Banco BPM SpA

MIL:BAMI

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM Third Quarter 2018 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Tom Lucassen, Head of Shareholder Strategy, Investor Coverage and Rating Agencies of Banco BPM. Please go ahead, sir.

[Tom Lucassen, executive]

Yes. Thank you. Unfortunately, Roberto is not available today. In any case, good afternoon, good evening to all of you, and thank you very much for attending our Q3 2018 group results presentation. As usual, before leaving the word to our CEO, Giuseppe Castagna, let me remind you that our presentation is also available on our website under the Investor Relations section/presentations, and that our Q&A section is reserved for financial analysts. Thank you, and let me now hand you over to Giuseppe Castagna.

[Giuseppe Castagna, executive]

Good evening, everybody, thank you for being with us for this Q3 presentation. Let's start on Page 5, a topic that you well know, but maybe same argument seen with a different view. We would recall the step that we had up to now with the derisking also in view of the new ACE transaction. Let's say that the first histogram December '15 is the starting point when we -- the number we presented with the 3-year business plan. Then there's follow histogram 2016 is the starting point of our merger.

As you can see, meanwhile, we were always focused on disposals, which we see very clearly that were more than EUR 8.5 billion during the last 22 months and up to EUR 9.5 billion in the 3 years. A big contribution to the risk came also from recoveries, cancellation and workout. The global amount is almost EUR 6 billion only in the last 22 months, which became something like EUR 8.5 billion if you consider also 2016. This is just to say that our strength to recover is not only related to the disposal activity of NPL, which took, of course, the high in the last couple of years, but also in a very efficient workout machine, both in UTP and in bad loans.

The final step, September '18, we have nowadays EUR 18.5 billion gross -- GBV, EUR 10 billion of which are bad loans, which are -- the bulk of which we will concentrate to the ACE transaction. EUR 8.4 billion is the amount resulting from almost EUR 30 billion when we started in 2016 of UTP, which only, with workout, came down to EUR 8.4 billion.

On Page 6, just to give a global amount to this exercise, the total derisking in this 21 months was up to EUR 14 billion, which, of course, we have to restart the inflows over the last couple of years, which were EUR 3 billion. So global net GBV reduction is EUR 11.5 billion.

Let's pass to some update on the ACE transaction. As you know, the project that is related to the derisking of -- for the final part of our derisking plan with ECB, which would need only EUR 3.5 billion. We have in mind to integrate this disposal with a much bigger amount, and I will give you some information also on the bid -- beauty contest, which is now in course.

Apart from the portfolio, of course, you know that there is a possibility to sell the NPL business unit platform in order, of course, to give also to the buyer the opportunity to continue a very efficient and successful operation.

On the due diligence, we are in the last, I would say, days, couple of weeks remaining. Three Consortia, they have examined more than 40,000 documents. They've employed more than 600 people on the due diligence. The global amount -- the potential global perimeter is up to EUR 8.6 billion with respect to the EUR 9.2 billion or EUR 9.3 billion that we announced in August is a reduction only due to position excluded because of legal constraint, contractual status and -- which would have hindered the possibility to proceed with the sale.

Next step is to receive the bid to select the winning consortium to decide the final size and the perimeter of the portfolio to be disposed and examine the possible sale of the NPL unit. On top of that, you know that after the 3 of August in the last weeks was also signed by the government and approved by the courts of the country the new GACS extension. So we have also this opportunity to consider an alternative scheme with respect to the straight sale.

Let me stress also that in September, we terminated our quarter with a quite sound capital position. We have increased both common equity Tier 1 Phased-in to 13.2% and Fully Loaded to 11.2%. Notwithstanding, as you know, the impact of BTP portfolio performance, which, of course, eroded some few basis point.

Some words on Page 9 also on the results of the stress test. A very satisfactory scenario under the baseline scenario, which proved the generational value, which our bank is capable to affect with results, which are amongst the best in Europe, and also, the resilience that we provided to obtain in the stress test scenario. Of course, you know that due to the rules of the exercise, being one of the few or maybe the only bank under a merger and due also to the factor that it was not allowed to consider the results of 2018, there is some peculiarity which had some impacts on our common equity Tier 1 fully loaded, especially. Let's say that the exercise did not allow to filter out some merger-related extraordinary expenses and nonrecurring expenses, especially out of personnel and IT integration, which, on a cumulative horizon of 3 years, amounted for something like EUR 500 million, which were penalizing our final results. The same is, of course, for the Exodus transaction, which logically being effective in June, was not considered due to the exercise was considering the result December '17. The global effect that brought our results between 7.5% and 8% also under stress scenario and fully loaded.

Let's pass to the 9 months results. On Page 10, you have the stated performance, which is affected by some extraordinary transaction and some effect related to IFRS 9. But you see that we have reached some consistent results, both in terms of total income and especially also in the reduction of operating cost. The net income amounted to EUR 525 million, which, of course, is not confirmed with the 9 months of '17, which was much lower result.

On Page 11, we wanted to give you an adjusted performance, excluding the one-off items, which were related to the capital management transaction we performed during these last 3 quarters and also excluding the IFRS 9 effect, especially from NII and low LLP. In this respect, we are still experiencing a slightly better net interest income vis-à-vis last year. Total income slightly below last year due to the reduction of commission that we experienced especially in the second quarter. And you will see that we are also recovering these part of the fee-driven business.

Operating cost very consistent, down to EUR 2,056 million, more than EUR 120 million below last year results, still in reduction. Plus 4% profit from operation. A reduction in LLP due to the IFRS 9 adjustment, consistent reduction that we will see especially in Q3, and profit before tax and net income almost doubling last year results.

Again, on Page 15, NII. I would examine first the normalized results, which excluded the effects of IFRS 9 and PPA. You can see both on a year-by-year comparison and also on a Q-on-Q comparison that the result is positive, 1.7%, 1.4%. Meanwhile, the stated results is affected for the year-on-year comparison by the effect of IFRS 9 and on the quarter by the effect of the reduction of nonperforming loans due to the Exodus transaction, with basically half the contribution of IFRS 9. But on a like-for-like, you can -- we have experienced a growth of 1.5%.

Net interest spread is, on a progressive spread, 1.52. In the quarter, it is down to 1.47, especially for the reduction of both funding spread down to 49 basis point, but also a reduction of 8 basis point on asset spread. This is consistent with our policy had in the first part of the year, which, of course, brought to a new transaction in the third quarter of the year for the record amount for our bank of EUR 5.5 billion of medium-term new transaction. Let's just consider that the global budget for this year was around EUR 17 billion. So in just one quarter, we realized that 1/3 of the total budget. Especially, this was reached with a transaction with mid-cap and large-cap corporates, in which we increased in the quarter by 6% to 7% the total loan.

Net fees and commission, which we experienced a reduction last year -- last quarter of around 9% on a year-to-year comparison, is recovering. We are now still in a low figure in respect to last year, but down to 6.7%, with results in the Q3, which is equal to the Q2 results, which we consider quite satisfactory taking into account both the August including into the third quarter, which is -- there is always slowing down of the activity in the branch. And also, of course, the hike of the spread and peculiar situation in the market in Italy, which, of course, made very difficult to increase the sale for -- the investment for our clients. Very good results, especially in commercial banking and in credit fees, which offset the slight reduction in management and advisory fees.

Also quite sound the net financial results, plus EUR 43 million on the first 9 months comparison, EUR 47 million in the third quarter. Both results are very good for us, taking into account the reduction of capital sensitivity to government bonds that we adopted during the last quarter. We reduced by EUR 3.2 billion government bonds held in HTCS and reduced from EUR 3.5 million to EUR 2 million per basis point the sensitivity of our Italian Govies.

Let's pass on Page 17 to operating costs. Again, also, for this aspect, I want to show also the road map over the last couple of years. The results are very good, less 6% year-on-year and almost 2% on the quarter. Let's say that the results of the third quarter '18 was the best results for us, but we still are embedding some ammunition in order to reduce further these costs.

Just to make you understand the road that we had in cost reduction, again, we wanted to show the strategic plan figures. We started with end of 2015 cost up to EUR 3,086 million, with an objective to go down in 2019 to EUR 2,858 million. Nowadays, on an annualized comparison, we are down to EUR 2,723 million. And still, again, we have next year that we think we can still encompass and embed some further consistent reduction, vis-à-vis our objective.

Personnel and operating costs are reflecting exactly what I was saying before, so 4% reduction in personnel, 1.3% on a quarterly basis. We went down from 25,000 people at the beginning of the merger to 22,640 in September. We think we can terminate this year below 20,300 people due to the last final step of Exodus of anticipated Solidarity scheme.

Also, administrative expenses are down 8% year-on-year and almost 5% on a quarter-by-quarter. The main significant cost savings are applied to advisory services, maintenance, rentals, advertisement, transport and insurance.

On Page 21, we have the loan loss provision. We are going down both on a total figure, and especially, if we consider the IFRS 9 impact, which, of course, is going down to the derisking that we are affecting. The figure that we reduced in the 9 months '18 have allowed us to go down to 100 basis points, to 99 basis points. And in Q3, we had EUR 267 million of provision and compare it to the EUR 360 million of the second quarter, of course, affected by the Exodus transaction. Also, without considering the Exodus, we are experiencing a reduction of 13% of LLP.

Let's go to the balance sheet. We have, on Page 23, direct funding. We are still experiencing a stable growth in current account and sight deposit, up to 5% in the 9 months, 1.2% in the last quarter. It's almost EUR 4 billion of increase in current account, which now amount for 63% of total deposit. Of course, we are also experiencing a comparative reduction in more expensive source of funding like the bonds and CDs and time deposits.

Bond maturities, luckily enough, very manageable amounts. We have almost completed our reduction of retail bond maturities. As you see, there is still a EUR 1.3 billion expiring by the year-end and then only EUR 400 million for the next 2 years. And for institutional bonds, we have only, in the next 2.5 years, EUR 4 billion -- global EUR 4 billion, EUR 2 billion for each year, '19 and '20, of institutional maturities. This, of course, is -- we consider a very manageable amount and put us in no pressure, vis-à-vis the replacement to tap the market.

The liquidity position is still very sound. Of course, in September, we have experienced some reduction due also to the needs of refinancing the [staple activity] the Custodian Bank activity, which was giving us something like EUR 4 billion of liquidity. So we went down from EUR 52 billion to EUR 50 billion. Nowadays, we are already up from EUR 14 billion of unencumbered asset to EUR 17 billion. And in any case, together with other liquid unencumbered securities, we are up to almost EUR 20 billion of available assets. We started also utilizing this asset in order to refinance the debt with bilateral transaction, and we still have the majority of these eligible asset made out of govies. LCR at 133% and NSFR above 100%.

Let's talk on Page 26 about our restructuring of our securities portfolio. There was a reduction in the last quarter of almost EUR 2 billion. The most important reduction was out of our Italian Govies in HTCS, down to EUR 6.5 billion, more than EUR 3.5 billion from the beginning of the year. Meanwhile, we grew EUR 1 billion in Italian Govies under HTC. Non-Italian Govies grew to EUR 10.1 billion, 36% of total govies, especially France, U.S., German and some Spain Govies. The gross HTCS reserves is negative for EUR 330 million compared to EUR 200 million end of June.

A focus on the Italian Govies and on HTCS and on the sensitivity reduction to the spread evolution on Page 27. You can see on the underscore that every basis point we have reduced our sensitivity from EUR 3.5 million to EUR 2 million in September, vis-à-vis Q2. There is less global exposure in HTCS, down from EUR 15 billion in Q2 to EUR 11.9 billion in Q3, EUR 2 billion down in Italian Govies, EUR 1.3 billion down in non-Italian Govies. The duration went down from 3.4 to 2.9. The global Italian Govies, which stood to EUR 18.2 billion, 35% of which are under HTCS and 55% under HTC. On the bottom of the slide, there is also the phase-in of this EUR 6.5 billion reduction in Italian Govies portfolio, of which EUR 6.1 billion out of HTCS. As you can notice, the majority of the reduction was done before the spread increase. We went down to EUR 25 billion to EUR 19 billion in March '18 and then in the last couple of quarters, we just adjusted the percentage of Italian Govies between HTCS and HTC.

On Page 28, indirect funding, good performance of Funds and Sicav. Still in the third quarter, we registered some need to reorganize our Bancassurance joint venture, which, as you know, started in the second Q '18. The results are already good in the fourth Q also for Bancassurance. The total amount, of course, are affected by the market valuation of the stock. But as you can see on Page 29, the global effect, excluding the market price, is an increase between current account, asset under management and asset under custody of around EUR 4.2 billion globally.

On Page 31, net customer loans. I would bring you on the top right of the slide. We are increasing, especially, our core customer loans activity in the last quarter, up 1.7%, as I was telling you already commenting this asset spread, 3.4% by beginning of the year, 2.1% if we do not consider the senior notes of Exodus. Again, up to September this year, we experienced -- we granted new loans to Households for EUR 2.7 billion and almost EUR 12 billion to Corporate, of which EUR 5.5 billion only in Q3.

Let's pass to the NPL stock reduction. Here, we mentioned the net NPLs reduction, which almost halved by the beginning of the plan to EUR 9 billion, exactly EUR 5.5 billion UTP, EUR 3.5 million of bad loans. The reduction in Q3 was, of course, more in UTP. We handed up the Exodus transaction in the second quarter. And nowadays, we have reached 3.3% of net bad loan ratio, vis-à-vis an original 2019 plan, which would have brought us to 4.2%.

Conservative levels of coverage are maintained. Let's say that we had some write-off this quarter. So the bad loans appeared to reduce the coverage from 66% to 65%. But if we include the write-off, these come up to 69% as well as the global NPLs coverage comes from 50.6% to almost 54%, thanks to the write-off.

A focus on the bad loans details on Page 34. We, of course, start from the beginning of the year. The net book value, again, down to EUR 3.5 billion, of which only EUR 0.6 billion unsecured, which represent 18% of our global net exposure. In terms of coverage, we have the net exposure covered 81% and the secured portion covered 57%. Let me remind that GBV is represented by 68% of the secured asset and only 32% of unsecured, vis-à-vis an industry average of 50%50%.

On Page 35, notwithstanding a material lower starting point in GBV under management due to the disposal that we have experienced in these last 2 years, the global amount workout is still very, very good and is increasing, not only in percentage, but also in global amount. As you can see, vis-à-vis last year, we are having 51% of more workout activity with an annualized recovery rate up to 5% and GBV reduction from internal workout up to almost 11%, also with a very negligible impact on the profit and loss of only EUR 42 million related to the EUR 2.1 billion of reduction in GBV.

Again, on Page 36, this is just to show the consistency of our NPL bad loans recovery unit. We passed from 2.5% and 2.8% of 2015, 2016 to 4.3% in 2017 and 5% in 2018, annualizing the first 9 months.

A focus also on the UTP loans. Total consideration GBV EUR 9.5 billion beginning of the year. Nowadays, we are down to EUR 8.3 billion, with -- considering provision are down to EUR 1.5 billion of unsecured covered 47% and EUR 4 billion of secured with a coverage of 26.5%. Almost half of this amount is under restructured loans, which, as you know, are normally performing and paying interest in installment and are under procedure checked every installment.

Also, evolution of UTP ratios is very consistent on the low right part of the slide, well below the regional strategic plan and with good results owned in the last quarter 2018.

The last slide is related, again, to the evolution of common equity Tier 1. We were able to pass from 10.8% due to the capital management action already forecasted to 11.32% and then down again to 11.2% due to the Q3 variation of HTC reserves partially offset by the results -- net profit result of the quarter. Also, in terms of phased one (sic) [ phased-in ], we are up to 12.9% in June, which became 13.2% in the third quarter.

That's all for me. If you have any question, of course, I will be happy to answer.

[Operator]

[Operator Instructions] The first question comes from Jean Neuez of Goldman Sachs.

[Jean-Francois Neuez, analyst]

I just wanted to ask you 2 things. The first one relates to your outlook statement. At the end of the press release, I find it to read slightly more cautious than what was the one in Q2. And I just wanted whether -- I just wanted to know whether you would be able to kind of give us some measures or some of the quantitative things that you have in mind backing the changing tone from the outlook statement, for example, in terms of loan volumes or fees on these type of things into next year? And the second one I wanted to ask was on the NPL derisking. So you've nicely shared a lot of detail about the offer process for the project before year-end. I just wanted to understand where you would -- I mean, at which level of gross book value sale you would find that maybe you'd consider strengthening the capital with, for example, asset disposals or these type of things? So what are the protection mechanism that you envisage for Core Tier 1 ratio?

[Giuseppe Castagna, executive]

Okay. Thank you. The outlook is not that easy during this time to have a clear idea of what could happen in the macro. Of course, what I say that we are experiencing a stable growth, I would say, both in terms of loan volume and also deposit. So the only effect nowadays is the reduction by -- due to the market value of asset under management and asset under custody. We still see a willingness by client entrepreneurs to invest, but of course, there is a sort of a reflection in this moment due to the macro situation to the negotiation from the Italian government and the UE, and of course, everybody is a bit waiting -- wait and see for what's happening. We have done a lot of work with our client during the first 6 months of the year. Of course, this is coming good, and it has been very good in the third quarter, notwithstanding a difficult situation. The pace is good. Of course, there will be some reprising also for us, especially starting from 2019, but of course, high-quality financing is still very welcome, and we want to increase also our market share. In terms of contribution of capital in order to affect the derisking, of course, I think everybody knows that we were able in the past and are considering for this quarter to have restructuring and reshape of our consumer finance activity. We are working very hard on many sides in order to find the best possible and most valuable solution. We are confident that we can get some results together with announcement of the derisking in order to give you the full picture of sources and asset disposal. I cannot say much more just because we are under negotiation during these weeks. So let me give some couple of weeks in order to be more precise.

[Domenico Santoro, analyst]

Okay. Can I ask what's the expected contribution in your business plan from Agos then?

[Giuseppe Castagna, executive]

Let's say that we have almost EUR 80 million to EUR 90 million of net profit per year.

[Operator]

The next question is from Christian Carrese at Intermonte.

[Christian Carrese, analyst]

Just a clarification on the disposal of NPEs. I look at the spread, the CDS spread went up in the last few weeks. We know that you are trying to make the GACS for the [ Arca ] transaction. Do you expect, in terms of GACS, to see much higher cost due to the CDS increase? Or it's something that is manageable? The second question is on the risk provisions. I saw EUR 72 million booked in the quarter. If you can clarify what is the nature of this provision. Is it related to the other draft? And this could have an impact in the future commercial policy and see the trend for 2019?

[Giuseppe Castagna, executive]

Okay. Thank you, Mr. Carrese. I would say, of course, you know that we have a dual track, so we can decide depending on the cost what is more feasible for us and more valuable for us. Still, we believe there is a convenience in utilizing the GACS opportunity. Of course, we can know that the real cost also at the end of the road nowadays is still manageable, and still convenient. In terms of other provision, also thanks to the good extraordinary contribution we had during this quarter, there is some amount that we accounted due to the compliance to the tighter regulation in terms of current account overdraft and so on to be applied to customers.

[Christian Carrese, analyst]

So this is a one-off?

[Giuseppe Castagna, executive]

Sorry, yes. So this is a one-off, of course.

[Christian Carrese, analyst]

Just a follow-up on the disposal. My last question is on the capital managerial buffer. What kind of common equity Tier 1 ratio fully loaded you have in mind after the capital management action on NPEs and consumer credit?

[Giuseppe Castagna, executive]

No. Ideally, we would stay as we are doing a very consistent transaction on derisking. So we are considering a consistent amount of derisking, which should be financed by our capital management action.

[Operator]

The next question comes from Mr. Andrea Vercellone of Exane.

[Andrea Vercellone, analyst]

Four questions. The first one is a follow-up on NPL phase. I don't quite understand how the GACS option comes into play. Is it just a stand-alone option, i.e., if you do not reach a satisfactory agreement with the interested counterparties on pricing, then you would proceed on your own with the GACS? Or can the fact that GACS transactions usually are done at higher prices, somehow be factored in the price you may be offered because they can do the GACS on your own? So if you can elaborate a little bit on this. The second one is on funding. And you have a lot of liquidity at the moment. However, there are regulatory ratios kicking in, in terms of MRL at some point. You probably don't have a defined requirement yet. So at some point, you do need to issue something, I believe. So can you just give us a qualitative idea as to in more normal market conditions, what type of instruments are you planning to issue over the next 12 to 18 months? And whether you would consider restarting, reissuing retail bonds as at least one of your competitor is doing? The third question is on costs. Historically, particularly on the Banco Popolare side, there has always been positive cost seasonality in Q4. This was also the case last year for Banco BPM combined. Shall we expect costs dropping again in Q4 due to positive seasonality? And the fourth one is just a clarification. Is there anything strange in provisions for risk and charges of EUR 71 million? Seems a very high amount. It's quite unusual.

[Giuseppe Castagna, executive]

Okay. I'll answer the first 3, then maybe I didn't catch very well the fourth one. Let's say, no, GACS as I mentioned before, it's off to dual track. All the 3 bidders are very much engaged on this option. So I expect that everybody will provide different quotation for both the opportunity, straight sales versus GACS. And we will try to pick up the best potential opportunity, of course. So it's not something that we will do on our own, but something that we will do with a partner that we are going to selection through this beauty contest.

[Andrea Vercellone, analyst]

Just 1 clarification. If you go for the options on GACS, obviously you don't know the price. So you stated before that in an ideal world, you plan to announce the derisking -- the conclusion of the derisking process, together with capital management transactions. But if you don't know the price of the derisking process, how are you planning to square that?

[Giuseppe Castagna, executive]

Yes. Don't let me open all our option, but we are confident that with the kind of proposal we will receive, we will be able to have a fair idea of the GACS valuation due also to the experience that we have done with our Exodus transaction. And also to the fact that I would say, for instance, we mentioned it on the slide, rating agencies are already working on these portfolios. So we are pretty sure to have a fair idea ahead of time, of course. Regulation ratios, of course, is something applying in the next month. We are very much focused right now in the main target that we have upfront. But we are, of course, considering also that. As I mentioned, we have already done some bilateral transactions just to pace to the market for almost EUR 1 billion. We are trying to employ all our other asset, not only of course, covered bond, but also more sophisticated transaction. We don't expect for the time being to go back to retail markets, to the retail bond markets. And meanwhile, we are looking for opportunities. We are already offering a lot of reversal in prior transaction and mean -- time by time, we will decide, which would be the best option. But, of course, I am sure that also due to the liquidity attention that the next year will be brought also by the regulator, we will be -- we will have the right time to analyze in detail the needs for 2020 and give you in the next quarter some more detailed and precise coverage for source of funds. Cost, no, I don't expect -- neither last year, as far as I remember, we had just a small increase. But for us it was still -- a small decrease last year. This year, we have, of course, tried to account on a quarterly basis in order not to have surprise in the last quarter. As far as I know, we should go to the level that I very clearly stated also in my presentation. And then unfortunately, I didn't get your fourth question.

[Andrea Vercellone, analyst]

It's just the detail on the quarterly results. You booked a EUR 71 million provision for risk and charge in the quarter. I'd like to know a bit more about it, given that it's quite big.

[Giuseppe Castagna, executive]

Yes, I answer. To me [ SICAV ] is mostly related to CIV. So to the overdraft of clients, as you know, we already [ management made ] some request to reconsider the exact cost to be applied to clients. Most of them were duly driven by prudential approach for these new rules. But it's mainly one-off.

[Operator]

The next question comes from Riccardo Rovere of Mediobanca.

[Riccardo Rovere, analyst]

A couple of questions, if I may. The first one is on risk-weighted assets. If I get it correct, they're down significantly in this quarter. I was wondering what is driving that aside from the deconsolidation of the NPL? And still on this topic, I remember in past conference calls, you mentioned that you were, let's say, reasonably, how can I say, confident to get an LGD waiver by ECB. Is that still the case? Or do you think this should be -- this is not the case anymore? And still related to that, before selling the consumer finance unit, which contributes not a negligible part of the group, do you think there is some room may be in your credit exposure to reduce risk-weighted assets that maybe do consume capital, but do not add much to the profit of the bank?

[Giuseppe Castagna, executive]

Okay. Yes. The RWA, we're down mostly because it's written on Page 39 because we kept the senior notes, the GACS senior notes, on the Exodus transaction. So globally, we had an impact of reduction of the RWA. On the LGD waiver, I'm sorry, every quarter, I have to answer to this question. Unfortunately, I don't have any answer up to now. As you know, we have done an application beginning of the year when the plan was much lower than the effect of our derisking strategy. Let's wait another few weeks in order to complete and understand the magnitude of our derisking. But I am pretty sure that with this opportunity in some way, we will reach the target that we announced. On the consumer finance. So let me be quite clear even though, of course, again, we are in the middle of some discussions. So I don't want to embarrass anybody. I don't want to be embarrassed, but I am not saying that we are selling our consumer finance activity. I'm just saying that we are optimizing our consumer finance activity. We have to [ draw ] the factory, which basically do the same business. We are trying to understand the best way to make out some capital, trying to keep to the maximum of the profitability that we still have from our consumer finance activity. So I am not going to sell the activity, of course.

[Operator]

The next question is from Giovanni Razzoli of Equita SIM.

[Giovanni Razzoli, analyst]

A couple of questions. The first one, important to me to understand the timeline of the much-awaited derisking plan. So by the end of November -- by the mid of November, if you receive the binding offers on the NPL disposals, would you be in the condition to also define the overall plan involving also the consumer credit? Or shall we wait also for another -- shall we wait another couple of weeks or by year-end, you will have a clearer picture of the -- all the moving parts? So this is my first question. And would you commit to us that if by mid-November, the overall picture will be defined, you can share with us all your thoughts into a conference call or presentation, so that everything will be once and for all defined so we will have all the moving parts clearer in mind? And my second question is on again on the capital. You have mentioned that you have several elements to shore up your capital position. I was wondering if you can share with us what could be instead the headwinds that, at sector level, you may face. I'm referring to the TRIM process. So are you -- is the process ongoing if you expect something in the next couple of quarters? And what about the update of the risk parameters of the internal model? Shall we wait -- shall we expect something by year-end and shall we expect some headwinds on the capital?

[Giuseppe Castagna, executive]

Okay. Again, it's quite embarrassing to talk to you during some very hard negotiation. As you know, time is a part of negotiation normally. So if I say to you by this date, I will have some things, this already give my counterpart some advantage or disadvantage. So please, don't ask me to be more precise that I already did and I already write down on my presentation. So I say that there is an official expiry date for the presentation of the offer, which is mid-November. Of course, we are very much interested to receive the best possible offer, and to analyze this offer in order to give in a couple of weeks time since we will receive a comparable offer, which I already say this is sort of dual track GACS rate. So we need some time to understand what is the best way. But as soon as we do, as we receive the offer and that we make up our mind what is the best potential solution, of course, I will have a conference call with all of you and announce the global sides of my derisking. I never told anybody in the market that I am doing something without having the capital to do what I say. So for sure, if you will have a presentation, you will know exactly how we will finance our derisking. So the 2 things should come together. The fourth, TRIM, frankly speaking, again, maybe it's because we are very much concentrated on this aspect, which for us are very crucial, very important. No. We don't have any worries, but -- and not even any information, which anticipate any of the future impact. So our model, as you know, were validated maybe the last one, but to be validated with the new rules. So we do not expect any major change, but we are talking frequently and we will see together with the other banks the effect also of these new rules when they will come.

[Operator]

The next question is from Anna Adamo of Autonomous Research.

[Anna Adamo, analyst]

On the NPL disposal, you mentioned EUR 8.6 billion of gross book value. I would like to understand whether this number include also partial write-offs exposures, which are currently off balance sheet? And on Agos, can you remind us what is the book value of the stake? And whether this is fully deducted from CET1?

[Giuseppe Castagna, executive]

Okay. Thank you, Ms. Adamo. Yes. In the EUR 8.6 billion, there is the global consideration. So there is also some hundreds of write-off. We don't have many because, as you know, we have restated the vast majority of them. For Agos, yes, they are fully deductible because, as you know, we are above the threshold. And in our stake holdings, on our book is EUR 685 million.

[Operator]

The next question is from Delphine Lee of JPMorgan.

[Delphine Lee, analyst]

I just have 2. On funding, just wanted to clarify -- sorry if I missed this, on TLTRO. How much have you actually deposited in the ECB? And I can see that some of it is in your investment portfolio. But just want to have a little bit of [ this plate ] . And should we understand that you have basically the flexibility and you're thinking about not refinancing the EUR 1.7 billion of institutional bonds next year using the TLTRO amounts? And then, secondly, on NII, just wondering what the impact could be from sort of the repricing that you mentioned, which mainly occurs in 2019. Just wanted to understand a little bit of the magnitude, if you have any color to give.

[Giuseppe Castagna, executive]

Good evening, Ms. Lee. On the TLTRO, I have, on Page 25 of our presentation, there are all the asset employed with phasing the TLTRO financing. Very few of them are Govies. The majority are retaining covered bonds, ABACO and self securitization. Most of them are quality marketable securities, and they, of course, are on top of the EUR 20 billion of unencumbered liquid asset that are available for refinancing right now apart from the TLTRO. Repricing, again, I see that is an opportunity and an obligation because, of course, we have also a very strong sensitivity to the increase of interest contribution. Our sensitivity for every 40 basis points of increasing on price is EUR 170 million. So, of course, we are -- we will try to exploit, of course, any opportunity arising from the market.

[Delphine Lee, analyst]

Just as a follow-up, if I may. On the repricing. So this is mainly related to sort of market rates, short-term rates in Euribor. But do you see also the Italian banks in general repricing a little bit the loan book to adjust for this higher funding costs?

[Giuseppe Castagna, executive]

Yes. As I was mentioning, most of the increase in loans of this quarter came from negotiation started a few months ago. So normally, you have a time for granting new loans, which takes amounts especially in the bigger transaction. So, of course, there is different timing to market for increasing pricing. We have started already, of course, for the mass market activity, but we are foreseeing also to be compliant with regulation and most proper activity starting by beginning of the year. The spread, the sensitivity is not only to Euribor, but to any increase of price that we are applying.

[Operator]

The next question is from Hugo Cruz of KBW.

[Hugo Cruz, analyst]

A couple of questions. One on some of your -- other banks that are reporting so far have been talking about the need to reprice loans. Could you give your comments on that? And then on the LCR and NSFR, what do the operations will look like if you remove the TLTRO?

[Giuseppe Castagna, executive]

Sorry. What I can tell you -- I could tell you more on pricing. I don't understand very clearly.

[Hugo Cruz, analyst]

I was just wondering -- I mean, probably you answered this already but some of the other banks that reported so far have started talking about the need to reprice loan rates, the net...

[Giuseppe Castagna, executive]

Yes. Of course. Yes. Yes.

[Hugo Cruz, analyst]

So do you think that could have any impact on cost of risk, loan growth? How much do you think you can reprice over the next few quarters? Any comment on it would be appreciated.

[Giuseppe Castagna, executive]

I don't think so. Repricing means that you are going to reprice also good client, and not only to shift your lending propension versus lower PD rates. So, of course, we are going to try to, especially if the market is growing in the same direction, I think that is very feasible. The repricing also with the good rating names. So I don't think this will bring to a lowering of the quality of our assets. Again, on LCR, we have, right now, 133%. We have, of course, projection end of the year to be higher than that. NSFR is still above -- well above 100%. So we don't foresee also in terms of TLTRO nowadays any problem due to this maturity in 2020.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

Hopefully quick questions from me. First one is whether the GACS pricing, and judging by your conversations with prospective buyers, haven't curated much from the levels we saw before the summer. Second one is if you can sort of share with us your best approximation to cost of risk next year and the maximum NPL disposal scenario, i.e. the EUR 8 billion, EUR 8.5 billion, if you think you can normalize the cost of risk closer to the 60, 70 basis points you have mentioned in the past. And the third question is on whether Anima could be part of the funding sources, specifically for the derisking?

[Giuseppe Castagna, executive]

Thank you. Again, we don't have nowadays the possibility to calculate exact cost of the guarantee for GACS, because this will be determined at the end of the road. So in, basically, almost in March, if we go for GACS. Nowadays, our projection is that also with an increase, with the foreseeable increase due to the current level of CDS, a GACS could still be convenient, vis-à-vis a straight sale. But, of course, this depends on which kind of offer we will receive. And on that, we will apply all the threshold of the GACS cost and the sensitivity in order to understand which kind of transaction would be better for us. Cost of risk, yes, this is exactly the reason why we are focusing so much on derisking. We are willing to reach the level of our peers. Having also a very good level of disposal in the project. So for sure, we think the next year, we will be able to have a consistent cost of risk, vis-à-vis our competitor. Anima, right now, is not in our perimeter for disposal. Let's say that we are very fond of our asset vendor management activity. Nowadays, we don't see the need. But in any case, it's very easy for us to change our mind because, as you know, it's a one-side decision. So even though I decide to sell the stake, the day after, this is liquid in the market. Meanwhile, if we have to reach an agreement with somebody else, we have to work a lot in order to align the interest and to try to keep most of the possible value. So that's why I don't -- I'm not talking about Anima. It's really not nowadays in our plan because, still, we need to have some good reserve for the future.

[Operator]

Next question is a follow-up from Mr. Riccardo Rovere of Mediobanca.

[Riccardo Rovere, analyst]

I'll be quick. I've noticed that the gross amount of total bad loans came down by roughly EUR 1 billion in the quarter, which is, no doubt, a remarkable achievement. Is this entirely due to internal workout? Or was it affected also by write-offs, cancellation of loans or something like that?

[Giuseppe Castagna, executive]

No. It's mostly out of workout. That's why I had this Page 5 presentation just to give the idea of how big is our workout activity. Of course, there could be some few cancellation, but the vast majority of it comes from internal workout, both from UTP and bad loans, of course.

[Operator]

[Operator Instructions] The next question is from Mr. Alberto Cordara of Merrill Lynch.

[Alberto Cordara, analyst]

My question is more of a system question. Yesterday, we heard from [ Messino Vintes ] that there is a mentality that Italy's getting into some kind of Armageddon. But I mean, the reality is very different. Just would like to have your view on what we should expect in the coming cycle next year, and if there is any risk in your view that Italy may slide into the recession again or this risk is very remote? And also in terms of primary formation of NPLs in terms of flows, if we should expect the trend to continue to be positive or maybe there is going to be an inflection point at some stage?

[Giuseppe Castagna, executive]

No. Frankly speaking, unfortunately, I didn't follow [Mr. Messina] conference call, so I don't know exactly what you was referring to. But let's say that, of course, we have experienced some uncertainty on the market, and we know very well. I think both of us know the situation in Italy. There is, I think, more pressure by this confrontational attitude rather that our real economic environment. So frankly speaking, I don't see any recession at the door, neither we have some clue about recovering of inflows of deteriorating loans. So for the time being, let's cross finger, things are, of course, mostly affected by this tough negotiation, and this different view on growth by the Italian government, vis-à-vis the European Parliament Commission. But frankly speaking, I don't think we can see and say right now that there is some sort of recession at the door.

[Alberto Cordara, analyst]

So we view of the market, particularly the fixed income market on BTP is, in your view, is not really based on what you can experience on the ground and the reality seems to be very different than what the market is indicating us to be?

[Giuseppe Castagna, executive]

I think most of the spread is due to these very hard negotiation to the risk that Italy could take some extreme decision, but not related to the real economy.

[Operator]

The next question is from Domenico Santoro of HSBC.

[Domenico Santoro, analyst]

Just a quick follow-up to the answer you gave to the colleague before on the question regarding loan loss provision. Am I correct and understood correctly that you -- in case of a disposal of the nonperforming loans book, you expect the cost of risk which is more in line with your competitor? And if I look at your direct competitor, the cost of risk nowadays is around 50 or 60 basis points. Is this a level that you consider realistic after the disposal? Or in a couple of years? Or the risk profile of your business doesn't allow this sort of provisioning around rates? And then just a detail, the negative one-offs in Q2, because of the disposal of the equity tranche discount. We know that there was a mistake in the way the cash flow had been calculated by the rating agency. I was just wondering whether you have an update there and whether there might be some pre-negotiation of the price and maybe one-off can be recovered.

[Giuseppe Castagna, executive]

I would say, yes and yes, to be very sharp. I would say 50, 60. I feel that we are in the same territory, maybe a better one, vis-à-vis many of our competitors. We are only granting very good quality loans. So once we have solved our problem with our heritage, I am sure that the cost of risk should go down in line with our competitor. And also the calculation we are doing, of course, if you are able to derisk the bank, the size that you were mentioning should go to this level. Also, we are working, of course, on that, let's say, misinterpretation or mistakes related to the Exodus valuation. Of course, again, we are not the only part in close, so we have to deal with many different counterparty, but of course, our target is to recovery the majority of the lower value that we experienced.

[Operator]

Mr. Castagna, at this moment, there are no questions registered, sir.

[Giuseppe Castagna, executive]

Okay. Thank you very much, everybody. And see you next quarter the next time, so you have the possibility to hear about our transactions. Bye.

[Operator]

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