Bper Banca SpA

MIL:BPE

Earnings Call Transcript 2019-Q1

[Operator]

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the BPER First Quarter 2019 Consolidated Results Conference Call. [Operator Instructions]

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

[Alessandro Vandelli, executive]

Okay. Good evening, ladies and gentlemen. Thank you for joining the conference call today about our first quarter 2019 results. This is Alessandro Vandelli, Chief Executive, and I'm here with Roberto Ferrari, CFO; Alessandro Simonazzi, Head of Planning and Control; and Gilberto Borghi, Investor Relations Manager. As introduction to this conference call, I'd like to point out the main points, trying to keep my comments as short as they can in order to leave you enough time for Q&A session.

Please go to the executive summary of the presentation on Page 4, which is available on our website. After a very intensive first part of the year characterized by the announcement of the agreements related to [indiscernible] you all know about, we're focusing now on ordinary activity of the bank and the Q1 consolidated results.

And at the beginning of this presentation, I'd like to bring your attention 4 key points. First, profitability. Q1 closed with a satisfactory net profit of EUR 48 million after having charge a one-off cost of EUR 13.3 million related to the write-off of the contribution to the voluntary scheme of the Interbank Deposit Protection Fund for the intervention to support Banca Carige and the ordinary contribution to the Single Resolution Fund for EUR 23.2 million.

I want to underline that Q1 figures are not comparable to Q1 2018 ones, which was affected, as you maybe remember, by the non-Italian realized savings on bonds and the first time adoption of IFRS 9 accounting principle. Nevertheless, I'd like to highlight the resiliency of ordinary NOI, which showed the best quarterly result of the last 4, excluding the IFRS 9 and IFRS 16 effects, mainly due to a better contribution of commercial activity and a lower average stock of unreported [indiscernible]. Q1 net commissions were supported even though not comparable mainly due to the Q1 2018 when we recorded higher upfront fees and some one-off fee nor to the Q4 2018 which was impacted by the usual seasonality.

Cost of credit was relatively low at 61 bps, in line with our expectations. Operating costs are under control, and we expect some benefits already by the end of this year from the implementation of the actions included in the new Business Plan 2019-2021, with the goal to reduce the cost-to-income ratio below 59% into year 5.

Second key point, capital. We have shown to be able to manage capital in a very effective way, and our capital position continues to be very solid. Our CET1 ratio fully phased at the end of Q1 is at 12.24%, up by around 30 bps in the quarter from 11.95% at the end of the last year, so not only capital resiliency but ability to increase in not-too-easy environment.

The third key point is asset quality. After impressive achievements of the last capital year, it should be well known by all reasons. I'd like to underline that we confirm our target to be at 11.5% area in terms of NPE gross ratio by the end of this year after the completion of the transaction with Unipol Group. In the meantime, we keep processing on the NPE management showing a decrease of the NPE stock below EUR 7 billion, the levels we had 7 years ago. We are working on different projects in order to accelerate as much as we can with the decrease of the stock, and we are confident to be able to deliver successfully as our track record clearly shows.

Other policy news. The default rate came at 1.6% annualized compared to 1.9% in 2018, and above same percent only 3 years ago. It means that all the hard work we have done on the performing book is generating the expected positive results. The Texas ratio went down a bit to 83.6% from 85% in 2018 and coverage are still at high levels.

Last key point, business. Even though customer loan stock is slightly down from the peak at the end of the last year, we recorded a positive development of commercial activity in Q1, with the new production of mortgages up by 13.1% versus Q1 2018, and the stock increased by 1.3% versus December '18. It is too early to say with the slowdown we can't have the confidence of lower GDP estimate, but for what we see now, it is not in the mandate. Total funding grew again in Q1, and now it amounts to EUR 93.3 billion, including the Bancassurance segment, which highlighted significant increase in volume, plus 3.9% since December '18.

Furthermore, the activities for the implementation of the extraordinary transactions, already announced at the beginning of the year, continues as scheduled regarding the acquisition of the minority stake of Banco di Sardegna, the acquisition of 100% of Unipol Banca and the disposal of about EUR 1 billion of bad loans to UnipolRec, and finally the acquisition of the additional stake in Arca Holding. In addition, some of the actions scheduled in the new Business Plan 2019-2021 are already in advanced stage of execution.

Now into the analysis of the Q1 figures starting from the balance sheet. We can move onto Page 6. Here, we can appreciate the growth of the total funding at EUR 93.3 billion in Q1 compared to EUR 91.3 billion at the end of 2018, up by EUR 1.9 billion or 2.2%. We recorded an increase since the end of 2018, both in direct funding now at EUR 50.6 billion and in indirect and Bancassurance segments reaching EUR 42.6 billion. We continue to increase the assets under management in Bancassurance sector, which now accounts well above 45% of the total, in line with the objective of our new Business Plan.

Let's go to Page 7. Here we can see more in detail the breakdown of the direct funding, which came at EUR 50.6 billion in Q1, up by 1.2% since December 2018. Direct funding is mostly based on customer deposits, which weighed for over 90% of the total. Customer funding comes at EUR 46.1 billion, showing a growth by 2.5% since December 2018, recording a further strong increase in current accounts and sight deposits by 2.6%, mainly due to a conservative approach of customers to financial investments in the current environment and the slight decrease of retail bonds and CDs.

Retail outstanding bonds are declining in Q1. We are at EUR 1.3 billion. Institutional funding dropped by 9.6% in December 2018 due to a decrease of repos by EUR 1.1 billion, partially offset by an increase of bonds due to the issue of a covered bond for EUR 0.6 billion in March '19. We do not have any wholesale bond maturities in 2019, and only EUR 0.3 billion on retail in the coming 3 quarters. It provides us a good degree of flexibility in this challenging environment. We are revisiting our funding plan included in our Business Plan 2019-2021, in light of the announcement of the TLTRO by the -- III by the ECB, waiting for final details by the regulator. We think that it would be an opportunity to further reduce our cost of funding.

Page 8. As you can see, we recorded a positive trend in the stock, up by 3.4% since the end of the last year, mainly due to the increase in life insurance products by plus 3.9% since December 2018 and the positive market effect and assets under management. Bancassurance segment in Q1 reached the level of about EUR 5.2 billion. This is one of the sector we are investing a lot, and we see we may have great opportunity to exploit there.

Our perception is that customers are more and more sensitive to protection products, especially in this uncertain financial market scenario. I'd like to underline that a testimony of what I said before about the pressure for protection products by our customers, we have been able to place around EUR 270 million of life insurance products, which represents about 65% of what we placed in the whole 2018. This should be supportive for commissions in the coming quarters.

Moving on to Page 9, we see the trend of customer loans. We recorded a decrease both in net and gross loans, respectively, minus 1.1% and minus 1.2% year-to-date that we can consider seasonal after the peak of the end of the last year [indiscernible] and weighed better than -- of what we saw in Q1 2018. Net mortgages stock is up by 1.3% in Q1, showing the ability to be supportive on commercial business despite the expected growth in the economic conditions. Also the introduction of mortgages showed a very positive performance, up by 13.1% compared to Q1 2018.

Residential mortgages new production is very positive, up by 37.8% year-on-year. Derisking process is still going on, as we would see in the next page. Here, I just like to underline that the good quality of the performing loans book is still confirmed with the growth of the best rating classes to 60.5% as you can see in the right box of this slide. So overall, we recorded positive signals coming from credit demand in the quarter, even though it's too early to say if it would be sustainable in the coming quarters given the continuous downward revision of the economic growth for 2019.

Let's turn to Page 10. What are the main messages on -- of this slide? First, gross NPE decreased below the threshold of EUR 7 billion in Q1, the lowest level since the beginning of 2012, and that figure is now not far from EUR 3 billion. Gross and net NPE ratios are broadly stable, respectively, at 13.8% and 6.8% compared to the end of 2018. NPE and bad loans coverage are still high at 54.6% and 67.1%, respectively. As you all know, we are committed to improve further on asset quality as we planned in our new Business Plan 2019-2021. We can confirm our Business Plan gross NPE target of 11.5% area at the end of this year, but we can anticipate that we are working hard on a couple of projects with the goal of trying to further accelerate the achievement of the 2021 target of below 9%. We are confident to be able to deliver successfully as the track record clearly shows.

Moving on to Page 11. We can appreciate the significant improvement of annualized default rate in Q1 at 1.6% compared to 1.9% at the end of 2018 and more than half compared to 2016. Bad loans recovery rate annualized is 6.3% compared to 5.3% in 2018, showing a very positive long-term trend, demonstrating that our servicing platform, BPER Credit Management, is very efficient machine, and it is doing an excellent job in playing an important role within our overall NPE strategy.

Page 12, the securities portfolio slightly increased in Q1 2019 versus Q4 2018 by EUR 0.2 billion or flat 1.3% in December 2018. Stock on Italian govies is broadly stable as weighed on total assets 7.5% currently to our conservative attitude about the overall exposure to the domestic risk, almost half in comparison to 2014. Italian govies account for 30.8% of the securities portfolio, with a duration of 3.9 years. The duration of the total portfolio is 2.6 years.

Now we can move on profit and loss figures on Page 14. Here the only comment that is worth noting is about the quality of the profit. As you know, Q1 figure are not comparable to Q1 2018 ones, which is affected by the nonrecurring realized gains on bond and the first time adoption of the IFRS 9 accounting principle. Net profit came at exactly EUR 48 million after having charged the write-off of the contribution to the voluntary scheme of the internal deposit protection fund (sic) [ Interbank Deposit Protection Fund ] for the intervention to support Banca Carige of EUR 13.3 million and the ordinary contribution to the European Single Resolution Fund for 2019 of EUR 23.2 million.

Excluding these factors, the profit before taxes would be at EUR 100 million, which could be considerate in the result. To have a better understanding of the growth trend, I think it is better to go through the single items of the profit and loss, starting from the net interest income on the next page, 15.

In the comparison with Q1 2018, NII dropped off about EUR 20 million, but this difference becomes only EUR 6.7 million excluding the IFRS 9 and IFRS 16 effects, what we call in favor of simplicity ordinary NII. And in fact, more important in my opinion, if we look at the ordinary NII trend as it showed in the light blue line in the left-side box, Q1 2019 trends higher than the Q4, even considering that in Q1 there are 2 days less than in Q4 2018. And it is also higher than Q3 and Q2. This is mainly due to the slightly positive contribution of the commercial spread and the benefit attributable to the lower average stock of deposits in ECB at minus 40 bps. Looking ahead, the ordinary NII should benefit from the expected increase of volumes in the coming quarters as well as a slight improvement of spread, held by the pricing reaction still in place.

On Page 16, we can appreciate the net commission trend and the breakdown. Q1 '19 still shows a reduction year-on-year, mainly due to the lower contribution of upfront fees of assets under management and fees related to transition of business we should recover in the coming quarters. What we can notice is the very positive performance of Bancassurance fees, up by 24.4% year-on-year, and the positive support of assets under management [indiscernible]. Taking into consideration these elements, the level of net commissions should be considered very positive, better than in Q2 and Q3 2018, but closely comparison with Q4 '18 subject to seasonality.

On Page 17. Trading income was positive at EUR 22.1 million. Also, in this case, not comparable with neither Q1 '18 nor in Q4 '18. So what we know and is well explained by the call outs in the right side box of this slide. It must be said that this result includes a one-off related to the full write-down of the contribution to the voluntary scheme of the Interbank Deposit Protection Fund for the intervention to support Banca Carige of EUR 13.3 million.

Moving forward on Page 18. Important we have to highlight the introduction of IFRS 16, new accounting principle, staffing and admin expense and D&A. We have a [ very ] margin and overall net effect. Operating costs are up by 2% year-on-year. The presence of the stability of the sum of admin expense, D&A, the trend of operating costs is mainly driven by staff cost affected by the inflation and the higher provisioning on the variable part of the salary.

As you know, operating costs are one of the main focus of our new Business Plan 2019-2021, with a target of cost-to-income ratio below 59%. The plan includes a strong improvement, both of staff cost according to the [ portion of the ] plan that we already announced, and of admin expenses, of which some benefits are also expected by the end of this year, given that some actions have already executed. As for the plan for the closure of 48 branches at the end of March '19, out of 240 provided in the business plan.

On Page 19, loan loss provisions came at EUR 72.5 million, in line with the last 2 quarters as a confirmation of the expected trend for 2019. We can confirm the target for this year conservatively between 60 bps and 70 bps.

About liquidity, on Page 21. Our liquidity position is solid, thanks to the growth of the total eligible asset now at EUR 19.2 billion, fueled by EUR 0.5 billion versus the end of 2018, along with a bucket of unencumbered eligible assets of EUR 7.5 billion, and an extra liquidity of EUR 0.9 billion made by deposits with ECB. Both LCR and NSFR ratios stand well above 100%.

On Page 22, you can see our very solid capital position with a common equity 1 fully phased at 12.24%, up by 29 basis points compared with 11.95% at the end of 2018. I think this is a remarkable result in -- particularly in line of the challenging economic and market environment. It's a demonstration of our ability in capital management and of the greater patience we put on the solidity of our group. The main positive effects came from retained earnings, which includes the fourth quarter dividends, increase of fair equity value, other [indiscernible] income of service and lower deduction and reductions of RWA.

Now in conclusion, let me highlight directly the key final messages on Page 24. The main messages of the quarter I'd like to highlight are first on capital. In a very challenging economic and financial environment, we have been able to improve our already strong capital position with a common equity 1 fully phased growth at 12.24%. This is enforced by very good liquidity situation and a very low leverage. In a few words, we are very resilient and committed to obtaining a solid capital base.

Second, on asset quality. We are [ clearly doing ] well, and the stock is now below the threshold of the EUR 7 billion, the lowest level in the last 7 years. As you know, we are targeting to reach aggressive NPE ratio level around 11.5% area by the end of 2019, after the completion of the acquisition of Unipol Banca and the disposal of about EUR 1 billion of bad loans to UnipolRec.

Third, on profitability. All these achievements came along with a good profitability trend. As we saw during the presentation, ordinary NII trend is positive, commission are supportive, and we are waiting to get some benefits on the cost side by the business plan actions. Cost of risk remain lower -- remains low. Then finally, we maintained a strong commitment to the 2 extraordinary transactions already announced in the recent months, along with the action, including the new Business Plan 2019-2021, some of which already in advanced stage of execution. So overall, a satisfactory situation as a good starting point for the rest of the year.

Thank you very much, all, for your time and attention. Now we are going to start the Q&A session and take your questions. So thank you very much.

[Operator]

[Operator Instructions] The first question comes from Thomas Dewasmes with Goldman Sachs.

[Thomas Dewasmes, analyst]

I have 2 questions, please, on capital. The first one is, is the CET1 fully loaded presented on the presentation pro forma for any future DTA absorption? If which, what would be the amounts, please? And the second question is, could you please give us the future impacts of headwinds on capital for 2019 and going forward?

[Alessandro Vandelli, executive]

Sorry, could you repeat your second question, please, for a better comprehension? Thank you very much.

[Thomas Dewasmes, analyst]

Yes. I was asking if you could provide us with the detailed headwinds for capital for 2019 and after this.

[Alessandro Vandelli, executive]

Okay. What I -- so I will take your second question about the evolution and [ speak directly to the ] about the claim on the common equity 1 in the coming months by the end of the year. Let's say, first of all, that the improvement in the Q1 now is, in our view, absolutely important to face the extraordinary transaction in the second part of the year. Our expectation is to close the year, as we've said, also viewing the presentation of differentiation, allowing the 11.5%, probably better than 11.5%. About the EBITDA, Roberto Ferrari, our CFO, can you please go ahead?

[Roberto Ferrari, executive]

Yes, we don't have any EBITDA on fiscal loss system. Fiscal losses amount to EUR 150 million we will recover in the future. We have EBITDA on the FTA. First was January 2018. That's -- the impact is around 40 basis points.

[Operator]

The next question is from Riccardo Rovere with Mediobanca.

[Riccardo Rovere, analyst]

Couple questions if I may. The first one is on credit losses. One of your competitors today stated that the credit losses in Q1 included some charges related to the macroeconomic -- to the update of macroeconomic parameters so basically a revision -- a downward revision of GDP and the effect under IFRS 9 gave them some extra millions of credit losses. I was wondering whether this is something that you have done, so including a weaker GDP forecast in your expected credit loss calculations. If any of this has not happened, do you think that should happen maybe first half? And eventually, how much could be the impact? And the second question is just a follow-up on the previous one. When, Roberto, you were saying 40 basis points. Does it mean that the fully loaded common equity Tier 1 ratio without this adjustment would actually read 11.8% instead of 12.24%? Do I get it right without any kind of adjustment?

[Alessandro Vandelli, executive]

Okay. Continue, Riccardo, for your questions -- on the second part of the question, Roberto?

[Roberto Ferrari, executive]

Yes, absolutely. Yes, without the adjustment, it would be around 11.88%.

[Alessandro Vandelli, executive]

Okay. About your first question and our -- the level of our position, what I can confirm that there is no new effect coming from the new estimate for the GDP. In this year, frankly speaking, is a little bit strange, the situation today because what we saw in the Q1 was one of the best default rate in the last 5, 6, 7 years because 1.6% for BPER starting from 7% in some years ago was a very positive achievement. So we -- also the trend of, for example, the level of loans portfolio or other elements in other activity, everything is -- isn't reflecting any deterioration in the macroeconomic environment. And this is the same also in the activity of provisions. So said this, I confirm there is nothing about the worsening in GDP. And obviously, we will be -- we update in the second Q 2019 all the elements for this positioning in our balance sheet.

[Operator]

The next question is from Christian Carrese with Intermonte.

[Christian Carrese, analyst]

I have 3 questions. The first one is on customer spread. In particular, I saw that the asset spread went up in the quarter. If you can elaborate a little bit on this item because if I look at customer loss breakdown in the Slide #9, I see that mortgage loss drove the only growth in the quarter. So I see that these loans are at lowest spread compared to other kind of loans. So if you can elaborate a little bit on the asset spread evolution. The second question is on MREL, if you can give us some idea of the potential impact from MREL. And what are your funding plan 2019, 2020? And finally, on tax rate, I saw the tax rate at around 19% in the quarter. I was supposed to see a lower tax rate this year. I have 16%. I don't know if you can give us an update on that.

[Alessandro Vandelli, executive]

Okay. Thank you very much, Christian for your questions. I take, first of all, the last question about tax rate. Yes, the level of tax rate is around 19% in Q1. But I do confirm that our expectation is to have, by the end of the year, a tax rate below 10%.

About the spread, before [ I ask ] Alessandro Simonazzi to give you some details on that, I would like to express, first of all, my positive evaluation on the trend of NII. The ordinary NII, if I recall, the NII is not affected by IFRS 9 and IFRS [ 15 ]. We saw this stability in the last 3, 4 quarters and there was an increase in the last 1 considering also the 2 days less in the Q1 2019. So this is important because that in the last 2, 3 years, every single quarter, there were some reduction. Now the stabilization -- the positive trend is, in my view, an important attribute, thinking about the evolution of the year. Alessandro, some comments also on this?

[Alessandro Simonazzi, executive]

First of all, on the commercial side, you'll see a good and solid trend coming from retail mortgages and client account. Retail mortgages, in particular -- the performance in terms of volumes of retail mortgages is particularly increasing in this quarter. And the second element is the increase -- is the decrease of -- the slight decrease of the cost of state funding because we have improved -- we have increased the amount of the sight deposit, so there is a mix effect in terms of funding there in favor of the cheaper terms of [ bank retail ]. The third element is a financial element. That's because we have reviewed the amount in ECB, and so we have taken advantage from the negative rate coming from ECB funding that was recovered in the quarter.

[Alessandro Vandelli, executive]

Okay, before I hand over to Roberto for some elements about the funding plan. Let me as well confirm about the MREL that we have a very good buffer on this. So this is important to manage carefully our action [ in this side ]. But Roberto, could you give some elements on -- now on the funding plan.

[Roberto Ferrari, executive]

On MREL, actually, we have a positive buffer. We said that also on the last conference, and we stick with the funding plan. So we will issue EUR 1.2 billion senior bond by the end of 2021, but there is no hurry at all. While on the funding plan on covered bonds, we will recalibrate the issuances. [ Actually one ], we will know the final terms of the new TLTRO. For sure, we will take the opportunity to reduce our cost of funding after redefining our issuances of covered bonds in the future, probably lower amount with longer duration.

[Alessandro Vandelli, executive]

Just in addition, Christian, you asked about the lower rate in terms of mortgages compared to the other loans. In this quarter, there was a reduction of PPI amount, and the increase of mortgages [ so declined 12 ] -- are very low. Our mortgages are lean in terms of interest rate.

[Operator]

The next question is from Hugo Cruz with KBW.

[Hugo Cruz, analyst]

Can you give us an update on timing for some of the, let's say, big projects that you have on your pipe? So the completion of the merger, the IRB extension to Bra, the -- any large NPL disposals, if you could, that is on timing, please?

[Alessandro Vandelli, executive]

Well, speaking about deposit, first of all, within that, the [ regulation ] announced at the beginning of the year that they can say that we completed all the application for both deposit on minorities stake Banco di Sardegna and also the acquisition of 100% of Unipol Banca. We hope to be able to complete all the activities in the third Q 2019. Obviously, not all the processes are under our control, but anyway, we have no element to say that is not possible to expect these objectives. About Bra, I do confirm that we have received the opportunity to use and turnover also Bra, so it is included in the RWA this quarter. So there is a positive effect on this side.

And the last important activity are on the NPE, and we have already completed the portfolio for disposal to Unipol Banca. There is a combination with the acquisition of Unipol Banca and the disposal to Unipol Banca our portfolio of EUR 1 billion. Our idea is to complete also the transaction in the third Q 2019. So this is the plan that we have in mind. And also to complete the merger of Unipol Banca and BPER Banca by the end of 2019. All these elements are in good track, only depends in the time line of the authorization by the ECB, but we are confident that it's possible to expect this time line.

[Hugo Cruz, analyst]

So just to clarify, so the CET1 ratio for this quarter includes Bra. What was the benefit?

[Alessandro Vandelli, executive]

Yes. The benefit coming from Bra is around 10, 11 basis points.

[Hugo Cruz, analyst]

Okay. All right. And I'm sorry, on the M&A, I wasn't -- I didn't understand very well. So you expect completion in Q2, but basically, you're only going to have the -- it is going to be, what, the current timing [ is what ] balance sheet [ then ] on Q3, but then you only have a P&L, the P&L kind of effect in Q4. Is that it?

[Alessandro Vandelli, executive]

Yes, yes. If I catch your question is the effect on Unipol Banca will be starting from the third Q 2019. Our expectation is also to manage the bad will in 4Q 2019, and it depends on the closing of the acquisition. I repeat, my personal idea is to close by the end of July all the activities, not the merger that we need more time for the large AP environment. But the acquisition, the completion also, the acquisition of minority stake in Banco di Sardegna, my objective is July. So the second half of 2019 will be included the figures coming from Unipol Banca.

[Operator]

The next question is from Andrea Vercellone with Exane.

[Andrea Vercellone, analyst]

Three questions. The first one is on personnel costs. I was wondering if your personnel costs already include an assumption as to what the salary increases may be given that the banking contract is under discussion. If so, if you can give us an idea of what level you have assumed. The second question is on NPE coverage. You stated in the business plan that you plan to further boost the NPE coverage going forward. Is it fair to say that the majority of the increase will happen this year given that you have, well, a one-off positive being the bad will into Unipol Banca? And finally on capital, I may be mistaken, but I seem to remember you had guided for a core Tier 1 ratio of 12.1% at the end of the year at the time of the business plan, whilst you said 11.5%. Obviously, all of it is pro forma for the M&A transactions. Can you just clarify this point because that's not what I understood at the time of the business plan.

[Alessandro Vandelli, executive]

Okay, Andrea, thank you very much for you questions. About the first point, the personnel costs, there is nothing about the potential increase coming from the discussion for the new agreement with the union about the salary. There are a more conservative approach about the variable part of the salary to better spread the impact on the different quarter. And for the [ industry ] we have a higher impact in Q1 2019.

About the NPE coverage, it is too early to say. But yes, I think that one of the opportunity is to use the bad will partially for some increase in the coverage ratio. And this is [ from Q1 ] and we are analyzing. I confirm that we want to complete our action on NPE to accelerate, if it's possible, the reduction of the NPE.

About the CET1, I said before above 11.5%, probably [ there was ] something about [ with the buckets ] one hand and that is something that I didn't take into consideration at same this level. It was the internal mode on the floor of the last quarter. It is not overly sure because we are waiting from ECB, and I'm not sure that we will have the indication before the end of 2019. Probably yes. If that would be yes, I confirm that we can reach the 12%, probably something more. This is only to be more cautious. Anyway, something between 11.5% and 12% is our estimate at this stage.

[Andrea Vercellone, analyst]

Is it then fair to say that at the moment you'll be granted the validation for the IRB model on large corporate, the benefit will be somewhere around 50 basis points whether it's this year or next year?

[Alessandro Vandelli, executive]

Well, what I can say that we have a very positive situation with ECB on the evolution of our model for this area, so we have positive [ achievement ]. So in the discussion with ECB, there were some important messages. Said this, I repeat, the problem is in the time in which we will have the confirmation by the ECB. What I can say that if there would be the validation of the internal model for large corporate, the expectation is to have something around 50 basis points probably as net effect considering that there are some other elements that would be -- will have an impact on the CET1 and on risk weighted asset. So in the end, our estimate is to have this benefit after the validation on internal model.

[Operator]

The next question is from Ignacio Cerezo with UBS.

[Ignacio Cerezo Olmos, analyst]

Sorry, for the basic question, but in order to have a full clarification of Slide 22 on the capital, if you can break down the 8 basis points -- well, 8 basis points of retained earnings but the 16 basis points from FVOCI reserves and others, and the 5 basis points of RWA reduction in the quarter between different items. Second question would be if you can give us any color basically on the performance of Unipol Banca in Q1, any color will be useful. And then third one is whether you are planning to move closer to the CET1 leverage in terms of the NPL ratio 9.5%, 10%. Most of your peers are showing increase of coverage or planning to do by the end of the year.

[Alessandro Vandelli, executive]

Well, about Unipol Banca, I -- what I can say that we will see the confirmation as a positive trend but is, from my side, I don't like to comment the results of a bank today under control with -- of another group. What I can say, that I -- the information is that there is a positive trend of the bank. I'll [ give ] the second probably, Roberto Ferrari.

[Roberto Ferrari, executive]

Can you repeat the first one on capital and asset, please?

[Ignacio Cerezo Olmos, analyst]

Yes. If you break down the 16 basis points and 5 basis points on Slide 22. Certainly I understood, for example, that you're incorporating some DTA [ obstruction ] in the capital. It is the first time I hear that, so I just wanted to confirm actually [ bringing down of the reception ] on the RWA reduction?

[Roberto Ferrari, executive]

No, the 16 basis points actually are mainly the fair value of the comprehensive income impact from bonds. We have an increase in reserve of around EUR 37 million, EUR 38 million net of fiscal impact, and we have around 5 basis points to lower deduction because we increased capital. You see that we increased capital, and so actually, we lowered reduction of DTA and participation. This is the reason why in the risk weighted asset reduction you should also consider that we have a negative impact from IFRS 16 -- IFRS 15. So a part of the impact, the positive impact that we have on CR Bra that reduced that before is compensated by a negative impact from the IFRS 16 implication.

[Alessandro Vandelli, executive]

And the last question was on NP...

[Ignacio Cerezo Olmos, analyst]

Yes, in terms of the NPL disposal you are considering with the coverage [ pickup ] you're going to be planning to do in -- at the end of the year using the bad will from Unipol. What kind of ballpark NPL ratio you're considering to get to -- from the 11.5%, 12% pro forma you have now? And are you planning to get closer to around 10% [ of the value as we show in these ] or even lower than that?

[Alessandro Vandelli, executive]

I can say, first of all, after the disposal of EUR 1 billion to Unipol Banca, [ the positive ] is 11.5%. We estimate that we need another disposal around EUR 2 billion of bad loans to grow around 9%. This is the final target. What I can say that this is the target, below 9% for 2021. We are working to understand it is possible to accelerate the processes. We are positive on this, and probably, at the end, on the second half of this year, we have a more clear view on this after the completion of the disposal to UnipolRec and after also the impact of bad deal and the potential extra coverage of [ strengths ] to this element. So what I can say probably in the 4Q 2019, we have a clear view also in the time line. What I can say, 11.5% this year, I hope that in 2020 we can accelerate to reach the level as we make it toward the last part of the business plan.

[Operator]

The next question is from Giovanni Razzoli with Equita.

[Giovanni Razzoli, analyst]

My question has been just answered. You think that you plan to anticipate the 9% that you target in 2020. Thank you. If I got correctly.

[Alessandro Vandelli, executive]

Yes, [ that is correct ], Giovanni.

[Operator]

The next question is a follow-up from Riccardo Rovere with Mediobanca.

[Riccardo Rovere, analyst]

Just again on the NP target. If I remember correctly, one of your previous calls, you stated that at the time of IFRS 9 first-time adoption, you mark to market EUR 6 billion, if I remember correctly, of bad loans or soured loans. All this, let's say, the disposals that you are planning -- that you have done and you are planning do not cover the EUR 6 billion. So I was wondering why do you see the need of an additional coverage when you -- when in a theoretical world you could -- should have maybe a couple of billions left that theoretically already mark to market. Does it mean that the mark to market of roughly 1 year ago is not the mark to market of today? I'm just a bit confused about this. If you can just clarify.

[Alessandro Vandelli, executive]

Well, going back to the beginning of 2018. [indiscernible] was EUR 6.4 billion, and we estimate a probability of disposal of EUR 4.5 billion. And our estimate was that, thanks to the asset provisioning, we were able to complete disposal not less than EUR 4.5 billion. At the end of this process, we have to work again for a new perimeter of disposal, and this will be what we are planning for the second half of this year. Now where we are, we have already completed roughly EUR 3 billion of disposal. After the EUR 1 billion with indirect, we reached which EUR 4 billion roughly of disposal of the EUR 4.5 billion. So the last part, there is something around [ EUR 4.7 billion ] of a receivable part of the original perimeter. So at the end, considering that our target is below 9% and we need to complete EUR 2 billion of the disposal at the end of the disposal period UnipolRec, we consider again a new perimeter. And what is important is that the starting point there is -- that there is an achievable part of the original asset provisioning. But we need something more, and one of the potential opportunity is to use partially the bad will coming from Unipol Banca. So we are working on this, but as it is probably on the 4Q of the year after the completion of the conversion with Unipol, we have a clear view of all the elements for the next step of the disposal.

[Operator]

The next question is a follow-up from Ignacio Cerezo.

[Ignacio Cerezo Olmos, analyst]

Just wanted further to ask if you can give us your view on the default rates throughout the year, 1.6% you have in Q1, if you're expecting that to go down further?

[Alessandro Vandelli, executive]

Well, first of all, 1.6% default rate is for us an important confirmation of the effectiveness of the action implementing in last 3 years on credit. So now absolutely, the performing book is absolutely different compared with the same performing book over 3 or 4 years ago, and we are really proud of the strong activity completed.

Now let's say that it's not simple to express the expectation in this situation where there is some changes in the environment. But what I can say that probably what is important that in the past there were some big ticket that were -- had a negative effect on default rate. We estimate that the large part of the big tickets are already on -- are likely to pay than those. My idea is thinking about, for example, the real estate and construction sector. For this reason, we are positive. I think it's difficult to say we -- I am satisfied for 1.6% also at the end of this year.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

[Alessandro Vandelli, executive]

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

[Operator]

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