Banco BPM SpA

MIL:BAMI

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM First Quarter 2018 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR Manager. Please go ahead, sir.

[Roberto Peronaglio, executive]

Thank you very much. Thank you, everybody, who attended this presentation, the first quarter results of the Gruppo Banco BPM. Before leaving the field to Mr. Castagna, our CEO, for the presentation, let me remind that you can find the presentation on the website, on Investor Relations section. And the Q&A section that will follow the presentation is reserved for financial analysts. Now I leave the field to Mr. Castagna. Thank you.

[Giuseppe Castagna, executive]

Good evening, everybody. Let me introduce this first quarter 2018 results with some update about our capital and derisking strategy. As you know, this is the first quarter -- or the second year of the merger in which we have devoted a lot of activity in order to strengthen the capital and to enable the bank to afford a very increasing and demanding derisking strategy.

We start, therefore, with some number related to this capital management action, including the AIRB validation, which officially, from the 31st of March, are inside our official number, allowing us to show a very sound common equity Tier 1, both in terms of phased-in and fully loaded.

As far as fully loaded is concerned, we have reached a fully loaded status common equity tier 1 of 11.5%, including 180 basis points related to the first-time adoption on applied only and completely on bad loans, which are going to be disposed through our derisking strategy. The pro forma, which includes the 2 capital management actions related to the insurance reserve management, already concluded with Anima last year and which will be officially included in our balance sheet in the second quarter, gave us another 21 basis points of common equity tier 1. And in the third quarter, we'll also show further 34 basis points due to the disposal of the custodian banking activity.

Together, with some dividends from other associates for some 5 basis points, this brings us to a common equity tier 1 fully loaded pro forma at 12.10 basis points (sic) [ 12.10% ], slightly above the forecast we gave you last quarter. Of course, through -- due to the different phase-in of the rules related to IFRS 9 first-time adoption, we have almost a complete effect on our common equity tier 1 of this maneuver, showing 13.5% of common equity tier 1 phased-in and above 14% if we include the pro forma transaction we were mentioning before.

This capital strength and that, as you know, has been done only counting on our -- I would say, optimization of our [ product factory ], allowed us and will allow us to proceed speedily in derisking plan, which we already announced last month -- last quarter. And this is going to have some further effect during the next week.

We have included in the derisking slide on Page 6 not only the effect of EUR 5.4 billion already, reduction of gross amount of NPLs, we have added to that the further EUR 5 billion we are going to dispose through the GACS transaction that, in this slide, this -- called with this name Exodus.

So in 18 months after the merger, we will reach results of plus EUR 10 billion of derisking in 18 months vis-à-vis the EUR 8 billion forecasted when we announced the merger and the EUR 13 billion we are going to reach with the new NPL disposal plan.

In terms of only bad loans, the reduction is proportionally even bigger because we are going to reach from EUR 18.6 billion as of December 2016, more than EUR 8 billion reduction post the GACS transaction in only 18 months. All that having exploited very strong provisioning during all this quarter, and of course, taking advantage also from the IFRS 9, again, only devoted to bad loans. This allow us to increase massively also our coverage, which stand at almost 54% as total coverage of NPLs and 66.5% as bad loans coverage, increasing, respectively, to 55% and 68% if we include the write-off.

You already know that also, the quality of our bad loans, we feel being a bit more covered than the average of the Italian banking system, we have shown here, both bad loans and UTP composition, which is 68% related to collateralized assets and only 32% to unsecured. [ The measure ] is at 50-50, more or less, of the Italian banking system.

Let's spend some word about what we have in mind for the future. Of course, we have included the number post Exodus. As you can see, we are going to reduce the net bad loans to -- after Exodus to only EUR 3.4 billion, starting from the almost EUR 8 billion in December '16, and 3.3% as net bad loan ratio, again, in the first 18 months of our margin.

This aggressive policy, which is confirmed also by our provisioning, leaves us a wide range of options to accelerate and potentially go beyond the derisking planned targets. This is a strategy that we want to pursue because we understood that, of course, we are announcing time by time -- every time, more aggressive plan, but we feel that starting from the GACS, and so the Exodus transaction, we are really in the position to reduce further the net bad loans remaining in our portfolio, considering also the level of coverage that we have now reached that after Exodus, we will be even more -- even higher than before Exodus.

As you can see, the bad loan coverage is going to increase to 68%. Needless to say, that in the last few months and weeks, especially after an important transaction performed by Banca Intesa Sanpaolo, we have been receiving many reverse inquiries on the potential opportunity to sell the NPL platform, together with other NPLs, apart from the one that we already forecasted in the business plan. So we would like to still keep a very comfortable level of coverage in order to be able, in any time, to exploit any opportunity should arise to accelerate and again, go beyond the announced derisking plan.

Just a few words about Exodus. We are going to conclude -- to respect the timing and to account the effects by the next -- by this quarter, end of June. The GACS will be in the region again of EUR 5 billion. This will allow us to reach since 2016 a total of EUR 9.5 billion of disposed assets, 70% of the total disposal plan of EUR 13 billion. The composition of the portfolio will be 74% secured and 26% unsecured. And I would like to emphasize another positive effect. We are going to have, through the disposal, which is the decrease of the RWA for EUR 1.3 billion due to the new model and AIRB model application.

On Page 9, another very quick slide, just to give you the idea of the quality of the entire portfolio of Banco BPM. As you can see before and after the Exodus transaction, the geographical quality, the vintage composition and the collateral split will remain more or less unchanged, confirming that the average of our portfolio is, in any case, very sound.

Let's talk what we have done recently during the first quarter of 2018. As you know, we have started with the 2 banks put together -- the network banks put together, starting from the end of January this year. We had the opportunity of bringing -- or put in place the new organization, the division split in corporate from retail, organizing the bank in different divisions and activities and moreover, putting together all the branches of the bank as if we were already only one bank also in terms of subject.

And as you know, BPM will be -- we'll anticipate the merger of BPM as a legal entity since -- starting from the 1st of October this year. But in any case, the new organization allow us to work as one bank since the -- February this year. Of course, this new organization brought some reorganization needs. We had more than 10,000 people, employees involved with -- in this reorganization, over 3,000 employees and being reconverted to new professional roles, especially commercial roles. Just to make some examples, 700 new managerial roles, included many branch managers, 1,100 commercial roles and a very big increase also in the people devoted to the first-tier level of control in the ranking of the control activity at the branch level.

We have also decided to close further 312 branches by June this year. This brings the total of the closing to 400 -- sorry, 450 -- 483 branches vis-à-vis the 335 branches that we announced -- when we announced our merger plan. So we will have 150 branches more than the entire 2016, '19 plan already after 18 months. This will bring our network to 1,900 branches, which allow us easily to reach by 2018 the closing of further 200 branches, and so reaching what was adjusted and aspirational target when we announced the plan of almost 700 branches closed in the first 2 years.

On Page 12, you have also the effect on the people who is working with our bank and the personnel involvement in this activity. On the left of this slide, you have the announcement of the plan, 2,600 personnel involved in the merger, in the optimization of the merger, 1,800 to leave the bank, 800 to be reconverted in new roles, especially commercial roles. We have now updated the plan. We have already reached 2,200 of, as you already know, of exits from the early retirement scheme, 690 of which will go out during 2018, and more than 1,100 people changing roles through the anticipation of the restructuring and rightsizing of our branch network.

I leave you with Page 13, just talking about the organization, which is still going on. A merger, I learned on our own experience, which is a never-ending activity. And you -- as you can see, still, in the first quarter of 2018, we were organizing the new retail and corporate distribution model, the private and wealth management activity closed in the first quarter '18, the consolidation of internal model and so on. And you will see in yellow, the other activity we are involved, almost terminated, which will take full place by 2018.

This was just to give you the idea of the strategy that we are going to pursue this year, but let's go to the first quarter figures on Page 15. We have done the first slide with this comparison just to make for you easier to understand the IFRS 9 new accounting policy on the left and the pre-IFRS 9 numbers on the right. As you can see, the only difference is EUR 66 million, which are going to impact positively on NII and of course, negatively on loan loss provision.

I would comment, and then going ahead in order to make you a potential confrontation between the first quarter of last year, I just want to comment, the net income, which is EUR 223 million, including EUR 176 million from the sale -- buy and sale of the bancassurance business.

In Page 16, we gave you the possibility to have a look to the first quarter '18 and the pre-IFRS 9 adjustment with Q1 2017. As you can see, we had a net interest income pre-IFRS 9 on plus 2.4%, which we consider a very good result. On that aside, we got less commission due to this reorganization, which took place during -- from 30 to -- it took from 30 to 45 days, in which a lot of our colleagues were engaged in changing branches, in changing portfolio and so on. It has affected a bit our activity in the first quarter in terms of commission. This brought core revenues to minus 2.6%, which was offset by minus 3.4% in operating cost reduction. The profit from operations globally comes to EUR 403 million vis-à-vis EUR 418 million of 2017. Loan loss provision before, again, IFRS 9 were EUR 260 million compared to EUR 292 million of last year.

Let's go to the details. Net interest income, I would comment only the like-for-like, so the EUR 529 million compared to EUR 517 million of 2017, this is the 2.4% increase. This has been affected as for the previous and constantly affect the previous [ first ] quarter through a reduction of cost of funding, which offsets a reduction of asset spread. In terms of the comparison with last quarter, we still reduce -- there is slight increase, but basically a result which is comparable with last quarter 2017.

As I was mentioning before, the spread is constant. We were able to maintain, during the 5 quarters of our activity, basically the same spread, from 1.55 to 1.54, again leveraging on the bettering of asset -- of liability spread and the decrease of asset spread.

On Page 19, net fees and commission. Again, we registered a slowdown in the first quarter activity compared with the first quarter activity of 2018. This will -- this is the result of 2 effects, one of which I already mentioned is the reorganization. The -- secondly was the peak that we had. As you can see on the right part of the slide, in the first quarter in '17, which, as you know, was the first quarter of the merged banks and most possibly gained an effort from some prudent approach before the merger, which allowed to start a better 2017. As you see, '17 was, quarter-by-quarter, decreasing the effect of the fee.

Another important effect is also the change in -- that, as you know, we are already adding in our portfolio -- advisory strategy vis-à-vis asset under management. As you know, we are applying since January a portfolio -- an advisory by portfolio rather than an advisory by product. And this is bringing, of course, from one side, a decrease of the upfront fees. But on the other side, a constant increase in recurring fee that we are sure that, in the next quarter, will give a lot of strength to our fee-driven business.

On Page 20, net financial results. We have a slightly -- reduction vis-à-vis the first quarter last year, mainly due to EUR 5 million related to IFRS 9 accounting principle, the evaluation. But let's say that mainly, this result was affected by some prudent approach that the group decided to have vis-à-vis a hedging strategy approaching the electoral day, the 4th of March this year, which, of course, mark-to-market gave us some disadvantages, which we are already recovering. And I can announce that the guidance for the second quarter is very much in line due to the recover of this performing in line with 2017. So all in all, we think we are very much in line with the 2017 numbers.

Let's pass to the cost on Page 21. Basically, excluding the one-off effect, the like-for-like results is a reduction of 3.4% vis-à-vis first quarter last year. It's not very much comparable the first quarter this year with the last quarter last year because of some recovery, both in personnel costs and in other administrative costs that we gained in the fourth quarter last year. So we gave you some indication about the average of the cost because this is something that is going to be applied quarter-by-quarter. And as you can see, the reduction is stable and consistent and is in the region of 2%, also with the average of the previous quarter.

I wouldn't comment personnel and other administrative expenses because you can see exactly the same effect. Like-for-like reduction from 3% [ to 2.5% ] in the yearly comparison and a reduction of about 1% with the average of 2017 quarters.

Let's go directly to Page 24. Again, we are -- we have this target to continue to be very prudent and trying to put our portfolio at a level in which we can take advantage for any occasion available in order to dispose further our asset. So we will continue to have a cost of credit in line with the guidance we gave for this year. And of course, we have only split the difference between the pre-IFRS 9 and after IFRS 9. Let's only say that apart from the willingness of maintaining solid NPL coverage, we have also to say that the major effect of this policy will be more in the first half of 2018 rather than in the second part of the year. Meanwhile, we're going to have the risk of the bank, the effect of the risk.

Let's go back to some figure on the volume. Basically, we have no major change, both in terms of loans. As you can see, there is a slight increase. We put also the reference with the 1st of January because it's already affected by the reduction as a result of the FTA application. So the performing loans are growing 0.3%, adding in account the leasing in run-off is decreasing 2.5% and the NPLs for the first quarter were decreasing around 2%.

The same, I would say, unchanged situation comes from the direct funding. Our policy to change less expensive source of funding, like current accounts by deposit is still continuing. There is almost EUR 1 billion more of -- for a free deposit in the first quarter, with a corresponding reduction of bonds and certificates.

The bond maturity. The bonds maturing this year are still very consistent. We gave you some guidance about the different maturities. As you can see at Page 28, we have still EUR 4.5 billion of bonds maturing this year with an average spread of around 2.9%, 3%. As you know, we are not going to substitute completely this bond. And in any case, the part that you are going to substitute is at a very different and lower interest rate, enabling us to continue the reduction of cost of funding. This is also thanks to the strong liquidity position we will examine in a minute, which is really largely allowing us to leverage on this situation in order to make funding reserves.

Here we are on Page 29. As you see, the use of eligible assets -- the unencumbered eligible assets stand in 31st of March at EUR 19 billion versus EUR 16 billion of December. The EUR 19 billion nowadays are already EUR 24 billion, showing you the large amount of liquidity we could deploy to refinance the asset of the bank. The quality of unencumbered assets is also very good, as you can see on the cake on the right -- low right side of the slide, which is 95% composed by govies.

Indirect funding, here, we have 2 different situations. I would say, a good increase of asset under management, especially as far as conserved funds and SICAV, which are growing EUR 400 million in the last quarter, EUR 3.5 billion year by -- year-on-year. Meanwhile, we are having an offset in the growth of -- especially bancassurance. As you know, we have now, since the 1st of April, the new joint venture with Cattolica, which again started the 1st of April. So of course, both for the organization and also for allowing a good start of the new bancassurance joint venture, we expect this amount to grow in the next quarter. There was also some, I would say, market effect which amount for about EUR 1 billion.

As far as asset under custody, you see a decrease of around EUR 4 billion, EUR 5 billion. This is due to 1, only 1 consistent big ticket of an institutional client, which, I would say, anticipating the custodian bank disposal to BPM, switched to BMP before the effect of the disposal of activity that we will finalize by the next quarter.

Securities portfolio. We're going to pursue our strategy to reduce the Italian govies' weight on our portfolio. Italian govies from the 1st of January decreased around EUR 2 billion, EUR 1.8 billion. Compared with last year, Italian govies now represent 55% of the total govies. Last year, there were 76% of total govies. The portfolio has been reshaped during the last months. We have now a modified duration of the Italian govies, which is below 2 years. And as I was mentioning before, the maneuver on, again, the profit and loss allowed us to increase at 31st of March the debt reserve held to collect and sell EUR 2,207 million (sic) [ EUR 227 million ] capped with that of EUR 200 million coming from held to collect. As I was mentioning, was talking about profit and loss, a good part -- a consistent part of this reserve has been realized during April this year.

Let's go back to the -- what we were talking since the beginning, about the potential and the ongoing reduction of NPLs. Again, we have the net NPLs numbers, starting from the numbers we showed 1.5 years ago. We end up in 15 months to reducing EUR 6 billion of net NPLs in total, more than EUR 3.5 billion of NPL -- of OTP and almost EUR 3 billion of NPL.

Starting from the EUR 11.3 billion of net NPLs, we are going to reduce below EUR 10 billion due in this quarter due to the Exodus transaction. The first time -- of course, as you know, this will not have any effect on the profit and loss due to the first-time adoption, which again has been devoted all to bad loans disposal.

Coverage level, still very conservative. We mentioned before, you can see at Page 34 the increase of 500 basis points in NPLs coverage, 750 basis points completely due to the IFRS 9 first-time adoption for bad loans, with a composition of bad loans, split -- the coverage of the bad loans split 84% for unsecured and 58% for secured.

Another very important part of our strategy, as you know, is the performance of our NPL activity. This allow us to show the market the capability of our workout activity. As you can see, the first quarter vis-à-vis first quarter last year is running much better. It's EUR 484 million vis-à-vis EUR 394 million in the first quarter last year, split between recoveries and cancellations. And again, pointing on the low effect on profit and loss, low impact on further provision when we are able to work out our NPL, only 2% of total GBV reduction is the impact on NPL, EUR 10 million [ in whole ].

Last, again, common equity tier 1. You have the split with the different effects of the -- undergoing the capital management action and the first-time adoption, both for stated and pro forma numbers as of 31st of March 2018. On the up -- in the upside of the slide, you have the fully loaded. And on the low part of the slide, you see the phased-in with the impact of the IFRS 9 first-time adoption.

I would say that -- I will leave the floor to your questions in order to give you some more detail on what I presented to you. Thank you.

[Operator]

[Operator Instructions] The first question is from Christian Carrese with Intermonte.

[Christian Carrese, analyst]

Christian Carrese, Intermonte. The first question is on net interest income and the loan loss provision. The IFRS 9 impact in the quarter was quite important on net interest income and provision. I was wondering if you can give us a guidance of the impact of the EUR 5 billion and NPL disposals that would be carried out by the first half 2018. So what will be the impact on P&L of this item? The second question is on the coverage ratio. You pointed out that after the disposal with GACS, the coverage ratio of the remaining portfolio will go up, so if you can elaborate on this item. And finally, on the servicer, Intesa Sanpaolo stated -- said that they could be interested and buy other services through the joint venture with Intrum Justitia. If you can give us an update on the work in progress for your servicer business, if you're planning to maybe sell or to make a partnership in the coming quarters?

[Giuseppe Castagna, executive]

Okay. Thank you, Mr. Carrese. I would say that as far as the IFRS 9, of course, it's difficult to give you some proper guidance. For sure, for a bank who makes the center of their target, the derisking is difficult to give you -- to tell you that this will be stable. Because of course, meanwhile, we are going to sell NPLs, the effect on both NII and of course, cost of credit are going to be reduced. It's difficult to give you how much, also because as I was mentioning before, we don't know yet if it's only on the second quarter of this will continue, also for the further quarter, depending, I would say, on the third part of your question. The coverage is going to go up. Because again, we are going to consider very -- with some cautious, the portfolio, we want to give the idea that we are going not to be capped the best that we have in our portfolio. We want to give a sort of indication about the quality of the total portfolio. Of course, the mix between secured and unsecured and the different coverage of secured and unsecured give a difference on the remaining part of NPLs. But in our opinion also, differently from what we talked when we're, at first time, thinking about GACS, we thought that this was going to reduce our coverage. Instead, we ended up with a good solid consistency of our coverage. Further, NPL platform. I think that from my word and from the numbers that you have seen in our first quarter results, the willingness to pursue any potential opportunity and a very, I would say, favorable situation that a bank like ours -- we started 1.5 years ago with EUR 30 billion of NPLs, with a market which was not there, with the difficulties in giving some indication about potential disposal because of lack of market. And with the consistent results with -- quarter-by-quarter, we are going to deliver in terms of recoveries and cancellation. I think and I can affirm that is very much appreciated by the market. And of course, we are going to have a lot of reverse inquiry from different competitors in this -- I mean, this activity. And we will see what to do. But for sure, if we take in mind the price of a recent transaction, that's why we show the net and the coverage after GACS. You can see that the effects on our capital are going to be really negligible if we take in mind further NPL reduction. So we want to be really very, very prudent in order to approach any -- all the possible opportunities. Not to mention that again, after the validation, we are going to add a very sound effect, also for the release and the reduction of RWA.

[Operator]

The next question is from Giovanni Razzoli with Equita SIM.

[Giovanni Razzoli, analyst]

Very quick question on my side. After the IFRS 9 first-time adoption, we have seen one of your nearest competitors, BPER, guiding us in 2019 for a 60 basis points cost of risk for 2018. You have 63 basis points in '19 in your business plan. I was wondering how and if this level will be impacted in terms of timing or amount following the IFRS 9 first-time adoption? And then a couple of clarifications. If you can elaborate on the fee income. You've mentioned something about -- on the changing of commercial strategy in terms of fee income. But I apologize I missed your comments. And the third and the last question, what was the impact of the PPA on the P&L this quarter?

[Giuseppe Castagna, executive]

Okay. Thank you, Mr. Razzoli. Frankly speaking, I don't know exactly the strategy of my competitor in other banks. So I can talk only for my bank. Again, we feel that when you still have -- even though with a clear derisking strategy, but not yet delivered, like in our case, we have the duty of being very consistent in coverage and in provision. Because again, we want to take opportunity not to have a problem in selling, if there is an opportunity of disposing or accelerating our assets. So basically, this is also because, in this year, as you know, starting from the first quarter, but I already announced that one-off effect on the profit-and-loss this year. Due to the insurance, the reserve and the custodian bank, we have also room to be very consistent in provisioning. So basically, we feel that the more we can reduce our backlog in our NPLs, the more -- the lower can be the cost of risk going forward. I would say that if we said 63 when we forecasted to reduce only EUR 8 billion of NPL in our original plan, the possibility and an opportunity to reduce furthermore, as we announced EUR 17 billion with the already presented NPL plan. And the possible opportunity also to accelerate and potentially increase this target, of course, should bring to some cost of risk lower than the one we forecasted in 2019. As far as fee income, no, I was just mentioning 2 effects. One was again, that the first quarter last year is a bit uncomparable with the first quarter of this year for 2 reasons. One is the first year -- first quarter last year was the peak of our quarters. I have not explained that the bank will go into merger since January, basically, most probably, in December. That was not factored in December '16. There was not such an activity and a focus on fee income, which in turn, give us a lot of boost in the first quarter 2017, which of course, is the opposite this year. This year, we had the bank's national reorganization, lot of people changing activity. So we feel that this year is going the other way around. We start more prudent due to this situation, and we will increase quarter-by-quarter the fee income production. Also, because -- this is the third part of my talking -- also because we are switching from one-off fees to recurrent fees due to our advisory strategy, which took the place of former BPM, giving and advising by portfolio and not advising by product, which was in place for former Banko Popolare. This, of course, gave a lot of opportunity in terms of one-off, but of course, a need for selling every month in order to have a stable and possibly increasing result. We are switching this to fee generation. So we will see much more recurring fee in the next quarter. And already in the first quarter, there is an effect of this switch, which will allow us to be, first of all, giving a service -- a better service to our client, being more MiFID compliant and also having, for our network, the possibility to deal with the fee income commission without any stress, with some consistent recurrent fee, which allow to perform stable results. As far as the PPA is concerned, we have given, I think on Page 21 of our press release, the total effect of the PPA, which is in the region of EUR 30 million. We are not going to give, for the second year, any other details just because otherwise, we have PPA, IFRS 9, the disposal and derisking which is going to affect this number. We should do 2 or 3 comparison for each quarter.

[Operator]

The next question is from Jean Neuez with Goldman Sachs.

[Jean-Francois Neuez, analyst]

So questions from my side. On the targets of NPL ratio by 2020, I guess the transaction Exodus today is more detailed than it was, but just wanted to know whether the EUR 13 billion growth NPE ratio was still the number to look at for 2020? Or does that come further down with this quarterly release? My second question is -- so related to the cost of risk question of one of my friendly competitor before, when you will finish your plan in 2020, the ratio is still low -- low double-digit, but still double-digit, when larger peers are going to be essentially half of your level, and I wonder to what extent you wouldn't be incentivized to continue to provision highly in order to decrease that ratio beyond the target that you've already published maybe faster as you get to that number? And whether, really, the cost of risk target for next year is a relevant number in your opinion or whether derisking faster is more relevant in your opinion? And so I would like to see your opinion on that. And lastly, on performing loan growth, obviously, part of the ratio is driven by the performing loan growth. And this hasn't taken place maybe as much as you might have wanted in the first place, and I just wondered whether you felt constrained to grow loans right now by the derisking efforts, or whether you just don't see demand to execute on the plans that you had already disclosed in the past?

[Giuseppe Castagna, executive]

Thank you, Mr. Neuez. I will say, I think I gave you, with our presentation, some idea what we can forecast for the future. We really are convinced that we performed a very aggressive plan when we talked about EUR 13 billion of reduction and loan disposal. We still feel that it's very ambitious. But again, the market and the evidence that we can check, thanks to some -- the many request inquiries, make us think that it's possible also to go beyond. Of course, it's not something that we can state right now. It's an opportunity that we want to exploit. And in order -- and once we have reached the solid capital base, now we are in the better position to exploit any potential opportunity to increase this target. I would say, maybe after the GACS in the next quarter, we could be also a bit more explicit on what will be the scenario that we have in front of us. We -- of course, we are not in the habit, because we are still performing the EUR 15 billion, but as we were doing for the first EUR 8 billion plan, we were already thinking to what, possibly, we could have done better than that. Still double-digit. This is exactly the point, Mr. Neuez. We feel that maybe it's better to try to understand if there are good opportunity on the market to try not to be still at double-digit. Because of course, otherwise, you still have the carry provisioning to do. And this wouldn't allow to decrease with the pace we expect the cost of risk. Having said that, I can also say that it's complicated nowadays to make a strong opinion on that, because we can see that other banks are already reducing loan provision, also having double-digit NPL ratio. So this is my opinion. It's better to be focused on reducing in order to make the market show that we wouldn't be anymore affected by high cost of risk. Third question, performing loan could be a constraint, the growth of performing loans by the derisking, not at all. Unfortunately, the evidence of the market is that the market is not growing. But I can assure you that we are deploying a lot of building up opportunities to grow into the loan market. We -- with the new organization, we have in place the new corporate division, which has already granted a massive increase for the first-year client of potential opportunity. Of course, nothing happened in a few months, so we have only to be patient in order to see the fruits of this effort to be concrete on our number. But there is absolutely no constraint, and the strategy is to grow. And the ammunition that we have, also internal liquidity and unencumbered assets eligible, show you that we are providing for having enough ammunition to foster loan growth.

[Jean-Francois Neuez, analyst]

Okay. And I just wanted to ask about the Exodus. So the securitization means you -- this -- the equity stake of that will be sold by more than [ 50% ], yes? To a third-party investor to achieve full deconsolidation.

[Giuseppe Castagna, executive]

Yes. Yes, of course. It's a prerequisite in order to reconsolidate.

[Operator]

The next question is from Alberto Cordara with Merrill Lynch.

[Alberto Cordara, analyst]

The first question is related to a question that you received before about a PPA. My reading from your press release is that the impact has been positive for EUR 70.6 million. If you can give us the details line by line as you have always been doing. The second question is on the government bonds, I write that the modified duration is 1.85 years. If you can let us have an idea of the average maturities of the Italian Treasury bonds? And then finally, on Exodus, if you can give us an idea at which stage you are in the process, how many counterparties have you already started talking with. And generally speaking a bit more background about this transaction.

[Giuseppe Castagna, executive]

Okay. Let me start from the tail of your questions. We are already in talk with 10, 15 potential buyer of our junior mezzanine. That room will open -- sorry -- is already open. So we will be able, of course, to give some more information as soon as we have the rating agency to give us the final rating in numbers and tranching of our Exodus activity. Let me say about the securities, the average maturity. Okay. It's a bit below 6 year for held to collect, and a bit below 4 year held to collect and sell. For PPA, frankly speaking, we didn't give details. But we, of course, have all the details. It's EUR 30 million all in all. I'm sure Mr. Peronaglio will be able to give you all the details going on.

[Operator]

The next question is from Andrea Vercellone with Exane.

[Andrea Vercellone, analyst]

A couple of questions of detail. But first, I'd like to reemphasize again how important is to give the details on the PPA. You may not understand it, but it's very important for us because it moves up and down every quarter, and we can't analyze the results. So we do need to know at least what's in NII, if any, and what's in provision, if any. So, the questions are, I didn't understand your comment about monetizing bonds in April. Were those bonds classified as held to collect and sell or held to collect? Then the second question is on the capital. Can you let us know if there is any deduction for expected loss in your core Tier 1 capital? And that was it, actually, just these 2.

[Giuseppe Castagna, executive]

Okay. Of course, we want to be able to give you all the details about PPA. The only problem is that, frankly speaking, if you were in our shoes, with the IFRS 9, with PPA, again, with the very volatile aspect of these numbers coming from the derisking, it will be impossible to prepare slides for any possible confrontation. But of course, again, our colleagues of IR are available for giving you, line by line, all the details. But PPA, for the first quarter, was not that volatile. So it's volatile by definition, but not so material in terms of numbers. And it was more or less in line with the first quarter last year. The bond, I was mentioning 2 things, that we had a hedging strategy which penalized mark-to-market as of the 1st of March, the profit-and-loss for the first quarter. But the same effect, while penalizing, did gave us a reverse positive effect in the second quarter. Most -- on top of that, because the positive effect was also in the EUR 227 million of all the collect and sell, we monetized a part of this, of collect and sell, for around EUR 40 million, EUR 50 million. It's a bit more technical, the last one. Okay. I have the number. On common equity Tier 1 capital, we have a shortfall only on performing loans of in the region of EUR 190 million.

[Operator]

The next question is from Victor Galliano with Barclays.

[Victor Galliano, analyst]

Yes, 2 questions for me. Just on UTP coverage, clearly, I think, if you think in terms of ahead beyond Exodus and potentially increasing your NPL disposal plan, I would imagine you would increase, or include in there, perhaps, the UTP coverage, the UTP portfolio. Do you feel the level of coverage that you're at that there, and it looks like about 32%, would be sufficient for you not to need significant top-ups on disposals? Or is that an area where, perhaps, you may need to top up coverage going forward if you're looking to dispose of some of those? That's point number one. Question number two, just on Exodus. Is there any update you can give us on a potential LGD waiver for that disposal? And that's pretty much it. My question on fees has been answered.

[Giuseppe Castagna, executive]

Thank you, Mr. Galliano. Of course, we know that once we will be freed by bad loans, the attention will go to UTP. As you know, we are giving lots of details. Also on this occasion, you can find slide 48 in the nexus of our presentation in which we give you all the details of the derisking. As I was mentioning before, we are going to recover a lot also from unlikely-to-pay, more than EUR 2.5 billion since the start of our activity. A big part of the EUR 6 billion of the net book value remaining is what we call restructured loans, which means agreement mostly with other banks in order to help financial difficulties, which more -- which very often are already in due course to be sold for this restructuring. We have not only in place the normal repayment of the installment, included interest and capital. So frankly speaking, we are not that concerned about this activity. The remaining part of net unlikely-to-pay is EUR 3.5 billion, of which EUR 3 billion are secured and only EUR 500 million unsecured. And the coverage for this unsecured of this EUR 500 million is 47%. So of course, we will have all the possible attention -- we'll dedicate all the possible attention to UTP. But for the time being, we have the task of reducing further the bad loans in order to be -- to also devote more people and more activity to UTP. We don't have, in any case, any -- currently, we don't have any idea, and this is reflected in our first-time adoption, which was not devoted to UTP. We don't have any disposal plan on UTP.

[Victor Galliano, analyst]

[indiscernible] declining

[Giuseppe Castagna, executive]

Yes, I was mentioning the decline of EUR 2 billion. As far as Exodus, related to LGD waiver, I would say that, as I was mentioning very clearly, we are applying for a waiver on LGD. This was due also to the risk -- to the current derisking plan of EUR 13 billion. Basically, we are waiting for the decision from ECB. What we feel is that a bank which has showed up to now to be so aggressive and capable to reduce without -- with enough capital self-generated the -- our nonperforming loan portfolio, of course, has to reflect in the new portfolio remaining after the sale the real quality of the portfolio. And I can assure that the quality of our portfolio is very, very good. And we really are waiting for an answer on that.

[Operator]

The next question is from Hugo Cruz with KBW.

[Hugo Cruz, analyst]

I've got a few questions. So first, I mean, you've talked a lot about beating your kind of plans for cost-cutting, branches, staff, et cetera. I mean, do you have a new target for your operating costs for 2019 or for 2020? I'm looking at consensus is not that far from your original target, which was to be below EUR 3 billion, I think. Then on capital, so you think -- I don't think you gave an RWA for the 12.1% core Tier 1 pro forma. Can you give that RWA number? And what would be the RWA pro forma for the Exodus as well? Is it just removing the EUR 1.3 billion that you mentioned on the Exodus slide? Or is there something else? And how do you think about your -- of course, it raises the question, but I mean, what do you think is your core Tier 1 target? Is it going to be the 12%, 12.5%? If you could be a bit detailed there, it would be helpful. I think that's it.

[Giuseppe Castagna, executive]

I am not sure I got the last question, but maybe I'll answer it and then you can reply if I didn't get exactly what would you like to ask. As far as for cost-cutting, of course, we are already running better than the forecasted cost cutting. You know that we've already announced the increase from EUR 320 million of cost optimization to EUR 400 million for 2019. So we are well on track on this new achievement. Possibly, there could be further optimization, because we are running faster than we expected. But we want to also, of course, not try to push very hard further than that on costs, because we have also to invest. Of course, we never talked about digitalization and so on. But there are a lot of investments that we have in mind to do in order to offset a bit of saving with some new investment. But the number that I can confirm is the switch from EUR 320 million to EUR 400 million of cost-saving. Again, for the -- this means that end of the plan, we are confident to terminate in 2019, instead of the EUR 3 billion which we forecasted in 2016, at around EUR 2.8 billion. So a consistent reduction year by year compared with the previous plan. The capital, if I understood, is written on Page 37. The reduction of RWA, which was going down from EUR 75 billion to EUR 65 billion, so almost EUR 10 billion of reduction. Sorry, maybe I -- then maybe you asked about a further reduction in NPL ratio?

[Hugo Cruz, analyst]

No. I was just -- so the pro forma -- so EUR 65 billion would be the RWAs for the 12.1% core Tier 1 pro forma, is that correct? And then will it decline by another EUR 1.3 billion once Exodus is completed?

[Giuseppe Castagna, executive]

Ah, okay. EUR 1.3 billion, exactly. That was the guidance we gave. More or less, we expect a reduction of EUR 1.3 billion due to the EUR 5 billion Exodus transaction.

[Hugo Cruz, analyst]

Okay. And so what kind of -- when you're talking about, for example, potentially cleaning up your NPLs further. I mean, what kind of core Tier 1 targets do you have in mind? Is it the 12%? Is it 12.5%? Is it more 12.0% or 12.5%?

[Giuseppe Castagna, executive]

Of course, we didn't change our target in common equity Tier 1. We are in the region of 12.10%. This was what we aimed to achieve with the capital management and the IRB validation. We are confirming that this is a good and solid common Tier 1 position. Of course, this gives us the possibility to further exploit the opportunity of further derisking, especially with the coverage and the freezing of RWA that is embedded in derisking further. So we still expect a number in this region.

[Operator]

The next question is from Ignacio Cerezo with UBS.

[Ignacio Cerezo Olmos, analyst]

Two quick things from me. First one, on NPL inflow rate, if you can give us that number, actually, for Q1? And the second one is the net interest income impact of those bond disposals you have hinted, basically, you have done in the second quarter of the year.

[Giuseppe Castagna, executive]

Sorry, I'm checking the data because we didn't mention the data. Is that -- just a minute. So the inflows is EUR 284 million. And basically, we don't have material impact from the bond disposal on NII.

[Operator]

The next question is from Anna Benassi with Kepler Cheuvreux.

[Anna Maria Benassi, analyst]

My question relates to your comment about having filed for the waiver on LGD a way to denounce from ECB. Does that mean the 12.1% pro forma common equity Tier 1 that you have given with also the current transactions does not include any risk weighted asset inflation because of the NPL disposals? So can you eventually give us an idea in case the waiver will not be obtained, what the pro forma of the loss to capital could be? My second question relates to the consumer credit business. We know that the commercial agreement and the shareholders agreement on [ RWAs ] end this year? And we also understand that in the contract, it was said that in case of merger, the existing platform -- other existing platform of consumer credit like you have with [indiscernible] had to be offered to Akros as a first step. Can you let us know what are your thoughts on that portfolio target, if you prefer to have that [ portfolio ] with Akros. Give us an idea of what you expect to happen in that important business area for the bank?

[Giuseppe Castagna, executive]

We are, of course, managing. Of course, you know that there is a trade-off between LGD and disposal. Of course, up to now, we have been able to manage disposal without impacting as much the LGD effect. But of course, in order to enable the acceleration of the plan, the further potential disposal and so on, of course, we have to know clearly and exactly what is the position -- what will be our position in terms of potential waivers. So that's why I cannot give you the exact number of what we'll do in disposing before having a better or clear idea on LGD. As far as consumer credit, basically, as I mentioned many times, this is not strategic basically in order to make capital. This could be a good, efficient part in order to terminate the rationalization of our product [ factoring ]. So of course, everybody knows, that it does not make so much sense to have 2 different consumer finance activity, especially in the light of the upcoming merger of BPM main to Banco BPM. So of course, we are talking with our partner. Basically, we don't have any -- yet, any either agenda or any upcoming news about that. I think that there are possibilities that we are going, sooner or later, to decide which of the 2 parts we want to invest in order to enhance our consumer finance activity and profitability.

[Operator]

[Operator Instructions] The next question is from Domenico Santoro with HSBC.

[Domenico Santoro, analyst]

Just a few questions on my side. First of all, if I can sum up what you said before, you said basically that the cost of risk might be better in the future compared to the present target because the risk is, of course, is doing better. But you're a bit reluctant to give some positive outlook for loan loss provision over the next couple of quarters. I was just wondering whether this might include also the losses from this disposal because you hinted at some limited impact on capital from disposal. This might probably not be considered by competitors that have been probably more positive or more optimistic compared to you in giving us the outlook on provision. And also, some comment on Exodus, whether you expect some losses from the disposal. The second regards trading. I was just wondering whether the outlook for trading was related to the second quarter when you said compared to last year or was it for the full year? And then my understanding is that you reported the IFRS first-adoption for the capital gross of taxes. Was just wondering whether there are any DTAs that you might write up because of this and any tax benefits in the future? And then on this EUR 3.5 billion remaining, I was just wondering whether those might be bundled with the disposal of the servicing company? And we might see in one shot, basically, all the target for 2020 to be realized? Hypothetically, I mean.

[Giuseppe Castagna, executive]

Okay. Many questions. I was still writing. Thank you, Mr. Santoro. No, we don't expect the cost of credit to grow because of the disposal. We already announced that as far as the EUR 13 billion derisking plan, we have already provisioned a true FTA first time adoption, all we think is due in order to realize the complete derisking plan for the EUR 13 billion. And of course, this is worth as much for the first transaction, which will be Exodus. Second, the trading -- no, my guidance was only on the second Q. As I was mentioning before, it's not because I want to give you some news about the second quarter, but because it's a related effect to the first quarter results. The materialization of lower profit gave us an increase in unrealized gains which we, in part, realized and cashed in, in April. So that's why I was going to give you the guidance for the second quarter related to second quarter last year. Disposal -- further disposal of NPL. This is the question. If I can give you.

[Unknown Executive]

[indiscernible]

[Giuseppe Castagna, executive]

Yes, of course. This is -- as I was mentioning to Ms. Benassi, the timing of further disposal in the plan -- within the plan or on top of the plan, we need to understand exactly how it works also with the waiver on the LGD. So I cannot give you any guidance because we are, in turn, trying to understand the potential impact of accelerating or increasing the disposal plan. For the FTA impact on taxes, I would say that all the tax effects related to the IFRS 9 impact is not accounted in our common equity Tier 1 because it's related to DTA that referred to tax losses to be carried forward.

[Operator]

The next question is from Anna Adamo with Autonomous Research.

[Anna Adamo, analyst]

I have only one follow-up question, on the GACS securitization. You mentioned earlier that you are planning to sell the mezzanine and junior tranches of the securitization in order to deconsolidate the NPEs. What is your plan with regards to the senior tranche of the GACS? Is this going to be retained by the bank? And also, where do we -- if this is the case, where do you expect to reclassify this stake? Is it going to be reclassified into performing loans, which basically means that there will be positive loan growth as a result?

[Giuseppe Castagna, executive]

A very precise question. Thank you, Ms. Adamo. At this stage, frankly speaking, but this is before having a clear idea on the tranching, we forecast to keep the senior tranche, because of course, it's comparable with a govies investment. So we think we can keep it. And at this stage, again, because there are not much transaction done in this field, we feel that we can keep it in the loans activity, yes.

[Operator]

The next question is a follow-up from Victor Galliano with Barclays.

[Victor Galliano, analyst]

Yes. Just a very quick follow-up from me, if I may. That NPL inflow rate, the EUR 284 million for Q1, is that gross or net?

[Giuseppe Castagna, executive]

Sorry. Can you say that again? Sorry, Mr. Galliano, could you repeat your question, please?

[Victor Galliano, analyst]

Oh, I'm sorry. It's just a very quick follow-up on the NPL inflow rate of EUR 284 million, is that number gross or net?

[Giuseppe Castagna, executive]

This is net. Sorry, Mr. Galliano, this is net. I have to be more precise because my colleagues tell me that this is in the region of -- so it's a bit in that region is the net inflows.

[Operator]

Gentlemen, there are no more questions registered at this time.

[Giuseppe Castagna, executive]

So for the -- make you conclude up here this meeting, I would ask Mr. Peronaglio to give you some details about the PPA. Please, Mr. Peronaglio, go ahead.

[Roberto Peronaglio, executive]

Thank you very much. As I think as Mr. Castagna said before, more or less at the bottom level -- we had already around EUR 30 million at the bottom level, you'll find on Page 21 of our press release, which is more or less in line with the contribution we had in the quarter of 2017. In terms of a single line, compared with the fourth quarter of last year, we have around EUR 6 million more on interest margin compared with the same level, around EUR 6 million less in terms of cost of credit. So at the end of the day, the weight on -- the result is EUR 30 million, with EUR 6 million more on interest margin and EUR 6 million less on cost of credit.

[Giuseppe Castagna, executive]

Thank you very much, everybody. And I hope to see you soon in potential our meeting in the next few weeks. Thank you, and good evening.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may now disconnect your telephones.