Good day, welcome to the Millennium bcp 9M 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Miguel Maya, Chief Executive Officer of Millennium bcp. Please go ahead, sir.
Good afternoon, Miguel Maya speaking. I would like to start welcoming you to this conference call regarding bcp Q3 earnings. I will present you the earnings main highlights, then my colleague, Miguel Bragança, will follow, providing additional information and details. I would like to emphasize that during the first nine months of this year, we improved in profitability, reaching net earnings of EUR 257.5 million, improved in credit quality, having decreased NPEs by EUR 1.8 billion from September last year, have increased the business volumes, namely in the Q3 , in which total loans increased nearly EUR 700 million and the performing loans increased EUR 1 billion. Have additional 294,000 active customers since September 2017, and seen rating agencies recognizing the bank improvement over the last years.
Had a good performance on the stress tests when compared to the average for the banks tested, also a special mention for the agreement signed this week for the acquisition of Euro Bank, which will strengthen Millennium Bank's market position in Poland and provides an opportunity for relevant value creation. What I just mentioned is graphically illustrated on slide five. There was an improvement in the group's profitability with an increase of 93% to EUR 257.5 million. I must also mention the relevant contribution of the activity in Portugal for the overall increase of the group's profitability. Coming from a marginal positive contribution on the first nine months of 2017, the contribution from Portugal this year already surpassed EUR 100 million. In terms of asset quality, the reduction in NPEs from EUR 8.1 billion to EUR 6.3 billion represent less EUR 1.8 billion at group level since September 2017.
The reduction in Portugal was of EUR 1.6 billion from EUR 7.2 billion-EUR 5.5 billion. Last quarter reduction of NPEs in Portugal was EUR 367 million, which by itself is a strong evidence of the consistency of the work undergone in this front. At the group level, it should be highlighted that the coverage by impairment has surpassed the 50% result, the total coverage, including collaterals, is now 107%. I must underline that being our business model a relationship-centric model focused in retail and corporate, the coverage by collateral value has also a great relevance. In spite of the reduction of NPEs, the business volumes increased EUR 4.2 billion in the first nine months of 2018 compared to the same period last year. The increase was of EUR 3.8 billion in customer funds and EUR 400 million in loans to customers.
Just in the last quarter, there was an increase of EUR 700 million in loans to customers. The customer base has continued to be reinforced with the 294,000 active customers acquired in the last year, of which 120,000 in Portugal. This customer acquisition dynamics is particularly important considering the changing context of the financial sector being very relevant to the growth in terms of digital clients, which already account for 41% of the active customer base. Both Standard & Poor's and Moody's upgraded in October one notch the long-term bcp ratings confirming the significant improvement of the bank risk profile, namely in terms of asset quality as a consequence of NPAs reduction and in terms of profitability improvement in the domestic activity.
As we expected, bcp had a good outcome in the stress tests conducted by EBA and ECB, which on the adverse scenario have resulted on a Common Equity Tier 1 fully loaded impact of 300 basis points. I highlight that bcp results compare favorably with the average impact of the 48 banks tested, whose impact in fully loaded was 395 basis points. Regarding Euro Bank's acquisition by our subsidiary in Poland, which was announced this week, I wish to highlight some aspects. It is an opportunity to strengthen our market position in Poland, which is a high potential market where we have proven to be able to grow in a profitable manner while gaining market and customer trust. After carrying out a comprehensive and conservative analysis, we concluded that this was a relevant opportunity that fully justified the proposal we have presented.
I emphasize that the capital management is a matter of extreme relevance for the group. I want to be very clear, affirming that we do not envisage any further acquisition until the end of this board term. The growth embedded in the strategic plan that we announced to the market in July will be achieved 100% organically. The estimated price for Euro Bank acquisition of EUR 428 million sets the transaction at the price-to-book value multiple of 1.2. This acquisition will be paid in cash and exclusively financed by Bank Millennium own funds. Currently, Bank Millennium is trading in Poland at the market average price-to-book value of 1.3 at the date of the transaction, and several banks even trade in Poland at higher multiples. This acquisition will enable Bank Millennium network of branches to have the reach we consider desirable.
Currently, Bank Millennium has 356 branches, of which 60% are located in bigger cities, while around 70% of Euro Bank branches are spread throughout other cities where we are present or don't have the presence that we think we should have. Euro Bank has 501 branches, half of which are franchises, which is a flexible and agile model in this new digital environment. I would also like to highlight the relevant reinforcement of the market share of non-mortgage retail loans, in which we will turn into one of the major six operators. I also point out that no Swiss franc loans risk will be assumed with this transaction. We estimate to extract relevant synergies from the transaction, nearly EUR 40 million after Euro Bank integration and completion of the restructuring.
As a consequence, we project a significant improvement of the Bank Millennium's earnings per share with an additional 26% estimated on a steady-state stage. We also estimate that on completion of the transaction by the end of the Q2 of 2019, the group Common Equity Tier 1 will be reduced by 40 basis points, and the total capital ratio impact will be lower than 30 basis points. These impacts will be offset by additional optimization measures in the capital at the group level that we are currently undergoing, of course, without any capital increase, something that is completely out of the question.
Finally, I would like to stress in relation to the dividends payment that what I told to the markets was that we should start paying dividends as soon as possible, but always taking in consideration that it is also very important for the bank to achieve a Common Equity Tier 1 of 12% as it was projected in our strategic plan. Now, I will pass to my colleague, Miguel Bragança, to provide you a more detailed explanation of the earnings presentation.
Good afternoon, ladies and gentlemen. It's Miguel Bragança speaking right now. Entering now into the profitability main highlights. As you see that our consolidated earnings have improved by 93%, and this was achieved with two main levers. A very sharp increase in the Portuguese domestic activity as it normalizes with the more normal cost of risk, and as the net earnings also from international operations show a high resilience in spite of the macro challenges that we all know. In page 10, we may see the income statement. As you may see that our core income, in spite of this prolonged period of low interest rates, has shown a growth of three percent. Our recurring costs have grown by 3.3%. Included in these recurrent costs is the question of the salary normalization in Portugal.
As you know, up until the Q1 of last year, there was a salary cut associated to the restructuring plan that was reversed last year. This is basically what explains it. Our operating net income remains broadly stable, and the recurring operating net income shows growth of around two percent in spite of this prolonged period of low interest rates. Our impairments decreased to a still very high level with the cost of risk in Portugal still of around 100 basis points, which shows still some degree for further normalization. This is basically what explains, to a large extent, the increase in the net income of 93% in Portugal. In consolidated terms, I'm sorry. Going line after line.
The net interest income shows a very important increase of three percent in this environment. I would highlight here the stability of the NIM, both in consolidated terms and in the several geographies. We see that our consolidated NIM is 2.2% in Portugal, which is, as you know, a quite mature market. We are able to show a NIM of 1.8% in spite of these very low Euribor rates, and the international operations have been able to maintain a high level of NIM in the last year. Commissions, they are going up in spite of the challenges in the market, as you see. When we compare this quarter to the previous quarter, we see an issue of comparison in terms of commission that is to a large extent explained by market deals.
When we compare with the last year, we see here an improvement of 4.4% of commissions in Portugal and international operations. We show a stability mainly linked to investments, asset management, and bancassurance, which we expect gradually to reverse. The other income, as you may see on page 13, is to some extent influenced by the mandatory contributions. As you see, the mandatory contributions have increased around EUR 10 million from 2017 - 2018, which influences the net operating income and also the losses that we had in terms of credit sales. This year, we have had around EUR 21.6 million on credit sales losses that have been very important, and I think also value accretive because they are an important part of our NPE reduction strategy.
We see in Portugal here that this other income has reduced EUR 10 million, but in a very difficult market year, as you know, all the market gains and so on are in this line. We have still been able to show an accumulated other income line of EUR 39 million in Portugal. In international operations, you see some growth in spite of the small increase in mandatory contributions. In terms of cost, there is an increase in cost. A part of it has to do with non-recurrent positives that we had last year, so that when we compare the non-recurrent positives last year with the non-recurrent negatives of this year, by non-recurrent, I mean mainly headcount reduction costs and pension funds, special costs or special income as we had last year.
We see here a variation of around EUR 30 million. There has also been the reversal of the salary cuts that have explained that is responsible for a growth of EUR 7.5 million. Going forward, we feel very confident that our business model supports these very interesting cost to core income numbers, both in recurrent terms and excluding non-usual items. Page 15, once again, we remind you how our cost to core income compares with our competitors in Portugal and with averages of systems in other European markets, showing our capability to generate pre-provisioning profit on a sustainable basis. The cost of risk, albeit high, with at the level of 88 basis points in consolidated terms and 100 basis points in Portugal, is showing a progressive normalization trend, which we think is important. As you know, we have an objective of reaching 50 basis points by 2021.
We are on track. Of course, this is a line that may have always some volatility, but we are really on the long-term track of achieving our long-term objective. Credit quality. As Miguel Maya commented, we were able to reduce year-over-year around 22% of NPEs, almost EUR 2 billion, and achieving very already interesting ratios from an NPL and NPE perspective. Our NPE ratio, the official EBA ratio, including securities and off-balance sheet items, is already below 10%, is at 8.8%. Our more normal ratio that only considers credit is at 12.3%. If you consider only the NPL 90 days ratio, we are at 7.4%. This sharp drop in the ratio has been achieved maintaining a very high level of coverage, mainly when you consider the collateral. In terms of business activity, synthesizing it, I would say that it reflects our commercial capabilities.
Our commercial capabilities and our customer attraction remain very healthy. The total customer funds have increased by 5.5% in consolidated terms, of which 5.8% in Portugal, which we think very interesting value, and almost five percent in the international operations. The loans showing already a significant gain in the performing area. As you see here, we are growing here EUR 400 million, which is not a lot, but this EUR 400 million reflect the reduction of EUR 1.8 billion of NPEs, so that the performing portfolio effectively increased by EUR 2.2 billion, which is already an important reversal of the trend that we had until now. The net loans to deposit ratio continuing to improve and the liquidity situation also very healthy, both in terms of ECB funding and in terms of liquidity ratios.
Capital position. As we see when we compare with last year, the total capital ratio improved from 12.7% to 13.4%, basically to a large extent explained by the CoCo issue that we did at the end of last year. The Common Equity Tier 1 achieved 11.8%, with some growth vis-à-vis last year and comfortable above our SREP requirement ratio of 8.8%. If you do the numbers, this is the result of both the impact in terms of net income, in terms of our capital position, and the fact that we are increasing risk-weighted assets. Leverage ratio, very healthy growth and comparing very favorably with other markets. The RWA density, which is a ballpark approximation to the conservativeness of our models, also compares favorably, if you want, with other markets. I'll pass now to Rui Coimbra, going into detail in terms of Portugal.
On page 26, the net income in Portugal of EUR 115 million, an important increase from last year, driven mainly by lower impairment and provisions. On page 27, the dynamics of the NII since last year, an increase of one percent. This evolution is driven by the positive effect from still the CoCo repayment. The continuous decrease on the costs of funding, and here both retail funding, i.e. deposits and as well some retail bonds, but wholesale funding as well, and in particular, due to the replacement and the issuance of the covered bond with lower rates that we did last year. On the negative side, the effect of still lower volumes when we compare the nine months and the average nine months of this year versus previous year, lower contribution from securities, as well, a slight decrease on the average spread on loans.
Quarter-on-quarter, the NII increase is mainly due to the higher credit volumes that we were not seeing for quite some time and affecting in a positive way the NII this quarter. A higher contribution from securities when we compare with the previous quarter, and the lower funding cost as well, in particular, retail funding costs. So here, both time deposits, but as well, the kind of time deposits that more on the debt line that we can see a type of retail bonds. When we look to the spreads and the spread of time deposits, the back book at 60 basis points, an improvement of 10 basis points from last year. Regarding front book, still a relevant difference from the current one, the front and the back book, that is still with space to continue to decrease the average cost here.
Regarding loans, the spread is very much stable at 2.7, as well as NIM that is relatively stable at 1.88%. Looking to commissions now, up by 4.4% with market commissions up by 10% and banking commissions by 3.5%. Regarding other income, the decrease, as already explained, is mainly due to the credit sales and the higher mandatory contributions. Regarding costs, you remember previous year, the one-off gain in costs related to the agreement with the unions regarding the retirement age. If we take into back together with the one-off restructuring costs on both years, the operating costs increased 2.1%, and again, very much related with the impact of the reversal of the salary cuts. Moving to NPEs, we continue this trend of an average of EUR 1.5 billion a year, reducing the NPE and increasing the cash cover.
These two elements at the same time led the net NPE from a very high number to EUR 2.9 billion now. Regarding the last 12 months, the decrease of EUR 1.6 billion happens through a combination of EUR 700 million of net exits, EUR 400 million write-offs, and EUR 500 million of sales. Quarter-on-quarter, the performance, again, very positive. A decrease of EUR 367 million, again, with a balanced combination between exit, sales, and write-offs. cost of risk at 102 basis points, down from 137 last year. Regarding the NPE coverage, total coverage above 100% for both individuals and companies, and even for both NPE categories, 90 days past due and the other NPEs.
Coverage by provision at 48% for the whole NPE book, but stronger for loans to companies, and in particular, for the 90 days past due segment within the loans to companies. Regarding foreclosed assets, an important decrease of 20% from last year, in spite of a large amount of entries. We increased sales, as you can see, by more than 80%, and we continue still with those sales to register profits on those sales. Regarding restructuring funds, the amount of EUR 1 billion represent a decrease of four percent versus the previous year. Looking to volumes now, customer funds up by 5.8% and the loans relatively or almost stable, but with a combination of a 23% decrease in NPEs and the 4% increase in the performing book, and in particular, EUR 300 million increase in this quarter.
Looking now to the performing book, this increase of 4.2% mentioned already is mainly explained by the strong performance we had of loans to companies that represent 65% of this annual growth. In terms of customers, just a note on the important increase of 120,000, in terms of active customers, and 144,000 in digital customers. Moving to the international contribution at EUR 141 million this year, an increase of seven percent versus last year.
We exclude on top of this the effect of the application of the IAS 29 for Angola and excluding the effects as well, the contribution registered an increase of 13% from previous year. If we look to Poland now, the numbers, the net income of EUR 129 million, an increase of nine percent due to mainly the increase of the NII. Page 41, this increase of NII of 6.7% is due to higher volumes, but as well higher NIM.
Commissions up by one percent and higher trading as well, when we compare these nine months of this year versus the previous one. Costs increased 5.6%, but the cost to income relatively stable at the level of 46%-47%. In terms of credit quality, stable NPL ratio at 2.7% with an increased coverage that is now at 132%. Cost of risk at 47 basis points, a decrease from last year. Regarding volumes, customer funds up by 5.6% with an important increase in demand deposits of 17%, and loans, 7.5% up, reflecting a decrease of seven percent on the FX mortgage and an increase of 40% for other loans. Regarding Mozambique, net income up by 20% with a return on equity above 20% as well. Income grew eiht percent above the increase on the costs that was at four percent.
Looking to income now, the NII up by six percent, mainly due to the increased contribution from the securities portfolio, but as well from lower deposit costs. Commissions down four percent with less contribution from loans. The operating costs up by four percent and the cost to income still at the low levels at 37%. NPL, the stock is down from last year, and the cost of risk at a high level of 338 basis points, which generates a coverage of 60%, but more than 100% when we include collaterals. Regarding volumes, relatively stable deposits, but a 21% decrease in loans that reflects the conservative approach under the current challenging environment. Moving to just the key figures and comparing this year with the previous year, good performance in terms of customer growth, slight deterioration on the efficiency ratios due to the reversal of salary cuts, as we referred already.
Improved profitability with a return on equity at six percent now, improved capital and liquidity position, and improved asset quality with NPs now at EUR 6.3 billion and with lower cost of risk. Let's move to Q&A.
Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, that is star one to ask a question. We will now take our first question from Ignacio Ulargui from Deutsche Bank. Please go ahead, sir.
Hi, good morning. Good afternoon, gentlemen. Just have two questions, one on NII. After the strong Q on Q growth that we have seen in Portugal. From the messages that I've seen in the presentation, we should see some sort of stabilization going forward. What's a bit of view for NII over the coming quarters? If I just look to the performance of equity accounted revenues in the international operations was very strong. Whether you could give us some color on the sustainability of that EUR 16 million that we had in the quarter. Thanks.
Okay. Thank you very much for your questions, Ignacio. Effectively, in terms of NII, what we see here are different trends. In this quarter, as Rui commented, there were a couple of positive trends and a couple of negative trends. Going forward, the main factors that we will see is some continuation in terms of the reduction of the average cost of deposits as the front book approaches the back book. This is positive. We also expect to see some slight deterioration in the assets margin as the situation in Portugal normalizes. On the other hand, we are seeing here some volume growth. Until the moment where the Euribor picks up, I would say that the margin will be quite stable. Once the Euribor picks up, it's a different story. We are a commercial bank, we should benefit from it.
Until the moment where the Euribor picks up, the resulting of all these factors should be quite stable going forward. In terms of the equity account impact, as you know, our only international accounting equity accounted participation is in Angola. This small impact that you see in terms of the total accounts of the bank is explained basically by the contribution of our participation in the BMA. Okay?
Okay, It was strong this quarter, shouldn't we forecast those at least as something like this quarter? It was a bit of a one-off.
In terms of, you're saying the margin or in terms of the-
No, in terms of the Angolan business. That was a bit stronger this quarter.
No, there is also an impact in terms of the currency movements. I would expect that what we had this quarter should be more or less aligned with what's going on in the next quarters. This will be aligned with more volatility than the domestic equity participation.
Perfect. Thanks.
We will now take our next question from Sofie Peterzens from J.P. Morgan. Please go ahead, ma'am.
Yeah. Hi, here is SoFie from J.P. Morgan. You briefly mentioned in the beginning of the presentation that you're looking at additional capital optimization measures at the moment. I was just wondering if you could give a little bit more details and color around how we should think about these capital optimization measures that you're thinking of. My second question would be on Euro Bank Poland. You got 426% EPS upside, but could you just give us a little bit more guidance on how we should think about net interest income contribution, fee contribution, total revenue contribution, cost contribution, and kind of normalized cost of risk for the business that you are acquiring. Thank you.
Okay. In terms of the additional capital optimization, I would say this is BAU as we normally do. We always take a look back at synthetic securitizations. We always take a look at our minor participations on what we do with them, dividends of equity accounting participations. I would say this is mostly BAU. It's nothing out of line with what has been done in the past. It's something that's part of our job that we continuously do and that bring a normal benefit to our capital ratio. Okay? More of the same of what we have been doing in the past. In terms of Euro Bank and Bank Millennium, as you know, Bank Millennium in Poland is a listed bank with around 50% of the free float in the market or of the capital in the market.
Bank Millennium is effectively giving the information on the transaction, I would not like to have here a second point of entry, if you want, for all this information. Most of the benefit in terms of the synergies, and this is what I can say, most of the benefit in terms of the synergies will come from cost cutting. In terms of the value that will be generated through synergies, most of it we expect to be through cost cutting. That is, so to say, a comfort in terms of execution because it depends mostly from ourselves. Approximately what you can do is to sum the two banks together, then to apply an important cost-cutting factor to the cost base of Euro Bank. Okay?
Okay, that's clear. Just a final follow-up question on the capital side. You had your fully loaded leverage ratio was very strong and increased quite significantly this quarter. How should we think about that going forward, what actually drove that?
Effectively, we should probably have highlighted this better in the presentation. In our former fully loaded leverage ratio that we had presented to the market, we were applying very conservative criteria not the official EBA criteria. To give an example, we were using all the assets and not excluding the assets that from the official EBA ratio EBA recommends to take out. I would expect this ratio to evolve in line with the capital ratio as we are not expecting dramatic changes in terms of risk-weighted asset density. Going forward, I would expect this ratio to move broadly in line with the capital ratio, because we are not expecting changes in terms of risk-weighted asset density.
Thank you very much.
We will now take our next question from Ms. Noemi Peruch from Mediobanca. Please go ahead, ma'am.
Good morning. I have three questions, if I may. The first one is on capital and dividends. Do you feel comfortable start paying dividends with our Common Equity Tier 1 ratio below 12%? The second is, are you planning to issue subordinate or senior bonds in 2019? The third one is on Angola. We have seen on the press that the Banco Nacional de Angola has asked several banks for higher capital ratios. Do you know whether the bank you have a stake in Angola is among these banks? In case of higher capital requirements for M&A, would you be willing to deploy more capital in the country? Thank you.
First, in terms of dividends. We have presented to you a plan where everything makes sense and everything is interconnected. In this plan, we intend to reach an ROE of 10% with a Common Equity one of 12%, and with a very sharp reduction in terms of NPEs, which is also linked in some way to the cost of risk and consequently to the return on equity. We do think that based on our business model, the appropriate ratio for us right now, in relative terms, is a Core Equity one ratio of 12%. This is our view, and this is what we think. This need not be something that has to be matched on the cent in every quarter. This is, I would say, a threshold. This is an indicative level, but this is what we think makes sense. Would we pay dividends below 12% or not?
This is a discussion that, as you may see, has always pros and cons. What we can tell you is the following. If we were convinced that our ratio would remain below 12%, we would not probably, or at least I can speak for myself, I would not recommend to pay dividends. However, we have to keep this in mind, together with the situation that the bank intrinsically also generates capital. We have here too, this is not a yes or no question. This is not a simple question. It also depends a lot from our view on what the market values most, whether the market values most the commitment of starting to normalize the bank or whether the market values most the capital accumulation. We are almost at 12%, so it is not 10 basis points more or 10 basis points less that makes the difference.
This is something that will be decided by the general shareholders meeting, that I would like very much you to be represented and also you to participate in the discussion. In terms of senior and sub debt, I would say that BAU or say it is part of our job and particularly of my job as CFO to be constantly in connection with the market. Being constantly in connection with the market means here and there, based on the view that we have around the bank, about the bank, to test the opportunities of issuing. Of course, keeping in mind what it means for the different stakeholders, including the equity investors. We would not issue if we thought that this would be against the equity investors' best interest, so to say, because of the price.
We will also not try to issue in opportunistic terms just because the price is very low and wait until the price is the lowest possible. We have here long-term view in terms of our relationship with investors. I would say this is BAU. We don't have any specific pressure, but of course it's BAU. We have issued sub debt last year. We have issued senior debt last year also. Maybe we will issue, depending on the market circumstances, if we think that it's in the best interest of the bank. Okay. In terms of the ratio of Angola, as you know, we are not the majority shareholders of the bank in Angola. We don't have any indication that the Our participation is only 22.5% in the bank. The ratio of the bank is 12.7%.
We understand that the bank in which you participate there is one of the most solid banks in Angola, and probably is not so much on the spotlight as other banks about whom I don't want to speak right now, for obvious reasons. We don't have any indication in terms of pressure to increase the capital there. It is not in our scenario any type of capital call in Angola right now.
Thank you. If you find your question has been answered, you may remove yourself from the queue by pressing star two. We will now take our next question from Benjie Creelan-Sandford from Jefferies. Please go ahead.
Yes. Good afternoon, everyone. Just a couple of questions from my side. First of all, going back to the NII in Portugal, and particularly the funding cost move, because interest expenses have gone down sharply in Portugal quarter-on-quarter. I was just wondering what the drivers of that were, and perhaps if you could tell us what the quarter-on-quarter move in the average retail bond cost and term deposit cost was, that would be helpful. The second question is just on the NPL sales. They've picked up again this quarter. I was just wondering whether you could give any guidance in terms of the average ticket size of your disposals and the typical type of counterpart that is buying those, and then whether you're seeing any change in terms of demand or behavior for NPLs recently.
Perhaps if I just had one final question as well, just on the Polish acquisition. Could you just break out perhaps the moving parts of the minus 40 basis point impact in capital coming from the acquisition? Because based on the stated RWAs in the presentation and the implied goodwill creation, I wasn't quite able to reconcile, but perhaps there's some other consolidation effects that I'm not taking into account. Anything there would be useful. Thanks.
Okay. First, in terms of NII, the contribution from the time deposits on one hand and from debt on the other hand. The contribution from time deposits when you compare one quarter with the other quarter was EUR 3 million. The other debt, when you compare it, is around EUR 4 million positive. This explains most of the impact in terms of the liabilities. There were also some gains linked to the hedging of these liabilities, that also contributed and help explain the whole liability savings cost. In terms of NPL sales, what we had was a year-to-date, total sales of EUR 320 million, and in this quarter, we had sales in terms of around EUR 90 million. This was the sales of NPL that we have this quarter. In terms of the question about the 40 basis points, just one second.
It is an increase, the 40 basis point. It is an increase of EUR 2 billion over RWAs. An increase as well, positive, on the Common Equity Tier 1. The reason is that on one side, in a way you deduct the 20% of the goodwill, the fact that you are paying above book. On the other hand, the excess capital belonging to the minorities that we were deducting from denominator on the Common Equity Tier 1, there is a part of this, around EUR 150 million, that now is a lower deduction. It is actually these three movements at the same time that gives the around 40 basis points.
Great. Thank you.
We will now take our next question from Carlos Peixoto from CaixaBank BPI. Please go ahead, sir.
Hello. Good afternoon. It's Carlos Peixoto from CaixaBank BPI. Picking back again on the question on dividends. My question would be on whether the 11.8 fully loaded CET1 ratio reported is already adjusted for some sort of payout ratio, or basically, what are the assumptions in terms of dividend payout that are embedded in the ratio? The second question would be on your expectations for the evolution of cost of risk for the rest of the year and also into 2019. Finally, I was wondering if you could shed some light on what are your expectations on the evolution of tax rates, both for the Q4 and also for the medium term. Thank you.
In terms of dividend payout, I understand this question is what we have been saying is that we want to start to pay dividends as possible. What we also have been saying is that we have a target payout ratio structurally in terms of long-term trends to be hit by 2021 of around 40%. We have not yet taken any decision, I want to stress this, we have not taken any decision in terms of the dividend of this year. This is very important to say. Even if a decision is taken, the issue is more as a statement of normalization of the bank is not, in principle, to distribute 40% immediately this year. We have never said that dividends imply necessarily a 40% payout.
I want to clarify this point because there is no implication in terms of saying that our long-term dividend policy should be 40% for a bank such as ours on one end, and saying that we want to normalize the bank as soon as possible, to saying necessarily that we will hit the 40% immediately. I don't want to get too much messed up in this discussion, because this is a discussion of the shareholders, it is not a discussion of the executive management. What I can tell you is that even if we suggest to pay dividends next year, it will not be the 40%, and it will be something that is a statement to the market that we have enough capital and that we are becoming normal.
With this into consideration, because nothing has been decided yet, we are not projecting any payout in our present capital ratio. Okay? This is something to be decided next year. In terms of cost of risk, as you know, we are with 88 basis points of cost of risk. We have said, and we continue to say that we want to get to the 50 basis points of cost of risk by 2021. Of course, the cost of risk as well as the trading gain is a line that is more volatile because it depends sometimes on some big cases, and we have a long-term trend, but of course, there is some variability around this trend that we cannot project on a month-by-month basis with total precision.
I would say as a long-term trend, as a trend not necessary I would say that we would expect a path to the 50 basis point, that is a normal path, a linear path from the 88 basis points to the 50 basis points in the next years. In this last quarter, I would expect, in the absence of anything strange happening, I would expect to have a Q4 more or less aligned with the Q3 . This is my basic expectations. As well as with trading gains, and I want to stress this, the reality here is intrinsically volatile. That's how things are. Okay? The tax rate. The tax rate, it is a normal tax rate. We are expecting a tax rate between 24%-25%, which has been quite normal in the last years.
As a reminder, if you would like to ask a question, please press star one. We will now take our next question from Cristobal Adorno from Goldman Sachs. Please go ahead, sir.
Hi. First of all, thank you for the presentation. Just one question from my side on capital, the stress test specifically. You provide a 300 basis points of revision for the fully implemented approach. Could you also be in measure of providing us the landing point in terms of CET1 ratio, please?
Our landing ratio, that's relevant for the stress test in terms of CETone phasing is 9.1% in the adverse scenario.
Okay. Thank you.
We will now take our next question from Gabriel Kaminski from Autonomous Research. Please go ahead.
Oh, hi. Thanks for taking my questions. Firstly, on the stress test, decent performance, apparently. Do you expect any potential changes in your capital requirements, especially on the Pillar 2G, on the back of the stress test? Secondly, you mentioned in the presentation that the factoring business has been performing strongly in Portugal. Can you elaborate a bit on what sort of factoring business are you doing? Finally, just in terms of the timing of the dividend, can we assume that you would make a decision on the 2018 dividend before the closing of the Polish deal and that you want it to be above a 12% ratio, including the CET1 impact from the Polish deal?
Starting with the last question, because I think it's particularly easy. We are expecting the Polish deal to close by the end of the Q2 . Necessarily, the dividend decision will be taken before this. Okay. In terms of the dividend decision, I think I have been clear, I don't have much more to say. It is a decision of the shareholders. The 12% is a long-term anchor, I would say. 10 basis points more, 10 basis points less, I don't think it's the critical point. We have to take a lot of factors into consideration. Please keep in mind that one of the key anchors for us is both the strength of the bank, but also what it means for the shareholders and for the trust of the shareholders in us.
The decision by the board will be taken beginning of the Q2 when we present a proposal to the general shareholders meeting, and the decision of the general shareholders meeting will occur during the Q2 . In terms of the factoring business, we are not a product bank. We are a relationship bank. Being a relationship bank, it means that we don't have a monoline in terms of factoring. Basically what we do is that we serve our corporate clients as well as our retail clients in all their needs, so to say. It's not a standalone product strategy, it is a relationship strategy. We serve our corporate in the factoring needs that they have. It is not particularly specialized because we are the largest private sector bank in Portugal.
We serve all the factoring needs as long as the clients are our clients and they have a good credit risk. This is basically more a penetration in our clients and the relationship involvement than anything else. In terms of the stress test, we share the opinion also that this stress test shows the resilience of our business model. The fact that our capital depletion is only 300 basis points in a fully loaded basis when the capital conservation buffer is 250 basis points is clearly a good sign. This means that the capital conservation buffer is almost enough to cope with the capital depletion. We think this is very good news. We expect the P2G to be reduced, but we have not had the number yet.
As you know, the ECB has been strongly recommending the banks not to disclose the P2G.
Sure. Just a couple of follow-ups. Would you take into account a potential reduction, or would you reflect a potential reduction in your Pillar 2G in the 12% CET1 target? The other follow-up on the factoring business, I understand this is a relationship business, and you are not a monolineer. Do the deals recently include NPL financing? Just given the fact that the Portuguese NPL market has been picking up quite significantly.
Starting with the last question. The factoring business is a business where we lend money to clients and where we acquire risks. It is not the business where we divest risks, so to say. We are not acquiring NPLs. We are not acquiring bad loans. We are on the sell side in this area.
Sure.
Not on the buy side. The factoring business is a pure relationship business with commercial clients in their normal trade finance, local and international trade finance relationship. It is a pure, plain vanilla financing of working capital, okay?
Okay.
Is normal. In terms of P2G, a very short answer to you is no. The evaluation that we did of the 12% ratio is based on our view of the capital that we should have for our business model when we compare ourselves with other banks. It is not our intention to reflect any decrease of the P2G in a reduction of the benchmark ratio. What could lead us to reduce this 12%? Delivering in every milestone is very important. Please count on our utmost commitment on assuring the delivery going forward. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.