UniCredit SpA

MIL:UCG

Earnings Call Transcript 2019-Q1

[Operator]

Welcome, and thank you for joining the UniCredit First Quarter 2019 Group Results Presentation. [Operator Instructions]

At this time, I would like to turn the conference over the Mr. Jean-Pierre Mustier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.

[Jean-Pierre Mustier, executive]

Thank you very much, and good morning to you all, and welcome to our first quarter 2019 analyst call.

Before I walk you through our financial results for the first quarter, let me make a few remarks on the announcement we made yesterday that we sold 17% of Fineco for a CET1 ratio benefit of 21 basis points in the second quarter 2019. It is essential to put this announcement into the right strategic context. As you all know, we will present our new business strategy for the years '20 to '23 at our Capital Market Day later this year. To prepare for this new business strategy and ensure a robust foundation for a successful future development, we're announcing a comprehensive set of financial measures. We aim at further strengthening our lending capability, our ability to support the local economy and to develop our client business across our countries of operations.

These measures include: first, targeting to be at the upper end of the 200 to 250 basis point CET1 MDA buffer by year-end 2019 for the disposal of certain assets. This includes those already executed, for instance, the real estate in the first quarter '19 and the 17% of Fineco in the second quarter '19. Second, a gradual alignment of our domestic sovereign bond portfolio with the domestic bond holdings of our Italian and European peers on a relative basis; third, a further acceleration of the Non Core rundown which is expected to meaningfully beat the financial year '19 EUR 14.1 billion (sic) [ EUR 14.9 billion ] target, reconfirming the full runoff by 2021. That means for 2019, that we will be lower than the EUR 14.9 billion and closer to EUR 10 billion.

And last but not least, an evolution of our group structure to increase optionality and flexibility, in particular, optimizing the cost of funding under different potential macroeconomic scenarios. This means that value sections are being considered including the reduction of intra-group funding, as already started with Yapi and other subsidiaries. The placement of Fineco shares is only the first step in this comprehensive set of financial measures. Detail of these measures as well as the new business strategy will be presented at our Capital Market Day in London on December 3.

Now let's turn to Slide 4 for our quarterly results. After having walked you through the rationale for the comprehensive financial measures to prepare for our new strategic plan, let's now focus on our first quarter '19 result. In the first quarter, we have made strong progress on the delivery of Transform '19 and its third and final year of execution.

Now let's take a quick look at the highlight of the first quarter before Mirko takes you through the figures. We had record quarterly results that benefited from exceptional items. Our adjusted net profit of EUR 1.1 billion is up 1.5% year-on-year. First quarter '19 group adjusted RoTE is 9.4%. And we confirm the full year '19 RoTE target of above 9%. We sustained core bank performance as good commercial dynamics in CEE were partially offsetting the slower start in Western Europe due to some macro headwinds. The months of March and April were already better than the first 2 months.

Our Transform 2019 plan is well ahead of schedule. We already achieved 104% of our planned FTE reduction and 95% of our planned branch closures. Both targets will be exceeded, and the EUR 10.4 billion cost target is confirmed. And our first quarter cost of risk came in at a seasonally low 40 basis points. The full year '19 target of 55 basis points is confirmed. Non Core gross NPE reached EUR 17.7 billion in the quarter, down EUR 5.1 billion year-on-year.

Our CET1 ratio reached 12.25% for a fully loaded MDA buffer of 219 basis points. Thanks to our decisive actions taken in the first quarter '19 to prefund our TLAC requirements, we now have a subordination ratio of 18.41% and a buffer TLAC of 134 basis points. As we said in last quarter, our tangible equity increased. It is now EUR 48.8 billion, up 5.2% from its trough in the third quarter '18. This is UniCredit's best first quarter in a decade for the second time running.

Let's move to Slide 5. We report an adjusted net profit of EUR 1.1 billion, which is up 1.5% versus last year. Our adjusted group RoTE was 9.4% in the quarter, up 0.5 percentage point versus last year. These numbers are only adjusted for the disposal of real estate for a net impact of EUR 258 million, in line with past practice as we never adjusted our figures for U.S. sanctions provision in the past. We also took out the net impact of the U.S. sanction provision release and normalized the booking of the systemic charge by spreading them equally over the quarter. If we were doing that, they almost offset each other. And then our adjusted group RoTE normalized this way will be below, but very close to our full year '19 target of 9%.

Let's turn to our next slide. We finished the quarter with a CET1 ratio of 12.25%. For the end of '19, we confirm our CET1 ratio between 12% and 12.5% and an MDA buffer now at the upper end of our target range of 200 to 250 basis points. The real estate transaction in Germany mentioned in February closed in the first quarter and contributed a positive 7 basis point to our CET1 ratio. We see the first part of the overall 0.2 percentage point we expect from real estate disposal mainly during the course of the year. Mirko will give you more detail on the CET1 ratio development later.

On the TLAC subordination requirement, we prefunded most of our subordinated issuance for the year and have de facto completed our funding plan. With a pro forma ratio of 18.41%, we are already well above our financial year target at the end of the first quarter.

The de-risking of our balance sheet continues. The group NPE -- gross NPE ratio came to 7.6% in this quarter. The Group Core gross NPE ratio stood at 4.1%, close to the EBA average. Please be reminded that the EBA uses slightly different and less conservative definition of the NPE ratio that we have chosen to do. On a like-for-like basis, our Group Core gross NPE last quarter would have been 3.9%.

The operating model transformation is well ahead of schedule, reaching 95% of our branch reduction target and 104% for net FTE reduction. We will exceed both targets in 2019, and we confirm our full year '19 cost at EUR 10.4 billion.

Let's turn to Slide 8. Our client continue to embrace our multichannel offers and increasingly use digital solutions. We continue to support the real economy in Italy. Good examples are the following 2 major initiatives. On one hand, we have recently renewed our commitment to finance Italian small and medium SMEs together with the European Investment Bank. On the other hand, we announced last Monday that we would be the sponsor and cornerstone investor for a new innovative institutional platform aimed at sourcing patient minority growth capital for Italian SMEs. Entrepreneurs and family-run SMEs often need a more flexible and patient form of gross capital than traditional leveraged buyout provide, and UniCredit will bring providers of long-term patient capital together with its corporate clients to support best-in-class Italian mid-cap.

Now let me hand over to Mirko, who will give you more detail of our financials.

[Mirko Bianchi, executive]

Thank you, Jean-Pierre, and good morning to everyone. I will now take you through the UniCredit's first quarter financial performance.

Our Group Core has performed very well and shows high profitability with an adjusted net profit of EUR 1.3 billion in the quarter. The main divisional contributors to our strong performance this quarter were CIB, Commercial Banking Italy and CEE. In the chart on the right-hand side, you see the stated return on allocated capital of each division while the normalized return on allocated capital are shown in footnote #2.

Adjusted Group Core return on tangible equity was 11.3% for the quarter. Please remember that as a group, this number is not adjusted for the EUR 320 million net release of provisions for U.S. sanctions that we took in the first Q 2019. It is also not adjusted for the booking of systemic charges, of which more than half of the fiscal year 2019 charges are taken in the first quarter. Normalized for both, the adjusted Group Core RoTE would be lower, but still closer to 11% than 10%. Based on this, we confirm the 2019 Core RoTE target of above 10%.

Let's turn to Slide 11. We had a resilient commercial performance in the core bank as good commercial dynamics in CEE partially offset a slower start in Western Europe. March and April were much better than the 2 first months. Revenues were down 2.7% year-on-year mainly due to fees and trading. On a quarter-on-quarter basis however, a rebound in trading and stable fees led to revenues being up 1.5%.

We also enjoyed sustained commercial dynamics across the group. We gained almost 0.5 billion gross new clients in the quarter while writing EUR 22 billion of gross new loans in the same period. The execution of Transform 2019 continues to deliver tangible results quarter-after-quarter. Costs are down significantly, 4% lower year-on-year. The gross net NPE ratio stands at 4.1%, down 73 basis points year-on-year and already well below our fiscal year 2019 target of 4.7%. Net operating profit in the quarter was a solid EUR 2 billion, down 1.3% year-on-year. Adjusted net profit was EUR 1.3 billion, up 5.5% year-on-year.

Let's turn to Slide 12. Let's now look at the figures of the group. I would like to point out 3 items on this page. First, as previously mentioned, there were 2 exceptional items in the quarter, namely the real estate disposal and the provision release from U.S. sanctions. Please bear in mind that for both items, the gross impact was different from the net impact due to taxes. Details can be found in the footnotes. Second, our stated first Q 2019 tax rate of 29.4% was impacted by the provision release for U.S. actions, the real estate disposals in Germany and the IFRS 9 FTA tax effects. Third, our fiscal year 2019 stated tax should be in line with the previous guidance we gave of the normalized fiscal year 2019 tax rate being around 18%. Feel free to call our colleagues in IR for further details.

Let's turn to Slide 13. NII was lower in the quarter, down 4.5% stated and down 1.8% adjusted for one-offs, days effects and FX. The main drivers of the quarterly NII walk after the days effect and the FX were the following. First, average loan volumes were almost stable at minus 0.2% in the quarter at constant FX, compensated by higher customer rates, which were up 4 basis points quarter-on-quarter. For fiscal year 2019, loan volumes should grow, but slower than in fiscal year 2018. Second, term funding contributed a negative EUR 32 million as we prefunded the more expensive TLAC subordinated instruments in the quarter. This quarter-on-quarter contribution should be slightly less negative in the second Q 2019 and much less negative for the second half of the year as other funding runs off. Last but not least, higher spreads on our bond investments contributed positively by around EUR 25 million to the investment portfolio and treasury line offset by the nonrecurrence of an inflation-linked bond coupon from the fourth Q 2018 as well as higher excess liquidity.

Let's turn to Slide 14. I will highlight 4 points on this slide. First, average commercial loan volumes are stable at minus 0.1% while average commercial deposit volume continued to increase. Our commercial activities are essentially self-funded with a loan-to-deposit ratio close to 100%. Second, there were extraordinary items affecting the customer rate in Commercial Banking Italy, Germany, CEE and CIB. The impact of 2 days less this quarter affected the customer rate calculation in countries where the loan portfolio is not all on a contractual actual 365 basis as per footnote #2. Third, customer loan rates are stabilizing. We see a 4 basis point increase quarter-on-quarter at group level. And even excluding the days effect, customer rate went up 1 basis point. It seems likely that, as we have indicated since the third Q 2017, customer rate reached bottom in the fourth Q 2018. We expect customer rates to continue to slowly increase during the year. Considering the potential impact of TLTRO-III as well as lower long-term rates, we now expect an increase of middle-single-digit basis points for fiscal year 2019.

Let's turn to Slide 15. End of the period customer loan volumes for Group Core were down 0.9 billion or 0.2% in the quarter. The decrease was mainly driven by lower factoring volumes in Commercial Banking Italy as clients were actively managing their balance sheets over year-end. Without the factoring seasonality, loans in Commercial Banking Italy would've been flat. As a result, while the end-of-period core loan volumes were down 0.2% quarter-on-quarter, the average core loan volumes were actually up 0.2%. Beyond the seasonality of factoring and as loan levels are lagging indicator of economic activity, the fiscal year 2018 number was typical high late cycle growth. We expect loan growth in 2019 to be lower. We confirm our fiscal year 2019 target for loan -- group loans of EUR 444 billion.

End-of-period customer deposit volumes for Group Core were up 1.7% in the quarter. There were high deposits inflow from public sector entities in CIB in Germany which are expected to return to their fiscal year 2018 levels over the course of the year.

Let's turn to Slide 16. Fees in the quarter were down 5.3% year-on-year. As most fees are seasonal, let's look at the fees categories separately on a year-on-year basis. Investment fees were down 12.9% year-on-year. This decline was mainly due to upfront fees in Commercial Banking Italy which were down mid-double digits on lower gross AUM sales. The strong performance in certificate sales could only partially compensate that. Sales activity in March and April have recovered from a slow start to the year. Management fees for the group were stable on both constant pricing and average volumes. Financing fees were down 2.8% year-on-year as fees from CPI could not fully compensate for lower loan fees in CIB. Transactional fees were up 2.1% year-on-year driven by P&C insurance fees in Italy. Quarter-on-quarter, transaction fees were down 1.6% mainly due to lower fees from seasonality of payments in CEE.

Let's turn to Slide 17. TFAs stood at EUR 833.5 billion in the quarter, increasing 2.8% quarter-on-quarter. AUM in the quarter were EUR 223.1 billion, up 4.3% quarter-on-quarter, solidly driven by market performance. Net AUM sales for both group and the Western European commercial banks were 0.

Asset under custody increased by 2.3% quarter-on-quarter as strong market performance across divisions and good net AUC sales in Commercial Banking Western Europe were partially offset by large AUC outflows in CIB. The latter were nonrecurring and extraordinary high single-digit billion securities outflows from corporate clients in CIB. Deposits were up 2.2% quarter-on-quarter mainly driven by institutional deposits in CEE.

Let's turn to Slide 18. Adjusted trading income in the first Q 2019 was up 2.1% year-on-year and showed an impressive reversal versus last year and stronger underlying client activity. It included negative valuation adjustments of EUR 103 million as well as realizations from our fair value through OCI bond portfolio in the mid- to high double-digit range which will not repeat in the coming quarters as we shift our portfolio to held-to-collect. As a result, we expect an average quarterly run rate of around EUR 350 million for the rest of the year.

Dividends were down 10.1% versus last year. The contribution of Yapi to our dividend line was down 24% year-on-year on current FX but only 2% at constant FX. This is a function of Yapi's strong performance last year in a difficult macro environment, but much better than the double-digit amount we budgeted for the whole 2019. Yapi's P&L is included in the annex on Page 52. As of the first Q '19, our CET1 ratio sensitivity to Turkish lira moves is unchanged at plus 1 basis point, net of -- net from 10% adverse moves in the Turkish lira.

Let's turn to Slide 19. Our focus on cost efficiency is yielding tangible results quarter-after-quarter. Transform 2019 is well ahead of schedule. We have already achieved 104% of our planned net FTE reductions and 95% of our scheduled branch closures. Both targets will be exceeded by the end of 2019, allowing us to reach our fiscal year 2019 cost target of EUR 10.4 billion which we confirm.

Let's turn to Slide 20. Both HR and non-HR costs are down year-on-year. The first Q 2019 HR costs were down 3.5% year-on-year mainly driven by lower fixed compensation from reduced average FTE numbers. The quarter-on-quarter decrease was smaller at 1.5% as there were variable compensation releases in the fourth Q 2018. In the first Q '19, non-HR costs are down 5.2% year-on-year mainly driven by real estate and sponsorships. The quarter-on-quarter decrease was bigger at 6.7% after the seasonal spike in the fourth Q 2018.

Let's turn to Slide 21. Regarding group cost of risk, I would like to point out 4 items. First, the overall risk environment remains supportive in the quarter, which resulted in a seasonally low cost of risk of 40 basis points. We confirm the cost of risk target for fiscal year 2019 at 55 basis points, 4 of which from models. Second, cost of risk in Commercial Banking Austria was very low in the quarter as they continue to have net write-backs. We expect cost of risk to normalize during the year but to remain below our fiscal year 2019 target of 16 basis points. Third, cost of risk in CEE is quite low, thanks to a supportive risk environment. Fiscal year 2019 cost of risk will be below our target of 102 basis points. And last, the model impact is likely to hit in the fourth Q 2019, mostly in Commercial Banking Italy.

Our overall asset quality is steadily improving. The coverage ratio increased to 61.8% in the quarter, up 1.5 percentage points year-on-year. The group's gross NPE ratio dropped to 7.6% in the first Q 2019, down 1.9 percentage points year-on-year.

Let's turn to Slide 23. In the first Q 2019, NII was down 0.5% quarter-on-quarter due to the days effect. Excluding this, it would've been up 0.5%. Loan volumes were down in the quarter due to the factoring seasonality and would have been flat otherwise. Loan customer rates were starting to show signs of stabilization, up 1 basis point in the quarter adjusted for days as repricing actions continue to take effect. For the rest of the year, we expect a low single-digit billion increase in loan volumes and customer rates to go up by a few basis points.

Fees were down 3.8% year-on-year mostly due to lower investment fees being only partially compensated by higher transactional fees from P&C insurance. Regarding upfront fees, lower AUM gross sales of funds and insurance products were only partially offset by higher AUC sales from certificates. The commercial dynamics in March and in April are more promising than the first 2 months of this year. It is worth mentioning that for Commercial Banking Italy, our fees have a relative weight of 52% of the total revenues of the first Q 2019. This ratio has been improving steadily over the last 2 years and compares very well with our local peer group. We attached -- we attracted 85,000 gross new clients in the quarter, notwithstanding the ongoing optimization of the branch network.

Cost of risk in the quarter was 57 basis points with no impact from models. For fiscal year 2019, we expect the underlying cost of risk to be stable in a supportive risk environment. The stated cost of risk for the year will be higher as we expect a high single-digit basis points negative contribution from models in the fourth Q 2019. The update of the IFRS 9 macro scenario in the second Q 2019 should have a similar impact to the last quarter, namely a mid-double-digit million amount in loan loss provisions.

The normalized return on allocated capital in the first Q 2019 stood at 11.3%. And we confirm our fiscal year 2019 target at around 11% on higher risk-weighted assets.

Let's turn on Slide 24. In Commercial Banking Germany, adjusted net interest was down 0.7% quarter-on-quarter. This was the result of some customer rate pressure that was not compensated by rising volumes. The outlook for NII is stable on this level, i.e., in the first Q 2019 -- is a good run rate for the rest of fiscal year 2019.

Fees were down 8.5% year-on-year driven by both investment fees from AUC products and financing fees from loans. Fees were up 6.4% quarter-on-quarter thanks to the rebound in investment fees up 20% driven by AUM and AUCs.

21,000 gross new clients were added in the quarter, up 31% on last year. The net profit in the first Q 2019 was positively affected by both the disposal of real estate as well the release of provision from U.S. sanctions. The normalized first Q 2019 return on allocated capital was 6.2%. If we also adjusted for seasonality high-level systemic charges in the quarter and low double-digit million XVAs in trading income, normalized return on allocated capital would be above the fiscal year 2019 target of 9.1% which we confirm.

Let's turn to Slide 25. In Commercial Banking Austria, NII was down 0.9% quarter-on-quarter driven by lower loan volumes. Customer loan rates were slightly up but not enough to compensate. Fees were down 6.2% year-on-year as lower investment fees from lower gross AUM sales could not be compensated by higher financing fees from loans. Costs were down 3.6% year-on-year, driven by non-HR expenses. First Q 2019 cost of risk was negative 7 basis points due to net write-backs. For fiscal year 2019, cost of risk will be below the target of plus 16 basis points.

The first Q 2019 normalized return on allocated capital was low at 3.7% as the systemic charges in Commercial Banking Austria are customarily all booked in the first Q. It should increase materially in the next quarters. And we confirm the fiscal year 2019 return on allocated capital target of 13.3%.

Let's turn to Slide 26. CEE continues to be our growth engine with an inflow of more than 300,000 gross new clients in the quarter. Commercial dynamics remains strong. Revenues in the quarter were up 3% year-on-year at constant FX driven by NII and fees. Only dividends were down 2.5% due to Yapi. The quarter-on-quarter decline in NII was mainly due to the days effect as well as the nonrecurrence of the one-off from discounted funding in Hungary in the fourth Q 2018. On the other hand, there was a very low double-digit million positive one-off in the first Q 2019 from recoveries.

Fees were up 6% year-on-year at constant FX mainly thanks to financing fees from loans and CPI. Costs are up 1.7% year-on-year at constant FX due to wage pressure and well below inflation. Non-HR expenses are increased by a mid-single-digit million amount due to a technical delay in intra-group cost allocation that will be fixed in the second half 2019.

The division's cost/income ratio remained best in class, only 35.1% percentage points for the full year -- for the full quarter. The cost of risk is at a seasonally low, 61 basis points in the quarter. We expect some normalization during the year, but fiscal year 2019 cost of risk will be below our 102 basis points target.

De-risking continues at a vigorous pace. And the division's gross NPE ratio fell 1.3 percentage points year-on-year to 6.4%.

Regarding our outlook for systemic charges and following recent development in Romania, we revised our estimate for the local bank tax from mid- to high double-digit million to very low double-digit million. Return on allocated capital for the quarter was 14.1%. We confirm the fiscal year 2019 return on capital targets of 13.4%.

Let's turn to Slide 27. CIB enjoyed a resilient performance in a very difficult market environment. Revenues were down 7.4% versus last year on lower NII and fees. NII were down 5.9% quarter-on-quarter driven by nonrecurrence of an inflation-linked bond coupon from the fourth Q 2018. And lower recoveries includes those from shipping. The fiscal -- the first Q 2019 NII is clean of such one-offs.

Fees were down 30.8% year-on-year driven mostly by the very successful certificate business and, to a lesser extent, by lower volumes in structured finance. As certificates get manufactured in CIB for our Commercial Banking clients, they generate trading income in CIB. When they are then sold by the Commercial Banking divisions, they generate positive distribution fees in Commercial Banking and negative fees in CIB for a neutral impact at group level. The overall contribution from the group is, of course, positive, i.e., the trading income generated in CIB is higher than the fees paid for internal distribution.

Trading income strongly rebounded in the quarter on better client activity and is only down 2% year-on-year. It profited from mid- to high double-digit million income from the fair value through OCI realization from our bond portfolio which will not recur as we shift the bond portfolio towards held-to-collect. Positive impacts from certificate production in the trading were offset by negative contribution from OCS, both around mid-double-digit millions. Normalized return on allocated capital was 12.3% for the quarter. We confirm the fiscal year 2019 return on allocated capital target of 11.7%.

Let's turn to Slide 28. As most of you will have listened to the Fineco result on the 7th of May, and will have read the joint press release on our smooth transition towards more independence, I will limit what I'm going to stay on this slide. We are very satisfied with the overall financial performance of Fineco. As we announced today, yesterday, we have sold 17% of Fineco to institutional investors. The remaining stake of around 18% will be classified as a financial asset. As Jean-Pierre already said earlier, this is the first step in a comprehensive set of financial measures to prepare for the wider 2020-2023 business strategy of UniCredit to be presented later this year. We will update our KPIs for the deconsolidation of Fineco in the second Q of 2019.

Let's turn to Slide 29. In the Group Corporate Centre, revenues were down quarter-on-quarter due to higher funding cost driven by both higher volumes and spreads. Costs are down significantly mainly thanks to fewer FTEs. As a result, the ratio of Group Corporate Centre cost to total cost is down to 3.2% in the first quarter 2019. The fiscal year 2019 target of 3.8% is confirmed. The net loss increased quarter-on-quarter and year-on-year on lower positive taxes.

Let's turn to Slide 30. The accelerated 2021 Non Core runoff is fully on track. Gross NPEs dropped by EUR 0.8 billion in the quarter and stood at EUR 17.7 billion at the end of the first Q 2019. Our Non Core rundown is further accelerated to meaningfully beat the fiscal year 2019 EUR 14.9 billion gross NPE target.

Let's turn to Slide 32. We continuously work to de-risk the balance sheet to further lower our cost of capital. Group Core gross NPE decreased by EUR 1.9 billion year-on-year but slightly up by EUR 0.1 billion quarter-on-quarter. This reflects the normal quarterly pattern whereby the Q rate is seasonably weaker in the first 3 months.

The seasonal increase in the migration rate led to bad loans being higher and UTPs being lower quarter-on-quarter. Our core gross NPE ratio was stable at 4.1% in the first Q 2019, close to the EBA average and already well below our fiscal year 2019 target of 4.7%. Our coverage ratios has improved by 0.6 percentage point year-on-year.

Let's turn to Slide 33. For the Group Core, the default rate was stable year-on-year. The cure rate decreased by 1.9 percentage points year-on-year, and it normalized after an exceptionally good 2018 where some [ big ] files went back to [ bonds ] following intense restructuring efforts. The migration rate worsened by 3.1 percentage point year-on-year due to one single name moving to bad loans, albeit at a high coverage ratio.

Let's turn to Slide 34. Overall, the risk environment in Commercial Banking Italy remains very supportive and stable. Gross NPEs in Commercial Banking Italy are stable at EUR 8.7 billion which is a significant reduction in absolute terms year-on-year and was mainly driven by disposals. The group NPE ratio stood at 5.8%, up 0.1 percentage points to lower -- due to lower loan volumes. The 2019 target is confirmed at 5.3%. As we said before, please keep in mind that the reduction in NPEs will not always be linear. The first Q 2019 coverage ratio was at 56.3%, up 1.3 percentage points year-on-year despite significant disposal activity. Gross bad loans are up 4% quarter-on-quarter as migration rates are seasonally high and recovery and disposal activity is seasonally low in the first quarter.

Let's turn to Slide 35. The overall risk environment in Italy remains supportive. The default rate improved by 0.3 percentage points year-over-year and net flows to NPEs decreased. The cure rate improved by 0.5 percentage points year-on-year while the migration rates were stable.

Let's turn to Slide 36. The execution of the accelerated rundown of the Non Core is progressing very well. Gross loans in Non Core went down EUR 7.8 billion year-on-year and EUR 0.8 billion quarter-on-quarter. This reduction was thanks to a combination of disposals, write-offs and recoveries. Please bear in mind that disposal are usually seasonally low in the first half of the year.

Let's turn to Slide 37. Non Core loan volumes kept going down and are well on track to meet our accelerated target of full runoff by 2021. The net NPEs, which are a good indicator of economic risk, were down significantly to EUR 6.1 billion, dropping by EUR 2.4 billion year-on-year. Gross NPE decreased by EUR 5.2 billion year-on-year and stand at EUR 17.7 billion. We will be meaningfully better than our EUR 14.9 billion for fiscal year 2019 gross NPE target. That means that we will be closer to EUR 10 billion. Net NPEs coverage has increased by 2.9 percentage points year-on-year despite the disposal activity.

Let's turn to Slide 39. The group fully loaded core Tier 1 ratio at quarter-end stands at 12.25%, up 18 bps points -- 18 basis points quarter-on-quarter. The key driver was the net profit of 37 basis points in the first quarter that included real estate disposals and release of provisions from U.S. sanctions. Partially compensating FX were regulation models and procyclicality, minus 10 basis points; as well the DBO at negative 11 basis points. The latter was caused by the strong decrease in long-term rates. And we have added the core Tier 1 ratio's sensitivity to changes in the DBO in our footnote #5. The net impact of Yapi on our core Tier 1 ratio this quarter was negligible, as was the impact of BTP spreads.

Let me make a remark regarding our dividend payment which for 2000 -- fiscal year 2019 is based on a 30% cash payout on an adjusted net profit, i.e., excluding the gains from real estate and Fineco but including the release of provisions from U.S. sanctions. This is fully in line with the past practice for fiscal year '17 and '18.

For the end of 2019, we confirm our core Tier 1 ratio between 12% and 12.5% and an MDA buffer now at the upper end of our target range of 200 to 250 basis points. The expected evolution of our core Tier 1 ratio during the rest of 2019 will be driven by the combined effect of regulatory headwinds mainly expected in the second and the fourth Q and tailwinds from returned earnings and capital gains from real estate sales and Fineco. Overall, this should lead to a core Tier 1 ratio at the end of the second Q 2019 at above 12% at current BTP spreads before going back to the range of 12% to 12.5% by year-end 2019.

Let's turn to Slide 40. Risk-weighted assets in the quarter increased by 1.6% to EUR 371.7 billion. The biggest drivers were increased credit risk-weighted asset from regulation models and procyclicality. Market risk-weighted assets were down mainly due to lower multiplier. Over the course of 2019, we expect risk-weighted asset to increase every quarter up to our fiscal year 2019 target of EUR 406 billion. Regulatory headwinds from EBA guidelines and regulation models and procyclicality should account for roughly EUR 25 billion of risk-weighted asset increase and should mainly be split between the second and the fourth Q.

Let's turn to Slide 41. After a number of quarters with declining tangible equity value, we considered the third Q to have been the trough. In the first Q 2019, our tangible equity grew by 2.2% or EUR 1.1 billion quarter-on-quarter to stand at EUR 48.8 billion. The main driver was the net profit of the quarter. We expect a steady increase of tangible equity and tangible book value per share for the rest of 2019. This should lend support to our share price going forward as tangible book value per share has increased to EUR 21.9.

Please also keep in mind that since we launched the Transform 2019 plan up to the first Q 2019, we have already returned EUR 700 million in cash dividends to shareholders. In the second Q 2019, the cumulative dividend returned to shareholders will increase to EUR 1.3 billion as the dividend for fiscal year 2018 gets paid. So from a total return perspective, one would need to add that number to the growing tangible equity.

Let's turn to Slide 42. As of the first Q 2019, we are well above our upcoming TLAC requirements with a subordination ratio of 18.41%. This corresponds to a buffer of 134 basis points, well above our target of 50 to 100 basis points range. This is thanks to the prefunding we did on subordinated instruments, having de facto completed our subordinated TLAC funding plan for 2019 with only EUR 800 million left to do. The AT1 and Tier 2 transactions we placed in the quarter were very well received by the market and were issued with little or no premium. They generated record order books and are a testament to our strength as an issuer in the global capital markets. Over the course of the year, the TLAC buffer will go down as risk-weighted assets are expected to grow and some outstanding TLAC instruments get called. For the remaining quarters, we expect the buffer to be at or above the upper limit of our range. Taking that into account, we are also already compliant with the upcoming Pillar 1 subordination requirements for MREL.

Jean-Pierre, back to you.

[Jean-Pierre Mustier, executive]

Thank you, Mirko. Before we move to the Q&A, let me briefly recap on our first quarter '19 performance.

In our third and final year of Transform 2019 plan, we have seen a continued good core bank performance with Group Core net operating profit of EUR 2 billion and an adjusted Group Core RoTE of 11.3%. Transform '19 is well ahead of schedule and is delivering tangible results quarter-after-quarter. We have already achieved 104% of our planned FTE reduction and 95% of our branch reduction. Group costs are down to EUR 2.6 billion, and we confirm our fiscal year '19 target of EUR 10.4 billion. Our 2021 Non Core runoff is fully on track. Non Core rundown is to be further accelerated to meaningfully beat the financial year '19 EUR 14.1 billion (sic) [ EUR 14.9 billion ] gross NPE target. That means for financial year '19 that will be lower than the EUR 14.9 billion and closer to EUR 10 billion.

For FY '19, we also confirm our target of EUR 4.7 billion net profit, 9% RoTE and 10% Core RoTE. We also confirm our final year -- fiscal year '19 revenues at EUR 19.8 billion, cost at EUR 10.4 billion and cost of risk at 55 basis point. Commercial revenues in FY '19 will be at the same level as FY '18 and will be compensated by higher trading income. As Mirko mentioned earlier, our FY '19 cash dividend will be paid in 2020 and is expected to be 30% of adjusted net profit which based on the net income of EUR 4.7 billion means an increase over FY '18 dividend of more than 2.3x.

For the end of 2019, we confirm our CET1 ratio between 12% and 12.5% and an MDA buffer now at the upper end of our target range of 200 to 250 basis point. During the year, we expect the CET1 ratio trough in second quarter '19 above 12%. And last but not least, we are confident our tangible equity will grow throughout the year. Our underlying RoTE for the group without U.S. sanction impact was well above 9% for FY '18 and is very close to 9% in the first quarter '19. We are therefore confident that we will reach our FY '19 target above 9% RoTE.

Needless to say, we continue to focus fully on the execution of Transform '19 and work hard as One Team, One Bank, One UniCredit to ensure UniCredit remains a true Pan-European winner.

And now Mirko and I are ready to take your question. As it will become a tradition, we are joined here by our Co-CFO, Stefano Porro; our 2 Co-CEOs of Central and Eastern Europe, Gianfranco Bisagni and Niccolò Ubertalli; our Co-CEO of Western Europe, Francesco Giordano and Olivier Khayat; our Chief Risk Officer, Tj Lim; and our Co-COO, Carlo Vivaldi and Ranieri de Marchis. And they will be available as well to answer your questions. [Operator Instructions] Many thanks.

[Operator]

[Operator Instructions] The first question is from Adrian Cighi of RBC.

[Adrian Cighi, analyst]

Two questions, one on strategy and one on guidance. Going back on your opening remarks, on Fineco, increases your optionality and flexibility to build extra capital buffers. We've also seen a considerable amount of noise in the press regarding potential inorganic activity by UniCredit. Can you maybe discuss which criteria would you use to use some of this excess capital to pursue inorganic activity and maybe give us some insights into the specific return hurdles that you would use to judge some of these activities?

And the second one, just a clarification on your guidance. Last quarter, you provided an EUR 18.1 billion outlook for the combined NII and fee income for the full year. Do you need to update this guidance in line of the Q1 developments? Or does it still stand for the rest of the year?

[Jean-Pierre Mustier, executive]

Thank you very much. As you know, we never comment on rumors and speculation. And I said earlier that I think that mergers and cross-border mergers are extremely difficult to pull out. So I think that I will not comment further than that.

On the EUR 18.1 billion commercial revenues, I said in my conclusion that we confirm our EUR 19.8 billion of total revenues for the year and that our commercial revenues will be closer to our 2018 revenues, which were around EUR 17.6 billion.

[Operator]

The next question is from Andrea Filtri of Mediobanca.

[Andrea Filtri, analyst]

First question, following from Fineco, what is the business impact for the group of losing a fintech jewel like Fineco? And do you think that going from 12% to 12.5% CET1 will reduce your implied cost of equity? And finally, can we now assume you will move to 50% payout ratio from the next fiscal year?

Secondly, on carry trade, your financial assets are down EUR 2.3 billion Q-on-Q. What has been the loss in NII in the quarter and what will be for the rest of the year? You've also stated you want to progressively realign bond holdings with peers. But one of your peers increased bond holdings by EUR 18 billion Q-on-Q. Does this mean you will increase exposure? And if so, how much NII support do you foresee from this hypothetical move?

Finally, just allow me a follow-up on what Adrian said before on M&A. Essentially, your share price is not -- is flat during your business plan despite your delivery. Hypothetically, could you consider making the next strategic move even if the market is yet to recognize the progress you made on profitability?

[Jean-Pierre Mustier, executive]

Well, let me deal with your last question first. As you said, we never comment on rumors and speculation. We said our plan is based on organic assumption, and I say it again that we think that M&A transactions are extremely difficult to complete.

Let me go back to your first question is -- the disposal of Fineco has to be looked at within a set of mergers we commented about in the introduction of this presentation. We discussed with the Board these set of mergers, which aim to make sure that we improve even further the profile of the group in order to guide our cost of equity to a lower level. As you know, our implied cost of equity today is high and probably higher than a bundle of our peers. And we think that by taking these 4 measures and progressing on them will gradually improve the profile of the group and potentially lower the cost of equity, which is absolutely not under our control, but we can take actions in order to see if the market will consider it differently.

We think that to have a high buffer to MDA, CET1 MDA, MDA is important. A buffer is a buffer. It was impacted by the write-down of Turkey last year, potentially lower profitability with additional provisions we took on U.S. sanctions. Part of them have been released this year. And we aim to be at the upper end of the range, which on one side will allow us to better finance the economy in the various countries where we are present and allow us to potentiality gradually increase our dividend payout to the upper limit we gave of 50%. We will see in due time when and how we should increase the dividend payout post 2019. And I remind you that we had decided and already provisioned for the first quarter a 30% payout for the dividend, which, as we said, applied to the EUR 4.7 billion net income, mean that our dividend for the full year '19 to be paid in '20 should be more than 2.3x higher than the dividend paid in '18.

As far as our BTP portfolio is concerned and comparable, first, we don't do carry trades. I think that you all know that profits coming from carry trade are very, very low multiple in terms of net earnings, and so it's mostly artificial and does not bring value to the bank. At least this is our own assessment. When we say in our 4 measures that we want to bring our BTP holdings in line with our peers, it's our BTP holdings, it's not carry trade, it's not additional bonds we could buy to artificially flatter our net income. And we want to bring it to a ratio which is a ratio of BTP holdings to tangible equity, which will be in line with our peers in Italy or in line with domestic holdings of government bonds by our peers in other European country.

We want to stress that this will be a natural amortization of the portfolio with, for 2019, very little and nonmeaningful impact of our revenues as we confirm our EUR 19.8 billion of total revenues, which was decided and stated before we put in place this natural amortization of the portfolio. And we will follow what are our peers' BTP to tangible equity ratio is in the future. We confirm as well that we will keep acting as one of the most active primary dealers in BTP to support the issuance of the Italian Republic, that goes without saying. Our commitment to Italy is stronger than ever.

Finally -- but that's it, because I answered your many questions earlier, so that's fine.

[Operator]

The next question is from Jean Neuez of Goldman Sachs.

[Jean-Francois Neuez, analyst]

My first question would be on NII. So you provided a bridge where within the commercial dynamics, one of the key negative factor was term funding, and obviously you've been very active in the market recently. You also indicated that your funding plan is done and that you will exercise some cores and so on. Just wanted to understand going forward whether we should expect any more negative contribution in the flow quarter-to-quarter from that or whether that component of about EUR 30-odd million is essentially a step change but not necessarily a recurring step change going forward. And whether the sustainability of the loan rates increase, which you've seen in multiple geographies this quarter, do you think is sustainable, in particular in the view of the confirmation of TLTRO II -- or III, rather?

And my second question is on capital headwinds. You've seen very low default rates. I calculated net inflows 20 of less than 60 basis points this quarter. You also will have NPEs lower than what you had planned for this year and the years to come compared to when you disclosed the capital headwinds, a lot of which are based on NPEs or impact from NPEs. Is there any update on the magnitude of the capital headwinds post 2019, please?

[Jean-Pierre Mustier, executive]

Thank you very much. I will answer for the capital headwinds and let Mirko comment on the NII. We have said that the bulk of capital headwinds for 2019 will come in Q2. We adjusted the dip in CET1 capital to above 12% from the previous guidance which was around 11.7%. Clearly, the Fineco disposal is helping for that. And we have a CET1 impact in Q2, which is around 40 basis points, for a total impact for the year of around 80 basis points, knowing that 10 have been already taken in the first quarter, 40 will be in the second quarter, 0 in the third quarter and around 26 or close to 30 in the first quarter.

Beyond 2019, we will debrief the market at our Capital Market Day in December. But we have not seen any major adjustment from what we communicated at our Capital Market Day '17. The assumption we had at the time are broadly valid. I'll let Mirko comment on the NII side.

[Mirko Bianchi, executive]

Yes. So on the NII side, on the first sub-question on term funding, yes, the peak is going to happen in this quarter with minus EUR 32 million. You should expect a slightly lower number as an impact for the second quarter and then a meaningful smaller number for Q3 and Q4 because, as you said rightly so, we are basically done from, let's say, the costly funding plan side. And on the other side, we also have some funding that is actually amortizing.

In terms of the sustainability of the NII and especially on the client rate side, what we have said, yes, there is TLTRO III. Yes, there are long-term rates that are coming down. But we still expect a slight improvement in client rates over the rest of the quarter and that should support, let's say, the NII going forward.

[Operator]

The next question is from Antonio Reale of Morgan Stanley.

[Antonio Reale, analyst]

I've got 2 questions, please, one on the Non Core and the other one on Commercial Banking Germany, please. On the Non Core, the rundown here has been trending ahead of targets, and you've now lowered your target to EUR 10 billion Non Core loans by year-end. And if I understand correctly, with cost of risk guidance confirmed at 55 basis points, that means that there's going to be no impact on P&L or capital. First, do I understand that correctly? So the faster rundown of the Non Core comes with no expenses to capital and P&L? And the second follow-up to the Non Core rundown is, do you expect to see any RWA release from a faster reduction of the Non Core exposure this year or next, eventually? And if so, could you quantify how much that would be?

And the second question, on Commercial Banking Germany, they've been quite resilient in the quarter despite the challenging market. Could you maybe just talk about what you're seeing for competition here? Where do you see most opportunities grow? And perhaps just comment on the fees which, in Germany, seem to have held up quite well in the quarter.

[Jean-Pierre Mustier, executive]

Thank you very much. I will let one of our Co-CEO of Western Europe who is mostly covering Germany, Olivier Khayat, to comment about the German evolution later. On the Non Core, Tj can add some comments.

We have announced that we want to meaningfully beat the target of EUR 14.9 billion and be closer to EUR 10 billion. This is an acceleration of what we want to do. And based on the assets that we might dispose of, we might anticipate some of the provision which were planned in the following years. But this is fully taken into account in our EUR 4.7 billion net income. So we are highly confident that we'll be closer to EUR 10 billion, and we're highly confident to deliver the EUR 4.7 billion net income. But there could be some anticipation of provision as we move earlier than scheduled.

Maybe Tj, you can give a view of the market right now in terms of NPL disposal.

[Thiam Lim, executive]

Yes. Thank you, Jean Pierre. I think from the NPL point of view in terms of disposal activities, we have not seen any softening. If anything, things are continuing to evolve as last year and, clearly, even despite the [ significant ] slowdown. So we are confident that this meaningfully rundown, we can achieve. Again, we said closer to 10, that doesn't mean it should be 10.

And in terms of what Jean Pierre has rightly mentioned, some of the costs that we were expecting for next year would be anticipated this year, but it's fully adjusted into the plan of the EUR 4.7 billion. And the RWA release is already part of the capital walk that Mirko has mentioned.

[Jean-Pierre Mustier, executive]

Thank you, Tj. Olivier?

[Olivier Khayat, executive]

With respect to the result in Germany, we can see that on the quarter-to-quarter, we've been benefiting from a stable NII. And on the fee side, an increase of 6% quarter-on-quarter due to higher investment fees. The overall landscape in Germany in terms of competition is still in the market where the pricings are still very, very, very tight. Costs of risk are low, a high level of competition. Having said that, we are starting to get the benefit of [ growingly ] of the targeted growth plan that we have in Germany, which is at the moment taking place.

[Jean-Pierre Mustier, executive]

I would say in Germany, we have, on the corporate side, Mittelstand, which is our target growth plan. We have roughly, I mean overall in Germany, a 2.5% loan market share, 4% market share for the corporate side. And we have a 23% market share on export letter of credit. So you can see that there is a meaningful side business that we can do in Germany because more local German banks don't have the networks and the ability to cross-sell with their clients. So we think that is an extremely good business potential here, thanks to our unique network in Western and Central and Eastern Europe, which makes us extremely confident that we have growth potential as well as return on allocated capital on the corporate business in Germany, which is above our cost of capital.

[Operator]

The next question is from Alberto Cordara of Bank of America.

[Alberto Cordara, analyst]

Just getting back to your revenue target. So if I understand correctly, your core revenue targets have been lowered from EUR 18.1 billion to EUR 17.6 billion. But I think this was, I guess, already part of an educated consensus. But at the same time, you lifted your target on trading. So what makes you feel so confident that the EUR 350 million is going to be a run rate for each of the following quarters? And related to that, I was looking at the slide on trading. You were talking about the negative XVA. Can you elaborate a bit on this point? And what is it exactly?

Then if you want, the other question that I have is on NPL. So we saw a marginal increase in NPLs across the different lines of the core business. So you've done a fantastic job on Non Core, but on the Core business, there is this marginal increase. And the cure rate is lower than what we saw in Q1 '18. So going forward, leaving aside the Non Core, should we expect the Core to continue worsening even by a small rate or not?

[Jean-Pierre Mustier, executive]

Thank you very much. On the trading side, we have a very good quarter as far as trading is concerned. And we have said that we anticipate for the net quarter to be around EUR 350 million per quarter, which is exactly the average annualized basis of EUR 1.4 billion which has always been our guidance. So basically, we take the extra profitability of the first quarter. And afterwards, after normalized, if I may say, quarterly contribution from the trading side and higher dividend level, as we have said. I'll let Mirko comment on the XVA side.

[Mirko Bianchi, executive]

Yes. In terms of the composition of the XVAs, most of it is coming from funding value adjustments. That's almost half of it. And then basically, CBA is another part, and then the fair value adjustment also is the smallest impact. But the biggest impact of all is the funding value adjustment, basically.

[Jean-Pierre Mustier, executive]

And if you look at our trading profit for the quarter, with the minus EUR 100 million XVA, I mean the trading profit net of XVA were actually EUR 540 million. So you can see that there is a relatively high contribution for the quarter and afterwards, EUR 350 million per quarter going forward. So that's always been the EUR 350 million, the average.

On the core bank evolution, as you have seen, we have today a gross NPL ratio for the core bank, which is our core focus, which has not changed at 4.1%. And when you apply the EBA calculation, which is less strict than ours, we're actually very close to the EBA average of our competitors. The default rate is stable at 1.1%, so we see here a very favorable environment. And the cure rate is lower than on the first quarter last year. Your cure rate depends on some [ bulky funds ], which can go back to performing. So there is nothing specific to be read here. In terms of the niche of the portfolio and the quality of the portfolio, we are extremely comfortable.

But our ability and the quality of the portfolio, I don't know if Tj wants to say anything. Yes, I would just say that if you look, and we disclosed in the annex of the documents, the expected loss by division, you can see that the expected loss for the new business on the first quarter, that's on Page 61 of the document, is at 33 basis points versus a stock at 38 basis points. So still a very good expected loss for the new business and still a very good expected loss on the stock. Tj, if you want to add up anything?

[Thiam Lim, executive]

Just a quick addition. As Jean Pierre has mentioned, we confirm that the group asset quality in the core side remains sound. In Q1, there's some technicality that we have in terms of migration of some UTP to bad loan just from one file with very high coverage. So this is again by also the less-than-normal disposal activity, so asset quality remains sound.

[Operator]

The next question is from Andrea Vercellone of Exane.

[Andrea Vercellone, analyst]

One on NPE coverage, one on guidance 2019. On NPE coverage, as you essentially ran off the Non Core division, is it fair to say that your group NPE coverage will converge towards the core? Or do you plan to continuously increase coverage in the Core division in future years also? Because obviously, there is a discrepancy between the 2. On the guidance, you have reiterated the EUR 4.7 billion target for 2019. The revenues, the costs, these are all pre-Fineco disposals. So the perimeter is going to change. Is it fair to say that we just need to deduct from total revenues the contribution of Fineco, the same for total cost, the same for provisions, or not? And the same for the bottom line, EUR 4.7 billion includes the contribution of Fineco, but you will not only add this contribution, so that you stay EUR 4.7 billion? Or is it EUR 4.7 billion minus whatever Fineco would have contributed?

[Jean-Pierre Mustier, executive]

Yes. First of all, on the Core, clearly the NPE coverage of the Core will remain once the Non Core is run off the group NPE coverage basically. So we are not anticipating to change the coverage, otherwise mean that the coverage of the Core today is not the right one. So that's very clear.

On the guidance, we will give an update for the second quarter of the group figures ex Fineco. So Fineco will be deconsolidated. But the EUR 4.7 billion is confirmed ex Fineco. So the EUR 4.7 billion does not change whether we deconsolidate Fineco or not. I just want to state as well that the EUR 4.7 billion excludes the extraordinary capital gain from Fineco as well as the capital gain from real estate. This is the overall net income which will be paying, if I may say, the 30% dividend to the shareholders. And as Mirko commented, we want to carve-out all the extraordinary profit. But we nevertheless include on the EUR 4.7 billion the contribution of the provision write-back on U.S. sanctions as these were -- I mean the negative impact of U.S. sanctions were included in the net income which bear a dividend last year.

[Operator]

The next question is from Benjie Creelan-Sandford of Jefferies.

[Benjie Creelan-Sandford, analyst]

Three questions from me. First of all, on costs, I mean I know we all like to focus on the cost reduction delivery of UniCredit which has again come through. But just in terms of investment, be that on systems or digital capabilities, what are the key areas that you're prioritizing going forward? And can you perhaps comment on where we now stand in terms of IT systems integration across the key subsidiaries of the group?

My second question is just on Turkey. I mean it seems that the current regulatory capital treatment of the Yapi Kredi stake is relatively penalizing. Can you just confirm that you still see that as a core part of the business? And if so, besides exiting that stake, is there any strategic measures that you could foresee taking that might release capital or improve the return profile of that stake from a regulatory capital point of view?

[Jean-Pierre Mustier, executive]

Thank you very much. Just let me comment on Turkey. We'll briefly comment on the investment and let Mirko comment as well and maybe our Co-COOs can comment on the IT investment. On Turkey, we always said that this is a country with a large population, very well educated with very good companies. So we support Yapi Kredi in its development. We are going through the natural adjustment of the economy because of structural current accounting balance, which are corrected right now with the adjustment we are seeing, and that's it. So no change on our strategy. The Turkish regulatory treatment is not very favorable, as you pointed out. We have equity consolidation but a pro rata regulatory consolidation. It is a fact of life and we cannot change it.

On the detail of the investment, Mirko can give the financial figures, and then I will let our Co-COO comment on some of the key focus. Knowing that the Capital Market Day in December 3 will be about the transformation of the bank, what we do and what is our vision in terms of evolution and transformation, there will be a small part on the financial target that we have already anticipated, but the Capital Market Day is not a financial communication exercise. It is a business strategy exercise where we'll elaborate more on it.

So Mirko, first on the quantitative figures for IT investment. And then Ranieri and Carlo on the priorities for IT.

[Mirko Bianchi, executive]

Maybe something else. On Turkey, we are running down the intra-group, so we are down now to EUR 2.1 billion. So this is actually...

[Jean-Pierre Mustier, executive]

Yes, on track to reduce our intra-group exposure by 50% by the end of 2020.

[Mirko Bianchi, executive]

Exactly. In terms of...

[Jean-Pierre Mustier, executive]

So it is working and progressing, you are absolutely correct.

[Mirko Bianchi, executive]

Right. And in terms of the IT spend, the Transform 2019 was based on EUR 1.7 billion to be spent in terms of IT for the transformation. This in the plan was basically 1/3, 1/3, 1/3, and we are totally on track actually in terms of the IT spend. So we are totally in line. And now I'm going to let...

[Jean-Pierre Mustier, executive]

Yes. It's EUR 1.7 billion for transformation plus EUR 700 million for regulatory side, no? So it's the [indiscernible] is EUR 2.4 billion, but 1 point for transformation. Ranieri or Carlo, on the IT priorities right now?

[Ranieri De Marchis, executive]

Yes. As we actually presented also as part of the Transform 2019 plan, clearly the big programs of transformation that we're highlighting are fully on track. I would remind that one of the levers was the simplification and rejuvenation of some aspects of the core banking system. We called it at the time the [ digi seeker ] project. The [ digi ] project is, as I said, fully on track, already have deliveries in 2018, and we expect the final delivery by 2019.

In terms of leveraging the platforms, we are progressing in our mobile -- new mobile app. Actually, we leveraged the common infrastructure across the different core countries, i.e., Germany, Italy and Austria as well as the PSD2, which effectively is creating the API platform that covers in fact all of the group.

So in terms of digitalization, the priority is the enablement on one side of the efficiencies that are in the plan, i.e., through simplification and also the using of robotics, but as well as supporting the customer experience as well as the performance of the commercial business through an upgrade of our apps and taking a view always at a group level, not only at the single local improvements.

[Jean-Pierre Mustier, executive]

And I would say that, without disclosing too much of our Capital Market Day presentation, but we're working as well on making sure, for instance, in Italy, that on the retail side, our Italian retail activity will be paperless at one stage in 2020. We generated 51 kilometers of paper in our Western European network between Italy, Germany and Austria. Not only we want to save the earth and use less paper as part of our sustainability initiative, but we want as well to make sure we are more efficient. Being paperless will improve customer satisfaction and experience and will improve as well our efficiency in terms of operation. But I said too much, and you will have much more detail of that on December 3.

[Operator]

The next question is from Ms. Azzurra Guelfi of Citi.

[Azzurra Guelfi, analyst]

One question on the sovereign portfolio. As part of your realignment process that you have announced among the financial measures that you are going to take, this should result in a decrease of your sovereign sensitivity -- the Italian sovereign sensitivity to capital. Could you share with us what would be your end sensitivity if you have any simulation that you have already ran?

And sorry to come back on the growth strategies. I hear you loud and clear that you are going to remain focused on the execution of the plan, and that is crystal clear. But between now and 2023, there might be some opportunity that presents itself, whether in one of the countries where you're operating, whether it's a fintech company, there could be something because the market always evolves. Could you share with us what would be criteria for which you could look at something or what are your framework to think about this?

[Jean-Pierre Mustier, executive]

Well, thank you very much. In terms of sensitivity, we communicate about our current sensitivity, which we said would be reduced because we moved part of the portfolio to [ L2Connect ]. We have today EUR 54 billion of BTPs, EUR 35 billion which are in fair value OCI and EUR 18.6 billion in L2Connect. In the L2Connect, there is roughly EUR 3 billion of BTPs coming from Fineco. So with the consolidation of Fineco, you have a natural decrease of EUR 3 billion. And the current sensitivity on the fair value OCI is a post tax of 2.1 basis points for 10 basis points of movement of the BTPs. And we expect to keep moving part of the BTPs toward the L2Connect. And we have a natural amortization of the BTP portfolio, so the sensitivity should go down further.

On the nonorganic evolution, I mean I don't want to frustrate everybody, but we never comment on rumors and speculation, and we are focused on delivery of our plan. On December 3, we will comment about what should be the future evolution. But the future evolution of the group on an organic basis and maybe on a nonorganic one will be on extremely strict control, will be on extremely strong capital position and will be on ability to have an extremely strong delivery and governance. So afterwards, you can draw your conclusion that you want to draw. But we maintain the discipline we have shown in Transform 2019. And I would add that management team, and starting with myself, are shareholders of the bank and we want to make sure that anything we do is positive for the shareholders of the bank.

[Operator]

The next question is from Domenico Santoro of HSBC.

[Domenico Santoro, analyst]

Back to your Italian bond portfolio and the reference that you gave before with the tangible book, there is much bias among the Italians. So I was just wondering whether we should take Intesa as a reference. And presumably, you're going to reduce by EUR 10 billion, the Italian bond portfolio, if you can give us a time line and what are also the remedy actions to preserve the NII going forward? And update on the LGD waiver on capital and also SME factor, if you have any. And relating to funding, you're going to [ receive ] the MREL target by the SRB in the second part of the year, including the subordination requirements. So I was just wondering whether you are thinking about updating us or even upgrading your funding policy in terms of [ CL #5 ] for the second part of the year or beyond 2019.

[Jean-Pierre Mustier, executive]

Thank you very much. Mirko will take the funding question. Tj, the question on the regulatory evolution for the waivers.

On the NII side, I said that it's a gradual amortization of the portfolio. We are not selling bonds. And you know that our portfolio had a duration of 3.4 -- or 3.2 years, and so we will let the portfolio gradually amortize. We said that for 2019, there will be, I mean a nonmeaningful impact as we confirm the EUR 19.8 billion of top line.

As far as the -- our peers are concerned, clearly, as I said, we look at the BTP portfolio to tangible equity of peers. But we don't include any kind of extraordinary contribution of carry trade and whatever. And when we look not only at Italian peers but also at the European peers and look at their average holding of domestic bonds to tangible equity, so that should give you a target, and the time line is gradually following the target we have in terms of the natural amortization of the portfolio. And we do that to optimize and limit the NII impact, knowing that we can reinvest in other assets which could help smooth out the NII, the first one being growing our loan book to our clients with the liquidity we have.

On the funding side, maybe Mirko before Tj answers on the regulatory side.

[Mirko Bianchi, executive]

Yes. In terms of MREL, of course, we focused this part of the year on the subordinated MREL part. And from that perspective, we are totally super well-placed with a very good nice buffer. The only MREL number that we commented on in the past was the 25.03%. And as you know, there are various moving parts still out there in terms of really determining what is the level on the various banks. And what I can say is that definitely, on the new plan, we're going to have totally the MREL plan embedded. So the plan 2023 will have that. A reminder that MREL will start in 2022 with an intermediate target and then it will be fully loaded by 2024. So that's why this is probably more appropriate to be discussed at the Capital Markets Day.

[Jean-Pierre Mustier, executive]

Tj?

[Thiam Lim, executive]

Yes. And on the regulatory front, first of all, just to clarify, the -- it is -- this, on LGD, is not a waiver. It is a massive adjustment to the so-called disposal. The language has been finalized, but clearly, it has yet to be approved. It should be out hopefully by June sometime. And at that point, we'll work with the regulators in terms of the process for that. And this has not been built into the plan, and we will take advantage of this in terms of the regulatory headwind, which we will present in December. And on the SME supporting factor, this is a positive. Clearly, this has not been built into the plan. And this, we will update that during the Capital Market day.

[Operator]

The next question is from Giovanni Razzoli of Equita SIM.

[Giovanni Razzoli, analyst]

Two quick questions. The first one is on the guidance of the CET1 that you have reiterated the 12% to 12.5% at year-end. But you benefit -- based on my calculation for at least the 30 basis points for deconsolidation of Fineco, which may rise to up to 60, 70 basis points if you get rid also of the remaining 18% stake. So was wondering whether there is a more adverse regulatory headwinds because of this evolution in your CET1 ratio guidance. And especially in terms of risk-weighted asset inflation that you have mentioned, the EUR 25 billion at year-end, whether this was in line with your budget. So that's my first question.

The second one, I [ shared ] your points about the reduction of the portfolio of BTPs. In the recent past, actually, you were a little bit more vocal in buying domestic government bonds. So I was wondering whether there has been some regulatory pressure to increase the diversification of your portfolio since then.

And then please allow me to a very final question. You have been very vocal about not commenting or being very bearish about it, pan-European consolidation, can I apply the same standard to domestic consolidation?

[Jean-Pierre Mustier, executive]

Thank you very much. We never comment on rumors and speculation whether they are pan-European or domestic. So that's the point. And -- but we said that we are very happy to grow organically in Italy where we have a market share on retail and on the corporate side which allows us to grow organically. And that's our key focus.

On the BTP portfolio, we never comment either on speculations or regulatory issues. But as you can see, the measures we have discussed with the Board and we have communicated are part of a package which aim is to improve the profile of the bank and to pass, hopefully, an ability for the market to lower our cost of capital, so equity and funding. And so as I said earlier, our implied cost of equity today we think is too high versus with the profile of the bank. And we wanted to communicate it in advance of our Capital Market Day these measures in order for the market to see them, to digest them, to see the progress we are making. Hopefully, that should help drive our cost of equity which we do not control, but what we can control is actions we can take. And so BTPs, reduction of the noncore, being on the upper end of the buffer, limiting the impact on the cost of funding are all measures which go in the same direction and they make sense as a package, if I may say, and that's the rationale.

On the 12% to 12.5% guidance for the CET1 ratio, I mean I'll let you do your own calculation as far as Fineco contribution is concerned. We said that it will be, for the second quarter, a 21 basis point contribution. And then afterwards, we will see, based on the financial environment, what we do with the remaining part of our holding in Fineco. But we have not seen any worsening of regulatory headwinds. I commented earlier that we expect around 40 basis points of regulatory headwinds in terms of CET1 for Q2, 0 for Q3 and around 20 -- between 25 and 30 for Q4. And the risk-weighted asset impact will be around EUR 15 billion for Q2 and EUR 10 billion for Q4. We said there should be a EUR 25 billion risk-weighted asset, EUR 15 billion for Q2 and EUR 10 billion for Q4, irrespective of any of the loan book evolution that stood risk-weighted asset impact based on the regulatory evolution. So we stand by the prospect that we were giving to the market earlier.

[Operator]

The next question is from Anna Adamo of Autonomous Research.

[Anna Adamo, analyst]

Two questions from me. The first one is just a clarification on Fineco. What will be the capital impact from the potential full disposal of the stake assuming today's prices? And then going back to the targeted reduction in the domestic bond portfolio, if I look at the EBA data, the exposure to domestic bonds as a percentage of tangible book value for European peers is around 50% to 60%. Is this the target that you have in mind for UniCredit for the medium term?

[Jean-Pierre Mustier, executive]

Thank you very much. We -- I said that the impact for Fineco with the disposal of this first tranche, which is more or less equivalent to half of our holding, is 21 basis points based on the environment. I mean you can see that impact of disposal of second tranche will probably be very similar -- marginally higher actually, so a positive impact. As to the average of domestic bonds, investment to tangible equity is concerned, I think you have a good reading by looking at the EBA documentation. And we said that we should over time gradually converge towards the average of our peers. So I just confirm that and let you look at the average of our peers.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

Two questions from me, if I may. First one is on revenue guidance, especially on the core number. If you still have some rate increase in the second half embedded in your number? And if you take it out, where would you be? Second one is on capital. If you have embedded any operational risk and impact in terms of Basel IV implementation in the next 2 years before 2022?

[Jean-Pierre Mustier, executive]

Just on the rate increase question, I'm not quite sure exactly what you mean, but we have communicated the sensitivity to 3 months Euribor, which is EUR 187 million. And the customer rate increase, we have a sensitivity of customer rate increase 1 basis point is EUR 40 million. I don't know if it's exactly your question.

[Ignacio Cerezo Olmos, analyst]

I was referring to -- in order to repeat the core revenue, NII plus fees over last year, you said during the call [indiscernible] rates going up to be at the same level as last year.

[Jean-Pierre Mustier, executive]

Okayk. Okay. So I'll let Mirko comment on that.

[Mirko Bianchi, executive]

As I said before, in terms of client rates, we expect still some increase in client rates over the next couple of quarters. So that's basically what we embed in our guidance.

[Jean-Pierre Mustier, executive]

We said that the -- we communicated before that we said the client rate, which has been increasing in the first quarter, should bottom out in the fourth quarter 2018 and afterwards will gradually increase. You have seen this gradual increase in the first quarter. We had a little bit of, if I may say, exceptionals in the first quarter. So the 4 basis points outside of the exceptionals, which is 2 days shorter for the quarter which are based on our 360-days loans specifically in Italy versus the 365, has a positive impact on the client rates, plus other limited impact. We should have, for instance, for Commercial Banking Italy, instead of the -- this 360 to 365 days, instead of the 5 basis points, we should have 1 basis point increase in the first quarter. And so -- but we still see an evolution of 2 basis points in the year. And as I said, the sensitivity for 1 basis point is around EUR 41 million. And we don't see any increase of interest rate in Italy or anywhere else. Yes, Mirko, on operational risk?

[Mirko Bianchi, executive]

Yes. On operational risk, we basically are embedding a flat operational risk-weighted asset impact in our capital for the rest of the year.

[Operator]

Gentlemen, Mr. Mustier, there are no questions registered at this time.

[Jean-Pierre Mustier, executive]

We suspect you are all exhausted. We are not. So we can take a few more questions. Last chance before the next quarter or actually before the meeting we will have with you starting with tomorrow morning.

[Operator]

[Operator Instructions]

[Jean-Pierre Mustier, executive]

If there is no more question, we call it a day. Thank you very much for your attention. The call was a little bit longer and the presentation a little bit longer than usual because of the comment on these additional 4 measures. But we apologize for that, but we felt it was important to go into this detail.

Thank you very much, and we'll meet with you very soon during the roadshows. Bye-bye then.

[Operator]

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