Good morning. This is the Chorus Call conference operator. Welcome, thank you for joining the UniCredit Group Q3 2019 financial results presentation. As a reminder, all participants are on listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing Star and Zero on their telephone. At this time, I would like to turn the conference over to Mr. Jean Pierre Mustier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.
Thank you very much. Good morning to all of you, and welcome to our Q3 2019 call. Before we start, I would like to recall the profound sadness we all felt at the sudden passing of our esteemed chairman, Fabrizio Saccomanni, in August 2019, just one day after our last result call. I have personally lost a friend of great intelligence and humanity, highly competent, with a fine sense of humor and wit. UniCredit has also lost a chairman who expertly guided the board through a period of intensive challenges, always maintaining a clear strategic vision and a strong sense of direction. We welcome Cesare Bisoni, who was appointed chairman in September.
Cesare has been vice-chairman since April 2018, and thus already has an in-depth understanding of the bank and has closely followed the elaboration of the new Team 23 plan, which we will present in London on the 3rd of December. You will also have seen that last night we sold our stake in Mediobanca. The financial impact is irrelevant, and the transaction is in line with our strategy to sell non-strategic assets. As regards our financial performance, we had a strong Q3 2019, with a net profit of EUR 1.1 billion. This is the best adjusted net profit in the Q3 in more than a decade. Our de-risking continued at a vigorous pace, taking the group gross NPE ratio below 6% for the first time. Our CET1 ratios stood at 12.6%, translating into a 252 basis point buffer over MDA. We are innovating this quarter.
Due to popular demand, we will keep our remarks on the presentation much shorter to allow for a more comprehensive Q&A session. If you require more detail than we give in this presentation and today's session, feel free as always to call our colleagues in Investor Relations, who will tirelessly strive to help you. Let's move to slide four. Group revenues are up 1.7% year-on-year, while costs are down 1.8% year-on-year, resulting in a significant operating leverage. Cost of risk in Q3 2019 is 47 basis points, down both quarter-on-quarter and year-on-year. Let's move to slide six. Since the Q2 2019 upgrade by rating agencies, our spreads have tightened considerably. We tactically anticipated next year funding, issuing a Tier 2 bond at half the spread compared to our February issuance. We completed more than EUR 5 billion of NPE disposal in the quarter, EUR 4 billion of which in non-core.
As a result, we now expect non-core gross NPE to be below EUR 10 billion at the end of the year, a very significant reduction versus our original target of EUR 19.2 billion. As of the Q3 2019, we have completed the branch closures and FTE reduction that were part of Transform 2019. Let's move to slide seven. We continue to actively support the real economy in the countries where we operate. In Italy, we launched the Made4Italy initiative and signed an agreement with the EIF for an additional EUR 60 million for Italian micro-enterprise. Our partnership with Allianz and an MOU with EXIM are good examples of how we support our growth initiative. Let me hand over to Mirko.
Thank you, Jean-Pierre, and good morning, everyone. I will now take you through our Q3 2019 financial performance, and as promised by Jean-Pierre, I will be much shorter than usual. Group core performance was strong, with a return on equity above 10% for both the quarter and the year to date. We confirm the target above 10% for fiscal year 2019. We also confirm the fiscal year 2019 group ROTE and all divisional return on allocated capital targets. In order to avoid any misunderstanding, confirming a ROTE or a return on allocated capital target has always meant that we will be at or above the announced figure. Let's turn to slide 10. Revenues were up 2.2% year-on-year, mainly driven by strong trading, thanks to higher client activity. While fees were remarkably strong, we saw no seasonality quarter-on-quarter.
They could not completely offset the year-on-year decline in NII, mainly due to rates decreases. Commercial revenues were resilient, up in the quarter, but down year-on-year. Group core cost of risk is stable and low at 35 basis points in the quarter and 37 basis points in the nine months 2019. It is well below our fiscal year 2019 target of 43 basis points. Let's turn to slide 11. Let's now look at the figures for the group. You will notice that the stated net income is equal to the adjusted net income in the Q3 2019, up 25.7% as there were no adjustments. The tax rate in the nine months 2019 is 25.8%, down from the H1 2019 level as per guidance. The main reason is a different geographic profit mix. Let's turn to slide 12.
NII was flat in the quarter and down 0.9% without the days effects and FX, a very good result given the lower EURIBOR affecting loan rates. The other drivers of the quarter NII were deposit rates, positive by EUR 13 million, driven by the lower term deposit volumes in CEE. Term funding contributed positively thanks to the lower rates in Germany, Austria, and CEE. In the other bucket, we had a non-recurring EUR 11 million item in Factoring Italy. Let's turn to slide 13. Customer loan rates were down six basis points in the quarter, mainly driven by Commercial Banking Italy and CEE. Without one-offs, these two divisions showed declines in customer rates of four and five basis points respectively. EURIBOR was the largest contributor to the drop, coupled with some sustained competitive pressure in certain jurisdictions, including Italy. Let's turn to slide 14.
Group core end-of-the-period customer loan volumes were up EUR 1.3 billion quarter-on-quarter, while for the group, they were marginally down as non-core continues to run off. The loan to deposit gap due to the sale of Fineco last quarter is closing fast, down by more than EUR 7 billion quarter-on-quarter. Let's turn to slide 15. Group fees were up 3% year-on-year. A strong performance in investment fees and financing fees resulted in both being up quarter-on-quarter, which means that there was no seasonality in the Q3 2019, which is remarkable. On a year-on-year basis, investment fees are up strongly, mainly driven by upfront fees, while financing fees are lower, driven by lower market volumes in corporate finance. The start of the Q4 was promising for financing fees. Let's turn to slide 16. TFAs stood at EUR 781.6 billion in the Q3 2019.
AUM net sales were up EUR 2.5 billion, the highest quarterly level in more than one year, with positive contribution from all divisions. Asset under custody net sales, however, were negative as clients took advantage of tighter spreads and realized some profit in their bond portfolio, mostly in Commercial Banking Italy. We were able to convert a good percentage of these flows into asset under management. Let's turn to slide 17. Trading income in the Q3 2019 was EUR 378 million, up both quarter-on-quarter and year-on-year. Year-on-year, trading was up around 38% when excluding XVA, thanks to much stronger client activity. Quarter-on-quarter, trading had the full seasonality of the Q3 plus a +EUR 66 million swing in XVA.
Regarding Yapı, the contribution to the dividend line almost doubled year-over-year at constant FX, mainly driven by lower loan loss provisions and strong fee generation. The CET1 sensitivity to FX remained negligible. Let's turn to slide 18. Our focus on cost efficiency is yielding tangible results quarter-over-quarter. Please remember that we expect higher costs in the Q4 2019 due to seasonality, both in terms of HR and non-HR costs. The overall FY 2019 cost target of EUR 10.1 billion is confirmed. Let's turn to slide 20 as slide 19 speaks for itself. Regarding group cost of risk, I would like to point out two items. First, group cost of risk was 47 basis points in the quarter, including -1 basis points of models and 49 basis points year-to-date.
For fiscal year 2019, we confirm 55 basis points, including the 4 basis points from models. Second, we have successfully disposed of a residential mortgage NPEs in Italy. We initially intended to sell substantially all bad loans, residential mortgages loans after the non-core only. As this turned out to be a very successful transaction, we took the opportunity to also sell substantially all bad residential mortgage loans in Commercial Banking Italy. This positive action will increase the cost of risk in Commercial Banking Italy by 0.1 percentage points for fiscal year 2019, and as a result, the cost of risk is now expected to be in the low 70s basis points. Let's turn to slide 22. In the Q3, NII was up 0.2% quarter-on-quarter, driven by the days effect and an EUR 11 million non-recurring item in factor in Italy. Fees were up 3.3% year-on-year.
Strong investment fees from AUM products and transactional P&C insurance fees more than offset weak, but improving financing fees from loans. The overall risk environment in Italy remains very supportive. The very successful residential mortgage transaction comprising of both non-core and Commercial Banking Italy NPEs confirms our approach of taking decisive actions to clean up our balance sheet. As a result, as mentioned before, while the fiscal year 2019 divisional cost of risk will increase by circa 0.1 percentage points to be in the lower 70s, this action will have a very beneficial impact on our asset quality in Commercial Banking Italy. For the Q3 2019, the gross NPE ratio is 5.0%, already below our fiscal year 2019 target of 5.3%. Expected loss from new business and stock have improved in the quarter, despite the impact from models. The numbers are in the annex on page 60.
Feel free to ask IR for more detailed explanations. Let's turn to slide 23. In Commercial Banking Germany, we saw a remarkable performance up 1.7% quarter-on-quarter against the seasonal trend and up 7.5% year-on-year. The main drivers were investment fees. Loan loss provisions normalized in the quarter, and we expect a low cost of risk for fiscal year 2019. Let's turn to slide 24. In Commercial Banking Austria, NII was up 2.7% quarter-on-quarter, better than expected, and strong commercial dynamics. The costs were affected by non-recurring items from DBO and holiday provisions. Excluding these items, costs were close to flat year-on-year. Let's turn to slide 25. In CEE, we again saw a good performance in NII and fees.
The cost of risk was very low in the Q2 2019. It gradually normalized into the Q3 2019 and Q4 2019. It still will be well below our fiscal year 2019 target of 102 basis points. Let's turn to slide 26. The CIB quarter-on-quarter performance showed strong commercial dynamics across all revenue components. Looking at the performance year-on-year, it was strong trading profit from robust client activity that led to the overall revenue growth. Please remember that Ocean Breeze is still contributing to the top line, but not to the bottom line in the Q3 2019, as there is +EUR 21 million in revenues offset by -EUR 21 million in profit on investments. Cost of risk in the quarter was extraordinarily low and will normalize in the Q4 2019.
The fiscal year 2019 cost of risk target is confirmed at 21 basis points. Let's turn to slide 27. In the Group Corporate Center, revenues were down year-on-year due to higher funding costs. In 2019, year-to-date, the Group funding plan was executed for more than EUR 25 billion, compared to a fiscal year 2018 execution of EUR 17.2 billion for the whole year. Let's turn to slide 28. Execution of 2021 non-core runoff is progressing very well. At the end of fiscal year 2019, gross NPE will be below EUR 10 billion. Loan loss provisions in the quarter are in line with the average for the year and historic guidance. Let's turn to slide 30. We continuously work to de-risk the balance sheet. The trend is very good, primarily driven by disposals.
Group core gross NPE decreased by 13.5% year-on-year and 6.5% quarter-on-quarter, mostly thanks to Italy. Also, gross loans and UTPs were lower, both year-on-year and quarter-on-quarter. Our core gross NPE ratio improved to 3.6% in the Q3 2019, close to the EBA average. However, every time we sell, it pushes the EBA average down further. Let's turn to slide 31. The overall credit environment remains very supportive with default rate, cure rate, migration rate, and recoveries improving year-on-year. Let's turn to slide 32. Overall, the risk environment in Commercial Banking Italy remains supportive and stable. The trend across all NPE categories is very good, with bad loans, UTP, and total gross NPEs all down year-on-year as well as quarter-on-quarter.
This was supported by strong disposal activity, where we took advantage of a very successful transaction with residential mortgages in the Non-Core to sell substantially all bad loans in that asset class in Italy. The gross NPE ratio of 5.0% is already below our fiscal year 2019 target of 5.3%, while the coverage ratio improved. Let's turn to slide 33. The supportive credit environment for Commercial Banking Italy led to a significant improvement in default rate. Also, the cure rate and migration rate have improved year-over-year. As a result, the underlying cost of risk is low, both quarter-over-quarter and year-over-year, and the modification of the fiscal year 2019 outlook for cost of risk is solely driven by the disposal of the residential mortgage NPEs. Let's turn to slide 34. As already said, the execution of the 2021 Non-Core Runoff is progressing very well.
We did a large transaction residential mortgages NPEs out of the non-core. As a result, gross book value in non-core reduced by EUR 10.9 billion year-on-year, down to only EUR 11.2 billion at the end of the Q3 2019. Let's turn to slide 35. As a result of the very successful execution of the non-core runoff, we now expect less than EUR 10 billion of gross book value by the end of 2019. This represents a reduction in non-core NPEs since the start of Transform 2019 of around EUR 40 billion. Net NPEs are already below EUR 4 billion in the quarter, making non-core less and less relevant. The full runoff by 2021 is confirmed. Let's turn to slide 37. The group Core Tier 1 ratio at quarter end stood at 12.6% or at 252 basis points buffered to MDA.
The key positive items in the quarter were the Fineco deconsolidation for 31 basis points as per guidance, and the net profit for 28 basis points. Gains from fair value through OCI securities were offset by the DBO, which had a negative impact due to the discount rate lowered by 53 basis points on average in the quarter, more than the 10-year swap rate. We have reached our reduction target for BTP sensitivity that we announced in the Q3 2018. At the time, we had 2.5 basis points sensitivity post-tax that we wanted to reduce by 35 basis points by the end of fiscal year 2019. With 1.7 basis points today, we have reached our target a quarter early. For the Q4 2019, there will be now no significant regulatory headwinds as they have shifted to the next year, reflecting the expected timing of ECB approvals.
For fiscal year 2020 and beyond, we will update you on the regulatory headwinds at our Capital Markets Day in December. Our CET1 MDA buffer at the end of 2019 will be at the upper end of our target range of 200-250 basis points, assuming BTP spreads remain at current levels. Let's turn to page 38. Risk-weighted asset in the quarter increased by EUR 0.6 billion to EUR 387.8 billion, driven by FX, mainly from Turkish lira and US dollars. For once, regulation was a positive in the quarter as we rolled out a new advanced model in Italy, lowering the risk weights for that portfolio. Let's turn to slide 39. In the Q3 2019, our tangible equity grew by 1.7% to EUR 51.6 billion.
This is the fourth consecutive quarter of growth in both tangible equity and tangible book value per share, both now above the fiscal year 2017 values. Let's turn to slide 40. As the only Italian G-SIFI, UniCredit has to comply with the TLAC regulation that entered into force in June. As of the end of the Q3 2019, we are well above our requirements with a TLAC ratio of 21.85%. This corresponds to an MDA buffer of 226 basis points, well above our target buffer range of 50- 100 basis points. Thanks also to pre-funding. We completed our fiscal year 2019 TLAC funding plan with the October senior preferred issuance of EUR 1 billion at a very tight spread.
After Moody's recent upgrade of our Tier 2 instruments to investment grade, we tactically anticipated next year funding plan, issuing a EUR 1.25 billion Tier 2 at the lowest spread since 2011. As regards to the senior bond exemption, questions were raised in a number of sell-side reports as to its availability to European banks, including UniCredit. To be very clear on this topic, as of today, UniCredit can benefit from these exemptions according to CRR, and based on the interaction with resolution authorities, we are confident of benefiting from it from both TLAC and MREL. Jean-Pierre, back to you.
Thank you very much, Mirko Speedy Bianchi. Before we go to Q&A, let me look back over the last three years as this quarter is the last one before we present our new business strategy. In December 2016, we gave you Transform 2019. This was a very ambitious business plan, including EUR 20 billion of equity raising, cutting in half our non-performing exposure, and more than doubling our profitability. We told you at the time, we say what we do, and we do what we say. We have kept our promises. Despite all the headwinds from geopolitical tension, macroeconomic volatility, and higher regulatory pressure, we have delivered the plan. Financial Year 2019 guidance is confirmed. We will deliver the EUR 4.7 billion adjusted net profit that we promised three years ago. I remind you that we will be based on our 30% cash dividend payment.
We will deliver an adjusted ROTE above 9%, and we will deliver a 30% cash dividend of EUR 1.4 billion, up 120% on last year. We have been able to achieve our targets thanks to having always faced reality, looking ahead, and taking decisive action whenever needed, even if doing so was painful at the time. The execution of 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 their willingness to walk the talk, we have executed Transform 2019 very successfully. We can trust this team to deliver the next plan. As a sign of recognition of everyone commitment, we have decided to call the new business plan Team 23. We hope to see you all on the 3rd of December in London to discuss Team 23 and all of its detail.
Now, at this end of this shorter presentation, Mirko Speedy, the rest of the team, and I are ready to take your question. If you could please be so kind to limit your question to two each. Many thanks. Operator?
Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session for analysts and investors only. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove your question, please press star and two. The first question is from Mr. Domenico Santoro of HSBC. Please go ahead, sir.
Hello, good morning. Thanks for the presentation. It's everything very clear. I do have a couple of questions. First of all, on customer spread evolution for next year, can you please comment on the customer loan rate specifically, and customer deposit as well rate, in particularly referring to the cost of replacing new issuance with old issuance, that old bonds that might probably be more expensive, and also including the potential new TLAC issuance that you might do next year considering the regulatory headwinds. I do have a question on the securitization disposal. If my calculation is correct, this portfolio might have a coverage of 60% more or less because you are including also SME position. Given that the disposal price is around EUR 30, I was just wondering whether the loss from the disposal should be minimal, and if my calculation is correct.
Also on the buyback of shares. We heard from the other call of banks in Europe, the Spanish specifically, that the regulator is more open to buyback of shares. Just to anticipate any thoughts ahead of the December Plan. Thank you very much.
Thank you very much. On the customer loan rate, I will hand over to the Co-CEO of Western Europe so that they can give you the feeling of the market activities and as well to our Co-CEOs of CEE, and Mirko will comment on depot and cost of issuance. Just a comment is, and you might have a further question on that, but we use the current environment to shift our portfolio toward the good credit. We think it's an opportunity now because some of the banks are hungry for yield. We can actually shift to the good credits and the higher-rated client who actually give more side business. Consequence of maybe potentially lower rate is as well the fact that we increase the business and the risk profile of the portfolio, but the team will comment about the client evolution.
I will just comment on the buyback very quickly, and Tj will comment about the disposal. On the buyback, we will comment in our presentation in December about our strategy in terms of dividend and mix of cash dividend and buyback. We said that we are very open to look at buyback if our share price trade at a discount to tangible book. As you pointed out, the recent agreement of ECB for one specific bank to allow for a buyback and the communication we have with them show that ECB is very open to allow banks to do buyback when they have the adequate capital position, of course. First, the co-CEOs of Western Europe on loan rate, then Mirco will comment on the funding side.
On the loan rate across Western European countries, the absolute level has been following the fixed rate level in the market with a very low environment. Having said that, we have been able, across the three countries, to maintain a sustainable client spread in between our cost of funding and the level applied to the customers. Rates are following markets, to sum up, but margin being maintained at a stable level from one quarter to the other.
In terms of outlook, what do you see in terms of evolution?
In terms of evolution, we expect to maintain, in this very competitive environment, a customer spread at the current level. The only exception being on the mortgage side, where we take some action to be less aggressive in the market in the three countries, considering the evolution of the cost of risk.
Very good. Niccolò on C.
For C, net of the one-off, we have seen some normalization of the spread. We expect this normalization to continue in the next few quarters.
Mirko, on cost of issuance and depo.
Yes. Cost of issuance, of course, we expect cost of issuance to go down because of the base rate changes and reduction. Of course, we're going to be much more specific at Capital Markets Day. You have to wait another month. In general, in terms of, let's say volumes, they will be slightly higher. As you have seen, we tend to reduce execution risk, and we anticipated already one transaction this year in terms of Q2. So from that perspective, we are quite comfortable.
Tj, on the disposal.
For the disposal, to clarify, first of all, there's no SME included in the portfolio. This is all residential mortgages. Overall, our coverage are in line, and here, as Mirko has mentioned, that because the transaction is very successful, we included the core component, which clearly are not provisioned to sell like the non-core. Hence the expected so-called cost of risk increase for the core of the Italian parameter. By this transaction, we substantially dispose of all of our residential bad loan for the Italian parameter.
Next question.
The next question is from Adrian Cighi of RBC. Please go ahead, sir.
Hi there. Adrian Cighi from RBC. Thank you for taking my questions. Two questions from my side as well, please. The Mediobanca sale makes sense in the context of simplifying the group structure. What's the list of remaining financial investments as opposed to strategic stakes, and where do you see the Yapı falling on this spectrum? The second question on ROTE. Again, group ROTE was between 8% and 9%, and the core was above 10% again. What was clearly a strong but a very clean quarter. Is this a reasonable figure to expect as part of the plan, or do you see material headwinds to profitability from here? Thank you.
Thank you. As we said, the Mediobanca disposal is part of our disposal of non-strategic assets. We have a strategy, which is to proactively manage our assets when it makes sense to sell the non-strategic one to simplify the group structure. We might have a very few left, actually, in the portfolio, so they should be not very meaningful per se, but you don't speak only about financial asset or investment. We have said that we will keep disposing, for instance, of real estate that we don't feel is strategic, and could contribute in terms of our CET1. Our financial strategy is as well to very carefully manage our capital allocation, both on the top-down basis, looking at the profitability of our businesses, and making sure that they cover their cost of capital, so debt and equity, on an ongoing basis.
We make decision if we think that it is not the case on an ongoing basis, as well as on a bottom-up basis to manage proactively our client business and our portfolio activities, either by sub-segment of client or even on an an individual client basis. We will give more explanation during the Capital Markets Day on the 3rd of December. As far as the ROTE is concerned, we confirm a group ROTE above 9%, and you have seen our group core ROTE, which is around 10.6%. It's clear that the ROTE is a ratio between the net income and the regulatory capital. We will confirm during the Capital Market in December what is the regulatory capital evolution. You know that there are regulatory headwinds. We disclose fully. We were actually the only bank to disclose in December 2017 our regulatory headwinds for the next 10 years.
At the time, people said, "But you're the only one to have these regulatory headwinds." I noticed with great interest in the Q3 that many other banks are now discovering that there is an impact of Basel IV and any other issues. With UniCredit, you can be sure that we are transparent. We say what we do, and we do what we say, and there's no surprise, basically. You have seen the EBA impact study, which confirmed what we said, and we showed that for the European banks, there's an increase of 25% of capital linked to Basel 3.5 or completion of Basel III, the so-called Basel IV. 1 over 125 basically is 0.8, so we say that going forward, if the EBA guidelines are correct, 8% will be the new 10%.
If you look at increase of capital coming from the regulatory side and assume the net income is going to be stable. As far as UniCredit is concerned, we will give you all the details at our Capital Markets Day.
Next question, please.
Very clear. Thank you very much.
The next question is from Alberto Cordara of Bank of America. Please go ahead, sir.
I have a couple of questions. The first question related to tiering and your strategy regarding the new TLTRO. Specifically, what I would like to know is, how much this can help your top line, and what kind of trends should be seen in 2020? The second question is more specific on Commercial Banking Italy. Your comments in the presentation imply that customer revenues in Italy from lending are flat. However, earlier in the presentation, you highlighted quarter-over-quarter decline in both the customer loan rate and lending volumes. I would like to know how you can explain this difference, and how do you want to be positioned on the lending side? Thank you.
Thank you very much. I will let Mirko comment on the tiering, and I might take up your second question now. As I said earlier, we are increasing our activity with higher-rated clients. Basically, the client spread will tighten up because we move gradually to higher-rated clients. We feel it's a very good opportunity now. Some of the banks in many markets are desperate for yield and go for higher spread, which usually mean lower-quality clients. When we go for higher-rated clients, we actually deal with clients who give us more side business because these clients are usually exporters and are quite active. We use the opportunity today of the market to shift the portfolio towards the good credit, which might be slightly tighter in terms of spread, but should give us more side business in terms of commission going forward.
While we are more aggressive on the better-rated client, we can be as Francesco Giordano and Olivier had mentioned, we can be less aggressive on some of the activities and give up market shares on lower-rated client, which is not only corporate client, but also retail clients and mortgage. We see on the mortgage market in some of the countries, including this one, I've seen working in Rome recently in the branch of one of our largest competitor, 20-year mortgage at 0.7%. That's something we don't do at UniCredit. We don't mortgage our future liquidity, basically. You can see our market share evolving, but it is a conscious decision in order to manage properly the quality of our credit portfolio and of our long-term liquidity. In summary, we are going to increase the market share of higher-rated class, potentially lower the market share of the lower-rated class.
In the Italian market, you have seen that the repricing in this quarter was impacted equally by the movement of the EURIBOR, and so which had the most impact basically on the client rate, not speaking about the client spread, but the client rate. This has driven a general drop in the Commercial Banking Italy customer rate, basically. From 2020 onwards, and we launch managerial actions to compensate the interest rate environment, such as we mentioned publicly, the deposit facility rate and others. I let Mirko comment on the TLTRO.
First, I'm going to comment on the tiering question. From a UniCredit Group perspective, we have about EUR 10 billion in terms of minimal reserve requirements. On top, we have between EUR 25 billion and EUR 30 billion in available reserves. Of course, this number fluctuates over on a monthly basis. If we look at this type of a scenario, and we apply tiering, we might get between EUR 80 million and EUR 100 million in terms of tiering profit. That will change, because depending on the reverse repo usage that we do into our treasury department, this number basically can fluctuate. On the TLTRO side, first of all, the first comment is that we don't need TLTRO from a liquidity perspective because the company is extremely well-placed from a liquidity perspective. What we are going to do is potentially take up some of the allowance that we have in the new TLTRO.
The allowance is EUR 52 billion. We will take, let's say, an economic view on that. We're going to announce at Capital Markets Day what we intend to do from a TLTRO3 perspective.
Next question, please.
Fantastic. Many thanks. Thank you very much.
The next question is from Andrea Unzueta of Credit Suisse. Please go ahead.
Hi. Thank you for taking my question. On NII, in slide 12, you talked about 23 other impact, and you've explained that EUR 11 million out of those EUR 23 million come or are explained by Commercial Banking Italy. What are the other EUR 12 million, and am I correct to assume that those are within the CIB division?
Sorry, go ahead, yeah. Go ahead. Mm-hmm.
Sorry, my second question is on your guidance, on your EUR 4.7 billion clean profit guidance, which you are reiterating, I calculate EUR 1.4 billion for Q4. I understand that there are some tax probably benefits inside in there, I'm wondering if you can explain again that effectively. Thanks.
Okay. Let me take the second question, and Mirko will comment on the NII one. We confirmed the EUR 4.7 billion net income. We said that the Q2 that the underlying net income for the group should be going forward around EUR 4.3 billion, and you can see that this quarter confirmed that. The difference between EUR 4.3 and EUR 4.7 is linked to some tax benefits in the Q4 , as you pointed out, which are mostly one-off and which are linked to a DTA write-up for a large extent. I will let Mirko comment on the NII side.
On the NII side, the + 23 other, as you rightly said, EUR 11 million are coming from, let's say, a one-off situation in factoring Italy. The remaining amount is due mainly to reconciliations, and it's widespread among different divisions, so these are small bits and pieces, so nothing, let's say, worthwhile mentioning.
Next question, please.
The next question is from Antonio Reale of Morgan Stanley . Please go ahead, sir.
Hi, good morning. Thank you very much for the presentation. I've got two questions, please. First one on asset quality. In particular, I'm interested in what you're seeing with respect to potential risks increase in corporate credit quality in Germany. How do you see fundamentals holding up? What you're seeing on the ground, particularly from small and mid-corporates, please. Linked to that, in the non-core scope CDCP acceleration, you've now tackled the residential mortgage book, which from memory, I think you're now left with some corporate SME and leasing loans. Now, some of these loans are liquid, some are less so. How comfortable do you feel with your marks in the division going forward, and do you expect any potential top-ups in light of the acceleration you've delivered in the non-core rundown?
The second question is on the sort of banking union debate, which seems to be back on the agenda, well, at least on paper. From your perspective, how do you think you need, or better, have you already adapted your strategy to face the new potential regulatory headwinds that may come? I'm referring here mainly to the strategy to reduce the domestic portfolio of BTPs. If you expect the Basel proposal on sovereign risk weighting to be implemented anytime soon. Thank you.
Thank you very much. I will take the last question, and I will let Tj comment on the non-core side. On the regulatory headwind, first of all, we welcome you to our Capital Markets Day on the 13th December in London. To go back to what I said is we were very transparent on all regulatory headwinds, and we are taking actions, and I would say decisive action when needed in order to make sure we are at the upper end of our CET1 buffer of 200-250 basis point. We have looked with great interest at a recent comment made by a certain number of politicians, namely in Germany recently, about convergence with the European Deposit Insurance Scheme.
This, if I may say, headline comment was accompanied with condition precedent, which are probably difficult to achieve in terms of convergence of the bankruptcy laws, in terms of the makeup of the portfolio of government bonds and disposal of NPLs. As far as the government bond portfolio is concerned, we have said that we want to go back towards the European average, which is a domestic portfolio between 50%-60% of tangible equity. Our BTP portfolio went down by EUR 3.6 billion to EUR 44.9 billion over the quarter. The average duration is at 3.4 year, so you can see that over time it will amortize naturally, and we want to have a natural amortization. The hold to collect part of the portfolio is around EUR 20 billion.
Whatever could be the evolution of the spread, we said the evolution of the spread on a post-tax basis is 1.7 basis points for 10 basis points. It has been reduced by 35%, as we said late last year, in terms of de-risking of the portfolio. We feel very comfortable should anything be decided, which we think is extremely unlikely, on the comment made by one prominent politician in one of the countries where we're present. On the asset quality side, you ask a question about what we see in the portfolio and the evolution of credit of our clients. You have seen that actually all the credit metrics are actually very good. When we look at the various metrics, they all improved actually over the quarter. Should it be the NP ratio, of course, is down meaningfully.
We have seen, as far as the core group is concerned, default rate, which is stable to slightly lower. Cure rate, which is improving. Migration rate, which is improving. Recovery, which are improving. That is proof for the group core, is proof as well for Commercial Banking Italy, which has a very much lower NP ratio, which has a lower default rate in the quarter versus the previous quarter, much improved cure rate, and much improved migration rate as well. No specific sign of credit deterioration. We see our clients performing well. On the non-core, despite a massive disposal, basically that we did again this quarter, you have seen that our coverage ratio is actually above last year and more or less in line actually with the Q2 . High coverage, a very good performance of the credit portfolio. Tj on the non-core breakdown.
Thank you, Jean-Pierre. As you have seen on page 58, you can see of the EUR 11.2 billion of the non-core sort of portfolios of Q3, EUR 7.9 is in corporate SMEs and EUR 2.5 billion in leasing. If you remember, we started on leasing well over EUR 4 billion. This is going very well. On the EUR 7.9 billion in corporate, we are very confident we will deliver. If you can see on page 35, of the EUR 11.2, EUR 4.8 billion is in UTP. In here we are the largest player in terms of the platform, Sandokan, UCCMB and Pillarstone, we have well over EUR 2.3 billion. Again, as highlighted earlier by Mirko, that our target of EUR 19.2 originally, we are going to deliver below EUR 10. We are highly confident that we will deliver the non-core rundown by 2021.
Just maybe forgot to comment more specifically about Germany on the portfolio evolution. You have seen that the cost of risk for Germany for the quarter is 12 basis points. It's in line with our projection for the full year. We don't expect any evolution going forward. If you go to page 60, we give you the breakdown of expected loss, which will be a good indicator for the future. We have an expected loss on the stock of 17 basis points under the new business, which is aligned with that at 19 basis points. No specific issues and surprise to be expected from Germany. Next question, please.
The next question is from Andrea Vercellone, Exane. Please go ahead, sir.
Good morning. Two questions. First one is capital. In Q4, should we still expect the real estate gains you highlighted earlier in the year? At current level of German bond yields and Austrian bond yields, is there still a negative drag on the DBO or it's not material? Second one is on the guidance on regulatory capital drag, the old one, you said you will refresh that at the Capital Markets Day. I'm just curious if on the old one, you can give us a little bit of clarity as to how much the 130 basis points cumulative goes through risk-weighted assets, how much is potentially in provisions, and how much is potentially as capital deduction. Thank you.
Thank you very much. Basically your first question, yes, there will be more real estate gain in the Q4 , and we will announce some transaction. We will give the detail of the CET1 evolution between the real estate gains, specific transaction, and evolution at the Capital Market Day in December. You will have that in more details. The DBO side, we have adjusted our rate by 53 basis points, as Mirko mentioned. The adjustment brings our rate in Germany to 95 basis points or discount rate for the portfolio, in Austria to 75 basis points, and in Italy to 55 basis points. We carefully look at the overall evolution of the rate and the portfolio.
Today, DBO reserves are almost flat, based on the evolution of the rate, there might be some additional convergence, but clearly not to the extent of where we have adjusted this quarter where we took into account the adjustment of the swap rate. We think that the swap rate now are going to remain probably more stable. More detail as well on our projection of swap rate at the Capital Markets Day in December. For the detail on the regulatory capital headwinds, I will comment or we will comment about it at the Capital Markets Day. The only thing I can say that for the period between 2017 and 2019, we said that the regulatory impact would be around 210 basis points. I think we will end up at 208 basis points.
I think we were relatively close in our projection, and we expect to give you something which will be very close to reality as well from 2020 onward. Next question, please.
The next question is from Giovanni Razzoli of EQUITA. Please go ahead, sir.
Good morning. Question number one, you've done a very good job in terms of reduction the non-core portfolio. You have confirmed the full rundown in 2021. The non-core portfolio is still generating something like EUR 600 million of losses accumulated in nine months because of the clearly higher cost of risk. I was wondering whether, in parallel with the rundown of the non-core portfolio, shall we assume a parallel reduction in the cost of risk and going down then to the bottom line? That's my first question. The second question, as we have the opportunity to have you on the line, there's been a lot of debate on your proposal to apply negative rates. We have the opportunity to have you on the line and to share with us your thoughts about it.
My point is, shall we see it as an option to support the revenue generation, or is that a way to improve the monetary policy mechanism transmission? Thank you.
Thank you very much. On the non-core, we confirm the runoff by 2021. As we said, if you look at the net loan today, non-core is becoming less and less relevant. It will be even less relevant at the end of the Q4 , as it will be below EUR 10 billion on a gross basis. On a net basis, even much lower than what we have today. I think that the key focus, as you said, should be on the cost of risk of the core bank. You have seen that the cost of risk of the core bank is actually in the 37, 39 basis points on quarterly and yearly basis. We will discuss at the Capital Markets Day in more detail what we do with the non-core, the provisioning, and the focus on the core bank, and cost of risk.
To be discussed in a bit less than one month. On the negative rate, let me put things slightly differently. If the depo rate goes to - 100 basis points, everybody will say the negative rates have to be passed to the client. I think that I haven't met anybody who would say the opposite. When I meet central bankers, and the preeminent central bankers in any country where we operate, they all say banks should pass negative rates to their client.
They say, "We don't want to comment publicly about it, but for the transmission mechanism, it should be done." We have said that for 0.1% of our client base in Italy, which is a very, very small number, for a client having a deposit of more than EUR 1 million, we will, and I think it's important to go beyond the semantic of passing the negative rates because some of my friendly competitors say we don't pass negative rates to client. I could say we do not pass negative rates to clients either. With clients above EUR 1 million, we tell them, we give you the opportunity to invest in a money market fund, which has a target return of 0+ , and zero commission, because we will take care of the commission. For us, it's a net gain, basically, of the 50 basis point in the move.
For the amount of liquidity you leave above EUR 1 million, we will discuss with you excess liquidity fee. This is what all the banks are doing. De facto, we do not pass negative rate to the client. If you purely on a semantic basis say, are the rates on the account negative? The answer is no. We do pass negative rates by looking at excess liquidity fee that every bank is doing, or by shifting the clients towards AUM, and by shifting the clients towards AUM and going into a very low-risk portfolio initially, we hope that afterwards we can move them into more risky portfolio, which then will allow us to charge commission placement fees and to earn management fees as well.
I think it's as much a monetary policy transmission mechanism, and look at an extreme scenario, and afterwards, where should be the spread where everybody will say, "Yes, it has to be done." It is an optimization of our NII, and that's what we are doing in the countries where we are present. Frankly speaking, I think that's what all the banks are doing today. That is, I think extremely healthy. Next question, please.
The next question is from Axel Finsterbusch of JP Morgan. Please go ahead, sir.
Hello. Thanks for taking my question. My question is pretty simple. There's speculation in the press about the potential creation of a holding company in Germany. In that context, my question is if there's an intention to changing the resolution strategy of UniCredit or to go for multiple point of entry, and in that context, what are the implications in terms of issuance, the issuance patterns going forward? Thank you.
Thank you very much. I think you should never believe what is written in some of the Italian news wire. I think there was a conspiracy theory as late as two days ago that we'll do with another shareholders of a bank. We dispose of things which were extremely complex, which I did not understand about anything. The conspiracy theory is suddenly gone. We never said we wanted to have a holding company in Germany. We never said we wanted to list the holding company. We said we want to have an international holding. This international holding will be in Italy. We don't intend to list it. I said it, I repeated it. People should believe me and not believe what they see in some of the wires or some of the websites in Italy.
We said we want to be MPE ready. To do that, it will allow us to improve our MREL ratios and improve the resolution of the group. That's what we have in mind. End of speculation, end of rumors and anything, and we say what we do, and we do what we say, and we don't say what we do in website in whatever countries. Next question, please.
The next question is from Ignacio Cerezo of UBS. Please go ahead, sir.
Hi, good morning. Thank you for your presentation. Three questions from me, if I may, the final one is quite short. The first one is on the possibility of P2R going down in the nearest communications. The second one is a recurrent one for me. You can guide us a little bit better on treasury and hedge contribution to the NII. The third one, in terms of detail for the quarter, the other risk and charges provision outside the levies was very low, it's quite difficult to model this thing, if you can let us know if there is any non-recurring issue here. Thank you.
Okay. On your first question, we cannot anticipate any decision of the regulator. I suggest that we speak again at the Capital Market Day. By then, we might have maybe a decision of the regulator that we can communicate. On the NII side, I will hand over to Mirko, as well as the risk and charge provision.
Yes, in terms of the replicating portfolio, I think you can see it on the page 12, in terms of the first note, you can see what was the development there. Actually, we had an uptick for the quarter, and we're slightly down on a yearly basis. The numbers are there. From a risk and charge perspective, there is nothing major, as we said, in terms of adjustments for the quarter. Most of the other charges and provision, sorry, are basically dealt with the systemic charges.
Next question, please.
The next question is from Christian Carrese of Intermonte. Please go ahead, sir.
Yes, good morning. I have just a strategic question. I understand your thoughts on the German finance minister statement on the need for a common scheme to protect several deposits. I'd like to hear from you your thoughts on Mr. Enria's statement that the SSM is not against M&A, and in particular that he's in favor of cross-border deals that will lead to higher diversification in terms of risk. As a matter of fact, over the last three years, action taken by UniCredit allowed the bank to sharply lower gross NPE ratio closer to the European average net of non-core bank, reduce the weight of Italian BTPs on the total financial portfolio, bringing UniCredit more in line with other European peers. Do you still think cross-border deals will be hard to be implemented due to a lack of synergies?
Has something changed in your opinion, especially considering a potentially more accommodating approach from the regulator? Thank you.
As you know, we never comment on rumors and speculation. I've been always very clear about my view. I think clearly Europe needs bigger banks. When you look at the combined market share of the top five banks in Europe, they don't even represent half of the market share of JP Morgan, for instance. We clear for an economy in terms of GDP, which is more or less equivalent. This being said, I as well said that I cannot see M&A transaction at this stage. It's very simple, whatever the way you structure an M&A transaction, if you pay in cash or in shares, you usually have additional capital requirements to pay for restructuring costs, to pay for adjustments in the balance sheet. At a level of discount where European banks trade today, it does not work in terms of EPS accretion. It just financially does not work.
Today, what works very well is actually to buy back shares at a discount to tangible book. If you look at a bank which could be having a 9% ROTE, if you buy shares at 50% discount seen from the shareholders, it's a 18% ROTE transaction with zero execution risk. Guess what we would prefer to do, and we will discuss that at the Capital Market Day. Next question, please.
The next question is from Azzurra Guelfi of Citi. Please go ahead, madam.
Hi, good morning. A couple of questions. One is on the funding plan. Can you give us some detail on the 2020 funding plan? The second one is on the CET1. With the year coming by, you will have more realization of the regulatory headwind. Is it fair to expect that you would be happy to have a lower MDA buffer above, versus the one that you currently have once these regulatory headwinds materialize? That's it. Thank you.
Just on the funding plan, Mirko will comment very briefly in terms of MDA buffer. We have two MDA buffer, one on the CET1, the other one on TLAC/MREL. On the CET1, we confirm and we maintain our view that we want to be at the upper end of our 200-250 basis point CET1 buffer. This applies for this year as well as for the new plan. On the MREL side, we have MDA buffer of 50-100 basis point. We are well above that, as we are close to 220 basis point, actually 226 basis point, and because we did some pre-funding on a tactical basis in September, as Mirko mentioned, as market conditions are very favorable. We maintain our two buffer targets, and there should be no change in the new plan. On the funding side, Mirko, any comment?
No comments, Azzurra. As I said before, from a funding plan 2020, you have to wait in one month where we're going to make it public. Don't expect anything dramatic to change from what has been done in the past.
Next question.
The next question is from Benjie Creelan-Sandford of Jefferies. Please go ahead, sir.
Yes, good morning, everyone. We see from the notes that the Italian sovereign bond holdings continued to fall this quarter, financial assets overall on the balance sheet are up, and up relatively meaningfully. I was just wondering whether you could give us any more color on what assets you may be adding, and in particular, if there's any non-sovereign assets that you're adding. Also, any guidance you can give on how you see financial assets in the balance sheet trending going forward. Thank you.
Well, Mirko will give you more detail about the financial asset, but let me be very clear. We don't do carry trade. That's super clear. I very often say that the management of this bank has a long-term incentive. We are a long-term incentive plan. On my side, I have zero bonus, only a long-term incentive plan, and I committed to all my shares for seven years, and I bought a total of EUR 13 million with my own money of bank liability shares and bonds, and I committed to hold them for seven years. We don't do short-term stuff, which might be artificially propping up our result on the short term, and which will create either net income volatility or put the wrong type of asset in the balance sheet. That's not what we do.
We want to have a clean business, which is purely recurring, and that's it, basically. On the financial asset evolution, Mirko can give you a little bit more detail.
Yes. On the evolution, let's say from on a quarter to quarter basis, the biggest increase is actually coming from repos. This is basically what is making the financial asset higher from last quarter.
That's the normal volatility of repo, and it is not linked to a carry trade, just to be very, very clear. Next question, please.
For any further questions, please press star and one on your touch-tone telephone. Mr. Mustier, there are no questions registered at this time, sir.
If there's no more question, thank you very much for taking a part of this call. As we mentioned, we try to change slightly the format in order to be faster in the presentation and take more questions. Of course, our wonderful investor relation team is always available, and we will start going around with Jörg, Mirko, and all the team from tomorrow to meet each of you directly. See you very soon, and thank you very much for participating in this call.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.