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. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Jean Pierre Mustier, UniCredit Group Chief Executive Officer. Please go ahead, sir.
Thank you very much. Good morning to you all, and welcome to our first quarter 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 Mirko takes you through the figures. Our core bank shows a very solid performance with a RoTE of 10.4%, up 1.1 percentage points year-on-year. The gross NP 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 as the relevant metrics of the group performance. 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, previously planned 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. 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 EUR 1.9 billion, up 25.5% year-on-year. It is actually the best first quarter UniCredit has seen since the first quarter of 2007.
All divisions are doing well. 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 de-risking. Overall costs are down 5.2% year-on-year and 2% quarter-on-quarter. Our first quarter 2018 cost of risk came in at 45 basis points. The 2018 target of 68 basis points is confirmed. Our CT1 ratio stood at 13.06% at quarter end. Mirko will comment later about the details of the IFRS9 first-time adoption and FINO. Let's move to slide five for some highlights of the first quarter. This is UniCredit's best first quarter in more than a decade. We report a net profit of EUR 1.1 billion as positive commercial dynamics continue to drive performance across all divisions. Revenues in the quarter held up well at -0.7% year-on-year, mainly driven by fees.
First quarter costs were down 5.2% year-on-year, supported by lower HR costs. Our first 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 points versus last year. Let's move to slide seven. Slide seven and eight give you more detail of the progress of Transform '19. Our strong capital position allows the Group to accelerate the Non Core rundown to 2021. We have taken decisive action to deal with the most difficult asset class first, namely residential mortgage. We do this through a combination of disposals and write-offs. This leads to a higher IFRS 9 FTA 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% and 12.6%, and for 2019, above 12.5%.
In line with the prime objective to further reduce our cost of capital, we continue to de-risk the balance sheet. The last tranche of FINO transaction closed in January. The Group gross NP ratio stood at 9.5% at quarter end, finally below 10%, and is steadily moving towards the 2019 7.5% target. We are already at our 2019 target for gross NP ratio for the core bank. The operating model transformation is ahead of schedule, reaching 78% of the target for branch reduction and 75% for FTE reduction. On slide eight, you see that commercial dynamics for the group are positive and sustained. We have launched Samsung Pay in Italy and are now the only bank that offers all three major mobile payment solution, Apple and Samsung Pay, as well as Alipay.
This clearly demonstrate 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 hand, 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, underlined the strength of the platform, ensure that the fully plugged-in business model works. 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 Saccomanni was elected chairman shortly thereafter. Now, let me hand over to Mirko, who will give you more detail on our financials. Mirko.
Thank you, Jean Pierre, good morning to everyone. I will talk you through UniCredit's financial performance for the first quarter. Our stated net profit reached EUR 1.1 billion. All business lines showed a good underlying sustainable commercial performance. Adjusted return on tangible equity was 8.9% in the first quarter. We confirm the 2019 target of above 9%. Let's turn to slide 11. As Jean Pierre just said, the KPIs of our core bank are of strategic importance. They are seen more and more by investors as 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 actions and bring forward the rundown of the Non Core portfolio to 2021, previously planned for 2025. In the first quarter, group core ROTCE stood at 10.4%.
The corresponding net profit came at EUR 1.2 billion, up 11.8% year-on-year. The group core gross NPL 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 Transform 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 book more than half of overall systemic charges in the first quarter. Please also bear in mind that we resumed paying DTA fees in Italy of about EUR 30 million 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 first quarter has two days less, we collected EUR 58 million less in interest. The main drivers of NII were the following. Average loan volumes were up 0.5%, and customer rates were essentially unchanged. Lower-term funding contributed positively for EUR 51 million. 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 second quarter of 2018 and stabilize in the second half 2018.
We confirm our NII guidance for the year, which means we expect NII to remain stable in the first half 2018 at the average fiscal year 2017 underlying run rate and to increase in the second half 2018, thanks to the combined effect of higher volumes and stabilizing customer rates. Let's turn to Slide 14. I will highlight three points in this slide. First, in Group Core, average loans were up EUR 2.8 billion or 0.7%. Second, the average customer loan rates were stable. On a stated basis, they increased by one basis point versus last quarter. Excluding one-offs, they were down one basis point in Group Core. Third, in terms of customer spread, CEE 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 and 63. End-of-period customer loan volumes for Group Core were up EUR 5.1 billion in the quarter, 1.3% and 3.1% year-on-year. This compares with EUR 9.6 billion for the whole of fiscal year 2017 and underlines our positive commercial dynamics. Some divisions were affected more on a relativity basis by non-recurring effects. In commercial banking Italy, for example, stated loan volumes were flat, adjusted for IFRS 9 FTA 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 three 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 first Q 2018 performance. Financing fees were down 4.4% year-on-year due to the lower fees on overdrafts and guarantees in Italy. Transactional 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. TFAs reached EUR 815.4 billion in the quarter, increasing 2.4% or EUR 19.4 billion year-on-year.
AUM in the quarter were EUR 217 billion, benefiting from net sales amounting to EUR 3.9 billion, 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 EUR 4.7 billion. 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 billion of AUCs declined year-on-year came 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 first Q 2017. We saw a rebound of trading income to EUR 478 million in the first Q, up 23.2% on an adjusted basis. This is still above our normalized run rate, which is EUR 350 million to EUR 400 million 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 forwards. Our dividends, the contribution of Turkey was up 29.7% versus last year at constant FX. Turkey had a strong first quarter, which underlines the sustainability of its business model in a very volatile environment. Let's turn to slide 19. Our focus on cost efficiency is yielding tangible results. The operating model transformation continues to be ahead of schedule. We have already achieved 75% of our planned FTE reductions and 78% of our planned 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 EUR 11 billion and 2019 at EUR 10.6 billion. 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 as FTE reductions continues. Non-HR costs are up one percentage point versus the first Q 2017 as a result of expense recoveries normalizing from their seasonally high in the fourth Q 2017. Let's turn to slide 21. Regarding asset quality, I would like to point out four items. First, loan loss provisions are seasonally low in the first quarter, as this year was no exception. Second, there was no impact from model changes in the first quarter. The majority of the model's impact is expected in the second half. Third, the IFRS 9 first time adoption affected the coverage ratios in the first Q 2018. Last but not least, the line adjustments from accounting changes affect both cost of risk and NPE ratios. Numbers for fiscal year 2017 have been restated.
We still saw write-backs in Austria and low cost of risk in the CEE. 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 56.3% to 60.3%, mainly thanks to IFRS 9 FTA. The group's gross NP ratio has come down to 9.5% in the first 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 day's effects, customer rates were down two 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 2.4 billion, up 18.5% 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 strong. 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 fourth 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 first Q 2018, did not reach the level of the unusually strong first Q 2017, which benefited from closed-end fund sales and a non-recurring item. The insurance partnership with Allianz 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% for the first Q 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 three 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 first Q 2017. Return on allocated capital was 7.2% in the first quarter 2018, as the bulk of the systemic charges was booked in the first quarter, a much higher proportion than for the group. We confirm our 2019 target of 13.3%. Let's go to slide 26. CEE 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% 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%. 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 UniCredit's recent Capital Markets Day, we have decided together with our partner, Koç, to participate on a pro rata base in their capital increase of EUR 1 billion 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, a European environment, CIB commercial performance was resilient. NII was up 5.3% quarter-on-quarter, driven by improving front-book 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 non-recurring net trading gain of two participations for a total of EUR 39 million.
Cost income ratio at 36.3% 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 will have listened to Fineco's results on May 8th, 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 discounted operation like 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 is 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% is confirmed. Let's turn to slide 30. As we have already mentioned, we will bring forward the closure of the Non Core division.
We will write off EUR 1.4 billion of older vintages residential mortgages and accelerate the Non Core rundown by four years to 2021. As a result, we have also improved our 2018 targets for gross NPE disposals to EUR 2 billion and have improved our 2019 targets for gross NPEs to EUR 14.9 billion. Let's turn to slide 32. We continue to de-risk the balance sheet and lower our cost of capital. Gross NPEs decreased by EUR 3.7 billion year-on-year and EUR 1 billion quarter-on-quarter. Our core gross NPE ratio has fallen to 4.7% in first 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 NPEs 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 9.5 billion. 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 will not always be linear. The coverage ratio increased to 54.8%, also driven by the IFRS 9 first-time adoption. Let's turn to slide 35. Inflows to NPEs in commercial banking Italy were lower quarter-on-quarter after the seasonally high fourth Q 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 older vintages for EUR 1.4 billion taken in the first Q 2018. We will also improve the disposal target of Non Core in 2018 from EUR 1.7 billion to EUR 2 billion. Performing exposures in Non Core are down EUR 2.5 billion year-on-year and stand at EUR 2.7 billion. By the end of 2018, all performing exposures in Non Core will be gone, and the division will become a closed NPE book. Finally, there was a change in the methodology of reporting for NPEs as a result of Italian banks no longer account for default interest in gross book value. This reduces NPE gross book values by EUR 0.9 billion in Non Core. Let's turn to slide 37. Non Core loan dynamics further improved. Net NPEs were down EUR 8.9 billion, down EUR 4.2 billion year-on-year. Gross NPEs were down by EUR 7 billion year-on-year, reaching EUR 23.6 billion.
We are lowering our gross NPE target for 2019 to EUR 14.9 billion. NPE coverage improved significantly to 62.4%, mainly driven by IFRS 9 FTA. 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 and 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 second Q, in the second half 2018. This depends on a formal validation by the ECB, which we still expect for the second half 2018, but could slip into the first Q 2019. IFRS 9 became effective on the 1st of 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 CT1 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% and 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 2.8 billion to EUR 353.3 billion. The biggest driver was FINO. Jean-Pierre, back to you for the conclusions.
Thank you, Mirko. Before we move to Q&A, let me briefly recap our first quarter 2018. We had a solid current performance with net profit of EUR 1.2 billion and an RoTE of 10.4%. Positive commercial dynamics sustain resilient revenues, down only 0.7% year-on-year. We confirm our 2018 revenue target of EUR 20.1 billion. We also confirm our NII guidance for the year. The operating model transformation is ahead of schedule. We confirm the 2018 and 2019 cost target of EUR 11 billion and EUR 10.6 billion. We have taken further decisive action to accelerate the Non Core run down to 2021, bringing it forward from 2025. We confirm a gross NP disposal target for 2018 to EUR 4 billion and improve the gross NP target for the group and Non Core. We maintain our cost of risk target at 68 basis points for 2018, 15 basis points of which will come from models.
Our Tier 1 ratio fully loaded is 13.06% in the first quarter 2018, including the IFRS 9 FTA impact. We expect our fully loaded Tier 1 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 build 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, 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 group in the remaining quarters of 2018 and achieve our objective of making one bank, one UniCredit, a true Pan-European winner. Now, Gianni, Mirko, and I are ready to take your questions. If you could please be so kind and limit your questions to two each. Many thanks.
Thank you, sir. Excuse me, this is the conference call operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. The first question comes from Jean-Louis of Goldman Sachs. Please go ahead, sir.
Hi, good morning. Two questions. 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, I think I remember that there is still the OFAC outstanding for UniCredit. If you had any update on this, that would be really appreciated. Secondly, generally on asset quality, 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 included just as much in the original business plan target. 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. 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 a final feedback of U.S. authorities on a possible resolution of the matter of our OFAC discussion on a limited claim. We hope that this resolution can be reached in the course of the year. We deem that the provision we already took are appropriate. On your second question on asset quality and IFRS 9, as you have seen, by moving forward the run-off 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 through disposal. The price has been adjusted, which led to the FTA increase, as well as write-off.
We are writing off in the Non Core EUR 1.4 billion 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 four basis points impact coming from Model.
Next question, please.
The next question is from Andrea Filtri of Mediobanca. Please go ahead, sir.
Yes, good morning. You're clearly over-delivering on de-risking, which had just been upped last December, and net flows are improving. How much of the EUR 16 billion non-performing forborne that you disclose in the presentation do you expect to migrate to performing forborne over the next 12 months? How much room do you see to restructure non-forborne, unlikely-to-pay loans and bring them back to performing over the next three years? Is this included in your business plan targets in any way? I just wonder if you could also give us the corresponding P&L impact adjustments to your business plan targets for the accelerated run-off of the Non Core. Thank you.
We're entering into technical territories, which are well above my level of competence. I will hand over to our risk star, TJ Lim, with looking at the figures. TJ, as soon as you're ready, I'll let you comment.
Thanks, Jean-Pierre. On the forborne for 2018, we expect a cure rate in line with 2017 at 5%, and this flows to performing. We will only come from cure non-performing on UTP, it will be in a similar magnitude.
The second question was on the P&L impact. Mirko, I'll let you comment on that.
On the P&L impact, we have no P&L impact due to the FTA.
Next question, please.
The next question is from Andrea Vercellone of Exane. Please go ahead, sir.
Good morning. Two questions, one 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 will be transferred to other divisions. If it is zero, 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? Whilst we are at it, given 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? How much of these, if any, you think you can use in 2018 and 2019 according to your business plan projections?
Thank you.
Thank you very much, Andrea. I will let Mirko comment on the tax issues and DTAs. On the first point, once the Non Core portfolio will be run off, P&L will be zero, basically. There might be in 2021 a remaining P&L, from 2021 onwards, there will be zero. The non-[audio distorted] costs related to credit recoveries are legal expenses, there will be no more. The [audio distortion] costs, we have currently 431 FTE, will progressively decrease between now and 2021, the residual staff will be moved to other operational activities. We will end up having no staff afterwards by 2021. I'll let Mirko comment on the tax issues.
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 FTA. This is almost 80%, 90% of the impact. There is also the fact that it depends on the mix of, let's say, the P&L delivered by the different countries. 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. 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, first of all, how much DTAs we are going to be able to use, it will depend on the DTA test that we have to run on a regular basis. It depends on the profitability levels that each of, let's say, the divisions and, especially the legal entities will be able to do. In terms of the amounts, we have EUR 8.3 billion 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 Azzurra Guelfi 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 future 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 stronger, and you have been very conservative. Can you share with us what's your views on the recent market concern on the accounting of the cash? 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 two specific activities which will have more fee compression. One is the equity brokerage business, specifically with MiFID II, and you have seen for banks which are the 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 sales. That was a lucky move, which protect us from this negative fee evolution.
We expect as well on asset management, some compression of fees on the product, but there as well, we have sold our asset management business and entered into an agreement with Amundi. We think that on the business where we are present, we are dynamically managing our activities and our fees, and while there could be some overall 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 and 2019. On your question related to the cash, first of all, if you want additional information on the cash, we have posted more information about the main feature of the cash on our website. You can find them. If you don't, ask our IR team.
Just want to comment that the regulatory treatment of the cash 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, any impact on our CET1, and we have alerted the competent authorities and are evaluating potential legal action to protect the bank. Next question, please.
The next question is from Mr. Victor Galiano of Barclays. Please go ahead, sir.
Yes, 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, et cetera, why the conservatism on dividend payout? I know you expect it to go up to 30%, but is there a potential that you would review that higher? 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%, so for dividend to be paid in 2020. We have mentioned and disclosed in our capital market day last year in December, the overall CET1 work and CET1 impact of 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 a CET1 ratio above 12.5%. After 2019, so just saying that it's not in 2019. After 2019, based on the exit level of our CET1 ratio in 2019, the confirmation of the various regulatory impacts, we might consider to increase the dividend payout. Just as a reminder, 10 points of additional dividend payouts are equivalent to 10 basis points of CET1 ratio.
If in your projection, you see a continuous buffer of 10 basis points of CET1 ratio, you can assume that we will increase the dividend payout by 10 points. It will depend on where we are at the end of 2019, and what will be the further regulatory impact. We intend as quickly as possible to reach 50%, but it will depend, as I said, on CET1 ratio exit in 2019 and regulatory impact. Next question, please.
The next question is from Mr. Matthew Clark of MainFirst. Please go ahead, sir.
Good morning. Firstly, on net interest margins, could you comment whether you've seen any change in the competitive landscape since the TLTRO reference window closed? 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 Gianni give you a bit more detail and colors about the 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 EUR 5.1 billion, which is more than 50% of the overall loan volume for the full year 2017 last year. You can see that the commercial dynamic are very good in the first quarter, and you have seen as well that we have customer rates which have stabilized in the first quarter overall, as we have mentioned the presentation. Now I hand over to Gianni for more colors about the competitive environment.
Thank you, Jean-Pierre. Well, looking forward, we still expect customer loan rates, not customer spreads, customer loan rates to drop somewhat in the second quarter of 2018, and stabilize in the second half of 2018. As a result of that, we confirm our NII guidance for the year. We're seeing a lot of activity in the first quarter. 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've been growing the first quarter very nicely to more than half of the net growth of last year. We don't do volume lending, because we take care of the right kind of risk.
As I said, thanks to the combination of growth that we expect also in the quarters to come, and the stabilization in the second half of 2018, thanks to the combined effect of this, we see this improvement in the NII for year-end.
Thank you very much, Gianni. On the GDP growth assumption or economic growth assumption, TJ will comment for IFRS 9. Please, TJ.
Okay. We have assumed the LLP estimation, the macroeconomic assumptions, which is a baseline scenario consistent with the group strategy. In the baseline scenario, we're assuming the EU GDP at around 1.8% for 2018, and 1.5% for 2019. We have also looked at the positive scenario for the GDP growth on the EU side with an additional 0.2%. In this, we also look at adverse scenario in case of sovereign tension with the subdued growth . LLP assumption embed also both the baseline as well as the stress scenario.
Next question, please.
The next question is from Delphine Lee of JPMorgan. Please go ahead, madam.
Morning. Thanks for taking my questions. Two on my side as well. First of all, just wanted to come back on fees and commissions, to just try to understand your guidance of 3% increase year-on-year. Looking at last year, looks like the first half had a high comparison base, and the trend seems to be quite supportive, in particular on transaction fees. Just trying to understand 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 growth NPL 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 it will be closer 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, our fee evolution year-on-year is of 2.8%. It's very similar to the target evolution that we are planning for the year of roughly 3%, basically. We are just mentioning that once you look at the combination of the various nature of fees, investment fees, financing fees, transaction fees. We have a very good performance of transaction fees, which were helped as well in Italy by the fact that we start charging current account fees this year, 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, we should have a 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 stronger performance of net AUM sales for the quarter up, I mean, EUR 3.9 billion, up 8% or more versus last year. With the current market evolution, we need to see whether customers will shift from deposit into AUM, maybe there could be some adjustment on a quarter-to-quarter basis. All in all, because of the diversification and the strong commercial dynamic between transactional fees, which should do well for the year, financing fees, which should rebound, and evolution of the investment fees which rely on the strength of our network, we are confident to achieve the 3% CAGR that we communicated about, both for 2018 and 2019.
On the gross NP 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. That's important. You can see that the NP ratio for the group core is actually very good for the quarter at 4.7%, so close to the EBA guidelines. We expect the group core for 2021 to be below 5%. 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 to 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 EUR 15 billion the stock of NPLs 2019 and 2021, if I'm not mistaken. If I look at the mix of the reduction in the Q1, 50% of the reduction quarter-over-quarter were via write-offs and 30% were back to bonis. I was wondering whether this kind of mix can be applied also for the expected rundown of this business unit in 2019 and 2021. 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-over-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 in Italy. Thank you.
Thank you very much. I will let TJ comment in more detail about the acceleration of the run-off of the Non Core. Clearly this quarter, we took a one-off decisive action on the Resi mortgage in terms of write-off for the Non Core, for the Resi mortgage, EUR 1.4 billion, and total for the Non Core, including the rest, EUR 1.8 billion. This is not to be repeated, at least in the same scale. We expect the Non Core reduction to occur with a mix of action, a combination of recovery as well as sell-down, both of bad loans and UTP. I'll let TJ comment in more detail.
If you look to page 58 in the annex, clearly you would see that we have EUR 11.4 billion of the corporate as of end of Q1, EUR 4.8 billion of mortgages, EUR 4 billion in leasing, EUR 2.5 billion in small businesses. The mix will change as we start. We have taken decisive steps, as Jean-Pierre mentioned, on the mortgages side. There, in the coming, I would say, quarters and 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 Sandokan, Pillarstone, and even Idea. This one is part of the whole UTP sort of rundown. 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. There has been some one-off individual files, which mean that the default rate is there. As you can see, the NP ratio for Italy has been improving at 6.6%. We are happy with the work which is done, and we are maintaining, as Gianni mentioned, a very strict approach of new origination. We are monitoring every day, but also on a regular basis, the new expected loss for the new business, and the figures for Italy are actually very good as well. We are confident that the portfolio will keep improving. As an example, the expected loss on the new business for the first quarter 2018 in Italy is 35 basis points versus stock, which has an expected loss of 53 basis points. The new origination improve the quality of the portfolio.
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%. We are around
2.12%, again, part of the seasonality. As Jean-Pierre mentioned, the expected loss, the underwriting side is strictly monitored, and we've seen it's 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. I 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, I was wondering whether in December when you update the plan, you will be ready also to give us some profitability target beyond 2019. 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 Mirko comment on the risk-weighted asset evolution. On the target beyond 2019, as I said, we are in kilometer 18 of our marathon, so if I calculate properly, there are still 22 kilometers to go, basically. 24 kilometers. I don't calculate properly, actually. 24 kilometers to go. It was a shorter marathon. 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, and we'll see whenever it is, basically. 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 Mirko, will comment on the risk-weighted asset evolution.
I just want to say that we don't do a complex transaction or tricky things in terms of risk-weighted asset. You have the evolution of the risk-weighted asset on page 14. I'll let Mirko comment in more detail.
Yes, no, exactly. That's the point. Basically, of course, we do, let's say, marginal optimization that is ongoing optimization that we are doing to risk-weighted assets. In terms of the development of the risk-weighted assets for the quarter, we had, let's say, business evolution had the biggest impact with EUR 3.5 billion. It was basically countered by minus EUR 5 billion in terms of risk-weighted asset coming from business actions. In terms of regulation, we had an impact of EUR 2 billion into the risk-weighted asset walk. These are the three main pillars. Now, in terms of, you asked also about the FX sensitivity on Russia. Russia has for 10% devaluation in the currency, Russia is impacting us by 5 basis points. That's the sensitivity.
Next question, please.
The next question is from Benjie Creelan-Sandford of Jefferies. Please go ahead.
Yes, morning, all. I guess it's a slight follow-up on the last question around RWA growth. If we look over the past year at core capital generation, i.e., perceived earnings, less the underlying RWA growth X model impacts and pro-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. I'm just wondering what closes that gap or what level of underlying RWA growth do you expect over the medium term? The second question was just around the IFRS 9 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, so it's not something that the rest of your peers have been particularly vocal about? That'd be helpful. Thank you.
Yeah, I will take the second question, and I will let Mirko comment on the first one. In terms of the FTA impact, we guided initially at 74 basis points. 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. We really want to make sure that the core bank metrics become the metrics to value the bank, basically. You see that we have a RoTE, which is well above 10% and NP ratio well below 5%. To do that, we have decided to shorten and move forward the run-off period of the Non Core within the time horizon of analysts investors, meaning within three 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. By doing that and by shortening the period, there is of course, price adjustment as we're going to sell down more quickly some of the assets. We decided to make sure that we start with the most difficult assets, which are mostly residential mortgage. The price adjustment and the writedown meant that there has been an increase on the FTA impact that we were initially planning. That's basically making sure that core bank becomes key for the valuation of the group, and afterwards you have some kind of mechanical impact, if I may say, from the accounting side.
For the first question, Mirko is commenting now.
Maybe one more point on your point, Jean-Pierre. You're right. We go from a gross impact of 104 to a net of tax impact of 99 basis points, then we go on a net basis to 70, as we are showing into the appendix. The effect is going to come through shortfall during the course of the year. In terms of risk-weighted asset growth, for the rest of the year, basically most of it is going to come from regulatory, let's say, models impact. 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 Q2019 on the EBA guidelines anticipation, and the rest is lending volumes.
Next question, please.
The next question is from Ignacio Cerezo of UBS. Please go ahead, sir.
Hi, good morning, and thank you for the presentation. Follow-up on the Russian and Turkish FX risk, if 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. 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 points pick-up of Euribor next year, which according to your latest sensitivity, is in the region of EUR 350 million net interest income. I wanted to check what kind of buffers do you think you have in case actually the Euribor ends up not going up next year. Thank you.
I will let Mirko comment on the FX hedging. On the Euribor sensitivity to the business plan, first, our economic projection are for a tightening of the ECB by the second half of next year, starting from the summer and moving from the -40 basis points to zero, basically, at the end of the year. If it does not happen, we don't have any buffer. What I'm saying by that is, if the rates don't go up, the impact of the rates will not be seen. The only two mitigants I can see are on one side, the loan volume, if the loan volume is higher. On the other side, if our cost of funding is lower, because these are the other two dynamics. I would not call that buffer.
I just say that we have values moving paths, 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 basis points on an annual basis, to 10 basis points movement of the three-month Euribor is EUR 183 million per year. The sensitivity to a parallel movement of the curve to 100 basis points, parallel movement never happen, but it gives you a sensitivity, is EUR 1.1 billion for a full year basis, basically. EUR 183 on one side for 10 basis points and EUR 1.1 billion on the other side for 100 basis points. Mirko, on the hedging strategy on Russia and Turkey.
Yes. Basically, on a yearly basis, we put in place hedging strategies. Specifically, as you said, to Turkey and Russia, what we have done for 2018, we partially hedged the profit of the legal entity, we have basically put in place some selective hedging on this, specifically 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, two 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 EUR 3.8 billion pre-tax impact between stage 1 and 2 and stage 3, please? That's my first question. My second question is on NII. Could you tell us what was the contribution to NII coming from unlikely to pay in the first quarter? And whether you think that this contribution will come down as a result of the Non Core rundown, please? Thank you.
On your first question, we have, in terms of adjustments, more or less 80 basis points, 81 basis points coming from the stage 2 adjustment. And we have a 23 basis points coming from the write-off, if my memory is correct, plus one basis point of marginal adjustment. That's more or less the breakdown. On the NII side I didn't pick up the last part of your question. Can you repeat your question? I was not quite sure what you wanted to know.
The question was on the contribution to NII coming from the-
I can't hear you, actually.
Contribution is set to come down results of the-
We-
Of the Non-Core.
Excuse me, madam, could you please pick up the handset?
Sorry. Now we can hear you. It was the contribution of
Was the contribution to NII coming from the unlikely to pay, whether this contribution will come down from the runoff of the Non Core division.
That goes beyond my granularity. If I may say so, I will let Mirko comment on that as soon as he can get the information, if not, Aya will call you back. Mirko, do you have something?
No, I have something on the previous question, because you also asked about stage 3, stage 2, and stage 1, the composition. It's about 65% is stage 3, 27% stage 2, and the rest is stage 1. On the very last question, we have to come to you through Aya on this one.
We'll come back to you through Aya on your second question. Yep. Next question, please.
The next question is from Adrian Cighi 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 the timeline to 2021, you're still looking to do it on a self-funded basis? If for some reason it isn't possible, you would prioritize a 2021 period over doing it over self-funded? Thank you.
Well, we confirm it is done on a self-funded basis. As I said, it is important for us that we can move the focus of analysts and investors toward the core bank. We want to keep the 2021 target. 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 will do a cleanup trade in 2021.
Perfect. Thank you.
Next question, please.
The next question is from Carlo Di Grandi of HSBC. Please go ahead, sir. Mr. Di Grandi, your line is open, sir.
Yes, good morning. You did produce 37 basis points of capital growth in the quarter if I exclude IFRS 9. I was wondering what kind of expectations do you have over the next few quarters? I do realize that there are some others in your slide, probably those are not recurrent, or they do vary according to quarter. 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, in the annex, where we give some kind of a breakdown of the evolution of the CT1 for 2018. You can see on that page that we expect 0.4% of regulation model and procyclicality, a net IFRS 9 impact of 0.7%, 0.8% of EBA guidelines anticipation. We said it will be taken in the second half. We need a formal validation of the ECB of the model, it's a little bit of our hand. If the ECB comes later, might skip to the first quarter 2019, it will arrive, and we think the ECB will formally come back to us in the second half, a small risk of slipping in first quarter 2018. We have organic capital generation plus some improvement, if I may say, of between 0.6% to 0.9%.
The total CT1 impact is between -1% to 1.3%, the fully loaded CT1 ratio target for the year is between 12.3%-12.6%.
Thank you very much.
Next question, please.
The next question is from Ibrahim Sayed of Deutsche Bank. Please go ahead, sir.
Morning. Just quickly, I appreciate that you, with respect to the cash, have clarified that all competent authorities have approved the structure. If you could spell out which in particular, and more specifically, if the EBA has also reviewed and approved these. My second question is, when was the review done most recently? Thank you.
We don't comment about the regulators do in detail. If you listen carefully to what I said before, I said that the regulatory treatment of the cash has been confirmed, approved, and reviewed by all competent regulators. I repeat, all competent regulators. I assume you should have an answer to your question. You know that the ECB does a regular review of our capital structure, and they did a regular review recently, and they confirmed 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. 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 cashes as well. Is there any indication that CRR2 could reopen the debate about whether the cashes are acceptable to all of the various regulators? Thank you.
We have no indication, I said as well that we do not, under any circumstances, foresee an impact on our CT1.
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 one-on-one that Mirko and I will start from tomorrow in London on Monday, and then we'll go to the States in 10 days. Good to see you again soon. Bye-bye then.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.