Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the UniCredit First Quarter 2018 Group Results Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions.
At this time, I would like to turn the conference Over to Mr. Jean Pierre Muslier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.
Thank you very much and good morning to you and welcome to our Q1 2018 conference call. Looking back, I can say it was a busy quarter, but we have steadily progressed in the execution of Transform 2019, And we continue to deliver tangible results. Let's take a quick look at the highlights of the quarter before Mikko takes you through the figures. Our core bank shows a very solid performance with the RoTE of 10.4%, up 1.1 percentage points year on year. The gross NPE ratio of the core bank is 4.7%, improving 0.9 percentage points year on year, getting closer to the EBA average.
The core bank KPIs are of strategic importance to us. They are seen more and more by investors The relevant metrics of the group performance and they clearly show that our core bank performance is strong. To make sure the core bank becomes the relevant reference for the group valuation, we have decided to take additional Decisive action and bring forward the rundown of the non core portfolio to 2021 Produced the plan for 2025. We are helped by our strong capital levels And a more liquid NP market in Italy. This will bring the non core to closure Within the time horizon of the financial projections of investors and analysts, and as we usually do, We have decided to address the most difficult asset class first, which is residential mortgage.
We are satisfied with our financial performance, which for the quarter was driven by positive Sustained commercial dynamics across the group. Our strong underlying performance lead to a group net operating profit of 1 point €9,000,000,000 up 25.5 percent year on year. It is actually the best first quarter UniCredit has seen since the Q1 of 2007. All divisions are doing well, And thanks to our renewed customer focus, we reported an increase in fees of 2.8%, driven by both investment and transactional fees. Transform 2019 is on track In terms of cost and derisking, overall costs are down 5.2% year on year and 2% quarter on quarter.
Our Q1 2018 cost of risk came in at 45 basis points. The 20 target of 68 basis points is confirmed. Our CET1 ratio stood at 13.06% at quarter end. Jako will comment later about the details of the IFRS 9 first time adoption in Fino. Let's move to Slide 5 for some highlights of the Q1.
This is UniCredit's best first quarter In more than a decade, we reported net profit of €1,100,000,000 as positive commercial dynamics Continued to drive performance across all divisions. Revenues in the quarter held up well at minus 0.7 percent year on year, mainly driven by fees. 1st quarter costs were down 5.2 percent year on year, supported by lower HR costs. Our 1st quarter cost of risk came in at 45 basis points with no impact from model change yet. Our adjusted ROTE for the group was 8.9%, up 1.8 percentage point versus last year.
Let's move to slide 7. Slide 7 and 8 give you more detail of the progress of Transform 2019. Our strong capital position allows the group to accelerate the non core run down to 2021. We have taken decisive action to deal with the most difficult asset class first, namely residential mortgage. We do this For a combination of disposals and write off, this leads to a higher IFRS 9 FDA impact.
Despite this, our fully loaded CET1 ratio stood at 13.06% at the end of the quarter. We also expect our year end 2018 CET1 ratio between 12.3% 12.6% And for 2019, above 12.5%. In line with the prime objective to further reduce our cost of capital, We continue to derisk the balance sheet. The last tranche of Fino transaction closed in January. The group gross NPE ratio 7.5 percent target.
We are already at our 2019 target for gross NPE ratio for the Copeland. The operating model transformation is ahead of schedule, reaching 78% of the target for branch reduction And 75% for FTE reduction. On Slide 8, you see that commercial dynamics 4 of the group are positive and sustained. We have launched Samsung Pay in Italy and are now the only bank that offers all 3 major mobile payment solutions, Apple and Samsung Pay, as well as Alipay. This clearly demonstrates that we are not afraid of any potential competition when it comes to financial services offering for non banks.
Partnering with companies like Apple may lead to a small loss in payment revenues, but on the other end, allows us to acquire many new clients and Merchant Relationships. CIB retained its strong position in European bonds. The fact that CIB was involved in the highest number of bond transaction in Europe, underlying the strength of the platform and show that the fully plugged in business model works. And finally, we have completed the strengthening of our corporate governance. At the AGM in April, the list of candidates proposed by the Board Obtained a 90% vote of confidence, Fabrizio Sacconi was elected Chairman shortly thereafter.
Now let me hand over to Mircot, who will give you more detail on our financials. Mircot?
Thank you, Jean Pierre, and good morning to everyone. I will talk you through UniCredit's financial performance for the Q1. Our stated net profit reached EUR 1,100,000,000. All business lines showed a good underlying sustainable commercial performance. Adjusted return on tangible equity was 8 0.9% in the Q1, we confirm the 2019 target of above 9%.
Let's turn to Slide 11. The relevant metrics of the group's performance and they clearly show that our core bank performance is strong. To make sure the core bank becomes the relevant reference for the group valuation, we have decided to take additional decisive And bring forward the rundown of the non core portfolio to 2021 previously planned for 2025. In the Q1, group core ROAD stood at 10.4%. The corresponding net profit came at EUR 1,200,000,000 up 11.8 percent year on year.
The group core gross NPE ratio was 4.7%, Getting ever closer to the EBA average. Let's turn to Slide 12. NII was stable in the quarter, in line with our guidance. Fees increased by 2.8% year on year, driven by both investment fees and transactional fees. Costs were down 5.2% year on year as our transformed 2019 plan is progressing ahead of schedule.
Cost of risk was at a seasonally low 45 basis points. Below the line, we had some developments worth mentioning. The group tax rate was low as we had the impact from IFRS 9 first time adoption And a change in geographical mix of profits. For the fiscal year 2018, the tax rate should be around 20%. Systemic charges were seasonally high as we booked more than half of overall systemic charges in the Q1.
Please also bear in mind that we resumed paying DTA fees in Italy of about €30,000,000 per quarter. Let's turn to Page 13. NII was resilient in the quarter, down 0.4%, but up 1.4% When adjusted for days effect, as the Q1 has 2 days less, we collected $58,000,000 less in interest. The main drivers of NNI were the following. Average loan volumes were up 0.5% and customer rates were Essentially unchanged.
Lower term funding contributed positively for EUR 51,000,000. The drop in the TLTRO benefit is just a base effect. Last year included some spillovers from fiscal year 2016. Our outlook remains unchanged. We still expect customer loan rates to drop in the Q2 of 2018 and stabilize in the second half twenty eighteen.
We confirm our NII guidance for the year, which means we have we expect NII to remain stable in the first half twenty eighteen At the average fiscal year 2017 underlying run rate and to increase in the second half twenty eighteen, Thanks to the combined effect of higher volumes and stabilizing customer rates. Let's turn to Slide 14. I will highlight 3 points in this slide. First, in group core, average loans were up $2,800,000,000 or 0.7%. 2nd, the average customer loan rates were stable.
On a stated basis, they increased by 1 basis point versus last quarter. Excluding one offs, they were down 1 basis point in group core. 3rd, in terms of customer spreads, CE and CIB are improving, while Germany and Austria still decrease. If you want to have more details on this topic, feel free to call our colleagues in IR. Slide 15.
As we said previously, loan volumes were restated for line adjustments. We show these in the appendix on Pages 62 63. End of period customer loan volumes for group core were up €5,100,000,000 in the quarter, 1.3% and 3.1% year on year. This compares with EUR 9,600,000,000 for the whole of fiscal year 2017 and underlines our positive commercial dynamics. Some divisions were affected more on a relatively basis by nonrecurring effects.
In Commercial Banking Italy, for example, Stated loan volumes were flat. Adjusted for IFRS 9 FDA impact, they were actually up 0.4% in the quarter. Let's turn to Slide 16. Fees in the quarter were up 2.8% year on year. Let's look at the 3 categories separately.
Investment fees were up 2.9% in the quarter and 2.3% year on year. AUM net sales were up 8.4% year on year, which is a very good result in this challenging market And testimony to the strength of our commercial dynamics. AUM stock was down in the quarter as negative market performance more than offset Positive net sales. The investment fees outlook should be viewed in light of the strong base effect and the good 1st Q 2018 performance. Financing fees were down 4.4% year on year due to the lower fees on overdrafts and guarantees in Italy.
Transaction fees were up 9.3% year on year, mostly driven by current account fees in Italy. We confirm our fiscal year 2018 growth rate for total fees at approximately 3%, but expect some quarter to quarter Volatility. Let's turn to Slide 17. TFA has reached EUR 815,400,000,000 in the quarter, increasing 2.4 or €19,400,000,000 year on year. AUM in the quarter were €217,000,000,000 Benefiting from net sales amounting to $3,900,000,000 up 8.4% year on year.
This is an outstanding achievement considering the challenging market environment in the quarter. They were offset by an AUM market performance of minus $4,700,000,000 The decline in AUCs is mainly driven by commercial banking Italy as we have stopped selling retail bonds And expiries are converted into AUMs. For the group, more than EUR 6,000,000,000 of AUCs declined year on year Kim from Retail Bonds. Let's turn to Slide 18. Trading income in the quarter was down 19% versus last year As we had some large client driven transaction in the 1st Q 2017, we saw a rebound of trading income to $478,000,000 in the 1st Q, up 23.2% on an adjusted basis.
This is still above Our normalized run rate, which is €350,000,000 to €400,000,000 per quarter. Please be aware that since the beginning of the year, all valuation adjustments related to our own credit spread are flowing through equity. As a result, volatility of our trading income is expected to be lower going forward. Our dividends, The contribution of Turkey was up 29.7% versus last year at constant FX. Turkey had a strong Q1, which underlines the sustainability of its business model in a very volatile environment.
Let's turn to Slide 19. Our focus on cost efficiencies yielding tangible results. The operating model transformation continues We have already achieved 75% of our plant FTE reductions and 78% of our plant branch closures. As a result, operating expenses are down 5.2% year on year and down 2% in the quarter. We confirm our cost targets for 2018 at $11,000,000,000 and 20 19 at $10,600,000,000 Let's turn to Slide 20.
Both HR and non HR costs are down on a year on year basis. HR costs are down versus last quarter FTE's reductions continues, non HR costs are up 1 percentage point versus the 1st Q 2017 as a result of expense recoveries normalizing from their seasonally high in the 4th Q 2017. Let's turn to Slide 21. Regarding asset quality, I would like to point out 4 items. 1st, Loan loss provisions are seasonally low in the Q1 as this year was no exception.
2nd, There was no impact from model changes in the Q1. The majority of the model's impact is expected in the second half. 3rd, the IFRS 9 first time adoption affected the coverage ratios in the 1st Q 2018. And last but not least, The line adjustment from accounting changes affect both cost of risk and NPE ratios. Numbers for fiscal year 2017
have been restated.
We still can we We still can we still saw write backs in Austria and low cost of risk in DCE. They should normalize in the course of the year. We confirm the 2018 cost of risk target of 68 basis points, 50 basis points of which from models. Our overall asset quality is steadily improving. The coverage ratio improved from 56 0.3% to 60.3%, mainly thanks to IFRS 9 FDA.
The group's Gross NPE ratio has come down to 9.5% in the 1st Q 2018, below 8% for the first time. Let's turn to Slide 23. In Commercial Banking Italy, net interest income was down 1.4% quarter on quarter As pressure on customer loan rates overweight higher average volumes. Adjusted for the days effects, customer rates were down 2 basis points And average volumes grew by 0.6%. Fees were up 3.2% year on year, Mostly thanks to strong transactional fees from current accounts.
AUM net sales reached EUR 2,400,000,000 up 18.5 percent year on year. This is a good result in a very challenging market environment. We attracted 90,000 gross new clients despite closing another 50 branches in the quarter. The asset quality is improving, cost of risk is down to 64 basis points in the quarter. The risk discipline for new loan origination remains As expected, loss on new loans was 35 basis points, well below the expected loss on the stock At 53 basis points, both metrics significantly improved quarter on quarter.
Return on allocated capital for the quarter was 14.2%. Let's turn to Slide 24. In Commercial Banking Germany, NII was down 8.1% quarter on quarter, driven by the high amount of repayment in the 4th Q 2017. While we see some encouraging signs on loan volumes growth, we still experience pressure on customer rates. Fees were down 6.9% year on year, mainly due to investment fees.
In 1st Q 2018, Did not reach the level of the unusually strong 1st Q 2017, which benefited from closed end fund sales And there are no recurring items. The insurance partnership with Aylance had a strong start. Cost of risk is stable versus last year at a seasonally low 13 basis points. Return on allocated capital was 7.5% the Q1 2018, we confirm our 2019 target of 9.1%. Let's turn to Slide 25.
In Commercial Banking Austria, NII was down 2.4% versus last quarter due to repayments In commercial real estate and pressures on rates, customer loan rates were down 3 basis points, while average volumes were up 0.4%. Fees are up 1.2% year on year. AUM were down 1.1% quarter on quarter As the negative market performance offset positive net sales, we still had net write backs in the quarter, Cost of risk should gradually normalize in the course of the year. The branch closures in Austria have been completed. Costs are down 6.2% versus last year, while net operating profit is up on a year on year basis, Net profit is down in the same period.
The reason is a contribution from discounted operation in the 1st Q 2017. Return on allocated capital was 7.2% in the Q1 2018 as the bulk of the systemic charges was booked in the Q1, A much higher proportion than for the group. We confirm our 2019 target of 13.3%. Let's go to Slide 26. CE continues to be our growth engine.
We added 304,000 gross new clients In the quarter, while loan volumes saw a decline of 0.6% in the quarter, the customer rates stabilized overall, driven by positive rate movements in Romania and Czech Republic. Fees were flat versus last year also due to an accounting change on fee accruals. While the cost income ratio at 34.8 percent points continues to be best in class, We expect some cost increase in the coming quarters. The cost of risk is at a low 69 basis points and is expected to normalize over the course of the year. Return on allocated capital for the quarter was 15%.
And before we move to the next slide, let me say a few words on Russia and Turkey. UniCredit is very comfortable with its business in Russia, which has delivered recurring profitability above cost of capital. As everywhere else in the group operates, it strictly complies with all rules and regulations. Overall revenues related to the newly sanctioned entities are negligible, both in terms of revenues and overall exposure for the group. As you will have heard at YAPI Trade's recent Capital Markets Day, we have decided together with our partner, Koch, To participate on a pro rata base in their capital increase of $1,000,000,000 that will support the new strategic plan.
This will enable the bank to grow profitably backed by a strong balance sheet. Let's move to Slide 27. In a very competitive environment, European Environment, CIB commercial performance was resilient. NII was up 5.3% quarter on quarter, driven by improving front group rates and some non recurring items. Fees were up 10.5% year on year, driven by strong client activity in structured finance and primary capital markets.
In the trading income, we had a nonrecurring net trading gain of 2 participations for a total of 39,000,000 Cost income ratio at 36.3 percent is best in class in the industry. Normalized return on allocated capital stood at 14.1%. Let's turn to Slide 28. As most of you We have listened to Fineco's results on May 8. I will limit my comments on this slide.
We are very satisfied with the financial performance of Fineco. Let's turn to Slide 29. The performance of the Corporate Center was no longer affected by any Counted operation line in fiscal year 2017. Costs are down 3.7% versus last year, mainly driven by FTEs. As a result, the ratio of group corporate center cost to total cost stable at 3.4%.
Improvement versus last year quarter is thanks to the seasonal and mix effect. The fiscal year 2019 target of 3.5% Please confirm. Let's turn to Slide 30. As we have already mentioned, we will bring forward the closure of this division. We will write off EUR 1,400,000,000 of older vintages residential mortgages and accelerate the non core rundown by 4 years to 2021.
As a result, we have also improved our 2018 targets for gross NPE disposals to EUR 2,000,000,000 and have improved our 2019 targets for gross NPEs to EUR 14,900,000,000. Let's turn to Slide 32. We continue to de risk the balance sheet and lower our cost of capital. Gross NPEs decreased by $3,700,000,000 year on year $1,000,000,000 quarter on quarter. Our core gross NPE ratio has Fallen to 4.7% in 1st Q 2018, the coverage ratio improved to 57.9%, Also, thanks to IFRS 9 first time adoption.
Let's turn to Slide 33. In the core bank, net flows to NPs are down both year on year and quarter on quarter. Overall, the risk environment remains supportive. For the group, expected loss of new business was at 30 basis points, below the stock at 35 basis points. Both metrics improved versus the previous quarter.
Let's turn to Slide 34. Gross NPEs in Commercial Banking Italy declined reaching EUR 9,500,000,000. The gross NPE ratio reduced to 6.6%. The 2019 gross NPE ratio target is confirmed at 5.3%. The reduction of NPEs towards the target We will not always be linear.
The coverage ratio increased to 54.8%, also driven by the IFRS 9 first hand adoption. Let's turn to Slide 35. Inflows to NPEs in Commercial Banking Italy were lower quarter on quarter after the seasonally high 4th 2017. We continue to see the overall risk environment in Italy as supportive, also evidenced by higher recoveries year on year. Let's turn to Slide 36.
In the execution of our accelerated rundown, We have decided to address the most difficult asset class first, residential mortgages. We will do this through a combination of disposals and write offs of all the vintages for EUR 1,400,000,000 taken in the 1st Q 2018. We will also improve the disposal target of non core in 2018 from $1,700,000,000 to $2,000,000,000 Performing exposures in non core are down $2,500,000,000 year on year And stand at $2,700,000,000 By the end of 2018, all performing exposures in non core will be gone And the division will become a closed NPE book. And finally, there was a change in the methodology of reporting for NPEs as a result Italian banks no longer account for default interest in gross book value. This reduces NPE Gross book values by €900,000,000 in noncore.
Let's turn to Slide 37. Non core loan dynamics further improved. Net NPEs were down $8,900,000,000 down €4,200,000,000 year on year. Gross NPE were down by €7,000,000,000 year on year, reaching €23,600,000,000 We are lowering our group our gross NPE target for 2019 to 14,900,000,000 NP coverage improved significantly to 62.4%, mainly driven by IFRS 9 FDA. Let's turn to Slide 39.
The group's fully loaded Core Tier 1 ratio closed at 13.06%. The key drivers were the combined effect of IFRS 9 first time adoption in Fino, partially compensated by a Q1 earnings generation. Regulation models and procyclicality negatively impacted by 9 basis points. We expect the EBA guidelines And remaining impact of our models to occur mostly in 2nd Q in the second half twenty nineteen, this Depends on a formal validation by the ECB, which we still expect for the second half twenty eighteen, But could slip into the 1st Q 2019. IFRS 9 became effective on the 1st January 2018.
The decision to accelerate the non core rundown to 2021 and write off also had an impact on the first time adoption effect. In total, The negative impact net of tax for UniCredit is 99 basis points of core of CET1 ratio, most of which is due to increased LLPs and write offs. Following the completion of Fino, we will get a Capital benefit of 8 basis points, this effect will increase over time, thanks to the evolution of retained exposures. We expect our core Tier 1 ratio at year end 2018 to be between 12.3% 12.6% For 2019, we reinstate our core Tier 1 ratio target above 12.5%. On the next page on Slide 40, risk weighted assets decreased by EUR 2,800,000,000 to EUR 353,300,000,000.
The biggest driver was Fino. Jean Pierre, back to you for the conclusions.
Thank you, Marco. Before we move to Q and A, Let me briefly recap our Q1 2018. We had a solid core bank performance with net profit of €1,200,000,000 And the RoTE of 10.4%. Positive commercial dynamics sustained resilient revenues Done only 0.7% year on year. We confirm our 2018 revenue target of €20,100,000,000 We also confirm our NII guidance for the year.
The operating model transformation is ahead of schedule. We confirm the 2018 2019 cost target of €11,000,000,000 and €10,600,000,000 We have further taken further decisive action to accelerate the non core rundown to 2021, Bringing it forward from 2025, we confirm the gross NPE disposal target for 2018 to EUR 4,000,000,000 and improve the gross NPE target for the group and non core. We maintained our cost of risk target Our CET1 ratio fully loaded is 13.06% in the Q1 2018, including the IFRS 9 FDA impact. We expect our fully loaded CET1 ratio at year end 2018 to be between 12.3% and 12.6% And for 2019, above 12.5%. Naturally, we also confirm our dividend policy of 20% payout for 2018 and 30% payout for 2019.
As I have said in the past, Transform 2019 is just the beginning on which we will beat solid foundation for UniCredit To become a true pan European winner, I am very encouraged by these results, which again Show the tangible impact of Transform 2019, we are now at kilometer 18 of our marathon, And I am proud of all our teams who have been and keep working very hard and are in every way fully committed to transforming the bank. Thank you. I and the whole management team are confident we will continue to make good progress with the transformation of the book In the remaining quarters of 2019 and achieve our objective of making 1 bank, 1 unique credit, a true Pan European winner.
Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. The first question comes from Jean Louis of Goldman Sachs. Please go ahead, sir.
Hi, good morning. Two questions then. The first one is just housekeeping. There has been an acceleration in many banks' settlement of Past disputes with the U. S.
Authorities in general. And I think I remember that there is still the OFAC outstanding for UniCredit. So If you had any update on this, that would be really appreciated. And secondly, generally on asset quality, so you are taking more steps To hasten the end of non core, a lot of that goes through IFRS 9, which I guess I'm not sure if it was just Included just as much in the original business plan target. And with lower NPL balances, The coverage ratio, which is now 60% versus the target of 54%, I wonder to what extent the cost of risk target for 2019 Can be qualified at this particular stage.
So any view on this would be also very appreciated. Thank you very much.
Thank you very much. Just on your first question, we have yet to get final feedback of U. S. Authorities On a possible resolution of the matter of our OFAC discussion on limited claim. We hope that this resolution can be reached in the course of the year and we deem that the provision we already took are appropriate.
On your second question on asset quality and IFRS 9, we as you have We have by moving forward the runoff of the non core portfolio, We have taken a first time application of 104 basis points, This allows us to reduce more quickly the non core and specifically as mentioned to tackle The residential mortgage side, which is the most difficult asset class to deal with for disposal and the price has been adjusted, which led to the FTA increase as well as write offs and we're writing off in the non core €1,400,000,000 on the residential mortgage for the quarter. As far as the cost of risk for 2019, we don't foresee Any change? It is at 55 basis points, of which we have a 4 basis points impact coming from MEDEL. Next question, please.
The next question is from Andreas Siltri of Mediobanca. Please go ahead, sir.
Yes. Good morning. You're clearly over delivering on derisking, which had just been up last December and net flows are improving. How much of the €16,000,000,000 non performing for Born that you disclosed in the presentation. Do you expect to migrate to performing for Born over the next 12 months?
And how much room do you see to restructure non foreborn unlikely to pay loans and bring them back to performing over the next 3 years? And is this included in your business plan targets in any way? And I just wonder if you could also give us The corresponding P and L impact adjustments to your business plan targets For the accelerated runoff of the non core? Thank you.
We're entering into technical territories, which are well above my level of competence. So I will hand over to our risk star, TJ Lynne, with Looking at the figures, so TJ, as soon as you're ready, I'll let you comment.
Yes. Thanks, Jean Pierre. On the foregone for 2018, we expect a cure rate in line with 2017 at 5 And this flows to performing. So we will only come from QA nonperforming loan. UTP, it will be in a similar magnitude.
The second question was on the P and L impact. Mikko, I'll let you comment on that. Yes. No, on the P
and L impact, we have no P and L impact due to the FDA.
Next question, please.
The next question is from Andrea Vercellone of Exane. Please go ahead, sir.
Good morning. Two questions. 1 on the Non Core division and one on taxes. On the Non Core division that You now plan to shut down in 2021. Can you give us some guidance as to what you expect The I suspect negative operating profit to still be in 2021 But then we'll be transferred to other divisions.
And if it is 0, the net operating profit, why is it so? The second is on tax. Can you just comment briefly on the Elements that have driven the low tax rate in the quarter. And whilst we are at it, given that it's A sizable amount. Can you update us on the on balance sheet and off balance sheet DTAs, Ideally by countries, Italy, Germany and Austria that you still have outstanding and how much of these, if any, You think you can use in 2018 2019 according to your business plan projections.
Thank you.
Thank you very much, Andrea. I will let Nico comment on the Tax issues and details. On the first point, once the non core portfolio will be 1 off, P and L will be 0 basically. So there might be in 2021, the remaining P and L, but from 2020 onwards, there will be 0. The non HR costs related to credit recoveries are legal expenses and there will be no more.
And the HR cost, we have currently 4.31 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Feet Feet Feet Feet Feet will progressively decrease between now and 2021 And the residual staff will be moved to other operational activities. So we will end up having no staff afterwards By 2021, I'll let Nomieko comment on the tax issue.
Yes. On the tax rate, the tax rate was 15.9% For the quarter, it's lower than the budgeted rate. You're right. What has impacted this most of the impact is coming actually from FDA. So this is So almost 80%, 90% of the impact.
There is also the fact that it depends on the mix of, Let's say, the P and L delivered by the different countries. So there is, let's say, a different mix in which we delivered more, let's say, in Commercial Banking Italy that has, let's say, a lower tax rate and automatically this has an impact. But in order to allow for you to, let's say, for your models, I would assume 20% for fiscal year 2018 as a good proxy for this year. On the DTA test on first of all, how much DTAs we can we are going to be able to use, it will depend on the DTA test that we have On a regular basis, we are not thinking it depends, let's see about it depends on the profitability levels that each Let's say, the divisions and the legal no, especially the legal entities will be able to do. In terms of the amounts, we have EUR 8,300,000,000 of convertible DTA In our balance sheet and most of it is split between Italy, Germany and Austria.
Next question please.
The next question is from Ms. Azbura Gualsi of Citigroup. Please go ahead ma'am.
Hi, good morning. Two questions, one on fees and one on capital. Fees are progressing very well. Mine is more a question about The short of the industry, do you foresee any pressure in terms of margin going forward given the regulatory environment mix and things like that? The second one is capital.
Your capital position is clearly strong and you have been very, very conservative. Can you share with us what's your views on the recent market concern on the accounting of the cashies? Thank you.
Thank you very much. Well, I will take these two questions. On the fees, I mean, it's natural to always have a Fee evolution and fee pressure in every industry. We think that there will be 2 specific activities, which We'll have more fee compression. One is the equity brokerage business, specifically with MiFID II and you have For banks which have equity broker that there is a massive pressure on fees.
Luckily, I would say, with a sense of foresight, We have closed our equity brokerage activities many years ago and entered into a strategic agreement with Kepler, which is now Kepler Cheuvreux, which is now the largest broker in Europe in terms of research coverage and equity So that was a lucky move, which protect us from this negative evolution. And we expect as well on Asset Management, some contraction of fees on the product, but there as well, Some contraction of fees on the product, but there as well, we entered we have sold our Asset Management business and entered Into an agreement with Amundi. So we think that on the business where we are present, we are dynamically managing our And while there could be some overall some free fee pressure, we think that the volume Impact and the positive volume we could have will lead, as we mentioned, to a 3% CAGR evolution of the fees in 2018 2019. On your question related to the cashies, I mean, first of all, if you want additional information on the cashies, We have posted more information about the main feature of the cashies on our website. So you can find them if you don't ask our IR team.
Just want to comment that the regulatory treatment of the cashies has been fully disclosed to the market and confirmed, approved and reviewed by All competent regulators, I repeat, all competent regulators and is fully compliant with all past and current regulations. We do not see any under circumstances, no any impact on our CET1. And we have alerted the competent authorities
The next question is from Mr. Victor Galliano of Barclays. Please go ahead, sir.
Yes, good morning. Thank you. Just one question from me. Following on, on the capital, clearly very strong capital position, even factoring in the IFRS 9 FTA. I just wanted to ask in view of this strong capital and the faster rundown that you foresee for non core, etcetera, Why the conservatism on dividend payout?
I mean, I know you expect it to go up to 30%, but Is there a potential that you would review that higher? And if so, when could that be?
Thank you. Thank you very much. We have mentioned that we will increase in 2019 our dividend payout to 30%, for dividend to be paid in 20.30 in 2027. We have mentioned and disclosed in During our Capital Market Day last year in December, the overall CET1 walk and CET1 impact The various regulatory changes, which could happen up to 2027. We said at the time that We intend to raise the dividend payout to 50%, while maintaining CET1 ratio above 12.5%.
So After 2019, so you're saying that it's not in 2019. So after 2019, Based on the exit level of our CET1 ratio in 2019, the Confirmation of the various regulatory impact, we might consider to increase the dividend payout. And just as a reminder, 10 points of additional dividend payout are equivalent to 10 basis points of CET1 ratio. So if in your projection, You see a buffer, continuous buffer of 10 basis points of CET1 ratio. You can assume that we will increase the dividend payout by 10 points.
So it will depend on where we are at the end of 2019 and what will be the further regulatory impact. And we intend As quickly as possible to reach 50%, but it will depend, as I said, on CET1 ratio exiting 2019 and regulatory impact. Next question please.
The next question is from Mr. Matthew Clark of MainFirst. Please go ahead, sir.
Good morning. So firstly, on net interest margins, could you comment whether you've seen any change in the competitive landscape since the TLTRO Reference window closed. And then secondly, Perhaps if you could comment on what your central assumptions are for GDP growth within your IFRS 9 provisioning and maybe give some sensitivities around What would happen if GDP growth outlook changes plus or minus 1% or however you would look at the sensitivities that might affect your Required provisioning. Thank you.
Thank you very much. I will let Jenny give you a bit more detail and colors about The competitive competition dynamic in the quarter in terms of NII. Before I hand over to him, just want to remind you what we said in the presentation, which is that our end of quarter Loan volume increased by €5,100,000,000 which is more than 50% For the overall loan volume for the full year 2017 last year, so you can see that The dynamic, the commercial dynamic are very good in the Q1. And you have seen as well that we have Customer rates, which have stabilized in the Q1 overall, as we have mentioned in the presentation. But now I hand over Jenny for more colors about the competitive environment.
Yes. Thank you, Jean Pierre. So well, looking forward, we still expect customer loan rates, not customer loan rates to drop somewhat in the Q2 of 2018 and stabilize in the second half of twenty eighteen. And as a result of that, we confirm our NII guidance for the year. We have seen a lot of Activity in the Q1, we see also transactions that we did not want to participate because there was no value in participating to Activities and operation transactions where competition was really going for low spreads and low interest rates.
Nevertheless, as mentioned by Jean Pierre, we have been growing the Q1 very nicely to more than half of the net growth of last Yes. So we don't have we don't do volume lending because we take care of the right kind of risk. But as I said, thanks to the combination of growth that we expect also for in the quarters to come And the stabilization in the second half of twenty eighteen, thanks to the combined effect of this, we see this So an improvement in the NII for year end.
Thank you very much, Janisse. On the GDP The growth assumption or economic growth assumption, TJ will comment for IFRS nine. Please, TJ.
Okay. We have, assuming the LLP estimation, the macroeconomic assumption, we have a baseline scenario consistent with group strategy. In a baseline scenario, we're assuming EU GDP at around 1.8% for 2018 and 1.5% For 2019, we have also looked at a positive scenario for the GDP growth on the EU side with an additional 0.2. But in this, we also look at adverse scenario in case of sovereign tension with the subdued growth service. So LLP assumption embed also both the baseline as well as the stress scenario.
Next question please.
The next question is from Ms. Delphine Lee of JPMorgan. Please go ahead madam.
Morning. Thanks for taking my questions. So 2 on my side as well. So first of all, just wanted to come back on fees
and commissions. Just trying to understand your guidance of 3% increase year on year. Looking at last year, it looks like The first half had a high comparison base and the trend seems to be quite supportive, in particular on transaction fees. So Just trying to understand where if you see or expect some kind of weakness Or slowdown in the second half or if you could give us a little bit of color on the trends that would be quite helpful. Secondly, on The asset quality, just to understand a little bit the gross NPE that you're looking for in terms of ratio For 2021, if you assume that the non core deleveraging is fully done,
Is it fair to assume that
you will be close to 5%? I'm just trying to get a sense of where the ratio is heading to? Thank you very much.
Well, I will take these two questions. On the fee side, as you can see on Page 16 of the presentation, Evolution that we are planning for the year of roughly 3%, basically. We Just mentioning that one should look at the combination of the various nature of fees, Investment fees, finances fees, transaction fees. We have a very good performance of transaction fees, which will help as well in Italy The fact that we started charging current fees this year, so that explain part of the 9.3% evolution year on year. The financing fees, which were lower year on year, should go back with a new transaction.
And so we should have Very decent performance of financing fees. On the investment fees, it depends on the market environment and of our net AUM sales. We had a strong outperformance of NetSuite in UN sales for the quarter, up EUR 3,900,000,000 Up 8% or more versus last year. And with the current market evolution, we need to see whether customers will Shift from deposit into AUM and so maybe there could be some adjustment on a quarter to quarter basis. But all in all, because of the diversification and the strong commercial dynamic between Fees which should do well for the year, financing fees which should rebound and evolution of the investment fees which Relying on the strength of our network, we are confident to achieve the 3% CAGR that we communicated about both for 2018 2019.
On the gross NPE ratio, Clearly, we want to run off the non core by 2021, Because it is important for us that the group is valued actually on the core bank figures And that's important. And you can see that the NPE ratio for the group core It's actually very good for the quarter at 4.7%, so close to the EBA guidelines. And we expect the group for 2021 to be below 5%. So that's in line more or
less with where we are today. Next question, please.
The next question is from Mr. Giovanni Razzoli of Equita. Please go ahead, sir.
Good morning, everybody. Two questions on my side. Again, on the most price sensitive, in my view, Element of this quarter that is the anticipation of the rundown of the non core unit. Basically, you are assuming to reduce by €15,000,000,000 Talk of NPEs 2019 2021, if I'm not mistaken. If I look at the mix Of the reduction in the Q1, 50% of the reduction quarter on quarter were via write offs and 30% were Back to Bonnie, I was wondering whether this kind of mix can be applied also for the expected rundown of It is a business unit in 2019 2021.
And the second question is a clarification on the default rate in Italy. If I'm not mistaken, I've seen that there hasn't been any material decrease on a year on year basis. The default rate is still at 2% despite improving macro outlook. I was wondering if you can Give us some details about this trend in the Q1 for Commercial Banking Italy. Thank you.
Thank you very much. So for the I will let TJ comment in more detail about the acceleration of the runoff of the non core. But clearly, this quarter, we took, I mean, a one off decisive action on the ready mortgage in terms of write off For the non core for the rigid mortgage, €1,400,000,000 and total for the non core, including the rest, €1,800,000,000 This It's not to be repeated, at least in the same scale. And we expect the non core Reduction to cure with the mix of action, combination of recovery as well as sell down, both of bad loans and UTP,
If you look through Page 58 in the ANAC, clearly you would see That we have $11,400,000,000 of the corporate as of end of Q1, dollars 4,800,000,000 of mortgages, EUR4 1,000,000,000 in leasing, EUR2,500,000,000 in small businesses. So the mix will change as we start. We have taken decisive tariffs, Jean Pierre mentioned, On the mortgages side, there in the coming, I would say, quarters years up to 2021, we will also look at disposal. Corporate side, we have been one of the most active players using not just our own restructuring active restructuring, but also using platforms. You may have heard of ThunderCann, Pilastone and even IDEA.
So this one is part of the whole UTP sort of rundown. And leasing, if you look at the Capital Market Day, we've articulated a clear rundown strategy, and we will continue to refine accelerating that strategy.
On the default rate in Italy, it is more or less stable. I mean, there has been some one off Individual files, which mean that the default rate is there. But as you can see, the NPE ratio for Italy Has been improving at 6.6%. So we are happy with the workout I mean, the work which is done. And we are maintaining, as Gianni mentioned, a very strict approach of new origination.
We are monitoring, I mean, every day, but also on a regular basis, the new expected loss For the expected loss for the new business and I mean the figures for Italy Actually, very good as well. So we are confident that the portfolio will keep improving. As an example, The expected loss on the new business for 2018 for the Q1 2018 in Italy is 35 basis points Versus stock, which has an expected loss of 53,000,000,000, so the new origination improved the quality of the portfolio. But, TJ, I don't know if you want
to add something else. Just to add one comment, our 2019 target that we disclosed is 2%. So we are around 2.12% became part of the seasonality. And as Jean Pierre mentioned, the expected loss, the underwriting side It's strictly monitored and we've seen is much better than our targets that Jean Pierre just mentioned. Next question, please.
The next question is from Mr. Domenico Santoro of HSBC. Please go ahead, sir.
Hi, good morning. Thanks for the presentation. Just wonder whether you can share with us any further room to reduce risk weighted by a business action. As you mentioned in the presentation, given one of your competitor in Italy is quite active there, now that you give us also a rundown of the non core in 2021, Was wondering whether in December, when you update the plan, you will be ready also to give us some profitability target beyond 2019? And then if I can, also sensitivity of capital to FX devaluation, especially in Russia and Turkey.
Thank you.
Thank you. I will take the second question and let Nico comment on the risk So on the target being 2019, As I said, we are in kilometer 18 of our marathon. So I calculate properly, but still 22 kilometers to go basically. And 24 kilometers, so I don't calculate it properly. Actually, 24 kilometers to go, it was a short term marathon.
So let us deliver on the plan. And once we have delivered the bulk of our plan, Then we will come back to you with the next steps, I mean, and we'll see whenever it is, basically. But let us work, And we promise to come back with the next step as soon as we have delivered on the bulk of the plan. For Mieko, we'll comment on the risk weighted asset evolution. I just want to say that we Don't do complex transaction or tricky things in terms of risk weighted asset.
And you have the evolution of the risk weighted asset on Page 14, but I'll let Mircle comment in more detail.
Yes. No, exactly. That's the point. Basically, of course, we do, let's say, a marginal optimization that is ongoing optimization that we are doing to risk weighted assets. But In terms of the development of the respected assets for the quarter, we had, let's say, business evolution The biggest impact was EUR 3,500,000,000 and it was basically countered by minus EUR 5 €1,000,000,000 in terms of risk weighted asset coming from business actions.
In terms of regulation, we had an impact of €2,000,000,000 into the risk So these are the 3 main pillars. Now in terms of you asked also about the FX Sensitivity on Russia. Russia has for a 10% devaluation In the currency, Russia is impacting us by 5 basis points. So that's the sensitivity.
Next question, please.
The next question is from Benjie Kraland Sanford of Jefferies. Please go ahead.
Yes, good morning all. I guess just a slight follow-up on the last question around RWA growth. I mean, if we look over the past year at core capital generation, I. E. Earnings, that's The underlying RWA growth ex model impacts improved cyclicality.
The capital generation has been running on average over 30 basis points a quarter, Which is obviously quite a long way ahead of the 50 basis points per year organic generation that you have in the business plan. So I'm just wondering Now what closes that gap or what level of underlying RWA growth do you expect over the medium term? And then the second question was just around the IFRS nine impact. The net impact this quarter was 99 basis points, but you've guided that, that will close to Around 70 basis points over the course of the year. Can you just explain why there is that lag effect or how that comes through?
That's not something That the rest of your peers are being particularly vocal about, that would be helpful. Thank you.
Yes, I will take the second question I will let Mierko comment on the first one. In terms of the FDA impact, We guided initially at 74 basis points. But when we presented in detail the core bank Performance last year, there has been a strong and positive feedback from investors about focusing on the core bank metrics. And we really want to make sure that the core bank metrics become the metrics to value the bank basically. And you see that We have RoTE, which is well above 10% and NPE ratio well below 5%.
So to do that, We have decided to shorten and move forward the one off period of the non core Within the time horizon of analysts' investors, meaning within 3 years, we initially planned it and announced 2025, but we felt it was too far away For investors and analysts to take into account the fact that the non core will be fully run off and to focus on the core bank metrics. So by doing that and by shortening the period, there is, of course, price adjustment as we're going to sell down And more quickly some of the assets, and we decided to make sure that we start with the most difficult assets, which are mostly resi mortgage. And so the price adjustment and the write down meant that there has been an increase on the The impact that we were initially planning. So that's basically making sure that core bank becomes a For the first question, Nico is commenting now.
And maybe one more point on your point, Jean Pierre. So you're right. So we go from a gross impact of 104 to a net of tax Impact of 99 basis points and then we go on a net basis to 70 as we are showing into the appendix. The impact The effect is going to come through shortfall during the course of the year. In terms of Risk weighted asset growth that for the rest of the year, we believe most of it is going to come from regulatory from, let's say, models impact.
And as discussed before that we expect most of the models impact to happen in the second half with a potential to slippage into the first Q 2019 on the EBA guidelines anticipation and the rest is lending volumes.
Next question please.
The next question is from Ignacio Chieso of UBS. Please go ahead, sir.
Yes. Hi, good morning and thank you for the presentation. Follow-up on the Russia and Turkey's FX risk You're planning to take some measures basically to start hedging your earnings or your capital in those two countries to protect from currency volatility. And then the second question, I think actually if I have a look at your business plan presentation in terms of rate sensitivity, you seem to be implying around 20 basis I'm speak up of Euribor next year, which according to your latest sensitivities in the region of EUR 350,000,000 net interest income. So I wanted to check what kind of buffers do you think you have in case actually the driver ends up not going up next year?
Thank you.
Well, I will let Nicko comment on the FX hedging. On the EURIBOR Sensitivity to the business plan. First, we our economy's projection are for a tightening of the If it be by the second half of next year, moving starting from the summer And moving from the minus 40 basis points to 0 basically at the end of the year. So if it does not happen, we don't have any buffer. What I'm saying about that is if the rates don't go up, the impact of the rates will not be seen.
And the only Two mitigations I can see are on one side the loan volume, if the loan volume is higher and on the other side if our cost The funding is lower because we saw the other two dynamics. So but I would not call that buffer. I just say that we have values moving parts, and I think the rate sensitivity is the highest one. Just As an update to make sure that we all have the same figures in mind, the sensitivity to 10 bps on an annual basis, To tend this movement of the 3 months you are able is EUR183,000,000 per year. And the sensitivity to parallel movement of the curve to 100 basis points, so Parliament never happened, but it gives you sensitivity.
It's €1,100,000,000 for a full year basis basically. So €183,000,000 on one side for 10 bps and €1,100,000,000 on the other side for 100 bps. Merkru, On the hedging strategy on Russia and Turkey.
Yes. We have On a yearly basis, we put in place hedging strategies. We specifically to as you said, To Turkey and Russia, what we have done for 2018, we hedged partially hedged the profit of the legal entity And we have basically put in place some selective hedging on this, particularly with Russia and Turkey.
Next question please.
The next question is from Ms. Anna Adamo of Autonomous Research. Please go ahead madam.
Hi, thank you for taking my questions. 2 as well from my side. Going back to the IFRS 9 first time adoption, Could you share with us what is the updated split of the 3,800,000,000 pretax impact between Stage 12 and Stage 3, please? That's my first question. And my second question is on NII.
Could you tell us what was the contribution to NII coming from unlikely to pay in the Q1? And whether you think that this contribution will come down as a result of the non core rundown, please? Thank you.
So on your first question, we have in terms of adjustments, more or less The basis point, 81 basis point coming from the Stage 2 adjustment, and we have a 23 basis point coming from The write off, if I remember it's correct, plus one basis point of marginal adjustment. So that's more or less the breakdown. On the NII side, I didn't pick up the last part of your question. Could you repeat your question? I was not quite sure what you wanted to
Madam, could you please pick up the handset?
Sorry, no, no, we can't hear you, yes. So it was the contribution of
Was the contribution to NII coming from the Alaki to Pay? And whether this contribution will come down from the runoff of the Non Core Division.
That goes beyond My granularity, if I may say to you, I will let Mirko comment on that as soon as he can get the information. And if
No, I have something on the previous question because you also asked about Stage 3, Stage 2 and Stage 1, the composition, so it's about 65% is Stage 3, 27% Stage 2 and the rest is Stage 1. And on the very last question, we have to come to you to Alain on this one.
So we'll come back to you, Alain, on your second question.
Next question please.
The next question is from Adrian Chigi of RBC. Please go ahead, sir.
Hi there. Thank you very much. Just one follow-up question on the non core guidance, if I may. We've talked before of the self funded feature of the rundown. Can you confirm that now that you've moved You would prioritize the 2021 period over doing it over self funded?
Thank you.
Well, we confirm it is done on a self funded basis. And as I said, it is important for us that we can I move the focus of analysts and investors towards the core bank, so we want to keep the 2021 target? And so that will be the priority on the self funded side, if I may say. So to be clear, If there were a small remaining part, we'll do a cleanup trade in 2021.
Perfect. Thank you.
Next question please.
The next question is from Carlo Di Grande of HSBC. Please go ahead, sir. Mr. DiGrande, your line is open, sir.
Yes, good morning. You did produce 37 bps of capital growth in the quarter, if I exclude the IFRS So I was wondering what kind of expectations do you have over the next few quarters? I do realize that there are some others So probably those are not recurrent or they do vary according to quarter. But if you can just give us a rough indication About capital production over the next few quarters until the year end? Thank you very much.
Well, What you could do is you could go to Slide 60, so in the ANNEX, where we give Some kind of breakdown of the evolution of the CET1 for 2018, basically. And so you can see on that page that we expect 0.40% or 0.4% of Regulation Model and Procyclicality, net IFRS nine impact of 0.7%, 0.8% of EBITDA guidelines are anticipation. We said it will be taken in the second half. We need a formal validation of the ECB of the model. So it's a little bit of our hand.
If the ECB comes later, Mike, skip to the Q1 2019, but it will arrive and we think the ECB will formally come back to us in the second half, but small risk of slipping in first And we have organic capital generation plus some improvement, if I may say, of between 0.6% to 0.9%. So the total CET1 impact It's between minus 1% to 1.3%. And so the fully loaded CET1 ratio target for the year It's between 12.3% to 12.6%.
Thank you very much.
Next question please.
The next question is from Ebrahim Saied of Deutsche Bank. Please go ahead, sir.
Good morning. Just quickly, I appreciate that you with respect to the Kash, as I've clarified that all competent authorities have approved the structure. But if you could spell out Which in particular and more specifically if the EBA has also reviewed and approved these? And my second When was the last when was the review done most recently? Thank you.
We don't comment about the regulators do in detail. But if you listen Carefully to what I said before, I said that the regulatory treatment of the cashies has been confirmed, approved and reviewed By all competent regulators, I repeat all competent regulators. So I assume you should have an answer to your question. And you know that the ECB does a regular review of our capital structure, and they did a regular review recently, And they confirm the treatment of all our capital items. This is why We have alerted the competent authorities and we are evaluating potential legal action to protect the bank and all our stakeholders, And I hope I'm very clear on that as well.
Next question please.
The last question is from Corinne Cunningham of Autonomous Research. Please go ahead,
madam. Good morning. Thank you. It's just one quick follow-up on the cash as well. Is there any indication that CRR2 could We open the debate about whether the cash is, are acceptable to all of the various regulators.
Thank you.
We have no indication, and I said as well that we do not, under any circumstances, Foresee an impact on our CET1.
Thank you.
Under any circumstances should cover your question as well. I think this was the last question.
Yes, sir.
Okay. Thank you very much for your attention, and we look forward to meet you in the 1 on 1 that Nicolas and I will start from tomorrow in London and Monday, and then we'll go to the States in 10 days. So