Conference operator, welcome. Thank you for joining the UniCredit First Quarter 2019 Group Results presentation. As a reminder, all participants are in 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 Chief Executive Officer. Please go ahead, sir.
Thank you very much. Good morning to you all, and welcome to our first quarter 2019 analyst call. Before I walk you through our financial results for the first quarter, let me make a few remarks on the announcement we made yesterday that we sold 17% of Fineco for CET1 ratio benefit of 21 basis points in the second quarter 2019. It is essential to put this announcement into the right strategic context. As you all know, we will present our new business strategy for the years 2020 to 2023 at our capital market day later this year. To prepare for this new business strategy and ensure a robust foundation for our successful future development, we are announcing a comprehensive set of financial measures.
They aim at further strengthening our lending capability, our ability to support the local economy, and to develop our client business across our countries of operations. These measures include, first, targeting to be at the upper end of the 200-250 basis point CET1 MDA buffer by year-end 2019 for the disposal of certain assets. This includes those already executed, for instance, the real estate in the first quarter 2019, and the 17% of Fineco in the second quarter 2019. Second, a gradual alignment of our domestic sovereign bond portfolio with the domestic bond holdings of our Italian and European peers on a relative basis. Third, a further acceleration of the non-core rundown, which is expected to meaningfully beat the financial year 2019 EUR 14.9 billion target. We are confirming the full runoff by 2021.
That means for 2019, that we will be lower than the EUR 14.9 billion and closer to EUR 10 billion. Last but not least, an evolution of our group structure to increase optionality and flexibility, in particular, optimizing the cost of funding under different potential macroeconomic scenarios. This means that valuation actions are being considered, including the reduction of intra-group funding, as already started with Yapı and other subsidiaries. The placement of Fineco shares is only the first step in this comprehensive set of financial measures. Details of these measures, as well as the new business strategy, will be presented at our Capital Market Day in London on December 3rd. Now, let's turn to slide four for our quarterly results. After having walked you through the rationale for the comprehensive financial measures to prepare for our new strategic plan, let's now focus on our first quarter 2019 result.
In the first quarter, we have made strong progress on the delivery of Transform 19 and its third and final year of execution. Let's take a quick look at the highlight of the first quarter before Mirco takes you through the figures. We had a record quarterly result that benefited from exceptional items. Our adjusted net profit of EUR 1.1 billion is up 1.5% year-on-year. First quarter 2019 group adjusted ROTE is 9.4%, and we confirm the full year 2019 ROTE target of above 9%. We saw sustained core bank performance as good commercial dynamics in CEE, where partially offsetting a slower start in Western Europe due to some macro headwinds. The months of March and April were already better than the first two months. Our Transform 2019 plan is well ahead of schedule.
We already achieved 104% of our planned FTE reduction and 95% of our planned branch closures. Those targets will be exceeded, and the EUR 10.4 billion cost target is confirmed. Our first quarter cost of risk came in at a seasonally low 40 basis points. The full year 2019 target of 55 basis points is confirmed. Non-core gross NPE reached EUR 17.7 billion in the quarter, down EUR 5.1 billion year-on-year. Our CET1 ratio reached 12.25% for a fully loaded MDA buffer of 219 basis points. Thanks to our decisive actions taken in the first quarter 2019 to prefund our TLAC requirements. We now have a subordination ratio of 18.41% and a buffer TLAC of 134 basis points. As we said in last quarter, our tangible equity increased. It is now EUR 48.8 billion, up 5.2% from its trough in the third quarter 2018.
This is UniCredit's best first quarter in a decade for the second time running. Let's move to slide five. We report an adjusted net profit of EUR 1.1 billion, which is up 1.5% versus last year. Our adjusted group ROTE was 9.4% in the quarter, up 0.5 percentage points versus last year. These numbers are only adjusted for the disposal of real estate for a net impact of EUR 258 million, in line with past practice, as we never adjusted our figures for U.S. sanctions provision in the past. We also took out the net impact of the U.S. sanction provision release and normalized the booking of the systemic charge by spreading them equally over the quarter. If we were doing that, they almost offset each other, and our adjusted group ROTE, normalized this way, will be below, but very close to our full-year 2019 target of 9%.
Let's turn to next slide. We finished the quarter with a CET1 ratio of 12.25%. For the end of 2019, we confirm our CET1 ratio between 12% and 12.5%, and an MDA buffer now at the upper end of our target range of 200-250 basis points. The real estate transaction in Germany, mentioned in February, closed in the first quarter and contributed a positive 7 basis points to our CET1 ratio. This is the first part of the overall 0.2 percentage points we expect from real estate disposal, mainly during the course of the year. Mirco will give you more detail on the CET1 ratio development later. On the TLAC subordination requirement, we pre-funded most of our subordinated issuance for the year and have de facto completed our funding plan.
With a pro forma ratio of 18.41%, we are already well above our financial year target at the end of the first quarter. The de-risking of our balance sheet continues. The group gross NP ratio came to 7.6% in this quarter. The group core gross NP ratio stood at 4.1%, close to the EBA average. Please be reminded that the EBA uses slightly different and less conservative definition of the NP ratio that we have chosen to do. On the like for like basis, our group core gross NP last quarter would have been 3.9%. The operating model transformation is well ahead of schedule, reaching 95% of our branch reduction target and 104% for net FT reduction. We will exceed those targets in 2019, and we confirm our full-year 2019 cost at EUR 10.4 billion. Let's turn to slide eight.
Our clients continue to embrace our multi-channel offers and increasingly use digital solutions. We continue to support the real economy in Italy. Good examples are the following two major initiatives. On one hand, we have recently renewed our commitment to finance Italian small and medium SMEs together with the European Investment Bank. On the other hand, we announced last Monday that we would be the sponsor and cornerstone investor for a new innovative institutional platform aimed at sourcing patient minority growth capital for Italian SMEs. Entrepreneurs and family-run SMEs often need a more flexible and patient form of growth capital than traditional leveraged buyout provide. UniCredit will bring providers of long-term patient capital together with its corporate clients to support best-in-class Italian midcap. Now, let me hand over to Mirco, who will give you more detail of our financials.
Thank you, Jean-Pierre. Good morning to everyone. I will now take you through the UniCredit's first quarter financial performance. Our group core has performed very well and shows high profitability with an adjusted net profit of EUR 1.3 billion in the quarter. The main divisional contributors to our strong performance this quarter were CIB, Commercial Banking Italy, and CEE. In the chart on the right-hand side, you see the stated return on allocated capital of each division, while the normalized return on allocated capital are shown in footnote number 2. Adjusted group core return on tangible equity was 11.3% for the quarter. Please remember that as the group, this number is not adjusted for the EUR 320 million net release of provisions for U.S. sanctions that we took in the first Q 2019.
It is also not adjusted for the booking of systemic charges, of which more than half of the fiscal year 2019 charges are taken in the first quarter. Normalized for both, the adjusted group core ROT would be lower, but still closer to 11% than 10%. Based on this, we confirm the 2019 core ROTE target of above 10%. Let's turn to slide 11. We had a resilient commercial performance in the core bank, as good commercial dynamics in CEE partially offset a slower start in Western Europe. March and April were much better than the two first months. Revenues were down 2.7% year-on-year, mainly due to fees and trading. On a quarter-on-quarter basis, however, a rebound in trading and stable fees led to revenues being up 1.5%. We also enjoyed sustained commercial dynamics across the group.
We gained almost half a billion gross new clients in the quarter, while writing EUR 22 billion of gross new loans in the same period. The execution of Transform 2019 continues to deliver tangible results quarter after quarter. Costs are down significantly, 4% lower year-on-year. The gross net NPE ratio stands at 4.1%, down 73 basis points year-on-year, and already well below our fiscal year 2019 target of 4.7%. Net operating profit in the quarter was a solid EUR 2 billion, down 1.3% year-on-year. Adjusted net profit was EUR 1.3 billion, up 5.5% year-on-year. Let's turn to slide 12. Let's now look at the figures of the group. I would like to point out three items on this page. First, as previously mentioned, there were two exceptional items in the quarter, namely the real estate disposal and the provision release from U.S. sanctions.
Please bear in mind that for both items, the gross impact was different from the net impact due to taxes. Details can be found in the footnotes. Our stated first Q 2019 tax rate of 29.4% was impacted by the provision release for U.S. sanctions, the real estate disposals in Germany, and the IFRS 9 FTA tax effects. Our fiscal year 2019 stated tax should be in line with the previous guidance we gave of the normalized fiscal year 2019 tax rate being around 18%. Feel free to call our colleagues in IR for further details. Let's turn to slide 13. NII was lower in the quarter, down 4.5% stated and down 1.8% adjusted for one-offs, days effects and FX. The main drivers of the quarterly NII walk after the days effect and the FX were the following.
Average loan volumes were almost stable at minus 0.2% in the quarter at constant FX, compensated by higher customer rates, which were up four basis points quarter-on-quarter. For fiscal year 2019, loan volumes should grow, but slower than in fiscal year 2018. Term funding contributed a negative EUR 32 million, as we pre-funded the more expensive TLAC subordinated instruments in the quarter. This quarter-on-quarter contribution should be slightly less negative in the second Q 2019 and much less negative for the second half of the year, as other funding runs off. Last but not least, higher spreads on our bond investments contributed positively by around EUR 25 million to the investment portfolio and treasury line, offset by the non-recurrence of an inflation-linked bond coupon from the fourth Q 2018, as well as higher excess liquidity. Let's turn to slide 14. I will highlight four points on this slide.
Average commercial loan volumes are stable at minus 0.1%, while average commercial deposit volume continue to increase. Our commercial activities are essentially self-funded, with a loan-to-deposit ratio close to 100%. There were extraordinary items affecting the customer rate in Commercial Banking Italy, Germany, CEE, and CIB. The impact of two days less this quarter affected the customer rate calculation in countries where the loan portfolio is not all on a contractual actual 365 basis, as per footnote number 2. Customer loan rates are stabilizing. We see a four-basis-point increase quarter-on-quarter at group level, and even excluding the days effect, customer rate went up one basis point. It seems likely that, as we have indicated since the third Q 2017, customer rate reached bottom in the fourth Q 2018. We expect customer rates to continue to slowly increase during the year.
Considering the potential impact of TLTRO 3 as well as lower long-term rates, we now expect an increase of middle single-digit basis points for fiscal year 2019. Let's turn to slide 15. End of the period customer loan volumes for Group Core were down EUR 0.9 billion or 0.2% in the quarter. The decrease was mainly driven by lower factoring volumes in Commercial Banking Italy, as clients were actively managing their balance sheets over year-end. Without the factoring seasonality, loans in Commercial Banking Italy would have been flat. As a result, while the end-of-period core loan volumes were down 0.2% quarter-on-quarter, the average core loan volumes were actually up 0.2%. Beyond the seasonality of factoring and as loan levels are lagging indicator of economic activity, the fiscal year 2018 number was typical high late cycle growth. We expect loan growth in 2019 to be lower.
We confirm our fiscal year 2019 target for group loans of EUR 444 billion. End-of-period customer deposit volumes for Group Core were up 1.7% in the quarter. There were high deposits inflow from public sector entities in CIB in Germany, which are expected to return to their fiscal year 2018 levels over the course of the year. Let's turn to slide 16. Fees in the quarter were down 5.3% year-on-year. As most fees are seasonal, let's look at the fees categories separately on a year-on-year basis. Investment fees were down 12.9% year-on-year. This decline was mainly due to upfront fees in Commercial Banking Italy, which were down mid double digits on lower gross AUM sales. The strong performance in certificate sales could only partially compensate that. Sales activity in March and April have recovered from a slow start to the year.
Management fees for the group were stable on both constant pricing and average volumes. Financing fees were down 2.8% year-on-year, as fees from CPI could not fully compensate for lower loan fees in CIB. Transactional fees were up 2.1% year-on-year, driven by P&C insurance fees in Italy. Quarter-on-quarter, transaction fees were down 1.6%, mainly due to lower fees from seasonality of payments in CEE. Let's turn to slide 17. TFAs stood at EUR 833.5 billion in the quarter, increasing 2.8% quarter-on-quarter. AUM in the quarter were EUR 223.1 billion, up 4.3% quarter-on-quarter, solely driven by market performance. Net AUM sales for both group and the Western European Commercial Banks were zero. Asset under custody increased by 2.3% quarter-on-quarter. As strong market performance across divisions and good net AUC sales in Commercial Banking Western Europe were partially offset by large AUC outflows in CIB.
The latter were non-recurring and extraordinary high single-digit billion securities outflows from corporate clients in CIB. Deposits were up 2.2% quarter-on-quarter, mainly driven by institutional deposits in CEE. Let's turn to slide 18. Adjusted trading income in the first Q 2019 was up 2.1% year-on-year, and showed an impressive reversal versus last year and stronger underlying client activity. It included negative valuation adjustments of EUR 103 million, as well as realizations from our fair value through OCI bond portfolio in the mid to high double-digit range, which will not repeat in the coming quarters as we shift our portfolio to held to collect. As a result, we expect an average quarterly run rate of around EUR 350 million for the rest of the year. Dividends were down 10.1% versus last year. The contribution of Yapı to our dividend line was down 24% year-on-year on current FX, but only 2% at constant FX.
This is a function of Yapı's strong performance last year in a difficult macro environment, but much better than the double-digit amount we budgeted for the whole 2019. Yapı's P&L is included in the annex on page 52. As of the first Q 2019, our CET1 ratio sensitivity to Turkish lira moves is unchanged at +1 basis point net from 10% adverse moves in the Turkish lira. Let's turn to slide 19. Our focus on cost efficiency is yielding tangible results quarter-after-quarter. Transform 2019 is well ahead of schedule. We have already achieved 104% of our planned net FTE reductions and 95% of our scheduled branch closures. Both targets will be exceeded by the end of 2019, allowing us to reach our fiscal year 2019 cost target of EUR 10.4 billion, which we confirm. Let's turn to slide 20. Both HR and non-HR costs are down year-on-year.
The first Q 2019 HR costs were down 3.5% year-on-year, mainly driven by lower fixed compensation from reduced average FTE numbers. The quarter-on-quarter decrease was smaller at 1.5% as there were variable compensation releases in the fourth Q 2018. In the first Q 2019, non-HR costs are down 5.2% year-on-year, mainly driven by real estate and sponsorships. The quarter-on-quarter decrease was bigger, at 6.7%, after the seasonal spike in the fourth Q 2018. Let's turn to slide 21. Regarding group cost of risk, I would like to point out four items. First, the overall risk environment remains supportive in the quarter, which resulted in a seasonally low cost of risk of 40 basis points. We confirm the cost of risk target for fiscal year 2019 at 55 basis points, four of which from models.
Second, cost of risk in commercial banking Austria was very low in the quarter, as they continue to have net write-backs. We expect cost of risk to normalize during the year, but to remain below our fiscal year 2019 target of 16 basis points. Third, cost of risk in CEE is quite low, thanks to a supportive risk environment. Fiscal year 2019 cost of risk will be below our target of 102 basis points. Last, the model impact is likely to hit in the fourth Q 2019, mostly in commercial banking Italy. Our overall asset quality is steadily improving. The coverage ratio increased to 61.8% in the quarter, up 1.5 percentage points year-on-year. The group's gross NPE ratio dropped to 7.6% in the first Q 2019, down 1.9 percentage points year-on-year. Let's turn to slide 23.
In the first Q 2019, NII was down 0.5% quarter-on-quarter due to the days effect. Excluding this, it would have been up 0.5%. Loan volumes were down in the quarter due to the factoring seasonality and would have been flat otherwise. Loan customer rates were starting to show signs of stabilization, up one basis point in the quarter, adjusted for days, as repricing actions continue to take effect. For the rest of the year, we expect a low single-digit billion increase in loan volumes and customer rates to go up by a few basis points. Fees were down 3.8% year-on-year, mostly due to lower investment fees, being only partially compensated by higher transactional fees from P&C Insurance. Regarding upfront fees, lower AUM gross sales of funds and insurance products were only partially offset by higher AUC sales from certificates.
The commercial dynamics in March and in April are more promising than the first two months of this year. It is worth mentioning that for commercial bank in Italy, our fees have a relative weight of 52% of the total revenues of the first Q 2019. This ratio has been improving steadily over the last two years and compares very well with our local peer group. We attracted 85,000 gross new clients in the quarter, notwithstanding the ongoing optimization of the branch network. Cost of risk in the quarter was 57 basis points, with no impact from models. For fiscal year 2019, we expect the underlying cost of risk to be stable in a supported risk environment. The stated cost of risk for the year will be higher, as we expect a high single-digit basis points negative contribution from models in the fourth Q 2019.
The update of the IFRS 9 macro scenario in the second Q 2019 should have a similar impact to the last quarter, namely a mid-double digit million EUR amount in loan loss provisions. The normalized return on allocated capital in the first Q 2019 stood at 11.3%, and we confirm our fiscal year 2019 target at around 11% on higher risk-weighted assets. Let's turn on slide 24. In commercial banking Germany, adjusted net interest was down 0.7% quarter-on-quarter. This was the result of some customer rate pressure that was not compensated by rising volumes. The outlook for NII is stable on this level, i.e. in the first Q 2019, is a good run rate for the rest of fiscal year 2019. Fees were down 8.5% year-on-year, driven by both investment fees from AUC products and financing fees from loans.
Fees were up 6.4% quarter-on-quarter, thanks to the rebound in investment fees up 20%, driven by AUM and AUCs. 21,000 gross new clients were added in the quarter, up 31% on last year. The net profit in the first Q 2019 was positively affected by both the disposal of real estate as well the release of provision from U.S. sanctions. The normalized first Q 2019 return on allocated capital was 6.2%. If we also adjusted for seasonality, high-level systemic charges in the quarter, and low double-digit million EUR XVAs in trading income, normalized return on allocated capital would be above 2%. The fiscal year 2019 target of 9.1%, which we confirm. Let's turn to slide 25. In commercial banking Austria, NII was down 0.9% quarter-on-quarter, driven by lower loan volumes. Customer loan rates were slightly up, but not enough to compensate.
Fees were down 6.2% year-on-year, as lower investment fees from lower gross AUM sales could not be compensated by higher financing fees from loans. Costs were down 3.6% year-on-year, driven by non-HR expenses. The first Q 2019 cost of risk was negative seven basis points due to net write-backs. For fiscal year 2019, cost of risk will be below the target of plus 16 basis points. The first Q 2019 normalized return on allocated capital was low at 3.7% as the systemic charges in commercial banking Austria are customarily all booked in the first Q. It should increase materially in the next quarters, and we confirm the fiscal year 2019 return on allocated capital target of 13.3%. Let's turn to slide 26. CEE continues to be our growth engine, with an inflow of more than 300,000 gross new clients in the quarter. Commercial dynamics remain strong.
Revenues in the quarter were up 3% year-on-year at constant FX, driven by NII and fees. Only dividends were down 2.5% due to IAPI. The quarter-on-quarter decline in NII was mainly due to the days effect, as well as the non-recurrence of the one-off from discounted funding in Hungary in the fourth Q 2018. On the other hand, there was a very low double-digit million positive one-off in the first Q 2019 from recoveries. Fees were up 6% year-on-year at constant FX, mainly thanks to financing fees from loans and CPI. Costs are up 1.7% year-on-year at constant FX due to wage pressure and well below inflation. Non-HR expenses are increased by a mid-single digit million amount due to a technical delay in intragroup cost allocation that will be fixed in the second half 2019.
The division's cost income ratio remained best in class, only 35.1 percentage points for the full quarter. The cost of risk is at a seasonally low 61 basis points in the quarter. We expect some normalization during the year, but fiscal year 2019 cost of risk will be below our 102 basis points target. De-risking continues at a vigorous pace, and the division's gross NP ratio fell 1.3 percentage points year-on-year to 6.4%. Regarding our outlook for systemic charges and following recent development in Romania, we revise our estimate for the local bank tax from mid to high double-digit million to very low double-digit million. Return on allocated capital for the quarter was 14.1%. We confirm the fiscal year 2019 return on capital targets of 13.4%. Let's turn to slide 27. CIB enjoyed a resilient performance in a very difficult market environment.
Revenues were down 7.4% versus last year on lower NII and fees. NII were down 5.9% quarter-on-quarter, driven by non-recurrence of an inflation-linked bond coupon from the fourth Q 2018, and lower recoveries includes those from shipping. The first Q 2019 NII is clean of such one-offs. Fees were down 30.8% year-on-year, driven mostly by the very successful certificate business and to a lesser extent, by lower volumes in structured finance. As certificates get manufactured in CIB for our commercial banking clients, they generate trading income in CIB. When they are then sold by the commercial banking divisions, they generate positive distribution fees in commercial banking and negative fees in CIB, for a neutral impact at group level. The overall contribution from the group is, of course, positive, i.e., the trading income generated in CIB is higher than the fees paid for internal distribution.
Trading income strongly rebounded in the quarter on better client activity and is only down 2% year-on-year. It profited from mid to high double-digit million income from the fair value through OCI realization from our bond portfolio, which will not recur as we shift the bond portfolio towards held to collect. Positive impacts from certificate production in the trading were offset by negative contribution from OCS, both around mid double-digit millions. Normalized return on allocated capital was 12.3% for the quarter. We confirm the fiscal year 2019 return on allocated capital target of 11.7%. Let's turn to slide 28. As most of you will have listened to the Fineco result on the 7th of May, and will have read the joint press release on our smooth transition towards more independence, I will limit what I'm going to say on this slide.
We are very satisfied with the overall financial performance of Fineco. As we announced yesterday, we have sold 17% of Fineco to institutional investors. The remaining stake of around 18% will be classified as a financial asset. As Jean-Pierre already said earlier, this is the first step in a comprehensive set of financial measures to prepare for the wider 2020-2023 business strategy of UniCredit to be presented later this year. We will update our KPIs for the deconsolidation of Fineco in the second Q of 2019. Let's turn to slide 29. In the Group Corporate Center, revenues were down quarter-on-quarter due to higher funding costs, driven by both higher volumes and spreads. Costs are down significantly, mainly thanks to fewer FTEs. As a result, the ratio of Group Corporate Center cost to total cost is down to 3.2% in the first quarter 2019.
The fiscal year 2019 target of 3.8% is confirmed. The net loss increased quarter-on-quarter and year-on-year on lower positive taxes. Let's turn to slide 30. The accelerated 2021 non-core runoff is fully on track. Gross NPEs dropped by EUR 0.8 billion in the quarter and stood at EUR 17.7 billion at the end of the first Q 2019. Our non-core rundown is further accelerated to meaningfully beat the fiscal year 2019 EUR 14.9 billion gross NPE target. Let's turn to slide 32. We continuously work to derisk the balance sheet to further lower our cost of capital. Group Core gross NPE decreased by EUR 1.9 billion year-on-year, but slightly up by EUR 0.1 billion quarter-on-quarter. This reflects the normal quarterly pattern, whereby the cure rate is seasonably weaker in the first three months.
The seasonal increase in the migration rate led to bad loans being higher and UTPs being lower quarter-on-quarter. Our core gross NPE ratio was stable at 4.1% in the first Q 2019, close to the EBA average and already well below our fiscal year 2019 target of 4.7%. Our coverage ratios has improved by 0.6 percentage point year-on-year. Let's turn to slide 33. For the Group Core, the default rate was stable year-on-year. The cure rate decreased by 1.9 percentage points year-on-year, and it normalized after an exceptionally good 2018, where some big files went back to in bonis following intense restructuring efforts. The migration rate worsened by 3.1 percentage points year-on-year due to one single name moving to bad loans, albeit at a high coverage ratio. Let's turn to slide 34. Overall, the risk environment in Commercial Banking Italy remains very supportive and stable.
Gross NPEs in Commercial Banking Italy are stable at EUR 8.7 billion, which is a significant reduction in absolute terms year-on-year, and was mainly driven by disposals. The Group NPE ratio stood at 5.8%, up 0.1 percentage point due to lower loan volumes. The 2019 target is confirmed at 5.3%. As we said before, please keep in mind that the reduction in NPEs will not always be linear. The first Q 2019 coverage ratio was at 56.3%, up 1.3 percentage points year-on-year, despite significant disposal activity. Gross bad loans are up 4% quarter-on-quarter, as migration rates are seasonally high, and the recovery and disposal activity is seasonally low in the first quarter. Let's turn to slide 35. The overall risk environment in Italy remains supportive. The default rate improved by 0.3 percentage points year-over-year, and net flows to NPEs decreased.
The cure rate improved by 0.5 percentage points year-on-year, while the migration rate was stable. Let's turn to slide 36. The execution of the accelerated rundown of the non-core is progressing very well. Gross loans in non-core went down EUR 7.8 billion year-on-year and EUR 0.8 billion quarter-on-quarter. This reduction was thanks to a combination of disposals, write-offs, and recoveries. Please bear in mind that disposals are usually seasonally low in the first half of the year. Let's turn to slide 37. Non-core loan volumes kept going down and are well on track to meet our accelerated target of full runoff by 2021. The net NPEs, which are a good indicator of economic risk, were down significantly to EUR 6.1 billion, dropping by EUR 2.4 billion year-on-year. Gross NPE decreased by EUR 5.2 billion year-on-year and stand at EUR 17.7 billion.
We will be meaningfully better than our EUR 14.9 billion for fiscal year 2019 gross NPE target. That means that we will be closer to EUR 10 billion. Net NPEs coverage has increased by 2.9 percentage points year-on-year despite the disposal activity. Let's turn to slide 39. The group fully loaded CET 1 ratio at quarter end stands at 12.25%, up 18 basis points quarter-on-quarter. The key driver was the net profit of 37 basis points in the first quarter that included real estate disposals and release of provisions from U.S. sanctions. Partially compensating effects were regulation models and procyclicality, minus 10 basis points, as well the DBO at negative 11 basis points. The latter was caused by the strong decrease in long-term rates, we have added the CE T 1 ratio sensitivity to changes in the DBO in our footnote number five.
The net impact of IAPI on our CE T 1 ratio this quarter was negligible, as was the impact of BTP spreads. Let me make a remark regarding our dividend payment, which for fiscal year 2019 is based on a 30% cash payout on an adjusted net profit, i.e., excluding the gains from real estate and Fineco, but including the release of provisions from U.S. sanctions. This is fully in line with the past practice for fiscal year 2017 and 2018. For the end of 2019, we confirm our CE T 1 ratio between 12%-12.5%, and an MBI buffer now at the upper end of our target range of 200-250 basis points.
The expected evolution of our CE T 1 ratio during the rest of 2019 will be driven by the combined effect of regulatory headwinds, mainly expected in the second and the fourth Q, tailwinds from return earnings, and capital gains from real estate sales and Fineco. This should lead to a CE T 1 ratio at the end of the second Q 2019 at above 12% at current BTP spreads, before going back to the range of 12%-12.5% by year end 2019. Let's turn to slide 40. Risk-weighted assets in the quarter increased by 1.6% to EUR 371.7 billion. The biggest drivers were increased credit risk-weighted assets from regulation models and procyclicality. Market risk-weighted assets were down, mainly due to lower multiplier. Over the course of 2019, we expect risk-weighted assets to increase every quarter up to our fiscal year 2019 target of EUR 406 billion.
Regulatory headwinds from EBA guidelines and regulation models and procyclicality should account for roughly EUR 25 billion of risk-weighted asset increase and should mainly be split between the second Q and the fourth Q. Let's turn to slide 41. After a number of quarters with declining tangible equity value, we consider the third Q to have been the trough. In the first Q 2019, our tangible equity grew by 2.2% or EUR 1.1 billion quarter-on-quarter to stand at EUR 48.8 billion. The main driver was the net profit of the quarter. We expect a steady increase of tangible equity and tangible book value per share for the rest of 2019. This should lend support to our share price going forward as tangible book value per share has increased to EUR 21.9.
Please also keep in mind that since we launched the Transform 2019 plan up to the first Q 2019, we have already returned EUR 700 million in cash dividends to shareholders. In the second Q 2019, the cumulative dividend return to shareholders will increase to EUR 1.3 billion. From a total return perspective, one would need to add that number to the growing tangible equity. Let's turn to slide 42. As of the first Q 2019, we are well above our upcoming TLAC requirements with a subordination ratio of 18.41%. This corresponds to a buffer of 134 basis points, well above our target of 50-100 basis points range. This is thanks to the pre-funding we did on subordinated instruments, having de facto completed our subordinated TLAC funding plan for 2019 with only EUR 800 million left to do.
The AT1 and tier 2 transactions we placed in the quarter were very well received by the market and were issued with little or no premium. They generated record order books and are a testament to our strengths as an issuer in the global capital markets. Over the course of the year, the TLAC buffer will go down as risk-weighted assets are expected to grow and some outstanding TLAC instruments get called. For the remaining quarters, we expect the buffer to be at or above the upper limit of our range. Taking that into account, we are also already compliant with the upcoming Pillar 1 subordination requirements for MREL. Jean-Pierre, back to you.
Thank you, Mirco. Before we move to the Q&A, let me briefly recap on our first quarter 2019 performance. In our third and final year of Transform 2019 plan, we have seen a continued good core bank performance, with group core net operating profit of EUR 2 billion, and an adjusted group core ROTE of 11.3%. Transform 2019 is well ahead of schedule and is delivering tangible results quarter after quarter. We have already achieved 104% of our planned FT reduction and 95% of our branch reduction. Group costs are down to EUR 2.6 billion, and we confirm our fiscal year 2019 target of EUR 10.4 billion. Our 2021 non-core runoff is fully on track. Non-core rundown is to be further accelerated to meaningfully beat the financial year 2019 EUR 14.1 billion gross NP target. That means for financial year 2019, that will be lower than the EUR 14.9 billion and closer to EUR 10 billion.
For FY 2019, we also confirm our target of EUR 4.7 billion net profit, 9% ROE, and 10% core ROE. We also confirm our fiscal year 2019 revenues at EUR 19.8 billion, cost at EUR 10.4 billion, and cost of risk at 55 basis points. Commercial revenues in FY 2019 will be at the same level as FY 2018 and will be compensated by higher trading income. As Mirco mentioned earlier, our FY 2019 cash dividends will be paid in 2020 and is expected to be 30% of adjusted net profit, which, based on a net income of EUR 4.7 billion, means an increase over FY 2018 dividend or more than 2.3 times. For the end of 2019, we confirm our CET1 ratio between 12% and 12.5%, and an MDA buffer now at the upper end of our target range of 200 to 250 basis points.
During the year, we expect the CET1 ratio 12 in second quarter 2019 above 12%. Last but not least, we are confident our tangible equity will grow throughout the year. Our underlying ROE for the group without U.S. sanction impact was well above 9% for FY 2018 and is very close to 9% in the first quarter 2019. We are therefore confident that we will reach our FY 2019 target above 9% ROE. Needless to say, we continue to focus fully on the execution of Transform 2019 and work hard as one team, one bank, one UniCredit, to ensure UniCredit remains a true Pan-European winner. Now Mirco and I are ready to take your question.
As it will become a tradition, we are joined here by our co-CFO, Stefano Porro, our two co-CEOs of Central and Eastern Europe, Gianfranco Bisagni and Niccolò Ubertalli, our co-CEO of Western Europe, Francesco Giordano and Olivier Khayat, our Chief Risk Officer, T.J. Lim, and our co-COO, Carlo Vivaldi and Ranieri de Marchis, and they will be available as well to answer your question. Please be so kind and limit your question to two each. Many thanks.
Excuse me, this is the Chorus Call conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. The first question is from Adrian Cigi of RBC. Please go ahead.
Hi there. Thank you very much for taking my question. Two questions, one on strategy and one on guidance. Going back on your opening remarks, selling FinecoBank increases your optionality and flexibility to build extra capital buffers. We've also seen a considerable amount of noise in the press around potential inorganic activity by UniCredit. Can you maybe discuss which criteria would you use to use some of this excess capital to pursue inorganic activity, and maybe give us some insights into the specific return hurdles that you would use to judge some of these activities? The second one, just a clarification on your guidance. Last quarter, you provided an EUR 18.1 billion outlook for the combined NII fee income for the full year. Do you need to update this guidance in line of the Q1 developments, or does it still stand for the rest of the year? Thank you.
Thank you very much. As you know, we never comment on rumors and speculation. I said earlier that I think that mergers and cross-border mergers are extremely difficult to pull out. I think that I will not comment further than that. On the EUR 18.1 billion commercial revenues, I said in my conclusion that we confirm our EUR 19.8 billion of total revenues for the year, that our commercial revenues will be closer to our 2018 revenues, which were around EUR 17.6 billion.
Thank you very much.
Next question, please.
The next question is from Andrea Filtri of Mediobanca. Please go ahead, sir.
Yes.
Following from FinecoBank, what is the business impact for the group of losing a fintech jewel like FinecoBank? Do you think that going from 12% to 12.5% CET1 will reduce your implied cost of equity? Finally, can we now assume you will move to 50% payout ratio from the next fiscal year? Secondly, on carry trade, your financial assets are down EUR 2.3 billion Q on Q. What has been the loss in NII in the quarter, and what will be for the rest of the year? You've also stated you want to progressively realign bond holdings with peers, but one of your peers increased bond holdings by EUR 18 billion Q on Q. Does this mean you will increase exposure? If so, how much NII support do you foresee from this hypothetical move? Finally, just allow me a follow-up on what Adrian said before on M&A.
Essentially, your share price is flat during your business plan, despite your delivery. Hypothetically, could you consider making the next strategic move even if the market is yet to recognize the progress you made on profitability? Thank you.
Well, let me deal with your last question first. As you said, we never comment on rumors and speculation. I said again that we think that M&A transaction are extremely difficult to complete. Let me go back to your first question, the disposal of FinecoBank has to be looked at within the set of four measures we commented about in the introduction of this presentation. We discussed with the board this set of four measures, which aim to make sure that we improve even further the profile of the group in order to guide our cost of equity to a lower level. You know our implied cost of equity today is high and probably higher than a panel of our peers.
We think that by taking these four measures and progressing on them, will gradually improve the profile of the group and potentially lower the cost of equity, which is absolutely not under our control, but we can take actions in order to see if the market will consider it differently. We think that to have a high buffer to MDA, CET1 and BA is important. A buffer is a buffer. It was impacted by the write-down of Turkey last year, potentially lower profitability with additional provisions we took on U.S. sanctions. Part of them have been released this year.
We aim to be at the upper end of the range, which on one side will allow us to better finance the economy in the various countries where we are present and allow us to potentially, gradually increase our dividend payout to the upper limit we gave of 50%. We will see in due time when and how we should increase the dividend payout post-2019. Remind you that we had decided and already provisioned for the first quarter, a 30% payout for the dividend, which, as we said, applied to the EUR 4.7 billion net income, mean that our dividend for the full year 2019 to be paid in 2020 should be more than 2.3 times higher than the dividend paid in 2018. As far as our BTP portfolio is concerned and comparable, first, we don't do carry trade.
I think that you all know that profit coming from carry trade have a very low multiple in terms of net earnings, so it's mostly artificial and does not bring value to the bank. At least this is our own assessment. When we say in our four measures that we want to bring our BTP holdings in line with our peers, it's our BTP holdings. It's not carry trade, it's not additional bonds we could buy to artificially flatter our net income. We want to bring it to a ratio, which is a ratio of BTP holdings to tangible equity, which will be in line with our peers in Italy or in line with domestic holdings of government bonds by our peers in other European country.
want to stress that this will be a natural amortization of the portfolio with for 2019, very little and non-meaningful impact of our revenues as we confirm our EUR 19.8 billion of total revenues, which was decided and stated before we put in place this natural amortization of the portfolio. We will follow what our peers BTP to tangible equity ratio is in the future. We confirm as well that we will keep acting as one of the most active primary dealers in BTP to support the issuance of the Italian Republic. That goes without saying, our commitment to Italy is stronger than ever. Well, that's it, because I answered your many questions earlier, so that's fine. Okay, next question.
The next question is from Jean-Louis of Goldman Sachs. Please go ahead.
Good morning. My first question would be on NII. You've provided the bridge where within the commercial dynamics
One of the key negative factor was term funding, obviously you've been very active in the market recently. You also indicated that your funding plan is done, that you will exercise some calls and so on. I just wanted to understand going forward, whether we should expect any more negative contribution in the flow quarter to quarter from that, or whether that component of about EUR 30 odd million is essentially a step change, but not necessarily a recurring step change going forward. Whether the sustainability of the loan rates increase, which you've seen in multiple geographies this quarter, you think is sustainable, in particular in the view of the confirmation of TLTRO two or three, rather. My second question is on capital headwinds. You've seen very low default rates. I calculated net inflows to NPE of less than 60 basis points this quarter.
You also will have NPEs lower than what you had planned for this year and the years to come, compared to when you disclosed the capital headwinds, a lot of which are based on NPEs or impacts from NPEs. Is there any update on the magnitude of the capital headwinds post 2019, please? Thanks.
Thank you very much. I will answer for the capital headwinds and let Mirco comment on the NII. We have said that the bulk of capital headwinds for 2019 will come in Q2. We adjusted the dip in CET1 capital to above 12% from the previous guidance, which was around 11.7%. Clearly, the FinecoBank disposal is helping for that. We have a CET1 impact in Q2, which is around 40 basis points for a total impact for the year of around 80 basis points, knowing that ten have been already taken in the first quarter, 40 will be in the second quarter, zero in the third quarter, and around 26 or close to 30 in the fourth quarter.
Beyond 2019, we will debrief the market at our Capital Market Day in December. We have not seen any major adjustment from what we communicated at our Capital Market Day 2017. The assumption we had at the time are broadly valid. I'll let Mirco comment on the NII side.
On the NII side, on the first sub-question on term funding. The peak is going to happen in this quarter with minus EUR 32 million. You should expect a slightly lower number as an impact for the second quarter. Then a meaningful smaller number for Q3 and Q4 because, as you said rightly so, we are basically done from, let's say, the costly funding plan side. On the other side, we also have some funding that is actually amortizing. In terms of the sustainability of the NII, and especially on the client rate side, what we have said, there is TLTRO 3. There are long-term rates that are coming down. We still expect a slight improvement in client rates over the rest of the quarter, and that should support, let's say, the NII going forward.
Next question, please.
Thank you very much.
The next question is from Antonio Reale of Morgan Stanley. Please go ahead.
Hi. Yes, thank you for taking the time. I have two questions, please. One on the non-core and the other one on Commercial Banking, Germany, please. On the non-core, the rundown here has been trending ahead of targets, and you've now lowered your target to EUR 10 billion non-core loans by year-end. If I understand correctly, with cost of risk guidance confirmed at 55 basis points, that means that there's going to be no impact on P&L or capital. First, do I understand that correctly? A faster rundown of the non-core comes no expenses to capital and P&L. The second follow-up to the non-core rundown is, do you expect to see any RWA release from a faster reduction of the non-core exposure this year or next eventually? If so, could you quantify how much that will be? Thank you.
The second question on Commercial Banking in Germany. They've been quite resilient in the quarter, despite the challenging market. Could you maybe just talk about what you're seeing from competition here, where do you see most opportunities to grow, and perhaps comment on the fees which, in Germany, seem to have held up quite well in the quarter? Thank you.
Thank you very much. I will let one of our co-CEO of Western Europe, who is mostly covering Germany, Olivier Khayat, to comment about the German evolution later. On the non-core, T.J. can add some comments. We have announced that we want to meaningfully beat the target of EUR 14.9 billion and be closer to EUR 10 billion. This is an acceleration of what we want to do. Based on the assets that we might dispose of, we might anticipate some of the provision which were planned in the following years. This is fully taken into account in our EUR 4.7 billion net income. We are highly confident that we'll be closer to EUR 10 billion, and we're highly confident to deliver the EUR 4.7 billion net income, there could be some anticipation of provision as we move earlier than scheduled.
Maybe T.J., you can give a view of the market right now in terms of NPL disposal.
Yes. Thank you, Jean-Pierre. I think from the NPL point of view, in terms of disposal activities, we have not seen any softening. If anything, things are continuing to evolve as last year, clearly even despite the signal of the slowdown. We're confident that this meaningfully run down, we can achieve. Again, we said closer to EUR 10, it doesn't mean it should be EUR 10. In terms of what Jean-Pierre has rightly mentioned, some of the costs that we were expecting for next year would be anticipated this year, but it's fully adjusted into the plan of the EUR 4.7 billion. The RWA release is really part of the capital work that Mirco have mentioned.
Thank you, T.J. Olivier.
With respect to the result in Germany, we can see that on a quarter-over-quarter, we've been benefiting from a stable NII, and on the fee side, an increase of 6% quarter-over-quarter due to higher investment fees. The overall landscape in Germany in terms of competition is still in a market where the pricings are still very tight. Cost of risk are low and high level of competition. Having said that, we are starting to get the benefit growingly of the targeted growth plan that we have in Germany, which is at the moment taking place.
Yeah. We say in Germany, we have on the corporate side Mittelstand, which is our target growth plan. We have roughly, overall in Germany, a 2.5% loan market share, 4% market share for the corporate side, and we have a 23% market share on export letter of credit. You can see that there is a meaningful side business that we can do in Germany because more local German bank don't have the networks and the ability to cross-sell with their clients. We think that there is an extremely good business potential here thanks to our unique network in Western and Central and Eastern Europe, which makes us extremely confident that we have growth potential as well as a return on allocated capital on the corporate business in Germany, which is above our cost of capital.
Next question, please.
Thank you.
The next question is from Alberto Cordara of Bank of America. Please go ahead.
Yeah, thank you very much. Just getting back to your revenue target. If I understand correctly, your core revenue targets have been lowered from EUR 18.1 billion to EUR 17.6 billion. But I think this was, I guess, already part of educated consensus. At the same time, you lifted your target on trading. What makes you feel so confident that EUR 350 million is going to be a run rate for each of the following quarters? Related to that, I was looking at the slide on trading. You were talking about the negative XVAs. Can you elaborate a bit on this point and what is it exactly? If you want, the other question that I have is on NPLs. We saw a marginal increase in NPLs across the different lines of the core business.
You're doing a fantastic job on non-core, but on the core business, there is this marginal increase. The cure rate is lower than what we saw in Q1 2018. Going forward, and leaving aside the non-core, should we expect the core to continue worsening even by a small rate or not? Thank you.
Thank you very much. On the trading side, we have a very good quarter as far as trading is concerned, and we have said that we anticipate for the net quarter to be around EUR 350 million per quarter, which is exactly the average or annualized basis of EUR 1.4 billion, which has always been our guidance. Basically, we take the extra profitability of the first quarter, and afterwards, have the normalized, if I may say, quarterly contribution from the trading side and higher dividend level as we have said. I'll let Mirco comment on the XVAs side.
Yes, in terms of the composition of the XVAs, most of it is coming from funding value adjustments. That's almost half of it. CVA is another part, and the fair value adjustment also is the smallest impact. The biggest impact of all is the funding value adjustment.
If you look at our trading profit for the quarter, with the minus EUR 100 million XVAs, the trading profit net of XVAs were actually EUR 540 million. You can see that there is a relatively high contribution for the quarter, and afterwards, EUR 350 per quarter going forward. That's always been the EUR 350, the average. On the core bank evolution, as you have seen, we have today a gross NPE ratio for the core bank, which is our core focus, which has no change at 4.1%. When you apply the EBA calculation, which is less strict than ours, we're actually very close to the EBA average of our competitors. The default rate is stable at 1.1%, we see a very favorable environment. The cure rate is lower than on the first quarter last year.
Your cure rate depends on some bulky files, which can go back to performing, there's nothing specific to be read here in terms of the nature of the portfolio and the quality of the portfolio. We are extremely comfortable about our ability and the quality of the portfolio. I don't know if TJ wants to say anything else. I would just say that if you look, and we disclose in the annex of the documents, the expected loss by division, you can see that the expected loss for the new business on the first quarter, that's on page 61 of the document, is at 33 basis points versus stock at 38 basis points. Still a very good expected loss for the new business and still a very good expected loss on the stock. TJ, if you want to add up anything.
Just a quick addition. As Jean has mentioned, we confirm that the group asset quality in the core side remains sound. In Q1, there's some technicality that we have in terms of migration of some UTP to bad loans, just from one file with very high coverage. This is, again, by also the less than normal disposal activity. Asset quality remains sound.
Okay, thank you very much. Thank you.
Next question, please.
The next question is from Andrea Vercellone of Exane. Please go ahead, sir.
Good morning. One on NPE coverage, one on guidance 2019. On NPE coverage, as you essentially run off the non-core division, is it fair to say that your group NPE coverage will converge towards the core? You plan to continuously increase coverage in the core division in future years also? Obviously there is a discrepancy between the two. On the guidance, you have reiterated the EUR 4.7 billion target for 2019. The revenues, the costs, these are all pre-FinecoBank disposals, so the perimeter is going to change. Is it fair to say that we just need to deduct from total revenues the contribution of FinecoBank, same for total cost, same for provisions, or not? Same for the bottom line, EUR 4.7 billion includes the contribution of FinecoBank, but you will no longer have this contribution.
Does it stay EUR 4.7 billion or is it EUR 4.7 billion minus whatever FinecoBank would have contributed? Thank you.
Yes. First of all, on the core, clearly the NPE coverage of the core will remain once the non-core is run off the group NPE coverage, basically. We are not anticipating to change the coverage. Otherwise, mean that the coverage of the core today is not the right one. That's very clear. On the guidance, we will give an update for the second quarter of the group figures ex FinecoBank, as FinecoBank will be deconsolidated, but the EUR 4.7 billion is confirmed ex FinecoBank. The EUR 4.7 billion does not change whether we deconsolidate FinecoBank or not. I just want to state as well that the EUR 4.7 exclude the extraordinary capital gain from FinecoBank, as well as the capital gain from real estate. This is the overall net income which will be paying, if I may say, the 30% dividend to the shareholders.
As Mirco commented, we want to carve out all the extraordinary profit, but we nevertheless include on the EUR 4.7 the contribution of the provision right back on U.S. sanctions as the negative impact of U.S. sanctions were included in the net income, which bear a dividend last year.
Thank you.
Next question, please.
The next question is from Benjie Creelan-Sandford of Jefferies. Please go ahead, sir.
Yes. Good morning, everyone. Two questions from me. First of all, on costs. I know we all like to focus on the cost reduction delivery at UniCredit, which has again come through. Just in terms of investment, be that on systems or digital capabilities, what are the key areas that you're prioritizing going forward? Could you perhaps comment on where we now stand in terms of IT systems integration across the key subsidiaries of the group? My second question is just on Turkey. It seems that the current regulatory capital treatment of the Yapı Kredi stake is relatively penalizing. Can you just confirm that you still see that as a core part of the business?
If so, besides exiting that stake, is there any strategic measures that you could foresee taking that might release capital, or improve the return profile of that stake from a regulatory capital point of view? Thanks.
Thank you very much. Just let me comment Turkey, I will briefly comment on the investment and let Mirco comment as well. Maybe our co-CEOs can comment on the IT investment. On Turkey, we always said that this is a country with a large population, very well-educated, with very good companies. We support Yapı Kredi in its development. We are going through the natural adjustment of the economy because of structural current account imbalance, which are corrected right now with the adjustment we are seeing, and that's it. No change on our strategy. The Turkish regulatory treatment is not very favorable, as you pointed out. We have equity consolidation, but pro rata regulatory consolidation. It is a fact of life, and we cannot change it.
On the detail of the investment, Mirco can give the financial figures, and then I will let our co-COO comment on some of the key focus, knowing that the capital market day on December 3rd will be about the transformation of the bank, what we do, and what is our vision in terms of evolution and transformation. There will be a small part on the financial target that we have already anticipated, but the capital market day is not a financial communication exercise. It is a business strategy exercise where we'll elaborate more on it. Mirco, first on the quantitative figures for IT investment, and then Ranieri, Carlo on the priorities for IT.
Maybe something else on Turkey, we are running down the intragroup, we are down now to EUR 2.1 billion. This is actually happening-
Yeah. On track to reduce our intragroup exposure by 50% by the end of 2020.
Exactly.
It's working and progressing well.
Yes.
You're absolutely correct.
In terms of the IT spend, the Transform 2019 was based on EUR 1.7 billion to be spent in terms of IT for the transformation. This in the plan was basically one third, one third, one third, and we are totally on track actually, in terms of the IT spend. We are totally in line, and now I'm going to let Ranieri.
Yeah. It's EUR 1.7 for transformation plus EUR 700 for regulatory side. It's EUR 2.4, the EUR 1.7 transformation. Ranieri Carlo on the IT priorities right now.
Yes. As we actually presented also as part of the Transform 2019 plan, clearly the big programs of transformation that were highlighted are fully on track. I will remind that one of the levers was the simplification and rejuvenation of some aspects of the core banking system. We called it at the time the DGCE project. The DGCE project is, as I said, fully on track, already have deliveries in 2018, and we expect the final delivery be 2019. In terms of leveraging the platforms, we are progressing in our new mobile app, which actually will leverage a common infrastructure across the different core countries, i.e., Germany, Italy, and Austria, as well as the PSD2, which effectively is creating the API platform that covers, in fact, all of the group.
In terms of the digitalization, the priority is the enablement on one side of the efficiencies that are in the plan, i.e., through simplification and also the using of robotics, but as well as supporting the customer experience, as well as the performance of the commercial business through an upgrade of our apps and taking a view always at a group level, not only at the single local improvements.
Without disclosing too much of our capital market day presentation, we're working as well on making sure, for instance, in Italy, that on the retail side, our Italian retail activity will be paperless at one stage in 2020. We generate, or we generated 51 kilometers of paper in our Western European network between Italy, Germany, and Austria. Not only we want to save the Earth and use less paper, that's part of our sustainability initiative. We want as well to make sure we are more efficient. Being paperless will improve customer satisfaction and experience, and will improve as well our efficiency in terms of operation. I said too much, and you will have much more detail of that on December 3rd. Next question, please.
Question is from Miss Azzurra Guelfi of Citi. Please go ahead, madam.
Hi, good morning. One question on the sovereign portfolio. As part of your realignment process that you have announced among the financial measures that you are going to take, this should result in a decrease of the Italian sovereign sensitivity to capital. Could you share with us what would be your end sensitivity, if you have any simulation that you have already run? Sorry to come back on the growth strategies. I hear you loud and clear that you are going to remain focused on the execution of the plan, and that is crystal clear. Between now and 2023, there might be some opportunity that presents itself, whether in one of the country where you're operating, whether it's a fintech company, there could be something because the market always evolves. Could you share with us what would be criteria for which you could look at something?
What are your frameworks to think about this? Thank you.
Well, thank you very much. In terms of sensitivity, we communicate about our current sensitivity, which we said would be reduced because we move part of the portfolio to held to collect. We have today, out of the EUR 54 billion of BTPs, EUR 35 billion, which are in FVOCI and EUR 18.6 billion in held to collect. In the held to collect, there is roughly EUR 3 billion of BTPs coming from Fineco. With the consolidation of Fineco, you have a natural decrease of EUR 3 billion. The current sensitivity on the FVOCI is a post-tax of 2.1 basis points for 10 basis points of movement of the BTPs. We expect to keep moving part of the BTPs toward the held to collect, and we have a natural amortization of the BTP portfolio, so the sensitivity should go down further.
On the non-organic evolution, I don't want to frustrate everybody, but we never comment on rumors and speculation, and we are focused on delivery of our plan. On December 3rd, we will comment about what should be the future evolution. The future evolution of the group on an organic basis and maybe on a non-organic one, will be on extremely strict control, will be on extremely strong capital position, and will be on ability to have an extremely strong delivery and governance. Afterwards, you can draw the conclusion that you want to draw, but we maintain the discipline we have shown in Transform 2019. I would add that management team and starting with myself, are shareholders of the bank, and we want to make sure that anything we do is positive for the shareholders of the bank.
Next question, please. The next question is from Domenico Santoro of HSBC. Please go ahead, sir.
Yes. Hi, good morning. Thanks for the call. Back to your Italian bond portfolio and the reference that you gave before with the tangible book. There is much variance among Italians. I was just wondering whether we should take Intesa as a reference, presumably you're going to reduce by EUR 10 billion the Italian bond portfolio. If you can give us a timeline, and what are also the remedial actions to preserve the NII going forward. An update on the LGD waiver on capital and also SME factor, if you have any. Relating to funding, you're going to receive the MREL target by the SRB in the second part of the year, including the subordination requirements.
I was just wondering whether you are thinking about updating as or even upgrading your funding policy in terms of fee and non-recourse for the second part of the year or beyond 2019. Thank you.
Thank you very much. Mirco will take the funding question, T.J., the question on regulatory evolution for the waivers. On the NII side, I said that it's a gradual amortization of the portfolio. We are not selling bonds. You know that our portfolio had a duration of 3.2 years, so we will let the portfolio gradually amortize. We said that for 2019, there will be a non-meaningful impact as we confirm the EUR 19.8 billion of top line. As far as the peers are concerned, clearly, as I said, we look at the BTP portfolio to tangible equity of peers, but we don't include any kind of extraordinary contribution of carry trade and whatever. When we look not only at Italian peers but also at European peers and look at their average holding of domestic bonds to tangible equity.
That should give you a target, the timeline is gradually following the target we have in terms of the natural amortization of the portfolio. We do that to optimize and limit the NII impact, knowing that we can reinvest in other assets which could help smooth out the NII. The first one being growing our loan book to our clients with the liquidity freedom. Funding side, maybe Mirco before T.J. answers on the regulatory side. Yes. In terms of MREL, of course, we focused this part of the year on the subordinated MREL part, from that perspective, we are totally super well-placed with a very good, nice buffer. The only MREL number that we commented on in the past was the 25.03%, as you know there are various moving parts still out there in terms of really determining what is the level on the various banks.
What I can say is that definitely on the new plan, we're going to have totally the MREL plan embedded. The plan 2023 will have that. A reminder that MREL will start in 2022 with an intermediate target, then it will be fully loaded by 2024. That's why this is probably more appropriate to be discussed at the Capital Markets Day.
On the regulatory front, first of all, just to clarify, this on LGD is not a waiver. It is a massive adjustment to so-called disposal. The language has been finalized, but clearly it has yet to be approved. Should be out hopefully by June, sometime. At that point, we'll work with the regulators in terms of the process for that. Right? This has not been built into the plan, we will take advantage of this in terms of the regulatory headwind, which we will present in December. On the SME supporting factor, this is a positive. Clearly, this has not been built into the plan, this, we will update that during the Capital Markets Day.
Next question, please.
The next question is from Giovanni Razzoli of Equita SIM. Please go ahead, sir.
Good morning to everybody. Two quick questions. The first one is on the guidance of the CET1 that you have reiterated up to 12%-12.5% at year-end. You should benefit, based on my calculation, for at least 30 basis points for the consolidation of FinecoBank, which may rise to up to 60, 70 basis points if you get rid also of the remaining 18% stake. I was wondering whether there is more adverse regulatory headwinds because of this evolution in your CET1 ratio guidance. Especially in terms of risk-weighted asset inflation that you have mentioned, the EUR 25 billion at year-end, whether this was in line with your budget. That's my first question. The second one, I share your points about the reduction of the portfolio of BTPs. In the recent past, actually, you were a little bit more vocal in buying domestic government bonds.
I was wondering whether there has been some regulatory pressure to increase the diversification of your portfolio since then. Please allow me to a very final question. You have been very vocal about not commenting or being very bearish about the Pan-European consolidation. Can I apply the same standard to domestic consolidation? Thank you.
Thank you very much. We never comment on rumors and speculation, whether they are Pan-European or domestic. That's the point. We said that we are very happy to grow organically in Italy, where we have a market share on retail and on the corporate side, which allows us to grow organically, and that's our key focus. On BTP portfolio, we never comment either on speculations or regulatory issues. As you can see, the measures we have discussed with the board, and we have communicated are part of a package which aim is to improve the profile of the bank and to pass hopefully an ability for the market to lower our cost of capital, so equity and funding. As I said earlier, our implied cost of equity today, we think is too high versus the profile of the bank.
We wanted to communicate it in advance of our Capital Market Day, these measures, in order for the market to see them, to digest them, to see the progress we are making. Hopefully, that should help drive our cost of equity, which we do not control. What we can control is actions we can take. BTP's reduction of the non-core, being on the upper end of the buffer, limiting the impact on the cost of funding are all measures which go in the same direction, and they make sense as a package, if I may say, and that's the rationale. On the 12-12.5 guidance for the CET1 ratio, I'll let you do your own calculation as far as the FinecoBank contribution is concerned.
We said that it will be for the second quarter, a 21 basis point contribution, then afterwards, we will see based on the financial environment, what we do with the remaining part of our holding in FinecoBank. We have not seen any worsening of regulatory headwinds. I commented earlier that we expect around 40 basis points of regulatory headwinds in terms of CET1 for Q2, zero for Q3, and around between 25 and 30 for Q4. The risk-weighted asset impact will be around EUR 15 billion for Q2 and EUR 10 billion for Q4. We said there should be a EUR 25 billion risk-weighted asset, EUR 15 billion for Q2 and EUR 10 billion for Q4, irrespective of any of the loan book evolution. That's the risk-weighted asset impact based on the regulatory evolution. We stand by the prospect that we were giving to the market earlier.
Thank you.
Next question, please.
Excuse me, sir. The next question is from Anna Adamo of Autonomous Research. Please go ahead, Anna.
Hi, good morning. Two questions from me. The first one is just a clarification on Fineco. What will be the capital impact from the potential full disposal of the stake, assuming today's prices? Going back to the targeted reduction in the domestic bond portfolio, if I look at the EBA data, the exposure to domestic bonds as a percentage of tangible book value for European peers is around 50%-60%. Is this the target that you have in mind for UniCredit for the medium term? Thank you.
Thank you very much. I said that the impact for Fineco, with the disposal of this first tranche, which is more or less equivalent to half of our holding, is 21 basis points. Based on the environment, you can see that impact of disposal of second tranche will probably be very similar. Marginally higher, actually. Positive impact. As to the average of domestic bond investment to tangible equity is concerned, I think you have a good reading by looking at the EBA documentation, we said that we should, over time, gradually converge towards the average of our peers. I just confirm that, let you look at the average of our peers.
Thank you.
Next question, please.
The next question is from Ignacio Cerezo of UBS. Please go ahead.
Hi, good morning. Two questions from me, if I may. First one is on revenue guidance, especially on the core number. If you still have some rate increase in the second half embedded in your number, and if you take it out, where would you be? Second one is on capital. If you have embedded any operational risk impact in terms of Basel IV implementation next two years before 2022. Thank you.
Just on the rate increase, not quite sure to understand exactly what you mean, but we have communicated the sensitivity to three months EURIBOR, which is EUR 187 million. The customer rate increase, we have a sensitivity of customer rate increase, one basis point is EUR 41 million. I don't know if it's exactly your question.
I was referring to, in order to repeat the core revenue, NII plus fees over last year, you said during the call, you need rates going up to be at the same level as last year.
Okay. Let me co-comment on that.
As I said before, in terms of client rates, we expect still some increase in client rates over the next couple of quarters. That's basically what we embed in our guidance.
We said that we communicated before that. We said the client rate, which has been increasing in the first quarter, now should bottom out in the fourth quarter 2018, and afterwards gradually increase. You have seen this gradual increase in the first quarter. We had a little bit of, if I may say, exceptionals in the first quarter. The four basis points outside of the exceptionals, which is two days shorter for the quarter, which based on our 360 days loans, specifically in Italy versus the 365, has a positive impact on the client rates, plus other limited impact. We should have, for instance, for commercial bank in Italy, instead of this 360 to 365 days, instead of the five basis point, we should have a one basis point increase in the first quarter. We still see an evolution of a few basis points in the year.
As I said, the sensitivity for one basis point is around EUR 41 million. We don't see any increase of interest rate in Italy or anywhere else. Yeah, Mirco, on operational risk?
Yes, on operational risk, we basically are embedding a flat operational risk-weighted asset impact in our capital for the rest of the year.
Thank you.
Next question, if we still have one.
No, gentlemen, Mr. Mustier, there are no questions registered at this time.
We suspect you're all exhausted. We are not. We can take a few more question. Last chance before the next quarter, actually before the meeting we will have with you, starting with tomorrow morning.
As a reminder, sir, one for questions, please.
If there's no more question, we call it a day. Thank you very much for your attention. Call was a little bit longer and the presentation a little bit longer than usual because of the comments on these additional four measures. We apologize for that, but we felt it was important to go into this detail. Thank you very much. We'll meet with you very soon during the road shows. Bye-bye then.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.