Banca Monte dei Paschi di Siena SpA
MIL:BMPS
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
2.8164
6.156
|
| Price Target |
|
We'll email you a reminder when the closing price reaches EUR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Banca Monte dei Paschi di Siena SpA
You don't have any saved screeners yet
Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the MPS Group First Quarter 2018 Results Presentation Conference Call. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Marco Morelli, Chief Executive Officer and General Manager of Banca Monte dei Paschi di Siena. Please go ahead, sir.
Good morning, everybody, and thanks for attending this call here with Andrea Rovellini, Chief Financial Officer; and Martino Da Rio, our Investor Relator.
I would like to take you through the key messages and the key topics of our Q1 with Andrea, and then, as usual, we'll leave time for questions. We are going to be road showing Q1 in the next few days, so if any of you needs additional info or wants to go for a more vertical drilling, we are clearly ready to do it.
Let me start with Page 2. As you might recall, 2017 for us was pretty much work in progress. We had 4 key objectives and 4 main targets. Number one, capital strengthening, recovery of a stable position in direct commercial funding, approval from different authorities and regulators of our Restructuring Plan, completion of the burden-sharing and renewal of the governance of the bank. We did hit all of these key steps. And as I told you a number of times, last of which was during the AGM back in December last year, the beginning of 2018 was the real starting line for Monte dei Paschi to operate as a normal "going concern."
Key focus in 2018 in order to make sure we start showing some delivery and true recovery was -- and are -- actually, were and are, the revamping of our commercial effort, a stable and transparent NPE reduction, and in parallel, consistent asset quality and cost of risk stability and the already pretty much live trajectory on our cost savings.
So Page #2, if I start from the very left, the Restructuring Plan. All the key targets we set ourselves have been met, last of which, as you have seen yesterday, closing of the rating process of the securitization. Results are better than expected in this respect. The tranching exceeds the Restructuring Plan expectations. All the 3 rating agencies confirmed the investment grade. Timing is in line to what we presented back last year with the Restructuring Plan. In addition to these, we also hit and exceed our target of the branch closure. And we also reimbursed January this year the first EUR 3 billion of GGB.
This is, in a way, in my humble opinion, turning the page on 2017 and turning the page on what has seen at the Monte dei Paschi Group, pretty focused on the restructuring first step of the overall exercise of the 5-year plan. Now we are back in business. And Q1 results are the first step towards what we had in mind back last year in terms of making sure all our employees, all our clients and Monte dei Paschi all together could reach the targets set in the plan.
Highlights of Q1. We had, as you see, a pre-provision profit of EUR 304 million, which is 2x the last quarter we presented; net results of EUR 188 million, clear sign of commercial inversion of the decreasing trend of the last few years; close to EUR 1 billion new customers loan, and we provide -- we will be providing more details in this respect.
On the cost side, we are starting seeing the benefits of what we did last year in terms of headcount reduction and a better management of our expenses overall. Another very clear message is our asset quality and our cost of risk, which is set at 61 basis point. And let me anticipate one of the key messages I like to give you, this is the guidelines we would like to set ourselves for 2018. Bearing in mind, as you might recall, in our Restructuring Plan, the target for 2019 was 79 basis point.
As far as other key highlights, I would like to quickly dwell upon the result of our online banking business, Widiba, which, for the first time, went in black in Q1 on all the key P&L lines.
Which are the goals for the rest of this year? Number one, focus on lending and revenue growth. So ideally, there are 3 main areas: number one, top line revenue; number two, cost management; number three, asset quality and cost of credit. On the revenue, I repeatedly stated that it is going to be a long process. No doubt this is going to -- this has continued to be the case. But again, it's a long process with clear light at the end of the journey. And the numbers of Q1 bear out this key message. We are reducing the cost of funding consistently in our commercial deposits and our liability side. We have a very low attrition rate so far in terms of lending and funding following the closure of the branches according to the plan.
Topic number two, NPE reduction. We're going to shed a lot of light on that in a few moments. But again, we are beating our internal targets in terms of UTP reduction. We did close the largest ever done transaction, securitization of bad loans in Europe. It has been a very cumbersome process, which involved a huge number of people within Monte dei Paschi. But again, factually wise, we achieved what we stated in the next few months in terms of timing, in terms of target, and we over-performed in a way in terms of the final outcome of the tranches.
Page #3, key numbers. Core revenues are up Q-on-Q at EUR 421 million in terms of net interest income and EUR 407 million in terms of fees and commissions. Operating costs are down around 12%. We are starting seeing and posting the benefit of the 1,800 headcount reduction completed at the end of 2017. And again, there is a very thorough process in terms of managing our other expenses for obvious reasons. Since we are possibly the most monitored financial institution in Europe these days, there is a very clear discipline throughout the ranks and at all levels in terms of making sure the money we have available are properly invested.
Pre-provision profit, EUR 304 million. This is the very first key message in terms of inversion of the trend. As far as cost of risk, I quickly touched the point already, 61 basis point versus a much higher number year-end 2017. Bearing in mind that this bank in the last 6 years posted EUR 25 billion provisions, and so an average -- at the leverage of over EUR 57 billion of customers loans. I think it's the basis upon which I'm very confident our cost of credit can be kept stable at this level. And by the way, our aim is, throughout the business plan and the Restructuring Plan, to do better than the actual numbers. But again, I think I rather talk on the basis of facts. So this is a very, very positive results by all means.
As far as the UTPs are concerned, this is going to be our focus from now onwards in terms of reducing the overall size of nonperforming loans. We are going to give you some details. But in the first 3 months, we already -- we have already done for with EUR 5 billion -- with EUR 500 million of UTP reduction. And by the end of June, there are going to be a sizable amount of UTP, as you would see, which are going to be done with a positive impact.
Capital wise, 14.4% Core Tier 1 at the end of the quarter. Core Tier 1, the impact of IFRS 9 FTA would be facing until 2022. And we have an impact of EUR 1 billion for the disposals of UTP and bad loans. And our Core Tier 1 ratio will improve going forward with return earnings and risk-weighted asset reduction for NPL disposal.
I will skip Page 4 because we're going to go into details later on. Let me take you to Page 5. Here is a visual number. You can appreciate visually wise what is our trajectory in retail and corporate mortgages. Q1 is clearly the better performance in the last 5 quarters, both on the corporate side and retail side. We had new corporate mortgage flows of 20% -- 24% up quarter-on-quarter and 150% up year-on-year. On the retail side is close to 20% Q-on-Q and 37% year-on-year.
On the deposit side, as I mentioned in the past, the first objective beginning 2017 was to restore liquidity at a reasonable level and to recoup commercial deposits, which we did. You remember, we closed the year with EUR 12 billion of commercial deposits increased compared to the beginning of 2017. We kept stable this level of deposits, and at the same time, we did reduce substantially the cost of these deposits, which is now the main target as far as our net interest income is concerned. So current accounts and time deposits are up close to EUR 3 billion compared to year-end 2017. And as I said, the cost of funding is on the right trajectory, 10 basis point down compared to year-end 2017.
Page 6, I think this is, in my opinion, another box which has been ticked. The senior tranching of our securitization exceeds expectations and targets. I want to stress again, this is the largest bad loan exercise ever done in Europe, EUR 24.1 billion of gross book value, 80,000 clients and 550,000 positions. This is a work which took close to a year to be completed. We dealt with 3 different rating agencies, and great credit goes to all those people within Monte dei Paschi who thoroughly and very stubbornly follow this process. The disposal price is 20.6% of GBV. The cash in for junior is EUR 600 million. It is going to take 5, 6 weeks for completion of the GACS process. And we're clearly going to apply for the waiver in the context of the risk transfer. That leads us to have a securitization structure which is EUR 2.9 billion of senior notes, EUR 800 billion -- EUR 800 million of mezzanine notes and EUR 600 million of junior notes. And the EUR 800 billion of junior has already been -- have already been placed to Quaestio back last December, and the junior notes would be done once the process is completed. The full deconsolidation of the portfolio is expected to be completed by the end of June. So pretty much in timing vis-à-vis of what we mentioned and presented back last year when we launched the process.
Page 7. There is -- the process of bad loan disposals will be completed by year-end with 2 additional clusters of bad loans: number one, EUR 1.3 billion of leasing tickets, which are potentially going to be increased for an additional EUR 300 million to EUR 400 million originated in 2017 since the initial and original cutoff date was year-end 2016; and EUR 1.3 billion of so-called small tickets. And again, this is on track and the timing and the time frame for the disposal is as planned, year-end. There is an additional EUR 2 billion of bad loans, which we're planning to sell by the end of the Restructuring Plan, 2021. But as I said, in the light of the very good performance of our team in terms of dealing with the securitization and in terms of dealing with UTP reduction, our aim and target is to anticipate timing of this exercise.
Last page I would like to comment upon before I pass on to Andrea Rovellini, and I will give you some closing remarks at the end, is Page 8, which is our UTP focus. As I said, this is going to be the key focus of our management and operating team for 2018. Starting from the left side of the slide. Our target in 2017 was EUR 1 billion, and we actually closed 2017 with EUR 1.7 billion reduction of UTP. We have, as you know, a target of EUR 3.5 billion reduction by 2019. So far, EUR 200 million are done and -- meaning, already sold in Q1. And there is an additional EUR 1.3 billion, which we are planning to complete by the end of June. So if you add together the [ EUR 200 billion ] (sic) [ EUR 200 million ] actual 2018 Q1 with the additional EUR 1.3 billion, which is the aggregate of binding offers already received, part of the size, the overall size, EUR 600 million equivalent already in the market with binding offer expected by June '18. And what else is going to be put in the market, the target is to complete by presentation of Q2 EUR 1.5 billion, which is the original target for the overall year. So we are aiming to hit the target of 2018 by Q2. That leads us to think that we can exceed the number in 2018. But most of all, which is the right-hand side of the slide, we would like to get to a higher number in 2019, original target, EUR 2 billion. I think that the ongoing strategic analysis we are performing internally could make us work "on EUR 4 billion." And again, based on the pricing, based on the lower default rate that we are seeing, overall, the comments I would make is that there are -- all things being equal, i.e. we need to see what kind of approach our regulator is going to take in terms of future Core Tier 1 requirement. But all things being equal, I think we can lower the 12.9% NPE target in 2021 to a number which is in the 10% area before 2021.
I would now pass to Andrea Rovellini for some more details, and I'll come back to you for some closing remarks.
Thank you, Marco. We can go to some -- the most important line of the P&L, starting from some detail on the net interest income, Page 10 of the presentation. So here, we have a quarter-on-quarter growth that is driven by plus 1.3% increase in commercial volumes but mostly by the 6 basis point improvement in the interest rate spread. The cost of funding gap versus peers versus the average of the Italian banking system is continuing to drop. We were 25 basis point more in terms of additional cost of funding in comparison with the system at December last year. Now we are at 16 basis point. The trend is positive, and we consider it in condition to more than offset the potential decrease of the average lending rate also for the next quarter.
It is important to underline also the quality of the net interest income. The constant decline in the interest coming from the nonperforming loans is very positive. Their weights on a like-for-like basis decreased from 28% in the -- from the first quarter last year to 19% in this quarter; decreasing to a yet more physiological 12% if we consider the net value of the adjustment based on the new IFRS 9 accounting standard. The IFRS 9 effect on the net interest margin is not significant, and this is due to the nonperforming loans mix with unlikely-to-pay and past due that represent more than 50% of bad.
Moving to the net fee and commissions, Page 11. We can see that the quarterly growth of about 12% shows an overall stability in the contribution of fee and commission coming from the asset under management product, plus 1.9% quarter-on-quarter and minus 1.2% year-on-year. We had a good performance in placing of gross and net volumes of asset under management product. The net placement was able to offset the negative market effect in the first quarter, so the stock can remain more or less stable.
Growth is mainly concentrated on fee and commission under the credit facilities. Here, we have a one-off effect coming from the renewal of the 3 years agreement with Compass for the distribution of personal loans and is also positive, the reduction in the negative commissions stemming from the general reimbursement of EUR 3 billion of GGB. If we consider the comparison with the first quarter last year, on a more generous basis, without considering the contribution for the merchant acquiring business, which was interrupted with the sale to Nexi, we have a slight growth of the overall amount of the fee and commissions.
If we move to the analysis of the trend of the operating costs, I think that more than the comparison with the previous period, which you can see well represented in the picture, it is worth to underline the comparison with the last average quarterly values for the last year. And compared to a year ago, we have 8% less staff, more than 2,000 people less, 14% fewer branches. We are speaking about 264 branches less in 12 months. So these numbers are very, very important. That involved organizational activity in order to rationalize the distribution network, which began to find this stability only from the beginning of this year when we decide to close the last group of branches.
All the results that you can see in the trend of the operating costs was realized without stopping capital expenditure and IT investment for which we have a budget of around EUR 140 million this year. All the investment are focused to increase the system of the impairment system of control, the regulatory requirement, and we are investing in order to improve the branch efficiencies, together with the completement of the digitalization process. And other area in which we are investing is the credit management with improving order system in order to control the quality of credit.
The other area that is interesting to be -- to analyze in terms of trend is the asset quality from Page 15 and further. And here, we have all the metrics that are showing significant improvement with -- in comparison with the previous quarter. So default rate, 1.5% with -- compared with 2.5% average last year. We have a danger rate, very, very positive, 10%, that is compared with around 24% last year. But here, we can see that we have a kind of seasonality, also considering all of the activity that was complete at the end of last year. And in this area, we can say that our guidance for the full year is more to -- is in line with 20% danger rate that is in line with the forecast that we have inside our Restructuring Plan. It is important to underline that this trend in terms of migration within the different category of the nonperforming is represented with a cost of risk that is 61 basis point, well below the 172 that we recorded for the full year last year. The cost of risk is still driven by the cost of the nonperforming, that is representing around 60% of the total. And this is in order to facilitate the unlikely-to-pay disposal program. That is our priority in order to maintain the coverage of the nonperforming and the coverage of the unlikely-to-pay very high in order to continue and to cover right the derisking and the disposal of these assets. The coverage of the unlikely-to-pay increased from around 40% to 45-plus -- 45.4%, and this is mainly driven by the first-time adoption effect for the IFRS 9, considering the potential and the possible and the -- in our program in order to dispose a huge part of the unlikely-to-pay.
It is important to underline the area of the ratio. So the gross nonperforming ratio improved to less than 20% if we doesn't consider the weight of the bad loans that are under the securitization. And this percentage is expected to improve to an area that is around 70% following the disposal of the last EUR 2.6 billion of bad loans under -- represented by small ticket and leasing to be complete by the end of this year. The remaining NPE stock will have a low vintage. And it is important to underline that on this pro forma figure, we'll maintain 65% of -- percentage of -- in the distribution of the gross nonperforming represented by past due and unlikely-to-pay.
Moving directly to the capital structure, Page 20. We can see the capital adequacy. So the level of Common Equity Tier 1 phased in at 14.4%, that fully loaded for IFRS 9 rates, 11.7%. This difference is linked to the EUR 1.6 billion that will be the first time adoption impact, EUR 1.6 billion that will be fully phased in until 2022. In this amount, we have EUR 1 billion linked to the planned disposal of unlikely-to-pay and bad loans. And you can see the representation of the distribution of this amount in Page 21. The EUR 1 billion of impact coming from the possible disposal of bad loans and unlikely-to-pay refer to around EUR 8 billion of gross book value in terms of disposal.
It is important also to underline that based on the preliminary indication that we have, it could possible to have an add-on on the risk-weighted assets that are calculated on the nonperforming loans. This add-on is expected to be introduced starting from the second quarter of this year. And for the full year, with the completion of the disposal of the nonperforming -- the bad loans that we have in program, we are estimating increasing in a range of, risk-weighted assets, between EUR 4 billion and EUR 5 billion, an amount that is a little lower than the EUR 6 billion that we potentially estimated in the Restructuring Plan.
The last word on the area of taxes. So Page 22. We are still maintaining EUR 2.1 billion of not recorded DTA in our balance sheet. We have for the first quarter our assessment of DTA for around EUR 77 million, in additional with EUR 11 million coming from the benefit from ACE. And this reassessment could be maintained also in the next quarter if we are able to generate positive pretax profit.
Please, Marco, for the closing remarks.
Okay. Before I leave room for questions, I would like to make a few closing remarks. And my first message is for 23,400 employees of Monte dei Paschi. I think we all silently sailed through very stormy waters in 2017 when the picture was very blurred, i.e. a number of times, I stated that the beginning of 2018 would have been the real starting line from all of us. I'm very confident that we are back on track. I think Q1 results is the very first step towards a journey that, for all of us, is going to be a different journey. We still have a lot of things to do. By no means, we are in a very safe situation, but again, you deserve compliments because the numbers of Q1 are the results of comprehensive and concerted effort of all the people of the group.
The key messages I would like to leave you with are the following: Number one, our focus is going to be on pre-provision profit and net income going forward, which, in a nutshell, means performance. I think you are in a position to opine and analyze the Q1 numbers. But again, I will rather be factual from now onwards. And numbers in a way witnesses the fact that the focus on pre-provision and net income is going to be our lone star going forward. Point number two, top line of our P&L, which means commercial revamping. We are now going to be very focused, myself included, on our network on improving the growth trajectory in our volume in terms of loans and in consolidating our deposit line. And then last but not least, NPE and cost of credits. Guidance, as I mentioned at the very beginning of my speech, for 2018 is going to be 60 basis point area, and this is our target for this year. But as for other key items of our P&L and our balance sheet, the effort is going to be focused for improving all targets we consistently set ourselves.
In terms of NPE and performing loans, we're going to push and accelerate the NPE reduction once we have completed the EUR 24 billion securitization, which, as I said, is a testimony of the fact that our management team, our people in the credit department is in a position to reach and obtain very challenging number and targets. The cost saving is going to be on track. Metrics, as I said, overall are better than 2019 targets. And our gross NPEs over gross loans, if you do include the sales of -- disposals of UTP, disposals of bad loans, the small ticket that we have in our plan, if you do factor in the EUR 1 billion impact of IFRS 9 already in our books, are now at the level of 12.7%. This is the reason why I stated that aiming for a 10% area in terms of gross NPE, on gross loans is a target which for us is at reach.
I think I would now leave room for questions. And I stress again, in addition to this conference call, we are always available to go through additional details. You will see Page 25 and 26 of the presentation is sort of the time frame and the pace -- is a picture of the time frame and pace at which we are going for the various targets of our restructuring plans. So we will consistently update these numbers quarter-by-quarter to allow you to gauge and assess our progress.
Now I leave room for questions.
[Operator Instructions] The first question is from Mr. Jean Neuez of Goldman Sachs.
I have 3 questions, please. The first one is on capital. So from a fully-loaded perspective, I would just like to understand what are -- so you have a slight result of minuses from regulatory impacts potentially. I just wanted to understand if there is any pluses that you plan to activate from here like assets, disposals or other optimization measure to try to understand also what actions you can implement to increase the level of Core Tier 1 ratio? The second question I wanted to ask is on your potential revision downwards of your NPE target by 2020, 2021? I just wanted to know whether that would require to revise also downward the Core Tier 1 ratio target? Or whether that has no impact or no cost to Core Tier 1 ratio and essentially stems from improvement in the NPE market? And lastly, I wanted to understand a little bit more about the tax rate. So this quarter you have about EUR 80 million of positive tax, the bulk of it being DTA reassessment and ACE, but still that would mean that the underlying tax rate was essentially 0 and I just try to understand what the guidance for this year is and why the underlying tax rate ex those elements would be so low and because obviously it makes a big difference to your capital formation?
Okay, we go for 3 questions and then we come up with answers. So please go ahead.
The next question is from Delphine Lee of JP Morgan.
I just wanted to check for -- if you could give us a little bit of color on your commercial activity, the lending volumes, which I think are encouraging this quarter. And if you have any guidance for full year in terms of net interest income? My second question is on cost of risk. So I guess at this point your 2019 and 2021 guidance and target for cost of risk is -- are still unchanged, but if you could give us a little bit of color, maybe for this year already given the very good start, if you can give an indication on the level, that would be also quite helpful? And finally also wanted to ask you about the stress test for this -- for year-end. How confident are you on passing the test comfortably? And if there are any elements that you could share, that would be also appreciated?
The next question is from Giovanni Razzoli of Equita.
A clarification, If I may, on the deferred tax asset Page #22. I would like to understand whether my calculation is correct if I adapt the nonconvertible DTA, the DTA not recorded in the balance sheet and the DTA related to nonconvertible losses, we get to an amount, which is in excess of EUR 3.5 billion. Is it correct to assume that if we were to incorporate this amount into the capital, I would get a major positive impact out of the EUR 60 billion risk-weighted assets that are something like more than 5% of the total. So if we want to fully phase your common equity Tier 1 for this amount, how much of the DTA shall I add?
Okay. Let me start with 1 or 2 and then Andrea will interject on others. Cost of risk guidance and some color. I think I'd rather go step-by-step. So I'll give you guidance for 2018. As I said, is going to be 60 basis point area. This is a much lower number than our 79 basis point target for 2019, which is in the Restructuring Plan. So I will update guidance on cost of credit for 2019 at the end of this year. Stress test, 2018-wise, Monte dei Paschi will not be a part of the stress test exercise for this year. This is the message we received a few months ago from our regulators. Net interest income guidance. Our aim, as I said, is to increase the pace of growth of our volumes and decrease the cost of our deposits and try to move it in few quarters to market average. So I think the level where we stand today in terms of net interest income is a good proxy of what our target could be going forward for the next three quarters of 2018.
So some details on the level of the common equity Tier 1 fully phased. So we have 11.7% and this level could be under pressure for the increasing of the risk-weighted assets on the nonperforming. We are -- estimate to have another decrease between 70, 80 basis point for that -- for the end of this year. And the possible improvement comes mainly from the retaining of earnings. And considering that this level is fully phased for IFRS 9 and we have a huge part of this impact coming from the disposal of the nonperforming, we have also to, we could say, adjust and take the fully phased of -- for the nonperforming loans ratio. As I said before, we have EUR 8 billion of program of disposal for the nonperforming. We have EUR 3.5 billion unlikely-to-pay, EUR 2 billion of bad loans in 2021 and then the EUR 2.6 billion coming from the small ticket and the leasing. If we adjust the nonperforming loans ratio that we have at the moment pro forma from the securitization, our nonperforming loans ratio drop from 20% to 13%. So when we adjust the common equity I think that it is very important also to adjust the other ratio. And we can also consider that having this kind of adjustment on the nonperforming loans ratio is -- could represent the bank as less risky and then could -- we could have also some benefit coming from the [indiscernible] on the level of capitalization from ACB. Speaking about the area of taxes, putting together the 2 questions. I start directly from Page 22, considering the full main area of our DTAs. And we can consider that the first 3 areas, so the convertible DTAs, the DTAs from the nonconvertible losses and the other nonconvertible DTA. So these -- the conversion and the movement of this area will be not involving the structure of our P&L, so the structure of our profitability. We can have an improvement in terms of, just one, in terms of profit if we are able to record in the balance sheet the DTA that at the moment are linked to the losses that we recorded in the past. So we have at the moment EUR 8 billion of losses that can be used in the future. So if we are able to maintain stable grow of our profit for the next quarter, we can maintain this positive effect on the taxes. And our estimate for the full year, this year is to maintain more or less the quarterly level that we have in the first quarter. So we can at the moment consider a positive effect coming from the reassessment of DTA and the benefit of ACE in the area between EUR 150 million and EUR 200 million for the full year.
The next question is from Riccardo Rovere of Mediobanca.
I have 2, 3, if I may. The first one is on volume growth. Given that the deleverage carried out in 2017 has been more aggressive than what plugged into the business plan? I wonder whether the loan growth that was or the loan growth target that was -- that is included in the Restructuring Plan is kind of still valid? First. Second question I have is on fee income. Even if I strip out EUR 15 million of, you can say, one-off contribution for the renewal of agreement with Compass, I see a quite a little bit of volatility in this line of the P&L. I was wondering whether -- what is this driving, if you can give us an idea if there's a big contribution from upfront fees in your fee income or if there is any other explanation, explaining the volatility that we've seen also in 2017? The third question I have is on -- is again, -- sorry, on capital. When you provide the burden from RWA on defaulted assets, EUR 45 billion, is this amount calculated with the amount of MPS of bad loans existing on your balance sheet today? Or is it including already the planned disposal, planned reduction that you expect to execute from here till the end of the year?
The next question is from Hugo Cruz of KBW.
I just want to clarify them -- well, actually, 2 questions. One, I just want to make sure I understood, on the tax benefits from ACE and DTA reassessment combined -- the 2 combined, you're talking about the benefit of EUR 150 million to EUR 200 million for the full year, just want to make sure I understand that? And then on the cost of risk, I mean, can you explain why do you expect 60 basis points cost of risk this year? Just even in terms of usual trends, usually Q1 is always seasonally a low cost of risk quarter for -- typically for Italian banks, like you just have IFRS 9 improvements or potentially that could have helped to have a lower cost of risk in this quarter as well. So I just want to understand what are the reasons for the cost of risk to stay at Q1 levels?
At this time, there are no more questions registered sir. We have a -- excuse me, we have another question from Mr....
The fee income volatility -- so as you can see, we have a seasonality in the trend of the fee income. So the first -- the first 2 quarters of the year are the best quarters in order to complete the commercial activity. And then the third quarter is usually lower in terms of contribution from the asset under management. And then we have -- usually, we have a recovery in the last quarter. The volatilities are also linked with the level of the upfront fees coming from the placement of product. And we can say that inside the first quarter results, we have around EUR 70 million coming from the placement of between EUR 3 billion and EUR 4 billion of product. This is a percentage that usually is stable quarter-on-quarter. Speaking about the growth volumes. As you can see, we are very, very close to the target that we had for 2019 in terms of growth of our loan book. We are working and -- but this target was also linked to the fact that we need not to exceed an important grow during -- also in connection with the commitment with European Commission. We think that we could maintain a little stable growth between 1% and 2% per year for the next 2 years. So for the loan growth, we are not expecting important improvement in terms of growth for the next 2 quarters. Coming back to the effect of the risk-weighted assets on the nonperforming loans. So the amount of between EUR 4 billion and EUR 5 billion that we are expected is expected at the end of this year, and is considering the fact that we are disposing EUR 2.6 billion coming of bad loans. And also the target that we have in terms of reduction of the unlikely-to-pay. So this is a pro forma information, but this is in line with the forecast that we have for the full year.
On tax benefit ACE and...
Yes, from -- in terms of the benefit of ACE, so here we are having around EUR 11 million in the quarter and this is a stable benefit that we could also have for the next quarter. And also the trend of the net equity could improve this benefit also for the next year. We can say that on the reassessment of the DTA, this is a positive result that we could have quarter-on-quarter. So if we are able to maintain a good -- a level of profitability, so a positive profit quarter-on-quarter, we can have a reassessment and can confirm a total amount of positive effect, both for ACE and the assessment of DTA in area within EUR 150 million and EUR 200 million for the full year, so including also the EUR 18 million that we have recorded in the first quarter.
Back on cost of credit, I think the answer to the question you raised in terms of what is the basis, upon which you project 60 basis point area cost of risk for 2018 is very simple. We work for a year in terms of making sure that all our key credit indicators, cure rate/danger rate analysis file by file were probably dealt with and analyzed and put in place. So in the light of what I mentioned earlier I think this is what we have in mind for 2018, net of extraordinary items, which, at this juncture, are not on our table and not predictable or foreseeable. We strongly believe this is an achievable target.
The next question is from of Paul Fenner of Societe Generale.
I actually just wanted to get an update on any wholesale...
Can you speak louder please, I can barely hear you.
Can you hear me now, is that better?
Not that much actually.
Hello, is that better? Is that better? Hello, hello...
Yes, that's better.
That's better, okay. I actually just wanted to get an update on wholesale funding plan. So that you've done a Tier 2 this year. I understand you have no intention of issuing an 81 for the foreseeable future. Is that -- I guess that's still the case, I would like confirmation of that. And also, any plans to issue nonpreferred senior for -- to build up your MREL stack. Any color on funding would be great.
The next question is from...
Okay -- oh, sorry, go ahead.
The next question is from Riccardo Rovere of Mediobanca.
My question is again -- a couple of clarifications, if I may. The first one is on -- again, on cost of risk, one second, if I understood it correctly during the presentation, you stated in one of the slides states that danger rate, so the amount of unlikely-to-pay loans migrating to NPLs' amount of 10% of the stock of the previous period. I would imagine this is an annualized number. But if I understood it correctly, also during the conference call you stated that you expect the danger rate to remain at the end of the year in the region of 20%, which is in line more or less what you have in the Restructuring Plan. So if that is the case, theoretically, the amount of unlikely-to-pay loans migrating to NPLs and the subsequent increase in coverage, I would imagine, required should go up materially. But in the meantime, you are also maintaining the guidance for 2018 risk cost anchored at around 60 basis points. So are you basically telling us the amount of unlikely-to-pay loans migrating to NPLs are already covered like in NPL? Or is there any other offsetting factor that should kind of balance this thing? This is the first question. The second question I have is, again -- sorry, on clarification from Mr. Rovellini on the placement -- on fees related to placement of products. When you mentioned EUR 70 million, is this the entry fee to -- from the placement of assets under management product, because given that you don't control the asset management factory, I think theoretically also, assets under -- also management fees go -- are classified as placement products, a clarification on that. Third question I have is out of the benefit in cost of funding included in the Restructuring Plan, how much of that is already visible in Q1 numbers? And finally, on restructuring cost, do you have an idea on how this should develop over the next quarters and years? Because if I remember correctly, that amount was fairly high, if I remember correctly from the business plus on the Restructuring Plan.
Okay, on first set of question on potential issuance of 81 Senior Tier 2, the plan for 2018 is to issue EUR 700 million of Tier 2 that are part of the Restructuring Plan. The original amount was EUR 1,450,000,750, which were placed back in January. And we stick to our forecast in the plan of EUR 700 million additional Tier 2 by year-end.
For the level of danger rate, you're correct. Now we are in the area of 10%, our expectation for the full year is to stay in the area of 20%, that is in line with expectation that we have in the Restructuring Plan. This effect is also to be analyzed together with all the other migration that we have inside the different stage of the nonperforming loans. And the impact that we have when the position move from the unlikely-to-pay to bad loans is now also lower than in the past and this is because we have increased a lot the level of coverage, both for the IFRS 9, but also that out of the disposal program and also for all the coverage that was complete last -- in the quarter -- in the last quarter last year and in the first quarter this year. So at the moment, we are confident that also with the danger rate around in the area of 20%, we can maintain the focus that we could before for the full year in terms of cost of credit. Also because now we are working with a production of new nonperforming, that is better than our expectations. So we have also to combine these 2 effects. Coming to the area of the commissions. Yes, so EUR 70 million are the upfront commission that we receive when we place asset under management product, but -- and these are commissions that directly enter with the commercial activity. And together with this commission, if you want to complete the analysis of the distribution of the commission, which we receive upon the asset under management product, we have around EUR 90 million in the quarter of management fee and this is an amount that is stable in quarter-by-quarter, is an amount that is directly linked with the market value of the product after having received the upfront fee coming from the commercial activities. In terms of -- there is also a question in terms of the cost of funding. So we have -- as we have said, we have 25 basis point negative gap August last year, we closed this gap to 25 in December, and now we are in the area of 16. We can confirm this positive trend also for the next quarter. And as I said before, this is the area most important in order to be able to sustain the level of the net interest margin. Because on the other side, we are expecting also some pressure coming from the profitability of our loan book, mainly linked to the very different quality of the new lending and the new borrowers, in which we are interested, that at the end, could make more pressure on the market gap. But our estimate for the full year is to maintain at the end more or less stable the overall spread between cost of deposits and interest on the asset side.
The next question is from Marta Bastoni of Bloomberg Intelligence.
I have a couple of questions on loans. What is going to be the commercial focus of the new Monte dei Paschi bank. You have obviously a deep knowledge of the SME sector. And I was wondering whether you are planning to leverage it or you were planning to change your focus a little bit? Then always, related to the loan subject, can you give us a little bit of color on the margins, particularly the mortgage production, whether this is accretive for you at this point? And third, about the new loan production, which is very impressive in the past couple of quarters. What is the level that would ensure your -- the stability of your loan book?
The next question is from Victor Galliano of Barclays.
Just a couple of questions from me. Really on capital, I just wanted to clarify, really how you think about the capital going forward for the rest of this year and into 2019? You've given us an indication there of a hit capital from the defaulted assets of I think it was 80 -- 70 to 80 basis points. And we're obviously at 11.7% now on a fully-loaded basis. What are the -- mitigants are there potentially for this year in terms of capital? And what do you -- could you give us some idea of range of maybe where you see the fully-loaded CET1 ratio at the year-end? The other question is on coverage on UTP, in particular. I see that's gone up significantly to 45%, which I think is a clear indication obviously of your plans to dispose of a lot of this portfolio. How do you see that coverage? Do you see that as something that will continue to grow incrementally towards the sort of 50% mark? What I'm trying to get a sense of here is how much more incremental coverage or will there be any need for potentially additional top-up coverage there on the back of UTP disposals?
Okay, on question on SMEs, I think as I mentioned in my closing remarks, the effort -- one of the key pillars of our numbers going forward is going to be top line. Top line for us is pretty much households, families and SMEs. SMEs is our core business as far as the corporate environment is concerned. We are actually launching a very focused effort province by province on existing and potential SME and small business clients. And we'll keep you updated as soon as we make progress going forward. But yes, there is going to be a very clear focus on SMEs.
Yes, for the level of unlikely-to-pay, we consider it stable for the level of the coverage of the unlikely-to-pay. We want to maintain it stable in the area of 45% also for the full year. We can come back to the trend of the interest rates on the asset side. So just to analyze the turnover of the portfolio, so in order to maintain stable -- the total amount of the loan book, we have to generate new production for around EUR 10 billion per year, because EUR 10 billion -- around -- and the area of EUR 10 billion is the level of the total amount of the reimbursement and expiring of the short-term facilities that we have. We are in line with this target. And the trend in terms of the generation of new loans that is mainly based on mortgages and medium-terms operation is in line in reaching this target to maintain stable with a very little growth -- the total amount of our loan book. It is also true that the -- in order to obtain a better quality of our loan book, we need to be more and more competitive in terms of interest rates. And just to give you an idea, if we compare the market gap spread on the mortgages to the retail that we reached in the first 4 months of this year in comparison with the spread that we had for the new operation last year, we are paying around 50 basis -- 40 basis point less in terms of lower profitability. This is linked with the pressure that we forecast for this -- the full year. And the only area offsetting this pressure on the interest rates size on the assets is continuing our activity in order to maintain a very low -- decrease the cost of deposits. In terms of the other question was linked to the level of the capital fully-phased for the IFRS 9 at the end of this period. Yes, we could have another, we can say, decrease of this level for the risk-weighted assets, the nonperforming. The main area in order to improve this amount is to -- the increasing of the profitability. At the moment, we have some little potential forecast in terms of growth -- the risk-weighted assets for the full year. But in any case, we want also to able in the condition to use this potential approach in order to sustain a possible improvement in the area of the loan book. So we can mitigate the reduction through the profitability and retainment of earnings. This is the main area to improve the level of the common equity Tier 1.
Okay, guys. Thanks all for attending. Let me just remind you that we are road showing from Monday onwards. We would be in London on Monday, Tuesday and along Wednesday and are available for additional sessions if any of you would like to have it. Thanks, again, and we'll talk soon.
Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.