UniCredit SpA

MIL:UCG

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen. Today's conference call will be hosted by UniCredit CEO, Mr. Andrea Orcel; and CFO, Mr. Stefano Porro. [Operator Instructions] Today's conference call is being recorded.

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

[Andrea Orcel, executive]

Thank you very much. Good morning to you all, and welcome to the analyst call for our second quarter results.

Before we turn to the presentation, I would like to start by making a few comments on the announcement we made last night. As you will have read, we have entered exclusive negotiation with the Italian government to assess the feasibility of acquiring selected parts of Banca Monte dei Paschi di Siena.

My ambition for UniCredit has been clear from the start: to deliver risk-adjusted profitable growth with the overriding goal of sustainable returns above the cost of equity across the cycle. There is enormous value to be unlocked internally, which I will come back to later. I have also been clear about the role that M&A can play in the bank's new strategy. It is not a purpose in itself. Rather, it can be an accelerator and a potential improver of our strategic outcomes. It must be in the best interest of our shareholders in line with our goal of value creation, and we must be fully confident in our ability to execute the transaction. The potential acquisition of a going concern based on the commercial operation of Banca Monte dei Paschi di Siena with a carefully defined perimeter and appropriate risk mitigation is just such an opportunity. It will materially strengthen our competitive position in Italy, especially in the economically important central and northern regions and will allow us to generate material synergies.

We have agreed with the government the main prerequisite to be met for a successful transaction. These include capital neutrality, significant EPS accretion, protection from legacy litigation risks as well as the exclusion of all existing NPEs and appropriate protection on performing loans from any loan book that we might acquire. On the basis of the agreed prerequisites, a potential transaction is expected to be both tangible book value per share and value accretive. During the next few weeks, we will perform detailed due diligence as well as assess the ability of a transaction to meet the agreed prerequisites. This will allow us to define the detailed structure, terms and perimeter of any potential transaction and then, and only then, we will decide whether to proceed. I know you will have many questions on this and it will likely be the focus this morning, but please remember that this is just a start of a normal due diligence process albeit framed by clear principles.

So with that, I would now like to update you on the progress we have made in recent weeks as well as to share some of the thinking behind our new strategic plan. After that, Stefano will then take you through the second quarter '21 results in detail.

My initial goal has been to ensure that UniCredit as an organization is operating as efficiently and effectively as possible to achieve our ambitions on our new strategic plan. This meant initially focusing on the internal to unlock the phenomenal value that lies there. Our first step is doing this to create a new, more decentralized organization that provides greater empowerment albeit with clear control and oversight from the center, and accountability to the first line of management, the team that will deliver the plan.

With this new structure in place, our focus now shifts to translating the guiding principle that underpin our strategy into the financial levers that will guide the organization. These are the levers that will deliver our overarching goal of sustainable returns above the cost of equity over the cycle. Remember that we are not doing this to create a business that is simply fit for purpose. We're doing this so to create a business that can compete against the very best, a business which, over time, can be the very best.

Let me briefly summarize the second quarter. The bank delivered a strong quarter driven by a robust commercial performance reflecting the strengths of UniCredit's franchise as well as a low cost of risk. Fees, a key driver of these results, delivered the second highest quarterly level in many years, while net interest income is starting to stabilize. Underlying net profit reached EUR 1.1 billion in the quarter, up 24.7% quarter-on-quarter, and EUR 2 billion in the first half, equivalent to an underlying first half '21 return on tangible equity of 7.7%. Our balance sheet remains resilient with a CET1 ratio of 15.5% at the end of the quarter despite absorbing 49 basis points of regulatory headwinds.

Let's turn to Slide 5. When we last met 3 months ago, just after I had joined the bank as CEO, I said that I would spend my first 100 days getting to know my colleagues and the business strengths and weaknesses. These, I have done, and it has been fascinating. The bank has many strengths: our unique pan-European footprint, the distribution power of our commercial network, the strength of our balance sheet and, not least, some exceptional talent.

This unique geographic footprint is very important to us. With roots and heritage firmly anchored in Italy, our network spans 13 core markets with top 3 ranking in Italy, Germany, Austria and Central and Eastern Europe. Our knowledge of these diverse markets mean we can leverage their unique strengths in building a truly pan-European bank. We can take the best of cultures, practices and perspectives to form one group, but working together amounts to much more than just the sum of its parts. With 16 million clients, the distribution power of our commercial network has been demonstrated once again. In the second quarter, we delivered another record fee performance thanks to strong gross sales of EUR 15.5 billion of investment funds and insurance products. We also benefited from our broad product range and our ability to adapt to our customer needs. We also have a strong balance sheet to leverage on. Our gross NPE ratio is in line with the average of other European banks. Our CET1 ratio stands at 15.5%. We also have a solid and healthy liquidity position.

But there are areas where we can do better as a bank. These include a rebalancing of our risk appetite and addressing our lengthy decision-making processes and capital efficiency. Changing these, which we have already begun to work on, will form an important part of our new strategic plan.

Let's turn to Slide 6. My priority since I joined the bank has been developing a new strategy for UniCredit. This will be based around 3 core themes, namely simplification, digitalization and client-centricity. As I have said already, the real opportunity lies internally. These core themes will help us unlock the significant value inherent in the UniCredit business.

Simplification involves reducing complexity, eliminating bureaucracy and empowering colleagues while retaining clear lines of control and oversight from the center. This brings a number of clear benefits. There will be greater accountability so decision-making and execution will be much faster. By getting closer to our clients, we will be able to serve them more effectively. If we get this right, it will not only grow our revenues but also generate further cost efficiencies. We want to make digitalization part of UniCredit's DNA, incorporating technology and data into every decision we take. It will enhance our service to clients and reinforce the simplification of our business. And at the heart of everything we do are our clients and the communities that they are part of. They are the reason we exist.

Let's turn to Slide 7. We have moved fast since we last met, delivering on my promise that one of my first priorities would be to reduce complexity and simplify UniCredit's structure, evidenced in the establishment of a new Group Executive Committee and in the restructuring of the organization. Let me illustrate the changes we are making with 3 actions we have already put in place.

Bureaucracy has been and will continue to be reduced across the group. We continue to tackle unnecessary complexity, increasing individual responsibility within a strong control framework. This will speed up decisions, making across -- decision-making across the organization. Within the SpA, we have more than halved the number of committees and hours spent in them. This is now being replicated across the rest of the group.

Together with a simplified organizational structure, this will increase the proportion of decision taken locally closer to client, always within a clear framework. UniCredit Italy has been established managerially as a stand-alone, fully empowered geography, combining all our Italian commercial operation under the leadership of Niccolò Ubertalli. Alongside newly configured activities in Germany, Central Europe and Eastern Europe, the removal of unnecessary structure will allow faster decision-making and execution, providing closer links between management and the clients and community within which they operate.

Digital and data have been established as a new division that will elevate technology, digitalization and data to the Group Executive Committee. By removing digital and data as a silo and working across all businesses, this will ensure they will be embedded in every strategic delivery. Let me be clear. Digital and data are of critical importance to the future of our bank.

Taken together, the actions will increase ownership and accountability, reduce complexity and ultimately allow the organization to refocus its energy on our clients. This lays a strong foundation for the delivery of a new strategic plan.

Let's turn to Slide 8. Our strategy will be underpinned by the pillars of simplification, digitalization and client-centricity. But how will we deliver? To deliver sustainable returns above our cost of equity, our overriding objective, we will manage the bank by optimizing the combination of 3 levers: revenue growth, operating efficiency and capital efficiency.

Revenue growth will be enhanced by getting closer to clients and normalizing our risk appetite. Risk management is the bedrock of best-in-class banking, and we will not surrender the risk discipline we have worked so hard to acquire in the last few years. But we can get better at achieving a more efficient trade-off between risk and return, moving closer to the risk efficiency frontier. Operating efficiencies will be a result of reduced complexities and increased digitalization. Capital efficiencies has not been a priority during the restructuring over the last few years. Going forward, it will be central, a central element of the bank's plans. This will include more effective capital allocation and targeting capital efficiencies, including a focus on risk-weighted asset densities. This should allow us to better manage the regulatory headwinds in the years ahead.

Optimizing the outcome of these 3 levers will involve making trade-offs at times. It might be that we forego some revenue to release capital, leading to a higher return; or we invest in the business, increasing cost to generate a capital-light revenue stream. Each and every measure we take will be to achieve our singular objective: delivering sustainable returns above the cost of equity over the cycle.

Let's turn to Slide 9. Finally, I would like to share some thoughts on the second quarter results. The bank delivered a robust commercial performance in second quarter '21, with signs of recovery throughout the bank's franchise. Net interest income showed sign of stabilizing in the quarter, supported by an emerging demand for credit. Fees delivered another very strong quarterly performance, almost matching the record performance of the first quarter. Italy was a standout feature with new production of mortgages accelerating and gross sales of investment funds and insurance almost matching the high level we saw in the first quarter. This is a testament to the power of our distribution network, and one of the reasons why UniCredit Italy was established managerially as a stand-alone, fully empowered geography.

The bank's cost discipline remained evident in the second quarter with total costs almost flat versus a year earlier. This leaves us on track to deliver on our guidance of flat cost for full year '21 relative to full year '19. The cost/income ratio improved by 4 percentage points to 53.7% in the first half of '21, demonstrating the operating leverage within the business. But as I have already said, we can and we will deliver further operating efficiencies. Our strong balance sheet was maintained in the quarter with a CET1 ratio of 15.5%, equivalent to an MDA buffer of 647 basis points. This was despite absorbing 49 basis points of regulatory headwinds, thanks to our organic capital generation in the quarter. Capturing capital efficiency, where we know we can do better, will form a central part of our new strategic plan. Combined, a robust commercial performance, cost discipline and our strong balance sheet underpinned a solid profitability with an underlying return on tangible equity for the first half of 2021 of 7.7%.

I will now hand over to Stefano, who will take you through the second quarter 2021 results in more detail. Stefano, the floor is yours.

[Stefano Porro, executive]

Thank you, Andrea, and good morning, everyone. Let's turn to Slide 11. In second quarter '21, UniCredit delivered a sound underlying net profit of EUR 1.1 billion, up 24.7% quarter-on-quarter. Revenues reached EUR 4.4 billion in second quarter '21, up 5.5% year-on-year, reflecting very strong commercial revenues with net interest income plus fees up 2.8% year-on-year. The group's continued focus on cost efficiency and strong cost discipline resulted in second quarter '21 cost equal to EUR 2.5 billion, almost flat year-on-year.

Our stated cost of risk reached 33 basis points in the second quarter '21, benefiting from better-than-expected asset quality experience, including moratoria, partially offset by regulatory headwinds. As a consequence, we have decided to significantly improve our underlying cost of risk guidance to below 40 basis points, equivalent to underlying loan loss provision of less than EUR 1.8 billion. The strength of the balance sheet can be seen in our extremely healthy capital position. We closed the quarter with fully loaded CET1 ratio of 15.5%, implying an MDA buffer of 647 basis points.

The key financial events of the second quarter '21 include the following. conclusion of the first share buyback program 2021, where UniCredit purchased in aggregate around 17 million shares for a total consideration of EUR 179 million, equivalent to 0.8% of the share capital. These shares will be canceled in accordance with the resolution passed at the AGM in April; a combined ordinary capital distribution of EUR 447 million for full year '20 that was equal to a total yield of around 2%; issuance of our inaugural senior preferred green bond for EUR 1 billion with a very attractive book; upgrade from Standard & Poor's that changed UniCredit SpA's outlook to stable from negative; and the issuance of EUR 750 million of additional Tier 1 and of $2 billion of dual-tranche senior preferred.

Let's now look at the P&L in more detail, starting with the group net interest income on Slide 12. Net interest income is showing sign of stabilizing and was up 1% quarter-on-quarter. Even if we adjust for the extra day in the quarter, net interest income was still up by 0.4% over the quarter. Once again, this quarter, like prior ones, was characterized by massive excess liquidity in the system. Market rates, however, were relatively stable.

Let me make a few brief comments. Demand for credit is showing a sign of recovery. All divisions, bar Corporate & Investment Banking, delivered growth in average volumes in the quarter. We are starting to see the first sign of economic recovery feeding through the demand for credit but the picture remain mixed. While new Italian residential mortgage production is accelerating, new production in corporates continues to be offset by client repayments, a notable feature of CIB this quarter.

Customer loan rates remain under pressure. Continued competition arising from excess liquidity contributed to lower customer loan rates in all divisions, bar Corporate & Investment Banking. Typically, front book pricing remains below the back book. Most of the impact from lower customer rates in the quarter was concentrated in Commercial Banking Italy, which also saw further growth in its guaranteed loan book. There was an incremental contribution from TLTRO III. As previously announced, we took an additional EUR 12.7 billion of TLTRO III at the very end of March. This contributed EUR 15 million to the net interest income in the quarter. Market rates were stable. This can be seen amongst other items in the stability of the contribution from deposits and the minimal contribution from term funding and the investment portfolio in the quarter.

Our outlook remains unchanged. An economic upswing will drive with some delay a recovery in the demand for credit, a progressive reduction of the excess liquidity in client accounts as deposit gets spent or investment as well as an improvement in our lending mix as we normalize our credit risk appetite. However, until the system-wide excess liquidity is drained, customer lending rates will likely remain under pressure. Looking forward, as we move through the remainder of full year '21, some headwinds can still affect NII until a sustained economic recovery takes hold.

Let's turn to Slide 13. Fees delivered another very strong performance as economies began to slowly open up to the quarter. Fees in second quarter '21, were only 0.8% below the level of the prior quarter, which, remember, was our highest quarterly fee income in over 5 years. Year-on-year, there was a pronounced increase of over 20%, reflecting the initial material impact of the pandemic and lockdowns a year ago.

Let's look at the component parts of fees in more detail. Investment fees generated another standout performance, matching the level of the first quarter and nearly 50% higher than a year ago. Asset management upfront fees continue to perform well, albeit not quite matching the high level of the prior quarter, thanks again to robust sales activity across the network. Assets under management fees were up 6.9% quarter-on-quarter, a combination of both higher volumes and better pricing. Financing fees have continued their recovery from the lows seen in the third quarter '20 and are now 2.7% above the level over a year ago. This was thanks to a strong rebound in credit protection insurance sales, which benefited from the recovery in new residential mortgages production in Italy. Transactional fees were up 10.9% year-on-year and marginally up on the quarter, thanks to a recovery in cards and payment services as these GDP-sensitive subcategories responded to a pickup in economic activity.

In terms of outlook, let me make some general remarks. In terms of investment fees, we expect a normalization in the second half of the year. We do not expect the exceptional gross sales performance in investment fund in insurance product to be sustained. The recovery in transaction fees will continue into the second half as the restriction ease, although the rate of easing remains dependent on the vaccine campaign. Financing fees can benefit in the second half '21 from cross-selling opportunities connected with the better lending dynamics. With the ongoing rollout of the mass vaccination program across our key geographies, we remain cautiously optimistic that the worst of the impact of lockdowns on client activity is now behind us.

Let's turn to Slide 14. Trading income in first half '21 was very strong, reaching EUR 1.1 billion, double the level of first half '20, mainly thanks to the high quality of the recurring client activity and also to a positive contribution from XVA. Client-driven trading was excellent, contributing EUR 733 million in first half '21, up 27.7% first half from first half, excluding the volatile XVA component. This strong performance came mainly from fixed income and currency, which did particularly well in the first quarter of the year. Non-client-driven trading income was up 21.9% first half from first half, mainly thanks to treasury. Trading income excluding XVA in the quarter was above our quarterly run rate of around EUR 350 million on average per quarter, but it's expected to normalize at that level in the second half of the year.

The higher contribution from dividends in second quarter '21 more than double the level of second quarter '20 was thanks to the other equity and financial investment as well as Yapi. Let me remind you that the dividend line also includes the contribution from the insurance joint venture in Italy. In second quarter '21, this amounted to EUR 32 million.

Let's turn to Slide 15. Our continued focus on cost efficiency and strong cost discipline led to first half '21 cost of EUR 4.9 billion, down 1.2% first half on first half. This resulted in significant operating leverage with a cost/income ratio of 53.7%, an improvement of 4 percentage points versus first half '20. HR costs were 1.9% lower, first half from first half, thanks to faster-than-expected FTE reductions, with FTEs down 3.4% compared to first half '20. These reductions were mainly in Commercial Banking Italy. Non-HR costs were flat, first half from the first half, with lower credit recovery expenses and real estate costs partially offsetting higher IT expenses and depreciation.

Second quarter '21 total cost amounted to EUR 2.5 billion, 2% higher than the previous quarter, mainly due to a one-off lower pension cost in Commercial Banking Austria in first quarter '21. COVID-19 has had a limited impact on our cost base year-to-date. In the first half of the year, we had EUR 25 million of COVID-19-related costs mainly for security and real estate expenses. This was EUR 45 million less than in first half '20. For full year '21, we confirm our guidance of flat costs relative to full year '19 at EUR 9.9 billion.

Let's turn to Slide 16. Before looking at the quarter and our revised cost of this guidance, let me once again remind you of our approach to provisioning that we introduced during 2020 given the pandemic. We did not change our provisioning approach in general but rather, game was to proactively capture the future cost of default in the loan portfolio and properly reflect the forward-looking economic impact of COVID-19. Loan loss provisions -- there are 4, included overlays as well as specific provision and regulatory headwinds. As a result, you should always look at the cost of risk for full year '20 and full year '21 together just as you should for the underlying macroeconomic assumptions.

Our stated cost of risk reached 33 basis points in second quarter '21, reflecting a better portfolio experience than expected and the moratoria extensions. This was only partially offset by regulatory headwinds. Specifically, the quarterly cost of risk was made up of 22 basis points of overlay provisions, 13 basis points of regulatory headwinds, less 3 basis points of specific provisions. Therefore, our underlying cost of risk was 20 basis points in second quarter '21 and 17 basis points in the first half 2021. Benefiting from prudent underwriting, forward-looking provision in prior quarters and the better macro scenario than expected and to the successful vaccine rollout, we have had a better portfolio experience. This has resulted in an improved cost of risk guidance for full year '21. We now expect a stated cost of risk in full year '21 of below 50 basis points and underlying cost of risk of below 40 basis points, equivalent to underlying loan loss provision of less than EUR 1.8 billion in full year '21.

Let's turn to Slide 17. This quarter, we have changed the presentation of asset quality in this slide, moving to a full group view. That has included the noncore. This is consistent with our goal of fully running off the noncore by the end of 2021. Further details on our noncore can be found on Page 35 in the annex. In second quarter '21, both gross NPEs and the gross NPE ratio decreased to EUR 21.5 billion and 4.7%, respectively, thanks mainly to further disposals. Based on the EBA definition, the gross NPE ratio for the group, excluding the noncore, remains in line with the average of other European banks. The coverage ratio decreased 0.6 percentage points to 57.6% in second quarter '21, mainly due to a mix effect with a greater proportional reduction in bad loans, which naturally have higher levels of coverage. Our underlying asset quality remains sound with no material impact from COVID-19 yet. At the end of the quarter, a large part of the moratoria portfolio expired with only EUR 6 billion in Italy choosing to opt in to an extension.

Let's turn to Slide 18. Our fully loaded CET1 ratio sits at 15.5%, equivalent to an MDA buffer of 647 basis points. This was despite absorbing 49 basis points of regulatory headwinds in including procyclicality, thanks to our organic capital generation in the quarter. We now expect regulatory headwinds to be below 1.2 percentage points for full year '21 overall. Given the regulatory headwinds year-to-date, this implies the remaining headwinds in the second half of the year will be below 0.8 percentage points. Our MDA buffer in full year '21 is expected to remain above 400 basis points.

In the quarter, we completed the first buyback program 2021, where UniCredit purchased in aggregate around 17 million shares for a total consideration of EUR 179 million. This is equivalent to 0.8% of the share capital. This share will be canceled in accordance with the resolution passed at the AGM in April. Our capital distribution policy is confirmed with an ordinary distribution of 50% of underlying net profit, comprising cash dividends and share buybacks. We are currently accruing for the cash dividend at a rate of 30%. In addition, for 2021, an extraordinary capital distribution of EUR 652 million, fully in the form of share buybacks, was approved by the AGM in April. Execution will be later in the year, subject to supervisory approval. The total capital distribution for 2021 would be EUR 1.1 billion, equivalent to a yield of around 5%.

I will now hand over to Andrea.

[Andrea Orcel, executive]

Thank you, Stefano. Let me start by updating our guidance for full year '21. Assuming a progressive economic recovery over the remaining months of the year, the pace of which will be determined by the rate at which mass vaccination programs allow restrictions to ease and subject to stability in interest rates, full year 2021 revenues are expected to be in line with previous guidance at circa EUR 17.1 billion. Net interest income can be affected by headwinds in second half 2021, while transactional fees will likely benefit from tailwinds.

Full year 2021 costs are expected to be in line with full year 2019 levels at EUR 9.9 billion, consistent with previous guidance. Our full year 2021 underlying cost of risk guidance, however, is now expected to be below 40 basis points, equivalent to loan loss provision of less than EUR 1.8 billion. Our recent asset quality experience, including moratoria expirations, suggests that the outturn for the cost of risk may be even better than our revised expectations. As a consequence, the underlying net profit for full year 2021 is now expected to be above EUR 3 billion.

At the start of today's presentation, I updated you on some of the thinking behind our new strategic plan. It will be based on 3 guiding principles, namely simplification, digitalization and client-centricity. The overriding objective of the plan is to deliver sustainable returns above our cost of equity. To do this, we will manage the bank by optimizing the combination of 3 levers, risk-adjusted revenue growth, operating efficiency and capital efficiency. My first 100 days has been focused on putting in place the team and organizational structure to deliver that plan. I very much look forward to doing so and to seeing you all in the fourth quarter when we intend to present the new strategic plan in detail at our Investor Day.

Now I will hand over to Jörg Pietzner, Head of Group Investor Relations, for the Q&A session. Thank you, everyone.

[Jörg Pietzner, executive]

Good morning, everyone. Before we go to questions, let me make a small announcement that I hope will make your life a bit easier. By popular demand, we have now published our divisional database back in Excel. [Operator Instructions] Moderator?

[Operator]

[Operator Instructions] The first question is from Antonio Reale with Morgan Stanley.

[Antonio Reale, analyst]

Thanks for the presentation and the divisional database. A lot to digest. I'll try to stick to 2 questions, 2.5 maybe actually. The first one is on M&A. In the last quarter, you said M&A deals need to show not only financial discipline but also have a strategic fit. And yesterday as well, if I remember correctly, Andrea, you mentioned you don't think market shares are the reason behind UniCredit's profitability gap in Italy, which we agree with, by the way. But what do you think is the driver of the gap then is my question. What's the commercial rationale for buying Monte dei Paschi's assets here? I ask you -- please don't get me wrong, please. But you participated yourself, in your previous slides, in yields that were accretive on paper and turned out to be not as good in practice. How can you assure that the franchise is worthwhile? That's my first question.

Secondly, related to it really, will you be able to do share buybacks as you integrate Monte dei Paschi? Do you think the executional risk is something that ECB will be comfortable with?

And lastly, it seems like NII is starting to stabilize also in Commercial Bank in Italy, which is good to see. Fees have been strong. I've heard your comments on the second half of the year for investment teams, but I still struggle to understand why you've reiterated your revenue guidance at EUR 17.1 billion for the full year. You seem to be implying a significant slowdown. And I wonder how to square that with your previous guidance, which was always for second half to be better than first half, consistent with reopening. And those are all my questions.

[Jörg Pietzner, executive]

Thank you, Antonio. So we'll have the NII done by Stefano and obviously the ones on share buyback and Monte dei Paschi by Andrea. Andrea?

[Andrea Orcel, executive]

Okay. Thank you, Antonio. So strategic rationale, I guess. I think the -- as I said, the M&A is an accelerator at the right terms. Do we absolutely need to do a transaction in Italy? We do not. And I stand by my statement that the franchise is fully capable of growing profitably, and we will explain exactly how during the presentation of the business plan.

Having said that, we believe that not only Monte dei Paschi would come at the right terms if the terms that -- if the principle we have agreed are upheld but also and most importantly help us rebalance our presence in Italy to Center North. Monte dei Paschi brings about 17.7 points of market share in Tuscany for us, about 4.5% in Emilia Romagna, about 4.5% in Lombardy and about 8 points in Veneto. That for us means that we win the entire network of UniCredit, where we balance our center towards Center North away from Center South. And that is healthy. Just as you know, Italy is not a uniform country in terms of economic performance, in terms of characteristics. So the ability to rebalance towards Center North at, let's say, adequate terms is a clear benefit of this transaction.

The other clear benefit of the transaction is our plan, looking forward, is predicated on a number of actions on digitalization and multiple access to clients. And those actions obviously benefit from being applied to a larger scale. We have 7.6 million clients within UniCredit. Potentially acquiring another 4 million clients would greatly benefit the scale we have in rolling out these initiatives for the benefit of both of our clients and our core efficiency. So this is the industrial logic that we see, obviously within the principles that we have set, no deviation.

Separately, you asked also about integration and about ECB. Well, obviously, I cannot comment on the ECB, and the ECB will obviously have to sign off on the transaction. If and when, it is there to be signed off for. At the moment, we're just entering due diligence. So it's premature. In terms of the integration, all integrations are complicated. This one, I would say, would be simplified to a great extent by the fact that we would be purchasing only parts of the franchise and obviously parts that we select. And by purchasing what is complementary and by purchasing what is -- fits with us and by excluding what doesn't, obviously, the integration becomes much simpler than otherwise. So these are my 2 answer on the matter.

[Jörg Pietzner, executive]

I think Antonio had also the slight twist on the integration. If it's capital-neutral, will this have any impact on any planned share buyback or no?

[Andrea Orcel, executive]

For the time being, I'm only commenting on the plans that we have at present. And obviously, we stick by them. I think with respect to looking forward, we will discuss and debate with you our new plans, which will be grounded on the new business plan when we presented. But as a principle, I think you can expect that capital returns are a center pillar of any plan we would roll out.

[Stefano Porro, executive]

Antonio, in relation to the shares buyback, if you were referring to the buyback of this year. So as I was highlighting before, so the EUR 652 million shares buyback has been already approved by the AGM. And so taking consideration that ECB repeal their dividend distribution policy, we're then expecting to fill the authorization process and then to execute the buyback later in the year.

In relation to your questions, as a matter of fact were 2, one in relation to the NII stabilization, other one in relation to the previous guidance. I will start from the NII stabilization. If you look at the dynamic of the net interest income in the quarter, I mean not only Commercial Banking Italy but also Commercial Banking Germany and CE, were up slightly about EUR 10 million quarter-on-quarter. Then as a matter of fact, if we are looking at Page 23 of our market presentation, you can see the commercial loan dynamic in relation to both volumes and rates.

And in relation to volumes, all the division, bar Corporate & Investment Banking, are growing. More specifically, Commercial Banking Italy on average is increased in the stock of EUR 2.6 billion. The point is that on the client rate perspective, we are down 4 basis points on the group and 10 basis points in Italy due also to the combination of state guaranteed loans and a reduction in the rates of short-term loans and overdraft. So that's why in relation to the dynamic of the net interest income, we're highlighting that we might have further headwinds deriving from depression on the customer side because the front-book pricing is lower than the back-book pricing until the dynamic of the volume is more sustained.

In relation to the guidance, yes, we are in line with the previous guidance, meaning be broadly in line with EUR 17.1 billion, that it means that we can be slightly below or above EUR 17.1 billion or so for a few hundreds of millions. And as we were highlighting before, we are expecting, on one hand, to have headwinds on the NII. But on the other hand, on fees, we are expecting to have tailwinds, especially on transactional fees.

[Jörg Pietzner, executive]

Thank you. I think it's not so bad Antonio getting 4.5 answers and 2.5 questions.

[Operator]

The next question is from Andrea Filtri with Mediobanca.

[Andrea Filtri, analyst]

First of all, thank you for returning to the Excel publication. I have 2 questions. One is on your cost of risk guidance and another one is on M&A. On your cost of risk guidance, is it implying any usage of overlay provisions? And if so, how much? And could you explain us the mechanics and the timing of when, for instance, auditors could require you to either use or release overlay provisions?

And the question on M&A is if an eventual MPS transaction would imply that there is no room for another industrial deal.

[Jörg Pietzner, executive]

Thank you, Andrea. Of course, the first will be done by Stefano and then M&A by Andrea. Stefano?

[Stefano Porro, executive]

Yes. So in relation to overlays, as we shared, we did have overlays in 2020 but also during 2021. As a matter of fact, when we are looking the second quarter '21, we had overlays fundamentally connected with the performing portfolio, more specifically connected with the increase of coverage on the loans under moratoria, whose clients decided to opt in. The overlays are of fundamentally 2 topologies. One is connected with the macro scenario. The second one is connected with the movement of position to Stage 1 to Stage 2. We are updating the macroeconomic scenario twice per year. So one was just for the second quarter, and we will update in the second half. So in Q4 in relation to the macro scenario, we'll update the macroeconomic conditions.

In relation to the second topology of overlays, that's more connected, let's say, with migration of Stage 2. It will be dependent on the moment when we will have changes in the key parameters and also the timing necessary in order to look at the dynamic of the Stage 2 portfolio especially in Italy, following also the -- and considering the amount of position that are under moratoria in order to understand which position will migrate to Stage 1 and which position will migrate to Stage 3. The timing of these will be by the end of 2021 and first half of 2022.

[Jörg Pietzner, executive]

Thank you, Stefano. Andrea?

[Andrea Orcel, executive]

Andrea, thank you. And let me remind everybody what I say. I do not consider M&A to be a strategy nor a purpose in itself. I always consider it to be an accelerator or potentially improver of our strategic outcome. So in the case of MPS, the timing is right. The condition would be right in my opinion. And the position between the parties is aligned. Because of these reasons, we considered moving forward on it on an accelerated pace as we can, at this juncture, combine that integration with the roll-up of a broader plan for Italy. And so as such, it is an accelerator. It is an improver, and it is something that we can do without delaying too much the plans that we have for the broader franchise, which I insist are the plans that bring the lion's share of the value here. With respect to doing our deals, again, I can't comment, but honestly, there is no such focus and I do not anticipate any conditions such as this one to be available elsewhere.

[Operator]

The next question is from Hugo Cruz with KBW.

[Hugo Cruz, analyst]

I also have 2 questions on M&A and cost of risk. On the M&A, you mentioned the prerequisite of capital neutrality. Should we assume that, that neutrality will be pro forma for future regulatory headwinds, which could be substantial for both banks? And I remind that most banks have given guidance for substantial regulatory headwinds to come.

And then on the cost of risk, it's been very low. I see that the specific cost of risk in Q2 is actually negative. And you said to look at 2020, 2021 together. So clearly, there's some benefit from the cost of risk in 2020. So what should increase the actual underlying cost of risk this year net of -- excluding the benefits from 2020? Or to put it another way, what should we think is the underlying cost of risk post the COVID crisis in 2022?

[Jörg Pietzner, executive]

Thank you, Hugo. Cost of risk, Stefano will answer, and then Andrea on the capital neutrality of the deal with or without reg headwinds. And maybe Stefano first.

[Stefano Porro, executive]

So in relation to cost of risk, you are right. So as we were commenting, we need to look at cost of risk in combination, '20 and '21. We think that we will have a normalization during 2022 at lower level in comparison with the sum up of -- and the cumulative cost of risk of '20 and '21. More specifically, we are expecting an increase in relation to 2021, of the underlying cost of risk during the course of the second half, also considering a higher migration to NPEs especially in connection with a portion of the portfolio and the moratoria in Italy.

[Jörg Pietzner, executive]

Thank you. Andrea?

[Andrea Orcel, executive]

So with respect to capital neutrality, maybe a more general comment first. On this transaction, we have taken a relatively unusual stance of defining guiding principles before entering in due diligence and in negotiations. That makes the expectation of both parties transparent and allow us to comment to you on which terms we would agree to a deal. Having said that, we have not entered into detailed negotiations and we have not entered into due diligence. So what I'm going to say now is my expectation, but obviously, as you go through due diligence and negotiation, such expectation may vary.

So for us, and I believe the other side, the capital neutrality means UniCredit does not want to have a transaction, but putting the financing aside and all of that dilutes the capital strengths of UniCredit. How is the capital strength of UniCredit defined? It is defined by the last available CET1. It is also defined by taking into considerations other regulatory factors, such as stress test and other headwinds. Now everything has not been mapped up. I would highlight that our counterparty is the controlling shareholder of Monte dei Paschi di Siena. It is not the bank. So in this interaction, we have not gone in that detail. We just said the principle; in the next few weeks, due diligence and negotiation. We'll lend the exact answer to that question, but those are my expectations.

[Operator]

The next question is from Fabrizio Bernardi with Bestinver.

[Fabrizio Bernardi, analyst]

Unfortunately, just 2 questions because I couldn't take part to the call of yesterday. So I would have 10 probably. So first of all, I'm a little lost about the part of Monte dei Paschi you may buy. You mentioned, for example, EUR 80 billion of loans of Monte dei Paschi in the perimeter, which is actually their entire lending portfolio. So actually, the question is if you want to buy only the commercial franchise or maybe just a part of it and/or also the corporate center. I understand that the due diligence has not started yet, but maybe you can drive us through the -- let's say the building block of this deal.

Secondly, a general question about the protection that the government may give you. I mean do you have in mind about the way the protection may work? NPEs and/or legal risk are expected to be deconsolidated before you get the control of Monte dei Paschi, or UniCredit will get the protection once and if the risk materialize. Sorry, not a question, but maybe you can add something about the stress test, whose results should be out there today. Maybe you can give us any color about this.

[Jörg Pietzner, executive]

Thank you, Fabrizio. Maybe the first 2 on the perimeter and the potential protection by Andrea and then on the stress test with Stefano. Andrea?

[Andrea Orcel, executive]

Okay. So Fabrizio, again, the -- in terms of -- I think the message we're giving with the principles with respect to the perimeter is that we won't be buying the entirety of Monte dei Paschi di Siena. This is not an acquisition of Monte dei Paschi di Siena. It's an acquisition of a subset. So that's the first point.

The second point is at most, and I underline at most, the subset will include the entire commercial franchise and some other activities on the side. But at most, perimeter will then be, let's say, refined by the results of the due diligence. I'll give you an example. On lending, we may find that there is a level of loan concentration or there may indeed be some exposures, but we are less optimistic about the bank, in which case we will either get protection or leave them behind. With respect to -- and obviously, as I said yesterday, we would define the perimeter in a way that the level of complementarity and the simplicity and the speed of integration is maximized within the obvious restrictions, but the transaction needs to be -- makes sense for both parties. And I can't say much more than that at this juncture on this.

The second thing that you're asking is about protection. So I think the way we look at risks is the following. Number one, we have NPEs. The NPEs of Monte dei Paschi are excluded in full from the transaction. So we're not getting protected. We're not getting covered. They're not included in the perimeter. As such, if you do a pro forma of some sort, you should assume that you take the 2 banks together and 1 bank comes with 0 NPE, diluting the NPE ratio of the overall.

The second topic is performing exposure, what are within the perimeter that we are buying. But as I said before, we may have a different view on or may have an excessive concentration of some kind. Those are the exposures, depending -- we would either leave behind in the same way as the NPEs or see what we do within a reasonable short period of time to have the ability to put them back.

The third point of risk is legal. And while we are ready to take the normal legal risks of operating banking activity in Italy, obviously not getting any protection on that, and we will examine that during the due diligence, we would be excluding all the extraordinary legal risks, the ones that started at EUR 10 billion and are clocking down at the moment. So all those will remain behind. I hope that, that gives you enough answer on your question.

[Jörg Pietzner, executive]

Thank you. Stefano, on stress test?

[Stefano Porro, executive]

Yes. On the stress test, the assumption are conservative. As you know, so the capital depletion would be important, taking consideration the assumption. Having said that, this will be counterbalanced by the high capital ratio because the starting point in our case is above 15, the robust asset quality that we have taken into consideration all the action that we did so far and also the reduced cost base. So you will see the resilience of the group from this standpoint. For more details, you need to wait, however, the official publication that is today. So in the afternoon and you'll see -- you will see more specifically that result and the related resilience.

[Fabrizio Bernardi, analyst]

Thank you very much, and also thank you for the database.

[Jörg Pietzner, executive]

Again, you're welcome.

[Operator]

The next question is from Giovanni Razzoli with Deutsche Bank.

[Giovanni Razzoli, analyst]

Two questions on the deal. A clarification on the legal risks that you have just mentioned. If I look at the Monte dei Paschi presentations out of the EUR 10 billion of legal risk and that you have flagged that they are trending down, can I assume that those, which are not company specifics -- are those excluding the EUR 5.5 billion relating to the financial disclosure so you would be left with an ordinary legal risk in the tune of EUR 4 billion? Is that a figure that is completely out of discussion or its' something that is more or less reasonable?

And then the other question, also taking into account of what you have said yesterday, you have mentioned that you do expect a double-digit EPS creation from the deal in 2023, if I'm not mistaken. Shall we take then, I guess, the 2021 net profit of more than EUR 3 billion as a starting base, which squares to an EPS of EUR 1.6 per share as a starting base were to buy -- were to create that double-digit EPS accretion after the deal.

[Jörg Pietzner, executive]

Thank you, Giovanni. I think they are both for Andrea.

[Andrea Orcel, executive]

Okay. So the first one is which risk we take. So I repeat one thing, and sorry for that. But at the moment, what we have is outside in guiding principles agreed with the controlling shareholder. We don't have granularity. We haven't had access to numbers, and we have not entered in any other negotiation beyond establishing the way we will look at the next steps of this transaction, i.e., the guiding principle. So a lot of that is going to be part of what we do in the next few weeks.

Now from our point of view, all the risks that are strong, and in particular, the several billions that stay in legal lawsuits at the side, stay behind. The normalized legal risk that the franchise always take in doing banking activity and subject to what comes out in the due diligence, it is fair that moves with a selected perimeter.

With respect to the EPS accretion, again, we set a principle. We wanted to have a transaction that was double-digit EPS accretive and hence ensured a tangible book per share enhancement of a significant nature and an appropriate return on investment. That is why we have set that pillar. How we get to that pillar is very premature to discuss because a lot will depend in what is the subset that we buy and what those impacts are. But in approaching the negotiation, we will -- the parties have agreed to have an outcome of this nature. So that's all I can say for the moment.

[Operator]

The next question is from Domenico Santoro with HSBC.

[Domenico Santoro, analyst]

I do have a couple of questions, especially on the Slide #8, where you show clearly some discontinuity, I think, with the previous management. First of all, to reason with the answer that you just gave to the colleague, is there any target in terms of uplift in terms of RoTE that you would like basically to achieve via a merger with Monte dei Paschi. Of course, here, there is a trade-off between complexity of the deal and potential impact in terms of return on the capital that is invested. That will be very helpful for us to square up everything.

The second is more on the way organically you want to push return on tangible. I mean the former management was -- the former management strategy was very clear, selling, unfortunately, some very precious business to gain capital and to derisk the balance sheet. And also the volume -- the book has been cut significantly, the loan book, over the last couple of years.

So I mean Q2 shows already some signs -- encouraging sign in terms of inflation point, loan growth. I'm just wondering whether you are changing a little bit the risk appetite already across the board on the franchise and if you have already thought about reinvesting the capital into the product companies, especially if you have any plans at the moment to rethink a little bit the strategy in the asset management, in the insurance, where potentially now the return on tangible is probably the highest in the sector.

[Jörg Pietzner, executive]

Thanks, Domenico. They are both for Andrea. So one is concretely, what does the MPS deal do to return on tangible? And then organically, how do you get the return on tangible up? And does it have to do with product factories and risk taking?

[Andrea Orcel, executive]

Thank you, Domenico. So obviously, to be consistent with what I've said that most of the value is within our franchise and most of our focus is to relinquish -- is to make that value appear and crystallize it. We would not be doing a deal unless the deal has 2 characteristics: it's significant value-enhancing enough for us to take on the additional complexity, as you defined it, to integrate the 2 franchises. And so you should expect that any deal that we present would -- and this is how we try to address it with the EPS enhancement and the rest, would improve our return on tangible equity. Otherwise, there is no part.

So that's a general statement on that. So we believe that as the juncture -- because our plans are ready and they affect how we approach the client and a number of other elements of our strategy, we're in a good position to roll out on an expanded perimeter. So timing is very important, and perimeter is very important because it simplifies and it accelerates the integration to minimize the disruption that it could have to our franchise. So it's a trade-off, but we believe that the trade-off at these terms is worth taking.

The second thing that we said is the approach. As I think I said at the beginning, I think UniCredit underwent a phase of rationalization and restructuring. As of today or as of my arrival, it has a solid capital position. And it does have solid liquidity and solid risk management, and our position in NPEs is quite good. It is time to move the emphasis and the focus on doing what any organization should do, which is grow profitably, grow sustainably and grow at a cost that exceed the cost of equity. I mean we are here to reward the capital above this cost, or at least try.

So this is the emphasis. As we look at that emphasis, we have, as you refer to Page 8, 3 levers. One is revenue growth, or in my opinion, maybe in part answering the question, net revenue growth. For me, revenue growth in a bank has relatively little meaning. What is important is revenue growth net of loan loss provision. So net of risk, that's the important number. So we want to grow that sustainably. And therefore, there are trade-offs on the risk efficient frontier that we may take but always within a view that the net revenue growth needs to be healthy and growing.

With respect to the risk appetite, which linked to this portion, we have only normalized. What does normalized mean? We went back and reviewed our risk appetite and went back to what it was in 2019 and obviously, adjusting for the new environment, but to what it was in 2019. We are not expecting a significant increase in risk taking from the plan. Actually, it may even be the opposite. But I don't know which side of the fence is going to fall because we don't -- we haven't finalized the plan.

The places where we can make significantly better return is to focus much more keenly on capital efficiency. Capital efficiency, you may look at it in this way. Obviously, any business that is capital light, as you mentioned, insurance, particularly if it's distribution only and you don't have insurance tail risk, asset management, and all of these kind of products are obviously capital light. The more I increase that part of my revenue base, the more I do 2 things. I grow the revenue line, but I also derisk my net revenue growth because I have earnings that are, let's say, risk light. But most importantly, they're earnings that are capital light. So I'm earning releasing more capital than if I was earning by lending.

The second part is when instead we have capital-heavy businesses, in my mind, I bifurcate. The capital-heavy businesses that exceeds the cost of equity, that is phenomenal, we will be focusing on those in a very granular fashion. They're capital-heavy businesses that are not meeting the cost of equity, and we will need to review them one by one and answer the question of those businesses we want to be in, we don't want to be in, we want to deemphasize because they have an effect on the better businesses. But otherwise, there will be a lot more discipline on that topic.

And therefore, what we are trying to do is exactly what I said, get every unit of capital that we use, use it with a view that we need to exceed our cost of equity. And if we don't, reassess.

[Operator]

The next question is from Azzurra with Citi.

[Azzurra Guelfi, analyst]

A couple of questions. One is on your default rate. We have not seen any deterioration yet, and the loan loss provision are still very good. Is it fair to assume that you expect this to peak, especially in Italy in the fourth quarter? And how do you think over the medium term this will evolve?

The other one is on your digital strategy. Can you give us some examples on what are the main action and processes that you would like to change, if it's not too early to ask?

And if I may, very, very quick clarification on the deal. You said that the counterparty for your discussion is the main controlling shareholder of Monte dei Paschi. Do you assume that in the negotiation, there is no additional need of approval from the EU Commission?

[Jörg Pietzner, executive]

Thank you, Azzurra. The default rate will be done by Stefano. And then on the digital strategy, if we can say anything on the counterparty for the deal will be Andrea. Stefano?

[Stefano Porro, executive]

Thank you, Azzurra. The default rate for the group was 1.5%. All the division but Italy, the default rate so far lower than 2020. As a matter of fact, also Commercial Banking Italy had a default rate of 3.4%. I mean excluding the DoD effect is 2%. What we are expecting is fundamentally for the rest of the year, the default rate of all the division fundamentally in line or slightly below the one of 2020. But Italy, we are expecting a higher default rate in comparison with the level of 2020, also following the immigration of some of the position to Stage 3, the one in relation to the loan under the moratoria, but not a significant increase of default rate in comparison with 2020.

[Jörg Pietzner, executive]

Thank you. Andrea?

[Andrea Orcel, executive]

So I'm not going to go very far on digital strategy because it's probably one of the core pillars of the plan. I would just highlight what it means in my head. What it means in my head is that usually in a bank today, when people come with plans or they look at their businesses, they look at revenue. We look at cost. And now they will look at capital employment. But what they need to understand is that in a bank, IT, digital, data are absolutely critical and need to be embedded in any thought process, in any project, in any initiative they do from the beginning.

It is not I have this great initiative and IT will digitalize it. It is a joint team effort as a platform, as a team, that develop jointly the project. So that means embedding IT in every division, in every area with a digital and information officer embedded in every business and in every area. Yes, the group maintains architecture, framework, direction of travel, but then digital and data inform and are embedded in everything we do from day 1 within the team in every business. I think that's the philosophy that we're going to apply. And we're expecting quite a lot of impact from that. Beyond that, I'll leave it for the Investor Day.

I think you raised a question also on Monte dei Paschi di Siena and whether there were approval from the European Commission, et cetera, et cetera. I absolutely think that there will be a number of parties that need to approve this transaction. At this point in time, what we have done is just set the principles for having our due diligence and our negotiation. As the deal takes place, if it moves to conclusion, we will obviously have to clear all the regulatories, a number of approvals that we need to clear.

[Operator]

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

[Alberto Cordara, analyst]

Just going back to the Monte dei Paschi deal. You've been very clear about your strategy, but I just wanted to clarify a few issues. The first one is that the acquisition most likely will involve a subset of Monte. I don't know if you can give us a bit more clarity on the size of the potential subset.

And then in terms of the transaction being capital neutral, does this definition of capital neutral include also the restructuring cost that you need to take on to integrate Monte dei Paschi?

And I think you mentioned this, but I just wanted to get back on the point because I think it's very important. So you exclude any NPE. And also, you are going to have adequate protection from other potential credit risk, which means, if I understand correctly, that you're going to require some guarantees on high-risk performing loans.

Then in terms of the operational performance of the quarter. I just wanted to have a bit more clarity on NII. So on the slide where you show NII progression Q-on-Q, there are EUR 25 million, which are related to other. So I just wanted to, if possible, have a bit more clarity on what other means. And then there is an EUR 11 million plus, which is coming from volumes. But then when I look at the performing volumes, these were down by another 2% quarter-on-quarter. So you had a negative progression of volumes, which doesn't seem to abate. So first of all, I don't understand why we are talking about a positive impact on volume if they're down. And then as a broader question, when we should expect to see loan growth to start again and how the recovery fund can help in that respect.

[Jörg Pietzner, executive]

Thank you, Alberto. I was counting 5 questions, but we have a good day today, or maybe 6. So Stefano will do the one on NII, the other and then volumes and the outlook for that. And then we give it to Andrea for the 3 deal-related questions. Maybe, Stefano, do you want to start?

[Stefano Porro, executive]

Yes. So I will start. In relation to the NII walk at Page 12 of the market presentation, in other, yes, it's positive EUR 25 million in there. We are fundamentally including the effect deriving from the DoD effect. So the difference between Q1 and Q2 is around EUR 30 million and the other reclassification are connected to the impact they're having from the DoD classification in Q1. So these are the 2 elements deriving that effect.

In relation to the performing volumes, I think it's worthwhile to differentiate between the average customer volumes that we have, okay? The average customer volumes were up in the quarter. So if you look at Page 23, as a matter of fact, you can see that we closed the quarter with average commercial performing loans of EUR 391 million that we are looking at the average because the average is contributing to the NII of the quarter.

And as I was highlighting to you, we are up fundamentally in all the divisions: so Commercial Banking Italy, more than EUR 2 billion; Germany, around EUR 1 billion; Central and Eastern Europe, around EUR 600 million; Corporate & Investment Banking, that is down around EUR 1.6 billion in relation to the average.

With regards the dynamic and the expectation, I will park aside a little bit the recovery fund because the recovery fund will be GDP accretive and will be accretive also in relation to the banking lending, but the effect will be more long term. So we think the positive effect will be more in '23, '24 in comparison with, let's say, '21 and '22.

In relation to the dynamic that we are seeing and that we are expecting, we see an accelerate -- a higher acceleration on the retail side. For example, in Italy, both on resi mortgage and also consumer financing, while still on the corporate, it will take a while because the liquidity in the system is huge. And so we think that the corporate before they utilize there, we can wait for working capital, and then we will have the growth. So in relation to the growth on corporate, we think that it will be more in the final part of 2021.

[Jörg Pietzner, executive]

Thank you so much. So quickly I'd add to that. There was just one thing. I don't know if that was clear. In the other component, on top of the EUR 30 million [ days ] effect, the DoD reclassification increases the amount of nonperforming loans. And that is the NII-related component relating to these nonperforming loans.

Now on the 3 questions you had for the transaction, back to Andrea. The first was the subset of what we're going to buy. The second was the capital neutrality, including restructuring. And the third one was protection mechanism on the risky performing part. Andrea?

[Andrea Orcel, executive]

Okay. So with respect to the perimeter that we're going to buy, I would say that say as an intention, one of the reason why this transaction works with UniCredit is because the high complementarity of the networks and of the client franchises mean that we are able to combine the 2 franchises with minimal overlap. And therefore, subject to, let's say, the quality and the effect of the due diligence, we will try to maximize the commercial network that we would be bringing over. We'll be excluding what does not make sense, and that would be overlapping anyway.

I don't have much more than that to say on the topic because it's just a principle. And once we are granular, we will have a much better idea. But that's what we have agreed. In terms of capital neutral, our interpretation of capital neutral is including everything.

Then you touched on exclude NPEs and protections, et cetera, et cetera. So the way at least I look at it is the following. We have a loan book. We eliminate from the loan book that we are purchasing the entirety of the related NPE exposure, the entirety. So we just don't bring it over. It's not covered. It's not protected. It's not guaranteed. We don't bring it over.

At the same time, during due diligence, there may or may not be performing exposures that we view differently from Monte dei Paschi, obviously, more negatively. And if that were to be the case, we'll find the appropriate form to either exclude them immediately from the perimeter or exclude them over time over the perimeter. When I say exclude, give them back. So that's for the NPEs and that's for the performing exposures where our risk appetite may differ with the risk appetite of Monte dei Paschi di Siena or whether there could be excessive concentration. For the other risks, you are left with extraordinary legal risks, and we have touched on that before, i.e., we will leave them behind.

[Operator]

The next question is from Delphine Lee with JPMorgan.

[Delphine Lee, analyst]

So just 2 for me. The first one is going back to the transaction. So I mean Monte dei Paschi is not the only M&A option that you have given your excess capital. So you have talked about the alternatives. Just wanted to understand a little bit. Why not Banco BPM? And relative, what is Monte bringing to the table beyond the valuation and the financials? Just if you could just elaborate a little bit on that. And if you would exclude -- I mean would you rule out completely Banco BPM if this Monte transaction doesn't go ahead?

The second question is to go back on your net profit guidance of above EUR 3 billion. You've just revised your cost of risk guidance by 20 basis points from 60 to 40 basis points. And your net profit guidance doesn't seem to have changed. Or are you just being conservative? Or what are we missing? If you could just maybe comment on this, if we are -- if there are things that we haven't -- that has been forgotten in the process.

[Jörg Pietzner, executive]

Thank you, Delphine. I mean we did change, but I'll let Andrea comment on the substance. But on the form, we did change the underlying net profit guidance. We were around EUR 3 billion. And we say now above EUR 3 billion. Now that may be settled, but -- and for the less -- more settled, but I'll give to Andrea also on the BPM versus Monte.

[Andrea Orcel, executive]

Yes. So I confirm what Jörg just said. So we have slightly reviewed the guidance from around, which means below or slightly above to definitely above. So we are more positive on what we will achieve by the end of the year. We believe we are realistic but conservative in the way we state our expectations.

With respect to the transaction and other M&A options, I'm not going to comment on any specific transaction. It wouldn't be appropriate. What I will say is that, as I said, while M&A is not a purpose, it's an accelerator. It has the objective of adding and enhancing the performance of what we have. I believe strongly, probably, given my background, that it is the duty of management to analyze every option that is available and keep an eye on it, be ready if that option was an option that is positive for the bank. At this point in time, we feel strongly that the principles we have highlighted and given the timing and given the ability to carve the perimeter, Monte dei Paschi is the best option and the only option on the table at this point.

[Operator]

The next question is from Jean Neuez with Goldman Sachs.

[Jean-Francois Neuez, analyst]

I wanted to ask about -- on reflection about Monte dei Paschi after yesterday. I realized that you were talking about minimal overlap, which made me think that probably the cost synergies are there to be expected but maybe not necessarily the main driver of accretion over the base accretion, which you expect to be neutral before synergies. So I just wanted to understand what you thought you can do better with the Monte dei Paschi client base once inside UniCredit, for example, either fund it better or penetrate or cross-sell it better, and if you have already an idea about that. That was my first question.

And my second question was with regards to the levels that you are talking about with regards to improving the return on equity business. The capital headwinds that had been lined up in the past and continue to be a feature, for example, this quarter and also the guidance for the rest of the year are an extremely strong burden from a density which is already quite high. And I just wanted to know whether you could share your early thoughts about those headwinds in the future or ways to mitigate the gross headwinds with -- maybe with, at the end, net headwind, which wouldn't be the same? Because obviously, this -- for the return on tangible equity, it's an extremely strong way to carry.

[Jörg Pietzner, executive]

Thank you, Jean-Francois. I think both of them are for Andrea.

[Andrea Orcel, executive]

So Jean-Francois, so Monte dei Paschi, minimal overlap. Let's look at cost for a second. There are 2 ways of looking at it. One, you buy something greater, you pay for something greater, you then reduce the cost, and you get the synergies. You're just reducing the cost base at that point. Or the other one is you just don't include those costs.

So as you redefine the perimeter, you have almost, if you want to look at it that way, a perimeter that comes with a more efficient cost base directly as you have carved it out. So the value creation -- and this is why I insist do not look at Banca Monte dei Paschi di Siena as it is. Look at what the perimeter could be.

Once you look at our perimeter, their perimeter, what is complementary and what we can bring over, and then you apply to that general objectives that will obviously have a read across on valuation on, what our EPS should do on our tangible book per share should do, on what our return on investment should be and with an attention to the fact that what we would be bringing in is a franchise that has been completely cleaned in as much as really behind the risks. Now that does not mean that the performing portfolio is without risk. It will need to perform, and we will need to adapt to that. But we are bringing in something that starts from 0 risk, and that will be blended in what we're doing in Italy.

So that -- so the valuation for us is -- sorry, the impact for us is, one, the principle and the structuring of the transaction; and two, as we roll out our plan, our digital initiatives, our multichannel approach, et cetera, et cetera, instead of rolling it out on 7.6 million clients with the same investment, with the same approach, we're going to roll it out on almost 12 million clients. And that makes a significant difference on the efficiency of those investments.

With respect to capital headwinds and there being a big burden for RWA density and that we already have a higher RWA density and how we mitigate that. So I totally agree with you, we have a high, in my opinion, excessive RWA density. And we have, like every other bank, significant headwinds. However, I believe, and I have some experience in that, that if you go really granular on the business you're doing and you prioritize how you're deploying your capital on the basis of the return on that capital, you can make a lot of progress in improving the density on a blended basis, of course.

What do I mean? A corporate loan will not have the same density as a mortgage. A mortgage will not have the same density as a consumer loan. A consumer loan will not have the same density as an insurance product with or without the risk. So if as you design the plan, you don't say I'm going to grow without a differentiation in all of these and whatever the market takes I do. But rather, you take a step back and you say what is it that has -- that results in the highest return on tangible equity risk adjusted. And therefore, you're going to prioritize either the products that are capital light. We're spending more time in driving those products. And I think you will find that we had quite a bit of capacity on that.

Or two, when you put -- when you drive -- when you are on the products that are more capital heavy, i.e., they use capital, a loan, within the mix of those loans, you're going to prioritize the loans that either have the higher return on tangible or are lighter. And you're going to deemphasize those other ones. That is why I said we all are, and have been always that way, looking at I need to maximize revenue growth.

That is not exactly right. I need to maximize revenue growth of a mix of products that results in the highest RoTE because if tomorrow I were to do 100% of my growth in the highest-density products and the ones that obviously have the RoTE which is very low, you would look at my density and say, your density is increasing and your return on tangible is increasing because as you're growing, you're absorbing more capital than the returns you're generating.

If instead I do that in other products that either have a very high return on tangible -- or higher return on tangible or are capital light, my growth will not use as much capital and the return from that growth will feed out much more capital than they use. And if you start thinking about those concepts and you're able, over time, to steer a mix of your franchise, you can offset some, hopefully all, but some of your headwinds by a change in mix, which will affect your density. Sorry for the long answer.

[Jörg Pietzner, executive]

No, I think we'll stop there because we want to Jean-Francois to come to our Investor Day.

[Operator]

Next question is from Christian Carrese with Intermonte.

[Christian Carrese, analyst]

The first one is on governance and the shareholder structure. I was wondering if you would be happy to have the government into your shareholder structure. In other words, I'm asking you if you prefer to make a cash deal or a share swap in case of a deal with Monte dei Paschi di Siena.

The second question is on capital. Let's see what's going to happen with the stress test this afternoon. I assume there will be a capital deficit for Monte dei Paschi di Siena. We've had EUR 1.5 billion, EUR 2.5 billion capital deficit. I was wondering, what do you expect from the regulator [ from the system ]? Do you feel that it would be possible to close the capital gap through DTA in case of a merger or the regulator will ask for a proper rights issue?

And on the perimeter, now it's clear to me that the branches in Sicily will not be part of the deal because UniCredit has already a quite high market share, more than 20% market share in Sicily. And then you will go above 30% in a few provinces. So apart from that, I was wondering the headquarter cost in Siena, just not to replicate what were the problems with the Capitalia merger when there were some overhead in Sicily. So if you can elaborate on that.

And finally, on asset quality. You show a slide that you still have a 4.7% gross NPE ratio, still above the European average. We are going to dilute this number through Monte dei Paschi merger, but still you will be above the average. I was wondering if the deal is clear that you are not going to get the NPE from Monte dei Paschi. You are going to get only performing loans. But is it possible that in the deal you could do some additional derisking on the UniCredit loan book NPE?

[Jörg Pietzner, executive]

Thank you, Christian. We'll start with the asset quality one. I would argue it's an improvement, not a dilution of the NPE ratio. But I'll give that to Stefano. And then the 3 on the deals, including the beautiful area of Sicily go to Andrea. But maybe Stefano first on asset quality.

[Stefano Porro, executive]

Thank you, Jörg. So in relation to the second quarter figures, we are at 4.7% in terms of gross NPE ratio for the group. If we are excluding the noncore, we are at 4%. This is our methodology. If we are using the EBA methodology, the group excluding the noncore is at 2.7%. That is fundamentally in line with the EBA average. So if we are factoring an increase of the loans running from the potential MPS transaction that is contributing only performing loan, the NPE ratio will be lower than 2.7%.

[Jörg Pietzner, executive]

Thank you. Andrea?

[Andrea Orcel, executive]

So just about governance and shareholder structure. And again, I acknowledge that this is an unusual situation given that we're giving you foundational principles that are pre-agreed. But actually, we haven't done due diligence and we haven't done negotiation. So honestly, it is premature to discuss of any governance implications or any deal structure. I believe we know pretty clearly what the views of the market, the views of our shareholders are. And we're committed to delivering a deal that fulfills those expectations on all aspects. So I would leave it at that for a moment.

With respect to capital stress test, the MPS deficits and so forth and how it will be filled, I think, number one, it's not my place to comment on Monte dei Paschi. What I would say is the following. The foundational principle states that we will get capital neutrality. Capital neutrality means that we will have a perimeter that is capitalized in such a way that when combined with us will keep us capital neutral. From my standpoint, the rest is not something I need to focus on. It is something that the other party has to bring to the table. How we do that is still open for negotiation and for the next few weeks. The important is that the effect in -- visibly and in substance is what we have determined.

And I think the last one was on perimeter with Southern Region being included or not or certain parts of the business being included or not. I would say I would go back to what I said at the beginning. We're not buying Monte dei Paschi di Siena. We're buying a subset where the aim is to maximize the perimeter that we are buying because there is an enormous complementary between the 2, but at the same time, limiting the areas that are either overlapping or unnecessary to continue running the business. What that means in substance, I cannot tell you now because we haven't done due diligence and we need the negotiations.

[Operator]

The next question is from Ignacio Cerezo with UBS.

[Ignacio Cerezo Olmos, analyst]

I'm going to ask 2 probably a slightly different way same question that has been asked before. First one is on NII. Stefano has been mentioning some headwinds into the second half. Can I ask you if you can commit to Q1 being the floor of NII for the year?

And then on the deal, around the funding basically of the deal. Is the full cash deal a priority for you? Or given the capital neutrality, you're agnostic if you have to issue for some paper?

[Jörg Pietzner, executive]

Sorry, Ignacio, can you say the second one again? The line was a bit bad. You talked about the funding for the deal?

[Ignacio Cerezo Olmos, analyst]

Yes, the funding of the deal, if you can see full cash deal is a priority or if basically you are agnostic to having to issue paper given that you have capital neutrality binding constraint.

[Jörg Pietzner, executive]

Okay. Thank you. I think on the NII headwinds and has the second quarter been the bottom, Stefano will answer that. And then Andrea will talk about the funding and are we agnostic to the sources of fund. Stefano?

[Stefano Porro, executive]

Thank you, Jörg. So I would differentiate between commercial component, not commercial component. So for the noncommercial component, meaning replicating portfolio, investment portfolio and term funding, we are not expecting meaningful dynamic in '21 compared to 2020. So some of the effect are compensating out. For example, slightly decrease in the contribution of investment portfolio is compensated by the better funding cost from this standpoint. And on the replicating portfolio side, the net benefit contributed to the net interest income in 2021 will be fundamentally in line with 2020.

In relation to the commercial side, as I was highlighting before, in some of the division, we are having an increasing net interest income this quarter. I would differentiate between Western Europe and Central and Eastern Europe. In Central and Eastern Europe, we are expecting a progressive increase in the net interest income following the increase in the volumes. We are 2 quarters, Q1 and Q2, where we have a slight increase in the net interest income.

Still, we are seeing headwinds both in Commercial Banking Germany and Commercial Banking in Italy in relation to the rollover because as we were highlighting, the front book pricing is lower than the back book pricing, and this will continue until we will have a more sustained improvement in the lending that we're having from a more sustained and progressive economic rebound. So it will take a while more in the second half of the year.

[Jörg Pietzner, executive]

Thank you. Andrea, quickly on the -- on our view of the funding of the deal, cash versus shares.

[Andrea Orcel, executive]

So again, premature. Depending on the perimeter, the components, we don't know. Is the funding necessary? Or -- and if it's necessary, what is the base? What I would, however, highlight is that the capital neutrality is based that in the event there is a price to be paid, the capital neutrality starts from the assumption that we would be paying in shares. That does not mean we would. It just means that if we do -- but that is the base of the calculation for the capital neutrality. I hope I made that clear.

[Operator]

The next question is from Andrea Vercellone with Exane.

[Andrea Vercellone, analyst]

Questions on Slide #8. And then just a clarification on the comments you just made. Actually, I'll ask this one first. You said that to guarantee capital neutrality, if there is a price to be paid, you assume it will be shares. Just a small caveat to this. In absolute value, it may well be neutral, but on a per share basis, it wouldn't be if you issue shares. So if you can just comment on that.

And then on Slide #8, capital efficiency and operational efficiency. So on capital efficiency, you mentioned before a little bit about your thoughts on capital-light initiatives. You mentioned bancassurance -- insurance, actually, not bancassurance, several times. However, you don't start from a capital-light business model. And given that there are contracts in place, you can build one overnight. So I'm just wondering whether the sentence there, reallocate capital to higher-return business, could also mean M&A in capital-light businesses given your other comments that M&A is an enabler to profitable growth and so on.

On the operational efficiency side, the way I see it, there's 2 -- I'm talking about costs. There's 2 contrasting elements. On the one hand, you have simplification, delayering, digitalization -- sorry, delayering, that should reduce cost. On the other hand, you have digitalization, which may require investments. And you mentioned decentralization of part of the business to boost growth. This could increase costs. So if you can comment on which one of these 2 wins essentially.

[Jörg Pietzner, executive]

Thank you. Andrea?

[Andrea Orcel, executive]

Okay. So capital and how does it impact the potential transaction. Again, let me first say that we don't know what the transaction perimeter is. We don't know the structure of the transaction and indeed its financing. So everything is possible. Foundationally, we have principle that are there to tackle exactly your doubts. So the transaction needs to balance capital neutrality with earnings per share enhancement, and I suggest they're in the double digits, and tangible book per share enhancement and a return on investment of a significant nature.

So if you combine those 2, you are going to have the outcome that you're saying because you can always pay in share and achieve exactly those 3 things because that's what's foundational. For me, the structure of a transaction, share, cash, other instrument, in any transaction is not the way you evaluate the transaction. Of course, the more leverage you put in something, the more you're going to increase some of those parameters. So the way to look at them, comparing apples with apples is to look at them on a fully bedded capital base.

So that's -- so I don't think, and I hope I've been clear, that with this foundational principles, we could have a transaction that financed with equity is not enhancing to EPS, is not enhancive to tangible book per share, is not having a return on investment, that if you follow my comments, needs to be significantly in excess of our cost of equity or it wouldn't be considered. With respect to...

[Jörg Pietzner, executive]

So the other one is basically on Slide 8, and we'll go back to that. Andrea?

[Andrea Orcel, executive]

So capital increase and cost efficiency. So I don't fully agree with your statement that we don't start with a business model that has capital-light businesses. We start with a business model that has capital-light businesses. The problem is that we do not embed the factory. We will discuss at the Investor Day how much of our business is fee-based.

And when you look at any fee-based business, insurance, asset management, indeed anything. There are 2 ways of looking at it. The first way is if you vertically integrate and you have a factory in-house, you obviously keep the entire P&L of that business. If you do not vertically integrate, you obviously only keep the distribution in inverted commerce side of that business.

The first question you need to ask yourself is, how much do I keep if I only distribute? And is it worth it for me to go and vertically integrate to have the entire P&L? Because obviously, if you vertically integrate, as you mentioned, you have either acquisition cost or organic development cost.

You also have another aspect that is often forgotten in good times. You have the risk. So if I sell an insurance policy, I can only charge the fees. I can charge the fees, take the P&L from underwriting the insurance risk. But then I have an insurance risk, which cannot be underestimated. So it is absolutely possible, by rationalizing the business we do on the capital-light side, to extract more value from those agreements and to do more without the need to really go and buy.

I'm not -- I will add another point. I think in a world of MiFID and in a world of best execution and best product, internalizing a factory for a bank like us means implicitly that we're not offering the best product to a client. And over time, that may become a disadvantage. So when I put all this together, the objective is to develop the agreement we have to improve them, but to work with those, probably complemented by other things. But M&A at the moment is not even on the table on that topic.

[Jörg Pietzner, executive]

And the last one was quickly simplification versus digitalization in...

[Andrea Orcel, executive]

Okay. So which one will win, premature, or I would give you the business plan? I will only add this, that when we present the business plan, we will focus most probably, what is -- that is my intention today, both on absolute level of cost and on cost-to-income ratio.

[Operator]

The next question is from Adrian Cighi with Credit Suisse.

[Adrian Cighi, analyst]

I have a few follow-ups. One on the sustainability, return target and one on capital. On the sustainability return target, you've mentioned above the cost of equity. And you've highlighted the 3 levers on cost on Slide 8. What is not mentioned in the slide -- or on the 3 levers is the interest rate level. Do you believe that this above cost of equity return is achievable in the current interest rate environment?

The second one is on capital. And if I understood Mr. Porro correctly, you expect to end the year with an MDA buffer of over 400 basis points. You're now close to 650. You have 80 basis points regulatory headwinds and 20 basis points in buyback, and that's before any capital generation in the second half, over 550 basis points. What should the delta be between 550 and above 400?

And maybe one last one potentially related to this is you took action on the coupons of CASHES earlier this quarter. Can I confirm that you did not change your view in terms of the contribution of CASHES to UniCredit CET1?

[Jörg Pietzner, executive]

Thank you, Adrian. So the one on the CET1 level will be answered by Stefano. And just a mathematical remark, 647 is also greater than 400. And then the other 2 on CASHES and is the return achievable in the current rate environment to Andrea. Stefano?

[Stefano Porro, executive]

Yes. So as we were commenting in relation to the net profit guidance, so we will be above EUR 3 billion. And for the same reason, I mean, we have mentioned that we will not be close to 400 basis points. So we have highlighted that we will be above 400 basis points.

Commenting a little bit in relation to the key elements that will drive the dynamic of the capital in the second half. We have net profit net of the accrual of dividends. Then we have the share buyback to be taken in consideration, 20 basis points. We are commenting in relation then to the headwinds. Regulatory headwinds are below 120. Taking consideration that in the first half, we had already around 40 basis points, we will be below 80 basis points in relation to the impact on capital from regulatory headwinds. And the only remaining part is fundamentally connected with the risk-weighted assets deriving from business volumes.

In relation to the CASHES regulatory treatment, the current regulatory treatment is EUR 2.4 billion common equity Tier 1. The remaining part is grandfather additional Tier 1. Next year will be Tier 2. And this regulatory treatment is in line with the regular regulation, and we are not expecting any change.

[Jörg Pietzner, executive]

Just a quick one before I give it to Andrea on the return achievable in the current rate environment. Was your question on CASHES the one Stefano just answered? Or was it has our stance on the payment of coupon changed?

[Adrian Cighi, analyst]

No. The one Mr. Porro answered.

[Jörg Pietzner, executive]

Okay. Perfect. Perfect. Then just on -- Andrea, if we can achieve above cost of equity in the current rate environment.

[Andrea Orcel, executive]

So you also mentioned interest rate level. I mean does anybody on this line believe interest rates are going to be materially better in the next decade or next 5 years? We have had this interest rate environment for a long time. And my belief is that the job of the management team is to -- of the bank is to adapt to what is a reality and try to reward the shareholders above the cost of equity. So if we have headwinds, we have headwinds. Our job is to try to counter them. And I don't think that counting on helps from markets creates any alpha but beta.

So given that this is a reality that I believe is here to stay, we need to strive to do everything we can do to bring our organization to the right level of mix, efficiency and other things to try and exceed the cost of equity. Do I think we will get there? We'll see in the plan, but I will not stop until we do.

[Operator]

The next question is from Anna Benassi with Kepler.

[Anna Maria Benassi, analyst]

It's been a very long conference call. I'll try to be short. Actually, I'm -- because you always talk about data per share accretion, I'd like to know regarding the EPS if you are using as a base the target of Monte dei Paschi in terms of earnings for 2023 or you are making your own calculation on the perimeter you have in mind. Obviously, I'm saying that because we talk about EUR 300 million profit. And I think maybe I'm too conservative. They could be invest at breakeven.

The second question regards the take of subordinated bonds of Monte dei Paschi. In the press release, you mentioned that the level of deposits excluding any bonds from Monte dei Paschi. So just trying to understand if that could be in the perimeter or not.

More in general, I hear what you say about cash or paper deal or mixed deal. Obviously, the more we hear about you talking about per share, the more we think shares of UniCredit will be issued. That's why we are trying to understand a bit better to make the right assumption at least. And the same goes about who is going to take the cost of redundancies and eventual cost of penalties with partnerships that currently multiparty is having.

[Jörg Pietzner, executive]

Thank you, Anna. I think all of these questions go to Andrea.

[Andrea Orcel, executive]

Yes. Thank you, Anna. Thank you, Anna. So -- okay. So how do we assess the, I guess, profitability of the perimeter? I think at the moment, we have our views, but those views need to be refined with the due diligence. I think the assessment of the profitability of the perimeter that we would be taking on would be evaluated on the basis of the due diligence and a more granular view on their numbers that we're trying to develop over the next few weeks. So on the base of that, there will be negotiations. And that's on the base of -- and that will form the base of the possible deal that could emerge.

With respect to subordinated bond, level of deposit, et cetera, et cetera. Of course, the balance sheet is part of a deal. We can't just take the commercial activity without the balance sheet. What is the exact mix of that balance sheet is all to be determined. And it depends on the negotiations. But we have some of these principles on how all these cross together to deliver the outcomes that we have set as principles.

And then I think you talked about paper, mixed deal, about per share, et cetera, et cetera. Obviously, as I said before, the perimeter does not exist today. The valuation of that perimeter does not exist today, and it's very much dependent on what we take and what we don't take and what is the reality of that perimeter, its potential profitability and so on and so forth. So that's why I continue to say it's premature to discuss how we're going to fund this because depending on how it is cut and what it contains, valuations and funding may differ.

The cost penalty for redundancies or contract terminations or things like that. So we have our foundational principles. The deal needs to have those outcomes. And those outcomes are going to be evaluated after all the variables that can affect them. And so that's the way we are. We are looking at it. And also, as I have said separately, our intention as an institution is to avoid unnecessary redundancies. And therefore, the perimeters will also try to achieve that and optimize that variable.

[Operator]

Next question is from Andrea Lisi with Equita.

[Andrea Lisi, analyst]

Just back to the Monte dei Paschi deal. You mentioned the importance of a strategic fit for M&A and the importance of increasing, improving the focus on asset management and insurance. Just to understand how do you plan to manage the existing agreements that Monte dei Paschi has in asset management and insurance. And in case with synergies, do you think you are able to extract from them?

And second question is just to understand, if you purchase -- just a going concern of Monte dei Paschi, not the entity as a whole, do you think there can be concerns on the conversion of the DTAs and referred to Monte dei Paschi?

[Jörg Pietzner, executive]

Thank you, Andrea. So both of them go to Andrea.

[Andrea Orcel, executive]

So let me maybe -- thank you, Andrea, but let me maybe start from the second question on the DTAs and the concerns, et cetera. Look, in a way, I'm neutral on it. The important point is does the transaction fulfill the capital neutrality -- the capital neutrality principle or not. If it does, how we achieve it is really beyond the point. It can be in any way that is the most effective way to achieve it. So that's my answer on this question.

On the Monte dei Paschi focus on asset management, insurance and et cetera. So for us, it's important to develop our fee income in a way that, as I said, it's probably not the same way as everybody else looks at it and demonstrate it to you. Clearly, we have our views with respect to how to do that with partners in insurance and asset management that fulfill certain criteria. We will look at the deal. We will look at the partners and what agreements there are, and we will take a decision at that point. And that's why we need a due diligence and we need a negotiation.

If there were issues with respect to cost or others, again, you go back to the foundational principles. The deal needs to be capital neutral, need to enhance EPS, needs to have a return on investment of a certain sort and be tangible book per share enhancing. So on that basis, we will evaluate the impact of anything that we do or that we select.

[Operator]

This concludes the Q&A session from the call. The floor is back to you for any closing remarks.

[Jörg Pietzner, executive]

No, just thank you, everyone, for your time. And if there's any questions that come up in the future, you know where to find your favorite IR team. Have a good day.

[Operator]

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