Good morning. This is the Chorus Call's conference operator. Welcome and thank you for joining the UniCredit Second Quarter 2018 and First Half twenty eighteen Results Conference Call. As a reminder, all participants are in a listen only mode. After the presentation, there will be an opportunity to ask questions for analysts and investors.
During the conference call. At this time, I would like to turn the conference over to Mr. Jean Pierre Mestier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.
Thank you very much and good morning to all of you. I will start with Slide 3 of the presentation. The Q2 was marked by uncertainty created by a broader geopolitical situation and the threat of trade wars. As concerned Italy, the market reaction in May were overdone, considering the underlying fundamentals of the country are solid and the economy is strong with exports growing. Last but not least, the ECB has adjusted their rate guidance in what was extraordinary commitment of the whole team, which has delivered robust results in a market environment that was not easy.
Let me take a quick look at the highlights of our quarter before Mieko takes you through the figures. Our core bank shows a strong performance with a net income of €2,600,000,000 up 4.2% versus adjusted first half twenty seventeen and the RoTE of 10.9 percent in the first half twenty eighteen, up 0.2 percentage points on the previous year. The relevant ratio for asset quality is the gross NPE ratio of the core bank. It stands at 4.4%, improving 85 basis points year on year. These are very good KPIs that show that UniCredit credit will look like once the non core is run down by 2021.
The group continue to enjoy positive commercial dynamics in the quarter, and we had higher lending volume of €9,000,000,000 in the core group, the largest quarterly increase for several quarters. We also had positive book net AUM sales of €3,200,000,000 Our clients are very active and doing more and more business with us. As a result, financial results were resilient. Transform 2019 is ahead of schedule in terms of cost and derisking. Overall costs are down 7% year on year and 2.9% quarter on quarter.
Our Q2 team. The group cost of risk was stable at 45 basis points and will be below our target of 68 basis points for the full year 2018. We are giving a new growth NPE target for 2018 of €19,000,000,000 This is already below the €90,200,000,000 target we gave originally for 2019 at our Capital Market Day in 2016 and show the decisive actions we have taken in derisking the bank. The underlying financial performance was sustained with group net operating profit up 7.9% year on year. The engine that is transformed 2019 is working very well under all market conditions.
Our group net profit was €1,000,000,000 down 13.3% on the adjusted net profit of the Q2 2017 due to higher non recurring other charge and provisions. Mierko will give you some detail on this line item later. Our group CET1 ratio stood at 12.51 percent at quarter end, mainly due to a negative 35 basis point for fair value OCI. We confirm our CET1 target of 12.3% to 12.6% for the end of 2018 at current BTP Spread. Let's move to Slide 4.
This is a very good first half year for UniCredit. We reported net profit of €2,100,000,000 which is up 4.7% versus the adjusted net profit last year, but excluded the Paykel sales and the running net profit of Pioneer and Paykel. Revenues in the quarter were down 4.3% year on year, mainly due to weaker trading impacted by the overall market environment. Q2 2018 costs were down 7% year on year, supported by lower HR costs. Our Q2 cost of risk was stable at 45 basis points, thanks to a supportive risk environment with 5 basis points impact from model change.
Our adjusted RoTE for the group was 8.7% in the first half, of 0.4 percentage points versus last year. Let's turn to the next slide, which gives you some detail on the progress of Transform 2019. We continue to proactively de risk our balance sheet to lower our cost of capital. Let me also remind you that we continue to beat a trade blazer in Italy in terms of derisking. We have significantly upgraded our initial Capital Market Day 16 targets, and we still continue to outperform our NPE reduction plan.
We have improved the gross NPE target for the group by €4,000,000,000 announced the accelerated rundown of the non core division by 2021, boosted the 2018 disposal target and have set a new ambitious gross NPE 19,000,000,000 target for this year. And the results continue to be impressive. The gross NPE ratio for the group reached 8.7% in this quarter, below the 9% for the first time. Gross NPE ratio for the core stood at 4.7%, Getting even closer to the EBITDA range. This de risking is supported by the accelerated run down of our non core division.
In this quarter, gross NPEs in the division dropped to €20,200,000,000 well on track to reach our 2018 target of €19,000,000,000 The operating model transformation continues to be ahead of schedule, reaching 84 percent of the target for branch reduction and 87% for the FTE reduction. Let's turn to Slide 7. The commercial dynamics for the group are positive and sustained. We have signed 2 bank insurance partnerships in the CEE that will boost our non interest revenue growth in the region. We also signed a distribution agreement with Poste Itaniame on consumer loans in Italy.
We have demonstrated our capacity for innovation by being the 1st bank to offer cross border instant payments and by executing the 1st transaction on a blockchain trade platform that we co founded. And to enhance our customer digital experience, We have signed a partnership with Fintech Medical. This flexible approach to digital works very well for us and allows us to deliver the very best offer to our clients. CIB again confirmed its leadership franchise position. We are top 3 position in loans and bonds in Europe and in our home market.
We're also proud to have been the financial advisor on the largest number of transaction in Italy, Germany and CEE. Now let me hand over to Mierko, who will give you more details on our financials. Mierko? Thank you, Jean Pierre, and good morning to everyone. I will take
you through UniCredit's 2nd quarter first half financial performance, which was robust. Our group core net profit stands at €1,300,000,000 in the quarter. Despite volatile market conditions, we enjoyed positive commercial dynamics across the core bank as a result of the hard work and commitment by all our colleagues. The main divisional contributors to our strong performance this Quarter Work CE and Commercial Banking Italy. Group core return on tangible equity was 10.9% in the first half.
We confirm the 2019 target of above 10%. Let's turn to Slide 10. As we have said many times, the KPIs of our core bank are of strategic importance. These KPIs Good picture on how UniCredit will look like once the 2021 accelerated rundown of non core is completed. And the numbers are strong.
The group core gross NPE ratio was 4.4%, closing the gap to the ABA average fast. This performance was driven by resilient commercial activity, the tangible result of our cost reduction and an improved risk profile. Net operating profit was EUR 4,300,000,000 in the first half, up 13.1% over the same period last year. The group core net profit in the first half was EUR 2,600,000,000 up 4.2% on an adjusted first half twenty seventeen. Let's turn to Slide 11.
Let's now talk about the stated figures of the group. I would like to point out 3 items on this page. First, the underlying business performance is sound. As already mentioned on the previous pages, commercial activity was resilient, but offset by lower trading. Fees were slightly down 0.3% year on year, which is a very good result in the current market environment and well above the market in Italy.
2nd, the execution of Transform 2019 continues to deliver tangible results quarter after quarter and therefore costs are down significantly both year on year and quarter on quarter. Cost of risk was at a low 45 basis points, supported by a good risk environment. 3rd, on the non operating side, there were higher other charges and provisions. On one hand, systemic charges increased due to a higher contribution to the National Resolution Fund in Italy. On the other hand, we have, as always, taking a very prudent approach in booking additional non recurring provisions against a number of legacy files.
They were offset for a large part by positive non recurring items in profit on investments and single NAND loan loss provisions write backs. Hence, the overall impact on pretax profit is broadly neutral. Let's turn to Slide 12. NII was resilient in the quarter, up 1.6% on a stated basis and up 0.8% when adjusted for days and FX effects. The main drivers on NII were the following.
EBITDA ratio of $1,000,000,000 EBITDA ratio of $1,000,000 Lower term funding contributed €23,000,000 as the average cost of funding still goes down despite an increase in the marginal cost of borrowing. Investment Portfolio Markets and Treasury contributed EUR 22,000,000 to NII, mainly thanks to lower balances with the ECB and successful tactical liquidity deployment. We also started to break out the contribution of time value to NN AI, which is expected to be negative for the foreseeable future Expect fiscal year 2018 NII to be at or above the 2017 underlying NII. Funding costs should continue to creep up, but there will be little impact for the second half twenty eighteen as it is rather late in the year and volumes are still lower than expected. Let's turn to Slide 13.
I will highlight 3 points on this slide. 1st, by popular request, we have changed the right hand side of this slide from customer spreads to customer loan rates. 2nd, in group core, average loans were up by €5,100,000,000 or 1.3 percent in this quarter. That is almost double the pace of the Q1, thanks to good commercial dynamics. 3rd, The average customer rates were down 3 basis points for the group.
We saw stabilization across the divisions except for Italy and Germany, where we still see competitive pressure on customer rates. If you want to know more on these topics, Please call our colleagues in Investor Relations and they will be happy to help. On Slide 14, The end of period customer loan volumes for group core were up €9,000,000,000 in the quarter, 2.2% and 4.5% year on year. This compares with €9,600,000,000 for the whole year of fiscal year 2017 and underlines our current positive commercial dynamics. End of period customer deposit volumes for group core were up 0.5% in the quarter and 4.8% year on year.
Let's turn to the next slide. Fees in the quarter were slightly down 0.3% year on year and let's look at the 3 categories separately. Investment fees were down 3.1% in the quarter and 3.4% year on year, better performance than the market in terms of AUM net sales. More than half of the decline in upfront fees was compensated by higher AUM volumes and better pricing on management fees. This should make investment fees driven by positive net sales.
Financial fees. Financing fees were down 6.9% year on year due to lower fees in capital markets in CIB and guarantees in CEE. Our market shares were stable, which shows that the decline was market driven. Driven by current account fees in Italy. Let's now turn to Slide 16.
TFAs reached EUR820,500,000,000 in the quarter, increasing 3.3 percent or EUR 26,300,000,000 year on year. Gross and net TFA sales were higher than in the previous quarter. And while market performance was negative, It did not prevent TFA stock to go up by €5,100,000,000 in the quarter. AUM in the quarter were EUR 219,900,000,000 benefiting from net sales of EUR 3,200,000,000. AUM stock in all division was up quarter on quarter year on year is an outstanding achievement considering the challenging market environment in the quarter.
The decline in AUCs continues to be driven by Commercial Banking Italy as expiring the retail network bonds are converted into AUM. Let's turn to Slide 17. Trading income in the quarter was down 28.5% versus last activity. We also had fewer realizations from our bond portfolio. From our dividend line, the biggest contributor, as you know, is YAPI.
Yap is a very good bank in a country which has young and well educated population and has very good entrepreneurs. We are in Turkey for the long term going through cycles. YAPI had very good results in the first half twenty eighteen. The contribution of YAPI was up 27.9% versus last year at constant FX. However, Due to the adverse FX moves of the Turkish lira, it was down 3.4% at current FX.
So let us talk about the impact of these FX moves on the group. It is very small. From an accounting point of view, we consolidate Equity. So the pro rata net income of YAPI shows up in our dividend line. And there at EUR 183,000,000 in First half twenty eighteen, YAPI accounts for less than 2% of our overall revenues.
There is no other impact on our P and L, not in cost, not in non loss provisions. And on the regulatory consolidation, We only have the pro rata risk weighted assets of about EUR 25,000,000,000. The recent capital increase of Yafi had no impact on our core Tier 1 ratio at group level. Our core Tier 1 ratio sensitivity to FX moves is low, The minus 2 basis points net impact are composed of minus 6 basis points from capital and plus 4 basis points from risk weighted assets. Let's turn to Slide 18.
Our focus on cost efficiencies yielding tangible results quarter after quarter. The operating model transformation continues to be ahead of schedule. We have already achieved 87% of our planned FTE reductions and 84% of our planned branch closures. As a result, operating expenses are down 7% year on year and down 2.9% in the quarter. The development of cost over the quarters may not be linear, so we suggest you focus on the full year.
For 2018, cost will be below our target of EUR 11,000,000,000 While for 2019, we confirm our target at EUR 10,600,000,000 On Slide 19, Both HR and non HR costs are down on a year on year basis and quarter on quarter basis. HR costs are down 7.6% year on year as FTE reduction continues. Non HR costs are down 6% year on year, mainly driven by lower real estate, sponsorship and consulting expenses. Let's turn to Slide 20. Regarding group asset quality, I would like to point out 3 items.
First, the overall group risk environment was supportive in the quarter. It led to write backs in Commercial Banking, Austria and CE and consequently low cost of risk in these divisions. The cost of risk is expected to begin to normalize in both areas in the second half of the year. 2nd, the impact from model changes in this quarter was limited at 5 basis points. The majority of the model's impact for cost of risk is expected in Q4 2018 with slippage risk to Q1 2019.
3rd, There were some large write backs on a few files in CIB. These were one offs and will not reoccur. As a result, we represent we expect 2018 cost of risk to be below our target of 68 basis points. Our overall asset quality is steadily improving. The coverage ratio improved further to 60.9%, up 4.4 percentage points year on year.
The group's NPE ratio dropped to 8.7% in the 2nd Q 2018, down 2.4 percentage points year on year. This is a great improvement considering we started Transform 2019 plan close to 16%. Let's turn to Slide 22. In Commercial Banking Italy, NII was down 3.3% quarter on quarter, While average volumes were up 1.2%, competitive pressure on short term loans and corporate loans in general remains high, leading to a decline in customer loan rates of 11 basis points. Adjusted for some one off, The decline in customer rates was still 7 basis points.
We are experiencing no repricing in lending in Italy. Fees are up 0.9% year on year, mostly thanks to strong transactional fees from current accounts. AUM net sales reached EUR 1,100,000,000 and AUM stock is up quarter on quarter year on year. Closing of another 58 branches in the quarter. The asset quality is improving both for new business and stock.
Cost of risk in the quarter is down to 61 basis points. There was only a limited impact from models as most of the impact is expected in Q4 with slip at risk in Q1 twenty nineteen. Return on allocated capital for the first half was 14%. Let's turn to Slide 23. In Commercial Banking Germany, NII was up 4.1% quarter on quarter, driven by a one off recovery in the quarter.
Average loan volumes were down 0.8%, while customer rates were down 4 basis points on an adjusted basis. New loan production was up 10.6% in the quarter, mainly driven by corporates. Fees were up 1.6% year on year mainly thanks to investment fees. The AUM stock was up by 7.1% driven by positive net sales, which were higher than last quarter and last year. And the insurance partnership with Allianz continues to perform well.
Cost of risk is still seasonally low, thanks to a good risk environment. The net profit was affected by non recurring charges and provision I mentioned earlier, which were mainly booked in Commercial Banking Germany and CIB. Normalized for the sale of our participation return on allocated capital was 5% for the first half twenty eighteen. We confirm our 2019 target of 9.1%. Let's turn to Slide 24.
In Commercial Banking Austria, NII was down 1.5% versus last quarter due to repayments from the corporate sector. Corporate loan rates were stable, while average volumes were flat. Fees are up 1.8% year on year, AUM were up quarter on quarter year on year and we gained market share. There were still net write backs in the quarter due to a healthy loan book in both retail and corporates. Cost of risk should begin to normalize in the course of the year.
While net operating profit is broadly stable year on year As a result of the items mentioned before, net profit is down in the same period. The result is a positive contribution from discounted operations in the 2nd Q 2017. Return on allocated capital was 15.5% for the first half twenty eighteen. We confirm our 2019 target of 13.3%. Let's turn to Slide 25.
CE continues to be our growth engine. We saw an acceleration accelerated inflow of gross new clients in the quarter, an impressive 317,000 of them. We also confirmed our number one position in CE. We had a very good commercial performance and NII was up 3.9% in the quarter at constant FX, driven by increased loan volumes and broadly stable customer rates. Fees were up 0.6% on last year at constant FX.
Excluding the changes in accounting treatments on fees accruals in Czech Republic and Romania, fees would have been up 6.7%. Trading was down year on year as valuation adjustments in Croatia did not compensate the lower bond disposal gains in Russia and Czech Republic. Costs were down while they were up 2.2% year on year, still below inflation. Our cost income ratio remains best in class, only 35.5 percentage points in the first half. The cost of risk is at a low 65 basis points and should begin to normalize over the course of the year.
Derisking continues at a brisk pace and the division's gross NPE ratio of 7.2% in the quarter has already reached fiscal year 2019 target, which does not mean we shall slow down our efforts. Return on allocated capital for the first half was 16%. Let's turn to Slide 26. Specialty in Fixed Income. Our plugged in business model remained resilient in its clients' positioning.
We kept market shares in DCM stable and even increased the market share of client driven revenues. Normalized return on allocated capital was 10.6% for the first half. Let's turn to Slide 17. As most of you will have listened to the Finneco's results on the 31st July, I will limit my comments on this slide. We are very satisfied with the overall financial performance of Fineco.
It is worth mentioning the strong performance in AUM volumes, which is driven by the sustained productivity of the financial advisers network. Let's turn to Slide 28. On the Group Corporate Center, revenues improved significantly, mainly driven by lower term funding costs and positive hedging results. Costs are down significantly mainly thanks to lower FTEs. As a result, the ratio of group corporate center cost to total cost is down to 3.4% in the first half.
The fiscal year 2019 target of 3.6% is confirmed. Division, made a net profit of EUR 49,000,000 this quarter. Let's turn to Slide 29. As we announced at our Q1 results, we are bringing forward the closure of this division to 2021. On non core, one of the effects of the accelerated rundown is increased loan loss provisions in the quarter.
From the remainder of the year, this should be in the range of €150,000,000 to €200,000,000 per quarter. We already delivered tangible results. Gross NPEs are down by $1,500,000,000 quarter on quarter, of which $500,000,000 were disposals. The target for gross NPEs for the end of 2018 is EUR 19,000,000,000 and EUR 14,900,000,000 for 2019. Let's turn to Slide 31.
We continued to derisk the balance sheet to lower our cost of capital. Gross NPE of group core decreased by EUR 2,700,000,000 year on year EUR 500,000,000 quarter on quarter. Our core gross NPE ratio has falling to 4.4% in 2nd Q 2018, getting ever closer to the ABA average. The coverage ratio improved to 58.2%. Let's turn to Slide 32.
Overall, the risk environment remains supported the default rate increased 10 basis points year on year due to single names in CEE. The recoveries were up year on year. Let's turn to Slide 33. Gross NPEs in Commercial Banking Italy were stable at EUR 9,500,000,000. The gross NPE ratio was down to 6.4%.
The Commercial Banking Italy 2019 gross NPE ratio target is confirmed at 5.3%. Keep in mind that the reduction of NPEs will not always be linear. The coverage ratio increased to 55.5 percent in the 2nd Q 2018. Let's turn to Slide 34. Infros to NPEs in Commercial Banking Italy were stable on a gross basis and down significantly on a net basis quarter on quarter.
We continue to see the overall risk environment in Italy as supportive, also evidenced by higher recoveries quarter on quarter year on year. Let's turn to Slide 35. The execution of our accelerated rundown of non core is progressing smoothly. Performing exposure in noncore were down €1,400,000,000 year on year and stands at only €2,400,000,000 As we stated before, all performing exposure in noncore will be gone by the end of 2018 and the division will become a closed NPE book. Non core division will then run down by the end of 2021.
That means It will reduce its NPEs, costs and losses to 0 by that time. There will be no transfer of NPEs or costs back into the core bank as we have seen in other cases. Last but not least, we saw EUR 500,000,000 of disposals in the division for the 2nd Q 2018 and confirm our target of €2,000,000,000 for the full year. Let's turn to Slide 36. Non core loan dynamics further improved.
Net NPEs were down €8,100,000,000 down €4,700,000,000 on year. Gross NPEs were down by €7,500,000,000 year on year, reaching €22,200,000,000 We are giving a new growth NPE target for 2018 of €19,000,000,000 As Jean Pierre mentioned earlier, This is below the €19,200,000,000 target we gave originally for 2019 at our Capital Markets Day 2016. NPE's coverage improved significantly to 63.4% despite the disposal activity. Let's turn to Slide 38. The group fully loaded CET1 ratio closed at 12.51 percent, down 56 basis points quarter on quarter.
The key drivers was the fair value OCI reserve that impacted the core Tier 1 ratio by 35 basis points, 30 basis points of which came from the BTP widening. The second biggest impact came from risk weighted asset dynamics as our loan volumes led to higher credit risk weighted assets. Regulation models and procyclicality negatively impacted by only 2 basis points. On the FX side, as mentioned earlier, The depreciation of the Turkish lira was the main contributor with minus 5.5 basis points growth. As the risk weighted assets from YAPI went also down, the net impact of our CET1 ratio was only minus 1.8 basis points in the quarter.
We expect our core Tier one ratio at the end of 2018 to be between 12.3% and 12.6% as the negative impact from BTP spreads widening is compensated by partial slippage of impact from models for cyclicality and EBA guidelines into the 1st Q 2019. For 2019, we reiterate our core Tier one ratio target of 12.5%. Both targets are valid at the current BTP spread levels. Let's turn to Slide 39. Risk weighted assets increased by EUR 7,400,000,000 to EUR 3 €160,700,000,000 The biggest driver were credit risk weighted asset as this followed increase in loan volumes.
There was also some impact on market risk weighted assets from the elevated volatility levels. Jean Pierre, back to you for the conclusions. Thank you, Mirko.
Before we move to the Q and A, let me briefly recap our first half twenty eighteen. We had a strong core bank performance with group core net profit at EUR 2,600,000,000 and the group core RoTE of 10.9%. Positive commercial dynamics sustained resilient revenues with group net interest up 1.6% quarter on quarter and group fees down only 0.3% year on year. The operating model transformation is ahead of schedule. Group cost for 2018 will be below our target of €11,000,000,000 and the cost target for 2019 of €10,600,000,000 is confirmed.
The accelerated non core rundown is proceeding as planned, down to €20,200,000,000 of gross NPE. We give a target for 2018 of €19,000,000,000 Our group cost of risk for 2018 is expected to be below 68 basis points. Our CET1 ratio stood at 12.51 percent at quarter end. We confirm our CET1 target of 12.3% 12.6% for the end of 2018 and above 12.5% for the end of 2019. Both targets are valid at the current BTP spread level.
I and the whole team are very confident We will continue to make good progress with the transformation of the group. We have reached kilometer 21 in a marathon, But there is no time for a victory lap. We will continue to work hard and as one team achieve our objective of making 1 bank, 1 UniCredit a true pan European winner. And now, Jani, Mirco and I are ready to take your questions. If you could please be so kind and limit your question to 2 each.
Many thanks.
Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. Bar and 1 under touch tone telephone. The first question is from Adrian Chigi with RBC. Please go ahead.
Securities. Your line is open.
Hi, there. Two questions, please. 1 on NII and 1 on capital. On NII, thank you for the updated full year guidance. And a question on the moving parts.
We're still seeing pressure on customer spreads as indicated before. Previous guidance pointed to a stabilization in the spreads in the second half. Is this still what management expects? And then on capital, very helpful sensitivities to spread widening and FX. But if there's another sovereign shock, would you be comfortable with a lower CET1 temporarily or would you reduce the dividend or I'm assuming you wouldn't hold off any profitable loan growth to deal with the capital headwinds?
Thank you.
Thank you very much. I will give you an overall answer for the customer spread. Let Jenny comment on the client activities and competitor activities. And I will comment and Nico will add up on the capital side. If you go back to the Slide 13 of the presentation, You can see the customer loan rate and its evolution as stated on the slide.
We see stabilization in some of the As you can see in Germany, in CIB, which is up and CED. While we see still some pressure in Italy and Jenny will give you more detail about the competitive pressure in Italy where we will price and some of the banks have not done yet, but Jenny will elaborate on that. Our guidance is to say that the customer rate should stabilize on the second half of the year, while our loan volume will go up. And you have Our loan volume in the second quarter has been going up by €9,000,000,000 On a year to year basis, the evolution is more or less EUR 19,000,000,000, so basically did half of the loan growth evolution in the second quarter. And we have seen in July a good prospect in terms of transaction where our CIB business mainly closed a lot of deals in a very positive manner.
I'll let Jenny comment to give you more color on the competitive environment, particularly in Italy and No client activity, Jenny.
Sure. Thank you, Jean Pierre. So we believe customer rates are expected to stabilize in the second half In the range of within 1 or 2 basis points. Our loan growth is supported by an Thanks, commercial activity across all business division and customer segments. Although, we have an ongoing reduction Show of FDs and branches.
Having said that if we, for instance, talk about Italy, we have, For instance, repriced our mortgages at Sol Mortgage Business. We did this a couple of months ago Because we saw some tension on the pricing driven by the movement of the BTP. And for the time being, we are the only bank that has re Nevertheless, we don't see a deceleration of our business activity. We see also quite a pressure in Germany, both on the CIB side, but also on the corporate commercial banking, so this we call Unterneamer Bank, where we see that we have for sure a pressure that is coming from ample liquidity. Today, we have we can say that we have a double offering in terms of liquidity then requirements from borrowers.
Nevertheless, what we are doing, we are increasing the number of customers. So we are increasing lending, but because we are increasing number of customers. And this obviously is helping us also on the cross selling activity. In as much as As CIB is concerned, CIB is performing very well. We have a very strong pipeline and our CIB division has been performing very well in terms of activity with major corporates and across the different countries.
So all in all, I In that, we are confirming that we believe that we will have stabilization of the net interest income in light of competitive environment, in light of the updated ECB guidance on rates. So we have marginally updated our NII guidance and now expect financial year 2018 NII To be at or above financial year 2017, underlying net interest income adjusted if you recall for the €90,000,000 one off transaction that we had in commercial bank in Germany in the first half of last year.
Thank you very, Jenny. On the capital side, first of all, let's go through the sensitivity to the capital on the evolution of the BTP portfolio. We have and it's The last time I'm giving the pretax and post tax sensitivity and in the future we'll communicate only on the post tax sensitivity for the fair value of TI portfolio. We have a pretax sensitivity for 10 basis point move of the BTP rate of €137,000,000 on the quarter or 3.8 basis points and the post sensitivity of €95,000,000 or 2.6 basis points for a 10 basis point move on the spread. So 2.6 basis points for 10 basis points.
So you can see that the sensitivity is what it is, but We can absorb within the range of 12.3 percent to 12.6 percent, which is given for the 2018. We can observe evolution of the BTP portfolio and we can probably absorb even more, if I may say, As mentioned during the presentation, it is not unlikely that we could have a time translation of some of the regulatory capital impact mostly coming from the EBITDA guidelines anticipation from the Q4 to the Q1 2019. So all that to say that the 12.3% to 12.6 percent CET1 guidance for the year. It seems well under control, irrelevant of BTP widening or FX widening will give you the sensitivity to FX to our group. For Turkey, we have a net sensitivity of 2 basis points for 10% move on the Turkish lira, so 2 basis points for 10% move.
It is a net amount because part of it impact the FX, the capital and part of it impact the risk weighted assets. So the net is 2 basis points. So You can see there as well that the Turkish lira move is going to impact massively our capital level. But One could say, if we have a time translation of the regulatory capital impact for the EB anticipation from 2018 to 2019, that we could put more pressure on our target of 12.5% in 2019. And there, we have A certain number of managerial actions that we are considering in order to achieve our target.
So whatever could be the evolution, we feel confident with not only the dynamic position management of the bank, but also Some specific managerial action that we can achieve our target and this is without changing the current state of what we do in terms of management of the bank and the dividend.
Thank you very much. Very helpful.
Next question please.
The next question is from Jean Noyester with Goldman Sachs. Please go ahead.
Hi, good morning. So two questions then. The first question is on the capital guidance. I just obviously noted that you kept the same capital guidance range, so 12.3% to 12.6% compared to the Q1 of 2018. I guess this is not related to the potential delay in the model changes, etcetera, etcetera.
So I just wondered whether There was any updated view on your total capital headwinds, which you had described in last year's Capital Markets Day, whether there was any new mitigation which have come to light in the 6 months that have passed. And then I had a question more on the legal side. I saw that the provision for risk and charge were much higher than the usual run rate for Q2. I just wondered whether you could explain a little bit the moving parts there and what 2019 guidance was as well as trying to understand if there was any relation with the carriers or headlines that we are seeing around and what the situation there
Thank you very much. First of all, on the guidance, 12.3% to 12 point Thank you. As I just said previously to the question which was asked, There is a risk or an opportunity, whatever you see it, that the EBA anticipation moves from the 4th quarter To the Q1, there is no change in the overall projection of regulatory impact that we communicated at the Capital Credit 2017. So it is just a time translation from 1 quarter to another one. As we already mentioned during the Q1, This is marginally out of our hands as we can put in place these new guidelines once the model are validated by the regulator And the regulator might not validate the model in time for the Q4 and that might lead to the Q1.
But there is no change in mind No capital charge or whatever from a regulatory change. On the other provision, What we have been doing is we took a conservative approach. As you know, we are very conservative all the time. So we took a conservative approach to some of the files. We have nothing to do with the actions you mentioned with a specific small hedge fund.
And we have just been willing to make sure that we are on the conservative side. But as you know, we don't communicate and we don't say anything about the specific funds.
And for the overall guidance and the budget for this plan?
For the guidance for For what? For the For Western Charge. For Western Charge, we have I will let Mirco comment aside of this additional provision for the overall charge we have in terms of the Overall regulatory charge, we moved from €800,000,000 to €850,000,000 So if we were on a yearly basis, if you take out this additional €500,000,000 the increase of €50,000,000 is due to additional contribution to the domestic fund in Italy And it should be a yearly feature for at least the next few years.
Yes. No, we never guide on the overall risk The charges we only guide on the systemic charges and the number is exactly what Jean Pierre was mentioning, €850,000,000 a year.
But the €50,000,000 which is in addition will I mean this €50,000,000 should come on a yearly basis basically for the next few years because of Domestic Resolution Fund. Thank you very much.
The next question is from Abdul Raguelsi with Citigroup. Please go ahead.
Hi, good morning. Two questions for me. One is on the NII. In the past, we have seen The cost of funding being a strong component of the improvement on the commercial side quarter on quarter. This quarter, I don't see the same progression.
How much of this is linked to the sovereign situation and how much is that is commercial decision? The other one is on your target. You are, by your admission, ahead of schedule in many of the metrics and things are going very well. Thanks for all your effort. What would you need to be more optimistic on the 2019 target?
Because you moved 2018, which is a great signal, but not yet ready to change 2019. Thank you.
So I will Hand over to Mirko on the cost of funding. Let me just comment before me goes into detail that We have seen an improvement of €23,000,000 as stated on Page 12 from the cost of funding. And before Nico gives you more detail, I mentioned that in the last quarter, the widening of the BTP spread The negative impact on capital, but had a positive impact on the overall yield of our fair value OCI portfolio. As I said, the portfolio moved from EUR 42,000,000,000 to EUR 44,600,000,000 but the yield on the for you increased by 30%. So the team managed to do a very good job by increasing the yield, while the sensitivity remain the credit sensitivity remained very low at 3.3 years, so virtually unchanged from the previous quarter at 3 years.
I mean, there's risk and opportunity. But Mikko, I'll let you comment more detail on the cost of funding.
Yes. On the cost of funding, you're right. We have a positive impact of EUR 20 EUR 3,000,000. The reason for that is lower volume. So we have almost EUR 4,000,000,000 in lower volumes that we needed to do from a funding perspective at lower rates, minus 5 basis points in lower rates.
And this is basically the reason for this positive impact. Now For the fiscal year 2018, we still see, let's say, a positive contribution coming from funding cost despite the increase of the marginal cost of borrowing that we are experiencing because of, let's say, the volatility into the market.
On your cost question, as we said, the full year cost would be below €11,000,000,000 so below the guidance we gave. But we confirm the 2019 cost target of €10,600,000,000 It is important to look at the cost on a yearly basis that there are some seasonal impact specifically on the Q4 on the cost side. So don't double up for the Q1 in order to try to get the cost target for the full year. For 2019, we said that if we were To be well below the 10.6, we will do some additional IT investment as life does not stop at the end of 2019, But carry it on. So don't expect the cost for 2019 to be significantly below €10,600,000,000 I mean, we'll prepare life post transform 2019 as well.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi, thank you. Just a quick couple Quick question. So on YAPI, can you remind us of your hedging policy for the earnings contribution, if it's changed in any way? And then on cash, just why are you seeking compensation from Caio's? Thank you.
I will let Mirco comment on JAPI first and I'll take the second question.
Yes. And in terms of the YAPI hedging policy, we're basically using a 3 month 0 cost option strategy, which has a marginal contribution to our P and L to the hedge. And we do this for around 50% of our initial 2018 profit budget profits. And we are doing actually the same for Russia. So it's Not only for the Turkish entity.
On your second question, we welcome the decision of BBA not to open up an litigation on the matter raised by the fund you mentioned. On July 20, the EPS confirmed the 2012 treatment of the cashies, meaning that the shares under the indices were valid from a regulatory capital post before and after the introduction of the CRR. So that validates our previous statement and you have noticed that we don't comment much on the matter. We refrain from commenting in late the regulator comment. We mentioned on the last quarter conference call that the treatment of the cashies Have been reviewed and confirmed by all relevant authorities and insisted on the last quarter on all relevant authorities And that's all the initiatives are to be qualified at CET1 Capital.
So going forward, taking into account the evolution of applicable regulation and the Supervisory dialog. We are very confident that there will be no material impact. I repeat, no material impact on either UniCredit or the cash holders after the grandfathering of the cash is end in 2021. Nothing can be clearer than that. But as indicated in the press release on July 20, UniCredit has filed a complaint against this fund, Cayuse Capital, on the asset management company, but also against the funds.
So both against the asset management company and against the funds, To be very clear, in the quarter of Milan, seeking compensation of damage in the amount of approximately €90,000,000 stemming from Cayuse Capital and the fund actions against the bank over the course of the last month with respect of the cashies. As per our policy, we do not comment on ongoing proceedings, specifically when they are both pre enroll and civil, and I will not comment more than that.
Okay. Thank you. The
next question is from Antonio Reale with Morgan Stanley. Please go ahead.
Hi, good morning everyone. Thank you for taking my questions. I've got 2, 1 on fees and the other one is a follow-up on net interest income. On fees, it seems like your net new money growth in Italy, you're gaining market share, you're growing faster Then the market, especially on the new flows. Can you talk about what savings products have you been placing there?
And what's your fee outlook for second half of the year. And the second question is on the Corporate Center NII, which has seen has been improving sequentially for the last 3 to 4 quarters, which I understand is linked to the funding costs, the lower funding costs. But I've also noticed that there's been an increase in the contribution from the investment portfolio in the quarter. Maybe can you update us on your strategy there and its contribution to NII going forward? Thank you.
Thank you very much. I will let Mirko comment on the second question on the NIL for the Corporate Center. And before handing over to Jenny on the fees and the fees outlook and the market dynamic, let me just confirm that We target fees for the full year to be close or marginally below the 3% guidance that we gave and to be up 3% for 2019 as well. So 3% or close to 3% for 2018 and 3% for 2019. As you mentioned, our fee activity has been very resilient with very good commercial activity.
And Jenny can give you more detail about the business. Jenny, all yours.
Thank you, Jean Pierre. So, well, despite the let's say, The environment that has negatively impacted the fees, especially in terms of investment fees and especially in Italy, We do have very good results in term of fees and this comes mainly from transactional fees, which is a testimony of the strong commercial activity and the cross selling activity that we have across the group. We had a small decline of FISL in CIB. This was mainly driven by the slower market performance In the capital market, in fact, especially on the DCM activity, we had a very strong first quarter. We have a slowdown in the 2nd quarter, especially in May June, and we've seen a very strong recovery also in July, in Q3.
And this is because the market slowdown in fact, our CIB keeps around 6% market share, which is stable compared to the previous quarters. If we talk about the fees in general, we have upfront fees that were down mainly driven by lower gross sales in Commercial Bank in Italy, which in any case had a much better performance when we talk about net sales of AUM compared to the market and to the different and major peers. We had more than half of the decline in upfront fees was compensated by higher AUM volumes and metal pricing management fees. And AUM stock, as you know, was up 6% year on year and 1 point 3% in the quarter. If you look at the financing fees, as I said, we had a small decline and this is due to the lower fees in Capital Markets and CIB and the guarantees in CEE.
But again, our market share was stable and we had a very good performance in transactional fees. We're doing about 9.6% year on year And this is mostly driven by current account fees in Italy. So overall, we despite the turmoil in the market, we are very happy with results we have achieved. And as Jean Pierre mentioned, we believe we'll be closing the year slightly below the 3% increase that we have projected and indicator in our Capital Market in December 2017.
On the Corporate Center performance for quarter. There are 3 main items in there. The first one is cost of funding that is decreasing. So that is improving our NII on the corporate Center. The second point is basically a revaluation of basically the effects related to the AT1 issuance that we had in U.
S. Dollar. And the third component is that we are continuously taking down cost into the corporate center, meaning FTEs are going down and HR and non HR costs are also accordingly going down.
Next question please.
The next question is from Delphine Lee with JPMorgan. Please go ahead.
Yes, good morning. Thanks for taking my questions. So my two questions
will be, first of all, going back to capital. In terms
of the capital build this quarter was slightly negative. If you look at the other big growth outpaced the retained earnings and this is not something we've seen in the past. So is there something that has changed or Will you consider more business actions or managerial actions to offset that? Or just try to understand a with the underlying capital build and if you could give us maybe just what kind of other big growth underlying do you expect in the next year or so? The second question is on Turkey.
I think in your business plan, you had assumed 20% appreciation in the Turkish lira. I'm just trying to understand for 2019, how much you're off versus this or just to give you a little bit of the order of magnitude compared to your target revenues in 2019? Thanks a lot.
Thank you very much. Let me take the capital question and Mikko will give you more detail on the Turkish NER sensitivity. On the capital side, if you go to the Slide 38 of the presentation, which gives you the CET1 work, You can see that we have, I mean, 2 items which stand out. First, We have the negative impact of the fair value OCI of 35 basis points. And this, I mean, Should not happen every quarter basically and should be neutral on average.
So that's the first thing. And we have as well FX impact, which was negative 10 basis points. Part of the FX impact on Turkish lira On the Russian ruble, it's taking on this column of minus 48 basis points and the compensating effect Taking on risk weighted assets. So on the Turkish lira depreciation, for instance, we have on the minus 48 column, I think we have more than 5 basis points, 5.7 basis points, I think, of impact. And we have a compensating impact of EUR 3.8 billion on risk weighted asset.
So the fair value of TL minus EUR 35 billion should not be recurring. The FX impact should not be recurring either. So let's assume that we have a 45 basis points, which should be not part of the recurring activity. Nevertheless, we had a decrease of CET1 of 55 basis points, You have on the line risk weighted assets, minus 26 basis points. I mean, a large part of that, and if not almost Everything else we have only 2 basis points of regulatory model is coming from our loan increase.
I mentioned that our loan increase for the quarter was €9,000,000,000 If you look at the year on year evolution of the loan increase, it is actually almost double that. So it does mean that we have in terms of loan evolution, I mean quite a sustained and strong activity for the Q2, which unfortunately, if I may say, is not going to be recurring. So I think that when we look at the combination of non recurring lifetime linked to the fair value OCI, currency impact and probably sustained, but maybe less intense loan growth. You can see that aside of regulatory impact, which would come later in the Q3, Q4 and next year, side of regulatory impact, our internal capital generation should be compensating on one side our dividend payout And on the other side, the risk weighted asset growth. So consider this quarter more as an anomaly, if I may say, than a structural position for the group.
I will let Mirco comment now on Turkish
Yes, on the purple. The assumptions that we had taken in the Capital Markets Day 17 on Turkey was for 2019 a 4.9 dollars to dollar level.
And we give the 2 basis points sensitivity for 10 basis points 10%, sorry, depreciation of the Turkish lien. It's important, as Mirko mentioned, on Turkey, there has been some focus on analysts on The impact on Turkey on UniCredit. I mean to just repeat what Pekka mentioned is that Turkey contributes its consolidated equity And contribute for the pro rata share of the net income to the dividend line. So for the Q1, €180,000,000 So Whatever could be the variability of the net income of YAPI Credit, you can see that it is less than 2% of the group top line revenues. So that's something which is small anyway and variations are even smaller.
Then we have risk weighted asset From a regulatory point of view, the risk weighted assets are fully consolidated. This is why we take the 40% of risk weighted assets of YAPI credit. But in terms of sensitivity to the currency, it's a combination between the sensitivity on our investment in And the risk weighted asset impact, risk weighted assets of EUR25 1,000,000,000 more or less. And the net, as I mentioned, is 2 basis points. So whatever impact, 2 basis points for 10% depreciation, That's super small.
Next question please.
The next question from Andrea Filtri with Mediobanca. Please go ahead.
Good morning. A question on provisions on our capital. Can you hear me now?
It looks like somebody is crying or suffering next to you. You come back. We thank you afterwards if you might change your phone. I'm maybe coming from your phone, I'm afraid. So maybe, operator, we can take the next question and take Andrea afterwards if he can fix up his phone problem.
Of course, the next question is from Alberto Corvara with Merrill Lynch. Please go ahead.
Good morning. I just wanted to get back to a comment from Mr. Bianchi that we should Within the context of the NII evolution and negative evolution of the time value. So the question is, what is current contribution of the time value on the top line. And also a similar topic, if you can give us an idea of what is the weight of the macro hedge on NII and how we should expect these two items to evolve over time.
And then sorry, just on to apologize if I get back on this point, just to clarify. On YAPICredit, Can you tell us what is the current book value at which you have cost financials? And if there is any risk that this book value would need to be changed because When I look at the market value of the YAPI also in Turkish lira has declined significantly recently. Thank you.
I'll take the second question on JAPI, and I'll let Mircot dig into his notes if he Cannot find the answer before he will come back to you directly. On YAPI, the current book value, which is expected in our account is around €2,500,000,000 And if you look at our pro quarter share of the current market cap of Jepi at the current FX level, it's around 1.5. But you know that we look at Yappi valuation in the domestic market in Turkish lira based on the bank performance. And separately, we have FX impact, which impacts our FX reserve. Since we invested into Yapisa for more than 15 years, the FX reserves are negative €2,600,000,000 But are deducted from capital.
So the capital impact on the FX reserve is taken and has been taken over time. And I gave you the sensitivity of 2 basis points for 10% evolution of the currency. We don't see any reason to change the valuation of YAPI in Turkish lira basically based on its current performance. As you can see, YAPI has been performing very well. Their performance is outstanding on the 2nd quarter.
So as such, there's no impairment to be considered and the currency impact is taken separately in our currency reserve.
On the two questions you asked, the first one on the time value. So the time value is the first time that actually we are breaking it out. And the impact for the 2nd Q 2018 was €9,000,000 and mostly the main contributors are actually at the non core side and Commercial Banking Italy. So the effect, if I look at it in the 1st Q 'eighteen, it was minus team. So we went from minus 15 to minus 9.
And in terms of outlook, we expect contribution progressively to decrease in line with our Basically, derisking of the balance sheet, and this is mainly due to the non core write down, accelerated write down. On the replicating portfolio, the performance has been that for the 2nd Q, this earned us EUR 404,000,000 And this was slightly up almost €1,500,000 up from last quarter. So let's say in terms of outlook, we are not seeing major, let's say, changes in terms of what the replicating portfolio is earnings.
As I mentioned, the investment portfolio should earn us more, I mean, Both because of a very marginal increase of the amount invested and 2, because the yield on the portfolio is increasing while we keep credit duration super low at 3.3%.
Okay, many thanks. Thank you very much.
Next question please.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good morning. The first The first question is again on capital. Sorry to repeat the same question, but it's not clear to me. And the second one is on cost of risk. So I just wanted to break down a little bit the moving parts between now year end.
At the Capital Markets Day, you had indicated that 2 impacts related to procyclicality and EBA guidance. If I'm not mistaken, these two impacts were 40 basis points for procyclicalitymodel changes and 80 basis points for EBA guidelines. Now I would like to know how much of these essentially the 40 has already been crystallized, if any? Then how much of the 40 plus 80 or residual 40 plus 80 is embedded in your 12.3% to 12.6% guidance of core Tier 1 ratio for the year. And how much have you left out potentially for next year.
I don't understand if what you have left out is simply the difference between 12.3 and 12.6, I. E. May slip Or is it different amount? The second question is partially linked to this. So you have changed your guidance of cost of risk for 2018 to below 68 basis points.
The 68 basis points was, however, made up of 2 components, 53 basis points underlying and 15 indirect impact from model change. So I would like to know whether The component that has been impacted is the 53% or the 68%, I. E, is it simply a translation to next year Aura, the underlying cost of risk is behaving and expecting to behave better than the 53 basis points you had budgeted for. Thank you.
Okay. So let me try to give you an answer on this value stuff and if more explanation is needed, Omido will jump in. First of all, on your second question on the cost of risk, we have gave a target of 68 basis points, out of which, as you correctly pointed out, 15 basis points of regulatory impact. We think that the regulatory impact will be marginally lower potentially for the full year from 15 basis points to 9 basis point, so a decrease of 6 basis points. And we expect the better risk environment to guide us Besides this small reduction of the regulatory impact to a lower cost of risk, we'll see what it is, but we said that it would be below 60 8 basis points and clearly below 68 minuteus 6, which is 62 basis points.
On the capital side, we have taken as far from the since the beginning of the year in terms of regulation and profitability, we have taken 2 basis points 11 basis points sorry of impact, 9 basis points in the Q1 and 2 basis point in the Q2. As far as EBA guidelines are concerned, we have taken nothing yet as this relies on the validation by the regulator of our models. And if you look at what we could expect in terms of time translation, I would say that we could expect something which is more or less equivalent to maybe half of what we could have on the EBITDA guidelines, Which was anticipated of 80 basis points, so let's say 40, maybe marginally more than the 40 basis points, which could be a time translation Thank you. Next question please.
The next question is from Giovanni Raffoli with Equitasim. Please go ahead.
Good morning to everybody. A clarification on the last point that you have mentioned as far as the Eva guidelines are concerned. So just to see whether I got it correctly, the 13% 12.3%, 12.6 CET1 ratio guidance by year end incorporates an assumption of impact of the guidance of around 50 basis points and then another 30 may come in 2019, so that the total will adapt to 80 basis points. That was the original guidance provided during the Capital Market Day in December. And another there is more clarification.
You said that 12.5% of CET1 ratio target in 2019 It's confirmed even if the EBA guidelines are including clearly the EBA guidelines that was the guidance of December business plan. But that target to reach the target, you may activate some capital management actions, Meaning that probably the underlying CET1 is slightly lower. Is this due to the sovereign spread widening? Or did I got your comments not properly. Thank you.
What I said first is that for 2018, No, there is a risk or an opportunity, whatever you call it, of 40 to 50 basis points shift of regulatory impact from 2018 to 2019 because the regulator needs to validate the model. That's led to not go into the granularity of Again, line or is it regulation and for cyclicality, our estimate is 40 to 50 basis points, which is basically Within the spread of 12.3 to 12.6 and taking into account from our previous assumptions, The impact of the spread widening on the BTP. And of course, if we have, as I said during previous question. This time translation to 2019, that put into question our 12.5% CET1 target for 2019. The answer is absolutely not, absolutely not because we are very confident that we can take a specific number of actions.
And I mentioned that to a previous question, which are manageable actions, which will lead us to have a CET1 ratio above 12.5% for 2019. Thank you. The next
question is from Domenico Santoro with HSBC. Please go ahead.
Hi, thanks for the call. Actually, my question has been already answered. Just a clarification on your funding plan for this year, given that now you expect a different level of risk of the assets, presumably for end of the year. Just wonder whether your TLAC issuance are still in place or you still have to issue the EUR 4,500,000,000 on preferred or that has And then a similar one on the loan loss provision given that some of the model change will slip to next And I don't see any change in the guidance for loan loss provision. Just whether you now you're more positive on the recurring cost of risk of the bank also growing beyond 2019.
Thank you.
I will let Nico comment on the TLAC side and comment briefly on the L and P side. Nico?
Yes, on the TLAC side, basically the funding plan that we have left for the year is TLAC driven, so it will happen. The plan calls for approximately €4,500,000,000 to €5,500,000,000 in terms of TLAC instruments. Of course, that will depend on the risk weighted asset levels that we are going to achieve in the 3rd Q and in the 4th Q if this amount can be reduced.
As far as the LFPs are concerned, we mentioned that our cost of risk will be below 68 point that we anticipate and also because of better risk environment. For 2019, We have a cost of risk in our MIP, which is of 55 basis points. I think it's cost of risk, which is historically low, and we see no reason why we should change it. Next question please.
The next question is from Christian Carrezza with Intermonte. Please go ahead.
Yes. Good morning, everybody. First question is on risk provision. We saw an important pickup. Just An update on the litigation in U.
S, if you can if you're going to give us if there will be a conclusion in 2018. And what is the total amount for legal matters that you have provisioned as of first half twenty eighteen. The second question is on the total financial assets, Slide 16. We You still see a quite important growth in terms of deposits with a negative markdown effect on net interest income. What is the target that you have in mind in terms of weight of assets under management on total financial assets?
What are the action You are implementing to increase the indirect deposit compared to direct deposits. Thank you.
So Jenny will take the question on TFAs. On the first question, we have I mean, basically, we are confidence that we will reach an agreement with U. S. Authorities before the year end, as we said. And as As you know, we are always conservative in everything we do, but we'll not give any more detail on the matter.
As far as the TFA is concerned, I'll let Gennie comment on the very proactive action we are taking to shift actually AUC on one side And they push it towards Adrian.
Yes. Thank you, Jean Pierre. Yes, we had an increase in TFAs. We had quite a large fees on the deposit side, which is driven also mainly by the fact that at the end of the quarter, usually we have accreditation on the current accounts of liquidity coming from the companies and from the individuals because you have all the salaries that are coming towards the end of the month and then obviously also the end of the quarter. We did have an Please also on the overall net sales of AUM, so transferring basically both AUC and TSAs and the liquidity into AUM.
We had a quite strong Q1. If you recall, we had also positive second quarter compared to the market. We had a slowdown in the activity. Nevertheless, we performed much better than the market in Italy. We performed quite positively in Germany and in other parts of the group.
We are not only operating very strongly in the transformation on liquidity and AUC into AUM, But thanks also to the very recent cooperation agreement that we have signed. For instance, in Germany, as you know, we have signed an agreement with Allianz. So we are very active also in selling insurance products and Investments in Insurance Products. Obviously, we are concentrating a lot of attention in Transferring Liquidity Into AUM. Obviously, our activity is also very much driven by the volatility of the market.
And therefore, we will see if the market improves going forward. In as much as liquidity is concerned, nevertheless, we are also interested in keep on driving liquidity into the group because By increasing the liquidity, we increased the pool of money that then we can transform into AUM, Whereas if we would reduce the liquidity with us, it would be more difficult to transform it into AUM.
I think we keep the same target in terms
The target is 42%. We moved from 30% to 33% back in 2016 And the target is 42%, we are at 35%, 38% now. No, sorry, yes, 35%, 36%, meeting. It's 37% and but the target is 42%. In other areas, we're already at that level.
And I pass to Mikko on the cost of deposits more specifically. Yes.
In terms of the cost of deposits, yes, if you look at the average, Let's say, cost of deposits is going up by 1 basis points. And if I look into your question, There is a little bit of a higher cost in deposits, but it's mostly coming from sea countries. We have countries in the sea that have interest rate hikes And this is the natural progression of the cost of deposits. So we have some countries like Romania, Czech Republic that have the type of an impact. So it's, let's say, it's a natural evolution.
It's not us paying more in deposits in Western Europe.
Next question please.
The next question is from Ignacio Cerezo with UBS Global. Please go ahead.
Yes, hello. Good morning. Thank you for the presentation. A couple of quick ones on Turkey. If you can share with us which is the capital impact for the group of the 300 basis points widening of the bonds quarter to date?
And the second one, I know you have said actually you're in Turkey for the long But is there any scenario under which you would consider selling mistake in Japan? Thank you. Capital impact of the bond widening for Turkey, I will pass Just to I mean, we never comment on rumors speculation And we never comment on questions which are irrelevant. So for your last question, it is irrelevant. I mean, we have a long term commitment to Turkey.
And we know it is a country where there is a deeper cyclicality than in any other countries. If ever you went to Turkey and visited the Epicredit, visited the branches, Jenny and I were visiting some of the branches 2 weeks and a half ago 3 weeks ago, you can see that the bank in front of the client and the bank in the back room is a very good bank, Very well managed, very modern bank and a lot of the best practice of the group are actually coming from Turkey. We have a long term commitment and we are not going to comment on anything else. I'll let Nico comment on the Capital impact of
the bond widening. Yes, the capital impact on bond widening in Turkey is 1 basis point Every one hundred, let's say, business points are widening. So it's quite small.
So once again, I think that You have to take into account for Turkey that Turkey is consolidated at equity. And so the impact for us is We certainly contributed less than 2% of our revenues for the first half, EUR 180,000,000. Any variation as such will be small and on our total revenues and sensitivity both for the bond side in Turkey or the FX side is very limited as we have outlined both on the FX, 2 basis points for 10 percent and 1 basis points for 100 basis points for the downside. Next question please.
The next question is from Ana D'Amo with Autonomous Research. Please go ahead.
Good morning. Two questions from me as well. The first one is a follow-up on IAPI and the second one is on NII. Firstly, could you remind us what is UniCredit Intra Group Funding. Do you happen including any the maturity profile?
And second, on NII, Your 2019 NII target of €11,000,000,000 was based on the assumption of 0 arrival next year. If I look at the current forward curve, it implies a negative rate of roughly 25 basis points. In light of this development, Do you still confirm your NII target of €11,000,000,000? Thank you.
Yes. I'll take the second question. Miaco will comment on the first one. We have taken us an assumption initially that there should be a gradual convergence from the second half of next year to the end of next year from the minus 30 basis points or 33 basis points to 0 at the end of the year. Now it looks like that the ECB might delay its gradual normalization To only starting from September onwards and my end of the year, I mean, and the market is telling us that maybe We'll have Euribor at minus 11 or 12 basis points.
So you know the sensitivity we have on 3 months, which is on a full year basis of €182,000,000 So if we have a time translation of a few months, I mean, you can calculate, but it is an amount which is probably high double digit on AII and no more than that. And we said that we confirm basically our guidance on NII. This is something which is part of the normal volatility, if I may say, of the NII and we might have either higher loan volume on one side, positive spread impact or actually higher revenues coming from investment portfolio, which might compensate that. So no specific issue as far as 2019 and AIA's conference. On the other question,
This is a number that actually we do not make public, but I can give you a little couple of hints in the sense that Actually, these are loans to support our GTP and FIG business. So it is a very short term type of intra group funding. And then there are some loans in which we basically fund some non banking subsidiaries in Turkey.
Okay. Thank you.
Mr. Musied, there are no more questions registered at this time.
Maybe it's Mr. Filtrie from the phone. He dropped off. He dropped off. We'll call him.
Okay. Any other questions? Thank you very much for taking the time. I think we are one of the last bank to report just to make sure that everybody stays at his desk for most of the summer. We apologize for that.
And for those who didn't take a summer break, enjoy the summer break, enjoy the holidays. IR team never sleeps and never takes holidays. So if you have questions, you can call them. Mircro has installed phone on the beach, and we'll be able, together with Joerg and the team, to answer any of your questions. Thank you very much.
Have a good summer, and we look forward to see you soon in September. Bye bye then.