Conference operator. Welcome and 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. At this time, I
would like to turn
the conference over to Mr. Jean Pierre Muthier, UniCredit Group Chief Executive Officer. Please go ahead, sir.
Thank you very much, and good morning to you all, and welcome to our Q1 2019 analyst call. Before I walk you through our financial results for the Q1, 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 point in the Q2 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 'twenty to 'twenty three 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're 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: 1st, targeting to be at the upper end Of the 200 to 250 basis points 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 Q1 'nineteen and the 17% of Fineco in the Q2 2019. 2nd, a gradual alignment of our 6 sovereign bond portfolio with the domestic bond holdings of our Italian and European peers on a relative basis. 3rd, the further acceleration of the non core rundown, which is expected to meaningfully beat The financial year 2019, dollars 14,100,000,000 target, reconfirming the full runoff by 2021.
That means for 2019 that we will be lower than the JPY 14,900,000,000 and closer to 10,000,000,000. And 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 macro economic scenarios, this means that various actions are being considered, including the reduction of intra group funding As already started with ERP and other subsidiaries, the placement of Finneco shares is only the first step in this comprehensive set of financial measures. Detail of these measures as well as the new business strategy will be presented at our Capital Market Day in London on December 3. Now let's turn to Slide 4 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 Q1 2019 result.
In the Q1, we have made strong progress on the delivery of Transform 19 and its 3rd and final year of execution. Now let's take a quick look at the highlight of the Q1 before Mikko takes you through the figures. We had record quarterly results that benefited from exceptional items. Our adjusted net profit of CHF 1,100,000,000 is up 1.5% year on year. 1st 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 were partially offsetting a slower start in Western Europe due to some macro headwinds, The months of March April were already better than the 1st 2 months. Our Transform 2019 plan is well ahead We already achieved 104% of our planned FTE reduction And 95% of our planned branch closures, both targets will be exceeded And the €10,400,000,000 cost target is confirmed. On our Q1 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 R17.7 billion dollars in the quarter, down R5.1 billion dollars year on year.
Our CET1 ratio reached 12.25 percent for a fully loaded MDA buffer of 2 19 basis points. Thanks to our decisive actions taken in the Q1 2019 to prevent our TLAC requirements, We now have a subordination ratio of 18.41 percent and above TLAC of 134 basis points. As we said in last quarter, our tangible equity increased. It is now 48,800,000,000, Up 5.2% from its profit in the Q3 2018. This is UniCredit best first quarter in a decade for the 2nd time running.
Let's move to Slide 5. We report an adjusted net profit of 1,100,000,000, 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 €258,000,000 in line with 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 then our adjusted group RoTE normalized this way will be below but very close to our full year 'nineteen target of 9%.
Let's turn to next slide. We finished the quarter with a CET1 ratio of 12.25%. For the end of 'nineteen, We confirm our CET1 ratio between 12% 12.5% and an MDA buffer now at the Upper end of our target range of 200 to 250 basis points. The real estate transaction in Germany Mentioned in February, closed in the Q1 and contributed a positive 7 basis points to our CET1 ratio. This is the first part of the overall 0.2 percentage point we expect from real estate disposal, mainly during the course of the year.
Mieko will give you more detail on the CET1 ratio development later. On the TLAC subordination requirement, we prefunded most of our subordinated issuance for the year and have de facto completed our funding plan. With a pro form a ratio of 18.41%, We are already well above our financial year target at the end of the Q1. The derisking of our balance sheet continues. The group NPE gross NPE ratio came to 7.6% in this quarter.
The group core gross NPE ratio stood at 4.1%, close to the EBA range. Please be reminded that the EBA uses slightly different and less conservative definition of the NPE ratio that we have chosen to do. On a like for like basis, Our group core gross NPE last quarter would have been 3.9%. The operating model transformation is well ahead of schedule, Reaching 95 percent of our branch reduction target and 104% for net FTE reduction. We will exceed those targets in 2019, and we confirm our full year 'nineteen cost at 10,400,000,000 Let's turn to Slide 8.
Our client continue to embrace our multichannel offers and increasingly use digital solutions. We continue to support the real economy in Italy. Good examples are the following 2 major initiatives. On one hand, We have recently renewed our commitment to finance Italian small and medium SMEs together with the European Investment Line. On the other hand, we announced last Monday that we would be the sponsor and cornerstone investor for a new innovative institutional platform I'm not 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 leverage buyout provide, and UniCredit will bring providers of long term Now let me hand over to Mirko, who will give you more detail of our financials.
Thank you, Jean Pierre, and good morning to everyone. I will now take you through the UniCredit's 1st quarter financial performance. Our group core has performed very well and shows High profitability with an adjusted net profit of €1,300,000,000 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 €320,000,000 net release of provisions for U. S. Sanctions That we took in the 1st 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 Q1. Normalized for both, The adjusted group core RoTE 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 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 500,000,000 gross new clients in the quarter, while writing 22,000,000,000 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 €2,000,000,000 down 1.3% year on year.
Adjusted net profit was €1,300,000,000 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 3 items on this page. First, as previously mentioned, there were 2 exceptional items in the quarter, namely the real estate disposal and the provision released 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. 2nd, Our stated 1st Q 2019 tax rate of 29.4% was impacted by the provision released for U.
S. Sanctions, The real estate disposals in Germany and the IFRS 9 FDA tax effects. 3rd, our fiscal year 2019 stated tax You 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, FX and FX, the main drivers of the quarterly NII walk after the day's effect and FX were the following. 1st, average loan volumes were almost stable at minus 0.2% in the quarter at constant FX, Compensated by higher customer rates, which were up 4 basis points quarter on quarter. For fiscal year 2019, loan volume Should grow, but slower than in fiscal year 2018. 2nd, TARN funding contributed a negative 30 2,000,000 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 2nd Q twenty nineteen and much less negative for the second half of the year as other funding Last but not least, higher spreads on our bond investments contributed positively by around €25,000,000 to the investment portfolio and treasury line, offset by the non recurrence of an inflation linked bond coupon from The 4th Q 2018 as well as higher excess liquidity.
Let's turn to Slide 14. I will highlight 4 points on this slide. 1st, 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%. 2nd, there were extraordinary items affecting the customer rate in Commercial Banking Italy, Germany, CE and CIB. The impact of 2 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.
3rd, Customer loan rates are stabilizing. We see a 4 basis point increase quarter on quarter at group level. And even excluding the day's effect, Customer rate went up one basis point. It seems likely that as we have indicated since the 3rd Q 2017, customer rate Reached bottom in the 4th Q 2018. We expect customer rates to continue to slowly increase during the year, Considering the potential impact of TLTRO III 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 900,000,000 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 has loan levels a 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 loan group loans of BRL444 1,000,000,000. 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 April have recovered from a slow start to the year.
Management fees for the group were stable on both constant pricing and 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 and 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 Stored at 833,500,000,000 in the quarter, increasing 2.8% quarter on quarter. AUM in the quarter were RUB223,100,000,000 up 4.3% quarter on quarter, solely driven by market performance.
Net AUM sales for both group and the Western European Commercial Banks were 0. Asset under custody increased by 2.3% quarter on quarter, a 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 nonrecurring 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 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 €103,000,000 as well as Realizations from our fair value to 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 Health Collect. As a result, we expect An average quarterly run rate of around R350,000,000 for the rest of the year. Dividends were down 10.1% versus last year. The contribution of YAPI to our dividend Line was down 24% year on year on current FX, but only 2% at constant effect.
This is a function of YAPI's strong performance last year in a difficult macro environment, but much better Then the double digit amount we budgeted for the whole 2019. Yape's P and L is included in the annex On Page 52, as of the 1st Q 'nineteen, our CET1 ratio sensitivity to Turkish lira moves is unchanged At plus 1 basis point, net of 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 Plant 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 10,400,000,000, which We confirm. Let's turn to Slide 20. Both HR and non HR costs are down year on year. The 1st Q 2019 HR costs were down 3.5% year on year, mainly driven by lower Compensation from reduced average FTE numbers. The quarter on quarter decrease was smaller at 1.5% as there were variable compensation releases in the 4th Q 2018.
In the 1st 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 4th Q 2018. Let's turn to Slide 21. Regarding group cost of risk, I would like to point out 4 items. First, the overall risk environment remained 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, 4 of which from models. 2nd, 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. 3rd, 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.
And last, The model impact is likely to hit in the 4th 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 point The group's gross NPE ratio dropped to 7.6% in the 1st Q 2019, down 1.9 percentage points year on year. Let's turn to Slide 23. In the 1st 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 1 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 €1,000,000,000 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 April are more promising than the 1st 2 months of this year. It is worth mentioning that for Commercial Banking Italy, our fees have a relative weight of 2% of the total revenues of the 1st Q 2019. This ratio has been improving steadily over the last 2 years and compares very well with our local peer group. We attached 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 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 4th Q 2019, The update of the IFRS 9 macro scenario in the 2nd Q 2019 should have a similar impact to the last quarter, namely a mid double digit million amount in loan loss provisions. The normalized return on allocated capital in the 1st Q 2019 At 11.3 percent, 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 1st Q 2019 is a good run rate for the rest of fiscal year 2019. Fees were down 8 0.5% 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 1st Q 2019 was positively affected by both the The normalized 1st 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 ex VAs in trading income normalized return on allocated capital would be above 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. 1st Q 2019 cost of risk was negative 7 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 1st Q 2019 normalized return on allocated capital was low at The 3.7% as the systemic charges in Commercial Banking Austria are customarily all booked in the 1st 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 remained 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 YAPI. 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 4th Q 2018. On the other hand, There was a very low double digit million positive one off in the 1st Q 2019 from recoveries. Fees We're 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 intra group cost allocation that will be fixed In the second half twenty nineteen, the division's cost income ratio remained best in class, only 35.1 Percentage points for the full year 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. Derisking continues at a vigorous pace, and the division's gross NPE ratio The development in Romania, we revised 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 the very cyclical market environment. Revenues were down 7.4% versus last here on lower NII and fees. NII was down 5.9% quarter on quarter, driven by non recurrence of an inflation linked bond coupon from the 4th Q 2018 And lower recoveries includes those from shipping.
The 1st Q 2019 NII is clean of such one offs. Fees were down 30.8% year on year, driven 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 OCI realization from our bond portfolio, which will not recur as we shift the bond portfolio towards help 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 May And will have read the joint press release on our smooth transition towards more independence. I will limit what I am going to say on this slide. We are very satisfied with the overall financial performance of Fineco. As we announced today, Today, 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 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 Q1 2019.
The fiscal year 2019 target of 3.8% is confirmed. The net loss increased quarter on quarter 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 €800,000,000 in the quarter and stood at €17,700,000,000 at the end of the 1st Q 2019.
Our non core rundown is further accelerated to meaningfully beat the fiscal year 2019, dollars 14,900,000,000 Growth 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 €1,900,000,000 year on year, but slightly up by €100,000,000 quarter on quarter. This reflects the normal quarterly pattern whereby the cure rate is seasonably weaker in the 1st 3 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 1st 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 point 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 Bonnies 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 $8,700,000,000 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 points to lower due to lower loan volumes. 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 1st Q 2019 coverage ratio was at 56.3%, up 1.3 percentage points year on year despite significant disposal activity. Gross debt loans are up 4% quarter on quarter as migration rates are seasonally high and the recovery and disposal activity is Seasonally low in the Q1. 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 rates 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 7,800,000,000 year on year and 800,000,000 quarter on quarter.
This reduction was thanks to a combination of disposals, write offs and recoveries. Please bear in mind that disposal 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 €6,100,000,000 dropping by €2,400,000,000 year on year.
Gross NPE decreased by €5,200,000,000 year on year and stand at Net NPE's 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 core Tier 1 ratio At quarter end stands at 12.25 percent, up 18 basis points quarter on quarter. The key driver was the net profit of 37 basis points in the Q1 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 And we have added the core Tier 1 ratio sensitivity to changes in the DBO in our footnote number 5. The net impact of YAPI on our core Tier 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 2018. For the end of 2019, we our core Tier 1 ratio between 12% and 12.5% and an MBI buffer now at the upper end of our target range of 200 basis points to 2.50 basis points.
The expected evolution of our CORP-three-one ratio during the rest of 2019 will be driven by the combined effect of regulatory headwinds, mainly expected in the second and the 4th Q and tailwinds from return Earnings and capital gains from real estate sales and Fineco. Overall, this should lead to a core Tier 1 ratio At the end of the 2nd Q 2019, at above 12% at current BTP spreads, before going back to the range of 12% to 12.5% by year end 2019. Let's turn to Slide 40. Risk weighted assets in the quarter increased by 1 point 6% to RMB371.7 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 asset to increase every quarter up to our fiscal year 2019 target of BRL406 1,000,000,000. Regulatory headwinds from EBA guidelines and regulation models and procyclicality should account for roughly €25,000,000,000 of risk weighted asset increase and should mainly be split between the second and the 4th Q. Let's turn to Slide 41. After a number of quarters with declining tangible equity value, we consider the 3rd Q to have been the trough.
In the 1st Q 2019, our tangible equity grew by 2 point 2% or 1,100,000,000 quarter on quarter to stand at 48,800,000,000. 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 €21.9 Please also keep in mind that since we launched the Transform 2019 plan up to the 1st Q 2019, We have already returned 700,000,000 in cash dividends to shareholders. In the 2nd Q 2019, the cumulative dividend return to Shareholders, we increased to 1,300,000,000 as the dividend for fiscal year 2019 gets paid.
Let's turn to Slide 42. As of the 1st 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 to 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 €800,000,000 left to do. The 81 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 strength 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, Mirko. Before we move to the Q and A, let me briefly recap on our first with group core net operating profit of $2,000,000,000 and an adjusted group core RoTE of 11.3%. Transform 19 is well ahead of schedule and is delivering tangible results quarter after quarter. We have already achieved 104 percent of our planned FTE reduction and 95% of our branch reduction. Group costs are down to €2,600,000,000 and we confirm our fiscal year 2019 target of €10,400,000,000 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 14,100,000,000 gross NPE target. That means for financial year 'nineteen, that will be lower than the CHF14.9 billion and closer to CHF10 1,000,000,000. For FY 'nineteen, we also confirm our target of €4,700,000,000 net profit, 9% RoTE And 10% core RoTE. We also confirm our final fiscal year 2019 revenues At CHF19.8 billion, cost at CHF10.4 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 Mirko mentioned earlier, our FY 'nineteen cash dividend will be paid in 2020 and is expected to be 30% of adjusted net profit, which based on the net income of $4,700,000,000 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% 12.5% And an MDA buffer now at the upper end of our target range of 200 to 2 50 basis points. During the year, we expect the CET1 ratio in Q2 2019 above 12%. And 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 Q1 2019. We are therefore confident that we will reach our FY 2019 target above 9% RoTE. Needless to say, we continue to focus fully On the execution of Transform 19, I work hard as one team, one bank, one UniCredit to ensure UniqueCredit remains a true pan European winner. And now, Mirko and I are ready to take your question.
As it will become a tradition, we are joined here by our co CFO, Stefano Poirot our 2 co CEOs of Central and Eastern Europe, Gianfranco Bizzani and Niccolo Abertali our Co CEO of Western Europe, Francisco Giordano and Olivier Calliat Our Chief Risk Officer, TJ Lim and our Co COO, Carlo Vivaldi and Ranieri de Marquis, and they will be available as well to answer your question. Please be so kind and limit your question to 2 each. Many thanks.
Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer The first question is from Adrian Chigi of RBC. Please go ahead.
Hi there. Thank you very much for taking my questions. Two questions, one on strategy and one on guidance. Going back on your opening remarks, selling Steneko increases your optionality and flexibility to build extra capital buffers. We've also seen a considerable amount of noise in the press around In organic activity and maybe give us some insights into the specific return hurdles
that you would use to
judge some of these Activities. And the second one, just a clarification on your guidance. Last quarter, you provided an RMB18.1 billion outlook for Combined NII and 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.
[SPEAKER JEAN PIERRE
ANDRE DE CHALENDAR:] Thank you very much. As you know, we never comment on rumors and speculation. And I said earlier that I think that Mergers and cross border mergers are extremely difficult to pull out. So I think that I will not comment further on that. On the EUR 18,100,000,000 commercial revenues, I said in my conclusion that our we confirm our EUR 19 point €8,000,000,000 of total revenues for the year and that our commercial revenues will be closer To our 2018 revenues, which were around €17,600,000,000
Thank you very much.
Next question please.
The next question is from Antaresiosi of Mediobanca. Please go ahead, sir.
Yes. First question following from Fineco. What is the business impact for the group of losing a fintech jewel like Fineco? And did you think that going from 12% 0.5% CET1 will reduce your implied cost of equity. And 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 $2,300,000,000 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 $18,000,000,000 Q on Q. Does this mean you will increase exposure? And 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 and A. Essentially, your share price is not is flat during your business plan despite your delivery. Hypothetically, could you consider making the next strategic 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. We said our plan is based on organic assumption. And I said again that we think that M and A transaction are extremely difficult to complete. Let me go back to your first question.
Is the disposal of Finneco As to be looked at within the set of measures we commented about in the introduction of this presentation. We discussed with the Board the reset of our 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, So you know our implied cost of equity today is high and probably higher than a panel of RPEs. And we think that by taking these 4 mergers and progressing on them, we'll 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, And it 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. And 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. And I remind you that we had decided and already provisioned for the Q1 The 30% payout for the dividend, which as we said, applied to the €4,700,000,000 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 trades. I think that you all know that profit coming from carry trade have a very, very low multiple In terms of net earnings, and 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. And 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 countries. I want to stress that this will be Natural amortization of the portfolio with for 2019 very little and Non meaningful impact of our revenues as we confirm our €19,800,000,000 of total revenues, which was decided and stated before we put in place this natural amortization of the portfolio.
And we will follow what our BTP to tangible equity ratio is in the future. We confirm as well that we will keep as one of the most active primary dealers in BTP to support the issuance of the Italian Republic that goes without saying our commitment That's it because I answered you many questions earlier. So that's fine. Okay. Next question.
The next question is from Jean Louis of Goldman Sachs.
My first question would be on NII. So you've provided the bridge where within the commercial dynamics, One of the key negative factor was term funding and obviously you've been very active in the market recently. You also indicated that your funding plan is done And that you will exercise some calls and so on. Just wanted to understand going forward whether we should expect any more The contribution in the flow quarter to quarter from that or whether that component of about €30,000,000 odd is Essentially a step change, but not necessarily a recurring step change going forward. And whether the sustainability of the loan rates increased, which you've In multiple geographies this quarter, you think it's sustainable, in particular in the view of the confirmation of CLTRO2 There are 3 rather.
And 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 further capital headwinds and let me 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 Percent from the previous guidance, which was around 11.7%. Clearly, the Fineco disposal is helping for that.
And 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 10 have been already taken in the Q1, 40 will be in the 2nd quarter, 0 in the Q3 and around 20, 26 or Close to 30 in the Q4. Beyond 2019, we will debrief the market at our Capital Market Day in December, but we have not seen any major adjustment from what we communicated at our Capital Market Day 17, the assumptions we had at the time are broadly valid. I'll let Mierko comment on the NII side.
Yes. On the NII side, on the first sub question on term funding, yes, the peak is Going to happen in this quarter with minus €32,000,000 You should expect a slightly lower number as an impact for the second quarter And 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. And 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, yes, there is TLTRO 3. Yes, There are long term rates that are coming down, but 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.
Thanks, Christian. Thank you very much.
The next question is from Antonio Reali of Morgan Stanley. Please go ahead.
Hi, yes. Thank you for taking the time. I've got questions, please. 1 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 €10,000,000,000 non core loans by year end.
And if I understand correctly, with cost of risk guidance confirmed the 55 basis points, That means that there's going to be no impact on P and L or capital. First, do I understand that correctly? So a faster rundown on the non core comes to no Expenses to capital and P and L. And 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? And if And if so, could you quantify how much that will be?
And the second question on Commercial Bank in 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 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 CEOs of Western Europe who is mostly covering Germany, Olivier Kerjat, To comment about the German evolution later. On the non core, TJ can add some comments. We have announced that we want to meaningfully beat the target of €14,900,000,000 And be closer to €10,000,000,000 This is an acceleration of what we want to do. And based on the assets that we might dispose off, we might anticipate some of the provision which were planned in the following years, but this is fully taken into account In our €4,700,000,000 net income.
So we are highly confident that we'll be closer to €10,000,000,000 and We're highly confident to deliver the €4,700,000,000 net income, but there could be some anticipation of Provision as we move earlier than schedule. Maybe, TJ, 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 and clearly even despite the signal of the slowdown. So we are confident that This meaningfully rundown we can achieve.
Again, we said closer to 10%. It doesn't mean it should be 10. And in terms of what Jean Pierre has recently mentioned, some of the costs that we were expecting for next year It would be anticipated this year, but it's fully adjusted into the plan of the RMB 4,700,000,000. And the RWA release is already part of the capital work that Merkel have mentioned.
Thank you, TJ. Olivier?
With respect to the result in Germany, we can see that on the quarter to quarter, we've been benefiting from a stable NII And on the fee side, an increase of 6% quarter on quarter due to higher investment fees. The overall landscape In Germany, in terms of competition, we're still in the market where the pricings are Still very, very, very tight. Cost of risk low and high level of competition. Having said that, We are starting to get the benefit of growingly of the targeted growth plan that we have in Germany, Which is at the moment taking place.
I would say in Germany, we have on the corporate side, Mittelstand, which is our target growth plan, We have roughly I mean, overall in Germany, a 2.5% loan market share, 4% For the corporate side, and we have a 23% market share on export letter of credit. So you can see that there is 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, so we think that there is an extremely good business potential here, Thanks to our unit network in Western and Central and Eastern Europe, which makes us extremely confident that we have growth potential As well as 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.
Thank you very much. Just getting back to your revenue targets. So if I understand correctly, your core revenue targets have been lowered from point $1,000,000,000 to $13,600,000,000 But I think this was, I guess, already part of educated consensus. But at the same time, you lifted your target on trading. So what makes you feel so confident That $350,000,000 is going to be a run rate for each of the following quarters.
And related to that, I was looking at the slide on trading, you were talking about the negative XVA. Can you elaborate a bit on this point and what What is it exactly? Then if you want the other the other question that I have is on NPLs. We saw a marginal Increase in NPLs across the different lines of the core business. So you're doing a fantastic job on non core, but on the core business, There is a marginal increase and the Q rate is lower than what we saw in in Q1 2018.
So going forward, leaving aside the non core, Should we expect the call 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. We have said that we anticipate for the net quarter to be around €350,000,000 per quarter, which is exactly the On average annualized basis of EUR 1,400,000,000 which has always been our guidance. So basically, we take the extra The profitability of the Q1 and after we would have normalized, if I may say, quarterly contribution from the trading side And higher dividend level as we have said. I'll let Mirko comment on the XBA 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. And then basically, CBA is another part and then the fair Fair value adjustment also is the smallest impact, but the biggest impact of all is the funding value adjustment basically.
And if you look at our trading profit for the quarter, I mean, with the minus €100,000,000 ex VA, I mean, the trading profit net Exviers were actually €540,000,000 So you can see that there is a relatively high contribution for the quarter and that was €350,000,000 per quarter going forward. So that's always been the €350,000,000,000 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, We just changed at 4.1%. And when you apply the EBITDA calculation, which is Less strict than ours.
We're actually very close to the EBITDA average of our competitors. The default rate is Stable at 1.1%. So we see a very favorable environment. The cure rate is lower than on the Q1 last year. Your Q rate depends on some bulky files which can go back to performing.
So 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 the ability and the quality of the portfolio. If T. J. Wants to say anything else, I would just say that If you look and we disclosed in the annex of the documents the expected loss By division, you can see that the expected loss for the new business on the Q1, That's on Page 61 of the document. It's at 33 basis points versus stock at 38 basis points.
So still A very good expected loss for the new business and still a very good expected loss on the stock. And TJ, if you want to add up anything?
Just a quick addition, as John Prince 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 OTP to bad loan just from one file with very high coverage. So this is again by also the less than normal disposal activity. So Asset quality remains sound.
Okay. Thank you very much. Thank you.
Next question please.
The next question is from Andrea Vercellone of Daehen, please go ahead, sir.
Good morning. 1 on NPE coverage, 1 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 We converge towards the core or you plan to continuously increase Coverage in the core division in future years also because obviously there is I can see between the 2. On the guidance, you have reiterated the €4,700,000,000 target for 2019, the revenues, the costs, these are all pre Fineco 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 Fineco, same for total cost, same for provisions or not. And same for the bottom line, €4,700,000,000 includes the contribution of Fineco, where you will No longer have this contribution. So that is paid $4,700,000,000 or is it $4,700,000,000 minus whatever Fineco 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. So we are not anticipating to change the coverage. Otherwise, it means that the coverage of the core Today is not the right one. So that's very clear.
On the guidance, we will give An update for the Q2 of the group figures ex Fineco, as Fineco will be deconsolidated, But the €4,700,000,000 is confirmed ex Fineco. So the €4,700,000,000 does Change whether we deconsolidate Fineco or not. I just want to state as well that The EUR 4,700,000,000 exclude the extraordinary capital gain from Fineco as well as Gain from real estate, this is the overall net income, which will be paying, if I may say, the 30 Percent dividend to the shareholders. And as Mirko commented, we want to carve out all the extraordinary profit, But we nevertheless include on the EUR 4.7 billion the contribution of the provision write back On U. S.
Sanctions, as these were I mean, the negative impact of U. S. Sanctions were included in the net income, which
The next question is from Benjie Creelan Sandford of Jefferies. Please go ahead, sir.
Yes. Good morning, everyone. Two questions for me. First of all, on costs, I mean, I know we all like to focus on the cost reduction delivery at UniCredit, which has again come through. But just in terms of investment, Be that on systems or digital capabilities, what are the key areas that you're prioritizing going forward?
And could you perhaps comment 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 Yappi Credit stake is relatively Can you just confirm that you still see that as a core part of the business? And if so, besides exiting that stake, is there any 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 Turki will briefly comment on the investment and let Mikko comment as well. Maybe Our co CEO can comment on the IT investment. On Turkey, we always said that this is a country with a large population, very well We are very good companies. So we support YAPIC ready in its development.
We are going through the Natural adjustments of the economy because of structural current accounting balance, which are corrected right now with the adjustment we are seeing, and that's it. So 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 the some of the key focus knowing that the Capital Market Day in December 3 It 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. So, Mirco, first on the quantitative figures for IT Investment And then, Vanier Carlo, on the priorities for IT.
Maybe something else. On Turkey, we are running down the intergroup. And so we are down now to €2,100,000,000 So this is actually
Yes. On track to reduce our infra group exposure by 50% by the end of 2020. So it's working and progressing. You're absolutely correct. And in terms of
the IT spend, the Transform 2019 was based on €1,700,000,000 to be spent in terms of IT for the transformation. This in the plan was basically onethree, onethree, onethree and we are totally on track in track on track actually In terms of the IT spend, so we are totally in line. And now I'm going to let
It's €1,700,000,000 for Transformation plus €700,000,000 for regulatory side. So it's the commission. It's €2,400,000,000 for 1.4 transformation. Vanier or 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, rejuvenation Of some aspects of the core banking system, we call it at the time the DGCE project. The DGCE project is, I said, fully on track, already have deliveries in 2018, and we expect the final delivery by 2019. In terms of leveraging the platforms, we are progressing in our Mobile 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, So in terms of the deterioration, the priority is the enablement on one side of the efficiencies And taking a view always at a group level, not only at the single local improvements.
I would say that we're not disclosing too much of our Capital Market Day presentation, but we're working As well, I'm making sure, for instance, in Italy, not on the retail side, our Italian retail activity We'll 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, but 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. But I said too much and you will have much more detail of that On December 3. Next question please.
The next question is from miss Azura Guelfi of Citi.
One question on the sovereign portfolio. As part of your realignment process that you have announced among the financial measure that This should result in a decrease of your sovereigns and Could you share with us what would be your end sensitivity if you have any simulation that you have already run? And sorry to come back on the growth strategies. I hear you loud and clear that you are going to remain Focus on the execution of the plan and that is still factored here. But between now and 2023, there might be some opportunity that Present itself.
Whether in one of the countries 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? Or what are your frameworks to think about this? Thank you.
Thank you very much. In terms of sensitivity, we communicated about our current sensitivity, which we said would be reduced because we moved part of The portfolio to help to collect. We have today, out of the €54,000,000,000 of BTPs, €35,000,000,000 which are in fair value OCI and €18,600,000,000 in L2 Connect. In the L2 There is roughly €3,000,000,000 of BTPs coming from Finneco. So with the consolidation of Finneco, you have a natural decrease of €3,000,000,000 And the current sensitivity on the fair value OCI is post tax of 2.1 basis For 10 basis points of movement of the BTPs.
And we expect to I keep moving part of the BTPs toward the L2 Collect, and we have a natural amortization of the BTP portfolio. So Should go down further. On the non organic evolution, I 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 3, we will comment about what should be the future evolution.
But The future evolution of the group on an organic basis and maybe on an 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 Sean, in Transform 2019. And I would add that management team and starting with myself, No, our 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 your Italian bond portfolio and the reference that you gave before with the tangible book, there is much buy ins among Italians. So I was just wondering whether we should take in Tesa as a reference.
And Presumably, you're going to reduce by €10,000,000,000 the diamond portfolio. If you can give us a time line and what are also the remedial actions to preserve The NII going forward. An update on the LGD waiver on capital and SME Factor, if you have any. And relating to funding, you're going to raise the MRL Targeted by the SRB in the 2nd part of the year, including the subordination requirements. So I was just wondering whether you are thinking about Upgrading as or even upgrading your funding policy in terms of CNO preferred for the 2nd part of the year or beyond 2019?
Thank you.
Thank you very much. Gjoeka will take the funding question. TJ, 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. And you know that our portfolio had a duration of 3.4 For 3.2 years, and so we will let the portfolio gradually amortize.
We said that for 2019, there will be, I mean, Non meaningful impact as we confirm the €19,800,000,000 of top line. As far as the peers are concerned, clearly, as I said, we look at the BTP portfolio to tangible liquidity Of peers, but we don't include any kind of extraordinary contribution of carry trade and whatever. And 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, so that should give you a target and the timeline is gradually following the targets we have In terms of the natural amortization of the portfolio, and 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 freed up. On the funding side, maybe Meco before TJ answers on the regulatory
Yes. In terms of MREL, of course, we focused this part of the year on the subordinated MREL part. And from that perspective, we are totally super well placed with a very good nicely It's a buffer. The only MREL number that we commented on in the past was the 25.03%. And as you know, there are various moving parts still out there in terms of Really determining what is the level on the various banks.
And what I can say is that definitely the new plan, we're going to have totally the MREL plan embedded. So the plan 2023 will have that. A reminder that MREL will start in 2022 with an intermediate target and then it will be fully loaded by 24. So that's why this is probably more appropriate to be discussed at the Capital Markets Day.
Yes. And on the regulatory front, first of all, just to clarify, the it is this on LGD is not a waiver, it is a massive adjustment So called a disposal. The language is has been finalized, but clearly it has yet to be approved. It should be out Hopefully by June sometime. And at that point, we'll work with the regulators in terms of the process for that.
And this has not been built into the plan and we will take advantage of this in terms of the regulatory headwind, We should present in December. And on the SMB supporting factor, this is a positive. Clearly, this has not been built into the plan and this we will update that During the Capital Market Day.
Next question please.
The next question is from Giovanni Rottoli of Equitasim. Please go ahead, sir.
Good morning, everybody. Two quick questions. The first one is on the guidance of the CET1 that you have reiterated at 12% to 12.5% at year end. But you should benefit based on my calculation for at least 30 basis points for the deconsolidation of Fineco, which may Rise to up to 60, 70 basis points if you get rid of the remaining 18% stake. So I was wondering whether there is More adverse regulatory headwinds because of this evolution in your CET1 ratio Guidance.
And especially in terms of risk weighted asset inflation that you have mentioned the €25,000,000,000 at year end, Whether this was in line with your budget. So that's my first question. The second one, I shared your points about the reduction of the portfolio of BTPs. In the recent past couple, you were a little bit more vocal in buying domestic government bonds. So I was wondering whether there has Some regulatory pressure to increase the diversification of your portfolio Since then, and then please allow me to have very final question.
We have been very vocal about not commenting or being very A bearish about the Pan European consolidation. Can I apply the same standard to domestic consolidation?
Thank you very much. We never comment on rumors and speculation whether they are pan European or domestic. So that's the point. And but We said that we are very happy to grow organically in Italy where we have 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 fully an ability for the market To lower our cost of capital, so equity and funding. And so as I said earlier, our implied cost of equity We think it's too high versus the profile of the bank, and we wanted to communicate it in advance of our Capital Market 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, but what we can control is actions we can take. So BTP's reduction of the non core being on the upper end of the buffer, limiting the impact on the cost of funding 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% to 12.5% guidance for the CET1 ratio, I mean, I'll let you do your own calculation. As far as Finnacle contribution is concerned, we said that it will be for the Q2 a 21 basis point And then afterwards, we will see based on the financial environment what We do with the remaining part of our holding in Fineco, but 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, 0 for Q3 and around 20 between 25 and 30 for Q4.
And risk weighted asset impact will be around €15,000,000,000 for Q2 €10,000,000,000 for Q4. We said there €25,000,000,000 risk weighted asset, €15,000,000,000 for Q2 and €10,000,000 for Q4, irrespective of any of the loan book evolution. That's the With weighted asset impact based on the regulatory evolution, so 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, ma'am.
Hi, good morning. Two questions from me. The first one is just a clarification on Finecom. What will be the capital impact from the potential full disposal of the stake assuming today's prices? And then 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% to 60%. This is the target that you have in mind for unique credit for the medium term. Thank you.
Thank you very much. We 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, I mean, you can see that impact of disposal of second branch will probably be very similar, Marginally higher actually. So positive impact. As to the average of Domestic bond investment to tangible equity is concerned.
I think you have a good By looking at the EBA documentation, and we said that we should, over time, gradually converge towards The average of our peers. So I'll just confirm that and 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.
Yes. Hi, good morning. Two questions from me, if
I may. First one is on revenue guidance, especially in 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? And second one is on Capital,
if you have embedded any operational risk impact in terms of Basel IV implementation in the next 2 years Before 2022. Thank you.
Just on the rate increase, no question to understand exactly what you mean, We have communicated the sensitivity to 3 months Euribor, which is EUR 187,000,000 And the customer rate increase, we have a sensitivity of customer rate increase, one basis point is €40,000,000 I don't know if it's exactly your question, Oliver.
I was referring to in order to repeat the core revenue and I had plus fees over the last year, as you said and given the call, You need rates going up to be
at the same level as last year?
Okay, okay. So let me a quick comment on Veracam, as
I said before, in terms of client rates, we expect Still some increase in client rates over the next couple of quarters. So that's basically what we embed In our guidance. We said that
the we communicated before that. We said the client rate, which has been increasing in the Q1. Now should bottom out in the Q4 2018 and also gradually Increase. You have seen this gradual increase in the Q1. We had a little bit of, If I may say, exceptionals in the Q1.
So the 4 basis points Side of the exceptionals, which is the 2 days shorter for the quarter, which are based on our 360 days loans, specifically in Italy versus the 365 has a positive impact on the client rates Plus other limited impact, which should have, for instance, for Commercial Banking Italy, instead of This 360 to 365 days, instead of the 5 basis points, we should have a 1 basis point increase in the Q1. And so but we still see an evolution of a few basis points in the year. And as I said, the sensitivity for one basis point is around €41,000,000 €1,000,000 And we don't see any increase of interest rate in Italy or anywhere else, yes? Meco, On operational risk?
Yes. On operational risk, we basically are embedding a flat operational risk risk weighted asset
Gentlemen, Mr. Mestier, there are no questions registered at this time.
We Suspect you're all exhausted. We are not, so we can take a few more questions. Last chance Before the next quarter or actually before the meeting, we will have with you starting with 2 more morning. If there's no more question, we call it a day. Thank you very much for your attention.
The presentation is a little bit longer than it's unusual because of the comment on these additional four measures. But we apologize for that, but we felt it was important to go into this detail. Thank you very much, and we'll meet with you very soon during the roadshows. Bye bye then.