Intesa Sanpaolo SpA

MIL:ISP

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2020 first quarter results hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Stefania, and I will be your coordinator for today's conference. [Operator Instructions] Today's conference is being recorded.

At this time, I would like to hand the call over to Mr. Carlo Messina. Sir, you may begin.

[Carlo Messina, executive]

Thank you. Good afternoon, ladies and gentlemen, and welcome to our first quarter results conference call. This is Carlo Messina, Chief Executive. Normally, I would be sitting in the same room with my colleagues, Stefano Del Punta, CFO; and Marco Delfrate and Andrea Tamagnini, Investor Relations Officer. Today, we are doing this virtually.

Before I get into our results, I want to express my sorrow for everyone suffering because of the virus, which has also hit some ISP colleagues, and I feel especially close to their families. We are all personally touched by this pandemic in so many ways, and I hope you and your families are all safe.

Let me add that I'm extremely proud of our quick response to the COVID-19 emergency. We immediately started an impressive set of concrete actions to care for our people and our customers, supporting families and companies and ensuring business continuity. We already donated more than EUR 100 million for the sanitary emergency and will provide additional EUR 125 million from our Fund for Impact to reduce the socioeconomic distress caused by COVID-19.

We are entering this extraordinary scenario as a very solid and efficient bank. We delivered an excellent first quarter, fully in line with our pre-COVID outlook. In fact, we achieved the best Q1 since 2008 for net income, around EUR 1.4 billion when excluding provisions for future COVID impact. It was also the best-ever Q1 for operating margin.

At the same time, while increasing profitability and efficiency, we further strengthened our balance sheet, improving our rock-solid capital position and deleveraging NPLs to the lowest level since 2009. So it is safe to say that we are well positioned to continue delivering best-in-class profitability and to maintain a solid capital position, and to potentially distribute the suspended 2019 dividend when the time comes and subject to the ECB recommendation, and to deliver a payout ratio of 75% for 2020 and 70% for 2021.

And I believe that in the current scenario, the combination with UBI Banca can create even more benefits for all stakeholders. In fact, all the banks that can leverage strong economies of scale, high efficiency, a solid capital position and high asset quality will successfully navigate the times ahead. ISP and UBI have similar business models and share similar corporate cultures and values. Together, we are stronger. And together, we have a great potential for growth.

Let's now go through the presentation, and at the end, I will be glad to take your questions. Let's now turn now to Slide 3. Thanks to our solid fundamentals built over time, we are fully equipped for a very challenging environment. Our fully loaded common equity ratio is 14.5%, equal to around EUR 17 billion of excess capital. We have already deleveraged more than EUR 35 billion of NPLs at no cost to shareholders.

We have distinctive internal capabilities for proactive credit management, coupled with our strategic partnership with leading industrial players. We can rely on EUR 1.5 billion of additional buffers for future COVID impact. And we successfully evolved towards a light distribution model with 1,000 branches rationalized since 2018 and significant room for further branch reduction.

We have a strong digital value proposition, very much appreciated by our customers, and we already have around 10 million multichannel clients and 6 million using our app, recognized as one of the best in Europe. And we implemented a complete set of responses to mitigate the COVID impact on ISP people and clients and to support the economy and society.

Slide #4. Looking at Q1, we delivered excellent performance, EUR 1.2 billion of reported net income, EUR 1.4 billion when excluding the provisions for future COVID impacts. EUR 2.7 billion operating margin, the best Q1 ever and the best Q1 since 2007 for revenues. Our net interest income is resilient and benefiting from increasing and geographically diversified lending volumes.

We delivered significant growth in revenues from financial market activities, which naturally hedge the impact of market volatility on our fee-based businesses, coupled with solid growth in insurance, driven by the property and casualty business. The positive trend is also continuing in April.

In Q1, we recorded a EUR 6 billion increase in household sight deposits, EUR 18 billion in the past 12 months, which will fuel our Wealth Management engine in the coming quarters. With respect to assets under management, even in a very difficult quarter, we had positive inflows of EUR 500 million and the positive trend is continuing in April with other positive inflows.

We confirm our high strategic flexibility in reducing costs that are a point of strength for Intesa Sanpaolo. With operating costs down 2.7%, taking cost income to 44%, the best in Europe. We further deleveraged EUR 1.3 billion of NPL with the lowest ever gross NPL inflow. Overall, our performance in Q1 was fully in line with our 2020 pre-COVID targets.

More than ever, I want to thank all Intesa Sanpaolo people for their hard work in helping achieve these excellent results in this very difficult environment.

Slide #5. The Italian economy is resilient and can rely on strong fundamentals and strong government intervention. In particular, the wealth of Italian households stands at EUR 10.7 trillion and the amount of debt held by Italian families remains very low. Italian companies have stronger financial structure than pre-2008 crisis levels. They are more profitable and better capitalized, and the export-oriented firms have become powerhouses over the past few years.

The banking system is, by far, stronger than precrisis level with higher capital and less NPL stock. The Italian the government is providing extensive support. In Q1, the Q-on-Q growth in Italian GDP was lower compared to other European countries despite a longer lockdown period.

Slide #6. For all these reason, I just mentioned, Intesa Sanpaolo is well equipped to face the crisis. We have solid fundamentals and we are very well positioned to continue delivering best-in-class profitability with minimum EUR 3 billion net income for 2020 assuming a potential increase in cost of risk up to 90 basis points. And minimum EUR 3.5 billion net income for 2021, assuming a potential increase in cost of risk up to 70 basis points.

Maintain a solid capital position with fully loaded common equity ratio above 13%, that is 12% fully phased in, in line with 2018/2021 business plan estimates, and then deliver a payout ratio of 75% in 2020 and a payout ratio of 70% in 2021. And we have already deducted 75% of Q1 net income from capital ratios.

We believe that the rationale behind our combination with UBI Banca is even stronger in COVID-19 prospects, and that significant value creation can be achieved even if we acquire just 50% plus 1 share. We have always demonstrated our ability to fully deliver on our promises, activating all available managerial levers, and this is my personal commitment.

Slide #8. In recent years, we have more than halved the NPL stock while increasing the coverage ratio. We have increased our rock-solid capital base with common equity ratio up 1.5 percentage points in 2015. We achieved this through internal capital management and while also paying EUR 13.4 billion in cash dividends over the past 6 years, and we have continued to reduce cost/income ratio.

Slide #9. Now we are far better equipped than our peers to tackle the new environment. We have one of the highest capital buffer in Europe, and we have a best-in-class risk profile and we are the cost/income leader in Europe.

Slide #10. We are also entering this extraordinary environment at full strength, with the highest-ever Q1 operating margin and the best Q1 net income since 2008 when excluding COVID provision. And we can count on additional buffers of EUR 1.5 billion for future COVID impact.

Slide #11. Leveraging our top-performing delivery machine, we immediately responded to the COVID emergency with a complete set of actions to care for our people and customers, supporting the real economy and society and ensuring business continuity.

Slide #12. As a key priority, we immediately ensured safe working conditions for all our people and business continuity for our customers through a large and effective set of actions, including: quick and efficient scale-up of remote working, with 95% of people in central function working from home and 95% of branches opened during the lockdown, back to 100% since yesterday, with revised opening hours and employees working on a rotation scheme; ensure then business continuity via the online branch, Internet banking app and ATM cash machines. We also extended free ISP health insurance coverage to include COVID.

Slide #13. We doubled down on our long-standing commitment to support society and the real economy, helping families and organization impacted by the COVID emergency. And I'm very proud that our bank, our employees and our management Board donated more than EUR 100 million to help fight the COVID sanitary emergency. Moreover, we donated EUR 5 million to Ricominciamo Insieme project collaborating with the Diocese of Bergamo to financially and socially support families. And we are also activating -- and we are also sustaining families and companies with lending support. We made available EUR 50 billion in new credit in order to sustain companies and protect jobs.

We were the first bank in Italy to suspend mortgage and loan installments for family and company, and we did it long before the regulation came into force. At the end of April, we had already received some 430,000 mortgage and loan suspensions for around EUR 38 billion of value. Out of which, around EUR 24 billion for corporate and SMEs, and EUR 13 billion for [ individual ] clients.

We were the first bank in Italy to sign the collaboration protocol with SACE to provide support to large corporate and SMEs under the liquidity decree. And at the end of April, we had already received around 100,000 requests from SMEs for loans backed by a state guarantee for around EUR 3 billion.

Finally, EUR 125 million from our Fund for Impact will be used to reduce the socioeconomic distress caused by COVID-19. So we are convinced that after the sanitary emergency, and we donated EUR 100 million, we are now in an emergency from a socioeconomic point of view and want to support this in our country with another EUR 125 million. The most important support coming from private investors in Europe.

In this extraordinary situation, we were able to guarantee -- on Slide 14, we guarantee business continuity, thanks to our strong digital capabilities. Specifically, we have around 10 million multichannel clients, a 0.5 million increase in Q1 versus the last quarter of 2019, and 6 million of them are now using our app. We almost doubled digital sales in Q1 versus last year's quarterly average. And it is worth noting that these numbers reflect just 1 full month of the COVID impact.

Slide #15. We are fully aware that the COVID emergency will shape new trends, and we are ready to leverage our competitive advantages. We are ready to benefit from the growing demand for health, wealth and business protection by leveraging our leading position in insurance as well in Wealth Management. And in a new risk environment, we will take full benefit from our strong internal capabilities for proactive credit management and from our strategic partnership with leading industrial players for the late-stage.

The COVID emergency is rapidly shifting customer behaviors towards digital channels. And we are well -- very well positioned to serve them, thanks to our best-in-class IT infrastructure and digital channel value proposition. At the same time, this emergency is pushing towards a change in the approach to working. And we are fully equipped to accelerate the digitalization of our employees' activities as already demonstrated by the number of people smart working. Finally, in the new environment, society will need significant support, and we will play our role beyond providing financial banking and confirming our leadership in ESG.

Slide #16. Italian GDP will be significantly hit, as in all Europe, by the COVID emergency, and it is forecast to decrease around 8% to 10.5% this year. In 2021, we expect a rebound of 4.5% to 7%, thanks to the solid fundamentals of the country and government packages to support business and households. This means a GDP loss of around 4% in 2 years.

Let's now turn to Slide 18 to enter the analysis of the Q1 results. Q1 was affected by the COVID outbreak, and Italy experienced a strong drop in GDP and market volatility reached all-time highs, with a large drop in stock and bond performance. The 10-year BTP-Bund spread has widened. And in this difficult environment, we delivered excellent results, and we are fully equipped to successfully navigate the challenges ahead.

Slide #19. On this slide, you can see the highlights of our strong Q1 performance, but let me take you through the following pages to give you some color. Slide 20 -- in Q1, we continued to improve across all key indicators. In particular, net income was 30% higher than last year when excluding COVID provision, and we have deleveraged more than EUR 6 billion of NPL on a yearly basis. And our common equity ratio improved by 1 percentage point on a yearly basis after deducting EUR 900 million for accrued dividend.

Our excellent performance allow us to create sustainable benefits for all our stakeholders. In particular, in Q1, families and businesses received nearly EUR 17 billion in new medium/long-term lending, out of which EUR 14 billion in Italy. And we helped more than 3,000 companies to get back on track preserving around 15,000 jobs.

Slide 22. Our strength allow us to contribute to the society we belong to. ISP is strongly committed to its role as an engine for sustainable and inclusive growth. On top of COVID-specific actions, which I described before, Intesa Sanpaolo is also ready to contribute with loans for EUR 50 billion to Europe's green deal.

Slide 23. In this slide that you know well, you can see just a few examples of our work to support the Italian society, and in particular, the acceleration of our support during the COVID emergency. And I want to highlight that since 2018, we have already delivered almost 10 million meals to people in need.

Slide 24. As a result, we are the only Italian bank rated at the top of all the main sustainability rankings, and we are very proud of these achievements.

Slide 25. Despite a challenging environment in Q1, with negative market performance in all asset class and the country in lockdown in March, we delivered growth in profitability driven by an increase in revenues and a reduction in costs. Net interest income and commissions have been resilient despite lower interest rates and COVID impact. Profit on tradings more than doubled compared to last year, and April has been another good month for realizing trading profit?

Insurance income grew about 7%, driven by solid growth in nonmotor P&C revenues that more than doubled when including the component booked in commissions. The positive trend continued again also in April. Operating income was up double digit. We continue to be very effective at managing costs, with personnel expenses down 2.3% and administrative expense is down around 6%.

Depreciation is up slightly as we keep investing for growth. Operating margin was up 27%. Cost of risk, excluding the COVID provision, is at 40 basis points. Net income is at EUR 1.4 million when excluding the provision for future COVID impact and reaches EUR 1.6 billion when excluding costs concerning the banking industry, which largely consists of the full year charges for the resolution fund. Considering the Nexi capital gain, we have already achieved more than 50% of 2019 net income.

Slide 26. In this slide, you can see that on a quarterly basis, net interest income has been stable, increasing by 0.8% when considering the different number of days in the quarter, thanks to positive dynamics on volumes. On a yearly basis, net interest income would have increased slightly when excluding the impact of accelerating NPL deleveraging of financial components.

Net interest income was also affected by more than EUR 18 billion yearly growth in household sight deposits that impacts net interest income in the short-term but boosts our Wealth Management engine for the future. We will continue to work hard to improve the commercial component while continuing to manage our revenues in an integrated manner and with the aim of delivering a positive EBA strategy. In the coming quarters, net interest income will also benefit both from the increase in loan volumes registered in Q1.

Slide #27. Assets under management decreased by around EUR 20 billion in Q1 due to negative market performance. But in the same period, assets under management net inflow were positive for EUR 0.5 billion despite the outflows in March. And the net inflows turned positive again in April. So April, again, positive net inflows.

In Q1, family sight deposits increased by EUR 6.3 billion, and these so-called sleepy money collected so far around EUR 80 billion in the past few years, together with the EUR 152 billion in asset under administration, will prove to be the fuel for our Wealth Management engine.

Slide 28. We continue to be very effective at managing costs. The main sources of savings were headcount reduction, real estate optimization, legal entities reduction and the decrease in other administrative costs. We reduced headcount by more than 2,800 on a yearly basis, with room for further cost reduction. We have already agreed and fully provisioned more than 2,000 voluntary exit. On top of this, we have received 1,000 additional application to be reviewed.

Further branch reduction in the range of at least 1,000 on top of the 1,100 embedded in the business plan and almost already done are expected in light of the Banca 5 network scale up. Thanks to the strategic partnership with SisalPay and in light of the change in customer behavior.

Slide 29. We are proud to have a best-in-class cost/income ratio, and this chart illustrates our leading position in Europe, #1 in Europe.

Slide #30. NPL stock has continued to decline sharply with 18 quarters of continuous deleveraging. We have already achieved 88% of our pre-COVID 2021 business plan NPL deleveraging target. We deleveraged EUR 1.3 billion in Q1. And the gross NPL ratio is down by more than 10 percentage points since the peak of September 2015 to 7.1%, equivalent to about 6% according to EBA criteria, and the net NPL ratio decreased to 3.5%.

We recorded the lowest-ever Q1 gross NPL inflow. ISP has been able to deliver this impressive deleveraging at no cost to shareholders. The bottom line is this, we entered the potential COVID-related negative credit cycle in the most favorable possible condition.

Slide #32 -- 31, sorry. Our capital buffer versus regulatory requirement is roughly 600 basis points, well above our peers. And these figures also include a deduction of the EUR 900 million for the 2020 dividends accrued in this quarter. Our fully phased-in common equity ratio is at 13.5%.

Slide 32. Our banking class capital buffer versus regulatory requirement has been further strengthened in Q1.

Slide #33. When it comes to capital strength, ISP continues to be a European leader. In addition, we continue to apply a deliberate strategy of low leverage with a leverage ratio of 6.6%, the best in Europe.

Slide 34. We have a best-in-class risk profile in terms of the ratio of capital to financial illiquid assets. And by this, I'm referring to net NPL, Level 2 and Level 3 assets. ISP also enjoys a strong liquidity position, with both the liquidity coverage ratio and the net stable funding ratio above 100% with around EUR 200 billion in total liquid assets.

This situation, strong capital position, so rock-solid capital position, sustainable profitability and the best business model are the reason why in all the EBA stress test, we resulted as the clear winner. And we start also this situation of crisis as the potential winner also in this situation, rock-solid capital position and resilient profitability deriving from a clear and strong business model.

Now let me give you an update on how the combination with UBI Banca is proceeding. So let's move to Slide 36. When we announced our offer, we explained the solid rationale underlying the combination with UBI Banca. There are clear benefits for all stakeholders. The rationale is even more compelling now as we all face the challenges of the COVID recovery.

At a time when strategic options are very limited, UBI Banca shareholders can choose to join forces with a strong player in Italy and in Europe, a group that actively works to benefit its people, customers, shareholders and the broader community. And we are determined to move it forward and we remain absolutely convinced that this is the best option for UBI Banca shareholders and for Intesa Sanpaolo shareholders.

Slide #37. As you can see from this slide, we are fully on track to close the transaction by August.

Slide #38. The key message of this slide is that there is no change to the transaction terms. The exchange rates -- the exchange ratio remains 1.7 ISP shares for each UBI Banca share despite the 2019 dividend suspension. This is a 28% premium for UBI shareholders with an increase of 5.5 percentage points versus the premium announced in February.

We will go ahead with the operation even if acceptancy is just 50% plus 1 share. We can achieve the vast majority of the identified synergies and the risk of UBI Banca's balance sheet at no cost to shareholders even under these conditions. Following the completion of the deal, the remaining minority shareholders will not benefit from the premium which is incorporated in UBI's shares price today.

Slide #39. In simple terms, this deal makes a lot of sense, especially now. In fact, only banks that can leverage strong economies of scale, high-efficiency, solid capital position and high asset quality will be able to successfully navigate the times ahead. In particular, we will generate significant synergies with no social costs.

Negative goodwill from the transaction equal to EUR 3.9 billion will fully cover integration charges and additional loan loss provisions, meaning we can accelerate UBI's NPL deleveraging. As always, we do this only at no cost to shareholders.

We will pay high dividends with a payout ratio of 75% in 2020 and 70% in 2021. Our solid capital position will remain with a common equity tier ratio above 13% and the net income will be about EUR 50 billion -- EUR 5 billion, sorry, starting in 2022. So EUR 5 billion, '22. Our proven track record, emerging integrations shows that execution risk is very low.

Let me now turn to the next slide, where I would like to take the momentum to review how we will provide strong support to UBI Banca's reference territories. ISP has always dedicated a great attention to the local communities. We are the [Foreign Language]. UBI Banca's people, customers, shareholders and communities can expect us to bring the same attention to the territories that matter the most to them.

Let me now just a few of -- let me name just a few of concrete commitments to UBI Banca's reference people, clients and territories. We will create 4 new regional departments in Bergamo, Brescia, Cuneo and Bari with high lending capacity and management autonomy, and the heads of the such new departments will be appointed from among UBI Banca people.

We will boost lending by an additional EUR 10 billion per year in the next 3-year period, with no reduction in credit granted to mutual customers. UBI Banca's own social initiatives will be doubled, and UBI Banca's people will be able to remain where they are without any social impact. And UBI's also hire 2,500 young people, half of them from the territories of Bergamo, Brescia, Pavia, Cuneo and Southern Italy. The combination of Intesa Sanpaolo and UBI is a project that strengthens the 2 banks' local roots while offering benefits for our communities and all stakeholders.

In conclusion, to sum up, we are well equipped and ready to face this challenging environment. We are ready to face this challenging environment. We are a leading bank in Europe. When it comes to excess capital, #1 in Europe; low leverage, #1 in Europe; and strong liquidity, among the best in Europe. We have a well-diversified and resilient business model. So a winning business model, leveraging of Wealth Management & Protection, with strong ability to deliver also results in financial markets.

We have continued deleveraging NPL to a low stock, with robust coverage at 0 cost for shareholders. We have a limited amount of Level 2 and Level 3 assets, best-in-class in Europe. We have a high strategic flexibilities in managing costs with the best cost/income ratio in Europe. And furthermore, we can count on EUR 1.5 billion of additional buffers to take future COVID impact, while delivering one of the best first quarters ever.

For this reason, in the future, we are well positioned to continue delivering best-in-class profitability, with minimum EUR 3 billion net income for this year, minimum EUR 3.5 billion net income for the next year; maintain a solid capital position with common equity ratio above 13%; deliver a payout ratio of 75% in 2020, with 75% of Q1 net income already deducted from capital ratio, and 70% in 2021; and we expect to continue reviewing and fine-tuning our outlook in light of the country operate in.

Finally, let me remind you that we believe that the rationale behind our combination with UBI Banca is even stronger in the context of COVID-19, and that significant value can be achieved even if we applied just 50% plus 1 share.

Thank you for your time and attention. And now I'm happy to answer to your questions.

[Operator]

[Operator Instructions] We will now take our first question from Antonio Reale from Morgan Stanley.

[Antonio Reale, analyst]

I guess my first question is on the guidance. I guess it's very difficult to have visibility on full year numbers in an environment like this. So my question is, what are the assumptions behind your 90 basis points cost of risk for this year and 70 bps for next? I've seen your GDP range, but perhaps, I think it would be helpful to understand some of the assumptions behind these numbers. I'm thinking of government guarantees, moratorium, where you think NPL ratios could peak, et cetera.

My second question is, we've obviously seen a number of measures implemented by the government. Can you give us an update so far on what percentage of your loan book is currently on moratoria? What are the assumptions of how many of those will end up as NPLs when the grace period ends? And on the government guarantees, I think you mentioned EUR 3 billion as of end of April, what percentage of the loan book would you expect to be ultimately on government guarantee by year-end? And very last question on risk-weighted assets. I saw the drop in the quarter despite loan growth. Can you just share what's driving this and how do you expect RWA to move forward?

[Carlo Messina, executive]

So thank you very much. Looking at our guidance, we decided to make an analysis that can give to the market the view of the management and the view of the bank for a clear outlook for the future. Not only talking about the quarter or the implication of 2020, but also looking at 2021. Because we are convinced that in analyzing and making the evaluation of the implication of this emergency, you have to consider the delta between the reduction in 2020 and the recovery in 2021. So the majority of the provision will be related to Stage 2. So if you implement the moratoria and the guarantee on the state on the customers in Italy, the majority of the impact should be on Stage 2.

Do not forget that we enter into this crisis with 50% of our stock and nonperforming loans, with a significant number of percentage in terms of investment-grade clients in the corporate sector and with a corporate sector in Italy that is comparable with the one that you have in Germany. So if you look at the situation of companies in Italy, their financial structure is comparable with the one in Germany, and also their export-related attitude today is probably much better and much stronger than the one that you have in Germany. So structural condition is good in Italy, looking at this point.

So our expectation is that moratoria and the guarantee from the state can cover a significant part of what can happen into the possible migration between performing into nonperforming. This will avoid a massive move from performing into nonperforming loans. What will remain is the impact on Stage 2. This impact could be managed through -- in our expectation, through a maximum amount. Because we wanted to make a forecast for net income that could be conservative, we decided to post EUR 300 million as provisions -- extra provision in this quarter. But to devote the next capital gain that I can remind you, in terms of growth is EUR 1.2 billion of extra provision to this possible implication coming from deterioration in the market.

We will monitor the situation, but the majority will derive from this impact. We made an analysis on sector on looking on the different indications in different sectors. And at the end, our estimate is that it is likely that we will not exceed this amount of provision. And hopefully, we can stay also below this level of provision. But with our purpose to give also a net income guidance to the market because we want to pay dividend and our purpose is to pay dividend. With the application of the 75% and 70%, you can have a clear view on what could be the dividends that you can derive from your investments in Intesa Sanpaolo.

So analysis related to impact on moratoria; guaranteed sector analysis, Stage 1, Stage 2; the migration and the strength of the starting point of the portfolio of Intesa Sanpaolo, these are the most important analysis. There will be a reduction in provision in 2021 because we will be in a positive GDP trend remaining. In my view, in a conservative mood comparing to our asset quality. That's the most important area of analysis that we made on nonperforming loans and performing loans impact coming from this emergency.

If we look at the moratoria, today we reached EUR 38 billion of loans that are related to moratoria. The amount could increase in the next months. But we do not expect such a massive number. But in any case, will increase. On the impact on the so-called SACE and further guarantee impact, we are really at the starting point. We will see what will be the real request from clients in Italy. Because my understanding is that, in reality, their situation could be, in reality, probably better than can appear now looking at the first signs of lockdown. There are sectors like tourism, hotel and so is transportation that can be impacted in massive way. But in my view, there are a significant number of sectors that can rebound also in the second part of the year.

So my expectation is that we decided to make a conservative approach posting EUR 300 million and dedicated another EUR 1.2 billion coming from the Nexi capital gain in the next months. So if you make net-net, the availability of the results that we can use for provision is really massive in significance, but leaving with sustainable and resilient profitability.

Looking at risk-weighted assets, we had some optimization, accuracy and some recovery of the guarantee in the loan book. So this allow us to mitigate the impact on risk-weighted assets on credit. You know that we have a strong work that we, on a quarterly basis, made on in terms of collateral, recovery of guarantees, and this related condition will have a positive impact on risk-weighted asset, credit related.

[Operator]

We will take our next question from Andrea Filtri from Mediobanca.

[Andrea Filtri, analyst]

I hope you can hear me. I have 3 questions. The first is on the lending evolution to the different types of customers: SMEs, corporate, mortgage and consumer, if you could give us your outlook for these different types of lending going forward. And a comment on what types of margins you're expecting to charge vis-à-vis before COVID, including the fact that some of these will be government guaranteed.

The second is on trading. You have posted a fantastic result this quarter. There is a lot more market volatility and higher sovereign spreads. Are you counting on radical changes in the Eurozone and EU policies, and if you have any comments on that side? And finally, if you could provide us the insurance Solvency II ratio at the end of March.

[Carlo Messina, executive]

So insurance solvency ratio is above 200%. So it's 203%, that solvency ratio. So significant and very good considering also that we will continue to deliver a very good result in this sector that, in my expectation, could be really the star in terms of increasing results due to the property and casualty business. And especially in the health sector, driven by the acquisition of RBM, that starting from June will give us extra speed in terms of performance. But that's the level of insurance solvency, so very strong.

Looking at trading -- so I'm moving from the third to the second and then the first. Looking at trading, we made, for sure, very good performance. We took benefit from volatility. We think that we will remain with a percentage of Italian government bonds more or less in the range on which we are today, that is 43%, 44% of the total amount of government bonds. We think that there could be some reduction in terms of volatility, but we have to monitor the evolution of the agreement between the different EU participants to the Eurozone. Because ECB made a clear effort, commission is trying to do the best for solution, but they didn't reach a clear and final position on this point.

I have to tell you that I'm, in any case, convinced that Italy has a significant strength in the saving of the Italian families and also Italy can count on the Italian savings in order to manage the future needs for the public debt or to reduce public debt for the future. So I'm not worried about the position. And I think that looking at market volatility, we can continue to have a good performance. And as I told in the previous statement, April has been another very good month, especially in Banca IMI. And so I'm pretty confident that with this environment, we can continue to deliver good performance also in this area.

Looking at lending. It is clear that we had a trend in the first quarter. The trend in the first quarter made us with good diversification between international loans and domestic loans with good profitability because we made good results, looking at net interest income in the first quarter, mainly driven by the asset side because the liability side made negative impact arising from markdown and the growth of the deposit base. Margin for the future will be mainly related to the kind of guarantees that will be applied. And looking at guarantees and usage of TLTRO, it is clear that you will not have significant margins, but the volume effects could be much higher than what you can expect.

So my expectation is that, net-net, net interest margin could be the real surprise of 2020 due to the fact that we have stock embedded in the first quarter that is really significant. And we can, in any case, play a significant increase in terms of loans also with the guarantees. But it is clear that the guarantees will have a level of pricing that could be lower than a normal credit, but at the same time, the risk-weighted asset embedded will be really, really, really low.

So SMEs corporate consumer could be an area affected. Mortgage is also another area that can be affected from some months. So probably the real estate market and the embedded area related to this point could be affected. SMEs and corporate, depending on what could be the need in order to work for liquidity lack due to the lockdown, but also due to the fact that some players can decide to accelerate investments in order to be ready for the recovery in the export related demand to be the champion. Do not forget that a significant part of companies in Italy can be leader also looking at export related items.

And so if you want to be a leader in the future, you have to start investment in this phase. And so there could be also demand coming from this champion. We need to have a clear view of -- on this month. So May, because May could be a month important after the full lockdown. We will maintain the market informed quarter-by-quarter of the evolution of this component.

[Operator]

We will take our next question from Giovanni Razzoli from Equita.

[Giovanni Razzoli, analyst]

A couple of questions on my side. The first one, I would like you to share with us what's your view of the regulator's activities so far. It seems to me that they granted the banks a lot of flexibility in terms of capital requirement, in terms of IFRS 9 adoption and all those pro cyclicality elements that may impact the CET1. Do you share this point? Would you expect something more from the regulator? So this is my first question.

And the second one, in terms of the government actions here. You have also been pretty much clear in commenting what is the effect on the Stage 2 of the -- sorry, on the new nonperforming flows of the government actions. Here in this case, how do so you see the government actions? Would you expect something more to come? For example, we have seen that they are also considering some guarantees on the UTP. And I guess that these actions, the material impact on the cost of risk component. So I'd like to have your comments here.

And the very last point, sorry, back to the question on the trading performance that was quite strong. The headline number may suggest a relatively strong volatility, but half of it comes from capital markets. That seems to me more a kind of client-driven activity. So shall we consider this item relatively replicable going forward as it is not so related to the market movements?

[Carlo Messina, executive]

So I will start from the last one. So on trading performance. For sure, capital market is also benefiting from client activity. Difficult to say what can happen in the next months. So I can give you reality. So April has been a very good month. So again, with significant realized profit during the month and significant activity in terms of capital market. But we have also to consider that if there will be some recovery in terms of Wealth Management proposition, probably there could be a reduction in the component, client-driven on capital markets. So it is the typical historical evidence, there could be some correlation.

Do not ask me why there is this correlation. I can give you some hypothesis, but the evidence is this. So in case of a significant recovery in Wealth Management activity, so this can happen if the stock market can rebound, if the spread can be in a trending down evolution, probably you can have a reduction in terms of capital market activity. But for the time being, not for the level that you have in the first quarter, but my expectation is that this sector can give us positive results. Then it is, by definition, a factor that has some kind of volatility, so it is difficult to make a clear outlook in this area. But April has been a very good month also looking at this in this respect.

In terms of government action, I think that our government made all -- you can do in a situation in which you have a public debt like the one that we have in Italy. So not easy to do something more. Probably, they can work on some intervention, so-called [Foreign Language], so not giving only guarantee of debt but also giving money to the companies.

On UTP, probably they are starting this point, and my perception is that it is not easy to say that they can complete this area of analysis. But if they succeed, this could be absolutely something very important because UTP are performing -- loss performing in the sense that they can move the performing loans, and the purpose of the company and of the state should be to maintain into the performing areas because there are people working, thousand and thousand of people are working 2 companies that are in UTP. So this could be, in my view, a priority of the government, but I cannot tell you if they can have success in trying to analyze something in this area.

But by definition, this area is an area in which if you work hard in order to allow them to come back into bonus, you can give a significant boost to the GDP growth in the country, but especially to save employment in a situation which, in the next months, there could be some significant social problematic situation, not only in Italy but in all Europe, deriving from the reduction of GDP.

Looking at the regulators, for sure, they are acting in a very tougher way in order to reduce procyclicality to give flexibility to banks. So my expectation is that they can continue this very good job that they are doing. My expectation is that, especially at European level looking at SSM, ECB, better continue this very good job they are doing in order to make stabilization and not to put emphasis on the negative side to try to move all the sector into the positive side. So my expectation and my relation with these counterparties is positive. And my perception is that they are fully aware of what can happen into the market if they try to accelerate the procyclical impact of this negative trend. And my expectation is that they do all the best in order to reduce this impact.

We think that in any case, there would be an impact. Another reason why we decide to place EUR 1.5 billion on a yearly basis in order to face this very tough environment with an increase -- potential increase, maximum until 90 basis points for this 2020 year. But due to our strong efficiency, strong ability to have a resilient business model, we can remain easily with a net income well above EUR 3 billion in 2020 and EUR 3.5 billion in 2021.

[Operator]

Our next question comes from Domenico Santoro from HSBC.

[Domenico Santoro, analyst]

Just a couple of follow-ups. First of all, on the target in terms of net profit. Does the EUR 3 billion at least net profit include also an allocation of the Nexi capital gain to potential further provisions for the situation, the economic situation. And whether this is already included in the 90 bps. The reason why I'm asking, we have seen, of course, your colleagues, your Spanish colleagues charging much more in the quarter, more than EUR 1 billion for the large. So I'm just wondering whether you're going to book an additional part, which is a model update, if my understanding is correct, once you have the input from the ECB in the second quarter.

The second question is on capital. Can you please tell us what could be the impact positive from the measures that the European Commission has approved last week, especially the SME supporting factor and the others. And whether you expect, in the second part of the year when you have more visibility on the situation, some risk-weighted assets inflation because you're going to potentially update your PD, LGD in the portfolio. Can you also mention whether you're going to take up more in terms of TLTRO at the end of June, and what could be the maximum allotment.

[Carlo Messina, executive]

So I want to start in this case from the target. So to make clear the position on our EUR 3 billion minimum level. We talk about minimum because we talk about exactly on the allocation of Nexi. So our expectation is that it is useless to be so bullish in this -- so bullish in this sense, a negative, in the first quarter in which we have not a clear scenario coming from ECB. And they gave us a clear indication that they will give us, in June, the implication of a scenario that we would like to use in order to make the provision for the Stage 2 in the second quarter.

We want to give a clear understanding of the situation because we will have an impact for sure, and we think the EUR 300 million is the right amount that we can place. But we will have another amount in the next months. And we decided that this amount will be in our -- in all our analysis that we remain also stressing some condition, this amount would not exceed the EUR 1.2 billion. So we decided that we can allocate the negative capital gain in order to phase at this point a stressing condition which can leave us to maximum 90 basis points.

But when we -- if you remember, when we made the deal on Nexi, we made a clear statement to the market. So we will use only a portion of this capital gain in order to increase net income because a portion of this will be used in order to increase sustainability of results of the company. And we are perfectly in that situation. So we need to have Nexi capital gain in order to improve sustainability of results of the company. Because if we place EUR 1.5 billion extra provisions in 2020, believe me, starting from 2021, there will be another year in which there could be an impact but mitigated by the positive GDP. In the next years, we will have benefit coming from these extra provisions. So increasing sustainability for our results.

So the allocation of Nexi is included in EUR 3 billion. That's the reason why I'm absolutely -- I can tell you absolutely that EUR 3 billion is absolutely conservative. My expectation is that we can do better than this. And on this point, I prefer to stay on the conservative side giving indication to the market. And again because through this amount and through the payout ratio, you can also calculate what kind of dividend we expect to give to our shareholders. But the Nexi capital gain for us is a clear [ journey ] that we will use during the second and the third quarter in order to increase the provision for an amount that could be maximum EUR 1.2 billion deriving from the Nexi capital gain. So that's the position on Nexi.

On our capital position and the implication of the new analysis coming from the SME sectors, we will have a benefit on this point. We need to have some more weeks in order to make the perfect analysis on this point, and we will make the clear disclosure on this that it positive and we will have in the second part of 2020. But I think that in our case, is only another factor that can increase our already very strong excess capital that will remain very strong and in excess of what all the other European peers have communicated also paying the 2019 dividend. So if you pay in 2019, you remain in Intesa Sanpaolo with a position of MDA buffer exceeding the one of all the other European peers. But in any case, on this point, we will make disclosure in the next months as soon as we have more analysis in place.

Looking at TLTRO, we can reach the amount of EUR 85 billion, EUR 90 billion, and we will decide if we can take more. And this will depend also on the amount of loans, with the guarantee of the state, that we will receive in terms of demand during the next month.

[Operator]

We will take our next question from Benjie Creelan-Sandford from Jefferies.

[Benjie Creelan-Sandford, analyst]

Just looking at the back of the presentation on the sovereign bond holdings, it looks like they are stable quarter-on-quarter. But if we look at the balance sheet, total financial assets on the banking book appear to be up about EUR 10 billion quarter-on-quarter. So I was just wondering if you could give any more detail on what kind of assets those are, presumably that's corporate bond exposure that you have increased in the quarter?

And then I guess just in terms -- again, going back to the cost of risk outlook and the 90 basis points, you've obviously pointed to the 8.5% to 10.5% GDP decline in Italy this year. Can you give any sense of the sensitivity to your cost of risk assumptions to any change in the GDP growth outlook, both this year and in terms of the rebound in 2021?

[Carlo Messina, executive]

So thank you because the point on sensitivity on GDP, in my view, is very important. So that's a point in which it is clear that what is very important is the sensitivity on the delta between 2020, 2021. So the real point of analysis in our bank and analysis that we made and we will continue to make in the future -- because it is clear that if you have another 2 weeks of the lockdown or another month of lockdown, analysis could be, for sure, different. If you have the sectors that can be impacted in a tough way in the next months, it is clear that you have different impacts. And we made some reserve in the analysis of 90 basis points, also considering some further points on some area of lockdown. But the sensitivity should be applied in my perception on the delta basis deriving from the negative GDP of 2020 and the positive of 2021. So in kind of our case, minus 4 basis points.

If you make some stress on this analysis, you can have -- in case of positive, you can have a recovery in terms of provisions, especially in 2021 if the rebound is much higher than the one that we have considered. For 2020, my expectation is that with 90 basis points we are fully covered also from a worst-case scenario apart from a significant further lockdown in the country in the next months. In that case, we will need to make further analysis in order to evaluate what could be the impact but always related with a possible rebound in 2021. So that's the reason why I'm focusing on the delta basis.

On the delta basis, if you have from minus 4 into minus 6, my perception is that there could be limited extra provision that you can need in terms of the provision, especially in the 2 years 2020, 2021, you can have an impact but not so significant. What can happen is 2022, in which we can have another amount of provision related to this situation. But for another 2 percentage point, my expectation is that you can have another EUR 100 million, EUR 200 million in 2 years' time, but no more than this. If you have a lower impact in terms of 4 percentage point and you stress and you see that at the end you can go 2 percentage points, again, you can have a positive on the provision and much higher positive in 2022.

It is also clear that we are making analysis on the model, so we will give you a more clear view on this sensitivity in the next presentation for the next quarter results. But your point is completely right, sensitivity is very important. But what we are doing is using the delta on the 2 forecasts, negative and possible rebound in 2021. But the condition of extra provision due to the fact that we think that we have been really conservative in using EUR 1.5 billion extra provisions in our figures, we think that this can be enough. Also because the amount of state guarantee theoretically is massive. Then again, this is another part of the story that we will check month by month. But the amount of the intervention, 40% of the GDP, is really impressive. Again, we have to check if reality is equivalent to the project. That's for the basis points.

On the sovereign bond holding, we had an increase in some sovereign bond, and then we will also increase in some corporate and financial bonds. And there could be some increase deriving in this quarter from this holding. But the majority of the impact that we had on common equity is deriving from the [ business ] government bond in which there has been also a bridge of correlation between the AAA country and AA country like France and the other like Italy and Spain. That's also another reason. But on financial assets, then if you want all of the figures and disclosure, Investor Relations teams is at your disposal to give you all the figures that you need to make analysis.

[Operator]

We will take our next question from Alberto Cordara from Bank of America.

[Alberto Cordara, analyst]

From my side, a couple of questions. The first one related to efficiency. You already have a very good cost/income ratio, as you detailed in the presentation. Is there more room to improve your cost line? What is the degree of flexibility that you have in doing that? And how much of potential further cost line improvement is included in your current guidance. And I just want to know if you can put something else on top of your current guidance.

The second issue related to your offer on UBI. I think you explained very well the rationale. Banks today need more scale, more efficiency. They're coping with a tough environment from an interest rate standpoint and more importantly, from an asset quality standpoint. So all of this is very clear. What is probably less clear, particular to international observers, is why there is a group of core shareholders at UBI including foundations, that are seemingly opposing the deal. So I think it would be helpful if you can explain to us and explain to international investors why this is taking place. Because, again, from the outside, that may not look immediately something clear and understandable.

[Carlo Messina, executive]

So thank you, Alberto. We can start from efficiency. That is the easy way in which I can elaborate. Efficiency in Intesa Sanpaolo is a clear North Star. So we think that efficiency is the key factor of success of our organization. We have, for sure, more room to accelerate in terms of cost reduction. And do not forget that last year, we had 2,800 people leaving the organization. And in this first quarter, we had 1,000 people -- roughly 1,000 people leaving the organization. So embedded in the personnel cost of the organization, there is a significant number of possible reduction that we consider as potential for increasing people in other areas, such as insurance, artificial intelligence and other sectors that can lead to have a reinforcement -- a margin of reinforcement because we are talking about minus 4,000 people, and the hiring of people could be in the range of 500 people.

Today, we are reducing the hiring of people. We are stopping the turnover. We think that, also, in view of the UBI possible transaction. But in general, also on a stand-alone basis, we want to better understand the implication of this new scenario on our activity. Because I think that at the end, there is one area that gave us a clear indication that digital and remote working, and ability to work, reducing the need of real estate building. And on the other side, reducing the number of branches because with the SisalPay agreement, we had already planned a further reduction of branches.

But this situation gave us a clear view of 2 business model. One is the mass market and the other one is personal, affluent and private. On personal, affluent and private, you need to reinforce your activity into the branch. Then you can call a branch a private banking branch, a personal and affluent branch. But people in Italy need to have contact with people. And we received a request for meeting also in the lockdown people because -- in the lockdown period all because people want to be sure that they are giving the money to a person that -- with whom they can have a clear relation, a clear understanding of each other through a meeting.

On the other side, on the area of mass market, we think that we can really work on an extra plan of reduction of branches, leveraging on our superior ability of giving digital implication on business. So this will bring us to work on analysis of reduction of branches devoted to mass market, reinforcement of the one devoted to personal and affluent. And then you have, for sure, less travel expenses because working and demonstration of working by remote, it is possible to reduce this amount of expenses. And some real estate rationalization will be added to our program.

So cost base today is one of our business activity. The cost management sector that you know is in charge of this area is delivering fantastic results. We think that we can do more, but not only as contingency plan that will bring us positive in case of reduction of revenues, but also from a structural point of view. So this is an area which I'm working in order to prepare a new phase of cost reduction for the group.

Looking at UBI. Believe me, I'm really in a condition to say that it is difficult also for me to understand why there is such a strong opposition because you can have an opposition to a deal because you think that you can have more money. So there could be physiological opposition to a deal. In the case of core shareholder, it is a very strong opposition. And I have to tell you that I prefer not to give you my idea on this front. And I think that at the end, also these shareholders will understand that in this situation in which the environment is very tough, and if Intesa Sanpaolo will have to consider EUR 1.5 billion of extra provision in 2020 and consider also an increase of provision in 2021, a reduction in comparison with 2020 but for sure an increase considering the current situation, it is difficult that a second tier in the market can have much better perception than a first tier in the market.

And not intending that a second tier is not positive, but I'm talking about dimension, the scalability, the profitability, resilience of our figures. So all the banks in Italy will be impacted by this situation. And I think that we together, with the strong player can give to the shareholder, so there will be a much higher probability to have significant dividends and also upside in the future. So today, we have the correlation of UBI shares with the Intesa Sanpaolo shares, I think that the core shareholders can have a benefit in moving into Intesa Sanpaolo and benefiting from a clear trend in terms of profitability and dividends.

That's the reason why we decided to change the dividend policy that we made and disclosed to the market some months ago, in which we think that it is not fair to give a message that we can pay a fixed dividend to the UBI shareholders. But now we are entering to the same guidance that we are giving for the Intesa Sanpaolo shareholders that is 75%, 70%. And we think that UBI shareholders can also benefit from the payment of 2019 dividends that it is absolutely my intention to propose for the payment. Then we will see the position of the ECB. We have great respect of the ECB and SSM, and we absolutely need to have their approval.

But my intention, also looking to the capital position of the bank, the simulation of the impact is that we can be in a position to pay this amount of money at the end of this emergency. But believe me, I have full respect for the core shareholders. So UBI and I will respect their decision if their position will remain negative towards the transaction.

[Alberto Cordara, analyst]

I think this is a very important point because as a matter of fact, when I look at your pre-impairment profitability, it's so much higher than the rest of the sector, particularly with respect to the domestic bank. So forgive me, but I just want to ask you an additional opinion. So leaving aside the situation of UBI, do you expect that we are going to see much more consolidation in Italy? Because again, when I look at domestic banks, the higher cost of risk may make it quite easy for them to report losses in the current environment. So leaving aside this specific case, should we expect the Italian sector to consolidate more in this period or in the next few years?

[Carlo Messina, executive]

So let me add that I'm convinced that UBI Banca is a good medium-sized bank with a good management. I have full respect of Victor Massiah and what they are doing in UBI. But it is clear that if you have a situation in which you have a thunderstorm, probably you can be safe in a strong company, in a strong situation. It is true also for the other banks, medium-sized bank in Italy because all the CEOs of the medium-sized banks in Italy, in my view, made a very good job because they succeeded in reducing nonperforming loans. They increased the coverage ratio, especially other banks increased their coverage ratio, made very good jobs in terms of business model.

But at the end, dimension is dimension. And if you generate, like us, more than EUR 4 billion in a normal situation, you can't remain to generate more than EUR 3 billion after having posted EUR 1.5 billion of provisions. So with the cost of credit that for our standard is a very high cost of credit, 90 basis points. And the other player in the market can have a difficult situation. And their figures, if they increase, is so high. If you look at figures also from other players in Italy that announced EUR 900 million of provision, then there is a clear view on the big player in the country that the impact should be significant.

And if the impact is significant, the big-sized bank can have an impact. Also then, I hope that they can remain in profitability because, at the end, stability of the system is also positive for Intesa Sanpaolo. There could be some other consolidation move in the country, possible. But you have not to forget that there has been a lot of talking about consolidation. And the reality is that if you have 2 CEOs, one will have to lose the place. And in the history of Italy, this didn't happen. And that's the reason why there was no merger between 2 medium-sized bank in Italy because all the 2 CEOs want to remain CEOs of the company. So at the end, this is a clear point of difficulty in making transaction.

And you have -- also to add another point, if you want consolidation, you need to create condition to reduce nonperforming loans and the only priority is to make capital increase. So do you think that the market would prefer to have a merger with a big player -- and also the other shareholders because at the end other shareholders, we understand that any kind of transaction different for this, we need to have the capital increase. And to have a capital increase, it is not enough 20% of the capital, you need to have 100% of the capital. And so in my view, consolidation could be theoretical in a way. But it is difficult, especially in this environment in which you will need, by definition, a capital increase if you want to consolidate medium-sized banks.

[Operator]

We will take our next question from Britta Schmidt from Autonomous Research.

[Britta Schmidt, analyst]

I've got 3 questions, please. One, just returning to your comment on TLTRO 3, where you said that it depends a little bit on the loan growth that you see also under the government-guaranteed loan program. What is your expectation for loan growth under the program for 2020? And given that the terms of the TLTRO 3 are quite attractive, would you not consider increasing your government bond portfolio on that basis?

And the second question I have is on legacy NPLs. Have you seen any impact on your workout trajectory from the lockdowns that we've seen? And what should we expect here for 2020 and 2021? And lastly, can you give us a little bit of an insight in how fees and insurance income has behaved in April versus, let's say, January and February.

[Carlo Messina, executive]

So looking at fee and income, January and February has been the best months ever. So we had 2 very strong months. You probably remember that, by guidance, it has been at the end of the year that we can have an increase in net interest income due to the increase in loan book, and we delivered the increase in loan book. And the increase in the commercial part of net interest income, but also that we expected an increase in fee and commission due to significant conversion. We had conversion in the month of January, February, a negative month in March, but the combination has been, in any case, a positive. On a quarterly basis, April is again a positive month.

And we think that the insurance product business could be the one that can bring us positive results in 2020, especially life insurance, apart from property and casualty that is a clear engine for growth. So no doubt, this will be an engine for growth for Intesa Sanpaolo, but we think that we can have some positive on fee and commissions. The real point is that my expectation is that it is difficult to have performance fee, and it is difficult to have a fee coming from more or less EUR 20 billion of reduction that we have in terms of performance.

So the commissions is an area in which we are experimenting increase in terms of net inflows, but the amount of calculations coming from the reduction of stock is such that we will have an impact in terms of commissions on a yearly basis if the market will continue at this level. If spread can trend down below 200 basis points, there could be probability that the stock performance in the market will be better, and then we can have again some really positive on fee and commissions.

At the same time, we feel that we have -- we need another contributor, that is corporate investment banking because we have the positive contribution in terms of net interest income, but looking at commissions, the lack of deal creating lack of commissions, but we are working also in this area. But my expectation is that fees cannot be an engine for growth, it can be engine in terms of difference of results. So that's our target today in terms of fee and commissions.

Looking at NPL, the impact from the lockdown is really limited on NPL because in March, I have to tell you that, in the end, the impact is really negligible. My expectation is that with the combination of moratoria and the combination of the state guarantees, the only portion that will be affected could be hotel, tourism, transportation, something that in Italy is important but it is, at the end, less than 2% of our loan book. Then also at European level, oil and gas. But again, in our book it's 0.4%. So the total impact, excluding public guarantee and moratoria in my view is really limited.

Looking at TLTRO, we will not use for government bonds or increasing the government bond portfolio. We think we have a dimension that is the right one. So our expectation is that we can have some reach in terms of composition but the measure should more or less remain the same. The increase in TLTRO can be devoted only to increasing of loans and especially the one relating with the state guarantee.

[Operator]

We will take our next question from Andrea Vercellone from Exane.

[Andrea Vercellone, analyst]

Two small questions. The first one is on trading in the quarter. I was just wondering if there's any contribution in that very good figure from fair value of liabilities. And if there is, if you can disclose how much. The second is on risk-weighted assets. Directionally going forward, 2021, 2020, later on in the year, do you believe that the impact of negative procyclicality on your loan book, so PD and LGD worsening, will be bigger than the positive impact of the government-guaranteed loans, which are 0 risk-weighted or vice versa?

[Carlo Messina, executive]

So on this point of risk-weighted assets, we think that there could be a compensation. Our negative procyclicality will not be so significant because we have, through the cycle, PD, so we will not -- very positive in case of positive dynamics, but not very negative in case of negative dynamics. So my expectation is that we can have more or less a combination of the 2. And so we should not have a significant inflation in terms of risk-weighted assets. We will monitor the situation, but my understanding today is that it is, in any case, likely that they can be compensated. So our expectation is that there not should be significant negative impact coming from both of them.

Looking at the trading income, there is a component coming from the fair value of liabilities. On the total amount of trade -- of the profit of financial assets, the large majority is realized. Only a portion is coming on fair value, but we decided to take a very positive stance on this fair value on liabilities. So the majority of the results is realized like the one that is the result in April, in which this component of the fair value is still there, and the evidence is our prudent stance, and we increased the realized proportion of the portfolio. So we think that this result can be considered as a good contributor such a contributor to the results of the group.

[Operator]

Our next question comes from Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

Three questions from me. The first one is if you have a ballpark figure in terms of where the NPL ratio can go from the 7% you posted in Q1. The second one is whether you expect any fee contribution from increased lending under the guarantee. And the third is curiosity of why you haven't changed your loan loss estimate on the UBI deal. You're still targeting the need for EUR 1.2 billion net of tax loan losses, and considering the change of environment, I was wondering why you haven't changed that number yet.

[Carlo Messina, executive]

So we decided to -- so look, starting from NPL, we want to confirm our NPL plan. So there should not be a significant impact in terms of reduction. Our expectation is that we can go at 6% in 2021 and it can be close to 3% in terms of net nonperforming loans. We are still making all the analysis because we know that it is not easy. And we think we made probably one of the best job in comparison with all the other European peers in making a clear disclosure and giving to the market possibility to make analysis with us on this point.

But we are still working on the assumption. We have to see reality of the lockdown. We have to see reality of impact of guarantee because what can happen in Italy is that there is also a majority of owner of companies that has a lot of money. So probably, they will not need to have state guarantee. So we have to see the evolution. But our perception is that we can continue reduction in terms of stock of nonperforming loans, in terms of reduction of nonperforming loans ratio.

On fee contribution from state guarantee, there could be, but they could be not so significant. Our expectation in terms of fee contribution again comes from a recovery in the second part of the year from wealth management, it is coming from, for sure, profit in property and casualties business, and also from corporate and investment banking business. But from the state guarantees, not so significant.

Then in terms of provision, we decided to start from the analysis that we made on the implication of the scenario on the different sectors and the implication of moratoria and guarantee, the implication of the quality of our stock, the amount of nonperforming loans, the possible migration of difference from performing into nonperforming loans. We made a very significant analysis, especially in the chief lending office area and the chief risk office area, and the results is the amount of extra provision needed.

What we need is to have the final point in June from ECB because you know that they will give a scenario and they will -- they asked not to work from procyclicality. We asked to make a top-down approach, but to be phased with their scenario. So we decided to put EUR 300 million just to give the evidence that the portion is still there. And we are moving in the right direction, and we decided to make an allocation with a clear Board of Director resolution because, today, Board of Directors decided that the allocation of the Nexi capital gain could be devoted to provision if needed. So if needed would be -- a lower Nexi can be used for other sustainable items or could be used for net income. But that's the position of the bank.

We think that this job is a clear job of best practice of transparency in terms of information with all our shareholders. You know that when I decide to take a commitment, this is a clear priority for the organization. And I wanted my investors to have a clear framework on what could be the evolution in this difficult context. On the other side, also for UBI investors, I think that it is very important to understand the future of Intesa Sanpaolo and what could be the implication of becoming investors of Intesa Sanpaolo in this very difficult and tough environment, and I can confirm that also for these shareholders to become Intesa Sanpaolo shareholders could be a unique opportunity.

[Operator]

Our next question comes from Delphine Lee from JPMorgan.

[Delphine Lee, analyst]

I just have one question actually. In regards capital, when I look at your Slide 91, just wanted to understand a little bit sort of where the -- it looks like in your 14.5% CET1, you have this quarter a slightly bigger benefit from DTAs and also a smaller impact from IFRS 9 transitional adjustments. Just wondering sort of if you can explain a little bit the difference and the mechanics.

[Carlo Messina, executive]

So on the analytics, I have to tell you that probably it is much better if you enter in touch with the Investor Relations people. I can tell you my view on what happened on the capital position of the bank this quarter in which we had a negative component deriving from the -- as all the other European banks, coming from the COVID impact on the market dislocation. This is -- this had also implication on the DTAs. And I don't know if this is a component that can make an explanation to your request. But on this point, Marco Delfrate and Andrea Tamagnini can give you all the figures that you need.

My point is that for IFRS 9, we had a portion on the phase-in because you remember that on the fully loaded, you have to consider the impact that you had not in the phasing, but due to the fact that you had another area, you had to reduce the impact on the fully loaded, adding the impact on the phasing. But on this point, as I told you, Marco and Andrea are at your complete disposal.

[Operator]

Our next question comes from Anna Benassi from Kepler Cheuvreux.

[Anna Maria Benassi, analyst]

Several question already asked. I would like to come back to the offer on UBI Banca. I agree that your position looks stronger and stronger, and your commitment looks stronger and stronger, too. So I'm trying to understand that if the offer could be changed in any way, not in absolute terms but maybe in the mix of instruments, I mean less shares and introducing some cash. And the other thing is that you write in the presentation that assuming the 50% plus 1 share ownership, you will be able to proceed with all the integration actions. So the question is then a large minority component in the bank cannot interfere with even this overall action you can implement in the integration plan.

And the other point, you said also several times that we'll need to pay the 2019 suspended dividends. And if we look to that, if we assume the full amount, then the share is trading at 15% premium to the offer, which is, in fact, again, very, very strange. And excluding them, still at 5%. Can you clarify on the dividend side if you will have to start from scratch. I mean you don't start from the 92 -- sorry, the EUR 0.19, you can, in October, propose any type of amount just because -- I don't know what is possible or not given the new ECB guidance.

And finally, you've been asked about the contingency plan on cost, but I'm more curious to understand if the experience -- the client experience in these 2 months on the online and going in the branch by appointment, that I think is clearly a big piece of news in Italy, can bring the medium term a sizable cost saving. So different behaviors, it will imply obviously the different organizations.

[Carlo Messina, executive]

So on the last question, my understanding and my perception subject to the analysis is that we can have a sizable reduction in terms of cost especially for the mass market. So for this area, I think that at the end, there could be a lot of value in reinforcing the digital kind of relation with the clients, reducing the branches and the real estate embedded into the branches, and this means a clear reduction on cost. At the same time, as I told you, I think that we have to reinforce places, branches in which you can have meetings with people in order to manage their wealth and their insurance, especially for the health and the houses. So my view is that we can have really for the future, in the next plan, a strong reduction of cost in terms of business model.

Looking at UBI Banca, we will not change our offer. So no possibility, 0 possibility is from the first stated, I'm telling to the UBI shareholders that I'm fully convinced that this is the best option for them. And at the end, I'm the CEO of the Intesa Sanpaolo shareholders, so I have to mix between the 2 situation. My expectation is that we will not change our offer. We will deliver 50% plus 1 share. We will realize the integration of the IT system. That is fundamental in order to make the merger -- the substantial merger for the company because you can have a substantial and physical and legal entity merger.

If you realize the IT integration, you can have the possibility to explore the majority of the synergies. At the same time, making the consolidation, you can use the badwill in order to increase coverage and make disposal of nonperforming loans of UBI, you will have the impact on the consolidated and you will have the impact on the individual. So the UBI Banca remaining will have all the increase in terms of provisions in order to make disposal of nonperforming loans.

The minority shareholders can interfere in the physical merger. But I have to tell you that I'm ready also to maintain the bank on the first period in order to make integration of system, making the right job in terms of appointment of the new head of regional division. Give the power to the people, motivate the people and then make a valuation of physical merger. But as soon as you have the IT integration, you can have the majority of the synergies that you can derive. And using the badwill, you can have also the integration charges, expense integration charges already embedded in the figures and also the increase in coverage embedded in the figures.

So in the end, the majority of the actions will be absolutely available to Intesa Sanpaolo also with 500 plus 1 (sic) [ 50% plus 1 ] share. Then if minority shareholders want us to reinforce the linkage with the territories with their presence as minority shareholders renouncing and decide not to have the premium for the share, so renouncing the premium, we will be happy to maintain them as minority shareholders.

On the same time, on 2019 dividend, my intention is to pay dividends, but not because I'm crazy but because I'm the value-creator for my shareholders, having a clear attitude to make efforts in order to reinforce the community and the country in which I'm operating. And I want to remember you that we were the only one to make such a donation in the country. We were the only company to give money to clients in the company and in the country, but also we have shareholders like foundation, like retail, that need to have dividends in order to make something positive for the country or in order to survive in the situation of difficulty in the country.

Then it is also clear that I can understand the action of SSM, of ECB. And if they decide us not to pay dividend, we will not pay dividend by definition. But by -- my target is to try to pay all the 2019 dividends. And my capital ratio, also with a total payment of dividend, we remain in excess below the other European players. So as soon as I'm in a condition of cover the extra risk of COVID, I will try to pay dividend with full respect of SSM and ECB. And so it is clear that this is absolutely conditional to their position in the future.

[Operator]

This concludes today's question-and-answer session. This concludes today's question-and-answer session, and I will now turn the conference over to Mr. Messina.

[Carlo Messina, executive]

So again, thank you for being with me and with us today. And may you and your families stay healthy. So thank you very much.