Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Millennium bcp three months 2019 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone. I must also advise you that this conference is being recorded today, Friday the 10th of May 2019. I would now like to hand the conference over to your speaker today, Mr. Miguel Maya, Millennium bcp CEO. Please go ahead.
Good afternoon, Miguel Maya speaking. I welcome you all to bcp earnings conference call. Then, as usual, my colleague, Miguel Bragança and Bernardo Collaço, our new investor relations, will follow providing additional information and detail. The evolution of the bank and the net earnings of the first quarter of 2019 clearly show our options that the affirmation trajectory that we have been following in the several geographies where we operate. I would like to highlight that we have made significant progress in incorporation digital in our business model through careful choices that will enable significant improvements both in the quality of the service provided to customers and in the reduction of operational costs.
Good examples were the launch in this quarter of a more complete app, which provides customers with a superior level of interaction, as well as the introduction of highly productive robots and machine learning into our operations. I would also like to mention the proposals that will be presented at the shareholders general meeting, namely the dividend payment, which is indeed a very conservative proposal, and the one related to the employees compensation. These are two clear signs of the renewed determination, a reaffirmation of how bcp is facing the future and is serving the customer as a commercial bank of reference across the markets where we are presented. Slide four. Entering now into the earnings presentation, I will go through the first quarter major performance achievements. We improved in profitability, reaching net earnings of almost EUR 154 million, 80% more than last year's first quarter.
In this first quarter, I would like to highlight the relevant improvement of the contribution from the activity in Portugal, which more than doubled compared to last year's first quarter, having reached EUR 94 million. Slide five. Millennium bcp continues firmly committed to improving the assets quality with a consistent trajectory of reduction of NPE stock, which decreased to EUR 5.2 billion. Since March 2018, NPE has been reduced by EUR 900 million, mainly in Portugal. This last quarter, we have reduced an additional EUR 400 million, mainly by recovering NPL in arrears, which also reflects the improvement of the Portuguese public accounts and the macroeconomic business environment. This trajectory has been made while reinforcing the NPE coverage by impairment, which has increased to 55%, and also increasing the total coverage, which rose to 110%. The NPE ratio, including securities and off balance, according to the EBA definition, decreased from 10% to 7%.
The improvement in this asset quality, together with the growth of performing loans portfolio, are driving the reduction in the cost of risk, which has achieved 68 basis points on a consolidated level and 73 basis points in Portugal. Slide six. In this quarter, we have organically generated capital of 87 basis points in terms of the Common Equity Tier 1, reaching a ratio of 12.7%. The total capital ratio stood at 15.2%, incorporating the Additional Tier 1 issue of EUR 400 million, which was performed, as you know, in January. Millennium bcp capital position is therefore well above the SREP requirements in both ratios, counting with a total capital buffer above EUR 880 million. The business volumes growth pace increased throughout this quarter, confirming the quality and efficiency of the bank's franchise.
Excluding the NPE portfolio, the increase in the business volumes achieved EUR 2 billion during this quarter, of which EUR 700 million was an increase in the performing loans portfolio. Slide seven. Millennium bcp continues to be successful in attracting new customers, expanding its customer base both in Portugal and in international operations. Since March 2018, the number of active customers has increased by 326,000 overall. In Portugal, the number of active customers increased by 134,000, which confirms the good evolution evaluation that customers make of our value propositions and also of our capacity to reinforce the relationship with them. I would also like to highlight that in 2019, once again, we have been awarded with the Consumer Choice distinction in Portugal. Also, the bank's innovative digital commercial offer has been very relevant in the customer's attraction, enabling an increase of 32% in mobile customers. Slide eight.
Confirming the leadership in digital innovation and excellence in customer service, Millennium bcp has recently launched two new apps in Portugal that will strengthen the commercial relationship of the bank with the customers. The new Millennium apps is easier, quicker, and provides a new range of options and services, namely in personal loans, auto loans, alerts, and notifications. It's a breakthrough in customers' experience with Millennium bcp. We have also launched a new MTrader app that allows customers to trade in the financial markets while having access to news and research through a simple and intuitive interface that provides quick trading facility and real-time streaming from the main global stock exchanges. Slide nine. The progression and performance that the Millennium bcp has been consistently achieving is translated in the improvement of our credit profile, as recently confirmed by Moody's upgrade of our rating.
Since 2013, our credit ratings have been upgraded five notches by Moody's and four notches by Standard & Poor's. I will now give the floor to my colleague, Miguel Bragança.
I'm sorry. Good afternoon, ladies and gentlemen. As usual, I will present the general view in terms of the evolution of the group's profitability, business activity, and capital. Our new Investor Relations will elaborate in terms of the specific evolution of the Portuguese and the international operations. As you may see, in page 11, our net income grew by around 80% on a very solid footing with banking income. The top line growing 11.1% with a strong contribution from other income, mainly securities gains, and with very controlled costs where the recurrent costs evolves 4.5%. That's clearly positive drivers. The impairments in their progressive normalization trend, albeit still high when you compare with other banks in our geography, but clearly aligned with our targets.
The net interest income, as you may see in page 12, evolving well, 5.2% growth compares well with our competitors in this low interest rate environment. You see we have been able to maintain a stable NIM in consolidated terms and in Portugal with some slight NIM compression in the international operations. That is to a large extent due to the fact that we are preparing the bank in Poland for the acquisition of Euro Bank and there has been some investment in liquid securities to prepare for the integration. Fees and commissions. This is a story of two tales, so to say. In terms of banking fees, we keep progressing, growing 2.5% in consolidated terms, to a large extent driven by our strong franchise in Portugal, which grew 5%.
The market-related fees and commissions, including asset management fees, for reasons that you well understand, in terms of the dynamics of the markets, have not grown compared to last year. This is something that we expect to reverse once the markets improve and the clients feel more comfortable with investing in asset management products. Other income expands significantly to a large extent through trading gain. We are not a trading house, we don't involve regularly in terms of trading. We do have a securities portfolio that we use to hedge to a large extent our short-term deposits and our balance sheet. We sold a part of our long-term bonds, both the Portuguese government bonds and Portuguese government-guaranteed bonds that explain this growth in net trading income.
In terms of other operating income, as we explained last year, we had some one-offs last year that explain the negative of the minus EUR 29 million. This minus EUR 11 is the new normal. Operating costs. Operating costs, we are present in several geographies, as you may see. In terms of Portugal, what you see is a very disciplined evolution of the recurring costs that evolve 2.7%, broadly aligned slightly above inflation. What we see is that we are also in the process of transformation of the bank. In this process of digital transformation, there is a period where there is also some additional cost to enable exactly this transformation, which benefits we will get further down the road. In terms of the international operations, we have here a different factor. This is mostly explained by Poland.
Poland is having a very high top-line growth, as you may know from other banks in Poland and from the presentation of our bank in Poland, right now, salaries in Poland are growing quite fast. We have, of course, to compete in the market. Having said that, the bank in Poland, as most of you have seen, has presented very healthy set of results and a very healthy top-line growth. This evolution of cost together with the evolution of income still allow us to be the best bank in terms of the cost to core income in Portugal. In core income, the very positive effect of the trading gains is not considered, as you know. In terms of cost to core income, comparing with our European peers, we also compare very favorably, which reveals the robustness of our model.
When you compare it with the cost to income, which is the most usual but also the most volatile measure, we see that we are already below the 44%, reaching a 43% cost to income. In terms of the impairment, you see a reduction of 20% in terms of the impairment and provision charges to a large extent explained by the evolution of our activity in Portugal. This is aligned with what we have been telling you, that we expect as time goes by to normalize our cost of risk. This is happening. You see that we are with a cost of risk of 73 basis points. It's still above our long-term trend of around 50 basis points that we have presented to you. We expect to continue in this trend.
This is particularly notable because this has been achieved together with an increase in coverage, both in terms of the total coverage that includes the value of the collateral and the total coverage is already at 110%. In the coverage that excludes the collateral, that is already at 55%. In terms of the key ratios, the NPL 90 days, so the loans in default with more than 90 days in default, we are at 5.5%, decreasing more than 40% the ratio since March of last year. In terms of the NPE ratio including securities and off-balance sheet items as defined by the EBA, we are at 7%. In terms of the NPE ratio only with loans, we have also decreased around 30%. This strong set of results has been achieved with a very strong evolution of our franchise, as you may see on page 20.
We have been growing the customer funds 5.1%, this has been mostly explained by the evolution of by the individual customer funds, which have grown more than the total customer funds, 5.2 in consolidated terms. This impact is even more evident in Portugal, where the individual funds have grown 6.1% when compared with the total growth of 5%. We expect as time goes by that this strong value of funds that customers have trusted us may get transformed into more value-added products, this is clearly one of the areas where the bank expects to evolve over the next years. In the international area, we also have grown more than 5%, this strong set of results is visible both in Mozambique and in Poland. Loans to customers.
Here we are already seeing a growth in terms of loans to customers in spite of the very strong reduction of the NPEs. You see that the performing portfolio has grown EUR 2.4 billion. That compares very favorably with the EUR 1.9 billion. This is not only in consolidated terms, but also when you look at only the Portuguese activity that has, as you know, a higher ratio of NPEs. We also see that the growth in the performing assets is more important than the decrease in the NPEs. The net loan to deposits ratio is still very comfortable. You see that in terms of liquidity, we are a highly liquid bank. That is an opportunity, so to say, in terms of evolution of the profitability and keeps evolving positively. In terms of capital. As it was commented, we are comfortably above our requirement.
There was a very strong evolution of our Common Equity Tier 1 that is basically explained by three effects. The first effect, of course, is the net income. The second effect is when the net income is positive we benefit also from the DTAs because a part of the taxes, so to say, of the net income benefits from the DTAs. That's why they are an asset. A third impact that we also have was an evolution in terms of the mark-to-market of our government portfolio. The impacts of these three effects are more or less EUR 150 million, as you see in the net income, EUR 100 million around the DTAs, and around EUR 40 million-EUR 50 million, the evolution of the mark-to-market of the securities portfolio.
The leverage ratio evolving very well to very much explained by the same factors as the capital ratio, but also by the fact that we have issued Tier 1 in the beginning of the year. As you know, the leverage ratio includes the Tier 1. Our RWA density still at a high level, which points to a relatively conservativeness of our models. I will now pass the floor here to Bernardo, our new investor relations head.
Okay. Good afternoon, everybody. Let's start from Portugal, and starting from net income. As mentioned, there was an important and relevant increase from the last year. There was an increase of EUR 50 million. That means we leveled from the previous year, the net income. In terms of banking income, also there's an increase of 15%, and regarding operating costs, it has been Oh, sorry. Okay. In terms of operating costs, there's a small increase, but as mentioned as well, there are some restructuring processes that we are taking in. There are EUR 6 million that are related to restructuring costs. Going deeper and have a look on the NII in Portugal, the different effects. Once again, there are some positive and some negative effects that it's worth to mentioning. On the positive effects, there are EUR 2.9 million coming from the credit volume.
There are EUR 3.2 million coming from the reduction of the costs of the deposits, at the same time, the effect of a lower wholesale cost that accounts for EUR 6.6 million. On the other side, the credit rate effect and the macro environment push a little bit down the credit rate. Also from lower yields coming from the security portfolios, there's a decrease of almost half a million. In this, although on the NII, we have seen an increase of almost 5% in the year-on-year. Going to page 29. As you can see, we are still pushing on the reduction of the cost of deposits and spread is now at minus 50 basis points. That comes from minus 60 basis points. If you remember on December 17, it was at minus 70 basis points.
It also means that we have still a difference of around 10 basis points from the front book to the back book. There's some improvement here as well to do. Regarding on the front, on the loan book, we'll say that it's stable. As you can see, the spread is still at 2.7% and in terms of NIM, the same. We are at a stable NIM in Portugal at 1.8%. Going to page 30. We see overall the growing in commissions, it's important to reflect that the commissions increased almost, or most, increase in the commissions are coming from banking fees, not from market related fees, which means that it shows the increase on volumes and our capacity to open new accounts and to have a closer relationship with the Portuguese customers.
Banking fees increased 5.1%, due mainly to loans and agreements, loans and guarantees coming from volumes, from bancassurance and from customer current accounts. On the other side, with a substantial decrease year-on-year of 22%, as I said, it was mostly related with securities and asset management. Looking at the other income, as it was mentioned, there was an improvement of 135%, which means about EUR 38 million other income year-on-year. Mainly as referred, it was coming from the trading line. Moving to page 31 and looking at the operating costs. As I said, there's relatively stable with a small increase of 2.7%, there are some non-recurrent impacts that we are considering and in this quarter takes about EUR 6 million due to restructuring process that we are taking on. Looking at the number of employees.
There's a slight increase on the net number of employees and it's mainly related with people that we are recruiting for digital areas as well as internalizing some outsourcers. In terms of branches, we are still closing some branches, there's nothing, it's just on a case by case. Moving to page 32, I think it's one of the main points. As you have seen, there was a decrease of EUR 1.8 billion year-on-year on NPEs. That means roughly 30%. If you look at the decrease of this EUR 1.8 billion came through a combination of net exits, write-offs and sales. From quarter-on-quarter, as mentioned as well, we have seen a decrease of EUR 360 million, which also a nice figure from the first quarter. In terms of impairments. Cost of risk decreased to 73 basis points. In December it was at 105 basis points.
We are looking to going on the way for the achievement or the KPIs that we set for 2021. Moving to page 33, looking at coverage. As you can see, total coverage are now at 52%. It comes from December from 50%, it means in terms of loan loss reserves. Overall, the total coverage is above 100%. It now stands at 111%, where it was at 109% in December 2018. On the 90 days past due, looking at companies, you can see then that we have the level of coverage is really high. It's 68%. It comes from 67%. It shows our focus in terms of increasing coverage on companies. Moving to slide number 34, here regarding the foreclosed assets and restructuring funds. On foreclosed assets, we have seen a decrease of 21%, that means roughly EUR 350 million year-on-year.
As you can see on the left down chart, there was some sales of about more than 1 million properties, and we have then a profit of around EUR 25 million. That compares with EUR 16 million on the first quarter. In terms of restructuring funds, still quite stable, although we are starting to see a decreasing trend on this side. Moving to page 35 regarding volumes. It shows the strong business dynamics that we have already in Portugal. Customer funds increased 5%. In terms of loans, apart from decrease of EUR 1.8 billion, it's important to mention that the performing loan book, it was EUR 1.2 billion, and then the NPEs, as mentioned before, there was a reduction of EUR 1.8 billion for the same period. Quarter-on-quarter, it's also important to mention that the NPE reduction was around EUR 400 million.
In terms of performing, there was EUR 500 million new loans coming in. It means that we have a net of EUR 100 million performing loans. Moving to page 37 now in terms of international operations. A positive contribution for the P&L of EUR 46 million. That means an increase of 12.1% quarter-on-quarter. On page 38 moving to Poland. Net income increased 3% and we have a return on equity at 10.3%. Also banking income, there's an increase of 13%, and operating costs we have also an increase of 16.4% due to the strong economy that as you all know, we have in Poland, there's some pressure on wages. Moving to page 39 looking at the NII. NII goes up 14%. NIM has been stable at 2.5% and this is driven mostly because of the increase on volumes. Commissions and other income.
If we look at the side of commissions, there was a decrease of 5.4% and mainly related with investment products. On the other hand, we have an increase of EUR 7.1 million in terms of other income. Operating costs are mainly related with, as I said, some increase and some growth on the economy although the cost to income is still at a low level of less than 45%. Looking at the asset quality in Poland. Still with strong ratios. The NPL 90 days past due ratio stands now at 2.4%. The NPE book is on March 2019, below EUR 600 million, which compares with more than EUR 644 million in March 2018. Looking at the coverage ratio, once again, in Poland, we have really comfortable ratios above 135%, and we probably still improve that. Looking at the cost of risk in Poland.
There is an increase from 46 basis points to 55 basis points, but we think that between this level is a normal level for the operation and we think that everything is correct. Looking at the volumes on page 41. We increased 9.3% and it is important also to mention that we have a market share of about 5.4%. Looking on the other side, we have loans to customers increased once again at the very high level of 12%. If we exclude the FX mortgage loan, it was almost 17%. Also important to mention that the weight of the mortgage in foreign exchange now represents a lower level on the total portfolio. It comes down from 28% to 25%. Moving to Mozambique. We have net income come up 5.5% with a return on equity of 23.3%, and banking income goes up about 8.7%.
In terms of operating costs, a slight increase of 7%, but in terms of EUR is not really relevant. Going to page 43. NII goes down 8.8% and NIM also, and is mainly due to some decrease on the credit side. As you know, the Mozambique economy is with some changes. If we look then on the commissions and other income, we have seen an increase of almost 96%. Moving to asset quality in terms of the operation in Mozambique. Also, credit ratios are high with 16.1%. The NPE slightly lower. We have EUR 183 million March 2018, and now we have EUR 150 million in March 2019. As this type of economy, the cost of risk still high at a level of 283 basis points. Coverage ratio, also important to mention that it has been increased from 66% to 73%. Moving to slide 45.
In terms of volumes, customer volumes of customer funds increased 6.6%, mainly on the demand deposits. We have a market share of around 26% on customer funds. On the other side, looking at loans to customers, we have a market share of around 22%, and we have seen a decrease on loans of about 17% due to early repayments of some customers, and is mainly related to high interest rates in the country. I will move to Mr. Bragança again that will do some final words.
Okay. As you see in this final graph, our commitment vis-à-vis you is to present exactly our progress plan that we have presented to the market. We have a very strong set of objectives until 2021, where we really want to be a reference bank in the European sector. This is based on several pillars. A very important pillar is our customer franchise. You see that we keep progressing towards the 6 million of active customers and with a very strong penetration of digital and mobile that are two levers that will enable us to serve these clients better and at a lower cost. This is clearly a trend where we are outperforming, let me say, our competitors. Another very important part of our strategy is the normalization of our legacy stock. We have committed to you to reduce the stock by 60% from 2017.
We are clearly on track and really outperforming on this area. This together with reasonable evolution of the cost of risk to the trend of 50 basis points. These two bases of our strategy will translate, of course, in lower and improving from a very good level cost to income that will also enable us to present a recurrent ROE of around 10% by 2021. The key message that I would like to leave here is that it is clear that there are some points in the income statement in this quarter that are, I would say, better than the recurrent profitability, namely the trading gains, as you see.
In terms of everything that is recurrent, everything that has to do with the transformation of the bank, everything that has to do with the growth and improvement of the franchise of the bank, that is the underlying value creation for our shareholders. We are clearly on track for the objectives that we have set. Thank you very much. We are now open to questions and answers.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star and one to ask a question. Your first question comes from the line of Ignacio Ulargui from Deutsche Bank. Please ask your question, your line is now open.
Hi, good afternoon, gentlemen. Yes, I have two questions. On one side, on the loan growth and the expectations that you have in terms of the loan book in Portugal, what should we expect? It has been probably a bit softer this quarter. There has been any particular issue that you could just give some color on. The second one is on provisions and cost of risk. If I just look to the other Portuguese banks, they are delivering a materially lower cost of risk than the 50 basis points that you are targeting on a standstill level in 2021. Do you think, provided that NPE is declining, going the right direction, declining fast, do you think that that 50 basis points could be lower, that your standstill level over the cycle could be a bit below that 50 basis points? Thank you.
Thank you very much for your question. Starting with the last question. As you may know, over the short term, there is a trade-off between cost of risk and NPE reduction. If we want to reduce large amounts of NPEs, of course, this influences our recovery strategy. If we want to do it fast, the cost of risk tends to be higher than if we want to do it with time. Of course, once we reach the level that we think it's a more normal level when you compare ourselves with our competition, the cost of risk becomes lower. To answer your question briefly, do I think that across the cycle, the cost of risk could be lower than 50 basis points in Portugal?
Yes, I think that across the cycle, it may be lower, by 2021, I think that's more or less where we'll be. Probably there will still be some room to decrease the cost of risk, mainly if this positive cycle continues. Also to answer your question, in terms of this trade-off between accelerating the reduction of cost of risk and accelerating the reduction of NPE, probably if we have some slack there, we probably will devote it more to accelerating the NPEs than to reduce further the cost of risk. In terms of this trade-off, that's how we see it. In terms of loan growth, this is more, a bottom-up than a top-down view. What we have here right now is a positive loan growth, before NPE.
In terms of the performing assets, the loan growth that you see in Portugal is, I would say, a reasonably low loan growth for the years to come, as you may see. We are not expecting loan growth in Portugal to rise very fast, neither in the market nor in our specific case, we want to be very disciplined here. We will keep seeing a positive growth in terms of the performing portfolio, we will be always very disciplined in terms of pricing and we do not expect, I would say, high single-digit growth. The growth of the performing portfolio will be, in Portugal, a low single-digit growth.
Okay. Thank you very much.
Thank you. Your next question comes from the line of José Abad from Goldman Sachs. Please ask your question, your line is open.
Hello, good afternoon. Thank you very much for the presentation. I have two questions. The first one is on capital. You deliver a very healthy 12.7% CET1 now in Q1. I think it would be useful actually to get a bit your views on how you see the evolution of your capital position into year-end, and where do you see by Q4 of the year. The second question is related to this. Once you've already announced things on the dividend side, would you be open also to continue or to explore inorganic growth in Portugal? There could be some assets for sale, and there's been some rumors in the local Portuguese press about this. Is this something that you would explore? If so, what would be the criteria or the triggers that would help in that direction? Thank you very much.
Okay. Thank you very much for your questions. Starting with the last question. First, inorganic growth in Portugal, it is not in our plan. What we have right now in our plan is to keep transforming the bank and to keep developing the franchise of the bank. We are very much focused on this, we are not analyzing anything, and it's not in our plan. In terms of the capital going forward, there is an important impact, as we have disclosed to the market, that is the acquisition of Euro Bank. We have disclosed at the time that the net impact in terms of acquisition of Euro Bank, after some measures that will be taken, would be around 40 basis points. Now that these measures that were more or less responsible for 10 basis points were taken, the marginal impact will be around 50 basis points.
We think that you have to incorporate this in terms of the capital projection. Going forward, as you see, a part of our profitability this year, this quarter, had to do with trading gains. If you want to project the next quarters, you have to assume a more normal trading pattern, because it is not normal to have this trading pattern going forward. Of course, there will be a capital accumulation linked to the net income generation. I think that basically going forward, most of the capital accumulation will come from these net income gen, and there will be a slight consumption, as I said, in terms of the increase of RWAs linked to the business. But as I just commented to Ignacio, we are not expecting very strong growth of credit and neither are RWAs.
This is the guidance that we are giving. In any case, we are expecting to keep a healthy slack above the 12%.
Thank you. Your next question comes from the line of Mario Ropero from Fidentiis. Please ask your question. Your line is open.
Hi, good afternoon. My first question is a clarification on the capital comment that Miguel made. Did you say that the impact on capital from Eurobank is going to be 40, 50 basis points? If I remember well, I think it should have been 30 basis points, at least when it was announced. The other question is, if I recall correctly, your NPA reduction plan was going to be equally driven by recoveries, write-offs and sales. This quarter we saw a very big jump in recoveries. Was there an extraordinary in this line that should lead to some reduction in the pace of declines of NPEs going forward? If I may, you mentioned before that you did some sales of sovereign during the quarter. Could you please tell us what is the negative contribution to NII that you expect from this sale going forward?
Thank you very much.
When we presented the impact of Euro Bank, we did this presentation based on the pro forma latest available numbers. These pro forma latest available numbers were based on the RWAs of the time. Of course, the impact in basis points and in percentage points depends also on the basis, on the RWA basis of the time. We presented this, if I'm not mistaken, based on the RWAs of September. That were the latest available data. We did a pro forma based on September. Of course, as time goes by, and the capital increases, the same impact in euros has a different impact in terms of basis points. This is basically what explains the difference. We presented it also net in terms of total capital, net of the measures taken locally. As you may know, there was already a subordinated debt issue in local terms.
Right now, the impact that we expect, because a part of the mitigation measures have already been taken, and because the basis is also different, because in the meantime, more than six months have taken place. The impact that we now expect vis-a-vis our present ratio is between 40 and 50 basis points. In terms of the entries, there is nothing special going on in terms of the evolution of this quarter. What I can say is the following. What we present, because a part of the recoveries in Portugal is of short-term credit, we present it in net terms. As you may see on page 32 of the portfolio, we see a better composition, so to say, with less net exits. This reduced level of net exits is to a large extent due to less entries than what we had in the past.
Less NPEs coming in, less short-term, I would say, current accounts becoming NPEs, this means that the net exits are better. There was nothing particularly special going on in this quarter. Let's see how it will evolve going forward. Okay.
Thank you. Your next question comes from the line of Sameer Adatia from Citi. Please ask your question, your line is open.
Hi, this is Sameer Adatia from Citibank. I've got a few questions. Firstly, back on capital. Can you give some guidance on regulatory headwinds, in particular TRIM this year and a bit more direction on where you think your endpoint fully loaded CET1 will be at year-end? Secondly, in light of the cash coverage going up on NPAs, NPLs, and foreclosed assets, do you envisage any large disposals? As I understand, originally, this wasn't part of the plan, and especially in light of many of your peers in Portugal now doing large NPA disposals. Finally, on issuance, I noticed a week or so ago, Fitch gave you a rating at the non-preferred senior level, even though you haven't issued this part of the capital stack. Is this part of the plan this year to issue a non-preferred senior bond? Thank you.
Okay. Starting with TRIM impacts models, regulatory headwinds. What we think is that we have robust models. We have been engaging, of course, with the supervisor, always in the discussion of the models. As you know, the supervisors always do some cherry-picking, and they try to get the best or so to say, the most conservative dimensions on each model, and they do comparisons and so on, but we feel very comfortable with our models. In terms of the impact for this year of TRIM, if any, we are expecting to be minor impacts. If to give you a number between 5 and 15 basis points max, if any. This is the level of magnitude that we are expecting in terms of any type of impact that could occur this year based on TRIMing.
In terms of the disposals and the sales of NPEs, we probably have been one of the most active banks in the market in terms of the disposals of NPEs. Typically what we do is smaller targeted transactions so that we make sure that we don't leave money on the table and that we make sure that we really develop and segment the market so that the portfolio makes sense for the buyer and the discounting is not too large. We think, up until now, what we have been seeing is that this is the strategy that better protects your interests as shareholders and the interests of the institutions. Having said that, if we are approached at the price level for a large sale that has the same price level as the small sales, we will always consider. We have no prejudice against it.
It's just something that we want to do to defend your interest. Having said that, we don't expect it. We expect to continue exactly the same strategy that we have done until now. In terms of issuances, as we have commented you, we don't need to issue right now. We are very comfortable, as I have commented here, in terms of the levels of MREL issue that we need to do until June of 2022. We see that the bank is improving. We expect that the market reflects this in our spreads. This is always, I would say, a trade-off between maintaining a relationship with market participants and maintaining a relationship with investors, when you are still improving your financial performance, vis-a-vis, issuing probably at a more expensive rate than what you would issue further down the road.
This is a decision that we'll take, I would say, on a case-by-case basis. We may issue or we may not issue, we don't need to issue. The decision on whether to issue or not to issue will depend to a large extent on the price and on the trade-offs that we see between issuing now at a more expensive price, vis-a-vis issuing later once the bank reflects the positive evolution that we expect.
Fair, Chair. Thank you.
Impact analysis.
Thank you. Your next question comes from the line of Hugo Cruz from KBW. Please ask your question. Your line is open.
Hi, thank you. A couple of questions. On capital, can you give guidance on, you had all these benefits from DTAs in Q1. Can you give guidance on what could be the impact for the rest of the year? Obviously, I understand that depends on your guidance also on NPE kind of progression. Then also, once you have a target at the end of the plan of 40% payout for your dividend, but you know you already, I think you have a decent buffer above 12% already. Okay, you have the impact of the acquisition this year, but how fast can you get to a 40% payout? Do we have to wait until the end of the plan, or could you get, say, next year?
Finally, could you give a bit more granular guidance on your cost base for Portugal, i.e., how much of one-offs do you expect this year and the next? What kind of underlying structural cost inflation do you expect for Portugal? A net of those one-offs. Also investment, if you could split between one-off restructuring charges and investment, it'd be helpful. Thank you.
First, in terms of capital, as I would say, most of the impact will come here from three sources, the exact three sources that happened in this quarter. The net income, as I commented, the impact because we have net income, we benefit from the DTAs because by having a positive income, we benefit from the DTAs also because the threshold, as you know, for the DTA deduction also goes up. The evolution of the mark to market of the government debt portfolio. This in terms of the numerator. Then in terms of the denominator, the RWA increase. In terms of the net income, what we have told you, I think I cannot elaborate much more than what I've told you. This quarter was a good quarter. We are actually on the track of the year. We have here some extraordinary link to trading gains.
I think corrected for this and for the other extraordinary, this is the type of evolution that we would like to see in the bank. Most of the capital accretion going forward will come from this. In terms of the cost base for Portugal, we are in a transformation phase. As we commented, we need to have different types of skills for a bank that is a digital and a more mobile bank and a less branch-based bank. This, of course, we are trying to do this without sacrificing too much our recurrent cost base. What we are trying to do is to try to maintain the recurrent cost base, but at the same time reinventing the bank and having the type of skills that we need for the future.
I would say it would give or take, so to say, in terms of our plan, what we would like to see is a reduction in real terms of our cost base, but a sort of maintenance in nominal terms of our cost base, but with the reinvention of the bank and while serving many more customers with many more products. In terms of the non-recurrent part, we are still analyzing it. There will be a non-recurrent part that has already been announced to the AGM that is EUR 12 million that will be distributed on Q2 to the employees which salaries were reduced during the crisis, so to say. This is a non-recurrent part.
There will be other non-recurrent part that we still have to refine, basically in terms of headcount, in terms of this transformation, and in terms of the headcount reduction, that we still have to see exactly how many people we can reconvert and how many people we have to let go in this process of transformation of the bank. The main message that I would like to give to you, because it's the most important one in terms of valuation, is in terms of the perpetuity, in terms of what is recurrent and so on, we do expect stability. In terms of the dividend, the dividend is the decision of the shareholders. As you know, and I have commented, we will have the impact of the Euro Bank. This is an important impact that will have in our capital base. We are growing low single digits in Portugal.
We are still with an NPE ratio above with the NPE ratio where we want to get it by the end of 2021. Having all of this considered and while we have this NPE ratio, in terms of our recommendation to the shareholders, we will tend to be conservative until we reach the type of NPE ratios that we think that the market values most. We generally think that this is what protects best your interest. For us, it was very important to distribute this dividend this year, not because of the cash that it needs, but because it sends the right signal that we have enough capital for our business model.
The fact that we are distributing is basically a signaling effect that we have enough capital for our business model and that the people that have to participate in the dividend decision, and of course, the supervisors also are consulted in the dividend decision, feel comfortable that our business model and our capital generation is consistent with what we are doing.
Okay, thank you very much.
Thank you. Your next question comes from the line of Carlos Peixoto from CaixaBank BPI. Please ask your question. Your line is now open.
Hello, good afternoon. A couple of questions here as well. The first one would be on capital still. A bit of more detailed question, which is, you mentioned the net income of the quarter as accruing to the CET1 performance. My question is: Is there any accrual of any sort of payout policy embedded in the ratio or for the time being, you're considering no payout for regulatory purposes? Related with this theme, the first Q, quarter one ratio is already adjusted by the dividend payment that was announced. If you could just confirm that. On a second theme, on cost of risk. This quarter, cost of risk came down in a significant way and a strong improvement vis-a-vis the last quarter and as well, the full year 2018.
I was wondering whether you see this sustainable or should we expect it to pick up a bit throughout the year as it happened during last year as you speeded up a bit more on NPE sale? A third question, if I may, would be on MREL requirements. Last quarter, you mentioned a shortfall of EUR 1.4 billion or basically the need to issue EUR 1.4 billion of MREL instruments until June 2022. Is that still the figure we should be looking at? Or how high have this evolved in the meantime? Thank you.
Okay. Starting with the last question, yes. We have not redone the calculations of MREL. There is nothing to point out that the numbers should be different. Since we spoke last time, we have not issued any MREL-eligible instruments. What we will need to issue, and this is nothing special, as you may acknowledge, is a difference of EUR 1.4 billion through 2022. This is the net gap that we have to fill. It's very comfortable, as you know, for a bank such as us. The only reason here, the timing will depend exactly on the questions that have already elaborated before. In terms of cost of risk, I would say the trend is this one. We think our business model is consistent with a cost of risk across the cycle, even below 50 basis points, and we expect to get to 50 basis points by 2021.
This is where we want to get it. The cost of risk is a little bit like it has a component of volatility, as you know. We do not smooth our accounts. We may have quarters that are better, quarters that are worse, but I would say the quarter that we just had was a normal quarter. To say there could be quarters that are better than this one this year, there could be quarters that are worse than this one this year. I cannot promise you exactly what the next weeks will be or the next months will be because it will reflect the reality of the accounts, and the reality is intrinsically volatile. What I would like to say is that we are not expecting it to grow, neither to come down.
Actually, we are expecting it to come down over the trend to the 50 basis points, there is nothing special in terms of the cost of risk of this year. In terms of the capital ratio, the answer is yes. We advise to the normal rules in terms of capital ratio calculation. The present capital ratio, of course, already incorporates the one for the year end, the 10% of payout for the year end. Of course, as time goes by, we will assume a conservative value in terms of the accrual of a payout that then may be equal or different from the real payout decided by the shareholders. We are not accruing 100% of the net income.
For the same reason that I don't want to condition exactly the decision of the shareholders and the decision of the board of what will the possible payout be this year, we are not disclosing it. Of course, I will not disclose exactly what is the percentage that I'm accruing because it will be tantamount to saying exactly how this would condition the shareholders. Yes, we are not accruing the total of the net income because this is what the rules say.
Thank you. Your next question comes from the line of Ignacio Ulargui from Deutsche Bank. Please ask your question. Your line is now open.
Sorry, I thought I pulled out my questions, just one follow-up on the fee income trends and what you were commenting in Poland, particularly. Do you think that what we have seen this quarter is a bit of a trend that we should expect for the coming quarters, or there might be a bit of a change in trend on the market-related and asset management products? Thanks.
Ignacio, as you probably have seen, this quarter, when you compare with previous quarter, there was already an inflection in terms of bancassurance and market-related fees in Poland. When you compare this quarter with the same period of last year, it goes down. When you compare this quarter with exactly the last quarter, you already see some picking up of market-related fees. As you may also know, there was an issue, a reputational issue in the market, not with us, in the market in terms of asset management products in Poland. As the markets evolve better and as this reputational issue fades away, we do expect the market-related fees and bancassurance fees in Poland to start improving, as they did this quarter vis-a-vis the last one.
Fourth quarter. Okay. Thank you.
Thank you. Your next question comes from the line of Benjie Creelan-Sandford from Jefferies. Please ask your question. Your line is open.
Yeah. Hi, good afternoon. Two quick ones from me, please. First of all, can you just confirm what the average yield on the Portuguese sovereign bond portfolio was at the end of the quarter? Secondly, on Mozambique, on the sovereign exposure, it looks to be down about EUR 400 million quarter-on-quarter. I just wanted to check, is that related to a maturity? If so, how has the cash been reinvested in the country, and should we expect any impact on net interest income going forward? Thank you.
I'm sorry. There was a problem in terms of sound. Sorry. I will start again. In terms of the reduction of the bond portfolio, I can confirm that we have reduced the bond portfolio between December and March of this year. The amount that you have referred, around EUR 300 million, as you may see in the annexes to the presentation. As we have generated cash, what we see also is that our treasury bill portfolio, our short-term government securities have increased somewhat. This is more an effect, so to say, of cash accumulation than a decision by itself. What we are now doing is exactly to use this as an opportunity to improve our profitability further going in the next quarters, either by being more conservative in terms of the pricing of the largest deposits or by using this excess liquidity in more profitable ways.
The bond portfolio came down, the treasury bill portfolio went up. The average yields on the portfolio, to a large extent, because of the high component of treasury bills, was in the quarter 0.6% of the Portuguese government debt portfolio. Mozambique.
Thank you.
Okay. I'm sorry. Here, in terms of Mozambique, basically what was is a mix in terms of the portfolio in Mozambique. We had securities that were short-term government paper, and basically we have exchanged the short-term government paper by central bank paper. It's very similar products, mainly in a country where the central bank issues its own currency.
Thank you. We will now take your next question. It comes from the line of Noemi Peruch from Mediobanca. Please ask your question. Your line is now open.
Good afternoon. I have two questions on NII. What is the contribution to NII from NPE in Q1? Could you please give us some color on the evolution of yields in Portugal mortgages and corporate, since we see some pressure on mortgage front book rates on aggregate level as the corporate bond yields decreases. Thank you.
Yes. The contribution of NPEs, mainly of the unlikely to pay part to the margin is not very material. Of course, it's not mainly material. To give you a broad figure, more or less, it should be for every EUR 100 million of reduction, more or less, we lose more or less EUR 1 million. This is more or less what is because as it is already provided for, as you know, according to IFRS 9, you only account for the part that you really expect to recover and after the impairment. Because this is a part that is already impaired and is already covered, the part that really impacts the margin is not that large. It's broadly, if you want a ballpark number, around 1% value. That means that probably the value before the impairment would be around 2% of interest rate, give or take.
In terms of the pressure on spreads, as the country normalizes, it is normal, of course. By the same token as we have benefited and we are benefiting as it was shown to you from a reduction in spreads, that some of the corporates also benefit from this reduction in spreads. Effectively, we are seeing some margin compression in terms of spreads that we have been able to compensate through volume growth. We expect this volume growth, as you've seen the volume growth in Portugal, it's low single digits, but it's still relevant by being low single digits. Also, if you take a look at the whole portfolio, by the composition of the portfolio with a better weight of the unsecured cash loans vis-a-vis the mortgage loans. We do expect our NIM in Portugal to continue at present levels.
We don't expect a reduction in the NIM, this reduction in the NIM is through the fact that the mix effect compensates a potential compression when you look at it on a client-by-client basis. Next question, please.
Thank you. Your next question comes from the line of Hugo Cruz from KBW. Please ask your question, your line is open.
Hi, thanks. Just a quick one. In Mozambique, the recent natural disasters, do you expect any material impact out of that in the local business? Thank you.
Thank you for asking this question. Effectively, it was a big disaster and a big catastrophe for the country. Of course, we feel our social responsibility with the country. The immediate impact that it may have in our accounts is negligible. We do not expect any immediate impact in our accounts, neither in terms of credit risk nor in terms of destruction of collaterals, so to say. We are not expecting anything in this regard. Of course, our business model in Mozambique is very much a liability-based model, where we have liabilities, where we have client deposits, and where we invest these client deposits to a large extent in government debt and in deposits in the central bank. It is a very much a transactional-based model, a very low-risk model. It's not so much exposed to these and other types of risks.
Thank you.
Thank you. Your next question comes from the line of Carlos Peixoto from CaixaBank BPI. Please ask your question. Your line is open.
Hi again. Two specific questions again on costs. The first one would be regarding the distribution of profits that was announced for this year, the EUR 12 million that you referred to previously. Is this something that we should incorporate into our numbers, going forward? Will there be additional distributions of net profits, should we think on it as a sort of a payout ratio as well in the % that will pay this year versus the profit of last year? Should we look more at the broad figure, the EUR 12 million? Also related with this, I've noticed that there was an increase in the workforce in Portugal in the quarter, if I'm not mistaken. Should we think on this as being something temporary in the sense that you're renewing a bit the workforce, hiring people more related with IT while restructuring the retail force?
Is this a temporary effect, is this something more structural and should we expect it to continue growing? Thank you.
Starting with the last question. The total amount that the workers in the bank, so to say, have accepted to reduce their salaries during the period of the plan was around EUR 36 million. This was the total amount that they have accepted to reduce their salaries as a commitment with the project of improvement of the business model of the bank. The commitment at the time of that, if we all were successful, that we would present to the general shareholders meetings, decisions, as it was said at the time, so to say, to compensate the workers in aggregate terms, for this sacrifice that they have made, if we were successful as we have been. This was an additional motivation to repay the CoCo and so on.
This was a decision of the board to present this year EUR 12 million of these EUR 36 million. This is a decision that the board will take every year. One thing I can tell you is that once the EUR 36 million are distributed to the workers, that's it. Exactly the pace that it will be distributed will depend on the decision of the board, where there are some non-executives, the final decision will be taken by the AGM. This is not something that you should include in your, so to say, perpetuities. I would not include this in the perpetuities. If I were doing the calculations, I would compute the EUR 36 million, so to say, before tax, by the way, in terms of value to be distributed to the workers over the next years.
To say, that's something that I would do, but I would not include it in the perpetuity in any case. In terms of the dynamics in Portugal, what we want to become, taking a long-term view, is a bank with less people, with more digital skilled and mobile skilled people that serve our clients in a way that is prone to what they need in this new mobile and digital world. Of course, there is a moment in which we have to hire people for the digital, and we still keep some people for the old servicing model. The people that we have hired, they are here to stay, so to say. What we do expect as time goes by is that the total amount of people in the bank, as in other distribution models, will go down. It's a situation.
It's a part of the rules of the transformation of the economy. Having said that, this in terms of number of people, I would not fix too much in terms of number of people. What I think is more important is the recurrent cost. What we do expect is to have a maintenance of the recurrent cost, but with the bank much more able to be scalable. We expect an increase in revenues, to be able to increase revenues with stability in recurrent costs. That's basically the key message behind our plan. If you do the numbers, you reach more or less the same types of values that we are getting to, and these recurrent costs will be with less people, so to say. I think these are the general numbers.
Thank you.
Next question.
Thank you. We do not have any further questions at this point. I will hand back to you, Mr. Miguel Bragança, for some final remarks. Oh, sorry. We do have one last question. Would you like to take it now? Your last question comes from the line of Jonas Floriani. Please ask your question. Your line is now open.
Hi, gentlemen. Jonas Floriani here from AXIA. Just a question on your slide 29. Just wondering, now that we're seeing quite a consistent improvement in the spread of the portfolio on deposits. What do you see as a trend for 2019? How much lower these spreads will go? Any color on that would be very helpful.
We still have a difference between our front book and our back book. As the back book matures, we will improve, so to say still, the cost of deposits. We still also have some deposits that are corporate deposits that are not so important for our franchise that we can also let go and just by the fact that we let them go, this may still improve somewhat the cost of deposits. As you point out, the marginal benefit of the reduction of the cost of deposits will not be very large. I would say in the next quarters, we'll be decreasing vis-a-vis the EUR 3 million that we have seen in this quarter. We still expect in the next quarters to have some benefit from it, but we are speaking about these type of numbers.
What we expect to be, so to say, a driver of the NII is as our effort to reduce the NPEs become smaller, so to say, and our increase in the volume of credit starts to grow, we expect this to contribute positively to the NII in Portugal, so that we achieve low single-digit numbers in Portugal. That's the type of target that we have in Portugal as you have seen this quarter, vis-a-vis the quarter of last year. In terms of our business model, I would say we will have a strong top-line growth in Poland, as I was commenting. A strong top-line growth in Poland that will then translate in a very interesting also bottom-line growth. We are expecting top-line growth in Poland cumulatively over the next years.
A cumulative annual growth around 10% that will translate, of course, in a bottom-line growth that is substantially mid double digits. This is the business model in Poland. The business model in Portugal, what we would expect is some top-line growth, but low single digits top-line growth, contained costs, and a normalization of the cost of credit, where the benefit will come from the reduction of the cost of credit, and in terms of shareholder value creation, from the reduction of the NPEs.
Got it. Thank you.
Thank you. We do not have any further questions. I will hand back to Mr. Miguel Bragança for some final remarks.
Thank you very much, ladies and gentlemen, for your interest in our equity story. This has been, as I commented, a strong set of results. We would like here to reaffirm our commitment to the strategy that we have presented to you of transforming the bank while preserving the franchise. We would like here to commit to you that we are clearly on track to achieve the numbers that we have presented you. Thank you very much, and until next quarter, please.
That does conclude your conference for today. Thank you for participating. You may now disconnect.