, but as we have pointed out on Slide 51 of the presentation where we explain what we mean by overlay. We have a strategic cost of risk which is going to be for the full-year at around 50 basis points- 60 basis points.
That's in line with what we can see for the portfolio. We have an overlay of cost of risk of 40-50. The overlay is a mixture of preemptive reclassification between Stage 1 and Stage 2, sector-based provision, and a conservative macro assumption. We have an overlay already for Q1 of 83 basis points as for IFRS 9, 34 in Q2, and we expect to take additional overlay in the second half. We have 10 basis points of negative impact of regulatory headwinds, which reduced to the 100 basis points -120 basis points.
Thank you very much.
This overlay in order to anticipate the future specific risk we will have when the moratoria expire. Probably the moratoria will be extended from most of them. For instance, in Italy, expire at the end of September for the corporate, for the individual, it's more May or June next year. Probably for the corporate, the moratoria will be extended to January next year. We are not going to see a specific provision in 2020, which is why we take this overlay to anticipate the basically future specific provision. This overlay will basically be turned into specific provisions when these loans are all moved into Stage 3.
Thank you.
Thank you. Next question, please.
The next question is from Andrea Filtri with Mediobanca. Please go ahead.
Yes, thank you. One question on capital and one question on cost of risk. On capital, Slide 53, could you tell us what is the positive that is implicit on regulation when we exclude the impact of procyclicality and obviously new supporting factor? On NII, if you could tell us what the future contribution you expect from your pipeline of government-guaranteed loans, and an update on your ALCO portfolio, what is your position on guidance, how it has moved P&L, duration breakdown, and contribution to NII. Thank you.
Sure. Thank you very much, Andrea. I will invite Nico to comment on the NII for your second question. On the first question is from, we go to what's now the 53 in the remarks, which is the breakdown of the risk-weighted asset evolution. We had a certain number of positive, as you said, and so on the regulation side, we had a decrease of the risk-weighted asset by EUR 2.4 billion. We had an increase of risk-weighted asset of EUR 4.9 billion, which was into procyclicality. We had a total procyclicality impact for the first half of 21 basis points. Two basis points a bit more in the first quarter, 18 basis points in the second. We expect procyclicality on the third quarter to be around 14, around 14 basis points, and on the first quarter to be around 10 basis points, and for 2021, around 20 basis points.
that's the forecast for procyclicality by quarter. This increase of risk-weighted asset due to procyclicality was offset by the SME supporting factor, which was originally anticipated in 2021. for a decrease of 4.4 billion of risk-weighted assets. basically, SME supporting factor offset the procyclicality. We had a decrease of 1.2 billion of risk-weighted assets thanks to the use of one temporary benefit. it's a result of exposure, serving GOVs in FX, which has been moving from 50% -0 %, and this will last up to 2022. we have the decrease of 800 million of risk-weighted assets linked to the new regulation on systemically important institutions CET1, which is basically loans, and private loans, because there has been a decrease in the risk density from 75% - 35%.
That's the breakdown, the amount of this reduction of 2.4 billion of risk-weighted asset for the quarter. I'll let Mirko comment on the NII side.
Yes, thank you, Jean-Pierre. First of all, in terms of the GOVs, we have GOVs exposure of EUR 43.4 billion. It's down basically half a billion from last quarter. As you know, basically more than half is classified into hold to collect, and the rest is classified into OCI. We have a, let's say, duration of the portfolio of 3.3 years, so it's in line with last year. Now, in terms of contribution of the NII, I don't have the exact breakdown here. What I can say is that quarter-over-quarter, we were quite stable in terms of the NII that we were able to extract from on a quarter-on-quarter basis. We will continue to reduce this exposure as we go towards the target of 50% of our total tangible equity.
Next question, please.
The next question is from Britta Schmidt with Autonomous Research. Please go ahead.
Yeah, I've got three questions, please. Firstly, with regard to your guidance of EUR 3 billion-EUR 3.5 billion of underlying net income in 2021, are there any material non-operating items that we should adjust for? Where do you see the biggest potential year-over-year improvement in this number to explain the big gap versus market expectation? The second one is could you update us on the macro assumptions regarding the loan exposure, GDP outlook? The third one is could you be a bit more specific on the NII outlook for 2021?
Sure. Actually, I will take the first and third question in one go, and I will let TJ comment on the second question. As far as the EUR three to 3.5 billion net income for 2021. As we said in the previous quarter, we expect from what we were projecting for 2023 to have NII down by more or less 5%, so from EUR 10 billion to 9.5. We expect our fees to be down by low single digits, so there should be a recovery of fees versus what we were planning for 2023. We expect the cost to be more or less flat versus the cost we had at the end of 2019, so lower than what we had for 2023. The NLPs will follow the guidance of 70 basis points- 90 basis points. We are speaking about the underlying net income.
when we look at the combination of that and the specific change in the macro, we are moving to the EUR 3 billion-EUR 3.5 billion net income as we have confirmed. No underlying item, just coming from the normal operating activity of the bank with stabilization of the NII, normalization of the fees, having a credit profit which is back to normal discipline, and cost lower and provision lower than 2020, within the range of 70 basis points- 90 basis points. TJ, do you want to comment on the macro assumption?
Yep. Thank you, Jean-Pierre. In Q2, we do not see any need to update our macro assumption. We are comfortable that our macro reflects the environment. We confirm both our cost of risk guidance for the year of 100 - 120 with this assumption.
Before we move to the next question, just a point, Britta, on the non-operating items, if you meant the difference between stated and underlying net profit, these remain as per CMD '19 guidance. It's only the reg headwinds part of LLPs and any potential impact from the Yapi FX transaction. Next question, please.
The next question is from Antonio Reale with Morgan Stanley. Please go ahead.
Hi, good morning. Thank you for taking my question and thanks for the presentation. Two follow-up and one question. The first one is on your guidance for the second half of the year. I think if I understood correctly, I think that seeing underlying profits in the first half of just shy of EUR 400 million. The first half was affected by a number of relatively large one-offs, and in the second half, if I understand correctly, by looking at your guidance, will be affected by obviously higher loan loss provisions. Can you help us understand in better what that means, in particular for NIIPs and costs in the second half? Perhaps a comment on the tax rate, which is always difficult to forecast. Related to that, can you also remind us, please, the book value of the Yapı Kredi ?
The second one is a follow-up on cost of risk. My question is really on the moratoria loans, and I would like to understand what your estimates are assuming in terms of defaults on these loans. I'm looking at slides for the burner maximum /51, if I need to see related spreads. What percentage of EUR 35 billion do you assume in your cost of risk out of three defaults? Is it fair to assume sort of 4% non-performing rate? I think your cost of risk estimate for the full-year ultimately implies a default of 3.5% in first half is 2.4. Can you give us just a little bit more color underlying your assumptions there would be great. The last point is on NII. I have seen obviously yourself as well as other Italian banks take a large amount of TLTRO.
How are you seeing the sector coping with it in terms of lending spreads, pacing, and changes in competitive dynamics? I'm just trying to put together the net contribution requirement of EUR 75 million a year, which seems quite little. Also related to that, I guess with your answer, do you see any impact medium term on lending spreads from the government-guaranteed loans? Thank you.
Thank you very much. That's more than two questions there, Antonio. Let me give a brief answer to your first question. I will let Nico comment on the book value of Yapi and on the NII, and then TJ comment on the cost of risk of the moratoria loans. On the second half guidance, we don't give a guidance. We just gave an indication that we are taking additional overlay provision in the second half to properly reflect the evolution of the loans in our balance sheet, which are under moratoria in this situation. By taking this additional overlay, we will reach the 100 basis points- 120 basis point cost of risk, which included 10 basis points regulator headwind, as I previously mentioned.
We expect that the overall net income will be of the same order of magnitude as the first half, but we don't give a detailed breakdown on anything else. We will adjust things based on the evolution of the situation. That's the expectation that we could have. Not very different in terms of underlying net income than the first half. I hand over to Nico for the IAPI, book value, and NII.
Yeah. On the book value of Yapi, it's around half a billion for the 20% stake that we still have. On the NII side, first of all, the current situation. The current situation is that we are down 2.1%, driven mainly by interest base rates going down in CEE countries and the dollar. This is something that structurally will continue to be there. There is also, let's say, a mixed effect. On one side, our cautious stance on products like consumer finance, and then government guarantees and loan margins that, as you know, are lower than our normal, let's say, lending. In terms of trying to project this going forwards, I would say that NII, of all the revenue line items, is probably the one that will suffer a little bit more in the next two quarters.
basically driven by, let's say, competitive environment and TLTRO III pressure. that's basically how you should forecast NII going forward. Other line items in the P&L look better. Fees that you're seeing what we said, meaning we have a better outlook, and we are seeing the rebound, and also trading looks like back into track into delivering what it's supposed to deliver. from that perspective, revenue probably on the NII is probably the line item that is going to slightly be weaker going forwards.
On the moratoria, your question on the default rate. On Page 47, you can see that Italy, we have 14% in terms of the total loan portfolio. That's the focus area for us. You can see very little on Germany and Austria, and fees, look at it up in an another country, but overall is 12%. For Italy, of the EUR 24 billion, there are roughly about EUR 5.5 billion of individual. Enterprise is about EUR 18 billion of which you get a breakdown by leasing, and then there's small business as well as the corporate. We confirm our guidance in Q1 of 3.5% for Italy, which is almost double the full-year 2019 and higher than the 2008-2009 financial crisis, 2.5%. Clearly, we also look to break down among the rating classes, roughly the poorer or weaker ratings in Italy, we're assuming a default rate as high as 30%.
Overall, on Italy moratoria, we're assuming a default rate of almost 6%, which is almost double the 3.5% for Italy.
Thank you very much.
Next question, please.
The next question is from Domenico Santoro with HSBC. Please go ahead.
Hi. Hello. Thanks for the presentation. Good morning to everybody. Just a clarification on your guidance from 2021, and there were EUR 3 billion- EUR3.5 billion, because if my understanding is correct, you're guiding for 5% NII below the level that you guided in the industrial plan, which is around probably EUR 9.5 billion, here south of EUR 6.2 billion. On the cost and provision, you're very clear. I'm just wondering how can we bridge to this EUR 3 billion- EUR 3.5 billion. Either there is a very low tax rate, or there are adjustments that we have to just do. You mentioned before, potentially the regulatory headwinds on the cost of risk. Can you try to help us to reconcile a little bit the EUR 3 billion- EUR 3.5 billion with the guidance on the main P&L lines?
The other question is on the cost of risk, whether there is any top-up on the non-core interest accelerate a little bit rundown on top of already booked in Q2. Thank you very much.
Yeah, thank you. On the non-core, there is no top-up. Basically, we confirm the target of full rundown by 2021. We actually did already in Q2 many transactions, well within our provisions, and we are backing other in Q3. We confirm as well our intermediary guidance for the end of 2020. On the P&L lines, as I said, the NII will be around 5% lower than what we were planning in 2023. The fees will be only a few percent lower, which I believe will be decreased, so it is north of 6.2, as you said, and it's lower than 6.5, but north of 6.2. We have a trading profit which goes back to the normalized level of trading profit, which is EUR 1.3 billion-EUR 1.4 billion.
when you add that up, and you take the cost of risk and the NPL guidance of 70 basis points -90 basis points, and you end up with a net income of EUR 3 billion.
Next question, please.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi, thank you. A couple more questions. First, there's been some market speculation that Mr. Mustier might leave UniCredit to another bank. It'd be great if you could clarify or share with us your thoughts on the next steps in your career. Second, around your capital return in 2021, if ECB allows, removes the blanket ban, how could we see the timing of capital returns? Could we see some interim dividends, or will you ask for a buyback as soon as possible? Again, if you could discuss that would be great. Thank you.
Thank you very much. I certainly confirm that I'm working together with the team in order to make sure that we deliver in 2023. I think that should close any question mark about what I'm doing. As far the capital return is concerned, for 2021, there is two things. One is we are reinstating our normal dividend policy of the net income of 50% of the underlying net income, which would be a mixture of 30% cash dividends and 20% share buyback. We might adjust the split if necessary, but that's what we are targeting. On top of that, we will consider gradually, and gradually is important, returning the excess capital above the range of 200 basis points- 250 basis points based on our capital projection over the duration of the plan, basically.
that will be done gradually year-over-year, and not pursue one-off, and we think that it's much better to have a smooth and gradual return of excess capital. Okay, thank you.
Next question, please.
The next question is from Giovanni Razzoli with Equita. Please go ahead.
Good morning. One question, clarification on what TJ said as far as the default rate is concerned. You said that at the Commercial Banking Italy perimeter, you expect an increasing default rate from 2.4% - 3.5% in 2020. On top of that, I would like to know whether you can share with us what is the default rate at the Italian perimeter, that is including commercial banking, non-core, and the corporate Italy. A clarification on what you have answered before, whether you do expect 6% default rate on your moratoria loans. Thank you for clarifying me this.
Well, as you're asking a question to TJ, I will hand over to him immediately. TJ, if you want to give this clarification.
Yeah. For the Italian perimeter, clearly non-core, they're all NP, so there won't be any default rate per se. What we mentioned about the so-called 3.5% is indeed for the entire Italian perimeter. Clearly, we look at it by different sub-sectors within this 3.5%. For corporate side, it's two
This call is interrupted. Please try again later. Goodbye.
For the corporate side, it's 2.4%, versus the full-year of 1.5%. Small business is 6.5%, versus the 2.7% that we have in 2019. Consumer, 7.4%, against the 2.8% and 3.6% on the mortgage side, against the 29% that we had last year. Fairly conservative assumption.
Just to clarify, your question is, this is the Commercial Banking return. If we include what other banks might report, if we include the CIB side, which has a much lower default rate, the combined CIB and Commercial Banking Italy default rates will be much lower, basically. If you look, for instance, the first half, we had a 2.4% default rate for Commercial Banking Italy. If you include the CIB side, we are down to 1.4%, which should be the default rate to compare with other domestic banks, much lower than in business.
1.4. You said 1.4, right?
1.4, yeah. From 2.4 - 1.4.
Yes. Thank you very much.
Next question, please.
The next question is from Jean Mayer with Goldman Sachs. Please go ahead.
Hi. Good morning. I just wanted to ask quickly on cost of risk. I just wanted to understand whether, in your view, an extension of moratorium from the narrow perspective of the cost of risk of UniCredit is helpful or the opposite, is a hindrance in terms of asset quality, so that we can judge whether if they are extended further, that would be essentially good or bad. It is not obvious to me at least. My second question is more strategic. I couldn't help noticing that in the same week, a couple of weeks ago, the ECB had two calls, one which extended the blanket ban for dividends by a few months. This was based on data on a presentation which actually showed the banking system as quite resilient.
In another call a few days later, there was more encouragement for M&A, and we can see that banks around you are actually using depleting capital levels in order to pursue inorganic growth. Essentially, my question is, if the dividend bans or the share buyback bans were to be extended further, what would make you change your mind essentially, and potentially consider inorganic growth as essentially the sole avenue or another avenue for using your excess capital? Thanks.
Thank you. On the first question, it's a bit difficult to see what should be the positive or negative impact of an extension of moratorium. As I said, I don't think they're going to be extended for a very long period of time. probably by a few months and up to early next year as far as the Italian side is concerned. I think that probably rather than cost of risk, one has to look at the social aspect, and if all the moratorium are stopping at the same time, there could be waves of bankruptcies and waves of redundancies, which can create some social issues. staggering the end of the moratorium in different countries might help from a political and social angle.
If it's an extension of three months, I don't think it's going to meaningfully change the perspective we have as far as the cost of risk is concerned. In any event, we are taking overlay provision to properly reflect the overall risk profile of our portfolio, especially the portfolio under moratorium. As far the ECB is concerned, it's clear that from a political point of view, it was extremely difficult to allow dividend payments in the year the government and the different countries are extending credit guarantees for the banks so that they can extend the loan to their clients. The banks are part of the solution, so benefiting the client, not the bank. We are convinced and highly confident that the ECB will lift its recommendation next year, so I don't think that there's any doubt about it.
This is why we are saying that the dividend paid from the ECB confirm that they lift the recommendation on normal dividend conditions as well as extraordinary payments and for the excess capital. Thank you, Camille. On the other side, as I already mentioned, we want to use our excess capital today in order to finance the economy, which is first priority in our job. Secondly, to do share buyback. We think that share buybacks have no execution risk, and today represent the highest return that we could have for shareholders. We prefer to transform the bank and as of 2023, we have already provisioned, as we said in the presentation, all the cost of restructuring. That was a coincidence, if I may say. We have no additional costs. We have already agreed with the union about the FTE efficiency.
What we are doing with the team members is to accelerate the plan we have in 2023, focusing on remote banking, which is remote advisory, call centers, digital banking, in order to make sure that we can follow and anticipate the client evolution. We better transform than integrate, basically. Buybacks are options where we have zero execution risk and immediate accretion for our shareholders.
Excellent. Thank you.
Next question, please.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good morning. My first question is on Slide 51, and my second is on TLTRO NII booking. The first one is if you can reconcile the full-year 2020 cost of risk guidance with what you state for 2021. If I take the midpoint of the 70/90, and I also take the midpoint of the 40/50 Stage 2 overlay, let's assume you are right, spot on, for what will turn to Stage 3 in 2021. Therefore, that's 45 basis points. You're going to have some regulatory charges also in 2021. I remember it's EUR 400 million. If you can confirm that, it would be helpful. That leaves with a very, very low specific charge for anything else. I'm struggling a little bit to tie the two together. The second question is on the TLTRO booking.
My understanding is that you were planning to book the TLTRO in 2020 at - 0.5, and then only take the benefit of - 1% in 2021. The question is that still the case? If that is still the case, your guidance of NII for 2021, does it include the extra bit related to 2020, or that comes on top? Thank you.
Thank you very much. We're getting into quite a technical issue. I will hand over to TJ for the reconciliation of the 2020 cost of risk and the 2021, knowing that I said that we have in 2021 higher regulatory headwinds than they have in 2020, as there has been a time translation. TJ will give you the detail on that. On the TLTRO booking, Mirko or Stefano, of course, the CFOs will comment on the way we book the TLTRO and the impacting in the different terms. TJ, first, if you can comment on the cost of risk 2020 versus 2021.
Thank you, Jean-Pierre. Again, if you see Slide 51, as you said, the specific cost of risk for the full-year, we're assuming sort of 50 - 60. Clearly, that depends on the extension of the moratoria. Assuming no moratoria, I think this will be in this range. You can see that we have done quite a bit of overlay, almost more, about half. The 10 basis points, the regulatory headwind, that also includes the new definition before. This is already taken in full-year 2020. We are front-loading, I would say, anticipating if a lot of this moratoria spill over into 2021, you will expect definitely lower cost of risk in terms of the provision has already been done, and some of the overlay will be used against the specific LLP when the moratorium expires.
Some of the overlay that you book in 2020, you are still planning to maintain beyond 2021. This is what this guidance implies. Also the other extra bit, is there a regulatory headwind element also in 2021 or not?
Most of the regulatory headwind in terms of the LLP component are taken already in Q4 2020. The overlay clearly are, I would say, to the extent that the timing. We have the specific LLP charge. The overlay will be released against the specific charges.
In other words, if the moratoria are lifted in 2021, most of the overlay will be released in 2021, and will offset the specific provisions for the loans which move into Stage 3. Based on the evolution of the moratoria, and if they are extended further, quarter by quarter, we could have a different evolution. It will depend exactly on the timing of the moratoria, the risk parameter end, and the default criterion. 2021 will be a mixture for specific provision one side and release of overlay in the other, which should compensate each other on a full-year basis. On the TLTRO side, I can ask Stefano or Mirko to comment.
Yeah, we are accruing 50 basis points now. The additional will be accrued linearly in three years, equal to the 16.7 basis points yearly, so that's the delta. We will start depending on, let's say, the technical calculation based on the regulatory rules. 50 is already in there now, and the rest will be accrued linearly over three years.
Okay, clear. Thank you.
Next question, please.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Ignacio, good morning. A couple of things from me. The first one is on the comment that Mirko was making around the discrepancy between quarter loans and average loans through the quarter. I think I understood that that was attributed to the reduced drawdowns from corporates throughout the quarter. Do we need to think about volumes being under pressure in the second half as a result of that, or is it something that has already come to an end? The second one, more clarification, if you can let us know that the tax rate you're working with in 2021 is around 20%, if that's it.
Yeah. Mirko, if you want to comment on the tax rate. If on the quarterly loan, we said that we have a difference between the average loan evolution one side and the end-of-period loan. You have to see that because of drawdowns, specifically on the CIB side at the end of the first quarter 2020, we actually had a sharp increase of the loan on the CIB side at the end of the first quarter. These loans have remained more or less stable in the second quarter. The drawdowns are going to be partially paid back by the corporate client, but only partially, so that should be not a meaningful impact on the CIB side by, from the just the loan volume evolution.
We have to take into account on the CIB side that we have, in the second quarter, a specific number of contribution coming from the treasury side, which had a positive impact on NII, the management of some of the treasury portfolio, which contributed positively for low double-digit million of NII. On the tax side-
Yeah.
Stefano.
Yeah. On the tax rate, the 2021 guidance is confirmed between 18% and 20%. We have no real guidance for 2020, considering the low level of profit before tax affected by, let's say, relevant non-recurring and non-operating items. We'll keep the basically the 18% - 20% for 2021 as the valid one.
Thank you.
Thank you. Next question, please.
The next question is from Patrick Lee with Santander. Please go ahead.
Hi. Good morning, everyone. Thanks for the presentation and for taking the questions. I just have one follow-up on asset quality and one on fee income. Firstly, on the asset quality side of things, the Stage 2 loans actually fell 5% versus the first quarter, and I believe some of that was driven by disposals and write-offs. Can you give us some color on the magnitude of the underlying deterioration that was migrated from, let's say, Stage 2 to Stage 3 this quarter? Secondly, on fee income, and despite the difficult market environment, et cetera, your net new AUM was actually positive in the second quarter, with AUM also up 6% versus the first quarter. Your investment fees fell by some 20%.
I guess there's a matter of timing within the quarter when those fees came in. Is there something structural going on there with customers necessarily buying lower-risk, lower-margin products, or can we just assume a much healthier level of fees income in the second half of the year? Thank you.
Thank you very much. I will let TJ first comment on the Stage 3 loan evolution, and then comment on the fee income afterwards.
Thank you. As you can see in terms of the staging that we have on Slide 50, the so-called Stage 1 to Stage 2 went from EUR 48 billion - EUR 62 billion, of which a large part comes from Germany, about EUR 8 billion. These are very highly rated MNC side. It's a relative set of criteria. In Italy, we have EUR 4 billion, roughly about EUR 2 billion. Due to PD deterioration and EUR 2 billion was more of a proactive action in terms of classification, and EUR 2 billion in CEE. Overall, it's 12.5%. We moved from Q1 to Q2, and it is about 30% increase. A large part comes from Germany, which is actually a very good rating. In Italy, of the EUR 4 billion, EUR 2 billion are proactive classifications.
on the fee income, we can go to the slide, the statistics of the presentation, which gives you a breakdown, a month by month of the evolution of the group by products. Basically, as you can see that we have a sharp increase in June versus June 2019 of the investment fees. clients have been more active, but we have pushed much more in June certificates, basically, other than PD1. Also, clients were looking at products which are probably a more stable risk profile and less risky, and one we shifted into more A1 in July when the situation has stabilized, and it confirmed the recovery in fees in July that we have seen in June. investment fees rebounded and were higher in June 2020 than June 2019, as you can see.
We expect that investment fees will keep performing quite well in terms of upfront fees and replacements over the second half of the year.
Okay, thank you.
The next question, please.
The next question is from Delphine Lee with JP Morgan. Please go ahead.
Yes, good morning. Thanks for taking our questions. Just have two clarifications to ask you. First one is on dividends. If we think about the full-year '19 dividend, so if I understand your messaging on your capital distribution policy, you basically intend to sort of distribute that over time as potentially exceptional distribution over time. Is that how we should look at it in terms of buybacks? The second question is on sort of domestic consolidation. You've been very clear about M&A and ruling out M&A. Just looking at sort of your current market shares in Italy, are you satisfied with what you have right now in your current setup, or would you opportunistically look at adding presence potentially if the opportunity presented itself? Thank you very much.
Thank you. Your understanding on the dividend side is correct. We are looking at a gradual payout of the excess capital over the years of 2020, 2023. We said that we are targeting MDA, so this will be above 100 basis points at the end of 2020 and 2021. That we want to pay back to our shareholders excess capital over the targets. We're looking at the overall duration of the plan, which is above our range of 200 to 250 basis points. We will do that gradually year by year, basically, to smooth out the payback to investors on top of the normal payout of 50% of underlying net income. As far as the domestic consolidation is concerned, we have in Italy, more than 10% market share, 11% market share. As I said, we will grow our business on a purely organic basis.
We prefer to transform the bank rather than integrate. Our approach is very simple, especially post-COVID, when cost of risk is going to increase. We hopefully also, we are seeing from our own portfolio, and we think that the risk profile is as such that we should just focus on our business, benefit from the market disruption which has been brought by COVID to target clients with a very good risk profile. It's very important to be extremely disciplined on the risk side and keep transforming our network and keep cross-selling to the clients, which are the right clients. We are managing the bank in a very disciplined way. We have already said that, and taking the right kind of risk, and we think that's the best way to increase our market share.
If you compare Italy to other countries, if you compare to Spain, to the U.K., or to France, you can see that there could be banks with a larger market share and other banks which have a market share which is high, high single digit, low double digit, which are performing very well. I don't think there is a magic level of market share where one could say we need to do consolidation. We think that we should not do consolidation. Consolidation bring us more FTE. We want to keep reducing FTEs. Consolidation brings us more balance sheets. We want to keep cutting balance sheets, and consolidation will bring more enormous provision and additional non-performing exposure, and we keep reducing our non-performing exposure. Basically, no consolidation. We grow organically. We accelerate the transformation rather than integrate, and we pay back to our shareholders our excess capital. Next question, please.
The next question is from Gonzalo López with Redburn. Please go ahead.
Hi, good morning. Just a quick follow-up, please. Could you please confirm that you're expecting to take the EUR 600 million net regulatory headwind impact on cost of risk, as you announced in the capital market day, please? You mentioned 10 basis points regulatory cost of risk in 2020, but could you please quantify at this point if there is going to be anything in 2021? Thanks.
I will let TJ comment on that. As we said earlier, there has been a time translation of some of the regulatory headwinds because of the COVID crisis validation of the model by the ECB, and decision by the ECB to delay some of the impact. As far as 2020 is concerned, we were targeting in 2020 at the capital market day -5 0 basis point of regulatory headwinds. We target for 2020 now is the different impact, - 20 basis point of regulatory headwinds, which includes, as I mentioned, the expected impact from the migration, which is between 40 basis points to - 50 basis points . That in 2021, because there has been a shift of some of the regulatory headwinds from 2020, we have a regulatory headwind of - 140 basis points compared to the 50 basis points that we were giving at the capital market day.
This increase is coming from some regulatory shifts. TJ can give you the breakdown. Some additional routine migration impact, and the fact that there has been some positive of 2021 were sharper in 2020. We don't expect any change, especially in 2022 and 2023 of the capital market day regulatory headwinds of around 60 basis points in 2022 and 2023, but TJ can give you a little bit more details.
Thank you, Jean-Pierre. Just on your first question, in terms of the 600 million LLP, a large part is taken in 2020, over 400 million. There'll be either remaining in 2021. Clearly, this will also depend on the evolution of the loan books and the volume dynamics. As Jean previously, in terms of the capital sort of point of view, we already mentioned for 2020, the original CMD was - 50, and as of today, it's roughly about 16 basis points, -1 6. All of this difference are clearly some due to the regulation CRR quick fix, which is positive, including some of the model implementation postponement. There's the so-called rating migration, which is negative, and other impact. All of these have a - 34 basis points. That's why the guidance from the Team 23 in CMD in 2020 is - 50, is now - 16.
For 2021, there's obviously a shift from 2020. All of the models, RWA accuracy side, something in the region of 61 basis points, plus we're anticipating the regulation quick fix, the SME supporting factor, as well as Basel IV, and then the proportionality, almost 100 basis points swing due to the postponement of the model, a quick fix anticipation, and further with the PD situation that Jean-Pierre just mentioned of - 20. Next year, we're anticipating the regulatory headwind to be more in the order of around -140.
Thank you.
Thank you. Next question. Just to confirm this 140 regulatory headwind negative impact, we still confirm that our CET1 number for next year will be over 20 basis points, as mentioned earlier. Thank you. Next question, please.
The next question is from Benjie Creelan-Sandford with Jefferies. Please go ahead.
Yes, good morning. Most of my questions have been answered, but perhaps just one coming back to the point on extraordinary capital returns. I guess historically, the regulator has appeared somewhat uncomfortable with implicit payouts of often beyond 100% of profit. I'm just wondering, whether going forward, do you think that remains an implicit cap, the 100% payout ratio, or do you think the regulator shifts to a little more absolute capital buffers? Thank you.
I think that what we said in terms of extraordinary payout, we never say something which would not have been in line with what the regulator thinks. We always mention a certain number of items. In 2017, Capital Markets Day, the regulatory headwind last year, the TRIM factor called number four, now we are speaking about extraordinary dividends. Each time, we make sure that they're fully aligned with what the regulator thinks. What I said, that we are going to gradually return our excess capital. I think the gradual return to excess capital could be probably an answer to your point.
Perfect. Thank you.
Next question, please.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Hi. Just one quick question on the Italian sub-holding project. We read on the newspaper that by autumn, the project could be done, if you can give us an update, and if this project could help to reduce faster DTA. Thank you.
Well, on the sub-holding, if you go back to the presentation we made in the Capital Markets Day 2019, on the Slide 21, we said that in terms of group structure, we will look at a project of sub-holding. That this project means that we want to optimize the end-point requirement, but the first stage is the reduction of intra-group exposure, and we've been working on that. The improvement of the group reserve ability. The teams are just progressing on this project. It's not an easy project and a simple project. If there's anything to mention, we'll mention it when the project progresses. For the moment, nothing specific. The target is to optimize the end-point requirements.
Maybe to complete on the DTA, there is no benefit on DTA from an international sub-holding. Thank you.
Next question, please.
As a reminder, if you wish to register for a question, please press Star and One on your telephone. Please make sure you're not on loudspeaker. As there are no further questions, I would like to hand the call back over to Mr. Jean-Pierre Mustier for any closing remarks. Go ahead, sir.
Yeah. Thank you very much. Thank you very much for your question, and your continuing interest in UniCredit. Before we go, I'd like to wrap up by reminding you of the journey that we've been at UniCredit, and why this puts us in a strong position to further develop our client franchise as your bank is. Thanks to the continuous hard work and successful execution of Transform 2019, we entered in the year with a significantly de-risked balance sheet. We have disposed of more than EUR 50 billion of non-performing exposure, and a significantly strengthened balance sheet has raised EUR 13 billion of equity for that issue, and has been sold more than EUR 16 billion of non-strategic assets.
As a result of this action at the end of the second quarter 2020, we achieved a significant reduction of our NP ratio to 3.4% for the bank including Bank Intesa Sanpaolo, and using the EBA definition, it is at 2.7%, now below the average of other European banks for the first time. We have a best-in-class NP coverage ratio, and we have a higher CET1 fully loaded MDA buffer, is at 481 basis points and in line with our current market cap. We have a very high level of liquidity with a point-in-time liquidity coverage ratio of 473%. We'll continue to manage the bank in a very conservative and disciplined way. We give priority to long-term sustainable outcome over short-term solution, meaning we do not do volume lending, nor do we do carry trades.
From this position of strength, we will use the opportunities presented by the crisis to accelerate the remote banking and digital offering of the bank, and to grow further our client franchise while maintaining a strict risk focus. Bear in mind that the necessary adjustments for the former have already been in provision and agreed with the Team 23 before the crisis. We confirm our underlying net income target for 2021 of EUR 3 billion-EUR 3.5 billion, which is equivalent to an ROTE of 6%-7%. As already said, we will reinstate our capital distribution plan for 2021 onward, subject to the ECB recommendation not being extended, targeting a distribution of 50% of underlying net profit. That concludes our second quarter results.
I would like to wish you all a most enjoyable summer break, and I look forward to talking with you all again in three months' time, if not before. Stay safe and have a good summer. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.