Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the UniCredit Group Third Quarter 2019 Financial Results Presentation. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to Tuuk Question.
At this time, I would like to turn the conference over to Mr. Jean Pierre Musier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.
Quarter. 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 esteemed Chairman, Fabricio 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 for a period of intensive challenges, We welcome Cesari Bizoni, who was appointed Chairman in September. Cesari 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 TIM23 plan, which we will present in London on the 3rd December. As regard for our financial performance, we had a strong Q3 2019 With a net profit of €1,100,000,000 this is the best adjusted net profit in the 3rd quarter 2.6% for the first time. Our CET1 ratio stood at 12.6%, translating into a 2 2.52 Basis Point Buffer Over MDA. We are innovating this quarter.
Due to popular demand, we will keep our remarks on the presentation much shorter As always to call our colleagues in Investor Relations who will tirelessly strive to help you. Let's move to Slide 4. 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, funding, issuing a Tier 2 bond at half the spread compared to our February issuance. We completed more than €5,000,000,000 of NPE disposal in the quarter, €4,000,000,000 of which in non core.
As a result, we now expect non core gross NPE to be below €10,000,000,000 at the end of the year, a very significant reduction versus our original target of €19,200,000,000 And as of the Q3 2019, we have We continue to actively support the real economy in the countries where we operate. In Italy, we launched the Made for Italy initiative and signed an agreement with the EIF For an additional €60,000,000 for Italian microenterprise. Our partnership with Allianz and an MoU
Thank you, Jean Pierre, and good morning, everyone. I will now take you through our 3rd Q 2019 financial performance. And as promised by Jean Pierre, 10% for both the quarter and the year to date. We confirm the target above 10% In order to avoid any misunderstanding, confirming a ROTE or a return on allocated capital target percent. 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. As a result, 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 2.
Basis points in the 9 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 The tax rate in the 9 months 2019 is 25.8%, down from the first half twenty nineteen 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 Rates positive by €13,000,000 driven by the lower term deposit volumes in CEE. Term funding contributed positively, thanks To the lower rates in Germany, Austria and CEE. And in the other bucket, we had a nonrecurring €11,000,000 item in factoring Italy. Let's turn to Slide 13. Customer loan rates were down 6 basis points in the quarter, mainly driven by Commercial Banking Italy and CEE.
Without one offs, these two divisions showed declines in customer rates 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 1,300,000,000 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 €7,000,000,000 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 On a year on year basis, investment fees are up strongly, mainly driven by upfront fees, while financing fees Let's turn to Slide 16. TFAs stood at €781,600,000,000 in the 3rd Q 2019. AUM net sales were up €2,500,000,000 the highest quarterly level in more than 1 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 trend. Let's turn to Slide 17. Trading income in the 3rd Q 2019 was €378,000,000 up both quarter on quarter and year on year. Quarter on quarter, trading had the full seasonality of the 3rd quarter across a positive €66,000,000 swing 2nd quarter. Regarding YAPI, the contribution to the dividend line almost doubled year on year at constant FX, Mainly driven by lower loan loss provisions and strong fee generation, the CET1 sensitivity to FX Please remember that we expect higher cost in the 4th Q 2019 due to seasonality, Regarding group cost of risk, I would like to point out 2 items.
First, group cost of risk It was 47 basis points in the quarter, including minus 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 2nd, we have successfully disposed of our 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 0.2% quarter on quarter, driven by the day's effect and an €11,000,000 nonrecurring item in factoring Italy.
Fees were up 3.3% year on year. Strong investment fees from AUM products P and C insurance fees more than offset weak but improving financing fees from loans. Overall risk environment in Italy remains very supportive. The very successful residential mortgage transaction comprising Both noncore 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 For the 3rd Q 2019, the gross NPE ratio is 5.0%, already below our fiscal year 2019 target of 5.3%.
Also, expect the loss from new business and have improved in the quarter despite the impact from models. The numbers are in the annex on Page 60. Performance up 1.7% quarter on quarter against the seasonal trend and up 7.5% year on year. In Commercial Banking Austria, NII was up 2.7% quarter on quarter, better than expected and strong commercial dynamics. The costs We're 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 2nd Q twenty nineteen, but it gradually normalized into the 3rd Q 2019 and 4th to 2019. However, it still will be 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 And we normalize in the 4th Q 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 25 €1,000,000,000 compared to a fiscal year 2018 execution of €17,200,000,000 for the whole year. Let's turn to Slide 28. Execution of 2021 non core runoff is progressing very well. At the end of 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. 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 3rd Q 2019, Close to the EBA average.
However, every time we sell, it pushes the EBA average 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 debt asset class in Italy.
The gross NPE ratio of 5.0 percent is already below our fiscal year 2019 target of 5.3%, while the coverage ratio improved. Let's turn to Slide 33. The supported credit environment for Commercial Banking Italy led to a significant improvement in default rate. Also the cure rate and migration rate have improved year on year. As a result, the underlying cost of risk is low Both quarter on quarter year on year and the modification of the fiscal year 2019 outlook The 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 €900,000,000 year on year, down to only €11,200,000,000 at the end of the 3rd Q 2019. Let's turn to Slide 35. As a result of the very successful execution of the non core runoff, Net NPEs are already below €4,000,000,000 in the quarter, making non core less and less relevant.
The full runoff by 2021 is confirmed. Let's turn to Slide 37. The The group core Tier 1 ratio at quarter end stood at 12.6% or 2 52 basis points buffer to MDA. The key positive items in the quarter were the Fineco de consolidation for 31 basis points as per guidance and the net profit for 28 basis points. Gains from fair value to OCI securities were offset by the DBO, which had a negative impact to the discount rate lower by 53 basis points on average in the quarter, more We have reached our reduction target for BTP sensitivity that we announced in the 3rd Q 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 4th Q 2019, there will be now For fiscal year 2020 and beyond, we will update you on our on the regulatory headwinds at our Capital Markets Day in December. Our CET1 NDA buffer at the end of 2019 will be at the upper end of our target range of 200 to 250 basis points, assuming BTP spreads remain at current levels. Let's turn to Page 38. Discreted asset in the quarter increased by €600,000,000 to 387 €800,000,000 driven by FX, mainly from Turkish lira and U.
S. Dollars. For once, Regulation was a positive in the quarter as we rolled out a new advanced model in Italy, lowering the risk weights tangible equity grew by 1.7 percent to €51,600,000,000 This is the 4th consecutive quarter of growth Let's turn to Slide 40. As the only Italian GC fee, UniCredit has to comply with The TLAC regulation that entered into force in June. As of the end of the 3rd Q 2019, we are well above our requirements with a TLAC ratio of 21.85%.
This corresponds to an NDA buffer of 226 basis points, Well above our target buffer range of 50 to 100 basis points, thanks also to prefunding. We completed our fiscal year 2019 TLAC funding plan with the October senior preferred issuance of €1,000,000,000 at a very tight spread. After Moody's recent upgrade of our Tier 2 instruments to investment grade, we tactically 2nd quarter. Next year funding plan issuing a €1,250,000,000 Tier 2 at the lowest spread 2.6% 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, 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 Yankee. Before we go to Q and A, Let me look back over the last 3 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 €20,000,000,000 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. And we have kept our promises. Despite all the headwinds from geopolitical tension, macroeconomic volatility and higher regulatory pressure, we have As our financial year 2019 guidance is confirmed, we will deliver The €4,700,000,000 adjusted net profit that we promised 3 years ago. I remind you that we will We will deliver an adjusted RoTE above 9% And we will deliver a 30% cash dividend of €1,400,000,000 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 19 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 executive transformed 2019 very successfully. We can trust this team to deliver the next plan. As a sign of recognition of everyone's commitment, we have decided to call the new business plan, TIM23. We hope to see you all on the 3rd December in London to discuss TIM 23 and all of its detail. Now at this end of this shorter presentation, Mirko Spiedi, the rest of the team and I are ready to take your questions.
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. Q3.
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 as rate? In particularly referring to the cost of replacing new issuance With all 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. Then I do have a question on the securitization disposal. If my calculation is correct, quarter. This portfolio might be might have a coverage of 60% more or less because you are including also percent SME position.
So given that the disposal price is around Turkey, I was just wondering whether the loss from the disposals should be minimal and if my calculation is correct. And then 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. So 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 Mijako will Comment on depot and cost of issuance. Just a comment is and you might have Further question on that. But we use the current environment to shift our portfolio toward a good credit. We I think it's an opportunity now because some of the banks are hungry for years.
And so we can actually shift to the good credit and the higher rated clients 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. And as you pointed out, The recent agreement of the ECB for one specific bank to allow for a buyback and the communication we have with them Show that the ECB is very open to allow banks to do buyback when they have the adequate capital position of course. So 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 3 countries to maintain From 1 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 spread 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 industry countries considering the evolution of
the cost of risk.
Thank you, Nicolas on C. For C, net of the one off, we have seen some normalization of the spread, And we expect this normalization to continue in the next few quarters.
Mierko, on cost of issuance and Deepu.
Yes. Yes. Cost of reissuance, of course, we expect cost of issuance to go down because of the base rate changes reduction. Of course, we're going to be much more specific at Capital Markets Day, so you have to wait another month. But in general, in terms of, Let's say, volumes, they will be slightly higher.
But as you have seen, we tend to reduce execution risk, and we anticipated already one transaction this year in terms 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 Merkel has mentioned, that we Because the transaction is very successful, we included a core component, which clearly are not provisioned to sell like the non core. So there were hence the expected so called cost of risk increase for The core of the Thailand parameter.
But this transaction, we substantially Dispose of all of our residential bad loan for the Talion parameter. 2.
Next question.
The next question is from Adrian Chigi of RBC. Please go
Hi, there. Adrian Chikki from RBC.
Thank you for taking my questions. Two questions from my side as well, please. Sure. The Mediobanca sale makes sense in the context of simplifying the group structure. What's the list of remaining financial investments as opposed Strategic stakes and where do you see the YAPI falling on the spectrum?
And the second question on RoTE. Again, Group RoTE was between 8% and 9% and core was above 10% again and what was clearly a strong Very clean quarter. Is this a reasonable figure to expect as part of the plan? Or do you see material headwinds to profitability from Ahip? Thank you.
Thank you. As we said, the Mediobanca disposal is part of our disposal of non strategic asset. 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 this 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 2. And could contribute in terms of CET1.
And so and our financial strategies as well to very carefully And making sure that they cover their cost of capital, so debt and equity on an Ongoing basis and 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 our client business and our portfolio activities either by subsegment of clients or even on an individual client basis. We will give more explanation during the Capital Market Day on the 3rd December. As far as the RoTE is concerned, we confirm a group RoTE above 9% and you I've seen our group core RoTE, which is around 10.6%. It's clear that the RoTE In December, what is the regulatory capital evolution? You know that there are regulatory headwinds.
We disclosed We were actually the only bank to disclose in December 2017 our regulatory headwinds for the next 10 years. And at the time people said you're the only one to have these regulatory headwinds, I noticed with great interest on the 3rd quarter that Many other banks are now discovering that there is an impact of Basel IV and any other issues. So 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. And so you have seen the EBA impact study, which confirmed what we said and we showed that for The European banks raised an increase of 25% of capital linked to Basel 3.5 completion of Basel III, the so called Basel IV, one over 125 basically is 0.8%.
So we'd 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 Market Day. 2. Next question, please.
Very clear. Thank you very much.
The next question is from Alberto Cordara of Bank of America. Please go ahead, sir.
Q2. I have a couple of questions. So 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 plans should be seen in 2020? And then the second question Earlier in the presentation, you highlighted Q on Q decline in both So 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 Mico comment on the tailing and I might take Your second question now. As I said earlier, we are increasing our activity with higher rated clients. So 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. So we use the opportunity today of the market to shift the Towards the good credit, which might be slightly tighter in terms of spread, While we are more aggressive on the better rated client, we can be as Francisco Jorn and Olivier Kaye had mentioned, We can be less aggressive on some of the activities and give up market shares on lower rated clients, 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 mean, I've seen working in Rome recently On the branch of 1 of our largest competitor, a 20 year mortgage at 0.7%. I mean that's something we don't do at UniCredit. We don't mortgage our future liquidity basically.
So 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. So in summary, we are going to increase the market share of higher rated class, Potentially lower the market share of the lower rated class. And 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 are the most impact Basically on the client rate, not speaking about the client spread, but the client rate. And Visa has driven the general drop in the Commercial Banking Italy customer rates basically. From 2020 onwards, we launched managerial actions to compensate the interest rate environment Such as we mentioned publicly, I mean, the deposit facility rates and others.
And I let Mierko comment on the TLTRO.
1st, I'm going to comment on the tiering question. So from a UniCredit Group perspective, We have about €10,000,000,000 in terms of minimum reserve requirements. And on top, we have between €25,000,000,000 €30,000,000,000 in Available reserves. Of course, this number fluctuates over on a monthly basis. If we look at this €100,000,000 in terms of tiering profit.
And that will change because depending on the reverse 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 view on that and we're going to announce at Capital Markets Day what we intend to do from TLTRO 3 perspective.
2. Next question please.
Fantastic. Many thanks. Thank you very much.
The next question is from Andrea Unsueta 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 11,000,000 out of those 23 come or are explained Those are within the CIB division.
Sorry, yes, go ahead.
Sorry, my second Question is on your guidance on your €700,000,000 clean profit guidance, which you are reiterating, I calculate $1,400,000,000 for Q4. I understand that there are some tax probably benefits
6.
Okay. So let me take the second question and Mierko will comment on the NII one. We confirmed the €4,700,000,000 net income. We said at the Q2 that the underlying net income for the group should be going forward around €4,300,000,000 and you can see that this quarter Confirm that. So the difference between CHF 4.3 to CHF 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 DTA write up for a large extent.
I will let Miro comment on the NII side.
Yes. On the NII side, the +23 other, As you rightly said, €11,000,000 are coming from, let's say, a one off situation in factoring Italy. The remaining amount is due mainly to
2. The next question is from Antonio Reale of Morgan Stanley. Please go ahead, sir. Q2.
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 And what you're seeing with respect to potential risks increase in corporate credit quality in Germany, how do you see fundamentals holding up? And what you're seeing on the ground, particularly from small and mid corporates, please.
And linked to that in the non core, it's good You've now tackled the residential mortgage book, which from memory, I think you're now left with some corporate S and E and leasing loans. 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? And the second question On the sort of banking 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 adopted your strategy to face the new potential regulatory headwinds that may come? I'm referring here mainly to To the strategy to reduce the domestic portfolio of VTPs, if you expect the Basel proposal on sovereign risk rating to be implemented anytime soon. Thank you.
Thank you very much. I will take the last question and we'll let TJ comment on the non core side. On the regulatory headwind, first of all, we welcome you to our Capital Market Day on the 3rd December in London. But to go back to what I said is, we were very transparent on all regulatory headwinds And we are taking actions and we'd say decisive action when needed in order to make sure we're at the upper end of our CET1 buffer of 200 to 250 basis We have looked with great interest at recent comment made by a certain number of politicians, 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 domestic portfolio between 50% to 60% of tangible equity.
Our BTP portfolio went down by €3,600,000,000 to €44,900,000,000 over the quarter. The average duration is at 3.4 years. So you can see that Over time, it will amortize a natural link and we want to have a natural amortization. And the L2 To connect part of the portfolio is around €20,000,000,000 So whatever could be the evolution of the We said the evolution of the spread on a post tax basis is 1.7 basis points for 10 basis points. So it has been reduced By 35%, as we said late last year in terms of derisking of the portfolio.
On the asset quality side, you asked 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. And should it be the the NPE ratio, of course, is done meaningfully. And we have seen, as 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 recoveries which are improving. That's true for the group core.
It's true as well for Commercial Banking Italy, which has a very much lower NPE 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. So no specific sign of credit deterioration and we see our Clients performing well. And 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 2nd quarter. So 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 the CHF 11,200,000,000 of the non core sort of portfolios of Q3, €7,900,000,000 in corporate SMEs and €2,500,000,000 in leasing. And if you remember, we started on leasing well over €4,000,000,000 So This is going very, very, very well. And on the €7,900,000,000 in corporate, we are very, very confident we will deliver. And if you can see on Page 35,000,000,000 of the €11,200,000,000 4,800,000,000 is in UTP.
So in here, we are the largest player in terms of platform, Sandokan, ID and Pillarstone, we are well over €2,300,000,000 So again, as highlighted earlier by Merkel We will deliver the non core rundown by 2021. Just maybe I forgot to comment more specifically about Germany
and the portfolio evolution. You have seen that the cost of risk for Germany for the quarter is 12 basis points and it's in line with our projection for the full year And 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. And we have an expected loss on the stock of 17 basis points and the new business which is aligned with that at 19 basis points. So no specific The
next question is from Andrea Vercellone, Alexeyen. Please go ahead, sir.
Good morning. Two questions. First one is capital. Q4. In Q4, should we still expect the real estate gains you highlighted earlier in the year?
And at Current level of German bond deals and Austrian bond deals. Is there Still a negative drag on the DBO or it's not material? Second one is on the guidance on regulatory capital drug. The old one, you said you will refresh that at Capital Markets Day. But 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 growth through risk weighted assets.
How much is potentially in provisions and how much is Potentially as capital deduction. Thank you.
Thank you very much. On basically your first question, Yes, there will be more real estate gain in the Q4 and We will announce some transaction, but we will give the detail of the CET1 evolution between the Real estate gains, no specific transaction and evolution at the Capital Market Day in December. So you will have that in more details. On 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, our discount rate for the portfolio, in Austria to 75 basis points and in Italy to 55 basis points. And so we carefully look at the overall evolution of the rate and the portfolio.
And today, our I mean, DBO reserves are almost flat. And so based 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 I mean, into account the adjustment of the swap rate. We feel that the swap rate now are going to remain probably more stable. More detail as well on our projection swap rate at the Capital Market Day in December. For the detail On the regulatory capital headwinds, I will comment or we will comment about it at the Capital Market Day.
The only thing I can say that for the period between 2017 2019, we said that The regulatory impact will be around 210 basis points and I think we will end up at 208 basis points. So 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
2nd quarter. Question number 1, you've done a very good job in terms of reduction in the non core portfolio. You confirmed the Full rundown in 2021. So but the non core portfolio is still generating something like €600,000,000 of loss It's cumulated in 9 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.
So that's my first question. The second question, as we have the opportunity to have you on the line, there has been a lot of debate on your proposal to apply negative rates. So So 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 the way to improve the monetary policy mechanism submission?
Q3. Thank you. Thank you very much. On the non core, I mean, we confirmed the runoff by 2021. As we said, if you look at the net loan today, I mean non core is becoming less and less It will be even less relevant at the end of the Q4 as we'll be below €10,000,000,000 on a gross basis and on a net basis, I mean, Even much lower than what we have today.
So I think that the key focus, as you said, should be on the cost of risk of the core bank. And 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. And so we will discuss at the Capital Market Day in more detail what we do with the non core, the provisioning and the focus On the core bank and cost of risk, so to be discussed in a bit less than 1 month. On the negative rate, I mean, Let me put things slightly differently. If the depot rate goes to minus 100 basis points, everybody will say The negative rates have to be passed to the clients.
I think that I mean, I haven't met anybody who would say the opposite. Actually, when I meet central bankers and The prominent central bankers in any country where we operate, they all say banks should pass negative rates to their clients. 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, So which is a very, very small number for clients having a deposit of more than €1,000,000 we will and I 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 I could say we do not pass negative rates to clients either. But with clients above €1,000,000 we tell them We give you the opportunity to invest in a money market fund, which has a target return of 0 plus And 0 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. And For the amount of liquidity you leave above €1,000,000 we will discuss with you excess liquidity fee. And this is what all the banks are doing. So de facto, we do not pass negative rate to the clients. If you purely on a semantic basis say, Are the rates on the account negative?
The answer is no. But we do pass negative rates by looking at excess liquidity fee that every bank is doing Or by shifting the clients towards AUM and going into a very low risk portfolio initially, We hope that Afroze we can move them into more risky portfolio, which then will allow us to charge commission placement And to earn management fees as well. So 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, I mean, everybody will say, yes, It has to be done. And 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. And that is, I think, extremely healthy. Next question please.
The next question is from Axel Fins of JPMorgan. Please go ahead sir.
Hello. Thanks for taking my question. My question is pretty simple. So there's speculation in the press about the potential creation of a holding company in Germany. So in that context, my question is if there is 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 debt issuance patterns going forward?
Q3. 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 2 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 that we wanted to have a holding company in Germany, and we never said we wanted to lease the holding company.
So we said we want to have an international holding. This international holding will be in Italy and we don't intend to list it. I said it. I repeated it. So people Who should believe me and not believe what they see in some of the wires or some of the websites in Italy.
And we said we want to be NPE ready. And 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. So end of speculation, end of rumors and anything. And that's 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 Chiedrazzo of UBS. Please go ahead, sir.
Yes. Hi, good morning. Thank you for the presentation. Three questions from me, if I may. The final one is quite short.
The first one And the possibility of Pillar 2 coming down in the news communications. The second one is a recurring one for me. If you can guide us a little bit better on treasury and hedge contribution to the NII. And the third one in terms of DQ for the quarter, the other risk and charges provision outside the levies was It's very low. So it's quite difficult to model this thing, but you can let us know if there is any nonrecurring issue here.
Thank you.
Any decision of the regulator and or subject 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 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. Therefore, actually, we had actually an uptick for the quarter, and we are slightly down on a yearly basis. So the numbers is are there.
From a risk and charge perspective, there is nothing major, as we said, in terms of
Next question please.
The next question is from Christian Carrese of Informante. Please go ahead.
Yes, good morning. I have just a strategic question. I understand that your thoughts on the German Finance Minister's statement on the need for a common scheme To protect several deposits, I would like to hear from you your thoughts on Mr. Maria's statement that SSM is not against M and A and in particular that is in favor of cross border deals that will lead to higher diversification in terms of risk. As a matter of fact, over the last 3 years, action taken by UniCredit allowed the bank to sharply lower gross NPE ratio Close to the European average net of non core bank reduce the weight of Italian govies on the total financial portfolio, Bring UniCredit more in line with your other European peers.
Do you still think cross border deals Will be hard to implement due to a lack of synergies or 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 5 banks in Europe, They don't even represent half of the market share of JPMorgan for instance. So we clear for an economy in terms of GDP which is more or less equivalent. This being said, as well said that I cannot see a transaction M and A transaction at this stage.
And it's a very simple whatever the way you structure an M and A transaction if you pay in cash or in shares, you usually have additional requirements to pay for restructuring costs, to pay for adjustments in the balance sheet at a level of discount where European banks trade today. I mean, it does not work in terms of EPS accretion. It just financially does not work. And today, what works very, very well is actually to buy back seen from the shareholders. It's an 18% RoTE transaction with 0 execution risk.
So guess what we would prefer to do? And we will discuss that at the Capital Market Day. Next question please.
The next question is 2nd quarter. 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 Cleaver once these regulatory headwinds materialize. And that's it.
Thank you.
Just on the funding plan, Mirko will comment very briefly in terms of MDA buffer. I mean, we have 2 MDA buffer, 1 on the CET1, the other one on Tilak On the CET1, we confirm and we maintain our view that we want to be at the upper end of our 200 basis points to 250 basis points CET1 And this applies for this year as well as for the new plan. On the MREL side, we have MDA buffer of 50 to 100 basis points. Well, well above that as we are close to 220 basis points, actually 226 basis points, Because we did some prefunding on a tactical basis in September, as Mirko mentioned, as market conditions are Very favorable. So and we maintain our 2 buffer targets and there should be no change in the new plan.
On the funding side, Mirco, any comment?
No comments, Zura. As I said before, from a funding plan 2020, you have to wait in 1 month
2. Next question.
The next question is from Benjie Creeland Sandfort of Jefferies. Please go ahead, sir.
Hi, yes. Good morning, everyone. I can see from the notes that the Italian sovereign bond holdings continue to fall this quarter, but financial assets overall in the balance up and up relatively meaningfully. I'm just wondering whether you could give us any more color on what assets you may be adding and in particular If there is any non sovereign assets that you're adding and also any guidance you can give on how you see financial assets and the balance sheet trending going forward. Thank you.
Well, Mikko will give you more detail about the financial asset, but let me be very clear. We don't do carry trade. So that's super super clear. And I very often say that the management of this bank As a long term incentive, we are a long term incentive plan. On my side, I have 0 bonus, only a long term incentive plan and I committed to all my shares for 7 years and I bought a total of €13,000,000 with my own money of bank liability shares and bonds and I committed to all them for 7 years.
So we don't do short term stuff, which might be Artificially propping up our result on the short term and which will create the net income volatility or put the wrong type of asset in the balance sheet. So that's not what we do. We want to have a clean business, which is purely recurring and that's it basically. So on the Financial Asset Evolution, Mierko can give you a little bit more detail. Yes.
No, on the evolution, let's say,
from a on a quarter quarter basis. The biggest, let's say, increase is actually coming from repos. So this is basically what is, Let's say, making the financial asset higher from last quarter.
And so that's the normal volatility And it is not linked to CarGitrade just to be very, very clear. Next question please.
At this time sir.
If there's no more questions, thank you very much for taking part of this call. As we mentioned, we tried to Change slightly the format in order to be faster in the presentation and take more questions. And of course, our wonderful Investor Relations team is always available and we will start going around So see you very soon and thank you very much for participating to this call.
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