Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the UniCredit Group third quarter and nine months of 2018 results conference call. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Jean-Pierre Mustier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.
Thank you very much, and good morning to you all, and welcome to our third quarter 2018 conference call. Q3 saw an increase in uncertainty created by the broader geopolitical situation and concerns about the growth prospect in U.S. and Europe. Also the market in Italy was particularly volatile. The country's private sector fundamentals remain strong. The underlying performance of the group remains as very strong, and our adjusted results are up year-on-year. However, before we look at these results per se, I would like to start by highlighting a few external events beyond our direct control that had a negative impact on our bottom line and capital in the quarter. As you know, we have a policy to take up front the impact of negative developments in order to put them behind us.
This is why we have taken decisive actions on Turkey and U.S. sanctions, and as a result, our stated net profit for the quarter is EUR 29 million . This will lead to some adjustment of our Transform 2019 revenue targets. I stress that all other key targets are confirmed, including asset quality, as well as 2019 net profit of EUR 4.7 billion and ROTE above 9%. First, Turkey. In light of the evolution of the macroeconomic environment in the country, we have reviewed our investment prospects in Yapı Kredi, looking at all potential alternatives. Based on the outcome of our analysis, we are confident it is in the best interest of all our stakeholders to maintain UniCredit Group investment and pro rata shareholding in Yapı Kredi, and, if necessary, provide capital support on a proportional basis.
Also, in the third quarter, we have taken a proactive but conservative approach and did a EUR 846 million impairment for the profit on investment line in our P&L. Together with the quarter-on-quarter negative change in FX revaluation reserve of EUR 500 million, this takes the carrying value of our participation closer to the market value of our stake. This greatly minimize the risk of future impairments. Second, we are in continuing discussion with the U.S. and New York authorities. There continue to be some open issues, but consistent with our conservative approach to provisioning, we have increased our provision in the third quarter. We hope to be able to communicate an in-principle agreement in the first quarter 2019.
We expect the settlement to have no material impact on UniCredit Group CET1 ratio target. In addition, the increase in the BTP -Bund spread led to a nine-basis point charge to our CET1 ratio.
As it is in our habit, we have taken decisive actions to put this topic behind us. As a result, our stated net profit for the quarter is EUR 29 million. The whole team has put an extraordinary effort and worked really hard to compensate for these factors that are outside of our control. They have delivered a very, very strong underlying performance in this challenging environment and continue to execute Transform 19 that is well ahead of schedule. I am super proud of what has been delivered, and together, we will keep moving forward regardless of one-off external events and focus on what is under our control while making real progress with the transformation of the group. In the remainder of the presentation, we will focus on the net profit figures adjusted for the impairment of Yapı Kredi in order to give a more normalized view of the bank.
In order to offset the financial impact of this quarter, in addition to the actions already taken, we will be implementing other proactive and decisive remediation measures to maintain and protect the strength of our capital level. First, let's focus on the business evolution in the quarter. We saw a very strong commercial performance in the core bank. Third quarter NII is up 3.1% quarter-on-quarter. Fees are up 2.6% year-on-year. Our core bank net operating profit reached EUR 1.8 billion in the quarter, up 21.9% year-on-year. This is an outstanding performance. The nine-month 2018 adjusted core ROT reached 10.4%. It is only adjusted for the Yapı Kredi impairment and not for the higher provision for U.S. sanctions. If we had adjusted for those, our ROT will be meaningfully higher. I repeat, meaningfully higher. The core gross NPE ratio grew up to 4.3%.
Now, let's go back to the remediation action I mentioned earlier. First, we will implement additional cost reduction measures in 2018 and 2019 which, at the end of 2019, will amount to around EUR 200 million versus the original Transform 19 target. This includes further non-HR cost reduction, thanks to the optimization of back-office activities and real estate, as well as lower HR costs resulting from our faster execution of Transform 19. Second, we will dispose specific assets, such as real estate. Third, we will be reducing the BTP spread sensitivity significantly, primarily through the partial allocation of future BTP purchase from rollover investment to held to collect. Also, given the current volatility across a number of markets and to further enhance the group risk profile, we will ensure that all group legal entities become self-funded by progressively minimizing intra-group exposure.
Before we move on, let me briefly mention the EBA stress test result published last Friday. Our 2020 CET1 ratio result are 13.76% in the baseline scenario and 9.34% in the adverse scenario. Those ratios show a sharp improvement over 2016. UniCredit Group had the third highest CET1 ratio in the adverse scenario of all eurozone G-SIB, a clear confirmation of the renewed strength of the group balance sheet. Let's move to slide four.
UniCredit Group has performed very well in the first nine months of the year, thanks to strong underlying commercial dynamics and the unwavering commitment of all our teams. We report an adjusted profit of EUR 3 billion, which is 4.7% up versus the same period last year. Revenues in the quarter were up 2% year-on-year, mainly thanks to stronger net interest and fees. Third quarter 2018 costs were down 7.7% year-on-year, driven by both HR and non-HR costs.
Our third quarter 2018 cost of risk was normalizing at 60 basis points in a still supportive risk environment with one basis point impact from model change. Our adjusted ROTE for the group was 8.3% in the nine-month 2018, up 0.5 percentage point versus last year. Let's turn to slide six, and I will give you details on the positive progress of Transform 2019. As a result of the decisive action taken in Q3 and the corresponding remediation action on capital, we have updated our CET1 targets. We expect a CET1 ratio of 11.5%-12% at the end of 2018, and of 12%-12.5% at the end of 2019. The MDA buffer target for CET1 is confirmed at 200-250 basis points.
The range gives management the flexibility to adjust as needed to the macroeconomic environment, up to the upper level in good times and closer to the lower level under more adverse conditions. As communicated at our Capital Markets Day, it applies from the end of 2019 onwards. In 2019, we will initially be below the 200 basis points before remediation action and retained earnings bring the buffer back up again. Mirko Bianchi will give you more details on the CET1 ratio development later. The de-risking of our balance sheet continues. The group gross NPE ratio reached 8.3% in this quarter, almost half of what it has been when we launched Transform 2019. Group core NPE ratio stood at 4.3%, close to the EBA average. The operating model transformation is ahead of schedule, reaching 88% of the target for branch reduction and 93% for FTE reduction.
Our improved cost efficiency for 2018 and 2019 mean we will be below the EUR 11 billion and EUR 10.6 billion original 2018 and 2019 cost targets, delivering an improved reduction at the end of 2019 of around EUR 200 million. Let's turn to slide seven. Commercial dynamics for the group are very positive and sustained. Our clients are embracing our multi-channel offer and increasingly use digital solutions. We're leveraging on our partnership with Alibaba and have expanded the relationship to corporates in Italy and payments in Hungary. Our fully plugged-in CIB model continues to prove its success with leading position in IPO and debt capital markets. Our corporate centers streamlining is well on track to reach its target of reduced weight on total cost. Now, let me hand over to Mirko Bianchi, who will give you more detail on our financials. Mirko Bianchi, over to you.
Thank you, Jean-Pierre Mustier, good morning to everyone. I will now take you through UniCredit Group's third quarter and nine months financial performance. Our Group Core Adjusted net profits stand at a strong EUR 1.1 billion in the quarter and EUR 3.6 billion in the first nine months. Despite volatile market conditions, the commercial dynamics across the core bank community continued to be strong. The main divisional contributors to our strong performance this quarter were again CEE and Commercial Banking Italy. Adjusted Group Core Return on Tangible Equity was 10.4% in the first nine months. We confirm the 2019 target of above 10%. Let's turn to slide 10. We had a strong commercial performance in the core bank. Net interest was up 3.1% quarter-on-quarter and 7.7% year-on-year. Fees were resilient, up 2.6% year-on-year. In Commercial Banking Italy, fees were even stronger.
We are enjoying sustained commercial dynamics across the group and gained 484,000 gross new clients in the quarter, while writing almost EUR 78 billion in new loans in the first nine months. The execution of Transform 2019 continues to deliver tangible results quarter after quarter. Costs are down significantly, 7.1% year-on-year and 2.8% quarter-on-quarter. Loan loss provisions were down 1.4% year-on-year. The gross NPE ratio stands at 4.3%, down 85 basis points year-on-year and already below our FY 2019 target. Net operating profit in the quarter was EUR 1.8 billion, up 21.9% year-on-year. Adjusted net profit was EUR 1.1 billion, up 9% year-on-year. Let's turn to slide 11. Let's now talk about the stated figures of the group. I would like to point out three items on this page.
First, we took decisive non-recurring action in the quarter that affected our non-operating items. We impaired our participation in Yapı Kredi for EUR 846 million in the profit from investment line. This reduces the carrying value much closer to market value and greatly minimizes the risk of future impairment. We also have increased other charges and provision mainly for U.S. sanctions, as we are nearing a settlement. The impact of the settlement should be non-material, ± mid-single digit basis points on our Core Tier 1 ratio. Second, our normalized year-to-date tax rate would have been around 16%. For the FY 2018 normalized tax rate, we expect a similar level. While for FY 2019, we expect between 18% and 17%. Both numbers are not including the potential effects from ongoing DTA assessments.
Third, as we said before, we have decided to adjust our net profit for the non-recurring impairment on Yapı Kredi. As a result, our adjusted net profit for the quarter is EUR 875 million, while the stated net profit is EUR 29 million. We did not adjust for the higher charges and provision from U.S. sanctions. Let's turn to slide 12. NII was strong in the quarter, up 3.2% on a stated basis and up 2.3% when adjusted for days and foreign currency effects. The main driver of NII were the following. Average loan volumes were up 2.5% at constant FX, although not quite offsetting lower customer rates, which were down eight basis points.
Term funding costs were lower by EUR 41 million, driven by both volumes and rates. As we resume issuance of capital market bonds, this benefit should decrease. Investment portfolio and treasury contributed EUR 49 million to the quarterly increase in NII.
The higher spreads on our bond investment done in the 2Q 2018 contribute a large part of this. In the 4Q 2018, we expect that contribution to go down. Let's turn to slide 13. I will highlight three points on this slide. First, in Group Core, average loans were up by EUR 10.8 billion or 2.8% in the quarter. That is the result of the good commercial dynamics we saw in the last two quarters, which include a large transaction in factoring in the 3Q 2018. Second, the average customer loan rates were down eight basis points for the group. We saw stabilization in Commercial Banking Austria and CIB. In CEE, while customer rates fell, they remain high. In Commercial Banking Italy and Commercial Banking Germany, we continue to experience competitive pressure.
We still expect a bottoming out of customer loan rates at group level by the end of the year, as we have indicated since the third quarter 2017. Third, in CIB, there were extraordinary recoveries in shipping in the third and second quarter 2018, which are not expected to recur in the next quarter. Let's turn to slide 14. End-of-period customer loan volumes for the Group Core were up EUR 10.3 billion or 2.5% in the quarter and 6.7% year-on-year. This compares with EUR 9.6 billion for the whole year in 2017 and underlines our current strong commercial dynamics across the group. In Commercial Banking Germany, CIB and CEE, the loan growth was particularly strong. We do not expect loan growth to the same extent in the next quarter. End-of-period customer deposit volumes for Group Core were up 1.7% for the quarter and 5.5% year-on-year.
The decreases in deposit in Commercial Banking Germany and Austria are the result of our decision to extend negative rates to more corporate clients. Deposits in Commercial Banking Italy are steadily increasing, especially on the retail side. There were technically driven and extraordinary high single-digit billion deposit inflows for corporate clients in CIB that are expected to reverse in the next few months. Let's turn to slide 15. Fees in the quarter were up 2.5% year-on-year. As there is seasonality in the third quarter, let's look at the fees category separately on a year-on-year basis.
Investment fees were down 3.1% year-on-year. This decline was due to a different AUM product mix, which leads to lower upfront fees but higher management fees. It should make investment fees overall more stable and resilient in the future. AUM stock was up 4.9% year-on-year and 0.9% in the quarter, driven by positive net sales.
Financing fees were up 1% year-on-year, thanks to good fees from debt capital markets and better results from factoring and consumer protection insurance in Italy. Transactional fees were up 10% year-on-year, driven by card services and current account fees in Italy. Given the volatility in the market and the negative impact on investment fees, we revise our guidance for total fees growth fiscal year 2018 over fiscal year 2017 to a similar level as the nine months over nine months fees growth. Let's turn to slide 16. TFAs reached EUR 833.8 billion in the quarter, increasing 3.4% year-on-year. AUM in the quarter were EUR 221.9 billion, benefiting from net sales of EUR 1.5 billion. Commercial Banking Italy had positive net AUM sales in the quarter and outperformed the market in the first nine months.
AUM stock in all Commercial Banking divisions was up, both quarter-on-quarter and year-on-year, is an outstanding achievement considering the very challenging market environment in the quarter. AUCs decreased year-on-year, driven by retail bond run-offs and the market performance in Commercial Banking Italy. Let's turn to slide 17. Trading income in the quarter was down 27% versus last year, as the general market environment continues to be unfavorable. Spread widening across the board led to lower client activity. There was also a negative impact in the trading line of about EUR 30 million from the mark to market of our mandatory convertible into Bank Pekao shares. A similar amount was received in the dividend line on the shares underlying the convertible.
Going forward, we expect our trading results to be at the lower end of our previously guided EUR 350 million-EUR 400 million quarterly run rate, implying a fiscal year 2018 target of around EUR 1.4 billion. One of the biggest contributors to our dividend line is Yapı Kredi. Yapı Kredi is a very good bank and has a very good underlying performance in the quarter. Revenues and gross operating profits in euro are up, both quarter-on-quarter and year-on-year. Loan loss provisions were also up in the quarter as Yapı Kredi conservatively increased the stage two loan classification and coverage. Yapı Kredi P&L is included in our annex on page 51. Yapı Kredi's third quarter EUR 24 million contribution to our dividend line appears low. This is mainly due to the accounting treatment of FX translation at UniCredit Group level, which amplifies the recent FX moves.
Discounting this account treatment, Yapı Kredi's P&L contribution would have been in the middle double digits range. Thanks to the decisive actions taken in the quarter, we have reduced the Core Tier 1 ratio sensitivity to future FX volatility. After the impairment and the currency moves in the third Q 2018, our sensitivity has turned positive at +1 basis point net, for 10% adverse move in the Turkish lira from now on. The +1 basis point net, in fact, is composed of -2 basis points from capital and +3 basis points from risk-weighted assets. Let's turn to slide 18. Our focus on cost efficiency is yielding tangible results quarter after quarter. We have already achieved 93% of our planned FTE reduction and 88% of our scheduled branch closures. As a result, operating expenses are down 7.7% year-on-year and down 2.4% in the quarter.
We expect the usual seasonally increase in both HR and non-HR expenses in the fourth quarter after a third quarter that was seasonally low. As Jean-Pierre Mustier said earlier, we will see an improvement in our cost base of around EUR 200 million by the end of fiscal year 2019 versus the original targets. As a result, expenses for 2018 will be below EUR 11 billion, despite the fourth quarter seasonality, and for 2019 will be below EUR 10.6 billion.
Let's move to the next slide. Both HR and non-HR costs are down on a year-on-year basis and on a quarter-on-quarter basis. HR costs are down 7.6% year-on-year, and non-HR costs are down 8%. Let's turn to slide 20. Regarding group asset quality, I would like to point out three items. First, the overall group risk environment was supportive in the quarter, as demonstrated by a good underlying cost of risk of 59 basis points.
While we had write-backs in Commercial Banking Germany and a low cost of risk in CEE, there was an increase in Commercial Banking Italy due to single names. For the fiscal year 2018, cost of risk should be around 60 basis points. Second, the impact from model changes in the first nine months of this year was limited to two basis points. Even with the remaining impact on models in the fourth quarter 2018, we expect the model impact for fiscal year 2018 to be in the mid-single-digit range. The reasons for this decrease from the initial guidance of 15 basis points is the first-time adoption impact of IFRS 9. Consequently, it is not a time shift effect, but a real reduction. Underlying cost of risk is confirmed at 53 basis points for fiscal year 2018.
Third, we confirm the cost of risk target of 55 basis points for fiscal year 2019, four basis points of which are coming from models. Our overall asset quality is steadily improving. The coverage ratio was stable in the quarter at 6.9%, but up 4.3 percentage points year-on-year. The Group's gross NPE ratio dropped to 8.3% in the third quarter 2018, down 2.5 percentage points year-on-year. This is a great improvement considering we started Transform 2019 at a close 16%. Let's turn to slide 22. In Commercial Banking Italy, NII was down 1.4% quarter-on-quarter, while average volumes were up 3.7%. Competitive pressures remain high, leading to a decline in customer loan rates of 16 basis points. Adjusted for some one-offs, customer rates were down 12 basis points.
Repricing in the Italian loan market is starting, and we still expect a bottoming out of customer loan rates in the fourth quarter 2018. The new business has a low expected loss, well below the expected loss of the stock. Fees were up 3.7% year-on-year, mostly thanks to strong transactional fees from current accounts and card services. Productivity went up, with fees per FTE increasing almost 15% year-on-year. AUM net sales were positive, and AUM stock is up quarter-on-quarter and year-on-year above the market performance year to date. We were able to attract 93,000 gross new clients, despite the ongoing optimization of the branch network. Cost of risk in the quarter was 89 basis points, up 26 basis points due to single names. The impact from models on cost of risk in the fourth quarter 2018 should be around 30 basis points.
Normalized for the sale of the pawn business, the return on allocated capital for the first nine months was 12.3%. Let's turn to slide 23. In Commercial Banking Germany, NII was stable quarter-on-quarter. Customer rates remain under pressure but are compensated by higher loan volumes. Fees were flat year-on-year, as higher transactional fees from increased client activity offset lower fees from AUCs. The drop in revenue year-on-year is mainly due to trading, which included a EUR 39 million capital gain in the third quarter 2017. 20,000 gross new clients were added in the quarter, up 50% over last year. This was supported by the end-to-end redesign of account opening process, which was exported from Italy to Germany. It reduces the time for opening an account significantly, lowers the cost, and facilitates new client acquisition. Cost of risk was impacted by non-recurring write-backs.
The net profit was affected by higher other charges and provisions that I mentioned earlier. These were mainly booked in Commercial Banking Germany and CIB. Normalized for the sale of the participation in the second quarter 2018, return on allocated capital was 5% for the nine months 2018. If we also adjusted for the higher charges and provision, return on allocated capital would be above the fiscal year 2019 target of 9.1%, which we confirm. Let's turn to slide 24. In Commercial Banking Austria, NII was up 6.9% versus last quarter, thanks to higher non-recurring prepayment penalties from corporates. Customer loan rates and average volumes were stable. We gained 14,000 gross new clients in the quarter, up 5.2% year-on-year. The client churn rate is dropping further after the conclusion of the branch network restructuring. Costs were down 8% year-on-year.
After net write-backs in the first half, thanks to a healthy loan book in both retail and corporate, cost of risk began to normalize in the quarter and should continue to do so. Return on allocated capital was 16.6% for the first nine months 2018. Considering one-offs in NII and cost and normalizing cost of risk, the recurring fiscal year 2018 return on allocated capital is around 13%, in line with the 2019 target and above cost of capital. Let's turn to slide 25. CEE continues to be our growth engine, with an inflow of 334,000 gross new clients in the quarter. The division turned in a very good performance, with NII up 2.5% in the quarter at constant FX, driven by increased loan volumes. Yapı Kredi dividends were affected by the FX translation accounting treatment mentioned earlier, while the Yapı Kredi impairment was done in Group Corporate Centre.
Fees were up 3% on last year at current FX, excluding the change in the accounting treatment of fees accruals in the Czech Republic and Romania, fees would have been up by around 6%. Our cost-income ratio remained best in class, only 36.6 percentage points in the first nine months. The cost of risk is at a low 58 basis points, but should increase in the next quarter. De-risking continues at a vigorous pace, and the division gross NPE ratio fell another 229 basis points year-on-year to stand at 6.5%. Return on allocated capital for the first nine months was 15.9%. We expect return on allocated capital for the full year to normalize at closer to 14%, still above the fiscal year 2019 target. Let's now turn to slide 26. CIB had a good quarter. Net operating profit was up 5.8% year-on-year.
NII was up 5.3% in the quarter, driven by a rebound in volumes and stable rates. Even adjusted for the extraordinary interest from shipping, it was up almost 3% and shows the sustainability of NII. Fees were up 11.4% year-on-year, thanks to strong structured finance and GTB businesses. Our leading franchise in loans and bonds was confirmed, with CIB ranking number one in EMEA, all bonds in euro by number of transactions, which demonstrates the success of our fully plugged-in business model. Costs were down 6.5% year-on-year and led to best-in-class cost-income ratio at 40% in the first nine months. Loan-loss provisions started to normalize in the quarter and will continue to do so in the fourth quarter 2018. Normalized return on allocated capital was 8.3% in the first nine months.
If we take out the higher provision for U.S. sanctions, return on allocated capital would be well in the double digits. Let's turn to slide 27. As most of you will have listened to the Fineco results on the 6th of November, I will limit what I say on this slide. We are very satisfied with the overall performance of Fineco. Fineco saw a strong performance in AUM volumes and management fees. Let's turn to slide 28. In the Group Corporate Centre, revenues improved significantly, mainly driven by lower term funding costs, thanks to both lower volumes and spreads. Costs are down significantly, mainly thanks to fewer FTEs. As a result, the ratio of the Group Corporate Centre cost to total cost is down to 3.4% in the first nine months. The recasted fiscal year 2019 target of 3.8% is confirmed.
The division made a net loss of EUR 882 million this quarter, negatively affected by the Yapı Kredi impairment. Let's turn to slide 29. The accelerated 2021 non-core rundown is progressing according to plan, and our gross NPE targets are confirmed. Performing loans continue to decrease as they are transferred back to the core bank. Gross NPEs dropped by EUR 1.1 billion in the quarter, and our end fiscal year 2018 EUR 19 billion gross NPE target is also confirmed. Let's turn to slide 31. We continue to de-risk the balance sheet to further lower our cost of capital. Group costs gross NPE decreased by EUR 2.6 billion year-on-year and EUR 0.7 billion quarter-on-quarter. Our core gross NPE ratio dropped to 4.3% in the third quarter, close to the EBA average. Let's turn to slide 32. Overall, the risk environment remains supportive.
The default rate worsened year-on-year due to single names in Commercial Banking Italy. Let's turn to slide 33. Gross NPEs in Commercial Banking Italy were EUR 9.2 billion, which is a significant reduction in absolute term versus last quarter and was driven by disposals. The gross NPE ratio was down to 6.2%, driven both by gross NPE reduction and higher loan volumes. The 2019 gross NPE ratio target is confirmed at 5.3%. As we have said before, please keep in mind that the reduction of NPEs will not always be linear. The third quarter 2018 coverage ratio was broadly stable at 55%. Let's turn to slide 34. We continue to see the overall risk environment in Italy as supportive, also evidenced by higher recoveries year-on-year. The default rate was stable at 2.1% in the quarter.
Let's turn to slide 35. The execution of our accelerated rundown of non-core is progressing smoothly. Gross loans in non-core were down EUR 9.6 billion year-on-year and EUR 1.8 billion quarter-on-quarter. This reduction was done through a combination of disposal, write-offs, and recoveries. Performing exposures in non-core are down EUR 1.8 billion year-on-year and set only at EUR 1.7 billion. As we stated before, all performing exposure in non-core will be gone by the end of 2018, and the division will become a closed NP book.
Let's turn to slide 36. Non-core loan volumes kept going down and are on track to meet the 2021 accelerated rundown targets. Net NPE were down EUR 4.8 billion year-on-year to EUR 7.8 billion. Gross NPE decreased by EUR 7.8 billion year-on-year, reaching EUR 20.6 billion. We are confident to reach our EUR 19 billion gross NPE end-of-the-year target. NPE coverage improved to 64.3% despite disposal activity. Let's turn to slide 38.
The group's fully loaded Core Tier 1 ratio is 12.11%, down 39 basis points quarter-on-quarter. The key drivers were, apart from the low net profit impacted by Yapı Kredi and U.S. sanctions, the fair value through OCI and FX reserves. Out of the 11 basis points impact on the fair value to OCI reserve, 9 basis points came from the Italian sovereign bond portfolio. On the FX side, the depreciation of the Turkish lira was the main reason, with -14 basis points gross. As the risk-weighted asset from Yapı Kredi also went down, the net impact on our Core Tier 1 ratio was only -5 basis points in the quarter. Regulation models and procyclicality had an 8 basis points negative impact. As we said earlier, we expect our Core Tier 1 ratio at year-end 2018 to be between 11.5% and 12%.
This will be the result of BTP spread movements since the end of the quarter, the increased credit risk-weighted asset from model recalibration and EBA guidelines, as well as higher operating risk-weighted asset. We updated our FY 2019 Core Tier 1 ratio to 12%-12.5%, which corresponds to an MDA buffer target of 200-250 basis points. As we have communicated at our Capital Markets Day, this FY 2019 target is on a fully weighted losses and valid from the end of 2019 and beyond. During the year 2019, we will be below that level. We will reach the lowest point of our Core Tier 1 ratio in the first Q 2019, slightly below the end of FY 2018 due to the EBA guidelines phasing in.
During the course of FY 2019, we will steadily increase the Core Tier 1 ratio through retained earnings and our other remediation actions. Let's turn to slide 39. Risk-weighted assets increased by EUR 1.9 billion to EUR 362.6 billion. The biggest drivers were increased credit risk-weighted asset from higher loan volumes and the regulation models and procyclicality. The risk-weighted asset contribution from Yapı Kredi went down due to the FX development. Jean-Pierre Mustier, back to you.
Thank you very much, Mirko Bianchi. I said in the beginning, we are ahead of schedule on the execution of Transform 2019. Basically, we took advantage of an extremely strong operating performance to take decisive actions on Turkey and the U.S. sanctions to put them behind us. We have as well announced a number of remediation measures. As such, we confirm the EUR 4.7 billion 2019 net profit as lower revenues will be compensated by lower costs and an improvement in the normalized tax rate to between 17% and 18%. We also confirm our 2019 ROTE targets. The composition of our net income is different because of the challenging macro environment, we are updating some of our planned targets. Our 2018 and 2019 revenue targets are now EUR 19.7 billion and EUR 19.8 billion respectively, based on expected lower trading and dividends.
Regarding the latter, as mentioned earlier, we have taken a very conservative view of Turkey. The combined commercial revenues from NII and fees is confirmed around EUR 18.1 billion. On the cost side, as already mentioned, we'll be delivering an improved reduction at the end of 2019 of around EUR 200 million versus the original cost target. As a result, we slightly revised our 2019 cost to income ratio target to between 52% and 53%. Our 2018 stated net profit will be at least EUR 2.8 billion, and attributed net profit will be at least EUR 3.6 billion. Our asset quality targets, which we have already improved twice in the past year, are all confirmed. Regarding capital, as explained earlier, we now target a CT1 ratio of 11.5%-12% for the fourth quarter 2018 at today's BTP spread and a range of 12%-12.5% at the end of 2019.
This corresponds to an MDA buffer of 200-250 basis points as of the year 2019. Let's now go to page 42. Before we move to the Q&A, let me briefly recap our first nine months 2018. We have seen an ongoing strong core bank performance with group core net operating profit of EUR 6 billion and an adjusted group core ROTE of 10.4%. If we adjusted for the higher charge and provision U.S. sanctions, it would be meaningfully higher. Transform 2019 continues to be ahead of schedule and delivers tangible results quarter after quarter. Group costs are down 7.7% on a year-on-year and will be below EUR 11 billion in 2018. The accelerated non-core rundown is fully on track, now down to EUR 20.6 billion of gross NPE. We have taken decisive actions on Yapı Kredi and provision for the U.S. sanctions.
Any potential impact from the U.S. settlement is expected to be non-material, plus or minus mid-single-digit basis points. We expect a full year 2018 adjusted net profit of more than EUR 3.6 billion and a CET1 ratio between 11.5% and 12%. We will continue to focus fully on Transform 2019 and work hard as one team to achieve our objective of making one bank, one UniCredit Group, a true pan-European winner. Now, Gianni Franco Papa, Mirko Bianchi, and I are ready to take your questions. If you could please be so kind and limit your questions to two each. Many thanks. Operator, over to you.
Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. The first question comes from Paola Sabbione of Deutsche Bank. Please go ahead, madam.
Yes, good morning. Two questions then. First is on your funding plan. If you could give us some update on that, given the current context, in particular in Italy. The second, not sure if you can comment, but given the current share price, could you, as management team, consider buying UniCredit Group shares? Thanks.
Thank you very much. On the funding side, I will let Mirko Bianchi comment on buying shares. As we have now been coming out with the impairment on Yapı Kredi and the U.S. sanction, I will be buying shares, and we will announce that tonight for the equivalent of my gross salary. I will buy, as I did when I joined the group, a mix between shares and AT1. I think it is important on my side, now that I can do that from a compliance point of view, to show a very strong confidence, not only in UniCredit Group, but also in Italy and the country. Mirko Bianchi, for the funding plan.
Yes, on the funding plan side, we are basically 50% done for the year. If I look at the risk-weighted asset development of the bank, we actually need a smaller amount of the funding plan that we announced at the Capital Markets Day. That is one point. You are going to see us continuing to do secured funding as a group, including a Pfandbrief, a supranational funding, private placement, and wholesale funding that is TLAC-related. Now, in terms of the TLAC funding plan, we are probably going to access the market now that we have behind ourselves the Yapı Kredi impairment and also the U.S. sanctions. We are free also to go to the market. Because of this, you are going to see probably EUR 3 billion- EUR 5 billion in TLAC-related funding by the end of the first quarter next year.
Thank you.
Next question, please.
The next question comes from Mr. Ignacio Cerezo of UBS. Please go ahead, sir.
Yeah, hi, good morning. Couple questions from me. If you can sort of clarify the different impacts you're expecting, basically, in terms of pro-cyclicality regulation, EBA guidelines in the fourth quarter. If I have the EUR 700 million implied profit for the fourth quarter, retained earnings will be around 15 basis points. You're still going for a maximum reduction of core capital in the region of 60-70 basis points. We just wanted to clarify whether you are shifting back some of the 2019 impact back into 2018. The second question is on the treasury Net Interest Income, if you can comment how you expect that part of Net Interest Income to evolve in coming quarters. Thank you.
Thank you very much. I will let Mirko Bianchi comment on the NII side. I will comment quickly on the capital impact on regulatory headwinds. As we mentioned, we have taken a combined regulatory impact up to the third quarter 2018 of 19 basis points of CET1 ratio, which is split and mostly from the model side, basically, including eight basis points for the third quarter.
For the fourth quarter, we should have an additional 24 basis points of regulatory headwind, 15 basis points coming from the model side and nine basis points coming from EBA guidelines, which means that the total impact from model and EBA guidelines for 2018 will be 44 basis points, split 34 basis points for model and 10 basis points for EBA guidelines. As we communicated during the Capital Markets Day 2017, we will have -- and that's taking into account the time translation of some of the impact, which was expected for 2018. We will have for 2019, roughly 80 basis points, exactly 79 basis points of total regulatory impact, 34 basis points for model, and 45 basis points for EBA guidelines. We should have 48 basis points of the 79 basis points coming on the first quarter, 14 basis points for model, and 34 for EBA guidelines.
If you want further detail, you can speak to our IR team, that gives you the bulk and the overview of the value regulatory impact. As far as NII, I'll let Mirko Bianchi comment.
Yes. In terms of NII, I think you were looking for NII going forwards, we see that the fourth quarter NII probably will be in line with the third quarter NII, that's the guidance that we can give. For further down the road, fiscal year 2019, we have announced that the NII plus fees are confirmed at around EUR 18.1 billion. That's the second guideline that I can give you that includes the NII development.
I was asking specifically about the treasury component, the financial component within it, interesting, and has been a big plus in the quarter.
Yes. If you look investment portfolios and markets and treasury, it's plus EUR 49 million, EUR 32 million are coming from the investment portfolio. Of course, going forwards, you're going to see more flattening of the impact on the NII. That's what you should expect.
I think we can say from the investment portfolio that we should expect a higher NII contribution, as the team has been working very well in terms of turning the portfolio. We keep the duration short, actually shorter than before at 3.1 years, while the income from the portfolio has been increasing meaningfully. Now we are 50% above what it was at the beginning of the year. Very good work done by the treasury team, which should have a lasting impact on the NII side. On the projection for 2019, I just want to state again, the EUR 18.1 billion of NII plus fees are confirmed. The operating performance of the group is very good. You saw that on the third quarter.
We confirm going forward the operating performance NII plus fees, we have adjusted our revenues based on a very conservative view of Yapı Kredi contribution and a normalized contribution of the trading to EUR 1.4 billion. The operating performance of the group is doing very well.
Next question, please.
The next question comes from Mr. Alberto Cordara of Bank of America Merrill Lynch . Please go ahead, sir.
Thank you. I have a couple of questions. The first one is related to your NPE exposures, and in particular related to your bad loans. You have EUR 23 billion of bad loans, with a coverage of EUR 16.8 billion. The coverage ratio is 72.8%, which is extremely high. I want to ask you an additional question, if you can give us also the number for the write-offs, because including the write-offs, the coverage would be in a new standard. You have NPAs that are really at market value or over market value. The second question relates to the confirmed target for next year, EUR 4.7 billion. You trim the revenue a bit, but you give us better guidance on cost and a significant better guidance on tax rate, than what you have said before.
Just an additional point, I think in your initial speech, you mentioned also some real estate disposals next year. I just wanted to make sure, is this included in the EUR 4.7 or not? If yes, what would be potentially this capital gain? Thank you.
Thank you. I will let TJ Lim comment on the write-off impact on the EUR 4.7 billion confirmation of our net income. As I said, we have an adjustment of the top line, which is coming from a conservative view on Yapı Kredi, and an adjustment of the trading expectation to the lower range of the expectation for trading we communicated at the Capital Markets Day at EUR 1.4 billion. The underlying commercial performance, as I said, is very good, and we claw back this lower top-line performance thanks to cost saving of EUR 200 million and the tax rate between 17% and 18%. You are absolutely right to say that we should have a potential upside on our net income, as we did not take into account the capital gain, which should come with our disposal of some related assets. You know that we are always extremely conservative.
There we have, let's say, a buffer, if ever the environment was a little bit more negative than what we are expecting. I would say we probably have also an upside on the Yapı Kredi side as we are taking a very conservative view. All in all, that's why we are confident that we can deliver on the EUR 4.7 billion net income. TJ Lim, for the write-off.
Based on the Q3, as you said, the EUR 23 billion bad exposure, if we consider EUR 3.9 billion of the group write-off, the coverage would move from 72.8% to 76.7%, so almost a 4% improvement if we consider the write-off.
Great. Thank you very much [inaudible] . Thank you.
Next question, please.
The next question is from Mr. Andrea Filtri of Mediobanca. Please go ahead, sir.
Yes, good morning. What businesses could you dispose of, and what effects do you want to obtain from it? On liquidity, are you seeing any signs of liquidity tensions in Italy, either from other banks or from clients' behavior? Do you consider a third TLTRO plan likely? Finally, just a very quick one, curiosity here. Do the changes in targets have any implications for the LTIP plan? Thank you.
Thank you very much. On the TLTRO, I will let Mirko Bianchi comment. On the last question, we'll take it, and I will let Gianni Franco Papa comment on the first part potentially. On the change of target, do not impact the LTIP plan, basically. The LTIP plan, just to remind everybody, that's the long-term incentive plan for the management team, which includes around 150 people. We have roughly, within the managers, 100% of the LTIP allocation for Gianni Franco Papa and myself, so that's all our remuneration. For the executive management committee, 50%, and of course, for other managers in the management group, 30%. The three core parameters are the ROTE of more than 9%, which we confirm. The cost income of at or below 52% would be marginally higher than that, and we have a progressive reduction impact on the LTIP on that.
The disposal and the net NPE level of EUR 20.2 billion and will be meaningfully lower than that. I will let Gianni Franco Papa comment on our commitments to commercial banking activities. I can say that on the disposal of assets, we are looking at assets that are mostly real estate, as we mentioned. We are absolutely comfortable, and I'm not going to do anything on our commercial banking activities. I'll let Gianni Franco Papa comment on that.
Thank you very much, Jean-Pierre Mustier. As Jean-Pierre Mustier mentioned, we have the target that we gave, the EUR 4.7 billion financial year for net profit for next year, is without including the positive contribution of real estate assets. It's coming from pure commercial activity. We are very committed to all the countries where we are having activities, so we're talking about the division and the countries. For the different segments of the market, we are growing very nicely in retail business in all the countries, so in Italy, in Germany, in Austria, and in Central Eastern Europe. As presented by Jean-Pierre Mustier and Mirko Bianchi, we have a very positive contribution coming from CIB, where we are one of the major players in a particular segment part of the market.
We don't see much tension in terms of liquidity in the sense that even since the beginning of the Italian bond spread widening, commercial deposit base in Italy, in Germany, and in Austria are either stable or increasing, and this is true, in particular, as far as retail and corporate customers are concerned. We confirm our strong commitment to be a pan-European commercial bank with a full plugin CIB.
Yes. On the TLTRO topic, first of all, we have a pretty much evenly spread redemption amounts, basically in two different periods. We are going to manage smoothly the TLTRO redemptions and ensure that we have a strong LCR and a stable funding ratio. Our base case scenario includes basically our execution of our funding plan, the usage of short-term paper, and also our deposit commercial growth that we have in the plan. Of course, if there is potential TLTRO from the ECB in order to smooth these structural liquidity maturities, of course, we would also use that in case. Our base case scenario is based on normal market access and development of our liquidity position.
Next question, please.
The next question is from Jean-Francois Neuez of Goldman Sachs. Please go ahead, sir.
Hi there. I would like to ask a first question on the change in targets. I just wanted to understand a little bit better the drivers of the change in the tax rate guidance and its potential sustainability or not after 2019. Also, the geographic split, plusses and minuses of the revenue change, if that was possible. Secondly, I wanted to ask about the capital requirements. You said the new target of 12% to 12.5% is at least 200% above MDA. I guess that means an assumption for an unchanged capital requirement going forward. In light of the stress test results, I just wanted to know whether you would be able to share an opinion on the direction of the spread from here, or if it has any impact at all. Thanks a lot.
I will comment on the capital requirements and let Mirko Bianchi give you more detail on the tax rate. We might not go too much into details and feel free afterwards to call on your team. It is important for us to maintain a high buffer in terms of MDA requirements. I want to have a buffer which is high, but which gives us as well the ability to manage, if I may say, our own countercyclical buffer, meaning that in good time, we want to be at around 250 basis point buffer. In a more adverse environment, we can go down to 200 basis points, which is what we planned, and we said we should look at the MDA level at the end of 2019 at 11.5% CET1 in potentially first quarter 2019, we will be at only 150 basis points.
We think it is important, specifically, until we have not run off completely the non-core, we want to maintain a high buffer to MDA. We had already a Pillar 2 requirement reduction this year, which was applying for 2017. I think in the current environment, it is probably too optimistic to expect that the ECB will lower again our Pillar 2 requirements for 2018 to apply from 2019. Based on the evolution of our ratios, knowing that with the last actions we took with Turkey and U.S. sanctions, we should have put behind us all negative impact. We are expecting, and we will push very hard next year, to have a further reduction of our Pillar 2 requirements.
Once again, we are planning to have a high capital level, and we are focusing on the MDA requirement, which is, we see the MDA buffer is the right thing to look at between 200- 250, which is why we are taking a managerial action to reach back again to 200 or above at the end of 2019.
Yes. On tax rate, first of all, on the third quarter, the impact on the stated tax rate that is high at 32% is because of the Yapı Kredi impairment is not tax-deductible, that impacted the third quarter. Therefore, the normalized is more in line with the 10% rate. Now, if we look at the nine months horizon, also here, the stated is around 18.3%. If we normalize for the various disposals and not deductibility of some items in Germany, you land at a 16.3% group-normalized tax rate. That is also the tax rate that we think we are going to maintain for the full year 2019. For 2019, we are guiding between 17% and 18%, and that will depend on the various, let's say, legal jurisdictions in terms of the various tax rates impacting a slightly higher tax rate as for 2018.
We could say as well that these numbers do not include the potential effect from ongoing DTA assessment, which could come on top and show a further improvement.
On the geographic changes in the revenue targets, if possible.
I think we have, in terms of the revenue target, that we said that Italy will keep performing very well. We are targeting ROAC, which is between 12%-13%, which was what we communicated at Capital Markets Day. Germany, after the impact we had on the U.S. sanction, should go back to the 9% or above ROAC. Austria had a ROAC which was a bit too high at this stage because we had a provision one-time exceptional, we go back to the Capital Markets Day target of around 13% and slightly above 13%. CIB, which is for part booked in Germany, for part booked in Italy, will be at around 12%, this is what we communicated at Capital Markets Day, CEE will be roughly around the target we communicated as well above 13%.
If you look at the ROAC, which should give you a good geographic breakdown of the revenues, we are going to target the normalized view of the Capital Market Day. As we communicated, to find the true normalized profitability for the nine months to date, you have to take into account not only the impact of Yapı Kredi impairment on one side, but also the impact on the U.S. sanction, which is split between Commercial Banking Germany and CIB. If you were to take out the impact of the U.S. sanctions, and remind you that we as well to provision the second quarter for sanctions, part of that was for the U.S. side, you can see that the normalized profitability for Germany would actually be very good, and CIB, as we said, would be in the mid-teen, so a very good profitability as well.
To cut a long story short, we took advantage of an extremely strong operating performance to put things behind us and to have a clean 2019. We have, as we said, a little bit of potential buffer for the projection of Turkey evolution, the potential capital gain of the disposal of real estate, and potentially a good surprise on the DTA side.
Thanks a lot. Next question, please.
The next question is from Adrian Cighi of RBC. Please go ahead, sir.
Hi there. Thank you very much for taking my questions. I have two follow-up questions on net interest income. You're planning to reduce the BTP sensitivity by 35% by end of next year. Will you achieve this by reducing the amount of BTPs or further hedging? If so, what are the implications you have on either the NII outlook or NII sensitivity? Then, on Italian NII specifically, your quarter-to-quarter move in asset yields appear quite high in a flat EURIBOR environment. Can you give us a little bit more insight into how much of this is driven by mix, and whether there are any other drivers that are at play? You're growing specifically in Italy quite a bit higher than the market, and one could look at this as sort of chasing volumes at potentially discounted prices.
Is this a fair way to look at the strategy, or is there a different explanation? Thank you.
I just comment briefly on the BTP side, then I'll let Mirko Bianchi comment on the NII. On the BTP side, as we said, we have roughly EUR 12 billion of expiries of BTP of redemption next year. We will reinvest a part of this redemption directly into the held to collect. We cannot reclassify the portfolio, it is not allowed from an accounting point of view, we work with the flow. If you look at our current BTP portfolio, we have a BTP portfolio when you look at the available-for-sale portfolio, which is on the third quarter marginally lower than what we had on the second quarter, but which is meaningfully lower than what we had at the end of last year. If I may say, CT1, a sensitive part of the portfolio is lower. That's what we are going to keep doing.
We have EUR 44 billion, more or less, of BTP at fair value. We had EUR 50 billion at the end of last year of BTP at fair value. EUR 50 billion are going down to EUR 44, but we are increasing the H2 collect. We are at EUR 8 billion of H2 collect at the end of the quarter versus EUR 3.3 billion at the end of last year. You can see already that we have engineered the shift. We will keep doing that, targeting more or less an amount of BTP which should be equivalent. We might temporarily go slightly higher to take benefit of market environment and adjust afterwards, that's up to our treasury team to manage that. The move towards H2 collect allows us to reduce by the end of next year the sensitivity of the available-for-sale by 35%.
The sensitivity of the available-for-sale right now is 2.5 basis points for 10 basis points move of the BTP spread post-tax, and 3.5 basis points for 10 basis points move pre-tax. We will be at 35% lower than these figures at the end of next year. The duration, as I said, which I think is an extremely important component of the evolution of the sensitivity and our ability to be mobile on the portfolio, has been reduced at the end of the quarter from 3.3 years at the end of Q2 to 3.1 years. Reduction of the duration or the yield on the portfolio has increased, as we mentioned, versus the yield we had last year by roughly 50%. That's it.
Maybe a quick comment before Mirko Bianchi comments on the NII side is, you have seen that we have a very robust loan growth in most of our activities in most of our countries. This is a testimony of the very good performance of our commercial activities. We are up 6.7% on a year-on-year basis on the core bank, 2.5% on a quarter-to-quarter basis. We increased in Italy 5.5%, for instance, on a year-on-year basis and 1.5% on a quarter-to-quarter basis. Gianni Franco Papa and I are very focused on the quality of new origination. Gianni Franco Papa looks at it, I would say, real time, and we review together the quality of origination on a monthly and quarterly basis.
Just to give you some figures, in the expected loss on the new business for the group is for the nine months to date, 34 basis points versus a portfolio which is at 38 basis points. For Italy, where we increase by 5.5% on a [normal-to-normal] basis, we have an expected loss on new business of 35 basis points versus an expected loss on the performing stock of 53 basis points. You can see that the new business which comes into the portfolio improves the risk profile of the group, and we look together with Gianni Franco Papa on a very detailed basis, as we already mentioned, at the expected loss origination by bucket and focus on the lower quality bucket to make sure that we limit that.
This is why we can drive the new origination towards a very high-quality client, and we can show an improvement on the risk profile of the portfolio. A long answer to a short question, and I let now Mirko Bianchi comment on your NII question.
Yes. One question was the NII impact in terms of the sensitivity change, if this impacts our NII production going forward. It does not. It doesn't have a negative impact on our NII. Second, basically, as Jean-Pierre Mustier responded, meaning it's not a volume chase. We are getting back to our natural market share in Italy, and the type of business that we're doing is nicely spread over the corporate and the retail business. Here, the NII development is really more driven from client rates, in which we continuously see pressure from client rates, but if we look at the trend on a monthly basis, we start seeing a slow reduction of that. That's why we are still guiding for stabilization of client rates going forward.
Thank you very much. Very helpful.
Next question, please.
The next question is from Mr. Hugo Cruz of KBW. Please go ahead, sir.
Hi, thank you. Just wanted to ask about the intergroup funding exposure to Turkey, if you could give us an update.
Of course. We mentioned, and I think it is important in the introduction as some of our remediation action, one of them will be that we want each legal entity to become self-funded by progressively minimizing intragroup exposure. This applies to all our subsidiaries and to the group, and specifically towards Yapı Kredi, there are a certain number of upcoming expiries which are expecting to have our third quarter 2018 intragroup exposure within the next 24 months. Yapı Kredi is a listed company, so I will just mention the figure they gave on intragroup exposure of EUR 2.6 billion, and we are saying that within 24 months or within two years, we should have this exposure basically be down to EUR 1.3 billion. Next question, please.
The next question is from Delphine Lee of JP Morgan. Please go ahead, madam.
Yes, thank you for the presentation. Just two questions. First of all, on the litigation, just wondering if you could give us a little bit more color in terms of what stage of the discussions you are with the U.S. authorities and just to have an idea of the size of the outstanding for the provisions that you have allocated to U.S. sanctions. Also related to litigation, I've seen you've taken maybe EUR 150 million or EUR 200 million in Germany. Just wondering if you could also give us a bit maybe of an update of the litigation issues or Cum-Ex. Anything that you can provide in terms of color would be quite helpful to understand if there's anything more coming in the next two quarters. My second question is just briefly on capital for your target of 12%-12.5% at the end of 2019. This includes some disposals.
You mentioned real estate disposals, I just wonder sort of the magnitude of the contribution in terms of capital benefit to the ratio, if you could provide a little bit more on the assumptions you've made. Thank you very much.
Right. As you can understand, we are still discussing the U.S. authorities, so we cannot give any specific detail about the size of the provisions or the stage where we are. The only thing we commented about was first to say that we expect to have a resolution of this discussion by the first quarter of next year. We are not the master of the time. It's up to the U.S. authorities, but based on our discussion, we can expect that to be resolved. We said, I think it's important that we have taken assumptions, any additional impact on CET1 based on the final resolution can bring a plus or minus a single-digit basis point impact on CET1. I'm saying plus or minus, which means that there could be write-back, or there could be very marginal additional provision.
It's very difficult to estimate what should be the final figures, but we are confident that we are well-covered basically. As far as the Cum-Ex transaction, HVB has been settling with the German authorities the Cum-Ex issues, and you can find a detailed statement on the subject on the first half 2018 HVB financial report, for the specialist, it's on page 42. What we can say is that all criminal proceedings against HVB, which are relating to the claim for withholding tax credit, have been terminated. That's what we can say, I think that's behind us. On the capital target of 12-12.5 basis points for 2019, some of the remediation action include the disposal of some real estate assets, which we will sell in the course of next year. We don't give a precise indication on that because we are still negotiating.
It is not small, basically, but we'd rather wait for the transaction to close to communicate to the market, as we don't want as well to put ourselves in a weaker position with the various entities we negotiate with. We are confident we can deliver the 12%-12.5% target.
Thanks, Jean-Pierre Mustier.
Next question.
The next question is from Mr. Andrea Vercellone of Exane. Please go ahead, sir.
Good morning. Just one question from me. I like to have a little bit more detail on tax. I appreciate it's boring, but the drop in the projected tax rate from, I believe, somewhere around 22, 23 to somewhere around 17, 18 for next year is quite big in euro million terms. Number one, I like a little bit more color on how I can square this. You said there is no positive benefit from a reassessment of DTAs in that number. At the same time, if we look geographically, you have 33% tax rate in Italy, 31% and a bit in Germany, 25% in Austria. CEE is lower, somewhere 13%, 14%. But how can you have an average tax rate 17% or 18%? What am I missing? The ACE legislation in Italy is probably also being scrapped, so that's another negative.
I'm surely missing something. I'd like to see, also to know, beyond 2019, is this a number which is sustainable or not? Thank you.
I will let Mirko Bianchi comment on the tax rate to give you more detail. I think it would probably be more appropriate after the comment of Mirko Bianchi that you speak directly to the IR team or to Mirko Bianchi offline, as he might go a bit in detail. Just to be clear, if you look at our current tax rate for the year, we mentioned it will be between 16% and 17%, 16.3%, I think. That's clearly what we are targeted for 2019 is not very different from what we will have for 2018, even if there are some reason to have a 16% tax rate for 2018.
I confirm that there is no DTA impact on the tax rate, and that the tax rate, which was communicated at Capital Markets Day, was probably based on net income assumptions, which were probably conservative as far the tax rate is concerned. Let Mirko Bianchi comment in more detail about the assumptions.
Yes. First of all, the sustainability of this level of tax rate beyond 2019 is a yes. This is sustainable also going forward, beyond 2019. I would say that there are legal entities like Italy and Austria that are well below the nominal tax rate, and that changes your mix when you start comparing one tax legal entity from the other one. As I said, let's go back with a specific call because it's very technical, because every legal entity has its own logics behind it. Overall, what we are telling to you, we are guiding probably pretty well for fiscal year 2018 and 2019. We're very comfortable with what we are telling you in terms of 17%-18% going forward.
Okay. Thank you.
Ex DTAs, of course.
Next question, please.
The next question is from Christian Carrese of Intermonte. Please go ahead, sir.
Yes. Good morning. Could you share with us your thoughts on business confidence in Italy, because we saw some negative elements, GDP equal to zero, PMI down. According to your guidance, 2018 seems that you are not expecting any slowdown in Italy, it's just a matter of trading and specific for Turkey. What is the trend that you are seeing in terms of business confidence entrepreneur in the last couple of months, and what do you expect to be the loans growth in 2019? The second question is on dividend. If you can remind us your dividend policy and remind us that 2018 net profit will be lower than expected. Thank you.
Thank you. I take the dividend question, and will hand over to Gianni Franco Papa on the Italian business and the reaction of our clients. On the dividend side, we confirm our payout ratio of 20% of net income for 2018, so dividend to be paid on 2019, and 30% of net income of dividend for 2019 to be paid in 2020. No change in the dividend policy. We as well said that, based on the capital level and ability to maintain the MDA buffer, we will increase the dividend payout to 50% as soon as we can afterwards. On business confidence and client dynamic in Italy, Gianni Franco Papa, over to you.
Thank you, Jean-Pierre Mustier. Well, the business is going very nicely. As mentioned before, we had a very nice growth in the third quarter, and also year-on-year in terms of new production of loans. This both in retail and corporate, not to mention also the business for the CIB customers that are part of the CIB Italian business. We are growing the number also of customers, so not only market share in segments such as, for instance, mortgage business, but also if you look at corporate business in Italy, we've been growing market share in Italy overall. Also in CIB, thanks to the very strong commercial dynamic of our colleagues, all the teams, and the fact that also in terms of structural business, we are seen by our customers as the bank that can really deliver what they need.
In as much as 2019 is concerned, which was also your question, we believe that we'll keep on growing. We see our positive positioning and growing position in terms of customers acquisition, both in as much as retail and corporate business is concerned. We are very confident that we will be able to keep on assisting our customers. As mentioned by Jean-Pierre Mustier also at the beginning, we are assisting the Italian real economy in developing the business. On top of that, thanks to the network of banks and the fact that we are a pan-European bank, we are able to assist our customers also in as much as their internationalization drive we have. In fact, we see more and more, for instance, corporate customers becoming very active in terms of export activity, but also setting up buying companies abroad. We are confident on Italian business.
Next question, please.
The next question is from Benjie Creelan-Sandford of Jefferies. Please go ahead, sir.
Yes, good morning, everyone. I'd just like to go back onto capital again. It continues to have a lot of moving parts. I just wanted to check that I'd heard properly earlier that for the fourth quarter, you're expecting a 24 basis point headwind from regulation. If that's the case, could you just spell out what the additional potential negatives you are thinking of, given the buffer that seems to be embedded in the 11.5%-12% year-end target? My second question was just on Yapı Kredi. If you were to write that, the remaining investment, if you were to write that down entirely, can you just please quantify what the expected impact would be on both the book value and the CET1 for UniCredit Group? I'm just trying to think or understand the moving parts around the existing affect reserves in particular. Thank you.
Well, I think on the capital side, as mentioned earlier, we expect to have in the first quarter a 24 basis point impact of regulatory impact model and EBA guideline, 15 basis point from model, and 9 basis point of EBA guidelines. Which will move the total impact for FY 2018 to 44 basis point. We already are at more or less 19 basis point. As I said, we expect to have, for the first half 2018, probably in the first quarter, 48 basis point of impact, 14 on model, and 34 on EBA. On the Yapı Kredi side, first of all, Yapı Kredi is a very good bank. We are going through now normalize, if I may say, adjustment of the cycle.
What I mean by normalize is, over the summer was the normal adjustment of the economy in Turkey, which is always deeper than what we can see in other economy because they have a high current account deficit. On top of that, we had the tensions with the U.S. The tension with the U.S. have disappeared or are about to disappear with the release of the pastor, and with the withdrawal of the sanctions against some Turkish ministers and vice versa. I think we are now in a cycle adjustment as usual, which is always bigger than in some other economies. As such, writing off our stake in Yapı Kredi to zero is an absolute no-go.
If you want to know what is the mark-to-market value of our stake, it is around EUR 1.2 billion, when the market cap in euro, when the market cap of Yapı Kredi is around EUR 1 billion. Why didn't we write down to the market cap? Because the market cap is not a reference point for the valuation of our stake. We use a model, which is based on our own assumption in terms of profitability, a value in use model, and the valuation of Yapı Kredi, which has to be taken up, is the highest between the market cap and the model. We don't intend to change the valuation of our stake based on the market cap every day. The 200 buffer, if I'm assured the 200 gap, one is completely non-significant at group level. Two, we know that the situation in Turkey will improve.
That we know. If you have looked at the other cycle adjustments, we all know that we have in Turkey an adjustment usually which lasts between 1 year and 18 months, and after the economy turns and improve. We know that the situation will improve. As such, nevertheless, we have taken, as I said, extremely conservative assumption, not only to value the stake, but also to look at the future contribution of Yapı Kredi next year. To be conservative, we have an extremely low contribution to our revenues. Mind you, that Yapı Kredi contribution is for the dividend line, where we take a pro quota our share in the net income.
We consolidate Yapı Kredi at equity from an accounting point of view, but we consolidate Yapı Kredi proportionally from a regulatory point of view, which means that our sensitivity to the FX has actually changed, we now have, let me say, a positive sensitivity to the FX evolution, which means that if the FX is improving, if the Turkish lira is improving versus the U.S. dollar, it will reduce by 1 basis point, our CET1 ratio. We'll improve our tangible book, because we have a benefit as far as valuation is concerned.
It will reduce marginally our CET1 ratio, because we look at the improvement on one side of the value of the stake, and the other side, the impact on risk-weighted asset, because the risk-weighted assets are consolidated from a regulatory point of view, which is why we have this asymmetric behavior, if I may say, when you look at the CET1 ratio. I think we can say today with what we've done on Turkey, the Turkish issue is behind us. As we said, we are extremely confident that there will be no other move as far as Turkey is concerned, and we're extremely confident that our projection for next year are extremely conservative. Next question, if we still have one.
Gentlemen, at this time, there are no questions registered.
Okay. If there's no other question, thank you very much for your time. I just want to reiterate again that we had extremely strong operational performance as you have seen. We have been using this extremely strong operating performance in order to put behind us these headwinds, which are out of our control, Turkey and the U.S. side. We think that all these headwinds are behind, and we can keep delivering on the Transform 2019, which is clearly showing extremely strong sign of implementation. We are 93% done on the FTE reduction, 88% done on the branch reduction. We see a very strong commercial dynamic on the loan side, on the client side, and we look forward with confidence for Q4 in 2019. Thank you, and have a good day.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect.