Ladies and gentlemen, good morning. Thank you very much for joining us today at our Capital Markets Day 2019 in London. After having successfully concluded Transform 2019, it's time for us to introduce our new four-year plan, Team 23. As 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 three presentations today, two from our Chief Executive Officer, Jean- Pierre Mustier, one from our Co-Chief Financial Officer, Mirko Bianchi. They will present our business and financial strategy for the next four-year period. You will also get to hear from seven other members of our senior management team in the two Q&A sessions we'll have. The first Q&A session will focus on the business strategy. We will ask six team members onto the stage.
The Co-CEOs of Western Europe, Francesco Giordano and Olivier Khayat, the Co-Chief Executive Officers of CEE, Gianfranco Bisagni and Niccolò Ubertalli, as well as our Co-Chief Operating Officers, Ranieri de Marchis and Carlo Vivaldi. Please focus your questions in this session on the business and our operations. The second Q&A session, after a well-deserved coffee break and Mirko's presentation, will be on financial and risk topics, including those on corporate structure and participations. Consequently, for this session, Jean-Pierre will be joined by Mirko Bianchi and our Chief Risk Officer, TJ Lim. The first Q&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 email address, investorrelations@unicredit.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&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 three more focused Capital Markets 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.
Now, without further ado, let us start on the journey that is our new business plan, Team 23. Who better to set us off on the right track than our number one team member, our Chief Executive Officer, Jean-Pierre Mustier. Jean-Pierre, the floor is yours.
Thank you very much, Jörg. Also, a very warm welcome to all of you for our presentation of Team 23. Team 23 is our new four-year strategic plan covering the years 2020 to 2023. The reason for choosing the name is very simple. The execution of our previous three-year plan, Transform 2019, would not have been possible without the great team we have at UniCredit. Thanks to the unwavering commitment of the whole team and everyone's effort to walk the talk, we executed Transform 2019 very successfully. We have been successful by working as a team, 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 2019 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 while keeping a tight rein on risk, execution, and cost control. Let's move to slide three. You already know that UniCredit is a simple pan-European commercial bank, you know it is not just words. The facts speak for themselves.
16 million 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 bank network. We are ranked in the top three by assets in Italy, Germany, and Austria, and first in CEE 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 CEE 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 second-largest corporate lender in continental Europe, which is a clear proof of our strong position and of the trust our clients afford us. Our CIB is fully plugged in and focused on supporting the group 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 four. 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 UniCredit, we say what we do, and we do what we say. 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 five. 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 2016-2019. 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 turn to slide six. Let's look at what we have delivered. We have significantly strengthened our corporate governance. We are the only large Italian corporation where the board of directors presents its own list of candidates in line with the European best-in-class companies. We lifted the voting right restrictions and converted the saving shares into common shares.
We de-risk our balance sheet above and beyond our initial bold targets with gross NPEs down by EUR 50 billion. We reduce 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%. Last but not least, we raised more than EUR 13 billion of capital on the market and an additional EUR 8 billion for disposal, taking our CET1 MDA buffer to the upper end of our 200-250 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 point 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, we deliver on our commitments. Let's turn to slide seven. After successfully concluding our Transform 2019 plan, let's now turn our full attention to the new plan, Team 23. We have based the new plan on four pillars. I will give you a selected example of each pillar in a moment, remember what Jörg said at the beginning of the day.
There will be three dedicated Capital Markets Day in the next 18 months, where the team will deep dive on Western Europe, CEE, and the supporting operation. For those of you interested in more details, especially regarding the first two pillars, you will have the opportunity to find out more next year. Let's turn to slide eight. Before I take you through each of the four pillars in more 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 supports a growing capital 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 costs will be stable thanks to gross cost-cutting of more than EUR 1 billion. At group level, FTEs will be reduced by another 8,000, which for Western Europe, means a decrease of 12%. In addition, Team 23 includes a group-wide closure of around 500 branches, which for Western Europe translates 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 EUR 60 billion. We will keep our CET1 MDA buffer between 200 and 250 basis points at all times, 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 EUR 4.3 billion of underlying net profit, growing to EUR 5 billion 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 three years, going up to 50% for 2023 as a combination of cash dividend and share buybacks. On this slide, and in particular on capital underlying net profit and capital distribution, Mirko will give you more detail in his presentation. Let's move to slide nine. 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 now 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. With Team 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, HypoVereinsbank celebrates its 150 years year anniversary this year. We have a unique group-wide client model dedicated to SME services. This operational and distribution model will leverage on proprietary CRM tool and digital platform across all geographies. 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 Date. 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 channels. We will also support targeted growth in selected segments by using data 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, aided by additional investments in products and services. Let's turn to 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 to fully exploit the growth potential in the countries in which we operate, 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 two angle. First, how it improve customer experience, and second, but equally important, how it helps to further maximize productivity. Let me share two 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 networks. The Italian retail network will be paperless in the second half of 2020, Austria and Germany in 2021 for key products, and CEE by 2023. It allows us to improve profitability by generating EUR 100 million of cost savings and also improve customer experience. We will measure this using the net promoter score, which we aim to increase by five percentage point. 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, and 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 signatures on 60 pages on paper is now done in 15 minutes and is only one signature on a 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. 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 this very positive initial result, we have made this approach a permanent part of our setup for six key products. This approach will enable us to save cost of more than EUR 60 million across Western Europe and C, while also improving customer experience. Let's turn to slide 17. The third 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 commercial banks do. At UniCredit, we favor long-term, sustainable outcome over short-term solutions. A large part of our senior management's current compensation is in a seven-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 client. While this may put some pressure on the NII from lower margins, this is more than compensated by increased fees from cross-selling and a good cost of risk. Our general approach to credit underwriting is based on management of expected loss. We also use new technologies such as advanced analytics to support risk monitoring and automated underwriting. Overall, we run 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 2016, as proven by the rapid non-core rundown. This will help up 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 analysis to full real-time supervision. IT cannot be the sole solution to the issue. We cannot have a control officer behind every employee, we can have a guardian angel, the culture of the institution. Do the right thing is a guiding principle embedded into UniCredit Group culture.
We run numerous trainings and awareness campaigns on this topic in order to ensure all employees act as the first line of defense for the bank. Let's turn to slide 20. The fourth 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 MREL buffer between 200-250 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&A, as it offered unrivaled EPS accretion with zero execution risk. In May, we announced we were taking decisive action to increase the flexibility of our group structure.
We align our domestic sovereign bond portfolio to the average of European peers at between 50%-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 intragroup 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 decisions, and how we act on them.
As one team, one UniCredit, 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 EUR 1 billion in microcredit and impact financing by 2023. For our colleagues, we create an engaging and positive working environment through a 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. We will increase energy efficiency loan for Western European customers by around one-third for SMEs and by one 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 Relations. Let's turn to slide 24. Let me now finish my presentation by reiterating key financial targets for Team 23. Let's turn to slide 25. As you have seen, with Transform 2019, we successfully delivered the plan, notwithstanding a worse-than-expected macro environment. In order to make Team 23 as robust as possible, we have used pragmatic macro assumptions that are more conservative than the market expectations. On top of that, we have run two sensitivities to capture the uncertainties and volatility in the current market environment. One assumes a normalization of interest rate policy. We have called this sensitivity Lagarde. The other assume that negative rates for the duration of the plan will stay. We have called this one Draghi.
Our commitment to you, our investors, is that we will deliver the following three item in any of the outcome captured by this sensitivity. First, a resilient underlying net profit adjusted for non-operating items. Second, a capital distribution of 40% for 2020 to 2022, and 50% for 2023. Third, a CET1 MDA buffer between 200 and 250 basis point in every year of the plan. Let's turn to slide 26. Based on Team 23 economic assumptions, we will deliver EUR 16 billion of value creation to shareholders, EUR 8 billion of cash dividend and share buybacks, EUR 8 billion in tangible 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 is the basis for capital distribution as a combination of cash dividend and share buybacks.
It will grow from 4.3 billion in 2020 to 5 billion 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 200-250 basis points, while having an EUR 8 billion 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 V regulation will allow us to either absorb the fully loaded impact of Basel IV, 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&A, let me sum up what we have told you so far today. With Team '23, the whole team has made a clear commitment to deliver. We will create EUR 16 billion of shareholder value, EUR 8 billion from growth in tangible equity, and EUR 8 billion as capital distribution via dividends and share buybacks based on Team '23 economic assumption. We commit to do the right thing vis-à-vis all stakeholders. Thank you very much for your attention. For the Q&A session on the business strategy, I now ask my colleagues to join me on stage. These are our Head of Group Investor Relations, the Co-Chief Executive Officers of Western Europe, the Co-Chief Executive Officers of CEE, and our Co-Chief Operation Officers. Guys, all yours.
Hello again, everyone. Just to clarify a couple of details before we start. Obviously, asking a question, just raise your hand. The ladies will give you a microphone then, and that would be nice to speak into it because we webcast the event so people on the phone can also 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&A session after Mirko's presentation. I hope everyone is wired up, nothing is falling down. I think with that, we can start taking questions from the audience. Jean-François.
Morning, thanks for the presentation. Jean-François Neuez from Goldman Sachs. 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 two, three truly pan-European banks, and one of the key differentiating factor or USP for UniCredit is its pan-European corporate lending presence as said 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.
Just to get this right, how our Western European business can operate across borders?
Well, essentially how that would improve your operation from here, if anything. Yeah.
Yes. This is for our Co-Chief Executive Officers 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, a statement and development made towards Europe. We may say as far as we're concerned, our Chief Executive Officer said we have a leadership in Europe, in trade finance, in debt finance. We are already working the Banking Union. For us, this is good news, but this is something that we are already working every day. It has been the case for Transform 2019. It will be the case for Team 23.
Thank you. Giovanni. One row further ahead, and then Antonio.
Good morning to everybody. Giovanni Razzoli from EQUITA. I have a question on the commercial business in Europe and especially in Italy, because it seems to me, at 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. I see that you have factored in, if I'm not mistaken, some low single-digit growth for the fee income in Italy. If you can share with us what are your thoughts there, and what have you factored 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.
Yeah, 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. As you notice in the numbers, although we won't give you precisely what are our assumptions for pricing, you will notice that we have an ambitious growth in asset under management from, for example, EUR 226 billion of 6% growth with a growth in fee of 2%. That embeds naturally a certain deterioration or conservative assumption in the pricing environment. Consider also that with three areas of important growth in the client franchise. For brevity, I'll mention two areas where we expect growth of stock, one in bancassurance, in particular in long 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 Reale from Morgan Stanley. One question with respect to your loan growth assumptions in Western Europe. I've seen the 3%-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. What does it all mean for net interest income across the three regions? Thank you.
Olivier?
The loan growth, which is envisaged for the overall Western Europe perimeter for Francesco and I, is 2% in aggregate. This is breaking down according to the values 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, and 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 points, very low. We believe with Francesco that we can grow the business more than the overall GDP of Western Europe, but in an extremely strict and disciplined manner.
Thank you. Yes. Sorry, Domenico.
Hi, good morning. Thanks for the presentation. Domenico Santoro, HSBC. I read in the press release that you are basically creating the sub-holding or a grouping of the activities ex-Italy.
You are not asking for a change in the resolution model yet. My understanding is that also the financial targets, they do not include any funding synergies or improvement in the cost of funding. Can you make some comments on this? What could be the catalyst instead that could basically, in a way, make you ask for a change in the resolution model? Thank you. Of course, from Single Point of Entry to Multiple Point of Entry. Thanks.
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. That's not business operations, but we will take it for the next one. Maybe there's one from email, let me just read that and then give it to the panel. The question is: I realize that staying flat on costs is an achievement given underlying cost pressure, is there any flexibility to cut further should revenue growth not materialize as expected? That's for this panel. Carlo?
First of all, our plan is based on very conservative growth assumptions, so even more conservative than what the market is assuming for the future. Second, as our Chief Executive Officer said before, we already demonstrated in Transform 2019 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 slide number 10 of our Chief Executive Officer, is moving from a strong cost focus and de-risking to a plan of strengthening the franchise and growing the customer base. 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, I...
Delphine Lee from JP Morgan. Thanks for taking my questions. Just two questions from me, if I may. First of all, on your M&A strategy. It's very clear you prefer buybacks, but you mentioned small bolt-ons. Just trying to understand a little bit of what businesses, what area you would be interested in. What's the thought process here? Also, if we have some progress on the banking union, what are the main hurdles for larger transaction? 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 23. 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 we'll defer to the second panel. On the M&A one, that obviously has financial implications where it comes to capital allocation. There's also business implications. Maybe if we start with Western Europe to comment on the need or no need for bolt-on acquisitions from a business perspective and then CEE.
Let me give you a very simple and clear answer. As far as Olivier and I, Western Europe is concerned, the plan is organic, therefore we plan no acquisition. We have, say, in Italy, 12.5% market share. We have overall in Western Europe, 11 million clients. We believe this is a very solid base to develop our franchise and grow our business. We will continue to do in an organic fashion.
As far as CEE is concerned, we may evaluate transactions, bolt-on transaction on small portfolios or small institution, but we are talking about small sizes, a few hundred million EUR.
Thank you. On the SREP, Delphine, we'll remember that. Yes.
Yeah. Hi, good morning. It's Ignacio Cerezo from UBS. Couple questions. The first one is on AUM. You're targeting 6% CAGR in the next four or five 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? The second one, if you can comment on whether the fee growth you're targeting implies or includes making corporates pay for the deposits rather than through net interest income through fees. Thank you.
If we can go to slide 12, maybe because you refer to that. The Western Europe first, also CEE, because the growth rates, I think are quite different. I'm sure you'd want to hear from both of them. Let's start with Western Europe.
Just to give a perspective about the three countries where in Western Europe, Francesco and I are operating. Italy, Germany, and Austria are, in terms of wealth, are 40% of European wealth. Managing wealth and saving is a natural market for UniCredit. As of today, roughly, we got EUR 600 billion worth of TFAs, out of which EUR 190 billion in terms of asset management. We believe, with Francesco, we are planning a substantial increase, because we believe that we can grow this level of AUM versus our potential through digital distribution with the individual and a huge effort on private banking and wealth management.
Niccol`o?
Yeah. On CEE, the AUM base is small and will remain small. It is how the market is today. 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 you. Negative, right?
Negative, right.
I know it's not a shy audience. Yes.
I think we go next.
Hi there. This is Israel Akosa from Daiwa Capital Markets. I was just wondering if you could provide some color on how committed you are to your exposure to Turkey?
Niccol`o?
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 Yapı Kredi there, we do allocate capital based on the ability of our businesses to pay their cost of equity. Well, across the plan, this was not the case in Euro terms for Yapı Kredi, and therefore, we took the decision that you saw on Saturday. What does translate into three main things. First of all, we optimize our investment structure in Turkey. Second, we obviously reduce our direct stake to Yapı Kredi. Third, we increase our flexibility to optimize our capital allocation across the businesses.
Thank you. Azzurra.
Hi, good morning. Azzurra Guelfi 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? Then a second question, if I may. How do you split the responsibility within the two co-head in every division? Thank you.
The co-head question I think is a question to six of the gentlemen on the stage. Maybe Carlo can answer that on behalf of the group. The other one I think is for West and East because it's regulation, how does it affect? Carlo.
We are co-responsible of the same perimeter. The perimeter is a mix of different topics. We talk about IT, we talk about operation, security, real estate, HR, procurement, cost management. We have an operative split among us on the day-to-day activities, but anytime there is a very important decision to be taken, we consult each other, and we come out with a strong decision. 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 if on the business side, if CEE could answer how regulation affects it, and if you have anything to add to how co-heads work in CEE, but I think that's more a group thing.
On adding, Carlo already explained very well. It's very important, the communication, so we love each other, that's for sure.
They have the same ties, you see.
Same ties, yes. On the regulation, as Jean-Pierre explained very well, as in Transform 2019 also the new plan will take into account the headwinds coming from regulation, the business model will not change. TJ will tell you more later.
That's probably the same in Western Europe, right?
Only maybe what we can add is we monitor our portfolio and the effects the regulation has on capital absorption on an extremely granular level. 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 with 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. Daniele.
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 500 reduction is concentrated in Italy, Germany, and Austria, so does not imply any reduction in Eastern Europe? The same for the 8,000 full-time equivalent.
Maybe we quickly go to page eight, where we mentioned this, for our co-CEOs.
I will start commenting on the 8,000. The 8,000 is concentrating on Western Europe. As we speak, there are negotiations ongoing with the union, we don't want to disclose the breakdown. Just as a reminder, the Western Europe workforce is split today as 65% in Italy, 25% in Germany, 10% in Austria. 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, as soon as we will have the information, we will share with you. I think on the branches, I would pass the floor to my colleagues in Western Europe.
We have 2,900 branches circa in Western Europe, of which 2,400 in Italy. 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 transmit 98% of basic transactions out of branches into digital activities, and out of the remaining branches, roughly 2/3 will be cashless. Via cash will be handled via ATM machines, but the branch itself will have no cashier. It's a profound transformation, which we believe goes in the direction of strengthening and facilitating customer journeys and dedicating branches only to value-added activities.
Thank you. In the very back.
Hello, 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? 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. That's for our two Co-CEOs.
Yeah, for individual customers having more than EUR 1 million worth of deposit, which is less than 0.1% of our customer base. We are offering a money market product with a target of zero plus return and zero 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 all countries. For corporates with higher levels 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 Creelan-Sandford at Jefferies. I just had a question on asset quality. 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. I'm just wondering whether in your assumptions, you're embedding a deterioration in the underlying asset quality trends across the group. To follow on from that, if I've read correctly, I think you're front-loading about EUR 1 billion of provisions in the non-core division in the fourth quarter, then limited losses through 2020, 2021. Just wondering if you could give us an update in the run-off strategy for that. Are you planning additional larger sales as a result of those higher provisions, or not really? Thank you.
Good things come to those who wait. 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. I technically defer to the second, but I think we can answer the business aspect of this here, which is how do you look at underwriting with the revenue and loan growth targets you have embedded both in CEE and Western Europe? Maybe because West always starts, we start with CEE this time.
So on-
The financial and risk we'll do later.
On CEE, as Jean-Pierre will say, we will not do volume lending. We do have volume targets, but there will be no reason to reach them if, first and foremost, we don't stay within our risk targets. This is what we're looking at. This is how we'll manage CEE. Across CEE then, TJ later on will explain you better the trends of cost of risk and the trends of our NP ratios.
Western Europe is long-term sustainable as well, I guess?
Well Team 23 is about further growing the client franchise. We mentioned the 2% loan growth, i.e., we're going to look very carefully at the way we underwrite risk, and we take them, we put them in the balance sheet. We plan 25 basis points expected loss for Western Europe by the end of the plan. Francesco mentioned already that we are extremely careful about the underwriting, the risk we are taking. We are monitoring each asset class in each country on a monthly basis. What we originate, what are the risk, what are the values rating cluster. This is an extremely strong, close dynamic underwriting and risk-taking, and market-driven attitude that both 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? Does your plan include any core banking systems review? That's for the Chief Operating Officers.
Thank you. As you have seen in the presentations, we are actually increasing our IT investments in terms of change. We are going to a EUR 900 million average investment throughout the Team 23 plan. This is a continuous increase vis-à-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 mainframes from some of the applications that are more sensitive from a customer experience standpoint. Last but not least, we are increasing the IT and business partnership to ensure that, of course, the projects that we embark on do have the payback and efficiency and 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. Last but not least, we improve the quality of our IT vis-à-vis our customers and our internal people.
Thank you. Any Yes. Third gentleman.
Jakub Lichwa, RBC. A bit of a broad question, how do you see the customer behavior evolving on the digital front? It's related to the previous one. There is a lot of talk about IT investment, I do wonder what has changed in terms of average customer going and getting a mortgage. It is all about selling the product. To what extent this IT investment is putting you well ahead of your peers. Yeah, again, I just wanted to understand how the customer behavior has changed, say in the last five years, and how do you expect it to evolve in the, let's make it five years at the end of the plan, how customers will be banking then. Thank you.
Thank you. You ask a broad question, so you'll get the whole panel. First on customer behavior, maybe what you've seen change and maybe both Western Europe and CEE, because it may or may not be different. If the Co-Chief Operating Officers could say how IT and operations support that change in customer behavior. Let's start from the left.
Just to give you a short answer as to important and very broad question, the change of customer behavior is clearly accelerating. This plan is, to a large extent, a response to that acceleration. To give you an example, mobile users, 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 one year. We expect this to go close to 50% within the plan. 50% of our clients will use mobile. Probably this means 65% will use digital channels actively in Italy. 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. 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 of mobile users by 1.2 million clients. We will exceed the penetration of 50% during the plan. Obviously, the acceleration will be also boosted by the implementation of PSD2, the open banking, which is coming.
Actually, that's coming.
As part of the operation, I think the digital journey of the customer is as much a technology journey, but it 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, 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, or it is multi-channel in other type of engagements with the bank, whether mobile or through internet banking.
Okay. Thank you. Do we have one from the If not, I have one from the email. There's a question on wealth management. Other banks are putting a key focus on this. Why are you not? Here we can, maybe Olivier for the
We mentioned already-
You go to slide 12, by the way, where.
On slide 12. We mentioned already that Italy, Germany, and Austria are 40% of European wealth. It's a natural market for UniCredit. Private banking and wealth management as of today are standing for EUR 1 billion worth of revenues, EUR 190 billion 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 1,100 bankers, which are supported by product specialists in any area. It's a very important segment of our effort. It is planned within Team 23 to be one of the driver of our growth that we are envisaging with Francesco.
Okay. Thank you. Anyone else from the room?
Yes.
Hi. Ignacio?
Yes. It's Ignacio again.
Okay.
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 asset quality risk right now? Thank you.
Thank you. I think we should answer that from both geographical angles. We start with CEE and then Western Europe.
Yes. I would say that, as usual, you have to take things very carefully. When we say we're going to grow in consumer over ME, we do clearly understand the risk behind it. If there is a downturn effect, obviously those could be hurt. 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 consumer is only 19%. We do have a large room of penetrating better our current customers. 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. You would know the names by yourself, Minnie.
Let me give you three short examples of how we take it. In corporate, we mentioned already, lately, we've been concentrating our loan issuance by 70% to 80% in rating one to three. We're 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 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 three, among others, of activities we are taking to make sure that we can preserve our asset quality in any cyclical condition.
Thank you. There is one more for our Co-Chief Operating Officers from the email, 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 third-party support?
In terms of artificial intelligence, we are having 30 + 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.
Yeah. 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 Carlo 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've worked among others, for example, on consumer credit to make sure that when we develop pre-approval processes on the credit side, we can also target those that not only they're pre-approved, but also have propensity to take a 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. Jean-Francois.
Can you remind us-
No. Wait.
Related to financial assets and savings of customers, can you please remind us what is your current bancassurance setup in the markets where you are present and how you plan to grow or change this going forward? Thank you.
Thank you for that. That's both CEE and Western Europe. Let's start with CEE, because that's the most recent renewed.
Yes. On bancassurance, the business is small today. The customers do not ask much of this business. We have, just to give you an idea, roughly a little bit more than EUR 300 million of premiums collected. It's a small business. It's a business that's going to be growing 12%, from a small base.
Now, despite this, we believe it's part of the future and therefore we have partnered with two very good partners that cover our extensive network, and those are Allianz and Generali.
Right. Western Europe?
The bank insurance model is one of the driver for growth, with the asset management distribution. On asset management, we work with Amundi, and on the insurance side, we're working with prime names, like Allianz, UnipolSai, 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, the network in Italy has distributed My Care Famiglia, which is a non-life insurance product. It has been chosen by more than 100,000 customers just in a few months' time. Insurance and distribution of insurance product are going to be absolutely key within our Team 23 plan, and it's going to contribute to the fee generation that Francesco and I are planning.
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 vis-à-vis, for example, the loan book. Basically what you're showing us here is that in Western Europe, the loan book is more or less 10 times larger than in CEE, but the proportion of the AUM of the CEE vis-à-vis the core Europe is significantly lower. Shall I interpret correctly that you have a target of EUR 4 billion of AUM end of the period as a stock in CEE for the individual? That I think is the bulk of your business vis-à-vis EUR 226 in just three countries, which are clearly, number of population is higher, the GDP per capita is higher, but the gap seems extremely large to me.
You have more, I don't know, 10 countries in Eastern Europe, and you just have EUR 4 billion of AUM in total. Is that correct, the way we should look at?
It's correct. As Niccol`o mentioned, it's a business which is still growing, and we need to grow it well. We have ambitious plan, but the base is very low. We start from a low base, and we have a 10% growth ambition, but this is the result.
Okay.
Different story in-
Do you believe-
This story on the loan book, this is the individual, what the slide show. In CEE, we have a loan book of EUR 66 billion.
Do you think there is also an issue of penetration for UniCredit, 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, I think, is more or less comparable with the others we talked about.
There's different savings.
Of course.
Rating rate and also different pay rate.
Okay. Thank you.
The wealth is not distributed as equally as in Western Europe.
Okay, thank you.
I think one important thing, Giovanni, to note is that Slides 12 and 11, for example, we give examples of segments. This is SME or individuals. This is not the whole bank. Obviously, there's corporate, there's multinationals, et cetera. We picked selective examples of client segments that are relevant, obviously, for the plan. We got one other question from the email, and we'll start with Western Europe on this. The question is, how can we imagine the branch design going forward? Any specialization in the branch design? Then the other question, and that I think 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 CEE. Maybe Francesco first.
Sure. Briefly, I think we can elaborate more during our mini Capital Markets Day, that I take pleasure to advertise, will take place in the end of Q1. Olivier and I will run you through more details of our Western European plan. What is important is branch will be one element of a fully integrated multi-channel strategy. The branch is not a standalone, but is part of a multi-channel offer. Like I said, probably one-third circa 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.
You see it as a very integrated strategy with different types of specialized branches.
Olivier, maybe anything on joint ventures and partnerships in Western Europe? Do you need that to grow, or you grow organically?
I think we mentioned already that, Francesco and I, we gave a very clear answer about any kind of M&A. We said no.
Partnerships, joint ventures is sort of M&A light, so fill me in.
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 UniCredit. We are servicing our customer, to raise capital. 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 two in IPO in Germany. The business model in terms of aggregating forces is working 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 growth 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.
Thank you.
On this side, I may add, we commented already on the Boltin acquisition partnership with FinTech. I would like to mention an example. We are partnered with Meniga, a Swedish company, which is helping us on the front face for PSD2. 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 the telco company. 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 Koagne, 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 part of your business in Italy, but can you just tell us what is your strategy in Germany, Austria, and even CE? Are you looking to do more to participate more in term of consolidation on that? Thank you.
Thank you. We not only have co-heads of the businesses, we also have co-supervisors of the CIB business. Gianfranco takes care of GTB, which includes payments. Gianfranco.
Starting from payment, what we have done, we have been leading the European banking community on GPI and instant payment. We are already up and running in Germany, Italy, and Austria. CE 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. It has to be very well structured and legally strengthened. What we are doing, again, is for the group, is 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?
Yes. We have been the first bank in Italy, and now not only in Italy, in Hungary for example, to promote Alipay, Apple Pay, and so on. This is another example of partnership and cooperation that we have been thinking, just to follow the flow of the digital channel, which is obviously leading the industry.
Thank you. Anyone else? There are some not very shy people in this room who haven't spoken so far. We have one more from the email, and then we'll see if we let you off early for the coffee break. This one is for the Chief Operating Officers, 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 Transform 2019, and we expect to continue increasing every single year as part of the Team 23. We do spend overall in IT on a cumulative basis of cash out over EUR 9 billion of IT spending. That includes both dedicated spending on cybersecurity and data protection, as well as all of the IT developments, which do embed security by design. We are continually strengthening and putting resources at work in order to increase our cybersecurity defenses.
Thank you. Yes.
Hi. Christian Carrese, Intermonte. The first question is on Turkey. You said that in the previous plan, Transform 2019, return on allocated capital was not adequate. Is there any area that you think has to be improved or could be not core anymore in the new plan? If you can specify in the 2023 targets, Turkey stake is included, the 33%. The second question is on M&A. It's very clear you prefer to do buyback, no execution risk. If you can give us some criteria, you were supposed to give some criteria on potential M&A, small or larger M&A in the future, in the sense to increase customer base, to deliver better products for the customer, and so on. Thank you.
Thank you for that. On Turkey, I'll give it to Niccolò, and then I think on the M&A, the broad question versus share buyback, we'll take that as the first one on the next panel. Niccolò.
Yes. On Turkey, just to clarify, I was not only referring to Transform, but also to Team 23. Forward-looking, we could not ensure that we would have been able to return the cost of equity EUR terms. 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 Yapı Kredi. It's forward-looking rather than backward-looking.
Thank you. The last question to ask something on business operations or be silent forever or until the next panel. No? I think we'll see you all outside for the coffee break, and we'll be back at 11:15 A.M. Thank you.
I hope you enjoyed your coffee break. 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. Before we start on Team 23, let me quickly remind you of what we have delivered over the last three 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, 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. We have materially de-risked and strengthened our balance sheet. Thanks to all our hard work, we start 2023 at the upper end of our 200-250 basis points CET1 MDA buffer range. This will allow us to focus on returning capital to shareholders during the new plan. When we met here three years ago, we committed to deliver Transform 2019, we did so very successfully.
You can trust this team to also deliver our new plan, Team 23. Let's turn to slide number three. 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 EUR 50 billion, beating the original fiscal year 2019 target by more than EUR 15 billion. On the capital side, we have strengthened our CET1 ratio by more than 200 basis points. In recognition of the de-risking 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 SREP requirement decreased by 75 basis points. This reduction is by far the highest in absolute terms among G-SIFIs in Europe.
We reduced costs by EUR 2.1 billion, landing at EUR 10.1 billion, well below the initial target of EUR 10.6 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 EUR 4.7 billion. This is impressive considering the worse than expected macro headwinds. Let's turn to slide four. As Jean-Pierre mentioned earlier, Team 23 is based on four pillars. I will now cover these four 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 -0.2%. As a result, we will see positive operating leverage in the new plan despite HR and non-HR cost inflation.
The third pillar is about cost of risk. We have planned it conservatively. In fiscal year 2023, we expect it will be around 40 basis points. The fourth pillar is all about capital and funding. Here, I will illustrate our focus on capital distribution to shareholders. Let's turn to slide number five. 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 two sensitivities to illustrate potential alternative outcomes. You will find the assumption underlying the two sensitivities in the annex on page 26. The more positive one we have called Lagarde, which stands for interest policy normalization. In that case, we expect short-term rates to be close to zero by 2023.
The second we have called Draghi. That assumes rates at current level for the life of our plan. That will mean EURIBOR will stay at -50 basis points until 2023. Let's turn to slide six. Before I take you through the various P&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 EUR 1 billion over the plan period. In 2019 costs will dip as we cut more cost to invest in IT. 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 EUR 60 billion at the end of 2023. As we said earlier, our CET1 MDA buffer will remain between 200-250 basis points at all times. The underlying net profit will be the basis for our capital distribution to shareholders. As you know, for fiscal year 2019, this number will be EUR 4.7 billion. Next year, we have guided to EUR 4.3 billion, growing to EUR 5 billion by 2023. The tax rate throughout the plan period is at a low 18%-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 three years, increasing to 50% by fiscal year 2023. Let's turn to slide seven. 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 two 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 MDA buffer between 200 and 250 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 eight. Let's look at our Team 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 describe this CMD19 perimeter in the footnote number one. In short, it assumes that Ocean Breeze, Mediobanca, Fineco, and Yapı are not consolidated in our numbers. We did the same for Transform 2019 using the CMD16 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 nine.
Costs are expected to decrease over the plan with a CAGR of -0.2% from 2018 to 2023. This results in a positive operating leverage or [audio distortion] of 5.2 percentage point over the same period. The overall cost decreases is composed of a CAGR of -0.6% for Western Europe and +1.8% for CEE. The latter is well below the expected inflation, while the former includes an impressive EUR 1 billion gross cost reduction, about 12% of 2018 costs. In terms of cost component, HR costs are expected to decrease between 2018 and 2023, helped by FTE reductions of around 8,000 from today. Non-HR expenses will rise throughout the plan as we are increasing IT investments and amortization to support the automation 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 Transform 2019 and Team 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 Team 23. You can draw a number of conclusions from this slide. First, we are increasing our IT investment by 17%. Second, we already spent more than last three years than initially budgeted, partially anticipating investment needs for Team 23. Third, 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 Team 23, we will spend a total of EUR 9.4 billion in IT, or more than EUR 2.3 billion a year, EUR 900 million 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 forwards. 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 GDP growth. It is still at a low level, 34 basis points in Western Europe and a very good 70 basis points in CEE. 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 of the bank is clear and to show how it evolves. As shareholders will be remunerated on this basis, it is important that the number is stable, resilient, and predictable. Let me also stress that this will be neutral for the coupon payments for holders of the AT1s and CoCos. 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 and 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 EUR 16 billion of shareholder value over the life of the plan. This is almost two-thirds of our current market cap.
We will propose to distribute EUR 8 billion to shareholders over the financial years 2020-2023, EUR 6 billion in cash and EUR 2 billion in share buybacks. In addition, our tangible equity will increase by EUR 8 billion from now to the end of 2023. The share buybacks will almost boost the growth rate for all KPIs that are calculated on a per share basis. Underlying profit has a CAGR of around 10%. EPS has a CAGR of circa 12%. Tangible equity has a CAGR of 5%. Tangible book value per share has a CAGR of circa 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 EBA study found that Basel IV alone increases the ROTE denominator by 25% for large European banks. All things being equal, from a ROTE 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 EUR 50 billion at the beginning of Transform 2019, we were down to just EUR 11.2 billion in the nine months 2019, and we will below EUR 9 billion by year-end, well below our current guidance. By the end of 2021, we will be at zero. We are taking decisive actions to ensure a smooth non-core rundown. We took the proactive decision to bring forwards EUR 1 billion of loan loss provisions into the fourth Q2 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 EUR 2.5 billion. The net economic embedded risk, economic embedded in the non-core rundown will be zero. 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 impact of non-core on group net profit for 2020 and 2021 is minimal. You can find more details in the annex 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% 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 assumptions and the industry-wide introduction of the new definition of default from the fourth 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 three key things on this slide. First, 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.
Underlying expected loss is stable at a very healthy 40 basis points, reflecting strong credit quality. 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 subholding project to optimize our MREL requirement in the medium term. This subholding will be incorporated in Italy and will be not listed. It will hold all international commercial bank excluding Turkey. UniCredit S.p.A. will remain as the operating holding company of the Italian commercial banking business, and the resolution strategy will remain Single Point of Entry. The group will remain headquartered and listed in Italy. We will, as previously announced, continue to work on the reduction of the intragroup exposure and improvement of the group resolvability. Let's turn to slide 18.
Our combined funding plan for TLAC and MREL is straightforward. Over the next four years, we plan to issue EUR 45 billion of MREL instruments, of which EUR 20 billion are subordinated. For 2020, we plan EUR 13.3 billion in total MREL funding, of which EUR 7.3 billion are subordinated. This funding plan assumes a continued Single Point of Entry resolution strategy. As we said at our third Q 2019 results, based on our interaction with the resolution authorities, we 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 2017-2019, as well as 2020-2027. At the time, we were the only bank to give detailed estimates over such a long period.
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 headwinds page from December 2017. All banks in Europe are facing regulatory headwinds, we are the only one who has transparently and regularly disclosed the impacts. Our IR team will be able to give you more details about the 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 4 Q, regulatory headwinds are close to zero. Team 23 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 V. 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 MDA 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 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. The numbers are impressive. We will create EUR 16 billion of shareholder value over the plan. This is almost two-thirds of our current market cap. We will propose to distribute EUR 8 billion to shareholders for the fiscal year 2020-2023. Cash dividends will be EUR 6 billion out of EUR 8 billion, almost doubling average DPS. Proposed share buyback will be a key component of the return strategy, about EUR 2 billion of EUR 8 billion capital distribution. This will boost in growth in EPS, DPS, and tangible book value per share. Our tangible equity will increase by EUR 8 billion from today to the end of 2023, with a tangible book value per share CAGR of circa 5%. Let's turn to slide 22.
On this slide, we have illustrated what our commitment to deliver means in terms of financials. As you can see in all three columns, our plan, Team 23, Draghi, and Lagarde, we deliver the same capital distribution as percentage of underlying net profit. We stay in the same CET1 MDA buffer range of 200 to 250 basis points. The underlying net profit is resilient and fluctuates 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%-50% in all scenarios. Under Team 23, these assumptions amount to EUR 8 billion distribution. As you can see, the variation is less than 10% in the Draghi case. The asymmetry between Lagarde and Draghi is because the interest rate increase in Lagarde is back-end loaded, only nearing to zero 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 FY 2019, guidance given at the 2Q 2019 results is confirmed at EUR 4.7 billion, made up of a run rate of EUR 4.3 billion and EUR 0.4 billion DTA expected in the 4Q 2019. For 2020, we continue to expect the same run rate, i.e., an underlying net profit of EUR 4.3 billion.
By the end of 2023, underlying net profit will reach EUR 5 billion, and during Team 23, we will grow tangible book equity by EUR 8 billion and return another EUR 8 billion to shareholders via cash dividends and share buybacks. Let's turn to slide 24. Before we go to Q&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 EUR 16 billion of shareholder value and EUR 8 billion from growth in tangible book equity and EUR 8 billion as capital distribution via dividends and share buybacks. 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&A session on the financial topics with our CEO, Jean-Pierre Mustier, and our CRO, TJ Lim.
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. 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. Mirko, as you're already warm, maybe I let you answer for this question.
Yes, on the international subholding, of course, we are working on improving our requirements over the medium term. From this perspective, you basically should imply that, first of all, from a, let's say, timing perspective, as you know, MREL will be put in place in the second half of 2022. We are working on this project, and therefore, what we are doing right now is to actually continuously take down the infra group that we have among our legal entities. This is coming down dramatically when we extract, let's say, the impact of the internal MREL. From this perspective, this is what you should expect, and also this basically determines the timeline on potential impacts into the future.
Just to be very clear, Single Point of Entry remains. That's our strategy. We don't change it. We have a duty to our shareholders, as we do for CET1, to optimize our MREL requirement, which is MDA relevant. We take actions in order to make sure that we will lower the MREL requirement, which has, like for the CET1, a Pillar 2, so a discretionary component 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 we will never be resolved because UniCredit has a very strong capital structure. The more we can do that, the lower our MREL requirements and the lower the volume of MREL-eligible securities we have to issue. That is very clear.
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. We are saying what we do, and we are doing what we say, and basically Single Point of Entry, we lower the MREL requirement. That's it. Second question was from Delphine Lee about the SREP reduction, and is it finished. On this one, I will take it. First of all, I cannot speak on behalf of the ECB. 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.
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 Creelan-Sandford from Jefferies, it's about the non-core bringing forward EUR 1 billion of LLPs. If we can give an update on the rundown strategy, 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 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 in Q4 with decisive action. Just as a reminder, we started EUR 50 billion at the beginning of this plan, and we have shown at nine months, EUR 1,911.2, and we've just guided the market to be below EUR 9 billion by year-end. As you can see on the right-hand side of this slide, for the below EUR 9 billion, for disposal is roughly about EUR 5 billion, write-off, EUR 2 billion, which is totally within our control. Back to bonus and recovery is considered EUR 2 billion. Five billion, really, if you have seen for the plan, we have always over-delivered, and we have never disappointed you. Hence, this is a clear strategy that we will be able to run down the non-core by 2021.
Just to add, on the third quarter this year, we disposed around EUR 5 billion of NPEs. What is planned to be done in two years, we did it in one quarter this year. TJ Lim, you had another question, which is about asset quality and the target of 3.8% of NPE ratio, which is above the NPE ratio of the current core bank. 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 NPE will be below 5.5. In Q3, the core bank, we're already at 3.6. If you look at EBA light, we're at 3.2. Now, next year, there's this so-called new definition of default that we have to take into account. 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's a last question from Christian Carette from Intermonte about M&A. We're supposed to provide criteria. We don't provide criteria for M&A because we said we prefer share buyback to M&A. There will be no M&A. That's as simple as that. We said there will be a targeted or small bolt-on acquisition. On that, Gianfranco Bisagni commented earlier, it's on the CEE only. It might be very small portfolio acquisition or very small acquisition of a couple of hundred million EUR and no more than that. Don't expect us to enter into M&A transaction today. Buying back our shares at the current level is a zero-risk strategy for a shareholder, which has an extremely high EPS accretion. We just keep focusing on that. This being said, now we are open to questions.
From the room, don't raise your hand all at the same time, and from internet as well. Wonderful ladies in the room will give the microphone to the first person who raise his or her hand. I'll let you choose.
Hello, this is Axel Finsterbusch from JPMorgan. Thanks for taking my questions. 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 Yapı Kredi. Could we see further reductions in the stake in your Turkish business? A last one, given the various details that we have in terms of your funding plans, have you already received your MREL target for next year? Thank you.
Thank you very much. For the first question, rating agencies, I will let Mirko 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 them what our intentions are. In terms of the connectivity to the changing potential methodology from the Tier 2 side, this is not linked to basically our plan. From that perspective, it's a methodology change, so it's nothing to do with specific, let's say, issuers. We will have to see what actually the potential outcome will really be put in place.
On the second question, Yapı Kredi, 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 our stakeholding by 9%. By owning now directly 32% of the shares of Yapı Kredi, we have flexibility to manage our stake, and we always want to manage proactively our capital allocation. On the last question, on MREL target, yes, we 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 P2A, which was announced as well last night as it is, it was backward-looking. You can count on having a low MREL target for next year, taking into account the reduction of the P2A.
Maybe one more, from a funding plan perspective, this is exactly what we took into consideration in building this funding plan. Okay.
Other question. We can have another question from the front, and afterwards we'll go at the back.
Thank you for the presentation. Antonio Reale 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? The second point is on the implementation of CRD V. I understand that will start in December of next year already. If I understand correctly, you're assuming it will take two years and possibly more to be implemented. If I also take potential phase-in, in Basel IV headwinds, you probably have a buffer that is well above the 250 basis points.
Now, can you 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 regulators 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 2017 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 now saying, "Oh, we have increased regulatory requirement." Wrong. We have exactly the same regulatory requirement. Some committed them, some do. Actually, one does. It's us. We think that what we show here is what will happen. In what we showed between 2017 and 2019, we were right down to the one basis point. The mix was different, 210 basis points happened, and this is what we were predicting.
What we are showing here is that the regulatory headwinds are covered by our net organic capital generation. That's how we dimension, actually, our dividend payout and our share buyback. There is good news. The good news is coming from the CRD V. The CRD V, and you have the detail in the presentation in the next, allows for the P2R to be filled in for 44% in AT1 and Tier 2. 44% of 175 basis points is 80 basis points. Instead of having our MDA buffer in fully CET1, it is a de facto increase because for the P2R, we can use 80 basis points, which will be filled in by AT1 and Tier 2. That mechanically increase our MDA buffer by 80 basis points when the CRD V will be in place.
We will move, let's assume we are at 250 basis points, we will be at 330. 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 CRD V 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 a MDA reduction, which mechanically increase the buffer. We will see what we do. We will 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 2027 is that it will be phased in. 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, 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, we will see if it happens earlier. Question at the back.
It's Aditya from BlackRock. Just wanted a clarification on slide 20, where you've given the regulatory headwinds and the capital generation. How does the full sale of Yapı fit into that slide?
The full-
Does it not?
The Yapı, we assume that Yapı will be fully deconsolidated with our plan. Basically, this is taken into account into the projection
That is in the projection.
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-repeating item on page 27. You see the impact of Yapı deconsolidation. Mirko, I'll let you comment on that.
Yes. You can see that on the right-hand side, you have 2020 and 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&L impact. On the P&L impact, as you can see, Yapı Kredi deconsolidation, minus EUR 3.1 billion, so it's capital neutral, and this is coming from the recycling of the FX reserve that we build up over time in owning Yapı Kredi. The right-hand side, the capital impact of plus 4.07% is due to the regulatory deconsolidation of the risk-weighted assets of Yapı Kredi.
If we go to the slide, which is about risk-weighted asset evolution, which is on slide 32 of the document. If the team can go to slide 32 of the document. You can see as well, in terms of risk-weighted asset evolution, regulatory headwinds impact risk-weighted asset or can impact directly capital. But Yapı, as Mirko mentioned, allows us to deconsolidate these asset as we have an asymmetric consolidation of Yapı 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 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.
Correct. Thank you. 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 the back of end state RWAs in your NII targets?
Mirko, I'll let you comment.
You can go back to exactly the slide Jean-Pierre was dealing with the risk-weighted assets. These are the risk-weighted assets that are part of the plan, that's how we basically structured our MREL funding plan. It's based on below. It's basically almost EUR 415 billion in terms of risk-weighted assets, that's how it's sized.
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. We did not take any positive impact coming from that.
Okay. Thank you.
Maybe a question at the front, and then we 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, you maintain the stake at 32%, because my understanding is that reading the press release of Yapı, there are also some constraints, because you need a consent from your former Turkish partner. How confident you are, based on the discussion with ECB, that you will be able to deconsolidate all the EUR 18 billion, even maintaining EUR 18 billion risk-weighted assets, even maintaining the stake, of course. This is my first question. The second is on the new definition of default. 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 EUR 15 billion, 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? Also the 40 basis points 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 TJ take the last question. Mirco take the last question. TJ comment on the 40 basis points cost of risk. TJ take the new definition of default, and I answer for Yapı. As I said, we own directly 32% of Yapı, which gives us more flexibility to manage proactively our capital allocation. If we say that we can deconsolidate it fully, Yapı, is because we are confident that we can deconsolidate Yapı based on the proactive management of our capital allocation. We are in discussion with the ECB about that. On the new definition of default, TJ?
On a 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. You can sort of infer. We don't give exact sort of target. Throughout the plan, we're assuming the DoD is aligned, the current NPE ratio is aligned to the current level.
On risk-weighted asset evolution, Mirko.
Yes, on the risk-weighted asset evolution, you're correct. The EUR 15 billion partially is 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 cost of risk. Maybe, TJ, you can give more detail about the evolution of the cost of risk and how the 40 basis point is made up, as we have a 34 basis point for Western Europe, 70 basis point for CEE in 2023. Just show the evolution with the country breakdown in Western Europe, which is relatively relevant.
Yep. Thank you, Jean-Pierre. I think on slide 11, you can see the cost of risk for the group goes from 34 to 40. 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 timing sort of effect. Just to give you a feel, clearly, Italy, at the end of this year, we're going to forecast in the high 60s. At the end of the plan in Team 23, we will be in the so-called mid-70s. Again, conservative assumption. Germany, we're starting with low teens. We will be ending up with mid-teens. Austria, high single digit, will be ending up with mid-teens. CIB fairly stable. CEE, as you have seen, it's quite stable.
Within this plan, the cost of risk going up is due to a conservative assumption, as the headlines 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. 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 TJ 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. The 34 basis points we have for Western Europe is actually conservative, as we're making assumptions of the impact on the slowdown of the economic cycle already. 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. We are very confident that these projections are conservative. Any other question at the back? I can see some hands.
Paola Biraschi from CreditSights. 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? 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 NP 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, and the market as well. TJ, I'll let you comment on the NP ratio for Italy by 2023.
For the commercial bank in Italy, as you know, Q3, we are already at 5%. Next year, the NPE ratio will be impacted by the new definition of default. By the end of the plan for Team 23, we will be at or just below 5% as our assumption. CIB remain fairly stable. In Q3, it was 2.3%, we expect to be quite stable throughout the plan.
Just, because of the new definition of default, the NPE ratio in Italy will go up. Around 5.5%-5.7% in 2020, and then will go down to below 5% in 2023. It's because of the new definition of default, which brings more or less around EUR 1 billion, if I may say, of new NPEs in the way we consider them. Yeah. It does not change the profile and the credit quality of the group, it's just different measures. Mirko, on the cost of-
Equity
equity.
Yes, in terms of cost of equity, first of all, we use, let's say, a CAPM methodology internally. 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. That was exactly the example on Yapı. In terms of Yapı, 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 this cycle, through the plan, we are not matching the cost of capital from a EUR perspective. 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 Yapı 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.
On a relative basis.
have its own view about it, but that's the way we look at it.
Yeah.
Any other question?
Andrea Unzueta from Credit Suisse. Thank you. I have two clarifications and two questions. The clarifications are on capital. Am I understanding 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? 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? 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 sub-holding. 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. Can you walk us through what has changed there? Thank you.
Thank you very much. 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 are correct that if you mechanically apply the 80 basis points benefit coming from CRD V, if we have a CET1 absolute level of 12.5, if you deduct 80 basis points, we should be at 11.7, and while keeping exactly the same CET1 buffer. Because as we said, the CRD V will lower the MDA requirement, which basically will improve the CET1 buffer. 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 into 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 T.J. comment on the slide 42, if the team can bring us there, on the EUR 40 billion regulatory impact and impact taken for capital.
Yeah, on slide 32, as you can see, the regulatory headwind we're projecting below EUR 40 billion. If you go into page 29, this composes of all of the regulatory impact from regulation model, procyclicality, EBA guideline, calendar, FRTB, and Basel IV, this adds up really to roughly about 1.879%. There are some inherent, also built in, not like for like, all of the regulatory headwind, because some of the regulatory headwind that is seeing capital impact will also be impacted through the shortfall.
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. We are taking the actions, and it's on page 27, to actually adjust them from the underlying net income.
Roughly 70% is on the so-called RWA and 30% on the shortfall, as submitted.
If you want to have more detail about it, feel free to call our IR team or to speak directly to the guru of regulatory evolution, TJ Lim with here, or Aurelio Maccario, our Head of Institutional Business. I'll let Mirko 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 2020 because of TLTRO III. The competitive environment is there. 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, 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.
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 MREL requirement. As I said, MREL will come into effect by mid-2022, and it will take time to work out with the SRB any potential benefit. TJ, on the cost of risk, as we had a question on CE, mostly.
Yes. On the cost of risk for CE, firstly, we're building a fairly conservative assumption to the Team 23 plan. If you look, in the last few years, we've always been, in 2018, the cost of risk was 73. 2019, we're forecasting to be around 69. We're fairly comfortable that even though the new definition of default will have very little impact for CE, and the model, particularly on the standardized. We feel very, very comfortable CE will land in the low 70s, and the landing point, as we've shown, as 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, after that the back, and then we finish in the middle.
Hi. Azzurra. One qualification on the AT1. Given the benefit from the CRD V, it's fair to assume that you will have more AT1. Will the cost change significantly? Two things. One is on sovereign. What are the sovereign assumption you made into the plan, and what is the percentage of sovereign on total asset that you will have at the end of the plan? On the net profit, if I look at your 2020 target is EUR 4.3 billion of adjusted net profit. At the end, it's around EUR 5 billion. EUR 150 million 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 among the various division. Thank you.
Thank you. I will let Mirko comment first on the question on AT1 and CRD V.
Yes, on the AT1 side, yes, you're correct. If CRD V is implemented, we will have EUR 1.25 billion more AT1 to do and EUR 1.75 billion in Tier 2. This is not embedded in the plan. First of all, the AT1s are equity-treated, are not going to impact our net income. It goes directly to equity. The impact is simply coming, or will come, in that case, if 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 EUR 60 billion by 2023. 50% of EUR 60 billion is EUR 30 billion. As far as 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 Minister Scholz. It's likely that the Eurogroup will come up with some proposal. There were some rumors and some discussion of what could be done. I think the non-letter of Minister Scholz will accelerate, basically, the regulatory view of what to do and how to deal with the sovereign portfolio.
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. I think it's something which is fully costed in our plan in terms of reduction of the NII. It's part of the evolution of the risk profile. 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 Scholz 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. You will need to look at that on a consolidated basis, or you will have to give up the Danish compromise. I cannot see how it can be done differently. We don't care. We don't have an insurance company. I think you guys have to look in detail at what could be the impact of this new evolution, 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 it's the right strategy, actually.
On the macro evolution and what we see in terms of the component which help us move to the EUR 5 billion net income, I think that you have seen in our projection that we have some kind of improvement in our conservative assumption, which are more conservative than the market by 2023 of the EURIBOR. Which should allow us with EURIBOR going back to 40 basis points or so, to improve our NII. 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, when you have the cost of risk. All that allows us to reach a consolidated net profit around EUR 5 billion, knowing that our tax rate over the period, which is an important component, our tax rate between 2020 and 2023, will be between 19%-20%. In other words, in the period, we have a lower tax rate because thanks to the sustainable net income that we show, we'll be able to write up DTAs, which will lower our tax rate, which you should put in your model between 19%-20% over the period. Other questions? I think we took many question on this side, let's take a question on the other side, we go back to this side.
Jakub Lichwa, RBC again. A few questions. One is on CRD V, and the issuance expectations for capital instruments AT1, Tier 2. Do the issuance expectations already factor in the fact that you'll be able to make a use of Article 104A by 2023? In relation to that, what is the probability of issuing AT1s and Tier 2 into this bucket already in 2020? A 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? Potentially, are you able to disclose, in some way, in the future, those sensitivities? Thank you.
Well, 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 one-third. We are today post-tax at a 17 basis point sensitivity for 100 basis point of the BTP spread. 17 for 100, basically. It will keep going down with the reduction of our portfolio over time. On the CRD5 capital instrument-
I'll let Mirko comment.
Yes, first of all, it's not embedded in the plan. We're talking about EUR 3 billion in additional funding between the AT1 and the Tier 2, as I said before. This is very feasible. 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 the end of 2020.
We keep being very flexible, but the overall size of what will be issued to benefit from the full 80 basis point- Lower CET1 level, MDA, is something which is very easy to do for us. 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 third quarter.
Yes.
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, so.
Thank you. Andrea Filtri from Mediobanca. First question is that regulators are recognizing your improvements and de-risking by progressively reducing the P2R. What would you need to see to reduce your MDA buffer accordingly? Could you specify if the upper end of the buffer means being at 250 basis points or between 226 and 250?
Secondly, are you actually extending the buyback pro rata also to the cash? Can you elaborate more on the cost-benefit analysis of implementing a sub-holding? Were you 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 question is, upper part of the range is between 226 to 250. Actually, that's, if I may say, mechanical.
Mathematical.
The answer is yes, it's between 226 and 250. On the buyback to the cache, the answer is no. On the sub-holding NPE, we said our strategy is to be SPE. We don't do any cost benefit because we remain SPE, and we just want to make that very clear. We remain SPE, but by creating, having the project to create this sub-holding, we want to make sure that we can positively influence our MREL requirements and lower it, which will mean that we will have to issue less MREL eligible securities in the future. Other question at the back.
Delphine Lee 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 as well, TLAC compliant instruments, are you assuming similar level to where we currently at? Second question is just on slide 20, a very quick one. In 2021, you have slightly more capital generation, 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 Yapı 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 EUR 500 million net profit impact. If you can just elaborate a little bit on that. Thank you.
Thank you. I would like to, Mirko answer for the first question.
Maybe TJ, no, actually, Mirko for the second, and Walid there, he can answer as well on the third. Mirko, you're going to be busy.
Yeah.
Just while he prepares his answer for the first two questions, let me remind you that the Draghi Scenario is not only a rate scenario, it's also taking into account a lower economic environment. We have a more negative impact coming from lower growth, we take proactive actions in order to mitigate this environment. Basically, don't apply only in your model just a rate assumption, take into account that GDP will be lower, that we will impact proactive action from a managerial point of view to improve that. Now I let Mirko comment on the three questions.
On the funding cost, basically, we are assuming a BTP bund level of across the plan of 150. That's how we are basing basically the spreads. Interesting maybe to look at the impact or, let's say, the funding cost of 2020 versus last year. It's material basically how the funding cost is coming down. 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 Yapı. That's in there. The normal evolution of our plan is also in there. On the Draghi upside versus Lagarde, the delta seems, let's say, optically small, if you look at it. The reason is that on one side, Lagarde has an improvement in EURIBOR only in the last year, that's one side of the leg.
On the Draghi side, of course, we are taking managerial decisions in the Draghi scenario to reduce cost, to also make sure that we improve, basically, the performance of the bank. The delta between the two is optically low because we are taking steps in order to manage the Draghi scenario.
On the Lagarde, 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, basically.
Yes.
That explain as well a difference. Yep.
Yeah. Ken Wilson, JPMorgan. EUR 28 billion market cap, EUR 16 billion buyback. If you adjust for the P2R, you get to EUR 19 billion buyback, about two-third of your market cap over a short period of time. The question 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+, adjusted for below the line charges is 7+. How can we see a double-digit figure in the ROE? What has to happen besides economic scenario changes?
I got it.
What can you do within the bank to change that?
I think that we communicate about value creation, so between shareholder distribution, dividend payments, and share buyback, and tangible equity evolution. When you look at the overall evolution for banks in Europe, it's not UniCredit specific. If you believe the EBA impact study on Basel IV, the regulatory capital will increase by 25%. 1 over 125 is 0.8. Mechanically, the ROTE, because the E is increasing, will go down by 20%. This is why we said 8% into new 10%. Don't expect our ROTE to be double digit. That will not happen. Our ROTE based on the capital level of today would be double digit.
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 UniCredit specific issue, in light of the increase of regulatory requirement as the value creation between tangible equity increase. How much you build into your tangible equity versus distribution. You have a certain number of banks or companies which increase their payout but don't increase their tangible equity or actually from time to time, decrease their tangible equity. That's value destruction for the shareholders. So we not only increase the payout, we raise 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 UniCredit specific issue, it's a bank issue.
That will be my answer to your point. We want to be honest with our shareholders, and we are not going to pretend that we can be double-digit. I've 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. We have a question here at the front, or maybe one at the back and then one at the front here.
Hi, this is Ignacio Cerezo 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? Second question would be on fees, if you can give us a bit of color in terms of fee growth breakdown between transactional financing and market fees. The third one, if you have received authorization for the buyback from the ECB. Thank you.
Thank you. Well, just on the buyback from ECB, we will engage with the ECB once the decision is made by our board and, AGM, to go for a buyback. If we are mentioning 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 discussion with the regulator. On the NII, you're right. Based on the various assumptions we have, we should see in 2020 and 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. 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 EURIBOR, 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 EUR 160 million. The sensitivity to the curve is actually important. The NII will be more or less at par with 2019. We think, the forwards 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. Take it between 2018 and 2023 at around 2%, which could be a good approximation.
We have a question at the front. It's, here, Jean-François, just at the front here. I see you.
Okay. Take a question at the back, and then you'll have a question here. Please.
Hello. It's Corinne Cunningham with Autonomous. Just like to ask some questions about slide 18. Specifically, you have other MREL content there. You've got the senior preferred exemption, and then you've got other MREL-eligible instruments. Just like a bit more color about what you include there, whether that includes any retail debt, whether it includes any corporate deposits. 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. Even there are qualms over bailing in Tier 2 sometimes.
Bearing in mind 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 Mirko 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, 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 AT1, of course. 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.
Is there
preferred exemption is validated.
Yes.
I'll let Mirko comment.
Yes.
On the breakdown of eligible instruments.
Yes, on the eligible instruments is a mix between senior debt and also, let's say, certificates, and basically, that's the mix that we're using.
None of it is placed.
None is
Our retail clients.
No.
None of it.
It's capital-guaranteed instruments, basically.
Any other questions? Yeah, Mr. Jean-François, do you have the microphone? We'll get there.
Can I go? Okay.
Oh, yeah. Please, go ahead.
Okay.
Go ahead, yeah.
Thank you. Thank you. Couple of questions. The first one is about the systemic charges, which represent a significant cost to UniCredit P&L. I was wondering whether, shall we assume a stability over Team 23 of the strategic of the systemic charges, is there a way, some managerial actions, something that you can do in order to reduce this EUR 800 million-plus cost per year, which contributes to deflate significantly your bottom line? 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 SRF recommendations on the stock of NPE? That basically, last year, we know that the ECB asked to the banks to basically bring the coverage of high vintage loan to 100%. The very last question on the buyback.
You are about to, clearly, call the AGM to approve this plan, if I'm not mistaken. Are you about to also apply to the ECB for the full amount of the buyback? What's going to be the regulatory treatment for the buyback? 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 four years? Thank you.
Well, I just take the last question.
Let TJ answer to your second question, which I think is more linked to calendar provisioning and the impact of calendar provisioning, and I will let Mirco comment on the first one about systemic charges.
On the buyback, it's a year-by-year agreement from the ECB. There's 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. That's the way we will do it. 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. Maybe we can go to the detailed slide of regulatory impact that we have in the presentation of Mirko, which, if I'm not-
The appendix.
mistaken, is on slide 20-
29.
29.
As you can see on 29, in CMD17, we actually said the calendar provisioning was around the low 40s. This is for flows at that point in time, then since then, ECB has introduced also the calendar for the stock. We have estimated for stock through the plan that it will cost us in the so-called low single-digit basis points. This is in part due to our very decisive way we have dealt with the non-core. I think we are the only bank that have a real plan to run down the non-core. Obviously, it also affect the core, effectively, the calendar provisioning for the stock is in the low single annual, single basis points, during the plan for Team 23.
Mirko, 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 CE.
Next question, Jean-François.
My first question is on the regulatory headwinds. 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, or potential change in the way that recovery processes happen. I think there is an option to explain. Is anything of that included in the plan? 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. 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? 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. That's on slide 29, if the team can put back the slide on the screen. TJ.
Thank you, Jean-Pierre. 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. We have taken this into account. I think if you look through the plan, it will be around the 20+ basis points throughout the plan. For calendar provisioning, because of the stock and the calendar, obviously, the non-call rundown has really helped on the stock front. For the calendar, going forward, we will look at it between the price difference between value and the timing of when the disposal, but I expect this space to change the way bank handle the NPE management.
On the NII evolution in Italy, Mirko.
In Italy, yeah. On the NII side, you're correct, meaning the trends that you have seen, let's say, in our third-quarter results are the reality. We see that trend to continue into 2020, and we see basically a bottoming out around 2021, somewhere in 2021. That's the assumptions that we have taken. On the trading income side, we were guiding between EUR 300 and EUR 350 a quarter in the past. Probably, it's a good range to be using going forward.
Just on the NII side, we mentioned in the presentation that we do not do volume lending.
No.
We do not do carry trade. 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 a very long-term incentive plan. The new one is nine years. The current one is seven years. We don't look at short-term impact on our NII or net income, because this short-term impact have either zero value for the shares or have a very strong negative impact going forward. We are long-term shareholders. 100% of the remuneration of the top management and mine is in equities. 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. Everybody behave in a very aligned way with the shareholders.
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, Mirko.
I said it.
Okay.
Yeah.
As well. Next question.
A 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?
On buybacks, we will cancel the shares, and the bolt-on acquisition do not go against that. It's yes. Any other question? You need to have other question because the pasta are not completely cooked, need to wait for 1:00 P.M.
Thank you. Alberto Cordara, Merrill Lynch. Just a couple of clarifications. The first one is regarding Yapı. You're assuming in the plan a deconsolidation of risk-weighted assets. The question is, what is the percentage of Yapı you need to sell in order to deconsolidate? I assume it's not 100%, just would like to know if there is any Yapı earnings in the plan going forward, and what is your assumption there, if possible. The second question, more broadly, I was comparing slide 22 to slide 26 of the presentation from Mirko. Indeed, it looks like there are different assumptions, not only in terms of your EURIBOR rate, but also in terms of growth between Draghi, Lagarde, and your central case. Just to clarify, can you elaborate on the sensitivity just to interest rates?
Yes.
If you have a plus 10 basis points or minus 10 basis points or plus 100, ±100, how much your NIM will be impacted?
Thank you.
Yep. I'll take the first one, and Mirko will comment on the second one. As I said, we sold 9% of Yapı to Koç over the weekend. We own 32% of the shares. That will give us more flexibility in terms of capital allocation. We said that we expect to have a full deconsolidation of Yapı. We are in discussion with the ECB. I will not comment more than that. On the-
On the NII
sensitivity to interest rate.
Yes, on the NII, sensitivity to interest rate is 10% delta, approximately, on average, is EUR 125 million in NII.
Any other question? I think there's no more questions. 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. Can the team in the back room put the conclusion slide? Thank you. Before we go for lunch, I would like to quickly take you through the update 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 three.
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 Chief Executive Officer and 50% for the top management and the lower variable rate for the other executive. The duration of the LTIP has increased from seven to nine 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, and our dedication to the team. Let's move to slide four. Let me sum up again what we told you today.
With Team 23, the whole team has made a clear commitment to deliver. We will create EUR 16 billion of shareholder value, EUR 8 billion from growth in tangible equity, and EUR 8 billion as capital distribution via dividends or share buybacks based on Team 23 economic assumption. Again, we commit to do the right thing with all our stakeholders. 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.