Bper Banca SpA

MIL:BPE

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the BPER First Quarter 2018 Consolidated Results Conference Call.

At this time, I would like to turn the conference over to Mr. Alessandro Vandelli, CEO of BPER. Please go ahead, sir.

[Alessandro Vandelli, executive]

Okay. So good evening, ladies and gentlemen. It's a pleasure to welcome you and thank you for participating to our first quarter 2018 results conference call. This is Alessandro Vandelli, CEO, and I'm joined today by Roberto Ferrari, Chief Financial Officer; Alessandro Simonazzi, Head of Planning and Control; and Gilberto Borghi, Investor Relations Manager.

Before going through the details of the results, I'd like to extend preliminary comments on the main strategic focuses and messages and also on our performance in this first quarter in which we achieved net profit of EUR 251 million. For many reasons, this quarter is probably the most important over the last few years for the BPER Group. As a matter of fact, with the actions implemented, we have laid the foundation for looking at our future with optimism both in terms of profitability and asset quality.

The results of first Q 2018 arise at EUR 251 million, as I said before, and it is the highest ever achieved by our group. It has been influenced by the particularly positive trend in commissions, trading and cost of credit, delivering strong reductions. All the teams, members of the group were strongly committed to achieve this important goal, which is crucial to support our NPE strategy.

Asset quality improvement continues, and we have recorded a decrease of NPE for the seventh quarter in a row, and now the gross ratio is close to 19%. Texas ratio is below the 100% threshold in a quarter in which we reached levels of covers never seen before. This was possible thanks to the selection of a potentially transferable portfolio of NPE for a gross amount of almost EUR 6.4 billion, on which according to IFRS 9 first-time adoption, we have accounted additional provisions for more than EUR 1.1 billion.

With is a very sound capital position and a strong capital generation in the quarter, we are able to confirm solid capital level with a common equity Tier 1 ratio phased in at 14.6% and a fully phased ratio at 11.71%.

Now I'd like to focus for a while on our NPE strategy. So please move on to Page 6 of our presentation. Finally, we are able to apply our NPE strategy in a more ambitious term. Asset quality have always been the bank's priority, and now we can confirm that we are winning our challenge.

After improving the bonds portfolio quality and made unlikely to pay and bad loans management more efficient in the quarter, we have recorded very high level of recovery and confirming the strong capital position. Since June '16, we have started an organic reduction of NPE. Now we are ready to define a solid and effective strategy to obtain a quick asset quality improvement.

The strategy can be split into 3 different steps. The first one, as mentioned before, we have selected an NPE portfolio for potential disposals with gross amount of EUR 6.4 billion, representing 2/3 of the total NPE portfolio. The net values of this portfolio were aligned with those achievable in a probable disposal scenario, along with IFRS 9 introduction from January 2018. This action requires additional provision for a total amount exceeding EUR 1.1 billion, facilitating the alignment of coverage at the highest levels of the Italian banking system.

Second step, we are going to sell bad loans for an expected amount of EUR 3.5 billion, EUR 4 billion in the period 2018-2020, of which bad loan securitization transaction should be around EUR 1 billion on Banco di Sardegna with the closing expected by the first half in 2018 and around EUR 2 billion on BPER Banca with the closing expected by the end of 2018.

The third step is this, along with [ what's mentionable ], we are going to reduce NPE by about EUR 1 -- EUR 1 billion through internal workout. We expect to have, first of all, strong improvement in the default and cure rates via optimization of the performing loan quality and the NPE management processes within group's credit and business areas. Second, further bad loan segmentation and workout strategies related to the closure procedure for the bad loan portfolio while increasing the extrajudicial transactions relative to current levels and so increasing rates of activity. Because of these, as you can see on Page 7, we are confident about improving our gross NPE ratio target to achieve 11.5% in 2020 and below 10% in 2021.

Now let's go through a quick analysis of the balance sheet, and then we'll go over profit and loss sections. And at the end, there will be time for Q&A.

So first of all, on Page 9, there is total funding. And as you can see, the total funding is at EUR 90 billion -- EUR 90.404 billion. So the small reduction is mainly due to the decreasing of financial [ weighted ], and the funding from customers is increasing in the first Q 2018. And the trend of direct funding was due also to the decision no longer to accept certain forms of institutional funding, which are particularly explanatory, and at the same time, the commitment of transforming direct funding in indirect deposits.

The other trends are what we probably saw also in the other quarter. In particular, the bond decline has continued during first Q 2018, by 7% since December '17.

Now we can move on Page 10, net customer loans. First of all, there is a decline by EUR 2.2 billion, mainly due to the significant increase of coverage. So without the IFRS 9 first-time adoption, the decrease is EUR 1.1 billion, and this year, the usual seasonality of the first part of the year.

Let's go to Page 11. Assets under management and Bancassurance stocks, up also in this first Q 2018. So the net inflows are at 550, so in line with the other quarter of 2017. And now assets under management is very close to EUR 20 billion, 50% represented by Arca fund. Also here, Bancassurance had a positive performance, and now it's at EUR 4.8 billion.

Now we can move on to Page 12. And so here, we have the trend of nonperforming. First of all, the gross, we had a decline from EUR 10.5 million to EUR 9.9 million. And as you say, now we are single digit and probably look to go back in 2012 to see a similar amount of gross NPE. And at the same time, there was a very strong decline in net NPE that are in March '18, EUR 4.2 billion (sic) [ EUR 4.2 million ]. So the ratio, the gross, we have a decline from 19.9% to 19.3%. And the net now stands at 9.3%.

Particularly important is the trend in the coverage. First of all, bad loans, there is an increase from 59% to 66.5%. Unlikely to pay, they are close to 40%. And the NPE coverage is above 57%. And this is the result of the strong action under the first-time adoption of IFRS 9.

Looking at Page 13. We can see the trend of the financial assets. So after some years, we saw a decline from EUR 15.7 billion to EUR 15.1 billion. Bonds amount to EUR 14.2 billion and represent 94% of the total portfolio. What is important to underline is the amount of Italian government bonds at EUR 5.1 billion, and this is 33.9% of the total securities portfolio.

Now we can move on to profit and loss. And on Page 15, there is a representation of this first Q 2018. As I said before, the net profit of EUR 251 million, the best quarter in the history of the group. And it's also important, the net result from operation at EUR 325.9 million, supported in particular by the very positive trend in net commission and the net profit from financial activities. The pretax profit amounted to EUR 272.4 billion (sic) [ EUR 272.4 million ].

Now let's turn to Page 15. And we are going to analyze the NII. So the pro forma, as you see, is EUR 267.6 million, in line with 4Q 2017, if you consider the difference in the calendar effect. And this is my view here. It's a very important message because this represents a very important trend, supported by the commercial business, also because we have a decline in the contribution coming from the securities portfolio.

And the confirmation of these elements, you can see on Page 17, where after some quarter of reduction in the spread, we have an increase in the Q1 2018 in the total spread and also in the customer spread. Also as you see there, the pro forma spread and the customer spread is 1.86 compared with 1.8 in the first Q 2017.

On Page 18, I think there is another important element. Net commission income amounted to EUR 198.1 million. Also here is the highest level that we have ever been for the group. It's really an impressive result. And if you compare year-on-year, it is -- we have plus 11.7% even if there is not -- are not entirely comparable due to the [ addition ] of New Carife in the perimeter of the group, but the interest is very, very low. And let me say, it's particularly positive, the trend in the commission in indirect deposit and Bancassurance. So this is an area where we have an increase by 31.4%.

On the other hand, we have strong contribution and trading income, EUR 153.6 million. So in a very positive quarter, we decided to have some profit taking. This was a decision to support our strategy in nonperforming, and the result is this very impressive EUR 153 million from trading income.

Looking at Page 19. We can see the operating costs, down by 5.1% compared with 4Q 2017. Of this year, we have also here we have the impact of the consolidation of New Carife in the perimeter of the group. In detail, the personnel expenses amounted to EUR 207.5 million. Other administrative expenses amounted to EUR 102.3 million. And there are a reduction in the first elements and also in the second compared with the fourth quarter 2017.

Cost of credit on Page 20. Here, we have a very important reduction. And if we look at the cost of credit, it's very, very low. And also the provision breakdown, you can see, also the cost of risk and other provisions. Let me say that it's important for the [ figures ] to see this strong decline. We expressed in the last year that our expectation is to see this climb due to the strong provisioning and the first-time adoption of IFRS 9, and I think this is the first effect. So we confirm our guideline at 60 basis point for this year. But anyway, the starting point is absolutely positive.

Looking at liquidity and capital on Page 22. The liquidity and the total eligible assets are at EUR 16.8 billion, so with a strong increase compared with December '17. And at the same time, the unencumbered eligible assets are very high together with the deposit with the ECB. So the traditional liquidity is very strong with LCR and NSFR above 100%.

Looking at the capital position. First of all, the common equity Tier 1 ratio phased in is at 14.6%. Compare that with 14.89% at December 2017. And the ratio calculated on the full application regime, fully phased, is equal to 11.71%. Let me say that this ratio does not consider the mitigation of the IFRS 9 phasing, but it does not embed any future retained earnings and any portion of DTAs on losses carryforward. So the combination of this ratio and the coverage above 57%, I think, express clearly the strong position of BPER Group.

Now a few final comments to summarize the first quarter 2018 results, on Page 25. Q1 2018 represents the turning point for our group. All the trends came better than expected. Thanks to our solid capital position and high levels of NPE coverage, above 57%, we are ready to start a phase of quick reduction of the NPE stock after the very positive trend recorded in the last 18, 24 months. In this scenario, our expectation on the cost of credit reductions in 2018 becomes even more realistic. This brings immediate benefits on profitability. We should be supported also by the low level of taxation.

Good things are coming from the commercial activity, in particular from the commission side. In this positive scenario, we are working on the new business plan 2018, 2021, which will be presented to the market after the summer.

At this point, I would like to thank you very much for your time and attention. And now Roberto, Alessandro, Gilberto and I are ready to answer your questions. Thank you. Thank you very much.

[Operator]

The first question comes from Jean Neuez with Goldman Sachs.

[Jean-Francois Neuez, analyst]

So this is Jean-Francois Neuez from Goldman Sachs, and I had a question related to cost of risk and NPE strategy. On your Slide 6, I see bad loan disposals expected for EUR 3.5 billion to EUR 4 billion in the period 2018-2020 or with this EUR 3 billion by the end of 2018 in securitization. Just to clarify, these securitization transactions, do you expect to actually de-consolidate the NPL at that stage, meaning find buyers, or just to securitize them and only then start the sales process? And if that's the former, have you had initial conversations to back that claim, if you want? And the second thing I wanted to ask was on the cost of risk guidance of below 60 basis points. I wondered which year does this apply to. Obviously, you had a good start to this year with cost of risk, but I wanted to know whether that applies also for 2018 now.

[Alessandro Vandelli, executive]

Well, on the first point, securitization, we are working on 2 securitization, the first one on Banco di Sardegna for around EUR 1 billion and the second on BPER and will be around EUR 2 billion. Actually, our objective is the recognition of the bad loans. So I think it's possible to see the recognition of the first securitization by the end of the first half 2018, and we hope also to add the recognition of the EUR 2 billion in the second half of this year. So we are working for these important activities on the 2 main banks. So this is the first one element. Then after these 2 securitizations, we think that it's possible to complete other disposal probably without securitization or GACS. Probably our strategy will change. We want to identify some different portfolio and then try to find the best investor for different portfolio. This will be the activity in 2019 and in 2020. The cost of risk, really the starting point this year is really better than expected. So if you look at not in IFRS 9 but back to the old accounting principle, the cost of risk is close to 0. But let me say I want to be very cautious because in the past, we have the cost of risk of 120, 150. So we expect to see the cost of risk this year around 60 basis points, but it could be even better than 60 basis points. We'll see. But anyway, this is only to have a very cautious approach in the cost of risk. What is important is that it changed deeply the characteristic of [ nonperforming bad loans ] in this element. And we think that the effect on our portfolio profitability is absolutely crucial for our activities in the near future.

[Jean-Francois Neuez, analyst]

Sorry, I apologize but the line was bad and I didn't understand the basis point guidance for this year's cost of risk.

[Alessandro Vandelli, executive]

60 basis points.

[Jean-Francois Neuez, analyst]

For this year, okay.

[Operator]

Your next question is from Christian Carrese with Intermonte.

[Christian Carrese, analyst]

Christian Carrese, Intermonte. The first question is on net interest income. And we saw an important effect from IFRS 9 first-time adoption. We had a chance to listen to the conference call of Intesa Sanpaolo a few minutes ago. The impact was negligible, the impact of IFRS 9. So I was wondering if you can clarify why such an impact and if we are to take the first quarter numbers as a run rate for the coming quarters. Still on net interest income, you made an important capital gain in the quarter, the EUR 150 million to the income. If you can give some details on the portfolio that's being sold and what kind of impact you are expecting in terms of lower contribution to net interest income in the coming quarters and also the reserve that you still have from the portfolio. The second question is on capital. 11.7% is not including DTA. If you can clarify the on-balance sheet and off-balance sheet DTA as of today. And you have not included, of course, Banco di Sicilia -- sorry, Banco di Sardegna. And I know it's way out. There is something missing. Still that could improve the common equity in the coming quarters. For example, the Carife migration has been already included in the first quarter.

[Alessandro Vandelli, executive]

Okay. Thank you very much, Christian. Now I will take -- I would like to say something about the capital position. Then I'll ask also Roberto to speak about the profit taking on the securities portfolio. First of all, we closed the year with 11.7%. Frankly speaking, it is a little bit higher than expected, goes probably 10, 20 basis points more -- higher than what we thought at the beginning of the year. And we have rooms to increase also in the coming months because we have some opportunities. For example, we are working on [ Ciebra ] to apply the internal model for the loans portfolio of [ Ciebra ]. There is the update of our loans [ even the fourth ]. So there are some opportunities to have, in the coming years, positive benefit. We estimate it's something between 30, 40 basis points, the benefit coming from these 2 elements. And we hope to have, in the next quarter, in the second quarter 2018, then we'll see if it's possible in the third -- in the second or in the third. Before going through the year, and I'll ask Roberto to explain our strategy in the securities portfolio for the benefit. As I said before, and let me underline this point, the year was extremely positive before the decision to take this advantage, but it would be to sustain our strong action on the provisioning we decided to take some opportunity. Roberto?

[Roberto Ferrari, executive]

Okay. Christian, we sold mainly corporate bonds and B2Bs, long-term B2Bs from our portfolio. But we bought back B2Bs that we posted in amortized cost accounting. And this actually is the strategy that we follow in our portfolio. In terms of net interest income, the contribution from the financial portfolio on net interest income will be lower by around EUR 25 million compared to last year but will be partially compensated by the commercial side. So actually, the commercial side will give a better contribution than last year, compensating at least partially the lower contribution from the financial portfolio. On available for sale, the new -- actually, the new name is fair value, other comprehensive income portfolio. We still have positive reserve for around EUR 130 million, EUR 140 million gross. The last question actually was on DTA. We will have positive absorption of DTA in the future through our current profitability for more than EUR 350 million. That is almost 120 points in terms of common equity Tier 1.

[Christian Carrese, analyst]

These are on balance sheet?

[Roberto Ferrari, executive]

Those are past losses that have not been put on balance sheet, but we will recover them through profitability in the future quarters. EUR 350 million. They will become DTA when we will put them on balance sheet.

[Christian Carrese, analyst]

Okay. Just a clarification on the first quarter net interest income. The IFRS 9 impact, I'm referring to the slide -- let me see. I don't find the slide. Anyway, it's -- the positive impact will be recurrent. I mean, the first quarter number has to be seen as recurring numbers going forward.

[Alessandro Vandelli, executive]

Well, let me say, first of all, I do not see a significant difference between 456 and 490, more or less. This is the difference between NII in Q1, IFRS 9 or before. The difference is due to the time value on bad loans, as you know. And probably, I think it's possible to see in the coming quarter a decline in this. This is due to the disposal of bad loans. So we are working, as you know, in 2 important securitizations after that. So the amount of bad loans is going down and also the impact coming from this. Let me say, speaking about the NII, one important element. Comparing the last Q 2017 and the first Q of this year, I think that it's important to express clearly that the activity on the commercial side was extremely positive and offset the reduction of the component coming from the securities portfolio. And let me say, this was absolutely important because it spreads the activity of our business department. And this is absolutely crucial for the coming months. So for the first time, it is what we expected to see. So the offset of a reduction in the NPE portfolio contribution by the activity with the customer loans. And this is, in my view, is really positive. Christian, just to be clear, the impact of the IFRS 9 on NII is due to 2 main elements. The one is the recovery of time value on bad loans. This is significant, but it's not impacting the bottom line or the profit and loss because it's only a change of the line in which we can see this kind of element because it was, in the last here, this figure was inside the provisions. And the provisions were net of this effect. Now this effect has shifted on NII. The real impact of the IFRS 9 on the bottom line of the profit is the write-off of the interest on unlikely to pay, and for us, it's clearly negligible.

[Operator]

Your next question is from Giovanni Razzoli with Equita SIM.

[Giovanni Razzoli, analyst]

I have 2 questions. The first one is on the recent statement of Unipol CEO, who, as far as I understand, has hoped or suggested for an acceleration of the derisking strategy. I was wondering whether you can comment on this. Shall I take that the draft guidelines of your NPE strategy that you are presenting today are already consistent with this indication in a certain sense? If you have any comment on this, that could be very much appreciated. So I want to, first of all, clarify this position. The second point is actually more details on the CET1, 11.7%. Roberto just asked if there are 100 basis points of release of DTA that you will benefit in the future. I would like to know what is the time frame of this release of capital. In the previous derisking plan, you have mentioned that whatever was the case, the common equity Tier 1 would have been -- would have remained above 12%, if I'm not mistaken. So I was wondering whether you may exceed this level already in the second quarter or by year-end, thanks also to the actions that you have mentioned, the IRB on Cassa di Risparmio di Bra, the update of the [ MGD ]. And then I would like to know whether you can share with us what could be the cash flow generation going forward in terms of contribution to the common equity Tier 1. In the Q1, the pre-provision profit was something like EUR 330 million. You have the next trading profit of, let's say, EUR 120 million. In the past, you have guided us for recurring trading profit of EUR 20 million, EUR 30 million. So adjusted for trading pre-provision profit would be EUR 200 million and in excess of EUR 200 million, meaning that you may have pretax profit in the region of EUR 130 million would end up with the 9-month contribution in terms of bottom line in excess of EUR 300 million. Is this calculation correct? So that you can add all the moving parts to the CET1 that we have an idea what could be the year-end target.

[Alessandro Vandelli, executive]

Okay. Thank you. Thank you very much. I will take the first question, and I will hand over to Roberto on the second one and then Alessandro on the third. Well, I think it's not the task of the CEO to comment on the statements made by the shareholders. On the other hand, it would be hard because very often, these statements are extrapolated from a broader and more articulate discussion. I believe he said that the task of the CEO is to clearly express objectives and strategies, hoping that they are correct and appreciated by the all the shareholders and the market. In this sense, I believe that at the end of this quarter, our strategy is extremely clear. I think that also the targeted turnover and the gross ratio are ambitious and achievable, thanks to our strategy. Roberto, some of the elements on the common equity.

[Roberto Ferrari, executive]

The common equity. As you said, Giovanni, we will have some positive levers already by June. We can [indiscernible]. So I would say that we can have a target considering also retained profit with a very low tax rate, as you saw. That is already close to 12% or above 12% by the end of June. And then when we speak about DTA, it is important to see where it is, the quarterly current profitability. So it depends on the current profitability in the future. And I don't -- wouldn't like to enter on this analytics in number. But anyway, the target is to go above 12% already by next quarter on common equity Tier 1.

[Alessandro Vandelli, executive]

Before I hand over to Alessandro for your last question, let me say something about the expectation on our net profit, only to underline the important message that now with this different cost of risk, the expectation is obviously to see profitability at very high -- higher level. But at the same time, we have the opportunity to have a very low tax rate. So the combination of low cost of risk and low tax rate, we have to have better profitability and higher net profit, and through this trend, also a higher contribution to the capital position. Alessandro?

[Alessandro Simonazzi, executive]

In line with what Mr. Vandelli said about this thing, I can add that if you -- obviously, the first quarter is not an ordinary quarter. And you can refer to this quarter, trying to restate the result of trading and the result of provision. If you restate the result of trading with a normalized result, we usually have more or less from EUR 25 million to EUR 30 million each quarter of trading -- from EUR 20 million to EUR 30 million, let me say. And provisions with the guidance of 60 basis points are different from the first quarter, obviously. But with these 2 changes in the profit and the results of the first quarter, you can calculate a normalized profit that you can use for the cash flow for the common equity, reducing it by dividend because we are a payer. We are considering a higher level of payout compared with the last quarter -- with the last year.

[Giovanni Razzoli, analyst]

Yes. And with this calculation, I arrived to something like EUR 90 million of net income. That was my calculation exactly.

[Roberto Ferrari, executive]

In the quarter.

[Giovanni Razzoli, analyst]

And sorry, Roberto, just one clarification. Above 12% CET1 as of June before the release of DTA, right?

[Roberto Ferrari, executive]

Before the release of DTA, yes. Also thanks to very low tax rate on our Italian profit.

[Operator]

Your next question is from Riccardo Rovere with Mediobanca.

[Riccardo Rovere, analyst]

Just a couple of questions, if I may. The first one is on the gross NPE ratio. In one of the slides, you mentioned it is 19.3%. If I take EUR 9.87 billion as per Slide 29 and I divide that amount for -- by the customer loans according to the new structure of the balance sheet, EUR 48.7 billion, I would end up in the region of EUR 18 billion. So I was wondering, why -- what is the difference eventually? This is my first question. And the second question I have is on -- again, to get back for a second on taxation. Your profit -- let's assume your profit and loss is going to be positive for 2018, but you have the impact of IFRS 9 first-time adoption. Would this be seen as a fiscal loss by the tax authorities? Would this trigger the transformation of DTAs related to credit impairments and intangibles at year-end?

[Alessandro Vandelli, executive]

Okay. Thank you. Thank you for your question. First of all, on the gross, the gross NPE ratio on the numerator, there is the nonperforming exposure at EUR 9.868 billion and total gross exposure of EUR 51.251 billion. So this is -- the result is 19.3%. Actually, the 19.3% is due also to the fact that there was a reduction in total gross exposure between December and March because actually, if we have the same level of total gross exposure, we would be below 19%. But anyway, this is 19.3%. And let me say we expect to see a strong reduction during this year due to the 2 securitization that I mentioned before. So let me say also to have a perimeter of the EUR 6.4 billion of nonperforming with very high coverage, I think here, is the most important element to have strong confidence for the evolution of the NPE gross ratio. And I know that you have a question on the taxation. So Roberto, please.

[Roberto Ferrari, executive]

Yes. The taxation will be very low this year through past losses on loans -- on losses on loans clearly on provisioning. Then in the future, starting from next year onwards, we will recover the EUR 350 million of DTAs. So those are 2 separate actually accounting procedures, past losses on loans and DTA that we will recover in the future.

[Riccardo Rovere, analyst]

Sorry, Roberto, but you mentioned EUR 350 million. What is this EUR 350 million?

[Roberto Ferrari, executive]

EUR 350 million are DTAs that we will account in the future because we didn't account them in the past. We will count them in the future, and we will cover to current profitability in the future. Not this year. This year, through past losses, we will have very low tax rate and so very high retained profitability, as you see in the first quarter.

[Riccardo Rovere, analyst]

EUR 350 million is part of the 600 and something, 630 or whatever the number was at the end of 2017 that were not recognized on balance sheet, am I getting it right?

[Roberto Ferrari, executive]

Yes, yes, you got it right, yes.

[Operator]

Your next question is from Hugo Cruz with KBW.

[Hugo Cruz, analyst]

I actually have 4 questions. Apologies for that. So first, I'll start with NII. I just wanted to know if you can provide guidance for the NII for the full year. Can we annualize Q1 number? I noticed you said that if we did NPL sales, the time value effect will decrease going forward. So I just want to know if -- what NII should I be [ basing that in ]. Second, on the cost of risk this quarter, I mean, obviously, it was very low. You didn't give the flows. Is it because we don't know flows in the quarter? Arguably, increase in coverage show. No flows could mean no net. NPL flows could mean no cost of risk. I'd like to hear your thoughts on that. And then 2 quicker questions. One on -- you say in the presentation that you have a portfolio of EUR 6 billion of NPLs that is marked to sell already, but you're only talking about EUR 3.5 billion to EUR 4 billion of sales. So why don't you just try to sell the EUR 6 billion and try to get a faster improvement in your NPL ratio? And the fourth question on the core Tier 1. I also was expecting a core Tier 1 in Q1 around 12%. I think the main delta here was I kind of knew about the EUR 1 billion of IFRS 9, but it looks like there was supposed to be -- I was expecting some offset of some EUR 300 million related to Banco di Sardegna, the excess capital in that business. But it looks like there was no offset against the EUR 1 billion of IFRS 9. So I'd like to understand that. And also, what was the impact of IRB in Carife? How much of that was a benefit in Q1? I'd like to know that as well, please.

[Alessandro Vandelli, executive]

Okay. Thank you. Thank you very much. So I will take your first question and then ask Roberto to speak about the common equity Tier 1. First of all, NII. Our expectation -- last year, our NII was around EUR 1.124 billion, so EUR 1,124,000,000. We expect to see the full year more or less at the same level, if we look at [ IFRS 9 ], so resulted impact of IFRS 9 will be an increase in the NII. So if we compare on a homogeneous basis, there is substantially a flat level of the NII. Let me say at the same time that there will be an increase in -- a significant increase -- we're expecting a significant increase in commission and fees of more than 5% in this 2018. Speaking about the cost of risk, obviously the cost of risk is the sum of 2 main components. One is the new default, so the request of coverage for the new default. On the other hand is the default that we have already in our balance sheet. So through this stronger activity and the first-time adoption, the second component is going to be close to 0. Not only the first 2 but in the coming years, our expectation is to see a very, very low contribution in terms of cost of risk coming from the bad loans unlikely-to-pay portfolio. At the same time, the expectation to have a very low cost of risk is due to the fact that today we are improving the level of inflows from bonds to default. So in the -- 3 years ago, we have a huge amount of new default. Today, quarter after quarter, it is declining. So the combination of a good level of coverage on the NPE that we have today and the very low level of new default is the reason because our expectation is to see a cost of risk at the level that we said in this year, around 60 basis points, and probably something less also this year and the future for BPER Group. The last point is disposal. Yes, now we have an important bucket of NPE with very high coverage. As we said, we work on an amount of EUR 6.4 billion. So at the moment, we have in mind to complete disposal around EUR 4.5 billion, so 3 through securitization and other using different single deals, single tickets or different portfolio. Let me say after this year 2018, after the 2 securitization, we will see where we are and also what could be the market for bad loans, and we can accelerate our activity. It depends on the condition on the market if there is opportunity. But let me say at the same time that we experimented this last year and also in the first Q 2018 a very high performance in the recovery activity of our company. So let me say probably this quarter, it was the best performance of our company in the activity of recovery. So this is another opportunity. What we think that is the combination of disposal recovery is the good approach to have a strong reduction in our NPE ratio, but at the same time, we see what will be the market in the near future. Roberto, for the last question?

[Roberto Ferrari, executive]

Yes. Hugo, actually, when we spoke about the 12% threshold, we were considering an extra provisioning or asset [ TA ] provisioning of EUR 1 billion. As Mr. Vandelli said, we increased the perimeter of the NPE to EUR 6.4 billion. And so we saw the opportunity to increase also the provisioning through asset [ TA ] above EUR 1.1 billion. So the difference, the EUR 100 million that we have higher provisioning actually makes the difference between 12% and 11.7% in terms of common equity Tier 1. This actual reduction number is EUR 1.113 billion. The provisioning for Banco di Sardegna actually was marginally lower than EUR 300 million, so very close to the amount that we gave to the market before. So actually, we -- I think it was [ 40 ]. The increase in coverage was important. The last question was on the impact on Carife. The rollout of IRB model was a little bit above EUR 100 million of risk-weighted asset, really.

[Operator]

Your next question comes from Andrea Vercellone with Exane BNP Paribas.

[Andrea Vercellone, analyst]

Three questions on my side. You mentioned before that you were looking to have a higher payout ratio in 2018 versus 2017. So I was just wondering, what has been the accrual for the dividend in Q1, i.e., is it just a product of last year or you've already made some different assumptions? Then 2 questions, a little bit provocative, on asset quality. The first one is on your guidance of cost of risk, 60 to 70 basis points for this year, which in my opinion doesn't make much sense considering you've had 22 basis points annualized in Q1. You managed to recover and to decrease NPEs without selling them, and coverage is now 57%. So what is going to happen in Q2, Q3, Q4 to significantly increase the cost of risk from the current level? And the second one -- a third one also an asset quality. I'll ask the same question that was asked before, just in a different way. I know that the majority of market participants want you to sell nonperforming loans. I'm not one of them. I'd rather you work them out yourself. So now you have marked to sale EUR 6.4 billion, but you're only planning to sell EUR 4.5 billion at the moment. So in theory, on the residual EUR 2 billion, you're going to have some write-backs when you are going to recover them. Is that the case? Am I reading it right? So if you are not going to sell them and you recover them, provisional release at some point.

[Alessandro Vandelli, executive]

Well, I'll take your second and third questions, and I'll ask Alessandro to say something about your first question. You are right when you say that probably it's difficult to say why the guidance is around the 60 basis points of cost of risk. I would be -- you might think from our side that we are out from some years with a very high level of cost of risk, and so this is only a cautious approach. Let me say I prefer -- let me say to surprise the market, at the end of the year, for example, 30, 40 basis points, then express that we are at 30 and then it could be something more. But there is no evidence to give 60 basis points. It's only a very cautious approach after so many years when we paid a lot of money for increasing the coverage. So we are satisfied with our level. Probably -- I think it is probably the highest in the Italian banking system because we are above 57%. So for this reason, I think that this is what we work so hard for 1 year for this important project. Now we are ready to take all the advantages of the situation. Yes, I think you are right also on the second point. So we have the perimeter of EUR 6.4 billion. We have plans to sell something between EUR 4 billion, EUR 5 billion. So in the last part, the level of the coverage is so high that with the internal workout, it is possible to have some benefits on our balance sheet, on our profit and loss, if we use the workout unit and not to sell on the market. This is an optionality. I think it's important to have more optionality. If there are opportunities in the market, we can accelerate and so to use the full amount of EUR 6.4 billion or use our workout unit that is performing quite well and to have some benefits for the P&L. Alessandro?

[Alessandro Simonazzi, executive]

So about the retained earnings of the first quarter and just because we had the room in terms of profits, we decided to maintain a level of payout in the first quarter, pro rata, that is more or less half of the last year. It's obvious that it's not -- we cannot forecast the same payout for each quarter of 2018. So what we did is to maintain the payout in the first quarter, more or less at the level of the half year of 2017. This means that in terms of retained earnings, we use EUR 220 million, more or less, compared with the profit of 2000 and...

[Roberto Ferrari, executive]

EUR 251 million.

[Alessandro Simonazzi, executive]

EUR 251 million.

[Andrea Vercellone, analyst]

Sorry, it's not clear to me. How much have you retained as dividends?

[Alessandro Simonazzi, executive]

So as we say, EUR 251 million is the net profit. So EUR 222 million is the retained earnings. And the other part is for the dividend.

[Operator]

Your next question is from Cerezo Ignacio with UBS.

[Ignacio Cerezo Olmos, analyst]

A couple of questions for me. First one is if you can break down the EUR 500 million AUM inflow in quarter between new money, deposits, [ cash for the ] assets, retail bonds, et cetera. And the second one is if you see any risk on the tax scheme actually not being extended after the summer, especially given political uncertainties.

[Alessandro Vandelli, executive]

So I will take the second question about tax. Obviously, there is a risk. You know that on the 6th of September, if I remember correctly, is the expiry date of the GACS. So there is a risk and partly because of what I understand is that the government had the opportunity to expand for 18 months the GACS and they used only 12 months. So I think that there is probably something that could be managed also in the situation. And so in my view, it's so important for many banks in Italy, and I hope that it's possible to see an intervention to extend the last 6 months of these rules already in the first idea of the extension of the GACS. So the risk is present. But there are many, many reasons because it is correct to think that it is possible to see a renewal of this opportunity in terms of GACS. I have to also answer your first question. In terms of net inflows of the asset funds under management in the first quarter, they were EUR 550 million, and they were mainly addressed to discretionary accounts, what's in Italy we called [ discrezionale patrimoniale ]. So the activity in the first quarter was particularly stronger in terms of rebalancing and remixing the assets under management and assets under custody. And the inflows were particularly strong even from not clients or on personal -- on the clients that we called personal, so the middle level or affluent, if you know better. And the inflows were particularly concentrated on discretionary accounts.

[Operator]

Your next question is from Riccardo Rovere with Mediobanca.

[Riccardo Rovere, analyst]

Just once again on the risk cost. It's still not clear to me, what is the impact of IFRS 9 on a risk cost that is technically going close to 0 in this quarter, 6 basis points technically? All of a sudden, we had completely different level of risk provisions in the past but also in the last quarter. The economy has not changed dramatically, but all of a sudden, the risk cost disappeared and we have IFRS 9. So I just wonder, what is the impact of the new accounting in this number, if any?

[Alessandro Vandelli, executive]

Well, if you look at the trend in the last 3, 4 years, you can find that the large part of what our provision was to increase the coverage. So we increased dramatically the coverage from 37% to 49% in some years. And this was the reason because we have so high level of cost of risk. Now with the 57% of coverage on all the [ A&P ] of our group, we are absolutely committed that we will see a strong reduction in cost of risk. Also because the inflows is going down. So it's not only the level of inflows but also the level of inflows that we have today, and at the same time, the coverage that we have in our balance sheet. If you look at some years ago, we have a very high default rate. In this situation, the combination of high default rates and new coverage, it means 160 basis points of cost of risk. Today, we have lower default rate. So we hope, this year, to go below 2% and at the same time 57% of coverage. For this reason, our expectation is to see, let me say, a very low cost of risk not only for this year 2018 but also in the coming years. And our expectation, as we said, was to be around 60 and probably something below 60 in the near future.

[Operator]

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

[Alessandro Vandelli, executive]

Okay. Thank you. So no closing remarks. Thank you very much for the attention and have a good evening and see you soon. Bye-bye. Thank you.