Ladies and gentlemen, good morning, and thank you very much for joining us today at our Capital Markets Day 2019 in London. After having successfully you can see from the agenda, we have a busy half day ahead of us. I hope you will appreciate our new and streamlined format. In that spirit, we'll only have 3 presentations today: 2 from our CEO, Jean Pierre Messier and one from our co CFO, Marco Bjarnke. They will present our business and financial strategy for the next 4 year period.
You will also get to hear from 7 other members of our senior management team in the 2 Q and A sessions we'll have. The first Q and A session will focus on the business strategy. We will ask 6 team members onto the stage. The co CEOs of Western Europe, Francesco Giordano and Olivier Callatt the co CEOs of CEE, Gianfranco Gianfranco Bizzani and Niccolo Urbattali as well as our Co Chief Operating Officers, Ranieri De Marques and Carlo Vivaldi. Please focus your questions in this session on the business and our operations.
The second Q and A session, after a well deserved coffee break and Mirko's presentation, will be on financial and risk topics, including those on corporate structure The first Q and A session will be moderated by me the second by Jean Pierre. In addition to questions taken from the audience, you will also be able to ask questions via the usual e mail address, investorrelationsunicredit. Eu. You can find it on our website or in your handouts. These questions can be sent at any time between now and the beginning of the respective Q and A session.
After the closing remarks, we will conclude the day with lunch. Every table will be hosted by a senior management team member, and you will have received your table from the letter you drew this morning. It's in the back of your little badge. There's another piece of important news we would like to share with you today. Over the course of the next 18 months, we will host 3 more focused Capital Market Days.
These mini CMDs will be based on Western Europe, CEE and operations, respectively, and a deep dive on a relevant topic. Each will be hosted by the respective co heads who are present here today. More details on content, timing and location will be announced at the beginning of next year. And now without further ado, let us start on the journey that is our new business plan, Team 20 3. And who better to set us off on the right track than our number one team member, our Chief Executive Officer, Jean Pierre Messier.
Jean Pierre, the floor is
yours. Thank
you very much, Jorg, and also very warm welcome to all of you for presentation of Team 23. Team 23 is our new 4 year strategic plan covering the years 2020 to 2023. The reason for choosing the name is very simple. The execution of our previous 3 year plan, Transform 2019, would not have been possible without the great team we have at UniCredit. Thanks to the unwavering commitment of the old team and everyone's effort to walk the talk, we executed Transform 2019 very successfully.
We have been successful by working as a team. So we decided to call the new business plan, Team 23. You can trust us to also deliver this new plan. Before I take you through the Team 23 business strategy, let me give you a short recap of Transform 2019, which has created the solid foundation upon which the new plan is built. Our mission has not changed since we launched the Transform 2,000 plan in December 2016.
We are a simple, successful pan European Commercial Bank with a fully plugged in CIB. We will continue to build on our existing competitive advantages, our unique Western, Central and Eastern European network, our position as the go to bank for SMEs and our extensive and growing client franchise. Throughout Team 23, we shall continue to be proactive about capturing commercial opportunities, whilst keeping a tight train on risk, execution and cost control. Let's move to slide 3. You already know that UniCredit is a simple Pan European commercial bank.
So you know it is not just words. The facts speak for themselves. 16,000,000 clients across Europe trust us with their banking business. We are truly local with 13 Commercial Banks with a unique reach throughout our CIB and international banks network. We are ranked in the top 3 by assets in Italy, Germany and Austria and 1st in CE on a consolidated basis.
We have as well a well diversified business with a third of our lending coming from Italy, a third from Germany and Austria and a third from CE and CIB. We are the go to bank for the European Mittelstand, the mid market corporate clients in Europe that are the backbone of the European economy. We are the 2nd largest corporate lender in Continental Europe, which is a clear proof of our strong position and of the trust our client
afford us.
Our CIB is fully plugged in and focused on supporting the Group's clients. CIB ranking at the top of the league table is a proof of our very strong product offer and our ability to deliver significant cross selling and synergy across the bank. Let's move to slide 4. There are compelling reasons to invest in UniCredit. We have shown with the successful delivery of Transform 2019 that our team knows how to execute a business strategy even in a challenging macro environment.
At Unique Credit, we say what we do, and we do what we say. And we always favor long term sustainable outcome over short term solutions. We have an extensive and growing client franchise. We know how to maximize productivity, and we deliver sustainable returns. Our relentless focus on keeping high capital buffers and de risking our balance sheet will maximize shareholder value creation.
We will increase the dividend with a mix of cash and share buybacks. You can trust us to successfully deliver Team 23. Let's turn to slide 5. When we presented the Transform 2019 strategy, we made conservative assumptions. Yet, even such prudent planning could not have foreseen the headwinds that the industry has faced throughout the years 2016 to 2019.
We took a series of decisive actions to counter these unforeseen events, which together with our prudential initial assumption enabled us to deliver on our target. Let's Board of Directors presents its own list of candidates in line with the European best in class companies. We lifted the voting rights restrictions and converted the saving shares into common shares. We derisked our balance sheet above and beyond our initial goal targets with gross NPEs down by €50,000,000,000 We reduced cost, FTEs by 20% and branch by 25% in mature market, always in a socially responsible way. We more than doubled our profitability to an expected 2019 RoTE of above 9%.
And last but not least, we raised more than €13,000,000,000 of capital on the market and an additional €8,000,000,000 for disposals, $8,000,000,000 for disposal, taking our CET1 NDA buffer to the upper end of our 200 to 2 50 basis point range. All this hard work has been acknowledged by the ECB, who informed us yesterday that our SREP pillar 2 requirement will go down by a further 25 basis points to 175 basis points. This is 75 basis points lower than in 2016, an achievement we are very proud of and another recognition of the outstanding work done by the team over these last three years. As a result of all the above, I'm pleased to announce that we will increase our capital distribution for 2019. We will return 40% to our shareholders, 30% as cash dividend and 10% as share buyback.
This is double the initial target we set in 2016. We have clearly shown that no matter what, the environment will deliver on our commitments. Let's turn to slide 7. After successfully concluding our Transform 2019 plan, let's now turn our full attention to the new Team 23. We have based the new plan on 4 pillars.
I will give you selected example of each pillar in a moment. But remember what Joerg said at the beginning of the day, there will be 3 dedicated Capital Market Day in the next 18 months, where the team will deep dive on Western Europe, CEE and the supporting operation. So for those of you interested in more details, especially regarding the first two pillars, will detail, let's have a quick look at our 2023 targets. With the macro environment, which is not supportive of commercial banking, we will deliver resilient underlying profitability that support distribution. Notwithstanding negative rates, low growth and regulatory headwinds, we will be above 8% RoTE in 2023.
We continue to maintain our focus on costs. In 2019, we exceeded cost targets in order to have more IT investment. Throughout the plan, our cost will be stable, thanks to gross cutting of more than €1,000,000,000 At Group level, EFT will be reduced by another 8,000, which for Western Europe means a decrease of 12%. In addition, TIM23 include a group wide closure of around 500 branches, which for Western Europe translate into a 17% decrease. Asset quality will continue to improve, thanks to the full rundown of our non core by 2021.
In 2023, our gross NPE ratio for the group will be below 3.8%. Tangible Equity will grow significantly to €60,000,000,000 We will keep our CET1 MDA buffer between 202.50 basis points at all time, even assuming Basel IV fully loaded in 2023. Underlying net profit will be the basis for our capital distribution to shareholders. By adjusting non operating items, underlying net profit will be resilient. Next year, we expect 4 point €3,000,000,000 of underlying net profit, growing to €5,000,000,000 by 2023.
As already said, our capital distribution will rise to 40% already in 2019. We aim to keep it at this level for the next 3 years, going up to 50% for 2023 as a combination of cash dividend and share buybacks. On this slide, and in particularly on capital underwriting net profit and capital distribution, Mirko will give you more detail in his presentation. Let's move to slide 9. The first pillar is called Grow and Strengthen Client Franchise.
Transform 2019 was primarily about restructuring and reshaping the bank, putting emphasis on capital strengthening and asset quality improvements. Team 23 is about growing and further strengthening our client franchise, thanks to more efficient and streamlined products and services and to increase customer experience. We will, of course, continue to focus on asset quality and ensure we maintain a very strong capital at all times, but no, from a position of strength, thanks to Transform 2019. For this first pillar, I will share some examples. Let's turn to slide 10.
The previous business plan was focused on delivering cost efficiencies and strengthening the balance sheet. Within 23, we are focused on further growing the client franchise. Customer experience will be an increased priority. We measure the Net Promoter Score at different levels from a strategic one to compare with the market to an individual one across dedicated customer journeys. It will also become a KPI in our long term incentive program, as you will see later.
Let's move to slide 11. We are the go to bank for European SMEs, a fast growing segment in both Western Europe and CEE. We already have a long standing advantage, thanks to well established local commercial banks. In Germany, for instance, Uproffereinsbank celebrates its 150th year anniversary this year. We have a unique group wide client model dedicated to SME services, this operational and distribution model we leverage on proprietary CRM tool and digital platform across all geographies.
And last but not least, as you know by now, our CIB is fully plugged in to our commercial banks. Our targeted CIB offer facilitates SME access to global capital market and leverage on best in class CIB expertise. Let's turn to slide 12. As mentioned earlier, you will have the opportunity to deep dive on this topic next year at a dedicated Western European Capital Market Day. Regarding the distribution model, we will see an increased convergence of online and offline channels.
Transaction will continue to migrate to direct channels, supported by our paperless bank project, which I will explain later. We will also continue to redesign the network footprint in Western Europe by changing the mix of branch models, introducing new flexible formats. Our target is to become more efficient and to make our network fully focused on advisory. Our mass market services model will continue to evolve with an improved unique mobile banking app with a single look and feel across the group. More direct customer sales and services, integrated customer management via remote centers and digital analytics.
We have successfully launched a project to identify affluent clients even in our mass market segments to offer them better targeted product and services. We also intend to grow our Wealth Management and Private Banking business, strengthening coverage and enhancing our value proposition, led by additional investments in products and services. Let's turn slide 13. Both CEE and CIB continue to be growth engines with an above average contribution to our overall top line. They are both very efficient businesses with low cost income ratios earning well above their cost of capital.
CEE will build on its leading positions CEE will build on its leading position to fully exploit the growth potential in the countries in which we are present. And CIB will continue to pursue its successfully fully plugged in business model, delivering the full CIB product offerings to our commercial banking clients across the group with leadership position in loans, debt capital market and trade finance in Europe. Let's turn to slide 14. The second pillar is called transform and maximize productivity. As already mentioned, we will always approach this topic from 2 angles: First, how it improves customer experience and second, but equally important, how it helps to further maximize productivity.
Let me share 2 examples with you. Let's turn to slide 15. A great example of our transformation is the Paperless Bank. Leveraging on best in class expertise within the group, we are now going to roll it across our commercial banking network. The Italian retail network will be paperless in the second half of twenty twenty, Austria and Germany in 2021 for key products and CEE by 2023.
It allows us to improve profitability by generating €100,000,000 of cost savings and also improve customer experience. We will measure this using the Net Promoter Score, which we aim to increase by 5 percentage points. Let's turn to slide 16. During Transform 2019, we launched an end to end process optimization project. End to end means continuously focusing on the full value chain and adopting new ways of working that bring together the business, support functions in IT for a common purpose.
As an example, thanks to this approach, we optimized the current account opening process in Germany. What used to take 80 minutes and more than 20 signage shares on 60 pages on paper is not done in 15, 15 minutes and is only one signature on the digital document. As you can imagine, it greatly increased customer experience and our branch managers now have more time for commercial activity. In fact, Commercial Banking Germany now has positive net new clients for the first time in many years. The same process in Croatia takes 4 minutes, so there is still room for improvement.
This improvement will be achieved thanks to active best practice sharing across the group and continuous review of our processes. With these very positive initial results, we have made this approach a permanent part of our setup for 6 key products. This approach will enable us to save cost of more than €60,000,000 across Western Europe and Sea, while also improving customer experience. Let's turn to slide 17. The 3rd pillar is called discipline risk management and controls.
I will give you an overview of some aspects, namely credit and financial risk as well as operational risk and compliance. Let's turn to slide 18. Management of credit and financial risk is at the very heart of what outcome over short term solutions. A large part of our senior management's current compensation is in a 7 year all equity long term incentive plan. The new one will be even longer.
As a consequence, we will not do volume lending. We will not do carry trades. And we will not put risk on the balance sheet that we do not make sense in the longer term. That's why it is of paramount importance to always maintain vigilance and further sharpen our focus on this area. We focus our origination on the best rated clients.
While this may put some pressure on the NII from lower margins, this is more than compensated by increased fees from cost risk. Our general approach to credit underwriting is based on management of expected loss. We also use new technologies such as advanced analytic to support risk monitoring and automated underwriting. Overall, we won the business with robust credit risk strategies and policies and adopt a tight monitoring of the portfolio for clear risk drivers. On NPEs, we continue to have a proactive portfolio management approach, perfected since 20 16, as proven by the rapid non core rundown.
This is also will help us effectively to deal with calendar provisioning. Let's turn to slide 19. Compliance and cybersecurity are always on top of our agenda. We keep improving our processes and investing in IT solutions to strengthen controls. We also explore machine learning techniques, which will allow us to move from sample point in time issue.
We cannot have a control officer behind every employee, but we can have a guardian angel, the culture of the institution. Culture. We run numerous trainings and awareness campaigns on this topic in order to ensure all employees act as the first line of difference for the bank. Let's turn to slide 20. The 4th pillar is called Capital and Balance Sheet Management.
The main part of this pillar is our financial strategy, which will primarily be covered by Mirko in his presentation after the break, so I will be brief. Let's turn to slide 21. One of our key commitments is to maintain a CET1 MDA buffer between 200 to 2 50 basis points. We take a proactive approach to capital allocation, both top down and bottom up. I would like to make clear again that our preference is for share buybacks over M and A as it offered unrevised EPS accretion with 0 execution risk.
In May, we announced we were taking decisive action to increase the flexibility of our group structure. We aligned our domestic sovereign bond portfolio to the average of European peers are between 50% to 60% of tangible equity. We will evolve our group structure with a project to create a non listed sub holding in Italy, hosting our main subsidiaries to optimize our MREL requirement in the medium term. The first step of this reduction of intra group exposure will lead to an improvement of the group resolvability. Let's turn to slide 22.
We have spoken a lot about results and the tangible actions that will lead us to achieve them. But what is equally important is the way in which results are achieved. Values unite us and define our group culture, how we make decision and how we act on them. As one team, one unique credit, we are convinced that our two values represent what is most important for the group and for all our stakeholders today, ethics and respect. A simple guiding principle ensures we follow these values every day and everywhere in our business, do the right thing.
We apply these values and guiding principle to everything we do at all time. Let's turn to slide 23. Ethics and respect do the right thing is at the core of our stakeholder interactions. For investors and shareholders, it means execution, discipline and transparency, favoring long term sustainable outcome over short term solution. For Communities, we will support financial access and inclusion for social impact banking initiative, committing to approve a total financing of €1,000,000,000 in macro credit and impact financing by 2023.
For our colleagues, we create an engaging and positive working environment for dedicated initiative. For our customers, we continuously improve the quality of service and are committed to data protection and confidentiality. For the environment, we want to be a partner in the shift towards a low carbon economy and keep working on reducing our own direct impact. We have also set clear 2023 targets on client financing. For example, we will increase our exposure to the renewable energy sector by 25% by 2023, with an increased energy efficiency loan for Western European customers by around 1 third for SMEs and by 1 quarter for individuals, while increasing CEE new origination to more than 6% of total loans.
Last week, we held a separate event on ESG, at which we announced that we have signed up to the task force on climate related financial disclosures and committed to a wider set of balance sheet targets on ESG. You can find this commitment on our website or by contacting Investor for TIM 23. Let's turn to slide 25. Let me now finish my presentation by reiterating key financial targets for Team 23. Let's turn to slide 25.
As you have seen, we transformed 2019, we successfully delivered the plan, notwithstanding a worse than expected macro environment. In order to make TIM23 as robust as possible, we have used pragmatic macro assumptions that are more conservative than the market expectations. And on top of that, we have run 2 sensitivities to capture uncertainties and volatility in the current market environment. 1 assumes a normalization of interest rate policy. We have called this sensitivity Lagard.
The other assume that negative rates for the duration of the plan will stay. We have called this one Bragi. Our commitment to you, our investors, is that we will deliver the following three item in any of the outcome captured by the sensitivity. 1st, a resilient underlying net profit adjusted for non operating items. 2nd, a capital distribution of 40% for 2020 to 2022 and 50% for 2023.
3rd, a CET1 MDA buffer between 202.50 basis points in every year of the plan. Let's turn to slide 26. Based on Team 23 economic assumptions, we will deliver €16,000,000,000 of value creation to shareholders, €8,000,000,000 of cash dividend and share buybacks, 8,000,000,000 intangible equity growth. The underlying net profit is resilient as we adjust for non operating item such as provision for restructuring, extra LLPs due to regulatory headwinds and the impact from disposal. The underlying net profit in the basis for capital distribution as a combination of cash dividend and share buybacks.
It will grow for 1,300,000,000 in 2020 to 5,000,000,000 in 2023. Our focus on de risking allows us to reach a NPE ratio below 3.8% in 2023 and already below 5.5% at the end of 2019. Our capital generation will allow us to offset regulatory headwinds and maintain a CET1 MDA buffer between 200 to 250 basis points, while having an €8,000,000,000 payout as a combination of cash dividend and share buyback. At the end of the plan, the lower CET1 Pillar 2 requirement of 80 basis points coming from the new CRD 5 regulation will allow us to either absorb the fully loaded impact of Basel 4, FRTB and CVA or potentially to increase our payout ratio further based on prevailing economic environment and regulatory visibility. Let's turn to slide 27.
Before we go to Q and A, let me sum up what we have told you so far today. Within 23, the whole team has made a clear commitment to deliver. We will create €16,000,000,000 of shareholder value, €8,000,000,000 from gross intangible equity and €8,000,000,000 as capital distribution via dividends and share buybacks based on TIM 23 economic assumption. And we commit to do the right thing vis a vis all stakeholders. Thank you very much for your attention.
For the Q and A session on the business strategy, I now ask my colleagues to join me on stage. These are our Head of Growth Investor Relations, the Co CEOs of Western Europe, the co CEOs of CE and our co COOs. Guys, all yours.
Hello again, everyone. Just to clarify a couple of details before we start. So obviously, asking a question, just raise your hand. The ladies will give you a microphone listen in. Please state your name and firm when asking a question, and we'll also answer some questions for those of you who sent them via email.
Please note that in this session, because this one is on business and operations, we will not take questions on financials, but we will do that in the second Q and A session with Merkur's after Merkur's presentation. So I hope everyone is wired up. Nothing is falling down. So I think with that, we can start taking questions
from the audience. Jean Francois? Jean Francois Lemaitre from I just wanted to ask with regards to the recent announcement from the German government and policymakers about European Banking Union Completion. UniCredit is one of the 2, 3 truly pan European banks and one of the key differentiating factor or USP for UniCredit is its pan European corporate lending presence asset there. I just wanted to understand from an operational or from an opportunity set perspective, how that has scope to potentially change and improve all of the projects which have been detailed here?
Thanks.
So just to get this right, how our Western European business can operate across borders?
Essentially, how that would improve your operation from here, if anything, yes.
Yes. So this is for our co CEOs of Western Europe.
As a Pan European Bank, we must say that UniCredit is already working the banking union and the Capital Markets Union. Those are very important words, the statement and development made towards Europe, we may say as far as we are concerned. Our CEO said we have a leadership in Europe, in trade finance, in debt finance, and we are already working the banking union. So for us, this is good news, but this is something that we are already working every day. It has been the case for Transform 'nineteen, it will be the case for Team 'twenty three.
Giovanni? One row further ahead and then Antonio.
Giovanni Raffoli from Equita. I have a question on the commercial business in Europe and especially in Italy, because it seems to me, least this is my perception, that there is given a discussion in place, probably more ground to revision of the pricing policy for traditional banking services in Italy. And I see that you have factored in, if I'm not mistaken, some low single digit growth for the fee income in Italy. You share with if you can share with us what are your thoughts there and what have you factored in, in terms of pricing in the business plan specifically for Italy? And if you can also provide us some flavor also for Germany and Austria on this topic.
Thank you.
Maybe we go to Slide number 12. This is, I think, where you got the fee numbers from, but then Francesco on Italy.
Sure. Thanks for the question. The plan is based on growing the client franchise and on conservative assumptions. This is something that we do throughout the plan. And as you noticed in the numbers, although we won't give you precisely at asset under management from, for example, EUR 226,000,000,000 6% growth with a growing fee of 2%.
So that embeds naturally a certain deterioration or conservative assumption in the pricing environment. Consider where also that with 3 areas of important growth in the client franchise for brevity, I'll mention 2 areas where we expect growth of stock, 1 in bancassurance, in particular in loan life, where we have already a very solid base. And another one was mentioned by Jean Pierre on Wealth Management and Private Banking, where we can extend our presence.
Thank you. Antonio?
Hi, thank you for the presentation. It's Antonio Riale from Morgan Stanley. One question with respect to your loan growth assumptions in Western Europe. I've seen the 3% to 4% CAGR target. My question here is, what's your strategy in terms of achieving that level of loan growth, particularly in terms of how you're thinking between margin preservation and market share gains, which I know you've been pursuing in certain markets and certain products?
And what does it all mean for net interest income across the three regions?
Olivier?
The loan growth, which is envisaged for the overall Western Europe perimeter of Francesco and I is 2% in aggregate. This is breaking down according to the various segment of our customer a little bit differently. For SMEs, we are the go to bank for SMEs. The loan growth will be more substantial, 4%. For individual, it will be 3%.
What is very, very important is that this loan growth, because we are not doing volume lending, is going to be driven in an extremely disciplined approach. This is something that we have proven to deliver in the last plan, and this is what we are going to do this time. To give you an illustration about this discipline, we have been growing the lending business, both in Italy and in Germany this year with a very, very disciplined approach this year, 70% of our loan origination for Corporate Italy was investment grade, and we grew the business. In the last quarter, in Germany, the expected loss of our commercial banking business was 19 basis point 19, very, very low. So we believe with Francesco that we can grow the business more than the overall GDP of Europe, but in an extremely strict and disciplined manner.
Thank you. Yes. Sorry, Domenico.
Hi, good morning. Thanks for the presentation. Domenico Santora, HSBC. I read in the press release that you are basically creating the subordinating subholding or a grouping of the activities ex Italy, but you are not asking for a change in the resolution model yet. So my understanding is that also the financial targets, they do not include any funding synergies or or improvement in the cost of funding.
Can you make some comments on this? And what could be the catalyst instead that could made you ask for a change in the resolution model? Of course, from single point of entry to multiple point of entry.
Okay. Well, thank you very much. I think this is one of the financial questions that we'll write down, we promise, you'll be the first to get answered in the second panel. But that's not business operations, but we will take it for the next one. Maybe there's one from e mail.
So let me just read that and then give it to the panel. The question is, I realize that staying flat on cost is an achievement given underlying cost pressure, but is there any flexibility to cut further should revenue growth not materialize as expected? Now that's for this panel. Carlo?
So first of all, our plan is based on a very conservative growth assumptions. So even more conservative than what the market is assuming for the capability to manage the cost base, even overachieving the initial target. Having said that, we need also to remember that this new plan, as stated in the slide number 10 of our CEO, is moving from a strong cost focus and derisking to a plan of strengthening the franchise and growing the customer base. So within the plan, keeping in mind what we said on revenues, what we said on capability to deliver or over deliver on cost, we need to balance among those two lines.
Thank you. Yes, in the back. Sorry.
Delphine from JPMorgan. Thanks for taking my questions. Just two questions from me, if I may. First of all, on your M and A strategy, so it's very clear you prefer buybacks, but you mentioned small bolt ons. So just trying to understand a little bit of what businesses, what area you would be interested in?
What's the thought process here? And also if you have if we have some progress on the banking union, what are the main hurdles for larger transaction? And again here what's the thought process? The second question is related to your capital requirements which have declined by 25 basis points on the back of all the measures you've done on Transform 2019. You've laid out the direction on team 2023.
I mean, can we expect some further improvement or the bulk of it is already achieved and this P2R will stay at 175? Thank you.
I think the last one will defer to the second panel. But then on the M and A one that obviously has financial implications when it comes to capital allocation, need for bolt on acquisitions from a business perspective and then CEE.
I mean, let me give you a very simple and clear answer. As far as Olivier and I, so Western Europe is concerned, the plan is organic and is organic. Therefore, we plan no acquisition. We have, say, in Italy, 12.5 percent market share. We have, overall, in in Western Europe, 11,000,000 clients.
We believe this is a very solid base to develop our franchise and grow our business. So we'll continue to do in an organic fashion.
As far as NSE is concerned, we may evaluate transactions, bolt on transaction or small portfolios or small institution, but we are talking about small sizes, a few $100,000,000
Thank you. And on the SREP Delfin, we'll remember that.
Yes. Yes. Hi, good morning. It's Ignacio Cerezo from UBS.
A couple of questions.
The first one is on AUM, you're targeting 6% CAGR in the next 4, 5 years in individuals in Slide 12. What kind of market assumptions do you have behind that growth, which is significant acceleration versus recent growth rates? And the second one, if you can comment on whether the fee growth you're targeting implies or includes making corporates pay for the deposits, right, and through net interest income through fees?
So if we can go to Slide 12 maybe because you referred to that. The Western Europe first, but then also CEE because the growth rates, I think, are quite different. So I'm sure you'd want to hear from both of them. So let's start with Western Europe.
Just to give a perspective
about the 3 countries where in Western Europe, Francesco and I are operating, Italy, Germany and Austria in terms of wealth are 40%, four-zero, of European Wealth. Managing wealth and saving is a natural market for UniCredit. As of today, roughly, we got €600,000,000,000 worth of TFAs, out of which €190,000,000,000 in terms of asset management. We believe with Francesco and we are planning a substantial increase, because we believe that we can grow this level of AUM versus our potential through digital distribution on the within individual and a huge effort on private banking and wealth management.
Yes. On CEE, the AUM base is small and will remain small. It is how the market is today. So despite you see this growth of 9%, it will remain small. If you consider that on our total fees, AUM fees represent only 10% of the total for CEE.
Thank
I know it's not a shy audience.
Yes. This is Isradakosse from Daiwa Capital Markets. I was just wondering if you could provide some color on how committed you are to your exposure to Turkey?
Niccolo?
So, first of all, let me state that despite we like Turkey as a country, a young demographic, very entrepreneurial spirit and despite we do like the operational performance of YAPICREDI there, we do allocate capital based on the ability of our businesses Yapiceli. And therefore, we took the decision that you saw Yapiclady. And therefore, we took the decision that you saw on Saturday. And what does translate into 3 main things: 1st of all, we optimize our investment structure in Turkey second, we obviously reduce our direct stake to YAPICAREDI and third, we increased our flexibility to optimize our capital allocation across the businesses.
Hi, good morning. Atzora Goeffi from Citi. I have a question. In light of the regulatory environment that is changing on Basel IV, how does this affect your day to day business and your lending and capital allocation to the different operation? And then a second question, if I may.
How do you split the responsibility within the 2 co head in every division?
So the co head question, I think, is a question to 6 of the gentlemen on the stage. So maybe Carlo can answer that on behalf of the group. And then the other one, I think, is for West and East because it's regulation, how does it affect? Carlo?
So we are co responsible of the same perimeter. The perimeter is a mix of different topics. So we talk about IT, we talk about operation, security, real estate, HR, a very important decision to be taken, we consult each other and we come out with a strong decision. So we believe that in doing this, we can be very to the operational topic, but also balance our decisions in a more structured way.
Okay. Maybe then if on the business side, if CE could answer how regulation affects it and if you have anything to add to how co heads work in CE, but I think that's more a group thing.
And adding, Karl already explained very well, it's very important the communication. So we love each other, that's for sure. On the regulation, as Jean Pierre explained very well, as in Transform 'nineteen, also the new plan will take into account the headwinds coming from regulation. So the business model will not change. TJ will tell you more later.
That's probably the same in Western Europe, right.
I mean, Oli, maybe what we can add is we monitor our portfolio and the effects that regulation has on capital absorption on an extremely granular level. So capital allocation is not only a top down exercise, it's a bottom up exercise, and we expect our customers at single level to repay their cost of capital via an EVA analysis. To make you an example, we are very strict Olivier in monitoring our large corporate business to make sure that the combination of interest income and fees are repaying the cost of capital at single clients over each single period.
Thank you.
Giovanni again.
Sorry, a follow-up question on the branch reduction plan. You've mentioned the 500 branch reduction, if I take it your targets, is it correct to say that this EUR 500,000,000 reduction is concentrated in Italy, Germany and Austria, so does not imply any reduction in Eastern Europe and the same for the 8,000 full time equivalent.
Maybe we quickly go to Page 8 where we mentioned this for our co COOs.
So I will start commenting on the 8,000. The 8,000 is in Western Europe. We as we speak, there are negotiation ongoing with the union. So we don't want to disclose the breakdown. But just as a reminder, the Western Europe workforce is splitted today as 65% in Italy, 25% in Germany, 10% in Austria.
So even though I don't give you the breakdown, you have the magnitude of the components. We do it always in a socially responsible way. So as soon as we will have the information, we will share with you. But I think on the branches, I would pass the floor to my colleagues in Western Europe.
We have 2,000 900 branches, circa in Western Europe, of which 2,400 in Italy. So again, they're not exactly proportional, but you can make roughly that assumption. The reduction comes with also a change in nature and approach of our branches. You may have heard Jean Pierre saying, we want to focus our branches to do advisory activities. We plan to meet 98% of basic transactions out of branches into digital activities and out of the remaining branches, roughly 2 third will be cashless.
So via cash will be handled via ATM machines, but the cash itself will the branch itself will have no cash here. So it's a profound transformation, which we believe goes in the direction of strengthening and facilitating customer journey and dedicating branches only to value added activities.
My name is William Hahn from Standard Chartered Bank.
I've got a question on negative interest rates.
Does the bank still stand by comments made that you intend to pass these on to depositors? And if so, is that something that we would see spread across the group or just in Italy? Could you clarify that, please?
The negative rates, we only enjoy in Western Europe. So that's for our 2 Pro CEOs.
Yes. For individual customers having more than €1,000,000 worth of deposit, which is less than 1% of our customer base, less than 1% we are offering a money market product with a target of 0 plus return and 0 fees charged on this money market. For the additional balance, we are going to have with our customers ad hoc measures that are reflecting the situation of the market. This is applying for our countries. For corporates with higher level of deposit, we are charging an excess liquidity fee, which is discussed at the individual level with each and every corporate being in such a situation with us.
Thank you. Yes.
Hi, good morning. It's Benjie Creel of Sanford at Jefferies. I just had a question on asset quality. So obviously, the 2023 NPL target of less than 3.8% is a little bit above what the current NPL ratio in the core bank is. So I'm just wondering whether, your assumptions, you're embedding a deterioration in the underlying asset quality trends across the group.
And to follow on from that, if I read correctly, I think you're front loading about $1,000,000,000 of provisions in the non core division in the Q4 and then limited losses through 2020, 2020 one. Just wondering if you could give us an update in the runoff strategy for that. Are you planning additional larger sales as a result of those higher provisions or not really? Thank you.
So good things come to those who wait. So we'll have the financial presentation also with the risk topic. So you'll get answers at least to the second part of the question. So I technically defer to the second, but I think we can answer the business aspect of this and Western Europe. So maybe because West always starts, we start with CEE this time.
And then the financial and risk will do, David.
So on CEE, as Jean Pierre was saying, we will not do volume lending. We do have volume targets, but there will be no reason to reach them if, 1st and foremost, we don't stay within our risk targets. This is what we're looking at. This is how we'll manage CE. Across CE, then, T.
J. Later on will explain you better the trends of cost of risk and the trends of R and P ratios.
And Western Europe is long term sustainable as well, I guess?
Well,
team 23 is about growing the further growing the client franchise. We mentioned the 2% loan growth, I. E, we're going to look very, very carefully at the way we underwrite risk and we take them, we put them in the balance sheet. We plan 45 basis points expected loss for Western Europe by the end of the plan. Francesco mentioned class in each country on a monthly basis what we class in each country on a monthly basis, what we originate, what are the risks, what are the various rating cluster.
This is an extremely strong, close, dynamic underwriting and risk taking and market attitude that both and I Francesco and I are having. It's not purely us, it's the whole team that's the way we are running our business and the way we are looking at the risk moving forward.
Okay. Thank you. Maybe in between, I'll have one more from the emails. What kind of IT infrastructure investments are you embedding in the plan? And does your plan include any core banking
presentations, we are actually increasing our IT investments in terms of change. We are going to a €900,000,000 average investment throughout the TIM23 plan. This is a continuous increase vis a vis also the Transform 2019. As we are looking at that, we have a very pragmatic approach on our IT in terms of we are going to modernize our IT landscape with particular attention to the front end client facing systems. We are going to transform our backbone, particularly remaining with the mainframe and the system of record, but decoupling the main frame from some of the applications that are more sensitive from a customer experience standpoint.
And last but not least, we are increasing the IT and business partnership to assure that, of course, the projects that we embark on do have the payback and efficiency effectiveness that we expect. Ultimately, our targets are to increase the resilience of our systems to make sure that we generate productivity as we do our investments in IT. And last but not least, we improve the quality of our IT vis a vis our customers and our internal people.
Thank you.
Jakub Lipka, RBC. A bit of a broad question, but how do you see the customer behavior evolving on the terms of about IT investment, but I do wonder what has changed in terms of average customer going and getting a mortgage at the end of it is all about selling the product. And to what extent this IT investment is putting you well ahead of your peers. So yes, again, I just wanted to understand how the customer behavior has changed, say, in the last 5 years? And how do you expect it to evolve in the let's make it 5 years at the end of the plan, how customers will be banking then?
So you asked a broad question, so you'll get the whole panel. So first on customer behavior, maybe what you've seen change and maybe both Western Europe and CE because it may or may not be different. And then if the co CEOs could say how IT and operations support that change in customer behavior. So let's start from the left.
I just want to give you a short answer to important and very broad question. The change of customer behavior is clearly accelerating. And this plan is, to a large extent, a response to the acceleration. To give you an example, mobile users and a couple of years ago, we made mobile one of our core proposition. Mobile users, active mobile users in Italy, in particular, have gone from 17% to 24% of our customer base in 1 year.
We expect this to go close to 50% within the plan. So 50% of our clients will use mobile, probably this means 60 5% will use digital channels actively in Italy and these percentages are broadly higher in other countries. With the plan, as Jean Pierre mentioned, we expect paperless retail, so every single contract and transaction will be unable to be done in digital. And we expect that, therefore, over 60% of our transactions will be done through digital channels. And as Jean Pierre also said in the presentation, this means our branch networks that we will keep very granular, will be mostly dedicated to advisory activities, which we are going to boost even while reducing FTEs and to value added consultative services.
Briefly, on C, we confirm all the action and trends that Francesco just highlighted. We are expecting an increase on mobile users by 1,200,000 clients. So we will exceed the penetration of 50% during the plan. And obviously, the acceleration will be also boosted by the implementation of PSD2, the Open Banking, which is coming actually has come.
As part of the operation, I think the digital journey of the customer is as much a technology journey, but also is a customer experience that need to be supported, but also by all our processes behind, whether IT and operation. We are using the digitalization also to digitalize and optimize our processes in the back. So to make sure that we support effectively the customer experience, whether it is in the branch, where again, the paperless project has been already highlighted over this multichannel in other type of engagements with the bank, whether mobile or through Internet Banking.
Okay. Do we have one from the if not, I have one from the e mail. There's a question on wealth management. So other banks are putting a key focus on this, why are you not? And here we can maybe Olivier for the
We mentioned already
Go to slide 12, by the way, where there's one. On slide
12, yes. We mentioned already that Italy, Germany and Austria are 40% of European Wealth. It's a natural market for unique credit. Private Banking and Wealth Management as of today are standing for €1,000,000,000 worth of revenues, €1,000,000,000 worth of 1,000,000,000 worth of TFAs. It's a growing market for us.
We are intending to increase by 3%. We are present in 190 locations in Western Europe with more than 1100 bankers, which supported by product specialists in any area. It's a very, very important segment of our effort. It is planned within Transform 'twenty three to be one of the driver of our growth that we envisaging with the Francesco.
Anyone else from the
room? Yes.
Hi, Ignacio.
Yes, it's Ignacio again. Maybe a broad question, but if you can give us some color on which are the countries or the sectors that from a cyclical point of view, you feel there is more
you have to take things very carefully. So when we say we're going to grow in consumer over FME, we do clearly understand the risk behind it. So if there is a downturn effect, obviously, those will be could be hurt. But we also have to understand how we would grow on those areas. We will grow on those areas with our current customers.
Just to give you an idea, today in CEE, consumers average penetration of loan is roughly above 30%, while in consumers only 19%. So we do have a large room of penetrating better our current customers. So this is why our strategy will feel less of a potential downturn. In terms of countries, is usual countries where you can have a less stable economy, where we're taking more careful in how we grow and how the business would grow and you would know the names by yourself meaning.
Let me give you 3 short examples of
how we take it. In lately we've been concentrating our loan issuance by 70% to 80% in rating 1, 2, 3. So we're aggressive in aggressive in proposing our services to the best rating and happy to potentially decrease market share elsewhere. We are also very pricing wise aggressive in mortgages with LTVs at a lower level, while being much less present. And you may notice also in public pricing systems where LTVs exceed some threshold.
Thirdly, we have we are concentrating our consumer credit activity only on existing customers. We don't push consumer credit for customers of which we don't have a long credit history behind. These are 3, among others, of activities we are taking to make sure that we can preserve our asset quality in any cyclical condition.
Thank you. There's one more for our co COOs from the e mail, which is can you elaborate on your artificial intelligence initiatives? You talk about machine learning to identify AML transactions. What else do you do in the field? Do you have an in house team working on AI?
Or do you use 3rd party support?
So in terms of artificial intelligence, we are having 30 plus use cases, which are ongoing, and they are targeting better revenues, more efficient cost base or even better cost of risk. We have a complete floor of colleagues, 100 colleagues, which are focusing on those. We have a partnership also with top notch companies like Palantir in order to do that. I think that would be good if Francesco and Ranieri will explain to you a couple of examples, one on revenues part and the other one on security. So to give you more the sense of what we are doing on this respect.
Yes. In terms of security, anti fraud, clearly, artificial intelligence and machine learning in general, we leverage extensively, particularly with regard to behavioral analytics in order to understand how the behavior of internal people or external people actually is deployed and identify and intercept as quickly as possible what could be obviously fraudulent activity. We do partner with external companies that have a proven track record of technology. But as also Carlos said, we do have an internal team dedicated to developing of artificial intelligence applications.
There's many areas in which we're working on analytics, intensely using our data to better serve our customers. Jean Pierre mentioned one on hidden affluent, that was very successful identifying customers that bank with us on a marginal basis, but in fact have much wider activities that we can target with specific offers. We have worked, among others, for example, on consumer credit to make sure that when we develop preapproval processes on the credit side, we can also target those that not only they're preapproved, but also personal loan so that when we approach customers, we are much more sure that our marketing effort is welcome and it's appropriate.
As you can see, our artificial intelligence is augmented very well by human intelligence.
Related to financial assets and savings of customers, can you please remind us what is your current bank assurance setup in the markets where you're present? And how you plan to grow or change this going forward?
That's both CEE and Western Europe. Let's start with CEE because that's the most recent we renewed.
Yes. So on bank assurance, the business is small today. The customers do not ask much of this business. We have just to give you an idea roughly more than a little bit more than 300,000,000 dollars of premiums collected. So it's a small business.
This is a business that's going to be growing 12%, but from a small base. Now despite this, we believe it's part of the future and therefore we have partnered with 2 very good partners that cover our extensive network and those are Allianz and Generali. The
bank insurance model is one of the driver of our growth with asset management distribution. On asset management, we work with Amundi and on the insurance side, we're working with prime names like Allianz, EPULSI, Ergo, CNP, where we are distributing product, should it be life or non life. This has been an extremely growing area in the past months and in the past years, it's going to be a driver for the future as well. Just to give you an illustration, in a few months' time, we I mean, the network in Italy has distributed MiCare family, which is a non life insurance product. It has been chosen by more than 100,000 customers just in a few
months' time.
So insurance and this within our TIM23 plan and it's going to contribute to the fee generation that Francesco and I are
Could we have the microphone for Giovanni? Yeah. Thank you.
Thank you for taking my question. If we stick to this slide, I'm a little bit confused with the figures that you are showing us in terms of the difference between the AUM in Western Europe and in CEE visavis, for example, the loan book because basically what you are showing us here is that in Western Europe, the loan book is more or less 10 times larger than in CE, but the proportion of the AUM of the CE vis a vis the core Europe is significantly lower. So shall I interpret correctly that you have a target of €4,000,000,000 of AUM end of the period as a stock in CE for the individuals that I think is the bulk of your business visavis 226 in just 3 countries, which are clearly number of population is higher, the GDP per capita is higher, but the gap is extremely larger to me. So you have more, I don't know, 10 countries in Eastern Europe and you just have €4,000,000,000 of AUM in total. Is that correct the way we should look at?
It's correct. As Niccolo mentioned, it's a business which is still growing and we need to grow it well. So we have ambitious plan, but the base is very low. So we start from a low base, and we have a 10% growth ambition, but this is the result. This is the story on the loan book, this is individual.
What the slide show, you see we have a loan book of €66,000,000,000
Do you think there is also an issue of penetration for unit rate or you are more or less in line with the peers here?
We are absolutely in line, if not ahead of the peers.
Because the number of population in Eastern Europe that you have is, I think is more or less comparable with the other three countries.
Less different savings rate and also different pay rate. So the wealth is not distributed as equally as in Western Europe.
I think one important thing to run you to note is that Slides 12 and 11, for example, we give examples of segments, right? So this is SME or individuals. This is not the whole bank, obviously there's corporate, there's multinationals, etcetera. So we picked selective examples of client segments that are relevant obviously for the plant. We got one other question from the email, and we'll start with Western Europe on this.
So the question is, how can we imagine the branch design going forward? Any specialization in the branch design? And then the other question, and that I goes more towards the earlier question asked on bolt on acquisition or changes to the portfolio, which is any view on potential partnerships or joint ventures to boost the growth strategy? I think on the branch design, it's Western Europe only, but on the joint ventures and any partnerships to boost growth, it's also then afterwards for CE. Maybe Francesco first.
Sure. Briefly, I think we can elaborate more during our Mini Capital Market Day that I take pleasure to advertise will take place in the end of Q1 and Olivier and I will run you through more details of our Western European plan. But what is important is branch will be one element of fully integrated multichannel strategy. So the branch is not a standalone, but is part of multichannel offer. I said, probably 1 third chilka of our branches will be full branches, meaning with cashier standard time and all transactions available.
The remaining will go towards a model of cashless, but supported by smart ATM machines with basic advisory and also supporting remote advisory. For example, we boost significantly by close to 2,000 people remote advisory supporting affluent customers both on a remote basis or on premises as they so wish. So you see it as a very integrated strategy with different types of specialized branches.
Olivier, maybe anything on joint ventures and partnerships in Western Did you need that to grow or you grow organically?
I think we mentioned already that Francesco and I, we gave a very, very clear answer about any kind of M and A, we said no. Just Partnerships,
joint ventures is sort of M and A light. So
Then maybe elaborating maybe what has been done in CIB activities, where we have a joint venture with Kepler Cheuvreux, for example, that has been established in 2012, where our equity capital market activities are performed by Unique Credit. We are servicing our customer to raise capital. But Kepler Cheuvreux is distributing what we originate and they are providing the research. It has proven to be extremely successful. We've been, since then, a leader in equity capital market in Italy.
We've been growing up the ladder in Germany, last year number 2 in IPO in Germany. So the business model in terms of aggregating forces is working very, very well and it was a way more efficient way to raise capital for our customer. Another example of joint venture is what we do with Amundi in terms of distribution within the network. Amundi is the largest asset manager in Europe. There's a huge effort to distribute Amundi product within our various networks and the ambitions that we have, Francesco and I, in terms of fee generation, in terms of gross or AUM are reflecting the quality of the work we are doing with them, the quality of the partnership, the interaction.
That's why we believe that such business model, depending on the evolution of the client behavior, from time to time is making a hell of a sense to do things differently in a way better manner.
On the side, I may add, Will commented already on the bolt on acquisition, partnership with Fintech. And I would like to mention an example, we are partnering with Meniga, a Swedish company, which is helping us on the helping us on the front phase for PSD2, and
we are already piloting the platform in Serbia. We're also looking at partnership to increase and grow our customer base, such as in Croatia with a telco company. So those are other partnerships that we're looking at. And any partnership that in the digital arena allows us to simplify our product or increase our customer experience and at the end the NPS, it would be something we're looking into.
Thank you. Yes.
Hi, everybody. Alex Coigna, PM at ODDO. I just have one question relating to payment. Can you just elaborate what is your strategy in that field? I think that you have already sold prior business in Italy.
But can you just tell us what is your strategy in Germany, Austria and even see, are you looking to do more in term of to participate more in term of
Thank you. We not only have co heads of the businesses, we also have co supervisors of the CLB business. So Gianfranco takes care of GTB, which includes payments. So Gianfranco?
First, starting from payment, what we have done, we have been leading the European Banking community in GPI and Distant Payment. We are already up and running in Germany, Italy and Austria And C will follow very soon. In terms of evolution of blockchain payment, we don't believe for the time being that there's any equal to swift to replace the platform because to be very well structured and legally strengthened. So what we are doing, again, for the group, it's not only for country, we are moving on new platform available to everybody.
Do you maybe also want to say something on the partnerships we have with the apples and
Yes, we have been the 1st bank in Italy and now not only in Italy, in Hungary, for example, to cooperation that we have to think of just to follow the flow of the digital channel, which is obviously leading the
industry.
Anyone else? There are some not very shy people in this room who haven't spoken so far. We have one more from the e mail, and then we'll see if we let you off early for the coffee break. This one is for the COOs, which is asking, are your IT assets secure versus most modern day cyber threats?
Well, we continue to invest significantly on IT and cybersecurity. We have increased our spending through every single year throughout the transformed 2018, and we expect to continue increasing every single year as part of the TIM23. We do spend overall in IT on accumulated basis of cash out over CHF 9,000,000,000 of IT spending. That includes both dedicated spending on cybersecurity and data protection as well as all of the IT developments, which are to embed security by design. So we are continually strengthening and putting resources at work in order to increase our cybersecurity defenses.
Thank you. Yes.
Hi, Christian Carrezza, Intermonte. The first question is on Turkey. You said that in the previous plan, transformed 2019, then return on allocated capital was not adequate. Is there any area that you think has to be improved or could be no core anymore in the new plan? And if you can specify in the 2023 targets Turkey stake is included, the 33%.
Second question is on M and A. It's very clear you're not you prefer to do buyback, no execution risk. But if you can give us some criteria, you were supposed to give some criteria on the potential M and A, small or larger M and A in the future in the sense to increase customer base, to deliver better products for the customer and so on?
Thank you for that. On Turkey, I'll give it to Niccolo. And then I think on the M and A, the broad question versus Cielo Eibeg will take that as the first one on the next panel.
Yes. On Turkey, just to clarify, I was not only referring to Transform, but also to TIM 23. So forward looking, we could not ensure that we would have been able to return the cost of equity euro terms. Therefore, it was not a business that could have been sustainable. We could have allocated capital better in other areas and therefore we took the decision we took and we sold a 9% stake of YAPI Credit.
So it's forward looking rather than backward backward
looking. The last question to ask something on business or operations or be silent forever or until the next panel. No? Then I think we'll see you all outside for the coffee break, and we'll be back at 11:15. Thank you.
I hope you enjoyed your coffee break. And now I know this is what you all have been waiting for. I will take you through the financial aspects for Team 23 before Jean Pierre and the CRO, TJ Lim and I will take questions on these topics. But before we start on TIM 23, let me quickly remind you of what we have delivered over the last 3 years, thanks to our successful execution of Transform 2019. We have demonstrated that we know how to execute a strategy even in a rapidly changing and challenging macro environment.
We have demonstrated that we are proactive and transparent. At UniCredit, we say what we do and we do what we say. We have turned the bank around and as a result, we have delivered sustainable returns, leveraging on our extensive and growing client franchise while maintaining our focus on cost optimization and process improvement. And we have materially de risked and strengthened our balance sheet. Thanks to all our hard work, we start TIM 23 at the upper end of our 200 to 2 50 basis points CET1 NDA buffer range.
This will allow us to focus on returning capital to shareholders during the new plan. When we met here 3 years ago, we committed to deliver Transform 2019 and we did so very successfully. So you can trust this team to also deliver our new plan, Team 23. Let's turn to Slide number 3. Transform 2019 was a great success with all key targets met and many being exceeded.
On the asset quality side, we reduced the gross net NPE by close to fiscal year 2019 target by more than 15,000,000,000 On the capital side, we have strengthened our CET1 ratio by more than 200 basis points. In recognition of the derisking and capital strengthening, the ECB as per their SREP letter received yesterday has also lowered our SREP P2R from 200 to 175 basis points. This means that during Transform 2019, our requirement decreased by 75 basis points. This reduction is by far the highest in absolute terms among G SIFIs in Europe. We reduced cost by BRL2.1 billion, lending at BRL10.1 billion, well below the initial target of CAD10.6 billion.
This material cost saving was delivered in Western Europe, where we reduced net FTEs by more than 14,000. We more than tripled our underlying net profit to deliver our fiscal year 2019 target of 4,700,000,000. This is impressive considering the worst and I will now cover these 4 pillars from a financial perspective. Just like Transform 2019, Team 23 is a pragmatic plan with tangible actions based on conservative assumptions. The action in the first pillar will generate a revenue CAGR of 0.8%.
The second pillar translates into a cost CAGR of minus 0.2%. As a result, we will see positive operating leverage in the new plan despite HR and non HR cost inflation. The 3rd pillar is about cost of risk. We have planned it conservatively. In fiscal year expect it will be around 40 basis points.
And the 4th pillar is all about capital and funding. Here, I will illustrate our focus on capital distribution to shareholders. Let's turn to Slide 5. As you can see on the left hand side of our macro assumptions for interest rates are more conservative than the market. As these assumptions are volatile, we have also run 2 sensitivities to illustrate potential alternative outcomes.
You will find the assumption underlying the 2 sensitivities in the annex on Page 26. The more positive one, we have called LAGARD, which stands for interest policy normalization. In that case, we expect short term rates to be close to 0 by 2023. The second, we have called Draghi, and that assumes rates at current level for the life of our plan. That will mean Euribor will stay at minus 50 basis points until 2023.
Let's turn to Slide 6. Before I take you through the various P and L items, let me take a quick look at our overall targets. Our ROTE will be at 8% in 2020 and above 8% in 2023. This is despite persistent negative rates, low growth and future regulatory headwinds. Our cost in 2023 will be stable, slightly down on 2018.
This is thanks to gross cost cuts of €1,000,000,000 over the planned period. In 2019, costs will dip as we cut more costs to invest in IT. As asset quality will continue to improve, thanks to full rundown of non core by the end of 2021, in 2023, our gross NPE ratio for the group will be below 3.8%. Tangible equity will grow significantly, expected to be at $60,000,000,000 at the end of 2020 3. As we said earlier, our CET1 NDA buffer will remain between 202.50 basis points at all times.
The underlying net profit will be the basis for our capital distribution to shareholders. For fiscal year 2019, this number will be €4,700,000,000 Next year, we have guided to 4,300,000,000 growing to 5,000,000,000 by 2023. The tax rate throughout the plan period is at a low 18% to 20%, thanks to DTA write ups in Italy. As mentioned earlier, capital distribution for fiscal year 2019 will be 40%, 30% in cash and 10% in share buybacks. This is double the initial target of 20% announced at the launch of Transform 2019.
We will maintain our capital distribution at the same level for the next 3 years, increasing to 50% by fiscal year 20 23. Let's turn to Slide 7. As we demonstrated with Transform 2019, we executed our strategy and delivered on our commitments despite worse than expected macro and regulatory headwinds. We bring the same commitment to Team 23. We pledge to you our investors and stakeholders that we will deliver Regardless of the outcome between our macroeconomic assumptions and the 2 sensitivities, we will do whatever it takes, keeping our strict risk discipline to deliver the following three items.
A resilient underlying net profit adjusted for non operating items. This will be the basis for capital distribution. I will give you more details on this later. As I said a moment ago, total capital distribution of 40% already in fiscal year 2019, made up of 30% in cash and 10% in share buybacks. We expect to keep that level up to and including fiscal year 2022.
In fiscal year 2023, we will increase the cash element to 40% with a 10% share buyback. Finally, we will maintain a CET1 between 202.50 basis points in every year of the plan. A buffer is a buffer and we will utilize the full range when appropriate. Let's turn to Slide 8. Let's look at our TIM 23 revenue evolution.
In this slide and on the following pages, we will use 2018 as the starting point for the plan as it is the last full financial year for which we have actuals. We also use a perimeter concept to make the past comparable with the future. We described this CMD19 perimeter in the footnote number 1. In short, it assumes that Ocean Breeze, Mediobanca, Fineco and YAPI are not consolidated in our numbers. We did the same for Transform 2019 using the CND 16 perimeter.
Looking at the revenues, you see on the left hand side that we expect a CAGR from 2018 to 2023 of 0.8% for the group. This is made of 0.5% for Western Europe and 2% for CEE, as you would expect from mature markets versus growth economies. Using our current base case, which is more conservative than the forward curve, our NII is expected to go down next year before loan growth and rising rates reverse the trend by 2023. Fees are expected to grow in both absolute and relative terms throughout 2023. Let's turn to Slide 9.
Costs are expected to decrease over the plan with a CAGR of minus 0.2% from 2018 to 2023. This results in a positive operating leverage or draw of 5.2 percentage point over the same period. The overall cost decreases is composed of a CAGR of minus 0.6 percent for Western Europe and plus 1.8 percent for CEE. The latter is well below the expected inflation, while the former includes an impressive €1,000,000,000 gross cost reduction about 12% of 2018 costs. In terms of cost component, HR costs are expected to decrease between 2018 2020 3, helped by FTE reductions of around 8,000 from today.
Non insured expenses will rise throughout the plan as we are increasing IT investments and amortization to support the automatization and digitalization of processes. We will close around 500 branches across the group. Let's turn to Slide 10. Here, you can see a comparison of IT investments between 2019 and Teen 23. The left hand column was the initial plan for Transform 2019.
The middle column is the actual spend and the right hand column is our plan for teen 23. You can draw a number of conclusions from this slide. 1st, we are increasing our IT investment by 17%. 2nd, we already spent more than last 3 years than initially budgeted partially anticipated investment needs for Team 23. 3rd, we are spending the money in different ways more on cybersecurity and productivity, less on regulatory.
The important thing for you to understand is that the significance of the overall amounts invested. Over the life of TIM 23, we will 900,000,000 of which is for change the bank projects, meaning investments. Let's turn to Slide 11. Our risk management continues to be disciplined and conservative as does our planning for cost of risk. There are a number of regulatory headwinds affecting cost of risk in the banking industry, both in the recent past and going forward.
This includes the rollout of new models and the new definition of default. The underlying cost of risk is planned conservatively, rising from 33 basis points in 2018 to 40 basis points in 2023 due to our assumptions on GTV growth. It is still at a low level, 34 basis points in Western Europe and a very good 70 basis points in CE. Let's turn to Slide 12. As we have said before, we will base our capital distribution, both cash dividends and share buybacks on the underlying net profit.
There are strategic reasons to introduce this concept. We want to ensure that the relevant and true profitability important that the number is stable, resilient and predictable. Let me also stress that we will be neutral. This will be neutral for the coupon payments for holders of the 81s and cashes. To calculate underlying net profit, we exclude non operating items from stated profit.
You can find examples of such items in the footnotes on this slide, and the corresponding numbers are in the annex on Page 27. In 2019 2020, this allow us to offset negative impact of provisions for restructuring and the anticipation of provisions for non core. Let's turn to Slide 13. We will create 16,000,000,000 of shareholder value over the life of the plan. This is almost 2 thirds of our current market cap.
We will propose to distribute 8,000,000,000 to shareholders over the financial years 20 2023, 6,000,000,000 in cash and 2,000,000,000 in share buybacks. In addition, our tangible equity almost boost the growth rate for all KPIs that are calculated on a per share basis. Underlying net profit has a CAGR of around 10%. EPS is a CAGR of Chilkat 12%. Tangible equity is a CAGR of 5%, tangible book value per share has a CAGR of Care 6%.
This significant share value creation and capital return is possible, thanks to our sustainable profitability with ROTE at a strong level above 8% for 2023. This has to be seen in the context of upcoming regulatory headwinds. A recent ABA study found that Basel IV alone increases the Rota denominator by 25% for large European banks. All things being equal from a Rota perspective, 8% is the new 10%. Let me turn to Slide 14.
During Transform 2019, we have aggressively reduced exposure in our non core division. Starting from gross non core NPEs of around €50,000,000,000 at the beginning of Transform 2019, we were down to just €11,200,000,000 in the 9 months 2019. And we will below €9,000,000,000 by year end, well below our current guidance. By the end of 2021, we will be at 0. We are taking decisive actions to ensure a smooth non core rundown.
We took the proactive decision to bring forward €1,000,000,000 of loan loss provisions into the 4th Q 2019 for the updated rundown strategy. Future non core loan loss provisions will be therefore not material. This will take the net NPE book value to less than 2,500,000,000 dollars However, the net economic embedded risk economic embedded in the non core rundown will be 0. With these measures, the non core topic is essentially closed and no longer relevant. You can also stop looking at it from a valuation perspective.
The remaining financial The remaining financial impact of non core on group net profit for 2020 2021 is minimal. You can find more details in the earnings on Page 28. Let's turn on Slide 15. The successful runoff on non core is an important element in the overall de risking of the Group. It is also the main driver in the reduction of the Group NPE ratio.
Group gross NPE ratio will be below 5.5% at the end of 2019, at 5 percent in 2020 and below 3.8% in 2023. This is a very impressive journey down more than 75% from our starting point of 16% at the beginning of the previous plan. The net NPE ratio of the group is already well below 3% today and will go down further. The NPE ratios in fiscal year 2020 and beyond are affected by our macroeconomic quarter of quarter of 2020. You can find more details on the latter on the annex on Page 31.
Let's turn to Slide 16. As you know, we do credit underwriting and monitoring based on expected loss. There are 3 key things on this slide. 1st, expected loss is a measure of the stock and it is significantly affected by historical origination as well as conservative regulatory parameters. Hence, it does not reflect the current strict origination practices.
2nd, underlying expected loss is stable at very healthy 40 basis point reflecting strong credit quality. 3rd, this effect will be phased out over time and will allow expected loss to converge towards cost of risk. Let's turn to Slide 17. We are working on the holding project to optimize our MREL requirement in the medium term. This sub holding will be incorporated in Italy and will be not listed.
It will hold all international commercial bank excluding Turkey. UniCredit SPA will remain as the operating holding company of the Italian Commercial Banking Business and the resolution strategy will remain single point of entry. In addition, the group will remain in addition, the group will remain headquartered and listed in Italy. We will, as previously announced, continue to work on the reduction of the intra group exposure and the improvement of the group resolvability. Let's turn to Slide 18.
Our combined funding plan for TLAC and MREL is straightforward. Over the next 4 years, we plan to issue 45,000,000,000 of MREL instruments of which 20,000,000,000 are subordinated. For 2020, we plan BRL13.3 billion in total MREL funding, of which BRL7.3 billion are subordinated. This funding plan assumes a continued single point of entry resolution strategy. As we said at our 3rd Q 2019 results based on our interaction with the resolution authorities, can continue to benefit from the senior bond exemption.
Let's turn to Slide 19. In December 2017, at our last Capital Markets Day, we gave you our estimated projection for the regulatory headwinds for 2017 to 2019 as well as 2020 to 2027. At the time, we were the only bank to give detailed estimates over such a long period. And as you can see from this slide, our predictions were accurate to within a few basis points. This should also give you comfort in our ability to predict the impacts of the headwinds for the new plan.
Let's turn to Slide 20. On this slide, we have updated our regulatory headwind page from December 2017. All banks in Europe are facing regulatory headwinds, but we are the only one who has transparently and regularly impacts of regulatory headwinds and risk weighted asset evolution, which you will also find on Pages 29 to 32 in our annex. The key points to remember are: in the 4th Q, regulatory headwinds are close to 0. TIM23 shows a cumulative negative impact on the CET1 MDA buffer of minus 1.9 percentage points.
This is offset by 1.9 percentage points of net capital generation after organic growth, dividend distribution and share buybacks. As for the period 2024 to 2027, the regulatory headwinds are fully covered by the net capital generation. Let me also briefly comment on the CRD 5. Article 104A in the upcoming directive will allow banks to cover up to 44% of their P2R with subordinated instruments other than CET1. This will allow us to benefit from 80 basis points lower NDA CET1 requirement.
Thanks to this, we can also absorb the Basel IV FRTB and CVA impacts fully loaded by 0.8 percentage points or this could potentially allow us to increase our payout ratio based on the prevailing economic environment and the regulatory visibility as soon as such benefit will be effective, which could be before 2023. Let's turn to Slide 21. The financial strategy of Team 23 will be all focused on shareholder value creation and returning capital, while still maintaining a strong capital position. And the numbers are impressive. We will create €16,000,000,000 of shareholder value over the plan.
This is almost 2 thirds of our current market cap. We will propose to distribute 8,000,000,000 to shareholders for the fiscal year 2020 to 2023. Cash dividends will be 6,000,000,000 out of 8,000,000,000, almost doubling average DPS. Proposed share buyback will be a key component of the return strategy about 8,000,000,000 capital distribution. This will boost in growth in EPS, DPS and tangible book value per share.
Our tangible equity will increase by 8,000,000 from today to the end of 2023 with a tangible book volume per share CAGR of Chirka 5%. Let's turn to Slide 22. On this slide, we have illustrate what our commitment to deliver means in terms of financials. As you can see in all three columns, our plan, Team 23, Draghi and Lagard, we deliver the same capital distribution as percentage of underlying net profit. And we stay in the same CET1MDA buffer range of 200 to 2 50 basis points.
The underlying net profit is resilient and fruit to waste in a tight range of less than 10% regardless of the scenario. The same holds true for the cumulative capital distribution. The distribution will be 40% to 50% in all scenarios. Under TIM23, these assumptions amount to €8,000,000,000 distribution. As you can see, the variation is less than 10% in the Draghi case.
The asymmetry between Lagard and Draghi is because the interest rate increase in Lagard is back end loaded only nearing to 0 in 2023. The full run rate impact will be significantly higher. Let's turn to Slide 23. As we told you at the beginning, we will deliver resilient profitability support a growth capital distribution. RoTE will be at or above 8% for the whole plan.
This is ambitious but tangible goal considering the increased capital requirements from regulatory headwinds. The underlying net profit is resilient post transform 2019. For fiscal year 2019 guidance given at the 2nd Q 2019 results is confirmed at $4,700,000,000 made up of a run rate of $4,300,000,000 and 0.4 1,000,000,000 DTA expected in the 4th Q 2019. For 2020, we continue to expect the same run rate, I. E, an underlying net profit of 4,300,000,000.
By the end of 2023, underlying net profit will reach 5,000,000,000. And during teen 23, we will grow tangible book equity by 8,000,000,000 and return another 8,000,000,000 to shareholders via cash dividends and share buybacks. Let's turn to Slide 24. Before we go to Q and A, let me sum up what we have said today. With the success of Transform 2019, we have proven our ability to execute a financial strategy.
We will create €16,000,000,000 of shareholder value and €8,000,000,000 from growth in tangible book equity and €8,000,000,000 as capital distribution via dividends and share buybacks. And we commit to do the right thing for all our stakeholders at all time. Thank you very much for the attention. Now we have our Q and A session on the financial topics with our CEO, Jean Pierre Moustier and our CRO, TJ Lim.
[SPEAKER JEAN PIERRE ANDRE DE CHALENDAR:]
Thank you very much, Mirko. As promised, we will first answer the questions which were asked during the first part, but which were pertinent for the financial side. The first question from Domenico Santoro was about the sub holding structure and he was asking whether the resolution approach will change and what can be the benefit and what could be potential catalyst to change our resolution approach. Mircot, as you're already warm, maybe I'll let you answer for this question.
Yes. On the international subbalding, of course, we are working on improving our requirements over the medium term. And from this you basically should imply that, 1st of all, from a, let's say, timing perspective, as you know, MREL will be put in place in the second half of twenty twenty two. So we are working on this project. And therefore, what we are right now is to actually continuously take down the infra group that we have among our legal entities.
And this is coming down dramatically when we extract, let's say, the impact of the internal MREL. So from this perspective, this is what you should expect and also this basically determines the time line on potential impacts into the future.
So just to be very clear, single point of entry remains. That's our strategy. We don't change
it.
But we have a duty to our shareholders as we do for CET1 to optimize our ML requirement, which is MDA relevant. So we take actions in order to make sure that we will lower the MREL requirement, which as like for the CET1, Pillar 2, so discretionary components coming from the Single Resolution Board. The more we can show that we reduce intra group exposure, the more we can show that our bank is resolvable, I can tell you will never be resolved because Uniquelit has a very strong capital structure. No, that is very clear. And I can't So that is very clear.
And I can strongly advise you not to read or not to believe what you can have in, if I may say, some local website or Italian press, which always go on the side of conspiracy theory. So we are saying what we do and we are doing what we say. And basically single point of entry, we lower the ML requirement, that's it. Second question was from Delfin Lim about the strip production and is it finished? On this one, I will take it.
First of all, I cannot speak on behalf of the ECB. But you have seen that the ECB has rewarded our actions in order to improve the profile of the bank to take decisive action to maintain our capital level at the upper part of the buffer we have been defining. And we will keep working in order to make sure that we can optimize our capital structure and we shall see what should be the regulatory actions in the future. On the third question from Benjie Kennan Sandfort from Jefferies, It's about the non core bringing forward 1,000,000,000 of LLPs. If we can give an update on the rundown strategy, then we might go to the slide of the non core in Mirko's presentation, which we can put again on the screen.
And I will let TJ to give further detail if needed about the specific non core rundown strategy. TJ?
Thank you, Jean Pierre. As you can see on this slide, we have a clear rundown strategy for non core that has been updated with in Q4 with decisive action. And just as a reminder, we started DKK50 1,000,000,000 at the beginning of this plan, and we have shown as 9 months, DKK11.2 billion, and we've just guided the market to be below $9,000,000,000 by year end. And for as you can see on the right hand side of this slide, we for the below $9,000,000,000 for disposal is roughly about $5,000,000,000 write off $2,000,000,000 which is totally within our control, back to bonus and recovery is considered $2,000,000,000 So 5,000,000,000 really, if you have seen for the plan, we have always over delivered and we have never
And
And just to add on the Q3 this year, we disposed around 5,000,000,000 of NP. So what is planned to be done 2 years, we did it in 1 quarter this year. TJ, you had another question, which is about asset quality and the target of 3.8% of NPE ratio, which is above the NPE of the current core bank, which NPE ratio of the current core bank. So are we embedding reduction in the asset quality across the group? I'll let you comment on that.
Well, firstly, as you've seen, we've guided the market now that our group NP will be below 5.5. And in Q3, the core bank, we're already at 3.6. And if you look at EBA like we're 3.2. Now next year, there's this so called new definition of default that we have to take into account. But if you strip that out through the plan at the end of 2023, we definitely will be below 3.8 and we intend to maintain a very strong asset quality throughout the Team 23 plan.
There is a last question from Christian Carisse from Intermonte about M and A and we're supposed to provide criteria. But we don't provide criteria for M and A because we we prefer share buyback to M and A, there will be no M and A. So that's as simple as that. We said that will be targeted or small bolt on acquisition. And on that, Gianfranco Bizani commented earlier, it's on the CE only.
It might be very small portfolio acquisition or very small acquisition of a couple of €100,000,000 and no more than that. So don't expect us to enter into M and A transaction today, Buying back our shares at the current level is a 0 risk strategy for our shareholder, which has an extremely high EPS accretion. So we just keep focusing on that. This being said, now we are open to questions. So from the room, don't raise your hand all at the same time and from Internet as well.
So wonderful ladies in the room will give the microphone to the first person who raised his or her hand. I'll let you choose.
Hello. This is Axel Finsarouche from JPMorgan. Thanks for taking my questions. So I have three questions. The first one on ratings.
Have you been in close contact with the rating agencies when putting together the business plan? And how do you see these changes from Fitch in terms of methodology and obviously its impact on your IG Tier 2 rating? That's the first one. The second one is regarding YAPI credit. Could we see further reductions in the stake in your Turkish business?
And then last one, given the various details that we have in terms of your funding plans, have you already received your Emerald target for next year? Thank you.
Thank you very much. So for the first question, rating agencies, I will let Mirco comment.
Yes. Of course, we always with all our constituencies, the regulator included, we basically are very transparent with them. And of course, we deliver to what our intentions are. In terms of the connectivity to this to the change in potential methodology from the Tier 2 side, this is not linked to basically our plan. So from that perspective, it's a methodology change.
So it's nothing to do with specific, let's say, issuers. And we will have to see what actually the potential outcome will really be put in place. [SPEAKER JOSE
ANTONIO ALVAREZ
ALVAREZ:] On the second question, YAPI credit, do we have further room for reduction as was commented during the first roundtable? We have shown with the transaction which was announced over the weekend that we have reduced stake holding by 9%. And by owning now directly 32% of the shares of YAPI Credit, we have flexibility to manage our have received our MREL target. We actually issued a press release last night about the MREL target. Just want to say that it does not include the reduction of the P2R, which was announced as well last night as it is it was backward looting.
So you can count on having a lower MREL target for next year, taking into account the reduction of the P2R.
And maybe one more. From a funding plan perspective is exactly what we're talking to consideration in building this funding plan.
Other question? We can have another question from the front and our crews will go at the back.
Thank you for the presentation. Antonio Regale from Morgan Stanley. I have two questions. Actually, one question and one clarification, if I may. The first question is, we've seen a number of years of regulatory headwinds.
And after a number of years of capital buildup, we now infer from your presentation a stabilization on the regulatory headwinds. Do you think we've now reached the peak in terms of regulatory headwinds for the sector? And the second point is on the implementation of CRD V. Now I understand that will start in December of next year already. So if I understand correctly, you're assuming it will take 2 years and possibly more to be implemented.
And if I also take potential phase in Basel IV headwinds, you probably have a buffer that is well above the 2 50 basis points. Now can you help me help us quantify what sort of potential to capital distribution you could see in a scenario that is perhaps a bit less conservative than the one you've assumed? Thank you.
Thank you. I will take these two questions. In terms of regulatory headwinds, it is clear that the ECB and the regulator said that they are done with the regulatory evolution. We have heard some banks saying, oh, we have new regulatory headwinds. This is factually incorrect.
We communicated in December 'seventeen all the regulatory headwinds. We made assumptions, but we know what are the regulatory headwinds. The point is some banks are not communicating that and are not saying, oh, we have increased regulatory requirements, wrong. We have exactly the same regulatory requirement, some committed them, some do, actually one does, it's us. So we think that what we show here is what will happen.
In what we showed between 2017 2019, we were right down to one basis point. The mix was different, 2 10 basis points up and this is what we were predicting. What we are showing here that the regulatory headwinds are covered by our net organic capital generation. So that's how we dimension actually our dividend payout and our share buyback. Now, there is good news.
The good news is coming from the CRD 5. The CRD 5 and you have the detail in the presentation in Annex, allows for the P2R to be filled in for 44% in 81 and Tier 2. 44 percent of 175 basis points is 80 basis points. So instead of having our MDA buffer in fully CET1, it is a de facto increase because we can for the P2R, we can use 80 basis points which will be filled in by 81 and Tier 2. So that mechanically increase our MDA buffer by 80 basis points when the CRD-five will be in place.
So we will move, let's assume we are 250 basis points will be at 3:30. Now, it will be a point of knowing when it will be implemented. As you know, we are always conservative and we put a 2023 implementation date. It is likely it will be earlier, but we don't want to put assumptions which are today not confirmed by the regulator. The CRD5 will be translated into a law by the different countries.
It is not a P2R action. It will become a Pillar 1 issue. It will allow to reduce the MDA. It's an MDA reduction, which mechanically increase the buffer. And we will see what we do.
We'll see what we do based on the current economic environment at the time, based on the regulatory evolution is Basel 3.5 or Basel 4 going to be fully loaded or not. Our assumption in the plan between 2024 and 2017 is that it will be phased in. And based on that, we will decide to either anticipate an increase of the payout ratio and we have 80 basis points to use basically or to decide to grow more the bank or to decide to wait based on Basel IV. It is most likely that we will consider an increase of the payout ratio, but we will deal with that at the time when we will have a complete clarity on the regulation. If we communicate about it, because we think that this will happen at the latest in 2023, but we will see if it happens earlier.
Year. Question at the back.
Aditya from BlackRock. Just wanted a clarification on Slide 20, where you've given the regulatory headwinds and the capital generation, does the how does the full sale of YAPI fit into that slide? Or does it not?
The YAPI, we assume that YAPI will fully deconsolidated with our plan. So basically, this is taken into account into the projection. And we mentioned if you go to the annex, Mirko, I can let you comment on that and the team can put the slide in the annex in terms of the detail of the regulatory of the non operating item on page 27, you see the impact of FCD consolidation. Amir Kho, I'll let you comment on that.
Yes. So you can see that on the right hand side, you have 20 beyond. As Jean Pierre said, we are assuming a regulatory deconsolidation during the plan. And this would be basically the capital impact on one side and also the P and L impact. So on the P and L impact, as you can see, Yapide consolidation minus €3,100,000,000 So it's capital neutral, and this is coming from the recycling of the FX reserve that we build up over time in owning YAPI.
The right hand side, the capital impact of plus 0.07 percent is due to the regulatory deconsolidation of the risk weighted assets of YAPI.
We have if we go to the slide which is about risk weighted asset evolution which is on slide 32 of the documents. You can see as well if the team can go to slide 32 of the documents, you can see as well in terms of risk weighted asset evolution, regulatory headwinds impact risk weighted asset or can impact directly capital, but YAPI, as Mirco mentioned, allows us to deconsolidate these assets as we have an asymmetric consolidation of YAPI today in our account. We are equity consolidated from an accounting point of view and pro rata consolidated from a regulatory point of view. The deconsolidation from a regulatory point of view will free up risk weighted asset to the tune of 70 basis points of CET1 and this is fully taken into account in our regulatory headwinds evolution that you see on Slide 20.
Thank you. That's Slide 32 is a very useful slide. Follow-up question on that is when you've thought about your NII and given the higher RWAs and therefore have you assumed then higher MREL issuance on back of end state RWAs in your NII targets? No,
maybe Maybe, Mirco, let your concern.
Basically, you can go back to exactly the slide Jean Pierre was dealing with the risk weighted asset. These are the risk weighted asset that are part of the plan, and that's how we basically structured our NREL funding plan. So it's based on below it's basically almost €415,000,000,000 in terms of risk weighted assets and that's how it's sized.
[SPEAKER JOSE RAFAEL FERNANDEZ:] So in the plan in terms of MREL, we have taken into account the risk weighted asset evolution. We did not take into account yet the benefit of having the sub holding, which should come toward the end of the plan because it will be a decision of the single Resolution Board and that might take some time. So we did not take any positive impact coming from that. Maybe a question at the front and then we'll go at the middle and then at the back.
Hi, thanks again for the presentation. Santoro, HSBC. Just to be clear on Turkey that I'm a little bit puzzled here. In case you take the stake, so you maintain the stake at 32% because my understanding is that reading the press release of Yabi, there are also some constraints because you need a consent from the from your former Turkish partner. How, I mean, confident you are, based on the discussion with ECB, that you will be able to deconsolidate all the €18,000,000,000 even maintaining €18,000,000,000 risk with the assets, even maintaining the stake, of course?
So this is my first question. The second is on the new definition of defaulted loans. If you can give us the NPE inflation that you expect in Q4. On the risk of the assets, looking at the waterfall in the presentation, there is a minus €15,000,000,000 more or less of mitigation or other saving that you expect from securitization. Can you please comment on that?
And whether there is more to come given that you have been always very conservative on this compared to the other banks in Europe. And then also the 40 bps in terms of loan loss provision, can you give us an idea of what is the NPE inflows behind that number?
Thank you.
Okay. I will let Mirco take the last question, TJ comment on the 40 bps cost of risk and TJ take the new definition of default and I answer for YAPI. As I said, we have now we own directly 32% of YAPI, which gives us more flexibility to manage proactively our capital allocation. If we say that we can deconsolidate it fully YAPI is because On the new definition of that. On the new definition of default, TJ?
[SPEAKER JEAN FRANCOIS
VAN BOXMEER:] On the new definition of default, clearly this coming into force at the end of 2020. We're assuming that excluding this DoD effect, our NPE ratio would actually be quite stable. So you can sort of infer, we don't give exact sort of target. But so throughout the plan, we're assuming the DoD is aligned, the current NP ratio is aligned to the current level.
On risk
weighted asset evolution, you're correct. The $15,000,000,000 is partially through securitization. But then, of course, as you have also heard before with the panel of our co CEOs, we actively manage and proactively manage our risk weighted asset evolution.
On the cost of risk, I think you had a question of the cost of risk, maybe, TJ, you can give more detail about the evolution of the cost of risk and how the 40 basis points is made up as we have a 34 basis point for Western Europe, 70 basis points for sea in 2023. So just show the evolution with the country breakdown in Western Europe, which is relatively relevant.
Yes. Thank you, Jean Pierre. As I think on Slide 11, you can see the cost of risk for the group goes from 34 to 40. And within this, we have built in quite conservative sort of assumption despite the fact that GDP is growing towards the tail end, partly due to the migrate timing, etcetera effect. But just to give you a feel, clearly, Italy, at the end of this year, we're going to forecast in the high 60s.
And at the end of the plan in TIM 23, we will be in the so called mid-70s. So again, conservative assumption. Germany, we're starting with low teens and we will be ending up with mid teens. And Austria, high single digit, we'll be ending up with mid teens and kind of CIB fairly stable and CE, if you've seen, it's quite stable. So within this plan, the cost of risk going up is due to a conservative assumption as the headline say say in terms of our team 23 plan?
I think we have a plan conservatively a slowdown of the economy in 2021. This has a delayed effect on the cost of risk and so the cost of risk is a lagging indicator. This is why we have either a normalization in Austria, for instance, and Germany, or an increase in Italy, as CJ mentioned, in the mid-70s. Actually, we plan 78 basis points of cost of risk in 2023 for Italy, which just takes into account a cycle and the delayed impact on the cost of risk of the cycle. So the 34 basis points we have for Western Europe is actually conservative as are making assumptions of the impact on the slowdown of the economic cycle already, but it's coming from the mix of very low cost of risk countries, Germany and Austria, which are in the mid teens.
Germany will be in our plan at 16 basis points, Austria at 13 by 2023 and Italy at 78. So we are very confident that these projections are conservative. Any other question at the back, you can see some hands.
Parabiraske from Credit Suisse. One question on asset quality and one on capital allocation. Within the 3.8% NPE ratio target that you set for 2023, where do you see the Italian Banking business operating at, including Commercial Banking as well as CIB? And secondly, when you assess the strategy for capital allocation, what cost of capital do you assume for Turkey and for Italy? Thank you.
Thank you very much. I will let TJ comment about the NPE ratio that we have for Commercial Banking Italy. And then, Mirko, on the cost of capital for the group, I think the cost of capital, everybody has his own view in
the market as well. But, T. J, I'll let you comment on the NPE ratio for Italy by 2023. So for the Commercial Banking Italy, as you know, Q3, we are already at 5%. Next year, the NPE ratio will be impacted by the new definition default.
But by the end of the plan in for TIM 2023, we will be at or just below 5 percent as our assumption. And CIB remained fairly stable in sort of Q3 was 2.3%. We expect to be quite stable throughout the plan.
But just because of the definition of default, the NPE ratio in Italy will go up, I mean around 5.5%, 5.7% in 2020 and then we'll go down to below 5% in 20 23. So that's and it's because of the new definition of default which brings more or less around 1,000,000,000 if I may say of new NPEs in the way we consider them. So there's no change the profile and the credit quality of the group. It's just different measures. Mikko, on the cost of equity?
Yes. In terms of cost of equity, first of all, we use, let's say, a capping methodology internally. And as Jean Pierre was saying, every, let's say, analyst and also every company is using a slightly different methodology. For us, it's extremely important because we look to match the return on allocated capital versus the cost of equity on a local basis to make sure that we are returning that. And that was exactly the example on YAPI.
In terms of YAPI, we are not publicizing the number. But as you can imagine from what we have said, what we experienced and what we are going to experience through the cycle to the plan, we are not matching the cost of capital from a euro perspective. And that's how we measure every business that we have and every, let's say, legal entity that we have.
If we were looking at fully deconsolidating YAPI from the group, the impact on the cost of equity for the CEE division will be a reduction of 2% at a Group level of 0.6% based on our own measures. Afterwards, everybody can you about it, but that's the way we look at it.
Andrea Hunserta from Credit Suisse. Thank you for I have 2 clarifications and 2 questions. The clarifications are on capital. Am I understand correctly that you basically believe that the new benchmark of CET1 will be around 11.7% on a post Basel IV, post CRD V world for the sector? And then if I go back to your slide 32, you're talking about €40,000,000,000 impact on risk weighted assets from regulation.
Am I correct to calculate that this is roughly 120 basis points, so there are 70 basis points from regulatory impacts coming on the capital side as a capital deduction? And then my questions are the first one, if you could walk us through your NII expectations and if you could somehow quantify what kind of benefit you would expect from the new subholding? And the last one is on the cost of risk. If I compare your guidance by geography, the one that has changed the most is CEE, which you're reducing from a previous 100 basis points guidance to now 70 basis points. Can you walk us through what has changed there?
Thank you.
Thank you very much. So, let me take the first question on capital, then I will let TJ comment on the Slide 42, Mirko on the NII and TJ on the cost of risk evolution on the C side. On the capital side, you're correct that if you mechanically apply the 80 basis point benefit coming from CRD5. If we have a CD1 absolute level of 12.5, if you deduct 80 basis exactly the same CET1 buffer, because as we said, the CRD5 will lower the MDA requirement, which basically will improve the CET1 buffer. So the question and that will be a good question to ask is to know whether or not we want to manage only the CET1 buffer or the absolute CET1 level when this new regulation comes in to impact.
Let's wait for the regulation to happen and then we will debrief you on our own views. On the second point, I'll let TJ comment on the Slide 42, if the team can bring us there, on the RMB40 1,000,000,000 regulatory impact and impact taken for capital.
Yes, on slide 32, as you can see, the regulatory headwind we are projecting below SEK40 1,000,000,000. Now if you go into page 29, this compose of all of the regulatory impact from regulation model, procyclicality, EBA guideline, calendar, FRTB and Basel IV. And this adds up really to roughly about 1.9%. There are some clearly inherent also built in, not like for like, but this all of the regulatory headwind, because some of the regulatory headwind that you see in capital impact will also be impacted through the shortfall.
So basically, the regulatory impact as mentioned by TJ not only impact risk weighted assets, but in various ways can impact the capital or actually the net income directly as we have some additional LLPs, which can impact the net income, but we are taking their actions and it's on page 27 to actually adjust them from the underlying net income.
And what is 70% is on the so called RWA 30% on a shortfall submit?
If you want to have more detail about it, I mean, feel free to call our IR team or to speak directly to the guru of regulatory evolution, TJ Dimbusier or Aurelio Macario, our Head of Institutional Business. I'll let Mierko comment on the NII.
On the NII side, first of all, from a loan growth perspective, we have a healthy loan growth across the plan. In terms of client rates, we are seeing some, let's say, pressure. And you can see it already in 2019 that will continue in 20 20 because of TLTRO 3. So the competitive environment is there. So we are seeing some pressure on client rate that then will improve as we go through our macro environment improvement in terms of the Euribor.
So that will improve through the plan. From replicating an investment portfolio, they're, of course, having lower Euribor rates. This is slightly depressing, the NII. But on the other side, cost of funding is improving because of the current rates impact on our cost of funding.
And to answer your question about subholding, we are not taking into account in our NII projection for the plan any improvement coming from an improvement of the ML requirement As I said, MREL will come into effect by mid-twenty 22, and it will take time to work out with the SRB any potential benefit. TJ, on the cost of risk, we had a question on CEE mostly. Yes. On the cost
of risk for CEE, firstly, we have built in a fairly conservative assumption to the TIM23 plan. But if you look in the last few years, we've always been like in 2018, the cost of risk was 70 3, 'nineteen, we're forecasting to be around 69, so we're fairly comfortable that even though the new definition of default will have very little impact for CE and the model are particularly on the standardized. So we feel very, very comfortable CE will land in the low 70s and the landing point as we've shown, if Jean Pierre mentioned earlier, is going to be at around 70 for 2023.
Any other question? Let's go at the front here on this side, I've heard at the back and then we finish in the middle.
Hi, it's Zohr. A couple of one clarification on the AT1. Given the benefit from the CRD V, it's fair to assume that you will have more AT1 with the cost change significantly? And then 2 things. One is on the sovereign.
What are the sovereign assumption you made into the plan? And what is the percentage of sovereign on the total asset that you will have at the end of the plan. And then on the net profit, if I look at your 2020 target, it's €4,300,000,000 of adjusted net profit. At the end, it's around €5,000,000,000 1,500,000 comes from lower non core losses. If you can give us some color on what are the others within the different division and if there is any change in the capital allocation of the various division?
Thank you.
Thank you. I will let Mirco comment first on the question on AT1 and CRD5. Yes. On the 81 side, yes, you're correct. If CRD5 is implemented, we will have €1,250,000,000 more 81,000,000 to do and €1,750,000,000 in Tier 2.
This is not embedded in the plan. First of all, the 81s are equity treated, so are not going to impact our net income. So it goes directly to equity. So the impact is simply coming or will come, in that case, it happens from the extra Tier 2 that we need to issue.
On the sovereign side, we said that we want to reach a level which will be in line with the European average of 50 to 60 basis points. We should have, as you have seen, a tangible equity of BRL60 1,000,000,000 by 2023, 50 percent of BRL60 1,000,000,000 is BRL30 1,000,000,000. So that's why the BTP is concerned, you have an answer basically. I think it's important to look at this evolution because you have seen the non proposal of Ms. Mr.
Schultz. It's likely that the Euro Group will come up with some proposal. There were some rumors and some discussion of what could be done. So I think the non letter of Minister Schultz will accelerate basically the regulatory view of what to do and how to deal with the sovereign portfolio. So what we have planned and we have announced in March of this year in terms of improvement of the profile of the group is actually an anticipation of what could happen.
And I think it's something which is fully costed in our plan in terms of reduction of the NII is part of the evolution of the risk profile. Now there was a question earlier about do we want to develop the insurance business, whatever. We think that the regulatory evolution of the government bond concentration is actually a very interesting one when you look at what is a bank and what you're going to include into the definition of the bank and the sovereign exposure. What I mean by that is for banks which benefit from the Danish Compromise, you double count the capital between the bank and the insurance company. With the proposal coming from Minister Schulz or what the euro wants to do, you cannot double count the capital and only look at the government bond exposure on one side of the entity which is the bank.
So you will need to look at that on a consolidated basis or you will have to give up the Ganesh compromise. I cannot see how it can be done differently. We don't care. We don't have an insurance company. But I think you we because the perimeter will change and clearly will impact other banks.
As we said, we have a strategy which is to make sure that we outsource and we optimize our product factories, we think is the right strategy actually. On the macro evolution and what we see in terms of the component which help us move to the 5,000,000,000 net income, I think that you have seen in our projection that we have some kind of improvement in our conservative assumption, are more conservative than the market by 2023 of the Euribor. So, which should allow us with Euribor going back to 40 basis points or so to improve our NII. So, combination of client loan volume growth of the client rate and the NII will benefit from the slightly less negative rates. The fees will continue to grow at a growth which is very equivalent to the nominal growth of the economy and the net income will be in line with what we have in 2019, while the cost will be marginally lower, as we said, versus 2018, we have the cost of free.
So all that allows us to reach a consolidated net profit around €5,000,000,000 knowing that our tax rate over the period, which is an important component, our tax rate between 2020 2023 will be between 19% to 20%. So in other words, in the period, we have a lower tax rate because thanks to the sustainable net income that we show will be able to write up DTA, so which will lower our tax rate, which you should put in your model between 19% to 20% over the period. Other questions? I think we took many questions on this side. So let's take a question on the other side and then we go back to this side.
Jakob Liefon, RBC, again. So a few questions. One is on CRD V and the issuance expectations for Capital Instruments 81 Tier 2. Do the issuance expectations already factor in the fact that you'll be able to make a use of Article 104 by 2023? And in relation to that, what is the probability of issuing 81s and Tier 2 into this bucket already in 2020?
And the second question, one thing I feel that might have held up your spreads was volatility of CET1 with respect to BTPs. Were you able to give us some comfort that your CET1 volatility will be a bit lower during this business plan? And potentially, are you able to disclose in some way in the future those sensitivities? Thank you.
But just for the last question, if I understand properly, you want to have the sensitivity of our CET1 coming from BTP. We always disclose it. We said in November last year that we were willing to reduce it by 1 third. We are today post tax at 17 basis points sensitivity for 100 basis points of the B2B spread. So 1.7 for 100 basically.
And it will keep going down with the reduction of our portfolio over time. On the CRD5 capital instrument, I'll let Mirco comment.
Yes. First of all, it's not embedded in the plan. We're talking about 3,000,000,000 in additional funding between the 81 and the Tier 2, as I said before. This is very feasible. And then now it simply depends on the implementation.
If it gets implemented, let's say, theoretically in 2021, we would be able to anticipate an AT1 transaction in 2020 or 80
basis 80 basis points lower CET1 level, where MDA is something which is very easy to do for us. And you have seen that we are always willing to anticipate when we can the future issuance when we have a good window. And we did that for Tier 2 actually on the Q3. And each time we have a good window, we'd rather use the window rather than wait to marginally optimize the cost of funding. Many hands raised on this side.
Thank you. Andrea Fitri from Mediobanca. First question is that regulators are recognizing your improvements and derisking by progressively reducing the P2R. What would you need to see to reduce your MDA buffer accordingly? And could you specify if the upper end of the buffer means being at 2 50 basis points or between 226 250 percent?
Secondly, are you actually extending the buyback pro rata also to the cashes? And can you elaborate more on the cost benefit analysis of implementing a subholding where you're moving to an NPE model, which you said you're not. But if you were, what would be the cost benefit analysis there? And how significant would be the benefits to the MREL requirement in the medium term? Thank you.
Thank you. I will take these two questions. Upper part of the range is between $226,000,000 to $250,000,000 actually, that's, if I may say, mechanical. So the answer is yes, it's between 2.26,000,000 2.50,000,000 On the buyback to the cashier, the answer is no. On the sub holding MPE, we said our strategy is to be SPE.
So we don't do any cost benefit because we remain SPE and we just want to make that very, very clear. We remain SPE, but by creating having the project to create this building, we want to make sure that we can positively influence our MREL requirement and lower EBIT, which will mean that we will have to issue less MREL eligible securities in the future.
Delphine Li from JPMorgan. Just three quick questions. First of all, would it be possible to get a little bit of a sense of what you're assuming on funding costs for CDS spreads for the MREL, well, TLAC compliant instruments? Are you assuming similar level to where we are currently at? 2nd 60 basis points versus your 40 basis points every year.
Can you just detail a little bit the moving parts? I guess there's probably YAPI in it, but if you just can explain it a little bit. Thirdly, on slide 22, just trying to understand your downside scenario from Draghi maintaining the current policy. The upside is easy to understand, but I'm not sure about the downside. I mean, keeping at 50 basis points, minus 50 basis points would have €500,000,000 net profit impact, if you can just elaborate a little bit on that.
Thank you.
Thank you. I will let Mirco answer for the first question. Maybe TJ no, actually, Mirco for the second. And Walid there he can answer as well on the 3rd. So, Mirco you're going to be busy.
Just while he prepares you on the first two questions, me remind you that the Draghi scenario is not only a rate scenario, but it's also taking into account a lower economic environment. So we have a more negative impact coming from lower growth. And we take proactive actions in order to mitigate this environment. And so basically don't apply only in your model just the right assumption, but take into account that GDP will be lower, but that we will impact proactive actions from a managerial point of view to improve that. Now I'll let Mirko comment on the 3 questions.
Yes. On the funding cost, basically, we are assuming a BTP bond level of across the plan of 150,000,000 and that's how we are basing basically the spreads. Interesting maybe to look at the impact or, let's say, the 20%, 30% lower the funding cost is coming down. So we're talking 20%, 30% lower funding cost. On the capital generation, we have in there, of course, during the plan, the regulatory deconsolidation of the Yapi.
So that's in there. The normal evolution of our plan is also in there. On the Draghi upside versus Lagard, the delta seems, let's say, optically small, if you look at it. The reason is that on one side, Lagard has an improvement in Euribor only in the last year. So that's one side of the lag.
On the dragging side, of course, we are taking managerial decisions in the drug scenario to reduce cost, to also make sure that we improve basically the performance of the bank. So the delta between the two is optically low because we are taking steps in order to manage the drug scenario.
And on the Lagard, as Mirko mentioned, the improvement of the rate is coming in 2023 at the end of the year. So the full year impact in 2024 will be much higher. So that explains as well a difference.
Yeah. Kian Wursen, JPMorgan. Euros 28,000,000,000 market cap, euros 16,000,000,000 buyback. If you adjust for the P2R, you get to $19,000,000,000 buyback, about 2 third of your market cap over a short period of time. The question here is clearly you're returning a lot of capital, but at the same time sorry, total shareholder return, not just buyback.
You're returning a lot of capital, but the bigger question is also what happens to your ROE, which is 8 plus adjusted for below the line charges is 7 plus. How can we see a double digit figure in the ROE? What has to happen beside economic scenario changes? What can you do within the bank to change that?
[SPEAKER JOSE MARIA ALVAREZ DE SOTO:]
I think that we communicate about value creation, so between shareholder distribution, dividend payments and share buyback and tangible equity evolution. Because when you look at the overall evolution for banks in Europe, it's not Uniquelit specific. If you believe the EBA impact study on Basel IV, the regulatory capital will increase by 20 5%. 1 over 125 is 0.8%. So, mechanically, the RoTE because the E is increasing will go down by 20%.
This is why we said 8% in the new 10%. Don't expect our OT to be double digit. That will not happen. Our RoTE based on the capital level of today would be double digit. But because of the increase of tangible equity, you have a mechanical impact on the RoTE.
And I think it is important to look at the performance of banks, because it's not a unique credit specific issue in light of the increase of regulatory requirement as the value creation between tangible equity increase, so how much you build into a tangible equity versus distribution. You have a certain number of banks or companies which increase their payouts, but don't increase their tangible equity or actually from time to time decrease their tangible equity. That's value destruction for the shareholders. And so we not only increase the payout, we will be to 40% and 50%, where we increase the tangible equity as well. And I think that's the proper metrics to look at banks in Europe.
This is why I'm not saying it's not a unique credit specific issue. It's a bank issue. So that will be my answer to your point. And we want to be honest with our shareholders. And we are not going to pretend that we can be double digit.
I have seen very, very few banks achieving double digit RoTE, while many banks were claiming to be able to deliver that. With UniCredit, what you see is what you get and we always give you a clear and transparent view of what we expect for our profitability. Yes, we have a question here at the front or maybe one at the back and then one at the front here.
Here. This is Ignacio Del Cereza from UBS. Three questions from me. First one is on net interest income. All else equal, do you think 2020 is the floor in terms of NII?
2nd question would be on fees, if you can give us a bit of color in terms of fee growth breakdown between transaction and financing and market fees? And the third one, if you have received authorization for the buyback from the ECB? Thank you.
[SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] Thank you. Well, just on the buyback from ECB, we will engage with the ECB once the decision is made by our board and EGM to go for a buyback. And if we are mentioning it, it's because we feel that we have grounds to engage with the ECB. I will not elaborate more because I do not comment about my regulator. On the NII, you're right, based on the various assumptions we have, we should see in 2020 2021, actually it goes to 2021, a low of the NII, which will go back up afterwards for a combination of commercial actions as well as rate evolution.
But let me comment about the current market forward versus our own evolution. We are more conservative than the market. If we were to apply the forward as they are today, the EuroIBOR, the 10 year swap or the BTP Bund Spread, we will have a positive impact on our net income. If you just look at what it means in terms of the NII, applying the forward in 2020 means that our NII will be up by will be more or less at par with 2019. We think will be more or less at par with 2019.
We think the forward are maybe a bit too optimistic or we take a more conservative view and we will see what happens. As far as the fees are concerned, we said that we have a fee growth which is in line with the nominal growth of the economy. So take it between 2018 201823 at around 2%, which could be a good approximation. We have a question at the front, it's here Jean Francois, just at the front here. Okay, take a question at the back and then you'll have a question here, please.
Hello. It's Corin Cunningham with Autonomous. Just like to ask some questions about Slide 18. Specifically, you have other MREL content there. So you've got the senior preferred exemption and then you've got other MREL eligible instruments.
So just like a bit more color about what you include there, whether that includes any retail debt, whether it includes any corporate deposits. And then also just a bit of maybe insight into how the conversation goes with the SRB when you're putting together the resolution plan because clearly, in Italy, so far, regulators and the banks themselves have bent over backwards not to bail in anything that's remotely senior or deposit like. And even there's there are qualms over bailing in Tier 2 sometimes. So bearing them on whatever you're going to say in terms of what's in the extra bucket there, is it realistic to expect that those non subordinated instruments would actually ever really get bailed in?
Well, just on I will let Nico comment on the various eligible instruments. But let me say a few things. I have specifically since I joined UniCredit, made sure that we don't place into our network to our retail clients any of our securities to the retail client for the private banking and we place regularly a structured product to well informed clients. So this is MiFID compliant, but we don't sell even senior preferred in our network to our clients, not to say Tier 2 or 81 of course. And we have a confirmation that we can benefit from the senior preferred exemption as well.
As far as TLAC is concerned, it was a question which was raised by some analysts, the 3.5% senior preferred exemption is validated. But I'll let Mierko comment on the breakdown of eligible instruments.
Yes. On the eligible instruments, it's a mix between senior debt and also, let's say, certificates. And basically, that's the mix that we're using.
But none of it is placed with our retail clients, none of it. [SPEAKER JOSE RAFAEL
FERNANDEZ:] It's capital guaranteed instruments basically.
Any other questions, yes, Jean Francois, do you have the microphone, we'll get there.
Can I go?
Oh, yes, please go ahead. Thank you.
A couple of questions. The first one is about the systemic charges which represent a significant cost to unit credit P and L. I was wondering whether shall we assume stability over the planned 2023 of the strategic of the systemic charges? And is there a way some managerial actions, something that you can do in order to reduce this €800,000,000 plus cost per year, which contributes to deflate significantly your bottom line? And the second question is about regulation.
I don't know whether is it possible to extrapolate from the various regulatory headwinds in, I think, 2022, 2023, what is the impact of the 2019 SREP recommendations on the stock of NPE? That basically, last year we were we know that the ECB asked to the banks to basically bring the coverage of high vintage loan to 100%. And the very last question on the buyback, you are about to clearly call the EGM to approve this plan, if I'm not mistaken. And are you about to also apply to the ECB for the full amount of the buyback? So what's going to be the regulatory treatment for the buyback?
So are you about to suffer the full 10% share buyback impact on the capital in 2020? Or is this going to be split over the next 4 years? Thank you.
I'll just take the last question. We'll let TJ answer to your second question, which I think is more into calendar provisioning and the impact of calendar provisioning. And I will let Nico comment on the first one about seismic charges. On the buyback, it's a year by year agreement from the ECB. So there is no capital deduction of the full buyback plan.
Every year, we will have to apply to the ECB to get their validation. That's the way it works basically. So that's the way we will do it and the buyback can only work if we have on one side the AGM approving it and on the other side the regulator. On the calendar provisioning impact, TJ, I'll let you comment and maybe we can go to the detailed slide of regulatory impact that we have in the presentation of Mirco, which if I'm mistaken is on slide 29.
As you can see, 29, in CMD 17, we actually said the calendar provisioning was around the low 40s. Now this is for flows at that point in time and since then ECB has introduced also the calendar for the stock. And we have estimated for stock through the plan that it will cost us in the so called low single digit basis points. So we are this is partly in part due to our very decisive way we have dealt with the North calls. I think we are the only bank that have a real plan to run down the non call.
Now obviously, it also affect the call, but effectively, the calendar provisioning for the stock is in the low single annual single basis points during the plan for TIM23.
Merkru, on the
systemic charges? On systemic charges, it's correct to assume a slight reduction in terms of systemic charges over the plan. And it's not very material, meaning it's a mix between bank levies and lower bank levies and lower SRF charges versus higher DGS in CEE.
Next question, Jean Francois.
So, the question is on my first question is on the regulatory headwinds. So, you've disclosed all the gross capital regulatory headwinds. Many banks in the sector and in particular in Italy also talk sometimes about the mitigation directly related to these headwinds, such as, for example, loss waivers for large sales, also explanation potential for calendar provisioning as opposed to provisioning, so I think there is an option to explain, or potential change in the way that recovery processes happen, is anything of that included in the plan? And could you please shed more colors on that? Secondly, on the net interest income, on the commercial margins applied to loans in Italy, it seems to me according to the ECB data that this is where the competition is the fiercest.
I just wanted to understand what you've assumed in your plan and whether you expect the regulatory headwinds, which are not specific to UniCredit to essentially change that behavior locally? And lastly, it looks like your trading income that you've assumed is similar to 2018 throughout the plan. This was the year where the capital pressure was at its peak in terms of volatility. Do you feel that you were held back then and is there any essentially room to trade better going forward? Thank you.
Thank you. On the regulatory headwinds, I will let TJ comment on the large disposal provision and the calendar provisioning. So that's on the slide 29, if the team can put back the slide on the screen.
TJ? Thank you, Xiaampia. As you mentioned, there's really no waiver per se. The Article 500 that just came out in June of this year effectively allow banks for massive disposal treatment to build that into the model. And we have taken this into account.
I think if you look through the plan, it will be sort of in the around the 20 plus basis points throughout sort of the plan. And for calendar provisioning, we because of the stock and the calendar, we have really obviously, the non core rundown has really helped in the on the stock front. And for the calendar, going forward, we will look at it between the price difference between value and the timing of when the disposal by expect this space to change the way bank handle the NPE management.
On the NII evolution in Italy,
ERCO? On the NII side, you're correct, meaning the trends that you have seen, let's say, in our 3rd Q results are the reality. And so we see that trend to continue into 2020. And we see basically a bottoming out around 2021, somewhere in 2021. So that's the assumptions that we have taken.
On the trading income side, we were guiding between $300,000,000 $350,000,000 a quarter in the past. Probably, that's a good to be using going forward.
But just on the NII side, we mentioned in the presentation that we do not do volume lending, we do not do carry trade, and we do not put in the balance sheet any items which will negatively impact our profile. I will, in the conclusion, show you the new long term incentive plan of the management. We have very long term incentive plan. The new one is 9 years. The current one is 7 years.
So we don't look at short term impact on our NII, our net income, because this short term impact is either zero value for the shares or have a very strong negative impact going forward. So we are long term shareholders, 100% of the remuneration of the top management and mine is in equities. And so we make sure we deliver value for the shareholders and we are fully aligned. The first line has 50% of its remuneration into the LTIP. And so everybody behave in a very aligned way with the shareholders.
So we don't do what other banks could do and we look always for sustainable long term outcome rather than short term fixes. On the trading income,
A very, very quick follow-up on buybacks. Can you confirm that you will be canceling the shares and that the bolt on acquisitions do not go against the dividend and buyback targets?
[SPEAKER JEAN FRANCOIS XAVIER BOUVIGNIES:] On buybacks, we will cancel the shares and the bolt on acquisition do not go against that. So, yes, yes. Any other question? You need to have other question because the pasta are not completely cooked. So we need to wait for 1
Alberto Gordaro, Merrill Lynch. Just a couple of clarifications. The first one is regarding YAPI. You're assuming the plan a deconsolidation of risk weighted assets. So the question is, what is the percentage of YAPI you need to sell in order to deconsolidate?
I assume it's not 100%. So I just would like to know if there is any YAP earnings in the plan going forward and what is your assumption there, if possible? And the second question more broadly, I was comparing Slide 22 to Slide 26 of the percentage from MIRKO. And indeed, it looks like there are different assumptions, not only in terms of your average, but also in terms of growth between Draghi, Lagard and your central case. So just to clarify, can you elaborate on the sensitivity just to interest rates?
So if you have a plus 10 bps or minus 10 bps or plus 100, plus minus 100, how much your NIM will be impacted? Thank you.
Yes. I'll take the first one and Mirko will comment on the second one. As I said, we sold 9% of Yapie and to Coach over the weekend, we own 32% of the shares and that will give us more flexibility in terms of capital allocation. And we said that we expect to have a full deconsolidation of Xepi. We are in discussion with the ECB and I will not comment more than that.
On the sensitivity to interest rate is 10 percentage delta is approximately 100,000,000 on average is 125,000,000 in NII.
Any other question? I think there is no more question. So you either are exhausted or extremely hungry, but you have to bear with me for a few more minutes as I will make a very short presentation for the conclusion. If the team can put the conclusion slide, that could be marginally helpful. I think the back room went for lunch already.
So can the team in the back room put the conclusion slide? Thank you. So before we go for lunch, I would like to quickly take you through the updates of our long term incentive plan or the LTIP. The key pillar of the incentive plan remain unchanged compared to the current plan. It will continue to ensure, as I said, that the interest of our top management and our stakeholders remain fully aligned as well as reward long term sustainable performance and value creation.
Let's move to slide 3. As you can see, the LTIP framework is broadly the same. It is still 100% equity plan, representing 100% of the variable compensation of the CEO and 50% for the top management and the lower variable rate for the other executive. The duration of the LTIP has increased from 7 to 9 years to consider the longer length of the plan as well as to confirm the long term commitment of the senior management of the Group. The KPIs again cover profitability, asset quality and cost as per the previous plan.
For the first time, we have also introduced in the long term incentive plan, sustainability KPIs into the scorecard to reflect our firm commitment to ESG topics, the renewed focus on improved customer experience our dedication to the team. Let's move to slide 4. Let me sum up again what we told you today. With TIM 23, the whole team has made a clear commitment to deliver. We will create €16,000,000,000 of shareholder value, €8,000,000,000 from gross intangible equity and 8,000,000,000 as capital distribution via dividends or share buybacks based on Thank you very much for your attention.
We will be delighted if you have time to join us for lunch, which will be served in one of the next rooms. Thank you and enjoy the day. Thank you.