UniCredit SpA

MIL:UCG

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the UniCredit Second Quarter 2018 and First Half 2018 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions for analysts and investors. [Operator Instructions] At this time, I would like to turn the conference over to 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 all of you. I will start with Slide 3 of the presentation. The second quarter was marked by uncertainty created by a broader geopolitical situation and the threat of trade wars. As concerned Italy, the market reaction in May were overdone, considering the underlying fundamentals of the country are solid, and the economy's strong with exports growing.

Last but not least, the ECB has adjusted their rate guidance in what was viewed as a dovish move by the market, which again means lower rates for longer. This makes me all the more proud of the extraordinary commitment of the whole team which has delivered robust results in a market environment that was not easy.

Let me take a quick look at the highlight of our quarter before Mirko takes you through the figures. Our core bank shows a strong performance with a net income of EUR 2.6 billion, up 4.2% versus adjusted first half 2017 and the ROTE of 10.9% in the first half '18, up 0.2 percentage points on the previous year.

The relevant ratio for asset quality is the gross NPE ratio of the core bank. It stands at 4.4%, improving 85 basis points year-on-year. These are very good KPI that show that UniCredit will look like as the noncore is run down by 2021.

The group continued to enjoy positive commercial dynamics in the quarter. And we had higher lending volume of EUR 9 billion in the core group, the largest quarterly increase for several quarters. We also had positive group net AUM sales of EUR 3.2 billion. Our clients are very active and doing more and more business with us. As a result, the commercial results were resilient.

Transform 2019 is ahead of schedule in terms of cost and derisking. Overall costs are down 7% year-on-year and 2.9% quarter-on-quarter. Our Q2 '18 group cost of risk was stable at 45 basis points and will be below our target of 68 basis points for the full year 2018.

While giving a new gross NPE target for 2018 of EUR 19 billion, this is already below the EUR 19.2 billion target we gave originally for 2019 at our Capital Market Day in 2016 and showed the decisive actions we have taken in derisking the bank.

The underlying financial performance was sustained with group net operating profit up 7.9% year-on-year. The engine that is Transform 2019 is working very well under all market conditions.

Our group net profit was EUR 1 billion, down 13.3% on the adjusted net profit of the second quarter 2017 due to higher nonrecurring other charge and provisions. Mirko will give you some detail on this line item later.

Our group CET1 ratio stood at 12.51% at quarter end, mainly due to a negative 35 basis points for fair value OCI. We confirm our CET1 target of 12.3% to 12.6% for the end of 2018 at current BTP spread.

Let's move to Slide 4. We see the very good first half year for UniCredit. We report a net profit of EUR 2.1 billion, which is up 4.7% versus the adjusted net profit last year, but excluded the Pekao sales and the running net profit of Pioneer and Pekao.

Revenues in the quarter were down 4.3% year-on-year, mainly due to weaker trading impacted by the overall market environment.

Q2 '18 costs were down 7% year-on-year, supported by lower HR costs. Our second quarter cost of risk was stable at 45 basis points, thanks to a supportive risk environment, with 5 basis points impact for model change. Our adjusted ROTE for the group was 8.7% in the first half, up 0.4 percentage points versus last year.

Let's turn to the next slide, which gives you some detail on the progress of Transform 2019. We continue to proactively derisk our balance sheet to lower our cost of capital. Let me also remind you that we continue to be the trailblazer in Italy in terms of derisking. We have significantly upgraded our initial Capital Market Day '16 target. And we still continue to outperform our NPE reduction plan. We have improved the gross NPE target for the group by EUR 4 billion, announced the accelerated rundown of the noncore division by 2021, boosted the 2018 disposal target and have set a new ambitious gross NPE EUR 19 billion target for this year.

And the results continue to be impressive. The gross NPE ratio for the group reached 8.7% in this quarter, below the 9% for the first time. Gross NPE ratio for the core stood at 4.7%, getting even closer to the EBA average. This derisking is supported by the accelerated rundown of our noncore division. In this quarter, gross NPEs in the division dropped to EUR 20.2 billion, well on track to reach our 2018 target of EUR 19 billion. The operating model transformation continues to be ahead of schedule, reaching 84% of the target for branch reduction and 87% for the FTE reduction.

Let's turn to Slide 7. The commercial dynamics for the group are positive and sustained. We have signed 2 bancassurance partnerships in the CEE that will boost our noninterest revenue growth in the region. We also signed a distribution agreement with Poste Italiane on consumer loans in Italy.

We have demonstrated our capacity for innovation by being the first bank to offer cross-border instant payments and by executing the first transaction on a blockchain trade platform that we cofounded. And to enhance our customer digital experience, we have signed a partnership with fintech Meniga, with flexible approach to digital works very well for us and allows us to deliver the very best offer to our clients.

CIB again confirmed its leadership franchise position. We are top 3 position in loan and bonds in Europe and in our home market. We're also proud to have been the financial adviser on the largest number of transaction in Italy, Germany and CEE.

Now let me hand over to Mirko, who will give you more details on our financials. Mirko?

[Mirko Bianchi, executive]

Thank you, Jean-Pierre. And good morning to everyone. I will take you through UniCredit's second quarter/first half financial performance, which was robust. Our group core net profit stands at EUR 1.3 billion in the quarter. Despite volatile market conditions, we enjoyed positive commercial dynamics across the core bank as a result of the hard work and commitment by all our colleagues. The main divisional contributors to our strong performance this quarter were CEE and commercial banking Italy. Group core return on tangible equity was 10.9% in the first half. We confirm the 2019 target of above 10%.

Let's turn to Slide 10. As we have said many times, the KPIs of our core bank are of strategic importance. These KPIs gives a good picture on how UniCredit will look like once the 2021 accelerated rundown of noncore is completed. And the numbers are strong. The group core gross NPE ratio was 4.4%, closing the gap to the EBA average fast. This performance was driven by resilient commercial activity, the tangible result of our cost reduction and an improved risk profile. Net operating profits was EUR 4.3 billion in the first half, up 13.1% over the same period last year. The group core net profit in the first half was EUR 2.6 billion, up 4.2% on an adjusted first half 2017.

Let's turn to Slide 11. Let's now talk about the stated figures of the group. I would like to point out 3 items on this page. First, the underlying business performance is sound. As already mentioned on the previous pages, commercial activity was resilient, but offset by lower trading. Fees were slightly down 0.3% year-on-year, which is a very good result in the current market environment and well above the market in Italy.

Second, the execution of Transform 2019 continues to deliver tangible results quarter after quarter. And therefore, costs are down significantly, both year-on-year and quarter-on-quarter. Cost of risk was at a low 45 basis points, supported by a good risk environment.

Third, on the nonoperating side, there were higher other charges and provisions. On one hand, systemic charges increased due to a higher contribution to the National Resolution Fund in Italy. On the other hand, we have as always taken a very prudent approach in booking additional nonrecurring provisions against a number of legacy files. They were offset for a large part by positive nonrecurring items in profit on investments and single [ lend ] loan loss provisions write-backs. Hence, the overall impact on pretax profit is broadly neutral.

Let's turn to Slide 12. NII was resilient in the quarter, up 1.6% on a stated basis and up 0.8% when adjusted for days and FX effects. The main drivers on NII were the following. Average loan volumes were up 1.1%, and customer rates were marginally down 3 basis points. Lower term funding contributed EUR 23 million as the average cost of funding still goes down despite an increase in the marginal cost of borrowing. The investment portfolio markets and treasury contributed EUR 22 million to NII, mainly thanks to lower balances with the ECB and successful tactical liquidity deployment. We also started to break out the contribution of time value to NII, which is expected to be negative for the foreseeable future, as our NP stock decreases. We marginally update our NII guidance and now expect fiscal year 2018 NII to be at or above the 2017 underlying NII. Funding costs should continue to creep up, but there will be little impact for the second half 2018, as it is rather late in the year, and volumes are still lower than expected.

Let's turn to Slide 13. I will highlight 3 points on this slide. First, by popular request, we have changed the right-hand side of this slide from customer spreads to customer loan rates. Second, in group core, average loans were up by EUR 5.1 billion or 1.3% in this quarter. That is almost double the pace of the first quarter, thanks to good commercial dynamics. Third, the average customer rates were down 3 basis points for the group. We saw stabilization across the divisions, except for Italy and Germany, where we still see competitive pressure on customer rates. If you want to know more on these topics, please call our colleagues in Investor Relations, and they will be happy to help.

On Slide 14, the end-of-period customer loan volumes for group core were up EUR 9 billion in the quarter, 2.2%, and 4.5% year-on-year. This compares with EUR 9.6 billion for the whole year of fiscal year 2017 and underlines our current positive commercial dynamics. End-of-period customer deposit volumes for group core were up 0.5% in the quarter and 4.8% year-on-year.

Let's turn to the next slide. Fees in the quarter were slightly down 0.3% year-on-year. And let's look at the 3 categories separately. Investment fees were down 3.1% in the quarter and 3.4% year-on-year. While upfront fees were down, mainly driven by lower gross sales in commercial banking Italy, we still had a better performance than the market in terms of AUM net sales. More than half of the decline in upfront fees was compensated by higher AUM volumes and better pricing on management fees. This should make investment fees more stable in the future.

AUM stock was up 6% year-on-year and 1.3% in the quarter, driven by positive net sales. Financial fees, financing fees were down 6.9% year-on-year, due to lower fees in capital markets and CIB and guarantees in CEE. Our market shares were stable, which shows that the decline was market driven. Transactional fees were up 9.6% year-on-year, mostly driven by current account fees in Italy.

Let's now turn to Slide 16. TFAs reached EUR 820.5 billion in the quarter, increasing 3.3% or EUR 26.3 billion year-on-year. Gross and net TFA sales were higher than in the previous quarter. And while market performance was negative, it did not prevent TFA stock to go up by EUR 5.1 billion in the quarter.

AUM in the quarter were EUR 219.9 billion, benefiting from net sales of EUR 3.2 billion. AUM stock in all division was up quarter-on-quarter and year-on-year. This is an outstanding achievement, considering the challenging market environment in the quarter. The decline in AUCs continues to be driven by commercial banking Italy, as expiring retail network bonds are converted into AUM.

Let's turn to Slide 17. Trading income in the quarter was down 28.5% versus last year, as the general market environment was unfavorable, especially in fixed income. Spreads widening across the board led to lower client activity. We also had fewer realizations from our bond portfolio.

From our dividend line, the biggest contributor, as you know, is Yapi. Yapi is a very good bank in a country which has young and well-educated population and has very good entrepreneurs. We are in Turkey for the long term going through cycles. Yapi had very good results in the first half 2018. The contribution of Yapi was up 27.9% versus last year at constant FX. However, due to the adverse FX moves of the Turkish lira, it was down 3.4% at current FX.

So let us talk about the impact of these FX moves on the group. It is very small. From an accounting point of view, we consolidate at equity. So the pro rata net income of Yapi shows up in our dividend line. And there, at EUR 183 million in the first half 2018, Yapi accounts for less than 2% of our overall revenues. There is no other impact on our P&L, not in cost, not in loan loss provisions. And on the regulatory consolidation, we only have the pro rata risk-weighted assets of about EUR 25 billion. The recent capital increase of Yapi had no impact on our core tier 1 ratio at group level. Our core tier 1 ratio sensitivity to FX moves is low, only 2 basis points net. For 10% adverse move in the Turkish lira, the minus 2 basis points net impact are composed of minus 6 basis points from capital and plus 4 basis points from risk-weighted assets.

Let's turn to Slide 18. Our focus on cost efficiency is yielding tangible results quarter after quarter. The operating model transformation continues to be ahead of schedule. We have already achieved 87% of our planned FTE reductions and 84% of our planned branch closures. As a result, operating expenses are down 7% year-on-year and down 2.9% in the quarter. The development of costs over the quarters may not be linear. So we suggest you focus on the full year. For 2018, costs will be below our target of EUR 11 billion, while for 2019, we confirm our target at EUR 10.6 billion.

On Slide 19, both HR and non-HR costs are down on a year-on-year basis and quarter-on-quarter basis. HR costs are down 7.6% year-on-year, as FTE reduction continues. Non-HR costs are down 6% year-on-year, mainly driven by lower real estate sponsorship and consulting expenses.

Let's turn to Slide 20. Regarding group asset quality, I would like to point out 3 items. First, the overall group risk environment was supportive in the quarter. It led to write-backs in commercial banking Austria and CEE and, consequently, low cost of risk in these divisions. The cost of risk is expected to begin to normalize in both areas in the second half of the year.

Second, the impact from model changes in this quarter was limited at 5 basis points. The majority of the model's impact for cost of risk is expected in Q4 '18, with slippage risk to first quarter '19.

Third, there were some large write-backs on a few files in CIB. These were one-offs and will not recur. As a result, we represent -- we expect the 2018 cost of risk to be below our target of 68 basis points. Our overall asset quality is steadily improving. The coverage ratio improved further to 60.9%, up 4.4 percentage points year-on-year. The group's NPE ratio dropped to 8.7% in the second Q '18, down 2.4 percentage points year-on-year. This is a great improvement, considering we started Transform 2019 plan close to 16%.

Let's turn to Slide 22. In commercial banking Italy, NII was down 3.3% quarter-on-quarter, while average volumes were up 1.2%. Competitive pressure on short-term loans and corporate loans in general remains high, leading to a decline in customer loan rates of 11 basis points. Adjusted for some one-off, the decline in customer rates was still 7 basis points. We are experiencing no repricing in lending in Italy.

Fees are up 0.9% year-on-year, mostly thanks to strong transactional fees from current accounts. AUM net sales reached EUR 1.1 billion, and AUM stock is up quarter-on-quarter and year-on-year. This is above market performance in a very challenging environment. We were able to attract 92,000 gross new clients despite the closing of another 58 branches in the quarter. The asset quality's improving, both for new business and stock. Cost of risk in the quarter is down to 61 basis points. There was only a limited impact from models, as most of the impact is expected in Q4, with slippage risk in Q1 2019. Return on allocated capital for the first half was 14%.

Let's turn to Slide 23. In commercial banking Germany, NII was up 4.1% quarter-on-quarter, driven by one-off recovery in the quarter. Average loan volumes were down 0.8%, while customer rates were down 4 basis points on an adjusted basis. New loan production was up 10.6% in the quarter, mainly driven by corporates.

Fees were up 1.6% year-on-year, mainly thanks to investment fees. The AUM stock was up by 7.1%, driven by positive net sales, which were higher than last quarter and last year. And the insurance partnership with Allianz continues to perform well.

Cost of risk is still seasonally low, thanks to a good risk environment. The net profit was affected by nonrecurring charges and provision I mentioned earlier, which were mainly booked in commercial banking Germany and CIB. Normalized for the sale of a participation, return on allocated capital was 5% for the first half '18. We confirm our 2019 target of 9.1%.

Let's turn to Slide 24. In commercial banking Austria, NII was down 1.5% versus last quarter, due to repayments from the corporate sector. Corporate loan rates were stable, while average volumes were flat. Fees are up 1.8% year-on-year. AUM were up quarter-on-quarter and year-on-year. And we gained market share.

There were still net write-backs in the quarter, due to a healthy loan book in both retail and corporates. Cost of risk should begin to normalize in the course of the year. While net operating profit is broadly stable year-on-year as a result of the items mentioned before, net profit is down in the same period. The reason is a positive contribution from discounted operations in the second Q 2017. Return on allocated capital was 15.5% for the first half '18. We confirm our 2019 target of 13.3%.

Let's turn to Slide 25. CEE continues to be our growth engine. We saw an accelerated inflow of gross new clients in the quarter, an impressive 317,000 of them. We also confirm our number 1 position in CEE. We had a very good commercial performance, and NII was up 3.9% in the quarter at constant FX, driven by increased loan volumes and broadly stable customer rates. Fees were up 0.6% on last year at constant FX. Excluding the changes in accounting treatment on fees accruals in Czech Republic and Romania, fees would've been up 6.7%.

Trading was down year-on-year as valuation adjustments in Croatia did not compensate the lower bond disposal gains in Russia and Czech Republic. Costs were down -- were up 2.2% year-on-year, still below inflation. Our cost-income ratio remains best in class, only 35.5 percentage points in the first half. The cost of risk is at a low 65 basis points and should begin to normalize over the course of the year. Derisking continues at a brisk pace. And the division's gross NPE ratio of 7.2% in the quarter has already reached the fiscal year 2019 target, which does not mean we shall slow down our efforts. Return on allocated capital for the first half was 16%.

Let's turn to Slide 26. In CIB, net operating profit was up 11.1% year-on-year. This quarter was characterized by challenging capital markets, especially in fixed income. Our plugged-in business model remained resilient in its clients positioning. We kept market shares in DCM stable and even increased the market share of client-driven revenues. Normalized return on allocated capital was 10.6% for the first half.

Let's turn to Slide 17 (sic - see Presentation - Slide 27). As most of you will have listened to the Fineco's results on the 31st of July, I will limit my comments on this slide. We are very satisfied with the overall financial performance of Fineco. It is worth mentioning the strong performance in AUM volumes, which is driven by the sustained productivity of the financial advisers network.

Let's turn to Slide 28. On the group corporate center, revenues improved significantly, mainly driven by lower term funding cost and positive hedging results. Costs are down significantly, mainly thanks to lower FTEs. As a result, the ratio of group corporate center costs to total costs is down to 3.4% in the first half. The fiscal year 2019 target of 3.6% is confirmed. The division made a net profit of EUR 49 million this quarter.

Let's turn to Slide 29. As we announced at our Q1 results, we are bringing forward the closure of this division to 2021. On noncore, one of the effects of the accelerated rundown is increased loan loss provisions in the quarter. From the remainder of the year, this should be in the range of EUR 150 million to EUR 200 million per quarter. We already delivered tangible results. Gross NPEs are down by EUR 1.5 billion quarter-on-quarter, of which EUR 500 million were disposals. The target for gross NPEs for the end of 2018 is EUR 19 billion and EUR 14.9 billion for 2019.

Let's turn to Slide 31. We continued to derisk the balance sheet to lower our cost of capital. Gross NPE of group core decreased by EUR 2.7 billion year-on-year and EUR 500 million quarter-on-quarter. Our core gross NPE ratio has fallen to 4.4% in second Q 2018, getting ever closer to the EBA average. The coverage ratio improved to 58.2%.

Let's turn to Slide 32. Overall, the risk environment remains supportive. The default rate increased 10 basis points year-on-year due to single names in CEE. The recoveries were up year-on-year.

Let's turn to Slide 33. Gross NPEs in commercial banking Italy were stable at EUR 9.5 billion. The gross NPE ratio was down to 6.4%. The commercial banking Italy 2019 gross NPE ratio target is confirmed at 5.3%. Do keep in mind that the reduction of NPEs will not always be linear. The coverage ratio increased to 55.5% in the second Q '18.

Let's turn to Slide 34. Inflows to NPEs in commercial banking Italy were stable on a gross basis and down significantly on a net basis quarter-on-quarter. We continue to see the overall risk environment in Italy as supportive, also evidenced by higher recoveries quarter-on-quarter and year-on-year.

Let's turn to Slide 35. The execution of our accelerated rundown of noncore is progressing smoothly. Performing exposure in noncore were down EUR 1.4 billion year-on-year and stands at only EUR 2.4 billion. As we stated before, all performing exposure in noncore will be gone by the end of 2018, and the division will become a closed NPE book. The noncore division will then rundown by the end of 2021. That means it will reduce its NPEs, costs and losses to zero by that time. There will be no transfer of NPEs or costs back into the core bank, as we have seen in other cases. Last but not least, we saw EUR 0.5 billion of disposals in the division for the second Q '18 and confirm our target of EUR 2 billion for the full year.

Let's turn to Slide 36. Noncore loan dynamics have further improved. Net NPEs were down EUR 8.1 billion, down EUR 4.7 billion year-on-year. Gross NPEs were down by EUR 7.5 billion year-on-year, reaching EUR 22.2 billion. We are giving a new gross NPE target for 2018 of EUR 19 billion. As Jean-Pierre mentioned earlier, this is below the EUR 19.2 billion target we gave originally for 2019 at our Capital Markets Day 2016. NPEs coverage improved significantly to 63.4%, despite the disposal activity.

Let's turn to Slide 38. The group fully loaded CET1 ratio closed at 12.51%, down 56 basis points quarter-on-quarter. The key drivers was the fair value OCI reserve that impacted the core tier 1 ratio by 35 basis points, 30 basis points of which came from the BTP widening. The second biggest impact came from risk-weighted asset dynamics, as our loan volumes led to higher credit risk-weighted assets. Regulation models and procyclicality negatively impacted by only 2 basis points.

On the FX side, as mentioned earlier, the depreciation of the Turkish lira was the main contributor, with minus 5.5 basis points growth. As the risk-weighted assets from Yapi went also down, the net impact of our CET1 ratio was only minus 1.8 basis points in the quarter. We expect our core tier 1 ratio at the end of 2018 to be between 12.3% and 12.6%, as the negative impact from BTP spreads widening is compensated by partial slippage of impact from models, procyclicality and EBA guidelines into the first Q 2019. For 2019, we reiterate our core tier 1 ratio target of 12.5%. Both targets are valid at the current BTP spread levels.

Let's turn to Slide 39. Risk-weighted assets increased by EUR 7.4 billion to EUR 360.7 billion. The biggest driver were credit risk-weighted assets, as these followed the increase in loan volumes. There was also some impact on market risk-weighted assets from the elevated volatility levels.

Jean-Pierre, back to you for the conclusions.

[Jean-Pierre Mustier, executive]

Thank you, Mirco. Before we move to the Q&A, let me briefly recap our first half 2018. We had a strong core bank performance with group core net profit at EUR 2.6 billion and the group core ROTE of 10.9%. Positive commercial dynamics sustained resilient revenues, with group net interests up 1.6% quarter-on-quarter and group fees down only 0.3% year-on-year.

The operating model transformation is ahead of schedule. Group costs for 2018 will be below our target of EUR 11 billion. And the cost target for 2018 of EUR 10.6 billion is confirmed. The accelerated noncore rundown is proceeding as planned, down to EUR 20.2 billion of gross NPE. We give a target for 2018 of EUR 19 billion. Our group cost of risk for 2018 is expected to be below 68 basis points. Our CET1 ratio stood at 12.51% at quarter end. We confirm our CET1 target of 12.3% to 12.6% for the end of 2018 and above 12.5% for the end of 2019. Both targets are valid at the current BTP spread level.

I and the whole team are very confident we will continue to make good progress with the transformation of the group. We have reached kilometer 21 in a marathon, but there is no time for a victory lap. We will continue to work hard and, as one team, achieve our objective of making one bank, one UniCredit a true pan-European winner.

And now, Gianni, Mirko and I are ready to take your questions. If you could please be so kind and limit your questions to 2 each, many thanks.

[Operator]

[Operator Instructions] The first question is from Adrian Cighi with RBC. Please go ahead. Mr. Cighi, your line is open.

[Adrian Cighi, analyst]

Hi there. Two questions, please, one on NII and one on capital. On NII, thank you for the updated full year guidance. A question on the moving parts. We're still seeing pressure on customer spreads, as indicated there before. Previous guidance pointed to stabilization in these spreads in the second half. Is this still what management expects? And then on capital, very helpful sensitivities to spread widening and FX. But if there's another solvent shock, would you be comfortable with a lower CET1 temporarily, or would you reduce the dividend, or I'm assuming you wouldn't hold off any profitability loan growth to deal with the capital headwinds?

[Jean-Pierre Mustier, executive]

Thank you very much. I will give you an overall answer for the customer spread, let Gianni comment on the client activities and competitor activities and I will comment, and Mirko will add on the capital side. If you go back to the Slide 13 of the presentation, you can see the customer loan rates and its evolution, as stated on the slide. We see stabilization in some of the markets, as you can see, in Germany, in CIB, which is up, and CEE, while we see still some pressure on Italy. And Gianni will give you more detail about the competitive pressure in Italy, where we repriced. And some of the banks have not done yet, but Gianni will elaborate on that. Our guidance is to say that the customer rate should stabilize on the second half of the year, while our loan volume will go up. And you have seen that our loan volume in the second quarter has been going up by EUR 9 billion. On a year-to-year basis, the evolution is more or less EUR 18 billion or EUR 19 billion, so basically, the half of the loan growth evolution in the second quarter. And we have seen in July a good prospect in terms of transaction, where our CIB business mainly closed a lot of deals in a very positive manner. I'll let Gianni comment to give you more color on the competitive environment, specifically in Italy, and our client activity. Gianni?

[Gianni Papa, executive]

Sure. Thank you, Jean-Pierre. So we believe customer rates are expected to stabilize in the second half in the range of -- within 1 or 2 basis points. Our loan growth is supported by an intense commercial activity across all business division and customer segments, although we have an ongoing reduction of FTEs and branches. Having said that, if we, for instance, talk about Italy, we have, for instance, repriced our mortgages and so mortgage business. We did this a couple of months ago because we saw some tension on the pricing driven by the movement of the BTPs. And for the time being, we are the only bank that has repriced. Nevertheless, we don't see a deceleration of our business activity. We see also quite a pressure in Germany, both on the CIB side, but also on the corporate commercial banking, so the so-called Unternehmer Bank, where we see that we have for sure a pressure that is coming from ample liquidity. Today, we have -- we can say that we have a double offering in terms of liquidity than requirements from borrowers. Nevertheless, what we're doing, we're increasing the number of customers. So we're increasing lending, but because we're increasing number of customers. And this obviously is helping us also on the cross-selling activity. In as much as CIB is concerned, CIB is performing very well. We have a very strong pipeline. And our CIB division has been performing very well in terms of activity with major corporates and across the different countries. So all in all, I think that we are confirming that we believe that we will have a stabilization of the net interest income in light of competitive environment, in light of the updated ECB guidance on rates. So we have marginally updated our NII guidance and now expect financial year '18 NII to be at or above financial year '17 underlying net interest income adjusted, if you recall, for the EUR 90 million one-off transaction that we had in commercial banking Germany in the first half of last year.

[Jean-Pierre Mustier, executive]

Thank you very much, Gianni. On the capital side, first of all, let's go through the sensitivity to the capital on the evolution of the BTP portfolio. We have -- and it's the last time I'm giving the pretax and posttax sensitivity. And in the future, we'll communicate only on the posttax sensitivity for the fair value OCI portfolio. We have a pretax sensitivity for 10 basis point move of the BTP rate of EUR 137 million on the quarter, or 3.8 basis points, and a posttax sensitivity of EUR 95 million, or 2.6 basis points for a 10 basis point move on the spread. So 2.6 basis points for a 10 basis point move. So you can see that the sensitivity is what it is, but we can absorb within the range of 12.3% to 12.6%, which is given for the 2018. We can absorb evolution of the BTP portfolio, and we can probably absorb even more. If I may say, as mentioned during the presentation, it is not unlikely that we could have a time translation of some of the regulatory capital impact mostly coming from the EBA guidelines anticipation from the fourth quarter to the first quarter 2019. So all that to say that the 12.3% to 12.6% CET1 guidance for the year seems well under control, irrelevant of BTP widening or FX widening. We -- Mirko gave you the sensitivity to FX to our group for Turkey. We have a net sensitivity of 2 basis points for 10% move on the Turkish lira, so 2 basis points for 10% move. It is a net amount because part of it impacts the FX -- the capital, and part of it impacts the risk-weighted assets. So the net is 2 basis points. So you can see there as well that the Turkish lira move is not going to impact massively our capital level. But one could say, if we have a time translation of the regulatory capital impact for the EBA anticipation from '18 to '19, that could put more pressure on our target of 12.5% for 2019. And there, we have a certain number of managerial actions that we are considering in order to achieve our target. So whatever could be the evolution, we feel confident with not only the dynamic position, management of the bank, but also some specific managerial action that we can achieve our target. And this is without changing the current state of what we do in terms of management of the bank and dividend.

[Operator]

The next question is from Jean Neuez with Goldman Sachs. Please go ahead.

[Jean-Francois Neuez, analyst]

Good morning. So 2 questions then. The first question is on the capital guidance. I just noted that you kept the same capital guidance range, so 12.3% to 12.6% compared to the first quarter of 2018. I guess this is not related to the potential delay in the other changes, etc., etc. So I just wondered whether there was any updated view on your total capital headwinds, which you have described in last year's Capital Markets Day, or whether there was any new litigation which have come to light in the 6 months that have passed. And then I had a question more on the legal side. I saw that the provision for risk and charge were much higher than the usual run rate for second quarter. I just wondered whether you could explain a little bit the moving parts there and what the 2019 guidance was as well as trying to understand if there was any relation with the CASHES headlines that we have seen around and what the situation there is in your view.

[Jean-Pierre Mustier, executive]

Thank you very much. First of all, on the guidance 12.3% to 12.6% for the year, as I just said previously to the question which was asked, there is a risk or an opportunity, whatever you see it, that the EBA anticipation moves from the fourth quarter to the first quarter. But there is no change in the overall projection of regulatory impact that we communicated at the Capital Market Day 2017. So it is just a time translation from one quarter to another one. As we already mentioned during the first quarter, this is marginally out of our hands as we can put in place these new guidelines once the model are validated by the regulator. And the regulator might not validate the model in time for the fourth quarter. And that might slip to the first quarter. So there's no change in mind and no capital charge or whatever from a regulatory change. On the order provision, what we have been doing is we took a conservative approach. As you know, we are very conservative all the time. So we took a conservative approach to some of the files. We have nothing to do with the actions you mentioned with a specific small hedge fund. And we have just been willing to make sure that we are on the conservative side. But as you know, we don't communicate and we don't say anything about specific files.

[Jean-Francois Neuez, analyst]

And for the overall guidance in the budget for this line?

[Jean-Pierre Mustier, executive]

For the guidance for what, for the 2018?

[Jean-Francois Neuez, analyst]

For risk and charge.

[Jean-Pierre Mustier, executive]

For risk and charge. We have -- I will let Mirko comment. Aside of this additional provision for the overall charge we have in terms of the overall regulatory charge, we move from EUR 800 million to EUR 850 million. So if we were on a yearly basis, if you take out this additional EUR 500 million, the increase of EUR 50 million is due to additional contribution to the domestic fund in Italy and which should be yearly fixture for at least the next few years.

[Mirko Bianchi, executive]

Yes, no, we never guide on the overall risk and charges. We only guide on systemic charges. And the number is exactly what Jean-Pierre was mentioning, EUR 850 million a year.

[Jean-Pierre Mustier, executive]

But the EUR 50 million which is in addition will -- this EUR 50 million should come on a yearly basis basically for the next few years because of a domestic resolution fund.

[Operator]

The next question is from Azzurra Guelfi with Citigroup. Please go ahead.

[Azzurra Guelfi, analyst]

Two questions from me. One is on the NII. In the past, we have seen the cost of funding being a strong component of the improvement on the commercial side quarter-on-quarter. This quarter, I don't see the same progression. How much of this is linked to the sovereign situation? And how much of that is a commercial decision? The other one is on your target. You are by your own admission ahead of schedule in many of the metrics, and things are going very well, thanks to all your effort. What would you need to be more optimistic on the 2019 target? Because you've moved 2018, which is a great signal, but not yet ready to change 2019.

[Jean-Pierre Mustier, executive]

So I will hand over to Mirko on the cost of funding. Let me just comment before he goes into detail that we have still an improvement of EUR 23 million, as stated on Page 12, from the cost of funding. And before Mirko gives you more detail, I mentioned that, in the last quarter, the widening of the BTP spread had a negative impact on capital but had a positive impact on the overall yield of our fair value OCI portfolio. As I said, the portfolio moved from EUR 42 billion through EUR 44.6 billion, but the yield on the portfolio increased by 30%. So the team managed to do a very good job by increasing the yield, while the sensitivity remained -- the credit sensitivity remained very low at 3.3 years, so virtually unchanged from the previous quarter at 3 years. So there's risk and opportunity, but Mirko, I'll let you comment more detail on the cost of funding.

[Mirko Bianchi, executive]

Yes, on the cost of funding, you're right. No, we have a positive impact of EUR 23 million. The reason for that is lower volume. So we have almost EUR 4 billion in lower volumes that we needed to do from a funding perspective at lower rates, minus 5 basis points in lower rates. And this is basically the reason for this positive impact. Now for the fiscal year 2018, we still see, let's say, a positive contribution coming from funding cost, despite the increase of the marginal cost of borrowing that we are experiencing because of, let's say, the volatility into the market.

[Jean-Pierre Mustier, executive]

On your cost question, as we said, the full year costs will be below EUR 11 billion, so below the guidance we gave. But we confirmed the 2019 cost target of EUR 10.6 billion. I think it's important to look at the cost on a yearly basis that there are some seasonal impacts, specifically on the fourth quarter on the cost side. So don't double up the first quarter in order to try to get the cost target for the full year. For 2019, we said that, if we were to be well below the EUR 10.6 billion, we will do some additional IT investment, as life does not stop at the end of 2019, but carries on. So don't expect the cost for 2019 to be significantly below EUR 10.6 billion. We will prepare life post Transform 2019 as well.

[Operator]

The next question if from Hugo Cruz with KBW. Please go ahead.

[Hugo Cruz, analyst]

Just a couple of quick questions. So on Yapi, can you remind us of your hedging policy for the earnings contribution, if it is changed in any way? And then on CASHES, just why are you seeking compensation from CASHES?

[Jean-Pierre Mustier, executive]

I will let Mirko comment on Yapi first, and I'll take the second question.

[Mirko Bianchi, executive]

Yes, in terms of the Yapi hedging policy, we're basically using a 3-month zero cost option strategy, which has a marginal contribution to our P&L, to the hedge. And we do this for around 50% of our initial 2018 profit, budget profits. And we're doing actually the same for Russia. So it's not only for the Turkish entity.

[Jean-Pierre Mustier, executive]

On your second question, we welcome the decision of the EBA not to open up an investigation on the matter raised by the fund you mentioned. On July 20th, the EBA's confirmed the 2012 treatment of the CASHES, meaning that the shares under the CASHES were valid from a regulatory capital both before and after the introduction of the CRR. So that validates our previous statement, and you have noticed that we don't comment much on the matter. We refrain from commenting and let the regulator comment. We mentioned on the last quarter conference call that the treatment of the CASHES has been reviewed and confirmed by all relevant authorities and ECC in the last quarter on all relevant authorities and that all the shares are to be qualified as CET1 capital. So going forward, taking into account the evolution of applicable regulation and the supervisory dialogue, we are very confident that there will be no material impact -- I repeat no material impact -- on either UniCredit or the CASHES orders after the grandfathering of the CASHES ends in 2021. I don't think I can be clearer than that. But as indicated in the press release on July 20th, UniCredit has filed a complaint against this fund, CASHES Capital, and the asset management company, but also against the fund, so both against the asset management company and against the fund, to be very clear, in the Court of Milan, seeking compensation of damage in the amount of approximately EUR 90 million stemming from CASHES Capital and the fund's actions against the bank over the course of the last months with respect to the CASHES. As per our policy, we do not comment on ongoing proceeding, specifically when they are both criminal and civil. And I will not comment more than that.

[Operator]

The next question is from Antonio Reale with Morgan Stanley. Please go ahead.

[Antonio Reale, analyst]

I've got 2, one on fees, and the other one is a follow up on net interest income. On fees, it seems like your net new money growth in Italy, you're gaining market share. You're growing faster than the market, especially on the new flows. Can you talk about what savings products have you been placing there and what's your fee outlook for the second half of the year? And the second question is on the corporate center NII, which have seemed to be improving sequentially for the last 3 to 4 quarters, which I understand is linked to the funding costs, the lower funding costs. But I've also noticed that there's been an increase in the contribution from the investment portfolio in the quarter. Maybe can you update us on your strategy there and this contribution to NII going forward?

[Jean-Pierre Mustier, executive]

Thank you very much. I will let Mirko comment on the second question on the NII for the corporate center. And before handing over to Gianni on the fees and the fees outlook and the market dynamic, let me just confirm that we target fees for the full year to be close or marginally below the 3% guidance that we gave and to be up 3% for 2019 as well, so 3% or close to 3% for 2018 and 3% for 2019. As you mentioned, our fee activity has been very resilient with very good commercial activity. And Gianni can give you more detail about the business. Gianni, all yours.

[Gianni Papa, executive]

Thank you, Jean-Pierre. So well, despite the, let's say, environment that has negatively impacted the fees, especially in terms of investment fees and especially in Italy, we do have very good results in terms of fees. And this comes mainly from transactional fees, which is a testimony of the strong commercial activity and the cross-selling activity that we have across the group. We had a small decline of fees, though, in CIB. This was mainly driven by the slower market performance in the capital market, in fact especially on the DCM activity, we had a very strong first quarter. We had a slowdown in the second quarter, especially in May and June. And we have seen a strong recovery also in July in the third quarter. And this is because the market slowdown. In fact, our CIB keeps around 6% market share, which is stable compared to the previous quarters. If we talk about the fees in general, we have upfront fees were down, mainly driven by lower gross sales in commercial banking Italy, which in any case had a much better performance when we talk about the net sales of AUM compared to the market and to the different and major peers. We had more than half of the declining from fees was compensated by higher AUM volumes and better pricing and management fees. And AUM stock, as you know, was up 6% year-on-year and 1.3% in the quarter. If we look at the financing fees, as I said, we had a small decline. And this is due to the lower fees in capital market and CIB and the guarantees in CEE. But again, our market share was stable, and we had a very good performance in transactional fees. We're talking about 9.6% year-on-year, and this is mostly driven by current account fees in Italy. So overall, despite the turmoil in the market, we are very happy with the results we have achieved. And as Jean-Pierre mentioned, we believe we'll be closing the year slightly below the 3% increase that we have projected and indicated in our Capital Market Day in December '17.

[Mirko Bianchi, executive]

On the corporate center performance for the quarter, there are 3 main items in there. The first one is cost of funding that is decreasing. So that is improving our NII on the corporate center. The second point is basically a revaluation of basically the FX related to the 81 issuance that we had in US dollar. And the third component is that we are continuously taking down the cost into the corporate center, meaning FTEs are going down, and HR and non-HR costs are also accordingly going down.

[Operator]

The next question is from Delphine Lee with JPMorgan. Please go ahead.

[Delphine Lee, analyst]

So my 2 questions would be, first of all, going back to capital. In terms of the capital build this quarter was slightly negative if you look at the RWA growth outpaced the retained earnings. And this is not something we've seen in the past. So is there something that has changed, or will you consider more business actions or managerial actions to offset that, or just trying to understand a little bit the underlying capital build and if you could give us maybe just what kind of RWA growth underlying do you expect in the next year or so. The second question is on Turkey. I think, in your business plan, you had assumed 20% depreciation in the Turkish lira. And just trying to understand for 2019 how much you're off versus this or just to give a little bit of the order of magnitude compared to your target revenues in 2019.

[Jean-Pierre Mustier, executive]

Thank you very much. Let me take the capital question. And Mirko will give you more detail on the Turkish lira sensitivity. On the capital side, if you go to the Slide 38 of the presentation, which gives you the CET1 work, you can see that we have, let me say, 2 items which stand out. First, we have the negative impact of the fair value OCI of 35 basis points. And this should not happen every quarter basically and should be neutral on average. So that's the first thing. And we had as well FX impact which was negative 10 basis points. Part of the FX impact on Turkish lira or on the Russian ruble is taken on risk column of minus 48 basis points, and a compensating effect is taken on risk-weighted assets. So on the Turkish lira depreciation, for instance, we have on the minus 48 column, I think we have more than 5 basis points, 5.7 basis points I think of impact, and we have a compensating impact of 3.8 on risk-weighted assets. So the fair value OCI of minus 35 should not be recurring. The FX impact should not be recurring either. So let's assume that we have 45 basis points which should be not part of the recurring activity. Nevertheless, we had a decrease of our CET1 of 55 basis points. But you have underlying risk-weighted minus 26 basis points. A large part of that and if not almost everything, as we have only 2 basis points of regulatory model, is coming from our loan increase. Mentioned that our loan increase for the quarter was EUR 9 billion. If you look at the year-on-year evolution of the loan increase, it is actually almost double that. So it does mean that we have in terms of loan evolution quite a sustained and strong activity for the second quarter, which unfortunately, if I may say, is not going to be recurring. So I think that, when we look at the combination of nonrecurring item linked to the fair value OCI, the currency impact and probably sustained but maybe less intense loan growth, you can see that, aside of regulatory impact, which should come later in the third quarter, fourth quarter and next year, aside of regulatory impact, our internal capital generation should be compensating on one side our dividend payout and on the other side the risk-weighted asset growth. So consider this quarter more as an anomaly, if I may say, than a structural position for the group. I will let Mirko comment now on Turkish-ruble.

[Mirko Bianchi, executive]

The assumptions that we had taken in the Capital Markets Day '17 on Turkey was for 2019 a 4.9 lira to dollar level.

[Jean-Pierre Mustier, executive]

And we give the 2 basis points sensitivity for 10 basis points -- 10%, sorry, depreciation of the Turkish lira. So it's important, as Mirko mentioned, on Turkey, there has been some focus on analysts on the impact on Turkey on UniCredit. To just repeat what Mirko mentioned is that Turkey contributes its consolidated equity and contributes for the pro rata share of the net income to the dividend line, so for the first quarter, EUR 180 million. So whatever could be the variability of net income for Yapi Credit, you can see that it is less than 2% of the group top line revenues. So that's something which is small anyway, and variations are even smaller. Then we have risk-weighted assets from a regulatory point of view. The risk-weighted assets are from fully consolidated. This is why we take the 40% of risk-weighted assets of Yapi Credit. But in terms of sensitivity to the currency, it's a combination between the sensitivity on our investment in Yapi Credit and the risk-weighted asset impact, risk-weighted assets of EUR 25 billion more or less, and the net, as I mentioned, is 2 basis points. So whatever impact, 2 basis points for 10% depreciation, that's super small.

[Operator]

The next question is from Andrea Filtri with Mediobanca. Please go ahead.

[Andrea Filtri, analyst]

A question on provisions [indiscernible].

[Jean-Pierre Mustier, executive]

Andrea, we have a problem with your line actually. So --

[Andrea Filtri, analyst]

Can you hear me better now?

[Jean-Pierre Mustier, executive]

No, you -- looks like somebody is crying or suffering next to you. Can that be?

[Andrea Filtri, analyst]

Let me try to move.

[Jean-Pierre Mustier, executive]

Maybe we can take the next question, and you come back. We take you afterwards if you might change your phone. It might be coming from your phone I'm afraid. So maybe, operator, we can take the next question and take Andrea afterwards if he can fix up his phone problem.

[Operator]

Of course. The next question is from Alberto Cordara with Merrill Lynch. Please go ahead.

[Alberto Cordara, analyst]

I just wanted to get back to a comment from Mr. Bianchi that we should see within the context of the NII evolution a negative evolution of the time value. So the question is, what is the current contribution of the time value on the top line? And also, a similar topic, if you can give us an idea of what is the weight of the macro hedge on NII and how we should expect these 2 items to evolve over time. And then sorry, just on -- to apologize if I get back on this point, it's just to clarify. On Yapi Credit, can you tell us what is the current book value at which you have [ cost financials ] and if there is any risk that this book value would need to be changed? Because when I look at the market value of Yapi also in Turkish lira, it's declined significantly recently.

[Jean-Pierre Mustier, executive]

I'll take the second question on Yapi. And I'll let Mirko dig into his notes. If he cannot find the answer before, he will come back to you directly. On Yapi, the current book value, which is stated in our account is around EUR 2.5 billion. And if you look at our per quarter share of the current market cap of Yapi at the current FX level, it's around 1.5. But you know that we look at Yapi valuation in the domestic market in Turkish lira based on the bank performance. And separately, we have an FX impact which impact our FX reserve. Since we invested into Yapi, so for more than 15 years, the FX reserve are a negative EUR 2.6 billion, but are deducted from capital. So the capital impact on the FX reserve is taken and has been taken over time. And I give you the sensitivity of 2 basis point for 10% evolution of the currency. We don't see any reason to change the valuation of Yapi in Turkish lira basically based on its current performance. As you can see, Yapi has been performing very well. Their performance is outstanding on the second quarter. So as such, there's no impairment to be considered. And the currency impact is taken separately in our currency reserve.

[Mirko Bianchi, executive]

On the 2 questions you asked, the first one on the time value, so the time value is the first time that actually we are breaking it out, and the impact for the second Q '18 was EUR 9 million. And mostly, the main contributors are actually the noncore side and commercial banking Italy. So the effect, if I look at it in the first Q '18, it was minus 15. So we went from minus 15 to minus 9. And in terms of outlook, we expect a contribution progressively to decrease, in line with our basically derisking of the balance sheet. And this is mainly due to the noncore write-down, accelerated write-down. On the replicating portfolio, the performance has been that, for the second Q, this earned us EUR 404 million. And this was slightly up, almost EUR 1.5 million up from last quarter. So let's say, in terms of outlook, we're not seeing major, let's say, changes in terms of what the replicating portfolio is earning us.

[Jean-Pierre Mustier, executive]

But as mentioned, the investment portfolio should earn us more, both because of a very marginal increase of the amount invested and, two, because the yield on the portfolio is increasing, while we keep credit duration super low at 3.3 year.

[Operator]

The next question is from Andrea Vercellone with Exane. Please go ahead.

[Andrea Vercellone, analyst]

Good morning. The first one -- the first question is again on capital. Sorry to repeat the same question, but it's not clear to me. And the second one is on cost of risk. So I just wanted to break down a little bit the moving parts between now and yearend. At the Capital Markets Day, you had indicated 2 impacts related to procyclicality and EBA guidelines. If I'm not mistaken, these 2 impacts were 40 basis points for procyclicality/model changes and 80 basis points for EBA guidelines. Now I would like to know how much of this essentially the 40 has already been crystalized, if any. Then how much of the 40 plus 80 or residual 40 plus 80 is embedded in your 12.3% to 12.6% guidance of core tier 1 ratio for the year? And how much have you left out potentially for next year, i.e. I don't understand if what you have left out is simply the difference between 12.3% to 12.6%, i.e. may slip, or is a different amount. The second question is partially linked to this. So you have changed your guidance of cost of risk for 2018 to below 68 basis points. The 68 basis points was, however, made up of 2 components, 53 basis points underlying and 15 indirect impact from model change. So I would like to know whether the component that has been impacted is the 53 or the 68, i.e. is it simply a translation to next year, or the underlying cost of risk is behaving and expected to behave better than the 53 basis points you had budgeted for?

[Jean-Pierre Mustier, executive]

Okay. So let me try to give you an answer on this various stuff. And if more explanation is needed, TJ or Mirko will jump in. First of all, on your second question on the cost of risk, we have -- gave a target of 68 basis points, out of which, as you correctly pointed out, 15 basis points of regulatory impact. We think that the regulatory impact will be marginally lower potentially for the full year from 15 basis points to 9 basis points, so a decrease of 6 basis points. And we expect the better risk environment to guide us besides this small reduction of the regulatory impact to a lower cost of risk. We'll see what it is. But we said that it will be below 68 basis points. And clearly, below 68, minus 6, which is 62 basis points. On the capital side, we have taken as far -- since the beginning of the year, in terms of regulation and procyclicality, we have taken 2 basis points -- 11 basis points, sorry, of impact and 9 basis points on the first quarter and 2 basis points in the second quarter. As far as EBA guidelines are concerned, we have taken nothing yet, as this relies on the validation by the regulator of our models. And if you look at what we could expect in terms of time translation, I would say that we could expect something which is more or less equivalent to maybe half of what we could have on the EBA guidelines, which was anticipated of 80 basis points, so let's say 40, maybe marginally more than the 40 basis points, which could be a time translation to 2019.

[Operator]

The next question is from Giovanni Razzoli with Equita SIM. Please go ahead.

[Giovanni Razzoli, analyst]

A clarification on the last point that you have mentioned as far as the EBA guidelines are concerned. So just to see whether I got it correctly, the 13% -- 12.3%, 12.6% CET1 ratio guidance by yearend incorporates an assumption of impact of the EBA guidelines of around 50 basis points, and then another 30 may come in 2019 so that the total will adapt to 80 basis points. That was the original guidance provided during the Capital Market Day in December. And another that is more clarification. You said that the 12.5% of the CET1 ratio target in 2019 is confirmed, even if the EBA guidelines are -- including the EBA guidelines. That was the guidance of December business plan. But that target -- to reach the target, you may activate some capital management actions, meaning that probably the underlying CET1 is slightly lower. Is this due to the sovereign spread widening, or did I got your comment not properly?

[Jean-Pierre Mustier, executive]

What I said first is that, for 2018, there is a risk or an opportunity, whatever you call it, of 40 to 50 basis points shift of regulatory impact from '18 to '19 because the regulator needs to validate the model. That's -- let's not go into the granularity of is it EBA guidelines, or is it regulation and procyclicality? Our estimated 40 to 50 basis points, which is basically within the spread of 12.3% to 12.6% and taking into account from our previous assumptions the impact of the spread widening on the BTPs. And of course, if we have, as I said during a previous question, this time translation to 2019, then that puts into question our 12.5% CET1 target for 2019. And the answer is absolutely not. Absolutely not because we are very confident that we can take a specific number of actions, and I mentioned that to a previous question, which are managerial actions, which will lead us to have a CET1 ratio about 12.5% for 2019.

[Operator]

The next question is from Domenico Santoro with HSBC. Please go ahead.

[Domenico Santoro, analyst]

Actually, my questions have been already answered. Just a clarification on your funding plan for this year, again, that now you expect a different level of risk-weighted assets, presumably for end of the year. I just wondered whether your TLAC issuance are still in place or you still have to issue the EUR 4.5 billion here [indiscernible] or that has changed. And then a similar one on the loan loss provision, given that some of the model change will slip to next year and I don't think change in the guidance for loan loss provision, just whether you're now more positive on the recurring cost of risk of the bank also going beyond 2018.

[Jean-Pierre Mustier, executive]

Well, I will let Mirko comment on the TLAC side and comment briefly on the LLP side. Mirko?

[Mirko Bianchi, executive]

Yes, on the TLAC side, basically, the funding plan that we have left for the year is TLAC driven. So it will happen. The plan calls for approximately EUR 4.5 billion to EUR 5.5 billion in terms of TLAC instruments. Of course, that will depend on the risk-weighted asset levels that we are going to achieve in the third Q and in the fourth Q if this amount can be reduced.

[Jean-Pierre Mustier, executive]

As far as the LLPs are concerned, we mentioned that our cost of risk will be below 68 basis points. We said that it will come from, on one side, a slight reduction of the procyclicality impact from 15 to 9 basis points that we anticipate and also because of a better risk environment. For 2019, we have a cost of risk might be which is of 55 basis points. I think it's a cost of risk which is historically low, and we see no reason why we should change it.

[Operator]

The next question is from Christian Carrese with Intermonte. Please go ahead.

[Christian Carrese, analyst]

First question is on risk provision. We saw an important pickup. Just an update on the litigation in US, if you can -- if you're going to give us -- if there will be a conclusion in 2018. And what is the total amount for legal matters that you have provisioned as of first half 2018? The second question is on the total financial assets, Slide 16. We still see a quite important growth in terms of deposits with a negative markdown effect on net interest income. What is the target you have in mind in terms of weight of assets under management and total financial assets? What are the action you are implementing to increase the indirect deposit compared to direct deposits?

[Jean-Pierre Mustier, executive]

So Gianni will take the question on TFAs. On the first question, we have -- basically, we are confident that we will reach an agreement with US authorities before the yearend, as we said. And as you know, we are always conservative in everything we do, but will not give any more detail on the matter. As far as the TFA is concerned, I'll let Gianni comment on the very proactive action we are taking to shift actually AUC on one side and deposit towards AUM. Gianni?

[Gianni Papa, executive]

Yes, thank you, Jean-Pierre. Yes, we had an increase in TFAs. We had quite a large increase on the deposit side, which is driven also mainly by the fact that, at the end of the quarter, usually, we have accreditation on the current accounts or liquidity coming from the companies and from the individuals because you have all the salaries that are coming towards the end of the month and then, obviously, also at the end of the quarter. We did have an increase also on the overall net sales of AUM, so transferring basically both AUC and TFAs and liquidity into AUM. We had quite a strong first quarter, if you recall. We had also a positive second quarter compared to the market. We had a slowdown in the activity. Nevertheless, we performed much better than the market in Italy. We performed quite positively in Germany and in other parts of the group. We are not only operating very strongly in the transformation of liquidity and AUC into AUM, but thanks also to the very recent cooperation agreement that we have signed -- for instance, in Germany, as you know, we have signed an agreement with Allianz. So we are very active also in selling insurance products and investments in insurance products. Obviously, we are concentrating a lot of attention in transferring liquidity into AUM. Obviously, our activity is also very much driven by the volatility of the market. And therefore, we will see if the market improves going forward. In as much as liquidity is concerned, nevertheless, we are also interested in keep on driving liquidity into the group because, by increasing the liquidity, we increase the pool of money that then we can transform into AUM, whereas if we would reduce the liquidity with us, it would be more difficult to transform it into AUM.

[Jean-Pierre Mustier, executive]

I think we keep the same target in terms of AUM to TFAs in Italy.

[Gianni Papa, executive]

The target is 42%. We move from 30% -- to 33% back in 2016, and the target is 42%. We are at 35%, 38% now -- no, sorry -- yes, 35%, 36% in Italy.

[Jean-Pierre Mustier, executive]

37% actually in Italy the last quarter, yes.

[Gianni Papa, executive]

37%, sorry, and -- but the target is 42%. In other areas, we're already at that level.

[Jean-Pierre Mustier, executive]

And I pass to Mirko on the cost of deposit more specifically.

[Mirko Bianchi, executive]

Yes, in terms of the cost of deposits, yes, if you look at the average, let's say, cost of deposits, it's going up by 1 basis point. And if I look into your question, there is a little bit of a higher cost in deposits, but it's mostly coming from CE countries. We have countries in the CEs that have interest rate hikes. And this is the natural progression of the cost of deposits. So we have some countries like Romania, Czech Republic that have that type of an impact. So it's -- let's say, it's a natural evolution. It's not us paying more in deposits in Western Europe.

[Operator]

The next question is from Ignacio Cerezo with UBS Global. Please go ahead.

[Ignacio Cerezo Olmos, analyst]

A couple of very quick ones on Turkey, if you can share with us which is the capital impact for the group of the 300 basis points widening of the bonds quarter-to-date. And the second one, I know you have said actually you're in Turkey for the long run, but is there any scenario under which you would consider selling the stake in Yapi?

[Jean-Pierre Mustier, executive]

So on capital impact of the one bond widening for Turkey, I will pass the staff to Mirko. Just -- we never comment on rumor and speculation, and we never comment on questions which are irrelevant. So for your last question, it is irrelevant. We have a long-term commitment to Turkey, and we know it is a country where there is a deeper cyclicality than in any other countries. If ever you went to Turkey and visited Yapi Credit, visited the branches, Giannia and I were visiting some of the branches 2 weeks and a half ago or 3 weeks ago. You can see that the bank in front of the client and the bank in the back room is a very good bank, very well managed, a very modern bank. And a lot of the best practice of the group are actually coming from Turkey. So we have a long-term commitment. And we are not going to comment on anything else. I'll let Mirko comment on the capital impact of the bond widening..

[Mirko Bianchi, executive]

Yes, the capital impact on bond widening in Turkey is 1 basis point every 100, let's say, basis points of widening. So it's quite small.

[Jean-Pierre Mustier, executive]

So once again, I think that you have to take into account for Turkey that Turkey is consolidated at equity. And so the impact for us is we -- Turkey contributed less than 2% of our revenues for the first half, so EUR 180 million. Any variation as such will be small and on our total revenues. And sensitivity, both for the bond side in Turkey or the FX side, is very limited, as we outlined both on the FX, 2 basis points for 10% and 1 basis point for 100 basis points for the bond side.

[Operator]

The next question is from Anna Adamo with Autonomous Research. Please go ahead.

[Anna Adamo, analyst]

Two questions from me as well. The first one is a follow up on Yapi, and the second one is on NII. Firstly, could you remind us, what is UniCredit intragroup funding through Yapi, including any dematurity profile? And second, on NII, your 2019 NII target of EUR 11 billion and was based on the assumption of zero EUR IBOR next year. If I look at the current forward curve, it implies a negative rate of roughly 25 basis points. In light of this development, do you still confirm your NII target of EUR 11 billion?

[Jean-Pierre Mustier, executive]

I'll take the second question. Mirko will comment on the first one. We have taken as an assumption initially that there should be a gradual convergence from the second half of next year to the end of next year from the minus 30 basis points or 33 basis points to zero at the end of the year. Now it looks like that the ECB might delay its gradual normalization to only starting from September onwards and might end up the year -- and the market is telling us that maybe we'll have EUR IBOR at minus 11 or 12 basis points. So you know the sensitivity we have on a 3-month EUR IBOR, which is on a full year basis of EUR 182 million. So if we have a time translation of a few months, you can calculate, but it is an amount which is probably high double digit on AII and no more than that. And we said that we confirm basically our guidance on NII. This is something which is part of the normal volatility, if I may say, of the NII. And we might have either higher loan volumes one side produced by the impact or actually higher revenues coming from investment portfolio, which might compensate that. So no specific issue as far as 2019 NII is concerned. On the other question, Mirko?

[Mirko Bianchi, executive]

Yes, on the Yapi intragroup funding exposure, this is a number that actually we do not make public. But I can give you a little -- a couple of hints in the sense that most of it is actually -- it is loans to support our [ GTB and fig ] business. So it's a very short-term type of intragroup funding. And then there are some loans in which we basically fund some nonbanking subsidiaries in Turkey.

[Operator]

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

[Jean-Pierre Mustier, executive]

Maybe is Mr. Filtry on the phone to ask his question.

[Gianni Papa, executive]

He dropped off.

[Jean-Pierre Mustier, executive]

He dropped off. So --

[Gianni Papa, executive]

But we'll call him. So --

[Jean-Pierre Mustier, executive]

Okay. Any other question?

[Operator]

[Operator Instructions] I confirm there are no more questions.

[Jean-Pierre Mustier, executive]

If there's no question, thank you very much for taking the time. I think we are one of the last bank to report, just to make sure that everybody stays at his desk for most of the summer. We apologize for that. And for those who didn't take a summer break, enjoy the summer break. Enjoy the holidays. Our IR team never sleeps and never takes holiday. So if you have questions, you can call them. Mirko has installed a phone on the beach and will be able together with Jorg and the team to answer any of your question. Thank you very much. Have a good summer, and we look forward to see you soon in September. Bye, bye then.

[Operator]

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