Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the UniCredit Group 1st Quarter 2020 Financial Results Conference Call. As a reminder, all participants are in listen only mode. At this time, I would like to turn the conference over to Mr.
Jean Pierre Muthier, Chief Executive Officer of the UniCredit Group. Please go ahead, sir.
Thank you very much. Good morning to all of you and welcome to our analyst call for the Q1 2020 results. Before we start, let me make a few introductory remarks. This quarter was not a normal one for us or anyone else. The COVID-nineteen pandemic that is currently sweeping the globe has turned the daily lives of most of us upside down.
It has resulted in health care system of nation states being brought to their limits, sometimes even beyond them. It has resulted in human tragedy and economic disasters for individuals or small business and it will have a profound impact on the global economy and make change forever the way we live, work or interact. And this is true as well for UniCredit and our stakeholders. As a result, this presentation will look different from our usual quarterly presentation. For the Q1 2020, We have added several pages dedicated to COVID-nineteen and the profound effect it has had on our group and on all its stakeholders.
As we start the new financial reporting cycle, we have also simplified and streamlined the core part of the presentation. The overall deck contains the same information as before, but some of it has been moved to Amexis or the divisional database. So moving on to the result, we had an excellent start to the year with commercial revenues up significantly. The performance in the 1st 2 months allowed us to close the quarter with commercial revenues up 0.1% year on year despite the COVID-nineteen induced slowdown visible from mid March. As per our CMD-nineteen guidance, There were some non operating items in the quarter such as the transaction reducing our YAPI stake as well as the integration cost in Italy.
As a result, we have a stated net loss of €2,700,000,000 while the underlying net profit is close to breakeven at minus €58,000,000 Our capital is very strong. Our CET1 MDA buffer strongly increased to 436 basis points even after absorbing almost €1,000,000,000 of impact from the update of our IFRS 9 macro scenario. The core pillar of TIM23 plan will remain our strategic priorities. We will be updating the strategic plan and present our new assumptions when the environment stabilizes at the Capital Market Day towards the end of this year or early next year. As I said in the beginning, this was an unusual quarter and we adopted the presentation to this situation.
For information no longer in the core document, please go to the annex where we have also added information on our ESG positioning. Let's turn to slide 4. These are key financial figures. Nico will give you more details about this later. Our capital saw a sharp improvement with an end of quarter CET1 in the above of 4 36 basis points, up 124 basis points quarter on quarter and 218 year on year.
Nico will give you the details later. As you would be expecting on top of the additional LLPs from the IFRS 9 macro, The PML this quarter saw some impact from COVID-nineteen on revenues. They were down almost €500,000,000 in the quarter. The large part of that is explained by non recurring items that are not linked to the operating profitability of the group. Examples include quarter on quarter changes in XVA for almost €175,000,000 negative, Non recurring valuation adjustment on participations like Visa for a total of €65,000,000 negative Our swing in the balance of other income including Ocean Breeze for a total of €120,000,000 negative.
Also Dividend went down quarter on quarter following our disposal activity such as Mediobanca. Our balance sheet asset quality remains strong with our gross NPE ratio below 5% at 4.9% for the first time in many years. Let's turn to slide 5. UniCredit was a pioneer in terms of responding rapidly to the challenges posed by COVID-nineteen. We put and we'll continue to put the safety of our employees and clients at the heart of everything we do.
We were the 1st in Europe to close branches in a major way starting in Italy. In branches remaining open to support clients at this time of need, We immediately provided protective equipment including masks and sanitizer and protective screens. The majority of UniCredit team members rapidly transition to working from home with stable and secure access to all our system. Thanks to this initiative in Italy, we were able to share best practices quickly with all the other countries where we operate, significantly improving our integrated response across every geography. Our IT teams are doing an outstanding job Supporting group wide working from home setup.
In a few days, we were multiplying our remote capabilities by 15 times and secured 8,000 laptops before the worldwide rush to start up such equipment. We have done our very best to support all our stakeholders in this unprecedented situation for various actions. We supported the frontline factors in the war against the virus by sourcing and distributing protective equipment and respirators to hospital and also carrying group wide fundraising activities. We also proudly sponsored the creation of the first prototype of the so called CURA pod, which is an open source project to create plugged in intensive care units, ICUs, in converted shipping container. And I and the top management waived our financial year 2020 variable remuneration and benefited the proceeds to the fight against COVID-nineteen.
Thanks to the incredible commitment and hard work of all our team members, we have remained fully open for the business. We have continued to support our clients in these challenging times. We have completed numerous transaction for multinational corporates With funds in support of government agencies in their fight against COVID-nineteen and work with client supply chain to help stabilize cash flow for SMEs, We have also helped our own suppliers in a similar way. Let's move to slide 6. Over the last 3 months, we have made more progress in our digital transformation than in the last 3 years.
Our ability to do so is thanks to the significant investments made in our digital and mobile capabilities as part of Transform 19. Our customers have rapidly and increasingly embraced digital solution. Optiv mobile users are up 27% year on year, while digital sales as a percentage of total sales increased by 47% in the same period. These crises have structurally changed client behaviors For both individuals and corporates, the adoption of multichannel is accelerating and represents an opportunity to accelerate changes, Leveraging on investments made in mobile banking, call centers, Internet banking and paperless branch. We will reallocate our investment priorities for IT and start training to support such an evolution.
Let's move to Slide 7. We were the 1st bank in Italy to offer moratoria to our clients affected by COVID-nineteen well before regulations were put in place. Following in our footsteps, many governments have now introduced moratorium by law. In total, we have provided €28,000,000,000 of loans under moratorium. We work closely with all government agencies involved in COVID-nineteen related loans backed by state guarantees.
In total, we have provided €1,000,000,000 of loans backed by state guarantees so far. Guarantee processes have only recently been put in place by different Uniqueredit by the 1st bank in Italy to close a guarantee under such scheme and we expect the number to increase meaningfully in the coming weeks. Talking only for Unique Credit, we expect the biggest volume to come from Italy. We expect to reach around €15,000,000,000 of guarantees in Italy. Such guarantees loan will provide much needed liquidity to clients and help place them this unprecedented situation and consequently will positively impact our cost of risk.
Let's turn to slide 8. Our strategy is and will remain so to be a simple successful Pan European Commercial Bank. This lends great resilience to our business model. We have a strong presence in our 13 core markets in Italy, Germany, Austria and CEP, While the expected impact of COVID-nineteen is markedly different, we are fully focused on delivering efficiency services to our 16,000,000 clients Even more vital in this current operational environment, our geographic and business diversification provides stability not only in the current environment and thanks to our strategic investment, we're accelerating our digital transformation. Let's move to slide 9.
We have and will always be focused on disciplined risk management. We clearly demonstrated this during Transform 2019 and it remains a core principle of how we do business. We took decisive actions in order to do the right thing to safeguard our shareholders' capital. To mention just a few example, We reduced our BTP holdings by more than €10,000,000,000 year on year. We presented most of our TLIVE subordinated instruments early this year.
We accelerated our non core run down and reduced gross NPEs by more than half while significantly increasing coverage. We sold non strategic assets such as taking YAPI, all our holdings in FIMICO and Mediobanca as well as real estate in Germany for a total of more than EUR 7,000,000,000 and with 2020 eyesight, we chose a good time to do so. We shall keep that discipline going forward. There is no COVID-nineteen impact on our underlying cost of risk yet. This is expected to evolve during the year and we'll give you more details later in the presentation.
Now let me hand over to our co CFO, Mirko
Thank you, Jean Pierre, and good morning to everyone. We had a strong start to the Q1 with excellent commercial performance in January February. Then during the course of March, sales activities started to decline with the advent of COVID induced lockdowns in all our countries. Our revenues are down $472,000,000 or 9.7 percent quarter on quarter, of which, as Jean Pierre said, €390,000,000 are due to some nonrecurring items not linked to operational profitability of the bank. Trading is down EUR 300,000,000 of which minus EUR 174,000,000 from XVA and minus EUR 65,000,000 non recurring valuation adjustments on participations like Visa.
Billings are down EUR 31,000,000,000 due to disposals such as Mediobanca, balance of other income and expenses is down EUR 100 and EUR 20,000,000 mainly from Ocean Breeze disposal. Our costs continue to trend down as in Q1 COVID related operational expenses remain marginal. Let's turn to Slide 12. Below the line, in non systemic risk charges, it was a straightforward quarter. With regards to integration costs, we closed our TIM23 negotiation with the Italian trade unions planned and consequently booked the integration costs after CMD19 guidance.
Let me remind you that we closed 2 transactions in YAPISHAres during the quarter. Taken together, they took our indirect ownership of 41% to a direct ownership holding of 20%. This changed our regulatory consolidation from proportionate to equity. As a result, We no longer consolidate the pro rata risk weighted asset of Yapi, but deduct the equity stake from our CET1 capital. The net impact of the transactions was plus 58 basis points in core Tier 1 ratio.
The P and L was affected mainly by the reversal of the negative FX reserve to the P and L, which was capital neutral. There were also some transaction related expenses. Finally, we changed the reporting Segment reporting of the YAPI state from CEE to Group Corporate Center as it is now and nonstrategic investment. Taxes in the quarter were negative, almost entirely driven by a taxable gain on real estate in Germany. The normalized tax rate in the quarter was close to 0.
Let's turn to Slide 13. Let me remind you that at our last CMD in December, we introduced the concept of underlying profit. This was done for strategic reasons. We wanted to ensure that the relevant and true profitability of the bank is clear and to show how it evolves. To calculate underlying net profit, we exclude non operating items from stable net profit.
This quarter, as per guidance, we had a total of negative EUR 2,600,000,000 of non operating items that were Excluded. Details can be found in the annex at Page 49. As you can see from the profit distribution across the group, We have a diversified business model. The performance of CE stands out and underlines that this division is an important driver of the diversification and profitability of the group as it contains many countries with a strong contribution such as Romania. The post tax impact of the IFRS 9 macro update additional group level impairment was €902,000,000 Without this, the divisional performance would have been different And underlying group return on tangible equity would have been 6.5%.
You can see the details in the footnote on the page. Let's turn to Slide 14. Net interest income in the quarter was down 0.5 percent. The main driver of these were the customer loan rates, which contributed a negative EUR 48,000,000 in the quarter. Half of that This is due to lower base rates in CEE, while the other half is driven by competitive pressure in Germany.
There was also a tax related positive one off in Germany, which contributed plus EUR 50,000,000 to NNAI. And finally, let me remind you that the Q1 days effect was lower than usual because 2020 is a leap year. Let's turn to Slide 15. Fees were up 5.2% year on year. The foundation for this strong performance was an excellent commercial start to the quarter in January February, across a number of areas.
Commercial Banking Italy had one of the best first two months ever in terms of investment fees. CLB had one of their best quarters in debt capital markets. Post mid March, COVID-nineteen has had a strong impact on a number of key categories. Gross AUM sales in the last 2 weeks of March, for example, were down long to mid double digit percentage points depending on geographies. Levels in April have only recovered somewhat.
Let's turn to Slide 16. Overall trading income in the first Q2020 was EUR165,000,000 down EUR 300,000,000 quarter on quarter. We saw a solid performance in Equities and Commodities with an increase quarter on quarter of almost EUR 50,000,000, which was more than offset by XVA. Decline driven trading income, excluding XVA, was only down $103,000,000 quarter on quarter, $65,000,000 of which was due to nonrecurring valuation adjustments such our stake in Visa. For the other trading income, which was down $23,000,000 quarter on quarter, there was a mid double digit impact from mark to market losses on government bonds from treasury positions.
These are expected to recover fully. The dividend line went down following the disposal of our non strategic stakes in Mediobanca and IATI. While this will result lower dividend income in the future, the disposals strengthened our balance sheet and put us in a position of strength as to face COVID-nineteen. Let's turn to Slide 17. Costs continued to climb lower, both quarter on quarter and year on year.
In the 1st Q 2020, we regained some of the 4th Q 2019 seasonality. As we said at our Capital Markets Day in December, the U23 is more about bottom up process optimization. As a result, our cost efficiencies will be more back end loaded to offset cost inflation, leading to overall Flat costs over the plan period. These savings will fund the necessary IT spend over the plan period. COVID-nineteen had so far a limited impact on our cost base.
Year on year, we had $5,000,000 less of travel expenses, Largely related to the current situation, while in the quarter, we had $12,000,000 in extraordinary COVID-nineteen related costs for branch shifting and remote working. Let's turn to Slide 18. As you can see, our underlying cost of risk at 29 basis points is so far unaffected by COVID-nineteen. We are even below our previous guidance of 34 basis points. Cost of risk is as previously amount estimated to be in the range of 100 basis points to 120 basis points for the full fiscal year 2020.
This will be a combination of the IFRS 9 macro update non loss provisions we took this quarter and the expected recognition of sector and specific non loss provisions throughout the year as risks materialize. Latter are likely to occur towards the end of the year once the moratoria expire. There were essentially No regulatory headwinds in the quarter. Let's turn to Slide 19. You'll see introduction of Transform 2019, Our loan origination is expected loss driven.
You can see the impact of that on the left hand side, where the expected loss of new business is below the expected loss of stock for all periods. Also, both numbers steadily decreases over the quarters. Last year, we made an extra efforts in light of the late business cycle and focus on new business on the best rated clients. The result can be seen in the right hand side, more than 70% of new origination and more than 60% of the stock have an expected loss below the average. Let's turn to Slide 20.
The shape of COVID-nineteen trajectory with regard to GDP remains unknown with different expectations for each country. In Western Europe, we only just entering the start of the lockdown exit strategies and it is too early to tell How things will evolve? As an illustration, we have shown here for a Western European country 2 possible exit trajectories that differ, but how long they remain at the low point of the lockdown. Our economies have estimated that an additional 2 months at the low point will cost 6 percentage points of GDP growth, which for Western European countries is massive. This is consistent with the latest commentary by the ECB, which expects eurozone GDP to fall between 5% 12% this year depending on the trajectory of the low point of the lockdowns and the speed of the removal of the container measures.
ECB's 7% delta between the trajectories is very similar to our 6% delta. As the sensitivity is high, it is of paramount importance that assumptions weakened by the bank are realistic. Let's turn to Slide 21. In order to estimate the impact of COVID-nineteen and our cost of risk, we have taken the GDP assumptions that you can see on the left. We have applied them to our EUR 485 billion credit portfolio, which you can see on the right.
We have clustered the portfolio by GDP sensitivity and arrived at 4 segments from high to low impact. Only 10% of our loans fall into the high impact category and these are the sectors most sensitive to COVID-nineteen headwinds such as airlines, shipping and tourism. For more than half of our portfolio, on the other hand, we only expect a low impact, including the mortgages of private individuals. Let's turn to Slide 22. As a first step for Q3 2020, We have updated the IFRS 9 macro assumptions with our GDP growth rates.
In ordinary times, We do this all in the 2nd Q4, but COVID-nineteen warranted an extraordinary update. Then we applied the updated macro assumptions to our pro form a portfolio, which resulted in higher probability of default and those increased loan loss provisions. These provisions for our performing portfolio amounted to EUR 902,000,000 additional loan loss provision in the quarter on our loans. You can see that while the high impact portfolio comprises only 10% of our loans, it is responsible for 33% of the additional loan loss provisions. The low impact portfolio on the other hand results in a comparable amount of loan loss provision but it's more than 5 times bigger.
Let's turn to Slide 23. For the full fiscal year 2020 cost with forecast, we started from the Q1 that already includes the additional provisions from our IFRS 9 macro scenario update and added both sector specific overlays and the individual provisions that we expect later in the year as risks materialize. This will occur as exposures migrate down the rating scale and may get classified as non performing more often than not after moratorium expired. There will also be LGD FX. As you can see, total cost of risk is expected to be between 100 120 basis points, including the IFRS and macro, while the regulatory headwinds contribute less than 10 basis points as there is some time shift of models into fiscal year 2021.
As seen previously, Also for this analysis, the high and medium impact segments generate over 54% contribution to cost of risk, reflecting our conservative approach to the provisioning. The provisioning for fiscal year 2020 takes into account migration effects of the announced government measures. Let's turn to Slide 25. Our gross NPE stock for the group, excluding non core, was stable in the quarter. Our gross NPE ratio stood at 20.4 percent on our own definition and 2.8% using the EBA definition.
This one was exactly matching the the average of the ABAP sample of European banks, which is 2.7%. Let's turn to Slide 26. The non core rundown progressed well, even better than expected in Q1, that is traditionally a seasonally quiet quarter. Gross NPE in 1 quarter were down EUR 500,000,000 to stand at EUR 8,100,000,000. We are currently assessing the impact that COVID-nineteen will have on the MP secondary market, we will update our non core rundown strategy in due course.
Let's turn to Slide 27. Our CET1 capital is at a very strong 436 basis points buffer over our NDA level. This is the result of 2 separate effects. On the one hand, we saw an organic increase of the absolute level of core Tier 1 ratio, Thanks to the release of the fiscal year 2019 dividend and share buyback as well as lower risk weighted assets from the change in prudential consolidation of YAPI. On the other hand, our NDA level decreased significantly, Thanks to the application of CRD V Article 1048 for 77 basis points as well as our lower threat P2R for 25 basis points.
We expect to remain well above our target range of 200 basis points to 250 basis points CET1 NDA buffer throughout 2020. The recent changes from the revision of the CRR and ECB strong recommendations for the banking sector To use additional flexibility such as among others moving to IFRS 9 Phase E instead of fully loaded will bring additional improvement to the CET1 ratio in fiscal year 2020. On a transitional basis, this amount to more than 0.8 percentage points, while on a fully loaded basis, more than 0.2 percentage points. Please note that there is a shift of around 0.5 percentage points of regulatory headwinds from fiscal year 2020 to fiscal year 2021, mainly following the flexibility rules recently published by the ECB in response of COVID-nineteen partially offset by the updated macro scenario. This is purely a time translation and does not change the overall amount.
Let's turn to Slide 28. In line with the strong increase of our CT1 NDA buffer, our TLAC NDA buffer has increased to 3 91 basis points, well above our target range. This was driven by significant prefunding activity in the Q1 pre COVID-nineteen when we successfully raised EUR 4,500,000,000 of subordinated TLAC instruments at a very attractive level. Thanks to this, we have already completed close to 80% of the subordinated TLAC funding plan for fiscal year 2020. Let's turn to Slide 29.
Tangible equity stands at EUR 51,200,000,000 more than EUR 2,000,000,000 higher than a year ago. We took decisive action in the 1st Q 2020 To put the integration costs in Italy and the impact of the IFRS 9 macro update behind us, as a result, quarter on quarter, Tangible equity decreased by RUB 1,800,000,000. This was driven by the RUB 1 point $2,000,000,000 stated net loss net of Yatin and a decline in the revaluation reserves of $1,300,000,000 From FX and securities, it was only partially offset by a €600,000,000 gain from the BBO. Jean Pierre, back to you.
Thank you, Mircea. Before I conclude and we go to Q and A, let me briefly talk about the easing of lockdowns and what we are doing. As governments across Europe start to leave the restrictions, we are ready for the so called Phase 2. JF demonstrated flexibility and speed when it came to the initial lockdown, we will apply the same principle in the coming weeks. However, we will base all our actions on scientific data not dates.
The safety of our people and clients remains at the heart of what we do. We're not working for central functions will remain in place for quite some time. Some of our people will be invited not required to come to the office and we will listen and adapt to our people's needs. We are confident that in Phase 2, we should be able to open 90% of all our branches in Italy and Austria Followed closely by Germany. Thanks to our strong multichannel platform, we will continue to be fully operational Regardless of how many branches are physically opened, let's turn to Slide 32.
Before we go to Q and A, Let me reiterate the 3 key messages of this quarter. First, our business model is diversified and resilient. We have pan European scale, 16,000,000 clients that bank with us. We're accelerating our digital transformation and we have a very strong capital base. These factors will help us ease the impact of COVID-nineteen.
2nd, the core pillars of our TIM23 strategy remain. We will be updating the strategic plan and present our new assumptions when the environment stabilizes at the Capital Market Day towards the end of this year or early next year. Last but not least, we will continue to protect our employees, support our clients and contribute to our communities. This is also the best thing we could be doing for you our investors. Once more, our interests are completely aligned.
Before taking your question, let me extend my deepest thanks and appreciation to all UniCredit team members whose commitment, Resilience and incredible hard work in this unprecedented situation has allowed unique credit to prosper enabled us to do the right thing for all our stakeholders. May all our employees, clients and you, our investors, stay healthy and safe. I wish you the same for all of your loved ones. Now, Mirko, the rest of the team and I are ready to take your questions. If you could be please so kind and limit your question to 2 each.
Many thanks. Operator?
Excuse me. This is the Chorus Call conference The first question is from Francois Nuez of Goldman Sachs. Please go ahead.
Hi, good morning and thanks for
the presentation. I would have therefore two questions. And the first one would be on asset quality, in particular, with a focus on your scenarios And the action on the moratorium, so you're showing a balance of around €28,000,000,000 of moratorium loans, A 10,000 seat view on that could argue that when they lift, they could all become potentially or there is a risk that they don't return to when they migrate to non performing. I just wanted to understand what's your strategy to make sure that this doesn't happen. And in particular, whether you think that there is a risk of non financial, let's say, politically driven action to make these loans maybe or to extend this moratorium and make them less likely to become to stay performing?
And secondly, I just wanted to understand whether The cost of re trajectory that you've given on the other hand, what this would be in the base case of the ECB GDP prediction? And my second question is on capital. You NEMCO has given some sort of update On regulatory headwinds and potential delays, etcetera, I just wanted to understand what's included in there, in particular with SME discount factor, infrastructure So the recently announced measures and also whether the previously disclosed headwind, whether they change or not with regards to all of the measures that have been taken in order to understand fully the walk of the tax ratio going forward. Thanks a lot.
Thank you very much, Joerg?
Yes, Jean Francois. So thank you very much for the question. I'll and because We're doing this virtual for the first time. Let me just see if I get this right. So I think the first one on asset quality and the moratoria Was to say how are we thinking of the risk content of that?
And And what's our strategy, gee, to prevent that these will turn NPE once the moratorium lift? As well as What's your view on any political actions for the Moratoria to be extended? And then on the capital, The question was around regulatory headwinds. So what's included of the recent CRR revision measures such as SME supporting factors, software deductions, etcetera? And if our old regulatory headwind guidance that we gave at the Capital Markets Day is still valid.
So with that, I give it to Jean Pierre.
Thank you, Georges. So Let me make an overall comment and afterwards I hand over to TJ for most of the point. On the moratorium, we have taken specific actions on our side and then we applied as well the government request that came. We have €28,000,000,000 as illustrated on Page 7 of the presentation. There is a specific case for the CEE of €7,000,000,000 As €5,000,000,000 are in what we call opt out countries, in other words, In specific countries, the government asked to have all the loans under moratorium and clients who don't to be under moratorium can choose to opt out.
So clearly create €5,000,000,000 of opt out volume gradually the client cannot cut out if they want. €2,000,000,000 are in opt in, so meaning the client choose to be in moratorium. Besides CEE, the biggest impact is in Italy. Well, we have the EUR 19.4 €1,000,000,000 which comes from 100,000 clients. We have €3,000,000,000 of mortgages and €16,000,000,000 of loan to corporate and investment to corporate we more or less have €80,000,000,000 80% of the €16,000,000,000 which are for corporates of good credit standing and 20% so more than €3,000,000,000 of corporates which are in the lower credit rating, so which might be a bit more sensitive, but TJ can elaborate a little bit more on that.
Before I let TJ comment more on the moratorium, I just want to point out as well and TJ can comment about it, As you ask what could be the cost of risk evolution in the best case of the ECB that we are giving sensitivity Of the cost of risk in evolution based on the GDP evolution, You can see that in the annex basically and TJ will comment about it. But if the TTVT at the current level of GDP, it is nonlinear. For 1% of GDP, it's between 4 to 6 basis But TJ will get you through that later. And I will let TJ comment as well on the capital regulatory headwinds and the impact of the change of CR. So, TJ, all yours.
Thank you, Jean Pierre. As Jean Pierre already mentioned, for the moratorium, we have seen leveling off, firstly, in terms of the number of requests. And really, Jean Pierre mentioned of the €19,000,000,000 in Italy, €16,000,000,000 is the corporate client, 80% is good rating. So it's a good sign that a large part of the portfolio are in very good client. And the €3,200,000,000 of mortgages, the LGD is low and these are really high rated clients.
So we are closely monitoring the evolution of that. And where they're eligible for government guarantee financing, we will clearly help them to do so. On the capital side, clearly, we will use ECB flexibility rule. There's a time shift of close to 50 basis points from 2020 into 2021. And clearly, we will monitor that.
And we have not factored in the so called SME supporting factor From our discussion with ECB, they're very constructive to ensuring that they do not add more even in terms of work burden or capital burden at this stage of the cycle. So thank you, Jean Pierre. Okay. Next question, please.
Maybe just I think on the regulatory headwinds, capital impact, just to Come back to the question of Jean Francois is the revision of the CRR and kind of anticipate a a certain number of items and we put on page for I mean there's some impact. So Basically, the SME supporting factor for us, which should be anticipated in the second quarter, That should be around 19, 20 basis points basically. So that's something which was supposed to come later in 2021 and so it will come in 2020 on the Q2. We have a certain number of further impact. The software exemption for CET1 reduction will be around 10 basis points as well and that's anticipated probably for the Q3 instead of 2020, instead of the end of 2021.
So these two factors on 30 basis points, which are of an impact in terms of fully loaded capital or move forward to 2020. There are a certain number of other items which have a low impact and the IR team can comment about that if you need on a bad at all basis. But the ECB has been relatively vocal for asking for the banks and it's more a phased in issue To shift the IFRS 9 into a Phase D rather than fully loaded for those when fully loaded. And as you know, we always want to take the most conservative side, so we're fully loaded. So we will do that in the following quarters.
And that does have an impact in 2020 of 52 basis points, but that's a phased in level, which will be reduced by to 25 basis points in 2021. So this is why on a phasing basis between SME supporting factor software And IFRS 9, we have an impact which is above 80 basis points. And on a fully loaded basis for this year, which should be above 20 basis points, but probably closer to 30 basis points. Next question please.
The next question is from Alberto Cordara of Bank of America. Please go ahead, sir.
Hi, good morning. My question is about Since I see that we have profit before tax that is typically negative, yet you don't have a positive tax rebate. So if you can explain that, if you can give us a bit of a guidance for what we should expect this year. Thank you.
Okay. On the tax side, I will let Stefano maybe or Mirco comment on the tax impact and potentially guidance for the year. So, Mirco?
Yes. You're right. In terms of the Tax base for the 1st Q, the tax rate in Italy basically got affected by the one offs, so YAPI and integration costs. So therefore, the taxes were driven primarily by the gains in real estate in Germany. So it's The sale of asset that we have done and a normal, let's say, tax rate in the sea.
Yes, we gave a guidance in Capital Markets Day of 18% to 20%. At this point, today, There's not enough visibility for updating our previous guidance. So we're going to update as soon as we have better data in order to be able to guide you properly.
Thank you. Thank you very much.
Next question please.
The next question is from Adrian Chigi of Credit Suisse. Please go ahead.
Hi there. Thank you very much. Thanks for the presentation. I have two follow-up questions, 1 on cost of risk and 1 on capital. On the cost of risk outlook, you expect over 200 basis points cost of risk for Italy this year, more than double the outlook of some of the other peers in the same geography.
However, you have one of the highest coverage ratios and have over the last year risked the performing and non performing loan book in Italy. Given the inherently opaque nature of the risk profile of your loan book or any loan book of a bank, what reassurances can you provide investors that this some material difference in underwriting standards, but it's just sort of a more conservative take on the outlook. And the second on capital. You wrote back capital of 37 basis points Citi from full year 2019 dividends. Does management still expect to pay the dividend if the base case economic scenario plays out and if the ECB allows it?
Thank you.
Thank you very much. Let me take the question and I'll give you some hint on the cost of risk and TJ will comment as well. We will on the dividend 2019, we will wait until the Q4 to see how the situation and to see what is the ECB recommendation. So at this stage, we are in a wait and see position and we will decide later in the year. On the cost of risk, I mean, you're right to point out that we have one of the highest coverage of actually any GCC in terms of the LPs at group level at 65%.
In Italy, We have the highest negative GDP impact of anybody at this stage at minus 15%, which is an extremely strong impact and of course with an exponential impact when the GDP gets into more negative territory specifically. And as you know, we want to be always extremely conservative in what we do. So this is why I mean, we have based on this minus 15 percent to 200 basis points to 240 basis points, but it's a natural evolution, if I may say, of the cost of risk because of the GDP evolution. This being said, To go back to your question on underwriting standard and Titje can add more on that. We have shown in the presentation What we do in terms of the origination of the new business And you can now see in the page that we have originated a new business on the mostly investment grade category in the coming years And it is translated into an expected loss, which is actually much better than the average expected loss of the portfolio.
If you go to Page 19 of the presentation, you can see for instance that the expected loss on new business In the Q1 2020, we also want a 29 basis point where the expected loss on the stock of the portfolio was 36. So we are actually working very hard to be very disciplined and 72 percent of the new origination in the Q1 2020 was with clients which are strongly into the investment grade category. So the team has instruction and is working to make sure that we shift the portfolio towards a good credit and it's not a Q1 2020 action. You can see that in the past, in the Q1 2019, with expected loss on the new business well below the expected loss on the stock as well. So we keep having a very disciplined risk approach And that should translate into an improvement, as you can see, of the expected loss of the portfolio, everything else being equal.
I don't know, TJ, if you want to add anything else.
Jean Pierre, thank you. I would add, clearly, we're taking a very prudent approach to the cost of risk assumption. You're right that the cost of risk expectation is around €200,000,000 to €220,000,000 for Italy, as you can see in the annex of Slide 48. Just as a comparison, if we look back to 2,008 2009 versus the current period. And here, like for like, clearly, we strip out the so called the non core portfolio.
And there we have taken a look and see at that point in time Between the 8, 9, the default rate went from 1.7 to 2.5. Today, if you look at our assumption, the default rate in 2,009 for Italy ex non core was about 1.76. And our expectation for this year in the prudent assumption is about 3.5%. So this is almost double. So clearly, we're definitely taking a very conservative approach to the provisioning.
As Jean Pierre mentioned that our asset quality has improved over the last few years with a very, very discipline underwriting, if you as you've seen in the expected last slide.
Thank very much. Very helpful.
And as we said, we gave you on Page 48 as well the sensitivity. So just let me be clear about the sensitivity for In the additional 1% growth in GDP, the cost of risk group level should increase by between 4 to 6 basis points That includes both IFRS macro scenario as well as the specific provision evolution and include as well the impact of government guarantees, but the sensitivity is nonlinear. So that's at around the current level.
The next question, sir, is from Andrea Vercellone of Exane.
Good morning. I've got 3 questions, but one is just a clarification or it's a small detail. So they are all on asset quality. The first question is on your guidance of cost of risk. It's a slightly qualitative question.
Like you commented earlier on in the presentation The big jump or the jump, whether it's big or not, we see in NPLs is back end loaded to Q4 and next year. At the same time, you have a guidance that points to a cost of risk higher this year than next year, regardless of where the level the correct level will be. It's higher than the other next year. So if you can just explain why that would be since the big jump in provision is in Stage 3 loans, NPLs and not Stage 1 or Stage 2? The second question relates also to Page 48, but it's A slightly different directional question.
You have the sensitivity saying for any additional 1% drop in GDP, cost of risk moves up by 4 to 6 basis points. But you also point out that this is not linear. I'm more interested in the other way around. And the delta is mainly in Italy because that's where you have the big gap in lost GDP between 2020 2021, what if your assumption turns out to be too conservative And GDP drops less or the gap in terms of lost GDP is narrow. What does that do to cost of risk?
And the clarification is just on the new definition of default, which we were planning to implement in 2020, if I'm not mistaken. Is that still the plan for 2020 or does that shift back to 2021? Thank you.
Thank you very much. I will take The first question and let TJ answer for the second and third one. We have given guidance for the cost of risk for the full year of 100 basis points to 120 basis And we said that, I mean, most of the default will materialize on the Q4 because Potentially, we can expect that a lot of the loans, which could default are today under moratorium. So we should see the defaults at the exit of the moratorium more on the Q4. This being said, behind the specific provisions to be taken in the Q4, We expect to take a sector provision, which will then shift into specific provision when the default occur on the second and the third quarter on the Q4, which we don't anticipate default, which can happen later afterwards.
This is why We have a group cost of risk expectation of 100 to 120 basis points for the full year. It's a combination Beyond the IFRS 9 generic provision already taken, it's a combination of specific provision, Bulkovich would be mostly on the Q4 and a sector provision, which we anticipate the specific one which can happen later And the cost of risk in 2021, which is between 70 basis points and 90 basis points with the rebound of GDP we're seeing and lagging effect of the decrease in 2020. I'll let TJ comment on the second question on the sensitivity of the cost of risk and what happens if the GDP improved and on the new definition of default, TJ?
Thank you, Jean Pierre. Clearly, in terms of the cost of risk For the sensitivity, to the extent that our macro assumption is less severe than what we have built in, there will be lower cost of risk impact. So it shows that our assumption today is we are Probably one of the most conservative, so we'll see. Too early to tell. But if the assumptions are lower, it we will have, in essence write back of some of the generic provisions, which we'll then monitor to see what kind of specific provision will come through.
In terms of new definition of default, there's no change by EBA in terms of time line. So we are today for all of our assumption that the new definition default will still go ahead as planned to be in place by January 2021. So we're planning today for this to be implemented this year.
And just one point in terms of GDP evolution, the ECB mentioned that on the SSM, they will come up with guidelines in terms of GDP evolution for the year to be followed by various banks. Clearly, if guidelines are more conservative than ours. We will not just lower our GDP. If they are less conservative, we will keep our scenarios. We always want to be on the conservative end, and so we will keep our scenario and only adjust when the GDP fully changes in terms of figures.
So, I mean, for us, it's important that we take the pain first. We take a conservative approach and afterwards, We should have only good surprise. Thank you. Next question
is from Domenico Santoro of HSBC.
It's Tommenik from HSBC. Thank you for your presentation, and I hope All of you and your families are okay and well. Just a follow-up on the credit quality as well. My understanding is that You did some assumptions in terms of migration from Stage 1 to 3, and that was basically the base for your cost of risk Can you share with us what these assumptions are? And you gave quite a visibility, actually a good visibility on the positive moving parts on the capital.
Just wonder whether we should expect any Different direction in terms of risk for the assets at the end of the year when you're going to update your LGD, so if there is any negative on this side. And then a question on the TRTRO. I was wondering what are your thoughts in terms of take up in June? And what could be the impact at this point on the NII? Thank you very much.
Thank you. I will let Emeco comment on the TLTRO take up and then Titi comment on the assumptions and LGD impact we could have in terms of capital. So, Mirko, on the TLTRO first?
Yes. Yes. So on TLTR-three, as you know, when we present 1323, the assumption was to basically repay the full allotment of TLTR-two. Nevertheless, we have seen the much more favorable TLTR-three conditions that were announced in March and then also recently on equity in the 30s that actually are easing banks' liquidity and cost of funding, so sustaining new loan origination. So what we're going to do is we are going to revisit that.
And in any case, the maximum we can take is about EUR 87,000,000 and therefore, we are reassessing this.
I mean, by reassessing that if we could we might be on the upper end of the maximum Exactly. Exactly. TJ, do you want to comment on the first two questions?
Yes. Obviously, our so called full year 2020 guideline in terms of cost of risk is built into assumption on the flow to default migration to the worst NP status on top of the so called Stage 3 LLP. Most of the IFRS 9 are mostly on what we call the Stage 2, And the rest is spread across flows to default migration on top of specific LLP.
On the LGD migration and capital impact between TJ and Mirco, TJ, when what do you see in terms of LGD migration?
Well, at this stage, it's Too early to tell on the LGD sort of migration because of the moratorium, There's little impact in Observe, but we've clearly built into our assumption on the flow to default and the migration to sort of the worst betters. And that's reflected in the capital and the LOP assumptions.
And we might have in 2021 maybe some adjustment coming from the PD On the regulatory capital headwinds, but that's something to be looked at a little bit later basically. Next question?
Maybe we forgot to answer 2 parts of the question. Sorry. 1, you asked also what is the potential NII of TL3. So it's going to be north of €300,000,000 if we take the full take up. And on the risk weighted asset development, meaning from a capital perspective, we'll be very comfortably positioned in our 200 to 250 basis points in NDA buffer.
Of course, if the risk weighted asset will slightly go up, but you know that the amount of guaranteed business will have neutral capital impact and therefore we need to now follow the mix and how the mix will go through the various quarters.
Yes, but very comfortably, I mean, that we will be well above for the year of 200 basis points to 2.50 basis points buffer. And that should be the case as well for 2021. So the capital side will remain very strong in this phase. Next question?
The next question is from Giovanni Rastoli of Equita. Please go ahead.
Good morning to everybody. Two quick questions. The first one, can you share with us what is the default rate At the Italian perimeter that is including not only the commercial bank in Italy, but also the part of loans of the commercial of the corporate investment banking, the car base in Italy. And the second question, very broadly, We've been quite detailed into discussing the impacts on the cost of risk in 2020 and 2021 and also the sensitivity, which is actually quite low because 1 percentage point of GDP you said is the 4, 6 basis points of higher cost of risk, which is A good number. Can I ask you what is instead in general, can the impact instead on the revenue?
So Once this overall situation is hopefully solved, can we assume that there will be a structural impact on the 5th and NII, so that there is a part because sooner or later, the cost of risk will normalize at 'twenty one or 'twenty two or so. Why? My point is, shall we also factor in structural contraction of the NII of the fees? And Specifically on the fees, can you help us to understand what could be the impact on the overall activity in terms of volumes, Traffic on the branches in the beginning of the second 2 because it's an unprecedented situation and the factoring in the lockdown is So any comments would be much appreciated because my understanding is that also we should not also forget the impact on the revenues other than the cost of risk, but there has been a lot of elaboration on your side. Thank you.
Yes. Let me take the second question and we'll let T. J. Answer your first one. I mean, first of all, I mean, we benefit from a very diversified business model as you have seen and we in the presentation where we showed a breakdown between Italy, Germany, Australia.
And we have seen in different countries Very different client reaction basically. That's because of the lockdown has been put in place differently. And the resilience of the medical system has been different between the different countries. So for instance, in Germany, In terms of AUM fees, we saw very, very little impact of the lockdown in the month of March. It was true in Australia as well, While we have seen an impact in Italy, which was much more meaningful, as was mentioned before, January, February, we were at 150 percent in terms of investment fees compared to the average of 2019 and we went down in March to 50% the average of 2019 and Germany and Austria remain more stable.
So with the Phase II, we can expect Germany, and which on a combined basis represent terms of loan the same amount as Italy. We have the breakdown on Page 8. We can expect Germany in Austria to rebound more than Italy and CEE, which has €66,000,000,000 of loans, so half of Italy to rebound as well as CE has been less impacted. So that means that we could have a differentiated evolution based by the country. This being said, for 2020, as we don't have a good understanding of how the market The lockdown will be lifted in the different countries.
We don't want to give any guidance because it's more a bet than something which can be confirmed. And I don't like to say things on which I don't rely on hard evidence. It's different for the cost of risk because the cost of risk guideline we give are based on the almost mechanical application, let me say of the GDP evolution that we gave taking a conservative stance. So don't expect us to say something which can be too positive because we just want to remain as we are always conservative and say what we do and do what we say period. In 2021, 2022, we should see an evolution of the GDP.
We have, as far as the European GDP is concerned, plus 10% rebound of GDP in 2021 versus a 13% decrease in 2020. Italy is minus 15 plus 9. And so clearly, the GDP will close the gap to trend slowly, and we expect this gap to be closed more quickly in Germany and Australia than in Italy from the figures we gave and probably the gap to be close in 2022, 2023. So we will see an evolution back to GDP trend in the coming few years. So this is why we said during the 1 year call But if we look at the net income, we're not going into the detail of fees, NII, etcetera, because it's Still a bit too early to give a precise indication, but if we look at the gap to trend of GDP versus the evolution we can have in our various countries.
We think that we should be in 2021 in terms of net income, taking into account the LLP provisioning that we have indicated 70 to 90 basis points. That we have indicated 70 to 90 basis points, we should be at 75% to 80% of the net income we were planning in TIM 23. So 75% to 80% of the net income planned in TIM 23 €4,300,000,000 €4,400,000,000 gives us a net income between €3,000,000,000 to €3,500,000,000 which in terms of RoTE should be around 6% 6% to 6.5% RoTE. So that's the guidance we can give for 2021. But we don't give any guidance of the revenues for 2020 because it's a situation which is for the moment, not stabilizing for us to be too precise.
TJ, maybe on default rate?
Yes. On the default rate for the so called Italian parameter, which include both Commercial Banking Italy and the CIB component in Italy is relatively stable compared to the Q4 at around 1.9%. And remember, in our projection, we have assumed that this is almost double to around 3.5%, taking account the effect of the total government guarantee scheme. So we have taken a fairly conservative approach in our default rate assumption for this year. Thank you.
Next question.
The next question is from Britta Schmidt of Autonomous Research.
I've got 2 questions, please. One is just coming back to the assumptions around the The cumulative GDP over 2020, 2021 of minus 6% in Italy is not too dissimilar from what we see from other banks and still the 200 to 240 basis points is way above what other banks are guiding to. So do you think it's management baked into the translation into Stage 3 loans? Or do you see in your internal modeling a potentially very wide range of outcomes as well? And my second question would be there has been some press reporting on the merchant acquiring business as to whether you could potentially be doing something with that.
Could you give us a comment on that and maybe also let us know how much it contributes to the P and L? Thank you.
For the I don't think we'll give we disclose the detail of Merchant Acquiring Contribution to the P and L, but what I can say that it is a business that we like. And we said there is no M and A for unique credit in terms of combination, no disposal, our perimeter is We like merchant acquiring and we will not do anything. But this being said, we don't comment on rumors and speculation. So that's to answer to your second question. On the first one, and TJ can complement what I'm doing, but What is important is not only basically the overall net GDP impact over the 2 years, but it's also the trough.
If you have 15% negative GDP in 2020, the impact on the cost of risk will be much bigger than if you have a minus 7% or 8%. So this is why we take these conservative assumptions having a bigger trough And of course, a rebound which net gives you a convergence which might not be very different maybe from lower trough and lower rebound, But it is more conservative and as such impacts more the cost of risk, knowing that we have taken into account, of course, in our assumption the positive impact as well of government guarantees. Didier, anything else to add? Yes.
If I could add, if you look at Page 20 of the slide, clearly, we're assuming that the lockdown is going on for longer 2 months. That in itself would impact the assumptions in terms of recovery. We never fully recovered. And this will feed into the IFRS 9 sort of modeling assumption. That
means that
we will be taking a lot more provisioning in 2020 versus less in terms of anything generic. And this will help us anticipate, If any, in terms of the so called specific LRP that will come, particularly as we approach right after more return in Q4.
And I think what is important as well when you make the assumption, this is why we gave you the breakdown on Page 21, If you see how the portfolio is composed and so we this will indeed already commented The dividend by segment high impact to low impact and clearly the high impact for us, which is 10% as a Very high contribution, not only for IFRS 9 provision in the Q1, but for the full year. So you have to look at What is the trough on one side? And what is the breakdown of the portfolio between the different segments to estimate the NLP?
Yes. And I would just add for the high impact, even though it's 10% of the portfolio for the year, if you look to Page 20 3 of the slide, we are allocating 39% in terms of so called both IFRS nine and sector sort of specific generic provisioning. Thank you very much. Next question
please. Next question comes from Hugo Cruz of KBW.
So two questions. First, Can you please put your full year 2020 cost of risk guidance between Stage 2, progressing to Stage 3 and top up to existing Stage 3? And second, given the new environment, can you do better on cost cutting compared to previous targets?
Thank you.
Well, let me comment on the cost side and I don't know if we can give the buoyant Stage 2, Stage 3, but I will let TJ comment on that. On the cost side, we have demonstrated in Transform 2019 That we take always a very proactive and decisive actions on cost. We had a plan to keep our cost stable in TIM23, an increase in 2020, 2021 and then decrease to go back to a cost as a lot of the transformation has more back end loaded impact. With what's happening now, A certain number of development have been put on hold basically and we target for 2020 to have a cost base, which should be stable versus 2019, basically. If situation change, then we will change.
And we will what we want to make sure that we can, within our cost base, reallocate some of our budget towards what will help us transform the business model more quickly. So as we said, in terms of IT priority, We will refocus a lot of our project towards full transformation, making sure that we broaden fully digital offering for the product and improve even further the remote advisory side. I'll let TJ comment on the Stage 2, Stage 3 breakdown if we give it.
Yes. Clearly, for Stage 2 history, firstly, I think for the guideline for full year 'twenty, It's built on our assumption in the both the macro IFRS 9 sector that we look to on the flows to be full towards an NP status, which means that some part will go from Stage 1 to Stage 2 and some will go from Stage to the Phase 3. And this is built up into the 100,000,000 to 120,000,000. Clearly, We have not given sort of the exact sort of breakdown, and we'll be happy to revert On this true IRR?
But we can say that the IFRS 91 is mostly on Stage 2 Basically, and the rest is probably the one I want to Yes.
Yes. Yes. I think the factor specific we'll be achieving Stage 2 to Stage 3, yes. Yes. And Jukul will get back to you with additional information.
The next question is from Andreas Filtri of Mediobanca.
Just following up on the question on costs. What are your considerations? I hear you are now targeting flat costs for 2020. How much Of the therefore, additional cost cuts, you reckon, will be structural because of a different way of working for the group. And therefore, can we bring some of these forward?
Or most of this is just savings from people working remotely and not traveling and so on? And so on your risk weighted assets, what risk weighted asset impact are you expecting from reciprocal changes in PD and LGD and how much of this will be cushioned by a negative volume evolution and the government guarantees? And then finally, I just reiterate Andreas' question On the sensitivity of cost of risk to the upside of GDP, given this nonlinear? Thank you.
Sure. I will Let TJ answer on the sensitivity of the GDP evolution as well as on the impact of Positively on PD L GD. On the cost side is, as we said, we expect flat cost in 2020. Clearly, the I mean, the clients are changing and the adoption of remote banking is has increased de facto, If I may say, and we expect that the clients will stay in a much more remote banking digital interaction with their banks going forward. So that could help simplify the process and simplify as well the business model.
This being said, I mean, the cost savings that we could have in terms of process optimization, as we said in Transform in in 2023, sorry, are more back end loaded because they are consequence of process simplification. So it should appear more in 2022 and 2023. Well, accelerating some of these changes and that has already an impact in 2020, keeping the cost flat. And we will apply TIM23, which was already anticipating this changing. So it's not like it's something new because of COVID.
It's just an acceleration some of the impact and we'll get the benefit maybe earlier than what we were planning in TIM 23. But this day, there is no change in terms of what we expect in terms of FTE efficiency or branch closures versus what we were planning as we had transformation as one of our 4 pillars. On the risk weighted asset and sensitivity, I'll let TJ comment.
In terms of Clearly, risk weighted assets, the model recalibration, we do not while we expect Clearly, the PD deterioration will impact the recalibration. We expect this to be offset by the benefit we will get from the so called loans that will move towards the state guarantee scheme. So overall, we don't expect any meaningful impact on the PD LGD negative migration. In terms of sensitivity, I already mentioned sort of earlier for 1% to the extent that our assumption is too conservative, Let's say by 1%, we expect the cost of risk to improve by 4 to 6 basis points. Next question please.
The next question is from Antonio Reali of Morgan Stanley.
I have two questions, please.
The first one is on the government initiatives. I guess from your position as a pan European bank, how effective you see the government Some of the key countries you operate in, any early issues or concerns you can share from your conversations with SME and corporate clients? Particularly interested in Italy and Germany, please. And then the second question is, I mean, you've been derisking your earnings, That was a key part of your business plan. You've done lots of work on the non core and also have been reducing the BTP portfolio.
How do you manage the large demand for credit? And at the same time, defend your marginality and asset quality? I've heard your comments on Tier 3, But also how should we think about your B2B portfolio going forward? I saw the reduction over EUR 10,000,000,000 on year, but there's talks about changes to the solvency, so I want to I see your thoughts. Thank you.
Sure. I mean, I will let the co CEOs of Western Europe Comments on the client activity on Germany, Italy and government guarantees and the process. And I will take the second question afterwards on the de risking. But first, If Olivier or Francisco want to comment about Italy or Germany as far as the SME side is concerned? If we start from the
Italian side, we believe in general that the schemes are significant and effective and therefore Should the ability to make a difference in allowing our corporate clients to go through the most difficult part of the economic slowdown. We are very active on all three Teams, we've been lucky in receiving a large number of requests on the 25 1,100 percent guarantee amount issued by Fondo with 43,000 requests already processed to date and essentially a minimum refusal rate. So that should important in sustaining that small business, self employed part of the same sale. The large component will be Fundo, Cenzare de Galancia, run by NCC. We have currently 3,000 processing requests and we look to a significant increase.
And as mentioned by Jean Pierre, We've been first of the run such a guarantee, I think, issued already to and we have several orders in the pipelines, some of which may already be closed this week, expecting, as mentioned, over EUR 15,000,000,000 of overall amounts
of guarantees in Italy.
Olivier, do you want to
A great confidence in the value secured WSKs, which were already in reality, in place with the sponsor loan. So we have an engine, If I may say so, that is working already that has been working very, very well in Germany. And as we can see, for example, for the small business, The initiative on the Schnell credit for amounts below €800,000 is working effectively very, very well. So what we can see in terms of reaction is that is a strong redemption with
the KFW model
and the great confidence on the ability to bridge the situation.
So maybe on your second question on the de risking. So First of all, on government bonds, we said that we will reduce our BTP portfolio And to 50% of our tangible liquidity by 2023, we are we have reduced by €10,000,000,000 so from €53,000,000,000 €4,000,000,000 to €44,000,000,000 within 1 year. And we keep reducing, letting the portfolio naturally amortized. We have a duration, As we have said, which is around the 3.5 year as of the Q1 2020 for the banking group down from 3.6 years on the Q4 2019. And this EUR 44,000,000,000 portfolio is for EUR 23,000,000,000 in the L2 Collect category And for EUR 21,000,000,000 on the fair value OCR basically with sensitivity and capital on the after tax basis, which is around 1.7 basis points for memory for 1.4 basis points for 10 basis points, a move of the spread.
On the credit side, we have basically, we will have more demand for credit to go under the guarantee. So that as I mentioned an earlier positive impact in terms of risk weighted asset on one side and cost of risk on the other. And we are taking into account the benefits coming from the government guarantees on our cost of risk. But clearly, the loans under the government guarantees will be at a spread, which is going to be lower than the natural Right, to a certain extent. And so that should be slightly NII negative, but the TLTR on the other side will there's a benefit as illustrated by Merco.
So lower spread coming from the client spread, if I may say, because of the growing guarantees, but improvement in the NII coming from the TLTRO, which hopefully should compensate each other. In terms of the origination, I mean, we maintain clearly strict with discipline. At the same time, it's important for us to support the economy and when we can assist our clients with the government guarantee, we do that. I mean, government guarantees move from 100% guarantees. And for instance, on the in Italy, on the €25,000 loan, we had close to 30,000 requests and as of the 30th April, we had already processed and validated 52% of that.
So, on the 15,000 week price. So, we're trying to make sure we move quickly to support the economy to support the client and at the same time maintain the right management of which is classified.
Very clear. Thank you. Thank you. And next question please.
The next question is from
One question is on noncore. Will you confirm the target of quarterly fully runoff by 2021 given the
change in the
macro conditions. And the other one is on capital Turning to 2020 onwards, you have a strong buffer and assume that the regulatory and market condition normalizes and you are allowed to pay it. In the capital buffer, a bigger driver than the profitability of the group that could be like potentially loss in 2020? Thank you.
Thank you. On the non So I will let TJ comment on the current situation better. I would say that there is no reason at this stage to change forecast to run off fully the non core
by the end
of 2021, but TJ can give you the dynamic of the evolution. On the capital returning, I mean, clearly, the environment is very different from where we were at the end of last year or early next We said as far as the dividend side is concerned for the dividend 2019 that we will wait for the Q4 to look at what is the economic situation and prospect of economic evolution as well as the recommendation of the ECB. And from 2021 onwards, we will look at the evolution of the situation. We maintain The guidance that we gave in terms of percentage payout, which was given in TIM 23. And we will see if we have depending on the ECB recommendation, how we manage excess capital, which I said, we anticipate to be well above the 200 to 250 basis point buffer that we gave in TIM 23 in 2020, but also in 2021.
So all that will depend on the prospect of economic evolution. Didier, do you want to comment on the non core?
Sure. For the non core, clearly, we are still aiming for full runoff of the book by end of 2021. We're progressing on all the initiatives. Clearly, COVID-nineteen has an impact on the recovery, particularly those that involve because all the courts are closed. But for the so called unsecured portfolio, we'll continue to bring transaction to the marketplace.
3 portfolio are now actually in the market. And And actually, as of yesterday evening, we received for 1 of the portfolio binding bids. So it is still open, clearly, for the so called unsecured portfolio. But for the secured where you require due diligence on the secured asset, This clearly will have to wait until when the restriction is lifted. But overall, we're progressing on all initiatives, and we still expect to run down Non core by 2021.
I just would like to add that the coverage ratio on the non core With the additional provision we took on the Q4 is at a very high 78.4%. So we are of the very strong opinion that we are provisioned to So and the market, as TJ mentioned, still remains open. So we maintain our guidance that the non core will be 1 off by 2021. If you look at the net exposure of the non core being provisioned at 78%, we're basically On the €8,000,000,000 that we have left, the net exposure is less than €2,000,000,000 So I wouldn't say €2,000,000,000 are irrelevant, but you see that it is now a very, very small amount. And so that's why we focus on the group ex noncore as far as the focus on the risk profile of the group is concerned.
Thank you. Next question, please.
The next question is from Delphine Lee of JPMorgan. Please go ahead, madam.
Hi. Thank you for the presentation. So I just wanted to come back on asset quality. Looking at your Slide 21,
with the sector breakdown, Would it be possible to have sort of the asset quality metrics on the high impact portfolios in terms of NPE ratio and coverage. Also on Koichi, if I may ask, out of the €28,000,000,000 of loans, which are under moratorium, in your assumptions in terms of full year guidance cost of risk EUR 100,000,000, EUR 120,000,000. So how much losses Are you assuming against the €28,000,000,000 of loans under moratorium? And then just one quick Question on capital, just to clarify. So it looks like, I mean, you don't expect much credit rating migration And they are definitely some positives in terms of impacts on capital by year end from regulation.
So just wondering if you is there anything we're missing in terms of capital bridge by year end? Or should we expect significant increase by year end? Thank you.
On the capital side and Mihako can comment in more detail, but we said that We will have in addition to the structure we have today, we think it'd be equal, we'll have additional contribution on the phased in of more than 80 basis points of CET1, so that's the recommendation, which the strong recommendation of the ECB to ship to phase in for IFRS 9, which we will do while in a fully loaded plus the change of the CRR, which will impact Q2 and Q3, as I mentioned earlier, on the SME supporting factor and on the software side. So combined More than 80 basis points 81 positive impact for the year on the phased in and more than 20, closer to 30 on a fully diluted. And we said as well that we expect to be well above the 200 basis points to 250 basis points buffer in 2020, I would say in 2021 as well, basically. Even if in 2021, as TJ mentioned, We will have the regulatory headwinds that we were planning in 2020. There has been a time translation as well the one we were planning in 20 So the combined impact of regulatory headwinds for 2021 will be around 100, 120 is basically from what we see.
On the €28,000,000,000 of loans under moratorium, We have as we said, we gave the breakdown between what we have in Italy and in CEE mostly. And in CE, as we said, there is opt out and opt in countries. So the opt in is €2,000,000,000 out of the €7,000,000,000 For the West, it's more I mean, a mandatory shift towards the moratorium. And in Italy, as we said for the moratorium, and I will let TJ comment about what we expect if we have the breakdown of the losses, but we have on the EUR 19,000,000,000, €3,000,000,000 which are coming from mortgage. So the TD should be very small for any of this loan if they default.
And on the corporate side, which is for the balance, we have 20% of the corporates, which are in the lower credit where we could have your impact of provisioning, but the rest is in good credit quality, which should be fine. So this being said, on the Yes, good first.
Yes. So as Jean Pierre said, we expect strong capital position. The bigger driver is on one side, for sure the CRR relaxations and most of it is coming from IFRS 9 conditional. And then There is some risk weighted asset dynamics that we develop over the rest of the year. So maybe that's the building block The PR we see in your forecast and nothing else that is major aside from movements of the value towards the ISX and
So on. TJ, on moratorium and then on the NPE coverage metrics for the high impact, yes?
Yes. Firstly, on the moratorium, already Jean Pierre mentioned the breakdown. Just one point is that 80% of, for instance, the corporate that is requested in more return are actually in a very good rating category. And all of this clearly are part of our so called bottom up assumption in terms of the cost of risk forecast. For the sector, we clearly do a detailed sectors of impact.
And on Page 21, you've seen that 10% of the so called portfolio, we've clustered them in high impact With the transport, travel, airlines, shipping, tourism, oil and auto suppliers, we clearly have that breakdown by Firstly, by countries and within the country, what are some of the percentages? We do have the asset quality metrics And we can follow-up to IR just to give you all those metrics. It's too detailed to put that in. Yes, we'll be in touch with you.
Thank you very much.
So thank you very much. And next question, please.
The next question is from Christian Carrese of Informa Monte.
I have 2 questions, 1 on cost and 1 on capital remuneration. On cost, I was wondering if The COVID-nineteen crisis could delay a little bit the phasing or the exit of the personnel you agreed with the The second question on capital. Compared to last CMD, we are expecting now lower earnings but higher capital in a certain way. You said 80 basis Point over there on the phase in basis already in 2020. But in terms of dividend payout, 40 I suppose that it will be difficult to ask a regulator to approve Buyback.
So in theory, you have more capital. You're going to pay lower dividend based on a lower net profit. So I was wondering, Compared to last December, if we look at the banking sector, we see that some banks have lost almost 50% of the value. So there are already some banks at 80% discount to tangible equity. So this year maybe If you assume that the GDP will rebound by 10% next year, it's not the right time to maybe look at other banks, smaller banks to consolidate the sector, maybe also SSM would be in favor of this move And use the bed will of those banks to clean those banks as you did with the non core bank for June Credit.
So if you can Share your view on this. Thank you.
Sure. Let me first comment on the FTE exit, we have agreed with the Italian Union about on one side very socially responsible action in terms of early retirement for our colleagues in Italy to around 5,000 net FTE reduction. And this net FTE reduction include as well an agreement to hire 2,600 people. We are part of this 2,600 people already confirmed that we will transform the temporary contract of some of the apprentice into a full time contract. It is we have a plan for FTE exit and early retirement And this plan will be applied and could actually maybe be slightly accelerated.
It is a voluntary request of our colleagues. And I assume in the current environment, some of our colleagues might be willing to retire earlier than later basically. So we shall see, So we keep our plan in terms of ST Management and that's fine. In terms of the capital side, We said no M and A. And we said that we repeated that and we keep it.
If I may say Even more today than before, it is extremely important to focus all the management attention towards the transformation. The last thing you do, if you manage a bank today is to get more FTEs, more branch and more integration when what we need to do is to transform much more quickly. So we have a zero interest. I say 0 interest to enter into M and A transaction domestically in Italy or somewhere else as we want to focus 100% of our attention in the transformation. So I think that's clear and we will not change that.
Thank you. Next question please.
Next question is from Ignacio Charejo of UBS. Please go ahead, sir.
Hi, good morning. Thanks for the presentation. Most of the questions are answered. But then if I can follow-up on the importance of the government loan guarantees, especially in Italy, you're expecting a big portion of your corporate book to end up being rolled over Into the guarantees, meaning referring
to the back of credit and the new lending?
And then the second one is on trading. How quickly do you think you can come back
to your EUR 300,000,000 EUR 350,000,000 run rate you had in the previous guidance?
Thank you. On the trading side, we have guidance which was closer to 300 actually, more than 300 350 at the last CMD. I think with the current environment, the activity is client driven Almost all of it. So the trading activity is a consequence of the client activity. And we think that while the month of April was a good month for the ECB side, on the revenue side, we will still have in Q2 some impact of the XVIII as it moves based on the market environment.
But If you take out Xvier, which is on recurring, I mean, the months of April in terms of client activity show a rebound of activity, and we think that we should go and be back towards a more normalized activity probably in Q4. I mean Q2 and Q3 should be a transitional quarters in Q4. That should be a more normalized one. As far as the government loan guarantees are concerned, we said that we expect to have target more or less EUR 15,000,000,000 of common guarantees, which in Italy, if you look at and that's mostly in Italy, if look at our Commercial Banking Italy book, it's EUR 130,000,000,000 and most of the guarantees would be for the Commercial Banking Italy. So you can see that it's a bit more than 10% of the overall loan book.
Thank you. Next question, please.
The next question is from Patrick Lee of Santander. Please go ahead.
Hi, good morning, everyone.
Thanks for taking my question.
I just have one question
on the moratorium and also one on your cost of risk guidance. Firstly, on the moratorium,
am I right in saying
that any loans under moratorium now is still considered performing and therefore accruing interest? And if so, I guess that interest will be added at the back end as extra balance for the customers. And so if That is correct. Can you give us some sort of rough estimates in terms of the increase of the size of the interest burden for the corporates spend for the retail customer post the moratorium? And secondly, on the cost of risk guidance for the rest of the year, You're pretty much guiding to pretty much the same level as you have seen in Q1 at around 100 basis points.
But I just want to check with you, is it fair to assume that under the IFRS macro assumptions methodology and given your already very conservative stance, is I said, I assume that most of the macro assumption changes is already taken in the Q1 and consequently for the rest of the year, No guidance. Is that assuming a pretty big jump in specific risks that you're expecting for the rest of the year? And that's it for me.
I will let probably Stephane Le Port comment on the accounting treatment for the loans under Moratorium, but there is no P and L impact per se for the loans under moratorium and Stefano can give you a bit more detail on that. On the cost of risk, Luca Choe to understand completely your question, but if the IFRS 9 Generic provision, change they will change if we change our GDP assumptions basically. So If they worsen, we'll take more provision. If they improve, there will be a provision release. So that's mechanical and so we shall see, but you know that it is a 3 year average basically of the GDP evolution of a 3 year, which has to be taken into account.
I think what Patrick meant was actually because we take all the macro in the Q1, Is it fair to assume that for the rest of the year, it's more a jump in specific NLPs?
Yes, that's correct. Yes. Yes.
I think what I would also add, There's assumption of clearly we'll be building up sector specific provisioning as well, which is our assumption in terms of generic. And then we will see post the moratorium as the so called specific provisioning comes through in terms of classification, then we will We release the so called generic to be into the specific.
Okay. So just to clarify, IFRS 9 on the macro basis is taken and we don't expect to take more as we are conservative on the generic basis. And on the provisions which are remaining, so if as you can see, we have on the 100 120 basis points, 20 basis points on a full year basis coming from the generic, the balance coming from the rest. I mean, it's a mixture of sector as well as specific provision. We want to anticipate some of the specific name provision for sector provisions, which will be reversed afterwards into a specific provision when a default happens, but to make sure that We can take this 100 to 120 basis points fully in 2020 to put that behind us basically.
On the treatment accounting treatment for the loans and the moratorium, Stefano, do you want to comment on the way it is handled?
Yes. Thanks, Jean Pierre. So for the large part of the moratorium We have a payment suspension. So considering that we have no payment cancellation, The payment is already suspended, and so the bank will keep on accruing the NII in the P and L. From a customer perspective, it's a postponement of the cash flow.
So depending on the future of the Private or public moratorium, the cash flow is going to be paid by the customer at the end of the waiver or at the end of the cash flow profile connected with the package, meaning either the product or the public Thank you. Next question.
The next question is from Anna Benassi of Kepler. Please go ahead, madam.
Yes. Good morning. My question is a clarification on the Momoco dividend. I hear what you said. So you confirmed the runoff of Benin core of the 8,000,000,000 of Benin core, like the EUR 2,000,000,000 as you said by 2021.
But is it the EUR 4,300,000,000 growth target For end 2020 confirmed because I hear you I heard that you said, full portfolio are up Jose probably they are worth more or less EUR 4,000,000,000. So do you see still interest On this portfolio, and I think you commented already that the extra provision you took in Q4, you think is enough also considering some price pressure in the NPL market? This is my first question. Then my second question relate to the contribution to subsidiary funds and the banking revenues that I've more like BRL 900,000,000 for Ooni Credit. Do you hear anywhere some indication that some of them could be suspended for some time or removed given the situation always should stay with that assumption.
And regarding the shareholder In the ratio, given in Q1, you are running, Let's take breakeven. Do you believe that the high capital buffer would be enough for the regulator to allow you to pay any dividend or launch any buybacks even without Positive profitability or larger net profits to cover your policy and better slide for 2020 results, but even more to 2019 So standard distribution policy?
Sure. Just on your first question on the non core. Titje has already commented, but we have said that we maintain the full one off by 2021. I think the 2020 evolution will depend on the speed of the easing of the lockdown. Why?
As TJ mentioned, While on the unsecured loan, we have we continue to work and we receive, as he mentioned, Some beat for some of the portfolio. I mean, for the secured one, there needs to be some due diligence and some of the due diligence need to be physical due diligence. So as soon as the lockdown is blocking people from being able to travel, that might delay slightly And some of the transaction we want to do. But just to clarify on the non core reduction, we were planning to have on the €8,000,000,000 that we have left, more or less half coming from disposal and the balance from recovery and write off. So basically, we're not looking to have €8,000,000,000 disposal, but only half of it.
And so we are confident that by 2021, We run it off, but maybe based on the evolution of the lockdown, the €4,300,000,000 might skip a little bit towards 2020 But we confirm the target. On the systemic charges, We have no indication at this stage that there will be a suspension or relief of any systemic charges, which I see if something happens, but for the moment, I don't think we should bet on anything. On the share of the remuneration, Just to remind you that we were planning in 2020 on the 2019 To pay a dividend, which is based on the underlying net income, so which is different from the stated net income. And because or thanks to our high capital buffer basically. And so based on the situation, We will reassess what we do on the Q4.
And in terms of economic evolution and indication of the It is way too early to be able to anticipate, 1, the economic evolution 2, what the ECB will recommend banks to do. And we will follow, of course, the ECB recommendations.
The next final question is from Benjie Zalind Sanford of Jefferies. Please go ahead.
Good morning, everyone. Just a quick clarification from my side. I just want to be clear that the guidance earlier was for net profit in 2021 of €3,000,000,000 to €3,500,000,000 And if that is the case, just on the basis of the 70 to basis point cost of risk guidance, the comments you made around costs and systemic charges, etcetera, that We should therefore, as Sidney are basically saying that the revenue run rate in 2021 should be close to a 2019 level, quite a sharp recovery versus the run rate in the Q1 of this year?
Just checking on that. Thank you.
Well, you heard me well And I said that we are targeting net income based on the current economic evolution. Of course, if the GDP evolution is different. I mean, we will have a different evolution, which should be between 75% to 80 percent of what we were targeting in TIM 23. But Clearly, we have we will have an impact of higher provisions, as you pointed out. And if we're at 70% to 90% basis point of provision, it's an impact versus 40 basis points of provision that we were planning.
The cost should be, I mean, in line or lower than what we are planning for TIM-twenty 3, but the revenues will recover from what could be expected for 2020, but will still be lower than what we were targeting for TIM 23 so that you the net income would be based on the evolution of the spread, but if the situation improves, there should be a strong recovery on the fee side. That's very clear and normalization of the trading profit. But I'm not going to go into more detail about it because it's It's way too early to go into the detailed mechanics of what should be 2021 net income made off, but that's our expectation is more based on closing the to GDP and where we will be. The good news with the crisis is that they end at one stage and you go back to normality. And within our assumption, we start going back to normality in 2021 with a lot of unknown about the virus, the vaccine, the treatment.
So I'm not a medical specialist. So for the moment, give you what is my best expectation looking at the overall macro side, but which can change if the medical side or the virus evolution is different from what we could expect.
Thank you very much. I think Jean Pierre, it was important, like Benjie was saying that the numbers we gave are for 2021 and not 'twenty three.
That's correct. Okay. 2021 year.
So that's important. And this looks for now to be the last
There is no other question. Thank you very much for participating to this call, we will have a discussion with some of you during the virtual roadshows that we're starting right after this call. And I hope that you and your family will be well. And I look forward to