Good morning. This is the conference call operator. Welcome, thank you for joining the UniCredit fourth quarter and full year 2018 group results conference call. As a reminder, all participants are in listen-only mode, the conference is being recorded. 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 hand the call over to Mr. Jörg Pietzner, Head of Investor Relations, for introductory remarks. Please go ahead, sir.
Good morning to you all, welcome to our full year 2018 analyst call. Before I hand over to our CEO, Jean Pierre Mustier, for the main presentation, let me make a few remarks on an accounting topic on our fourth quarter stated net profit. As communicated at our first quarter 2018 presentation on slide 39 of the market presentation, UniCredit took a gross impact of EUR -3.8 billion for the First Time Adoption, FTA, of IFRS 9 on the 1st of January 2018. According to established accounting practices, such impact was taken at equity and had no impact on the Group's P&L. UniCredit S.p.A. did not book any positive tax impact in Italy related to the IFRS 9 FTA.
Following the publication of the recent Italian budget law, it has been ruled that such IFRS 9 FTA shall become tax-deductible over 10 years, rather than to be taken all at once in the first year. Taking into account the relevant accounting treatment, this change will accelerate the booking of the positive tax effects associated with IFRS 9 FTA at the current tax rate as for all Italian banks of around 33%. For UniCredit, this results in a positive effect of EUR 887 million. As the FTA was recognized at equity, a coherent representation for the related tax impact should have been at equity as well. Based on the very recent indications received from the relevant authorities, UniCredit has now recognized such positive tax effect related to IFRS 9 FTA through its P&L in the fourth quarter, generating a positive extraordinary effect equivalent to EUR 887 million.
The application of such accounting treatment has resulted in a stated fourth quarter net profit of EUR 1.73 billion. Excluding such positive tax effect, the fourth quarter 2018 would have recorded a net profit of EUR 840 million. In what follows, we will focus our analysis on the adjusted net profit that does not contain the above-mentioned positive one-off tax impact so as to reflect what UniCredit considers the economic performance of the group in the period. The regulatory capital and dividend implications will be clarified in the following pages. Thank you for your attention, now, Jean Pierre, over to you.
Thank you very much, Jörg, and good morning to everyone. Looking back, 2018 has been a year with strong macro headwinds, which have impacted the profitability of UniCredit, while we have made strong progress on the delivery of Transform 2019. This could not have been achieved without our very strong teams, who have worked tirelessly and with extraordinary commitment throughout the year. Before we start, I would like to thank them all, I would like as well to thank our loyal shareholders who continue to support us as we make great strides on our Transform 2019 plan, ensuring UniCredit remains a pan-European winner. Let's take a quick look at the highlights of 2018. Therefore, Mirko takes you through the figures. The underlying performance of the Group remains very strong, and our adjusted results are up versus last year.
Our net operating profit of EUR 6.4 billion was the best since 2008, and our adjusted net profit of EUR 3.9 billion is up 7.7% versus last year, despite large additional provisions for U.S. sanctions. As Jörg just mentioned, we will not comment further on the DTA IFRS 9 accounting treatment, and as Jörg said, the figures in today's presentation represent the real underlying economic performance of the bank. The Core Bank performed very well in this increasingly challenging macro environment. Our adjusted core ROTCE reached 10.1%. Without the impact of the very large U.S. sanction provision, the profitability would have been materially, and I repeat, materially higher. Our Transform 2019 plan is well ahead of schedule. We already achieved 100% of our planned FTE reduction and 93% of our planned branch closures. Both targets will be exceeded.
Non-core gross NPEs reached EUR 18.6 billion, and our Group NPE disposal reached EUR 4.4 billion, both better than targets. Our CET1 ratio reached 12.07%. Thanks to our decisive actions taken in December and early January. We are fully compliant with the TLAC requirements with a subordination ratio of 18.13% pro forma. The Group has excellent capital market access, as demonstrated by recent issuances. Our tangible equity increased to EUR 47.7 billion, up 3% from scope in the third quarter 2018. We intend to propose to our AGM a cash dividend of EUR 0.27 per share, which is equivalent to a 20% payout on our stated net profit, excluding the IFRS 9 FTA tax impact mentioned earlier. Before we move on, let me briefly mention the recently published EBA transparency exercise results, where many European banks are measured on a comparable basis with regards to a number of KPIs.
We are pleased that in the EBA sample, we have the second highest NPE coverage ratio of all Eurozone banks and the highest in Italy. Our CET1 ratio is also the best compared to Eurozone and Italian peers. You can find a chart in the annex on page 72 and 74. Let's move to slide 5. This is UniCredit's best full quarter in a decade for the second time running. This statement is based on our adjusted net profit, i.e., without the EUR 887 million positive impact from the IFRS 9 FTA tax subtract. We report an adjusted net profit of EUR 840 million, up 19.9% year-on-year. We saw a sustained Core Commercial Bank performance with full quarter 2018 gross operating profit at EUR 2.2 billion, up 5.1% year-on-year. Fourth quarter 2018 costs were down 2.7% year-on-year.
Our fourth quarter 2018 cost of risk came in at 79 basis points, as we saw the first impact of the IFRS 9 macro scenario and from model changes. Our CET1 ratio saw a negative capital impact of 23 basis points from regulation, model, and profitability in the first quarter. Let's move to slide six. UniCredit showed a strong financial year 2018 performance, thanks to sustained underlying commercial dynamics and the unwavering commitment to success by all our teams. We report an adjusted net profit of EUR 3.9 billion, which is up 7.7% versus last year. Our 2018 costs were down 5.6% versus last year, driven by both HR and non-HR costs. Our 2018 cost of risk was better than target at 58 basis points in a supportive risk environment, despite five basis point impact from model change and three basis point impact from the IFRS 9 macro change.
Our adjusted Group ROTE was 8% in the year, up almost one percentage point versus last year. If we also took out the large additional provision for U.S. sanction, our adjusted Group ROTE will already be close to double digits, I repeat, close to double digits, and above 9% our financial year 2019 target. Let's turn to the next slide, and I will give you some details of the positive progress of Transform 2019. We ended the year with a CET1 ratio of 12.07%. We confirm our target of 12%-12.5% at the end of 2019. In the course of 2019, we will initially be below 12% before remediation action and retained earnings bring the ratio back up again.
We have just signed yesterday the sale of a real estate asset in Germany, which will have a seven basis point positive CET1 ratio impact, which corresponds to a third of the overall amount expected from real estate disposal, most of which will come in 2019. Mirko will give you more detail on the CET1 ratio development later. On TLAC, we closed the year already fully compliant with the upcoming requirements on a stated basis. Pro forma the recent senior non-preferred issuance, our subordination requirements stand at 18.13%, which is a buffer slightly in excess of our target range of 50-100 basis points. Thanks to that, we are already compliant with the upcoming subordination requirement of MREL as well. The de-risking of our balance sheet continues. The Group Core NP ratio reached 7.7% in this quarter, less than half of what it has been when we launched Transform 2019.
Group Core NP 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 NP ratio that we have chosen to do. On a like-for-like basis, our Group Core NP ratio last quarter would have been 0.4 percentage points lower. Our IR team is happy to walk you through the details. The operating model transformation is well ahead of schedule, reaching 93% of the target for branch reduction and 100% for head count reduction. We will exceed both targets in 2019, and as a result, we confirm our financial year 2019 costs, which will be at EUR 10.4 billion. Let's turn to slide nine. As said earlier, commercial dynamics for the group are positive and sustained. Our clients continue to embrace our multi-channel offers and increasingly use digital solutions.
We recently launched Google Pay in Italy, now offer all four major mobile payment solutions to our clients. Our fully plugged-in CIB business model continue to prove its success with leading European position in trade finance and debt capital markets. Our corporate center streamlining is well on track and already below target of reduced weight of total costs. Now, let me hand over to Mirko, who will give you more details on our financials. Mirko, over to you.
Thank you, Jean Pierre, and good morning to everyone. I will now take you through our UniCredit fiscal year 2018 and fourth quarter financial performance. Our Group Core has performed very well and shows a high profitability with an adjusted net profit of EUR 4.7 billion for fiscal year 2018, and EUR 1.1 billion in the quarter. The main divisional contributors to our strong performance this year were, once again, CEE and Commercial Banking Italy. Adjusted Group Core return on tangible equity was 10.1% for fiscal year 2018. Please remember that this number is not adjusted for the large provision for U.S. sanctions that we took in fiscal year 2018. Without these provisions, the return on tangible equity would have been materially, I repeat, materially higher. With this in mind, we confirm the 2019 core return on equity target of above 10%. Let's turn to slide 12.
We enjoyed a strong commercial performance in the core bank. Net interest was up 2.9% versus last year. Fees were resilient, up 0.8% versus last year. We are also enjoying sustained commercial dynamics across the group. We gained almost two million new clients in the year, while writing EUR 105 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, 5.6% lower than last year. Loan loss provisions were down 14.1% versus last year, thanks to a supportive risk environment. The gross NPL ratio stands at 4.1%, down 99 basis points year-on-year, and already well below our fiscal year 2019 target of 4.7%. Net operating profit in the year was a solid EUR 7.5 billion, up 12.3% versus fiscal year 2017. Adjusted net profit was EUR 4.7 billion, up 9.1% versus last year.
Let's turn to slide 13. Let's now look at the figures of the group. I would like to point out three items on this page. First, there was no impact from the expected U.S. sanctions in the quarter, as we have not yet reached a settlement. We confirm that the impact of such settlement should be non-material, ± mid-single digit basis points on our Core Tier 1 ratio. Second, our stated fiscal year 2017-2018 tax rate was impacted by DTA write-ups in Italy and in Germany, the release of a tax provision in Germany, and the IFRS 9 FTA tax effects. Our normalized fiscal year 2018 tax rate would have been around 17.8%. Third, for the fiscal year 2019 normalized tax rate, we expect between 17% and 18%. Neither numbers include the potential effect from the ongoing DTA assessments.
The impact of the Italian budget law, on the other hand, is included in this guidance. Let's turn to slide 14. NII was resilient in the quarter, up 0.4% stated and down 0.3% adjusted for one-offs and FX. The main drivers in the quarterly NII walk were the following. First, average loan volumes were up 1.3% in the quarter at constant FX, compensating lower customer rates, which were down only 2 basis points quarter-on-quarter. For fiscal year 2019, loan volumes should grow, albeit at a lower pace than in fiscal year 2018. Second, deposit rates contributed a EUR -18 million, mainly from higher US dollar term deposits and rising rates in CEE.
For fiscal year 2019, we have a mid-double digit million of budgeted revenue increase at risk, should the ECB not hike short-term rates in the second half. Third, term funding contributed a EUR -6 million, as we resume capital markets issuance in the quarter. Last but not least, higher spreads on our 3Q 2018 bond investment contributed positively by around EUR 30 million to the investment portfolio and treasury total, offset by the NII leg of an FX swap unwinding. Let's turn to slide 15. I will highlight three points on this slide. First, as highlighted last quarter, there were extraordinary recoveries in CIB in shipping in the 3Q 2018, which did not recur in the fourth Q 2018.
The adjusted decline in customer rates is therefore only 3 basis points. Second, the group average customer loan rates were down only 2 basis points, and we saw stabilization across the divisions.
This is especially true in Commercial Banking Italy and Germany, where short-term loans even saw customer rate increases. Third, as we have indicated since the 3Q 2017, customer rates are expected to have reached the bottom in the fourth Q 2018 and should go up in fiscal year 2019. Let's move to slide 16. End-of-period customer loan volumes for Group Core were up 3.8 billion, or 0.9% in the quarter. For fiscal year 2018, however, the growth was 7.1% year-on-year. This compares with a year-on-year growth of only 2.2% in fiscal year 2017 and underlines our strong current commercial dynamics across the group. The strong fiscal year 2018 loan growth was well spread across our different divisions. Expected loss on new business remained below the expected loss on the stock.
As loan levels are a lagging indicator of economic activity, the fiscal year 2018 number was typically high late cycle growth, and we expect it to be lower in fiscal year 2019. We confirm our fiscal year 2019 targets for the group loans of 444 billion. End-of-period customer deposit volumes for Group Core were up 0.4% in the quarter and 2.1% year-on-year. As mentioned last quarter, there were technical-driven and extraordinary high single-digit billion deposits inflows on corporate clients in CIB in the 3Q 2018, that were reversed in the 4Q 2018. In Italy, deposits are up 3.8% year-on-year, which underlines the structural health of the savings culture in the country. Please note that our commercial banking divisions are essentially self-funded, with loan-to-deposit ratios close to 100%. Let's turn to slide 17. Fees in the quarter were down 1.4% year-on-year.
As fees are seasonal, let's look at the fees category separately on a year-on-year basis. Investment fees were down 14.5% year-on-year. This decline was mainly due to upfront fees in Italy. Management fees for the group were up as higher pricing compensated lower AUM volumes. AUM stock was down 2.7% year-on-year and 4.3% in the quarter, affected by negative market performance. For fiscal year 2019, in light of the macroeconomic environment, we expect investment fees flat versus fiscal year 2018. Financing fees were up 3.3% year-on-year, mainly thanks to good fees from loans in CE and CIB. Transactional fees were up 11.8% year-on-year, driven by current accounts and insurance fees in Italy. Fiscal year 2019 growth should be closer to 2%. Overall, fiscal year 2019 fees should grow by around EUR 100 million, but we will refine this guidance in the coming quarters. Let's turn to slide 18.
TFAs stood at EUR 811.1 billion in the quarter, decreasing 2.7% quarter-on-quarter. AUM in the quarter were EUR 212.3 billion, down 4.3% quarter-on-quarter. While we had good net sales of EUR +8.8 billion in fiscal year 2018, market performance was a EUR +14.6 billion. Commercial Banking Italy generated EUR +3.5 billion in AUM net sales in fiscal year 2018, which is down versus last year, while Commercial Banking Germany generated EUR +3.2 billion in AUM net sales, which is up more than twofolds on last year. AUC decreased by 7.8% quarter-on-quarter. Fiscal year 2018 net sales of EUR 0.7 billion were impacted by negative market performance of EUR 18.7 billion. While we have strong client dynamics, a continued challenging market environment will result in TFAs to be lower than our EUR 858 billion target for the end of 2019.
Let's turn to slide 19. Trading income in fiscal year 2018 was down 31.5% versus last year, as the general market environment continued to be unfavorable, especially in the fourth Q 2018. Almost all of the trading income was client-driven in fiscal year 2019, which is a testimony of our fully plugged-in CIB business model. Dividends were up 15.6% versus last year. The contribution of Yapi to our dividend line improved strongly from EUR 24 million in the third Q 2018 to EUR 92 million in the fourth Q 2018, as the Turkish lira reversed some of its earlier losses against the euro. This contribution of EUR 92 million appears high.
This is mainly due to the accounting treatment for FX translation at UniCredit group level, which amplifies the recent FX moves. Discounting this accounting treatment, Yapi's P&L contribution would have been in the EUR 30s. Feel free to call our IR team for more details.
Despite the external environment, Yapi posted a strong operational performance in Turkish lira terms. In fiscal year 2018, its contribution at constant FX is up 30.8% versus last year. Yapi's P&L is included in the annex on page 57. For fiscal year 2019, as we said last quarter, we have taken an extremely conservative view in estimating Yapi's contribution. Given the most recent performance and the signs of economic stabilization in the country, we could see some upside here. As of the fourth Q 2018, our core Tier 1 ratio sensitivity to Turkish lira moves is plus one basis point net for 10% adverse move in the Turkish lira. Let's turn to slide 20. Our focus on cost efficiency is yielding tangible results quarter after quarter. Transform 2019 is well ahead of schedule. We have already achieved 100% of our current FTE reductions and 93% of our scheduled branch closures.
Those targets will be exceeded by the end of 2019, allowing us to reach FY 2019 costs of EUR 10.4 billion below the original EUR 10.6 billion target. The gross FTE reduction agreed with the union stands, but the net impact will be higher on more efficient turnover management. Operating expenses are down 5.6% versus last year, and our cost income ratio is 54.2%, below the target for FY 2018. Let's turn to slide 21. Both HR and non-HR costs are down versus last year, 7% and 3.5% respectively. The fourth Q 2018 HR costs were down 5.9% year-on-year, but had a 1.7% seasonal increase quarter-on-quarter, driven by viable compensation and the release on unused holiday provisions in Austria. Fourth Q 2018 non-HR costs are seasonally up as well, both quarter-on-quarter and year-on-year.
Please bear in mind, however, that fourth Q 2017 had a lower seasonality than usual due to lower expenses recoveries. Adjusted for that, they would have been down year-on-year. Let's turn to slide 22. Regarding group cost of risk, I would like to point out four items. First, the overall group risk environment was supportive in the year, as demonstrated by a good underlying cost of risk of 53 basis points, spot on on target. While we had a low cost of risk in CEE, Commercial Banking Austria, and CIB, there was a relatively large impact from models in Commercial Banking Italy. Second, the impact from model charges in the year was limited to 5 basis points, while for the quarter it was high at 13 basis points. As we said the last quarter, the reason for lowering the initial guidance was due to the FTA impact of IFRS 9.
Consequently, this is not a time shift effect, but a real reduction. Third, we saw the first impact from the macro scenario changes according to IFRS 9, our cost of risk figures. Twice a year, we are evaluating our macro assumptions to see if they have changed and adapt the loan loss provisions accordingly. While at the end of the second Q, there was no change, we adapted the macro scenario at the end of the fourth Q 2018. As a result, we had an impact of 3 basis points on the FY 2018 cost of risk, while for the cost of risk in the fourth Q 2018, the impact was 10 basis points. We confirm the cost of risk targets for FY 2019, both on a divisional and at a group level. Our overall asset quality is steadily improving.
The coverage ratio was stable in the quarter at 61%, but up 4.7 percentage points year-on-year. The group gross NPE ratio dropped to 7.7% in the fourth Q 2018, down 2.4 percentage point year-on-year. This is a great improvement considering we start the Transform 2019 plan close to 16%. Let's turn to slide 24. In 2018, NII was down 5.6% versus last year, as pressures on customer rates was only partially offset by increased loan volumes. NII started to stabilize in the fourth Q 2018, down only 0.2%. There are encouraging signs regarding customer loan rates. They are starting to bottom out as repricing picks up speed. Customer loan rates were flat quarter-on-quarter after year-on-year reduction of 25 basis points. For FY 2019, we expect small but steady increase in customer loan rates.
Gross new loan production was strong at EUR 24.9 billion, while at the same time, risk discipline remained very strict. Expected losses on new business was 35 basis points, well below the expected loss on stock. Fees were up 0.8% versus last year, mostly thanks to strong transactional fees from current accounts and P&C insurance. In the 4Q 2018, fees were down 4.5% year-on-year, as the challenging market environment put pressure on AUM gross sales, and therefore, on upfront fees. 4Q 2018 investment fees were down 16% year-on-year. As a result, we now expect overall FY 2019 investment fees for the group at the same level of FY 2018. We attracted 363,000 gross new clients, notwithstanding the ongoing optimization of the branch network. Gross new clients give a good indication of the marketing dynamic of the network.
Our stock of active performing clients is marginally lower as we review inactive accounts in our client database. Cost of risk for the year was 74 basis points, up 3 basis points versus last year due to models and IFRS 9 macro, which taken together, contributed 14 basis points. The underlying cost of risk improved. Net profit in the quarter was affected by a number of items quarter-on-quarter adjusted for the sale of pawn business. It would have been down only 1.5%. Year-on-year net profit was impacted by higher other charges and provisions and lower integration costs in the 4 Q 2018. Normalized for the sale of the pawn business, Italy's return on allocated capital for the year was 11%. This double-digit return on capital is very good result, thanks to our low cost base, a testament to the success of Transform 2019.
Despite projected higher net profit for Commercial Banking Italy in FY 2019, we adjust our FY 2019 return on allocated target to be stable at around 11% on higher risk-weighted assets. Let's turn to slide 25. In Commercial Banking Germany, adjusted commercial revenues were down 3.3%. NII, adjusted for the one-offs from the tax provisions releases, was down 4.2%. This was the result of customer rates pressure that were not compensated by rising volumes. Customer loan rates started to bottom out, although they were down 2 basis points quarter-on-quarter and 19 basis points year-on-year. Fees were down 1.4% versus last year, as higher transactional fees could not fully offset lower investment fees. Fourth Q 2018 fees were up 2% year-on-year as transactional fees compensated for lower investment fees. 75,000 gross new clients were added in the year, up 50% on last year.
This was driven by the end-to-end redesign of the account opening process started last quarter and also resulted in a strong reversal of the net client acquisition. Cost of risk in the quarter was impacted by models and some single names. The net profit in the fourth Q 2018 was affected by a tax release and DTA write-up, while second Q and third Q 2018 suffered from the additional large provisions from the expected U.S. sanctions. These were mainly booked in Commercial Banking Germany and CIB. Normalized for the sale of a participation and the tax rebate, FY 2018 return on allocated capital was 4.1%. If we also adjusted for the U.S. sanctions provisions, normalized return on allocated capital would have been above the FY 2019 target of 9.1%, which we confirm.
Let's turn to slide 26. In Commercial Banking Austria, NII was down 5.1% versus last year, but adjusted for one-offs, down 3.3%. Fourth Q2018, NII was down 3.1% quarter-on-quarter due to the non-recurring prepayment penalties. Customer loan rates and average volumes were broadly stable, with volumes slightly up and rates slightly down. Fees for the year were resilient, at -0.8% versus last year, while the fourth Q2018 fees were down 5.3% year-on-year, mainly due to investment fees. Costs were down 5.9% versus last year, driven by both HR and non-HR costs. After net write-backs in the first half 2018, cost of risk was 6 basis points positive for fiscal year 2018. For fiscal year 2019, we expect a normalization in cost of risk and confirm the target of 16 basis points.
The fiscal year 2018 net profit was down from last year, as there were almost EUR 100 million less profit from discounted real estate operations. Return on allocated capital was 16% for fiscal year 2019. Expected fiscal year 2019 return on allocated capital on a normalized cost of risk will be close to the target of 13.3%. Let's turn to slide 27. CEE continues to be our growth engine, with an inflow of 1.3 million gross new clients in the year. The division turned in a very good performance, with NII at constant FX up 6.6% versus last year due to increased loan volumes. There was a EUR low double-digit million one-off in NII from discounted funding related to the government subsidies in Hungary. Yapı dividend was affected by the FX translation accounting treatment. Fees were up 5% on last year at constant FX, mainly driven by transactional fees.
Fourth Q2018 fees were up 17.4%, primarily thanks to financing fees. The division's cost income ratio remained best-in-class, only 36.7 percentage points for the full year. The cost of risk is at a low 73 basis points, but is expected to normalize in fiscal year 2019. De-risking continues at a vigorous pace, and the division's gross NPE ratio fell 1.5 percentage points year-on-year to 6.4%. Return on allocated capital for the year was 15.7%. We expect the fiscal year 2019 return on allocated capital to be lower due to a normalized cost of risk and the impact from the new Romanian bank tax, which we estimate, in the worst case, to be a EUR mid-to-high double-digit million amount before remediation actions. We confirm the fiscal year 2019 return on allocated capital target of 13.4%. Let's turn to page 28. CIB enjoyed a resilient performance in a very difficult market environment.
Revenues were down 7.3% versus last year on lower trading. NII was up 7.5% on last year, driven by higher loan volumes and higher income from the bond portfolio. Fees were down 2.4% versus last year due to a sector-wide weak capital markets business, and only partially offset by structured finance fees. The same general trend holds true for the Fourth Q2018 fees year-on-year. Our leading franchise in debt capital markets was confirmed yet again, with CIB ranking number 1 in EMEA, all bonds in EUR, by number of transactions. Costs were down 3.9% versus last year and led to a best-in-class cost-income ratio at 41%. Cost of risk was at a low 7 basis points in fiscal year 2018, driven by non-recurring write-backs in the Second Q2018. For fiscal year 2019, we expect a normalization and confirm our target of 21 basis points.
Normalized return on allocated capital was 8.7% for the year. If we take out the higher provision for expected U.S. sanctions, return on allocated capital would be well in the double digits. We confirm the FY 2019 return on allocated capital target of 11.7%. Let's turn to slide 29. As most of you will have listened to the Fineco results on the 5th of February, I will limit what I say on this slide. We are very satisfied with the overall financial performance of Fineco. Fineco saw a strong performance in management fees, despite lower AUM volumes from negative market performance. Let's turn to slide 30.
In the Group Corporate Center, revenues improved significantly, mainly driven by lower term funding costs, thanks to both lower volumes and spreads. The profit on investment line was affected by the IAP impairment in the third Q2018, while the tax line was affected by the IFRS 9 FTA tax effects. 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 3.4% in FY 2018. The FY 2019 target of 3.8% is confirmed. Let me reiterate that we ensure we allocate fairly and proportionately all operating and funding costs to our business divisions, so that we give a true and fair view of their operating performance, and do not flatter the business divisions.
The Corporate Center only retains true central revenues and costs, which have dropped considerably in the last few quarters as Transform 2019 has progressed. Let's turn to slide 31. The accelerated 2021 non-core rundown is progressing according to plan. As already indicated in the last quarters, the non-core division has transferred all remaining performing loans back to the core bank and is now a closed NPE book. Gross NPEs dropped by EUR 2 billion in the quarter and stood at EUR 18.6 billion at the end of FY 2018. Our FY 2019 gross NPE target of EUR 14.9 billion is confirmed. Let's turn to slide 33. On this slide, I would like to recap our impressive progress in improving our asset quality. Thanks to our decisive actions, we have massively reduced our NPE stock, which is down EUR 38.6 billion since the 3Q 2016, more than 50%.
Net NPEs are down even more on a relative basis. We have done an incredible EUR 27 billion of NPEs disposal in the quarter, while at the same time increasing the NPE coverage by more than eight percentage points. UniCredit today has the second highest NPE coverage of all Eurozone banks in the recent EBA transparency exercise, and the highest in Italy. At the same time, we have strengthened our underlying process to contain, as far as possible, the creation of new NPEs. The expected loss on new business for the group is 34 basis points, below the expected loss on stock of 38 basis points. Our proactive and decisive de-risking actions benefit all stakeholders, and we are well ahead of regulatory expectations and requirements. Another example of that is our voluntary partial anticipation of EBA guidelines. Let's turn to slide 34.
We continuously work to de-risk the balance sheet to further lower our cost of capital. Group Core gross NPE decreased by EUR 2.7 billion year-on-year and EUR 0.6 billion quarter-on-quarter. Our core gross NPE ratio dropped to 4.1% in the fourth Q 2018, close to the EBA average, and is already well below our 2019 target of 4.7%. Our coverage ratio has improved by 2.4 percentage points year-on-year. Let's turn page 35. Overall, the risk environment remains supportive, as demonstrated by an improvement in default rates year-on-year. The migration rates improved by 7.8 percentage points quarter-on-quarter due to single names in the 3Q 2018. Let's turn to slide 36. Gross NPEs in Commercial Banking Italy are down to EUR 8.7 billion, which is again a significant reduction in absolute term versus last quarter, and was mainly driven by disposals.
The gross NPE ratio dropped to 5.7%, thanks to both gross NPE reduction and higher loan volumes. The 2019 target is confirmed at 5.3%. The fourth Q 2018 coverage ratio was slightly up at 55.5%, despite significant disposal activity. Let's turn to slide 37. The overall risk environment in Italy remains supportive. The default rate improved by 0.2 percentage points year-on-year. The cure rate was more than double than the same quarter last year. As of fourth Q 2018, saw the return of three single names to performing. There was also a good trend of migration rates, which stabilized at 20%. Let's turn to slide 38. The execution of the accelerated rundown of the non-core is progressing very well. Gross loans in non-core went down EUR 10.7 billion year-on-year and EUR 3.7 billion quarter-on-quarter.
This reduction was thanks to a combination of disposals, write-offs, and recoveries. Please remember that there were extraordinary write-off on residential mortgages in the first Q 2018 for EUR 1.4 billion. Performing exposures in non-core are down to zero, turning the division into a gross NPE book. Let's turn to slide 39. Non-core loan volumes keep going down and are on track to meet our 2021 accelerated rundown target. Net NPEs, which are a good indicator of economic risk, were down significantly to EUR 6.6 billion, dropping by EUR 4.5 billion year-on-year.
Gross NPEs decreased by EUR 7.4 billion year-on-year, standing at EUR 18.6 billion, better than our fiscal year 2018 target and below our original fiscal year 2019 target from Capital Markets Day 2016. We confirm our EUR 14.9 billion for fiscal year 2019 gross NPE target. NPE coverage was stable at 64.3%, despite disposal activity. Let's turn to slide 41.
The group's fully loaded core Tier 1 ratio at year-end stands at 12.07%, down 4 basis points quarter-on-quarter. The key drivers were the net profit of 23 basis points in the fourth quarter, as well as regulation models and procyclicality that had 23 points negative impact. Let me make a remark regarding our dividend payment, which is based on a 20% payout on stated net profit, excluding the tax effect from IFRS 9 FTA. We did not take these tax effects through our profit and loss accounts in the first Q 2018, our shareholders did not suffer a negative impact on their dividend base. To keep a symmetric treatment, the related DTA benefits should not affect the dividend either. The impairment we took on IAP in the first Q 2018, however, is treated differently.
It affected the fiscal year 2018 dividend base negatively. In turn, any potential future write-up of IAP will impact the dividend base positively. The net impact of IAP on our core Tier 1 ratio this quarter was negligible, only one negative basis point, composed of +4 basis points from capital and -5 basis points from risk-weighted assets. The IFRS 9 FTA DTA write-up had only a very marginal combined initial impact of +5 basis points on our core Tier 1 ratio for fiscal year 2018. The reason is that DTAs resulted in risk-weighted asset and capital deductions for amounts exceeding the so-called combined DTA bucket. As the DTA bucket empties over time, some of this lost benefit will be regained in the future. In fiscal year 2019, we expect a positive core Tier 1 ratio contribution in the high single-digit basis points.
Feel free to call our IR team for more details on this topic. I'd like to make clear that we report our core Tier 1 ratio as we report to our regulators. You can see that the example in the EBA transparency exercise in annex on page 73. That also means we never pro forma our capital ratio for potential future positive DTA impacts, and as such, didn't do it for the IFRS 9 FTA tax impacts this quarter. With UniCredit, what you see is what you get. Also, let me use this opportunity to remind you that our capital levels compare very well in the recent EBA transparency exercise that put all banks on equal footing. UniCredit has one of the best core Tier 1 ratios in relation to Eurozone and Italian peers.
We confirm our end of 2019 core Tier 1 ratio target of 12%-12.5%, which corresponds to a target MDA buffer of 200-250 points. The expected evolution of our core Tier 1 ratio during 2019 will be driven by the combined effect of regulatory headwinds, mainly expected in the second Q 2019 and fourth Q 2018 due to the timing of ECB approvals, and tailwinds from retained earnings and capital gains from real estate sales. Overall, this should lead to a core Tier 1 ratio trough at the end of the second quarter of 2019 at around 11.7% at current BTP spreads, before going back up to our target range of 12%-12.5% by year-end 2019. Let's turn to slide 42. Risk-weighted assets in the quarter increased by EUR 7.6 billion to EUR 370.2 billion. The biggest drivers were increased credit risk-weighted assets from regulation models and procyclicality.
There were also around EUR 0.6 billion of risk-weighted assets from the 250% risk weighting of the deferred tax assets from IFRS 9 FTA not deducted from the core Tier 1. Market risk-weighted assets were down due to lower inventories from market-making activities. Operational risk risk-weighted assets increased following the inclusion of the additional large provision for the expected U.S. sanctions into our loss database. Over the course of 2019, we expect risk-weighted assets to increase every quarter up to our target of EUR 406 billion. Regulatory headwinds from EBA guidelines and regulations, models, and procyclicality should account for roughly EUR 25 billion of risk-weighted asset increase, and should mainly be split between the second and the fourth Q 2019. Let's turn to slide 43. After a number of quarters with declining tangible equity values, we consider the third Q 2018 was the trough.
In the fourth Q 2018, our tangible equity grew by 3% or EUR 1.4 billion. The main driver was the net profit of the quarter. The IFRS 9 FTA tax impact from the DTA write-up also had a positive impact on tangible equity. We expect a steady increase of tangible equity and tangible book value per share throughout 2019. This should lend support to our share price going forwards, as tangible book value per share has increased to EUR 21.4. Let's turn to slide 44. As of the fourth Q 2018, we are fully compliant with the upcoming TLAC requirements with a subordination ratio of 17.42%. Pro forma for our senior non-preferred issuance executed in January 2019, our subordination ratio is 18.13%. This corresponds to a buffer of 107 basis points, slightly above our target of 50-100 basis points buffer range.
Taking that into account, we are also already compliant with the upcoming subordination requirement for MREL. Our TLAC funding plan for 2019 is well advanced. Out of a total of EUR nine billion, we only need to issue an additional EUR 3.9 billion of subordinated instruments in the full year. Our two large successful senior non-preferred transaction in recent months have also put us ahead of the curve in utilizing our substantial market capacity and are positioned well with our investors. Jean Pierre, back to you.
Thank you, Mirko. Before I get to the conclusion, I just wanted to say a few words on the senior management team reorganization project we announced last night. The change in the management structure aims to continue the streamlining process initiative with Transform 2019. It will ensure that the management team who will deliver the next 2020-2023 plan will have full ownership of the new strategy from the very outset of the planning process. As we are nearing the achievement of our Transform 2019 key financial and operational targets, it is time to actively prepare for the next strategic cycle with the objective to continue sustained value creation for all our stakeholders. Gianni Papa has announced that, in agreement with the bank, he will be stepping down on the 1st of June 2019.
I would like to thank Gianni for his valuable contribution to the group over the last 39 years. Gianni has been integral to the first two years of the implementation of Transform 2019 and will, until he steps down, remain as an advisor to the CEO on the ongoing execution on the plan. Let's turn to page 47. Before we move to the Q&A, let me briefly recap our 2018 performance. In our second full year of Transform 2019 plan, we have seen a continued strong core bank performance with Group Core net operating profit of EUR 7.5 billion and an adjusted Group Core ROTE of 10.1%. If we adjust for the higher charges and provision on the expected U.S. sanction, it would be materially higher. Transform 2019 continues to be well ahead of schedule and is delivering tangible results quarter after quarter.
We have already achieved 100% of our planned FT reduction and 93% of our branch reductions. Group costs are down EUR 10.7 billion, better than our EUR 11 billion target. The accelerated non-core rundown is fully on track, already down to EUR 18.6 billion of gross NPE. The target for 2019 is confirmed at EUR 14.9 billion. For 2019, we also confirm our targets of EUR 4.7 billion net profit, 9% ROE, and 10% core ROE. As we said earlier, without the expected function, our 2018 adjusted group ROE would have been close to double digits and above the 9% target of 2019. We are confident our tangible equity will grow throughout the year. Last but not least, we confirm our CET1 ratio range between 12% and 12.5% at the end of 2019, corresponding to an MDA buffer of 200 to 250 basis points.
We expect real estate disposal to contribute around 0.2 percentage point to our CET1 ratio, mainly in 2019. We continue to focus fully on Transform 2019 and work hard as one team, one bank, one UniCredit, to ensure UniCredit remains a true pan-European winner. As a sign of my personal conviction that Transform 2019 will successfully meet the stated targets, I have decided to invest once more into UniCredit. I will invest the equivalent of the after-tax value of my long-term incentive plan in shares. That means I will buy EUR 3.6 million worth of shares, as well as EUR 3.6 million worth of AT1, holding both for the same length of time as the original LTP awards. Finally, let me announce that we shall present our new strategic plan for the period 2020 to 2023 at the Capital Markets Day in London on the 3rd of December this year.
Please put the date in the diary. Needless to say, we much look forward to seeing you all there. Now, Mirko and I are ready to take your questions. If you could be so kind to limit your questions to two each. Many thanks. Operator?
Thank you, Mr. Mustier. 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. We kindly ask you to use handsets when asking questions. Anyone who has a question may press Star and One at this time. The first question is from Andrea Filtri with Mediobanca. Please go ahead.
Good morning. I have two questions, capital and cost of risk. On capital, which of the two CT1 targets is senior to the other? Is it the 12% to 12.5% for 2019, or the 200 to 250 basis points MDA buffer? Do you reiterate your expectations given in December 2016 that your SREP should fall further? On the side, what are your IFRS 16 and TRIM impacts expected for this year? On cost of risk, you indicate 10 basis points of loan loss provisions from IFRS 9 macro scenario. What macro scenario are you reflecting? Are you confirming the provisioning guidance despite the deteriorated macro scenario, and will this also result in higher than expected risk-weighted assets from your IRB models? Thank you.
Thank you very much. Let me answer the CT1 question, and I will pass over to TJ for the cost of risk and the macro scenario. We have two targets, as you pointed out, in terms of CT1, 12% to 12.5% and 200 to 250 basis points buffer. We are very focused on the buffer, as this is the important parameter for our shareholders, not only on the CT1 ratio, but also on the TLAC ratio, and we announced a buffer for the TLAC ratio of 50 to 100 basis points. The management will make sure that we are within this target. This is why we took actions as well, in addition to our net earnings generation for 2019, to make sure we will be within the buffer. For 2019, the two ratios, 12% to 12.5% and 200 to 250 basis points, stand both.
It is fair to say that we have a SREP Pillar 2 requirement of 200 basis points, and we hope that this SREP Pillar 2 requirement will be able to be lowered again, but that will not impact 2019. The decision will be made by the ECB in 2019, and it will impact 2020. If we have a lower SREP Pillar 2 requirement, this means that we will have more room to move between our 200-to-250 basis points buffer. On IFRS 16 and TRIM, it has been embedded into our capital projection. We already communicated, I think before Capital Market Day, that the impact should be around 10 basis points, and so due to an increase of risk-weighted asset of EUR 2.7 billion. I hand over to TJ on the macro scenario.
Just to remind you that the 10 basis points for the fourth quarter is a fourth quarter impact, not an annualized impact. The annualized impact is 3 basis points. TJ, I hand over to you to explain on one side the parameters behind that and to give a sensitivity on further evolution. TJ?
Yeah. Thank you, Jean Pierre. As Jean Pierre mentioned, just from the process point of view, twice a year, we update the macro scenario to reflect just on the IFRS 9, what the additional LLP would be. For the so-called second half of the year, we have clearly, particularly for the Italian parameter, we've downgraded the GDP to be more in line with our forecast, and that gives the so-called 10 basis points for Q4, and 3 basis points for the year. This also, we are impacted also as well as by the BTP bund spread. We expect for sensitivity that if there's an additional 1% over the next three years in terms of the Italian GDP, the forecast, in terms of LLP, will be quite small, between EUR 40 million-EUR 60 million cumulative.
Just to clarify, the 1% is a cumulative 1% decrease, which, if you look at it over three year on operate, that should be 33 basis point per year, basically.
Yeah.
In terms of downward revision, if you focus on the Italian GDP, we have revised for the next three years the GDP for this IFRS 9 simulation to levels which are below 1% with a trough in 2020 at roughly 0.5%.
Next question, please.
The next question is from Adrian Cighi with RBC. Please go ahead.
Hi there. Thank you very much for the presentation and taking my questions. I'll focus on two questions on net interest income and fee income. Can you, in terms of net interest income, provide us a more detailed outlook for the various moving parts, particularly your thoughts on the repricing in Italy, some of the impacts from what you see on the wholesale funding movement, any time value outlook, and potential TLTRO scenarios impacting NII in 2019? Then on fees, you referred to the upfront fees decline as a key driver of the year-on-year performance. Can you disclose the amount of upfront fees, if possible, both absolute and percentage, to allow us to form our own estimates of potential future impacts? Thank you.
I will hand over to Mirko for the detail. I'm quite sure that we're going to give you all the details you want. Let me confirm on the core figures, and Mirko will go down in details afterwards. We confirm our 2019 revenues of EUR 19.8 billion and, of course, the net profit of EUR 4.7 billion. I just want to state again that the net profit, of course, EUR 4.7 billion, does not include a potential capital gain from a real estate asset disposal. We have here as well an additional buffer, if you want. We said that we expect the real estate asset disposal to contribute to 0.2% of CT1, mostly in 2019. As far as the commercial performance is concerned, NII plus fees, we should be within the EUR 18.1 billion that we have mentioned last quarter.
We said within there could be a variation of maybe EUR 100 million. We have as well potentially a less negative contribution than what we were forecasting before of Turkey. We had a very tough projection for Turkey, in terms of dividends. I mean, the figures of the first quarter show that potentially we have some upside here, and so we could have some upside as well. Basically, the evolution, and it's more an art than a science, of the commercial revenues, might be compensated by potentially better news on the dividend side and the trading side versus what we were expecting. Mirko can give a few more details on the NII and the moving parts of NII, which are always difficult to anticipate. Mirko, please.
Yes. Thank you, Jean Pierre. Yes, on the NII front, I think something that we need a good takeaway from the 4Q performance is that for the first time, we are seeing a positive impact if we combine the loan volumes and loan rates in terms of a positive number. We think that this is going to continue. Of course, we are not expecting the loans to grow at the current level like we have seen, EUR 3.8 billion for the quarter. Of course, due to the GDP environment in Italy especially, loan growth will be a little bit more subdued, but nevertheless, we are going to see loan growth. As we said into the script before, in terms of the loan rates, we are seeing a stabilization of rates.
Very important that Italy is stabilized. The stabilization is also supported by the repricing that we are doing in the Italian market. Therefore, we should see this trend continuing also in 2019. The line item that started to impact our NII is the term funding line item. You can see the minus EUR 6 million impact on this. For this quarter, due to the restarting of our funding. Expect going forwards on a quarterly basis to have, let's say, mid-single digits, EUR millions higher impact from cost of funding, because our funding plan is mostly focused on subordinated debt to maintain a strong, let's say, subordination ratio. In terms of TLTRO benefit, we are not planning in our budgeting further TLTRO. Of course, there are rumors about a potential new TLTRO.
If there is one, of course, it will be a positive element for us on our development of the NII. Even absent this, we would see 2019 slightly increasing. In terms of fees, as we said, the fee side, investment fees are the ones that are under pressure. If I look at the composition, it's mostly driven by AUM, especially on the upfront side, which we see lower volumes and also lower pricing, so very competitive environment there. Nevertheless, there is some counterbalancing from management fees that actually are flat. Also, this is a kind of a stabilizing aspect of the investment fees. Nevertheless, as a guidance for you, a flat development for 2019 should be the base case going forwards.
For investment fees.
Investment fees. For financing fees, we have seen a good performance, especially on the quarterly performance since CIB on loan fees and also CEE on loan fees and guarantees have performed quite well. We have a plus EUR 31 million there, so it should be sustained also into 2019. On the transactional fees front, we had a very strong, let's say, increase in fiscal year 2018, mainly driven by the current account repricing that we have done. Nevertheless, for 2019, we are going to continue to see potentially around 2% growth of this segment of the fees line item. Overall, fees will be around the level of 2018 plus EUR 100 million.
Thank you very much. Very helpful.
Next question, please.
The next question is from Jean Neuez with Goldman Sachs. Please go ahead.
Hi, good morning. I just wanted to ask firstly about the dividend policy going forward. I welcome your comments on the explanation for the basis of calculation and the underlying versus stated. I just wanted to clarify the path going forward, because of the slight revision compared to originally in the plan of the capital ratio, whether we're still on track for 30% in 2019 and 50% thereafter, subject to capital reaching 12.5%. Into this, whether going into the plan that you're going into for next year, also with the management changes, et cetera, whether you're budgeting any restructuring charge that could impact dividends. My second question is more conceptual. As you go into the next business plan, we are seeing a lot of banks doing business plans these days. Some are favoring more growth, some are favoring more returns.
I just wanted to understand from where you stand, and considering your geographic footprint also, where you're tilting in terms of your preference, in terms of maximizing returns. Otherwise, now that you've restructured successfully, looking for growth opportunities. Thank you.
Thank you very much, Jean-François. Remind you that our capital market is on the third this year, so we're not going to have it now, but I will give you some information. First, on the dividend policy, we confirm that we will increase for 2019 and dividend paid in 2020, our dividend payouts to 30% to be applied to our net income. It will be a cash dividend, of course. In terms of the increase to 50% thereafter, we always said that we aim to increase as fast as possible the payout to 50%. We didn't say we will increase it in 2020 to 50%, and that will be based on the forecast of our CT1 evolution.
Based on the question we had from Andrea before, we will focus mostly on the MDA buffer, so not on the 12.5% CT1 ratio, but making sure that we can be on the upper end of our buffer of 200 to 250 basis points. That, as I said, what will drive our strategy is not as much the absolute CT1 ratio than the buffer to CT1, so 200 to 250 basis point. If we reach the upper end of the buffer, then we can increase the dividend payout post-2019. As far as the strategic plan is concerned, we will communicate about it on the 3rd of December. I think it's important to state that we have a view that it is important to be credible in the projection we give.
I think so far we have delivered on the KPI of Transform 2019, because we gave objectives which were ambitious but credible. Growth on the top line in Europe cannot go well above the overall nominal growth of the economy.
We are not going to promise growth for activities which would not be consistent with what the real world is. You know that we lend to SMEs, we lend to retail individuals, and we are very focused on the real world, basically. Two is in terms of profitability, and I stated that the return on equity of European banks is probably not going to be well above the cost of capital going forward. I have seen actually adjustments of values banks in terms of their targeted return on capital. We feel that reaching the cost of capital will be a very good target. There is two ways to reach it. It's to make sure that the ROTE increases and to make sure that the cost of capital decreases, basically, and that would be as well the focus of the plan.
What we have in mind is reasonable growth, which is realistic and not based on assumptions which might be too optimistic. On the CIB side, we have a plugged-in CIB, which is serving our businesses. No complex business, no complex derivative, nothing. A cost income, which is 41% this year, so it's an extremely good cost income, and we're not betting on a realistic assumption there as well. Profitability and its ROTE, which should be close to our cost of capital.
Next question? Thank you.
The next question is from Delphine Lee with J.P. Morgan. Please go ahead.
Thanks for taking my questions. Two as well on my side. If I can just go back on the revenue target of 2019. Thanks for just confirming again the EUR 18.1 billion. Just looking a little bit at your comments on NII and fees and commissions, which were quite helpful. Just wondering where the, let's say, EUR 500 million pick-up from this year to next year is coming from. You seem to suggest a little bit of NII pick-up, and fee pick-up as well, but if you can just give us a little bit more guidance versus your old published targets, that would be quite helpful. The second question is just going back to capital. Just trying to understand a little bit the range of 12%-12.5%.
Are you assuming a little bit of a buffer for EBA guidelines to be maybe delayed or any impact from BTP bund spread widening? The timing of disclosure? I'm just trying to think about where the pick-up coming from in terms of the bottom of 12.7% end of Q2 to 12%-12.5% in just one half. Thank you very much.
Thank you very much. Mirko and I will answer your question. First, we don't have a pick-up on revenues of EUR 500 million. We have mentioned in the third quarter that we have a target for 2019 revenues, which were around EUR 19.8 billion, basically. We lowered on the third quarter our revenue target for 2019 by EUR 600 million, basically. Nevertheless, we confirm our commercial revenues, as I said, around EUR 18.1 billion. Around meaning that it is, as I said, an art and not a science. Any adjustment potentially, let's say, of EUR 100 million, which might be the viability, we think can be compensated outside of the commercial revenues by a potentially higher dividend than what we were planning, and a potentially higher trading revenues, as both of them were set at very conservative level when we confirmed the EUR 19.9 billion of total revenue.
We have fees, which would be EUR 100 million higher versus this year. On the NII side, as Mirko mentioned, they are positive, I think, in terms of funding cost. We had some comments of analysts saying after the senior non-preferred you issued were at a high level, is it going to negatively impact your NII? First of all, when we have a window, we issue. I think that is our policy, and we will keep doing it. Second, the issuance that we have done on senior non-preferred in December and in January, were at levels which were below what we have budgeted to come up with our NII projection. These do not impact negatively, but actually positively our NII projection. As you know, we always are extremely conservative in our projection. I think there is potentially, on the NII side, good news on the funding cost.
We have not planned a TLTRO. If it happened, that might be as well a positive, let us see. On the NII, Mirko commented on loan rate and loan volume. On the CT1 ratio, we said that we will have a trough around 11.7% in the second quarter. We have a slight delay, if I may say, with time translation of the impact of a model change and EBA guidelines from the first to the second quarter. We expect to have all in all for 2019 an overall impact of 75 basis points of combined model for 35 basis points and EBA guideline for 41 basis points. That is for the full year. The first quarter, we expect around 10, 12 basis points. On the second quarter, we expect that we should have a more important impact of roughly 39 basis points, which could impact the second quarter.
The combination of this negative regulatory impact with earnings on one side and potentially some managerial action, like disposal of real estate or others, mean that we have a trough at 11.7%, and we go back up to 12% at the end of the year. The second impact of regulatory change will be mostly on the fourth quarter. We have very little impact on the third quarter of any regulatory change. We move into a combined impact to the second quarter of 51 basis points. 12 and 39 on first and second, roughly nothing on the third, and about on 25 basis points on the fourth. That should guide you in terms of your CT1 projection. We are very confident that we will deliver on our 12% CT1 ratio and our 200 to 250 basis point MDA buffer.
As I said, it is as important to look at the MDA buffer going forward for the dividend policy than the absolute CT1.
Sorry, if I can just clarify. What I meant for the revenues was the EUR 500 million pickup was on Group Core revenue. Because you had EUR 17.6 billion in 2018, and you're targeting EUR 18.1 billion in 2019. If fees and commissions are going up only EUR 100 million, it just implies quite a bit on NII. I just wanted to understand a bit the trends in NII, basically. Thank you.
Well, the trend in NII, if you look at the Group Core, we have for the net interest for 2018, EUR 10.7 billion, and we have fees of EUR 6.8 billion. We are actually not very far from the EUR 18.1 billion. I'm not quite sure that I understand your EUR 500 million evolution, but I suggest that the IR team speaks to you directly afterwards.
Next question, please.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good morning. Two questions. First one on capital, second one tax. On capital, you have already taken a lot of the negative impact related to NPL sales, whether it's due to FINO or disposals which have happened afterwards. If the revised version of the BRRD was to include an LGD waiver on massive NPL disposals, does it mean you will have a benefit in your fully loaded CET1 ratio, or what is done is done? Second, on tax, how long can the 17%-18% tax rate last for, like 2020, 2021, or longer than that? Specifically on this, can you disclose how much potential you still have for DTA write-ups, specifically in Austria and in Germany?
I will let Mirko comment on the tax rate, and afterwards, TJ and I will comment on the massive disposal issue. Mirko, can you first comment on the tax rate?
On the tax rate, we have a 17.8 percentage point, a normalized percentage point. I think for 2019, it's going to be between 17 and 18. Post-2019, I think we should start modeling at a 23 to 24 normalized tax rate because this will depend a lot on the DTA checks that we need to do on a regular basis, depending on the various performances, like you said, in Austria and in Germany. That's basically where we are comfortable in basically guiding in terms of tax rate.
How much have you still got in potential cushion?
The cushion is around between, if I look at Germany and Austria, it's around EUR 450 million.
Okay.
I will hand over to TJ on the massive disposal and the impact on the model and the LGD impact it will have on the stock. I think that on the flow, which was not your question, but which I think is important, what is important for me is that we don't negatively impact our competitive positioning when we afford, because we are conservative, disposal of NPE, and take the pain first. We are discussing with the regulator, but the LGD waiver will allow us, when we look at a sub-pocket, if I may say, of loans, to lower the LGD on future origination to make it more consistent with our current underwriting policies so that we can remain competitive and not be impacted by past history, which has nothing to do with what the bank is today.
I think the future origination capabilities and competitivity is what is important. Together with the team, we are making sure that the negative impact of disposal on assets which have no relation with underwriting will have de minimis impact. On the stock, it's adjustment, if I may say, of the LGD. TJ, I'll let you comment.
Yep. Just one for clarification. Clearly, this waiver is not really a full waiver. It's an adjustment for massive disposal. It is still in final consultation. We expect this to be in the next few months. Clearly, that happened. It will have positive impact on our capital sort of work, but it depends on the number of factors, including the bad shortfall versus a good shortfall, the shortfall evolution. During the CMD in December 3rd, we will then give you a projection of this impact because it's still not fully signed off, and we are clearly working. We have estimated impact, and this impact has been embedded into the 2019 guidance that we have given. Going forward, clearly this is the future as well, and we will articulate this further on December 3rd.
Okay. Thank you very much.
Next question, please.
The next question is from Giovanni Razzoli with Equita. Please go ahead.
Good morning to everybody. Two clarifications, if I may. Back on the cost of risk, you've mentioned that you had a 10 basis point quarter-on-quarter increase in the cost of risk because of the update of GDP estimates. I was just asking whether this increase reflect is an increase only on the Italian commercial banking business or at group level. The second question, as we go in 2019, I was wondering whether we may have some updates on the litigation with the Austrian administration on the potential liabilities. Thank you.
Thank you. On the IFRS 9 cost of risk impact, as we said, the impact has to be looked at on an annualized basis, so it's three basis point and covers GDP adjustment for all European countries. We have mentioned, as far as Italy is concerned, what has been the specific impact. TJ can mention that on our Italian cost of risk per se, before TJ speaks, let me comment on the litigation side, is we have not taken any additional provision in the fourth quarter for U.S. litigation. We expect the provisions were taken to be in line with what could be the final decision. We had a minor low single-digit impact on our CT1, ± 5 basis point basically. That should not be a specific issue.
TJ, on the cost of risk for the IFRS 9 adjustments.
Yeah, on the cost of risk, we clearly updated all of the GDPs and all of the parameters across our entire Group. The most impacted clearly is the Italian side of the, for instance, from which it contributes more than two-thirds of the impact for the entire Group. Overall, it is 3 basis points for the year. If you look through all of the Group, the most impacted area is Italy. There are some minor impact in Austria, CEE, and [inaudible]
The next question is from Azzurra Guelfi with Citi. Please go ahead.
Hi, good morning. Something on cost and something on NPL, just a little bit different. When I look at your cost target for 2019, given the progress that you showed in 2017 and 2018, it's not particularly demanding. I just wanted to know if you could split for us what are cost saving and potential investment that instead you are considering to do during the year. If you see that there could be more space for optimization, or you would leave some more for the next plan. The second one is on NPL. As you said, you have one of the highest coverage, and you have done a lot of work on NPL. Could you increase disposal for 2019? In case, any update on the workout because the results that you showed so far are quite encouraging. Thank you.
I might take a slightly different view than yours on your not particularly demanding cost reduction. Let's be serious. Okay, we reduced our cost in a massive way. The team is focused on that. It's coming from the top. We are massively outperforming our cost reduction for 2018. We are down to EUR 10.7 billion, while our target was EUR 11 billion, while reducing further our cost and our target to EUR 10.4 billion. I know it's easy when you have an Excel worksheet to say, why not reducing the cost? We are managing people, branches, clients. Please recognize what we have been doing and don't make these kind of comments.
No, I do recognize-
No, that's it. On the NPL disposal, we have a target to reduce our non-core book to zero by 2021. We are on track. We are working in the most efficient way in terms of reduction. It is a combination of recovery, of write-off, and disposal. We said that the contribution should be more or less one-third, one-third, one-third. If we can reduce further and more quickly, we will do it. Don't expect us to be massively below our target for 2019 on EUR 14.9 billion for the non-core. It is a challenging target. It is very challenging to reduce to zero by 2021. We have reduced that massively from what we mentioned at the Capital Markets Day. We stick to our projection. Next question, please.
The last question is from Ignacio Freijo with UBS. Please go ahead.
Yeah. Hi, good morning. A couple of quick ones from me. The first one on NPL income within the net interest income, both time value of money and UTPs, if you can give us the weight within the group. Second, in terms of the update on the target book value and the intragroup exposure you have as of December. Thank you.
On the time value of UTP, I don't know if TJ can have the answer now. Otherwise, the IR team will call you back to say that you are challenging us with this question. Well done. On the Turkish, on the value of Yapı Kredi is unchanged. There is no specific additional impairment in our Q4 results, and we don't expect additional evolution for the Turkish, for Yapı Kredi book value. No, TJ is waving desperately, saying that the IR team will call you back.
I think we will need to get back on the time value.
on the time value of NPL.
Yes. Thank you.
There are no more questions registered at this time.
Maybe let me just make one remark from the IR side on the dividend that we just announced. The upcoming dates for the dividend will be the 23rd of April is the ex-dividend date, the 24th of April will be the record date, and the 25th of April will be the payment date. Any other specific communication regarding these dates and the dividend will be available on our website.
Any other question?
Gentlemen, I confirm there are no questions.
Thank you very much. If there's no other question, thank you very much for having taken the time to listen to us. We'll be, from tomorrow, on the road, Jacco and I, and being able to meet with you and with investors for the next one and a half or two weeks. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.