UniCredit SpA

MIL:UCG

Earnings Call Transcript 2018-Q3

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the UniCredit Group's Third Quarter and 9 Months 2018 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jean-Pierre Mustier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.

[Jean-Pierre Mustier, executive]

Thank you very much, and good morning to you all, and welcome to our third quarter 2018 conference call. Q3 saw an increase in uncertainty created by the broader geopolitical situation and concerns about the growth prospects in U.S. and Europe. And although the market in Italy was particularly volatile, the country's private sector fundamentals remain strong. The underlying performance of the group remains very strong, and our adjusted results are up year-on-year. However, before we look at these results per se, I would like to start by highlighting a few external events beyond our direct control that had a negative impact on our bottom line and capital in the quarter.

As you know, we have a policy to take upfront the impact of negative developments in order to put them behind us. This is why we have taken decisive actions on Turkey and U.S. sanctions. And as a result, our stated net profit for the quarter is EUR 29 billion. This will lead to some adjustment of our Transform 2019 revenue target, but I stress that all other key targets are confirmed, including asset quality as well as 2019 net profit of EUR 4.7 billion and RoTE above 9%.

First, Turkey. In light of the evolution of the macroeconomic environment in the country, we have reviewed our investment prospect in Yapi, looking at all potential alternatives. Based on the outcome of our analysis, we are confident it is in the best interest of all our stakeholders to maintain UniCredit investments and prorate our shareholding in the Yapi, and if necessary, provide capital support on a proper shareholder basis.

Also, in the third quarter, we have taken a proactive but conservative approach and did EUR 846 million impairment for the profit on investment line in our P&L. Together with the quarter-on-quarter negative change in FX revaluation reserve of EUR 500 million, we stated declaring value for participation closer to the market value of our stake. This greatly minimize the risk of future impairments.

Second, while in continuing discussion with the U.S. and New York authorities, there continues to be some open issues. But consistent with our conservative approach to provisioning, we have increased our provision in the third quarter. We hope to be able to communicate an in-principle agreement in the first quarter 2019. We expect the settlement to have no material impact on UniCredit CET1 ratio target. In addition, the increase in the BTP-Bund spread led to a 9 basis point charge to our CET1 ratio. And as it is in our habit, we have taken decisive actions to put these topics behind us. As a result, our stated net profit for the quarter is EUR 29 million.

The whole team has put an extraordinary effort and worked really hard to compensate for these factors that are outside of our control. They have delivered a very, very strong underlying performance in this challenging environment and continue to execute Transform '19 that is well ahead of schedule. I am super proud of what has been delivered. And together, we will keep moving forward regardless of one-off external event and focus on what is under our control while making real progress with the transformation of the group.

In the remainder of the presentation, we will focus on the net profit figures adjusted for the impairment of Yapi in order to give a more normalized view of the bank. In order to offset the financial impact of this quarter and in addition to the actions already taken, we will be implementing other proactive and decisive remediation measures to maintain and protect the strength of our capital level.

But first, let's focus on the business evolution in the quarter. We saw a very strong commercial performance in the core bank. Third quarter NII is up 3.1% quarter-on-quarter. Fees are up 2.6% year-on-year. Our core bank net operating profit reached EUR 1.8 billion in the quarter, up 21.9% year-on-year. This is an outstanding performance. The 9 months '18 adjusted core RoTE reached 10.4%. It is only adjusted for the Yapi impairment and not for the higher provision for U.S. sanction. So if we had adjusted for those, our RoTE will be meaningfully higher. I repeat, meaningfully higher. The core gross NPE ratio dropped to 4.3%.

Now let's go back to the remediation action I mentioned earlier. First, we will implement additional cost reduction measures in '18 and '19, which at the end of '19 will amount to around EUR 200 million versus the original Transform '19 target. This include further non-HR cost reduction, thanks to the optimization of back-office activities and real estate as well as lower HR cost, resulting from a faster execution of Transform '19. Second, we will dispose specific assets, such as real estate. Third, we'll be reducing the BTP's price sensitivity significantly, primarily for the partial allocation of future BTP purchase from all of our investment to held-to-collect. Also, given the current volatility across a number of market and to further enhance the group risk profile, we will ensure that all group legal entities become self-funded by progressively minimizing intra-group exposure.

Before we move on, let me briefly mention the EBA stress test result published last Friday. Our 2020 CET1 ratio result are 13.76% in the baseline scenario and 9.34% in the adverse scenario. Both ratios show sharp improvement over 2016. UniCredit has the third higher CET1 ratio in the adverse scenario of all Eurozone G-SIB, a clear confirmation of the renewed strength of the group balance sheet.

Let's move to Slide 4. UniCredit has performed very well in the first 9 months of the year, thanks to strong underlying commercial dynamics and the unwavering commitment of all our teams. We report an adjusted profit of EUR 3 billion, which is 4.7% up versus the same period last year. Revenues in the quarter were up 2% year-on-year, mainly thanks to stronger net interest and fees. Third quarter '18 costs were down 7.7% year-on-year, driven by both HR and non-HR cost. Our third quarter '18 cost of risk was normalizing at 60 basis point in a still supportive risk environment, with 1 basis point impact from other change. Our adjusted RoTE for the group was 8.3% in the 9 months '18, up 0.5 percentage point versus last year.

Let's turn to Slide 6, and I will give you details on the positive progress of Transform 2019. As a result of the decisive action taken in Q3 and the corresponding remediation action on capital, we have updated our CET1 targets. We expect a CET1 ratio of 11.5% to 12% at the end of 2018 and of 12% to 12.5% at the end of 2019. The MDA buffer target for CET1 is confirmed at 200 basis points to 250 basis points. The range gives management the flexibility to adjust as needed to the macroeconomic environment up to the upper level in good times and closer to the lower level under more adverse conditions. As communicated at our Capital Markets Day, it applies from the end of 2019 onwards. In 2019, we will initially be below the 200 basis points before remediation action and retained earnings bring the buffer back up again. Mirko will give you more details on the CET1 ratio development later. The derisking of our balance sheet continues. The group gross NPE ratio reached 8.3% in this quarter, almost half of what it has been when we launched Transform 2019. Group core NPE ratio stood at 4.3%, close to the EBA average. The operating model transformation is ahead of schedule, reaching 88% of the target for branch reduction and 93% for FTE reduction. Our improved cost efficiency for '18 and '19 mean we will be below the EUR 11 billion and EUR 10.6 billion original '18 and '19 cost targets, delivering an improved reduction at the end of '19 of around EUR 200 million.

Let's turn to Slide 7. Commercial dynamics for the group are very positive and sustained. Our clients are embracing our multichannel offer and increasingly use digital solutions while leveraging on our partnership with Alibaba and have expanded the relationship to corporates in Italy and payments in Hungary. Our fully plugged-in CIB model continues to prove its success with leading position in the IPO and debt capital market. And our corporate center streamlining is well on track to reach its target of reduced weight on total cost.

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

[Mirko Bianchi, executive]

Thank you, Jean-Pierre, and good morning to everyone. I will now take you through UniCredit's third quarter and 9 months financial performance. Our group core adjusted net profit stands at a strong EUR 1.1 billion in the quarter and EUR 3.6 billion in the first 9 months. Despite volatile market conditions, the commercial dynamics across the core bank continue to be strong. The main divisional contributors to our strong performance this quarter were again CEE and Commercial Banking Italy. Adjusted group core return on tangible equity was 10.4% in the first 9 months. We confirm the 2019 target of above 10%.

Let's turn to Slide 10. We had a strong commercial performance in the core bank. Net interest was up 3.1% quarter-on-quarter and 7.7% year-on-year. Fees were resilient, up 2.6% year-on-year. In Commercial Banking Italy, fees were even stronger. We're enjoying sustained commercial dynamics across the group and gained 484,000 gross new clients in the quarter, while writing almost EUR 78 billion in new loans in the first 9 months.

The execution of Transform 2019 continues to deliver tangible results quarter after quarter. Costs are down significantly, 7.1% year-on-year and 2.8% quarter-on-quarter. Loan loss provisions were down 1.4% year-on-year. The gross NPE ratio stands at 4.3%, down 85 basis points year-on-year and already below our fiscal year 2019 target. Net operating profit in the quarter was EUR 1.8 billion, up 21.9% year-on-year. Adjusted net profit was EUR 1.1 billion, up 9% year-on-year.

Let's turn to Slide 11. Let's now talk about the stated figures of the group. I would like to point out 3 items on this page. First, we took decisive nonrecurring action in the quarter that affected our nonoperating items. We impaired our participation in Yapi for EUR 846 million in the profit from investment line. This reduces the carrying volume much closer to market volume and greatly minimizes the risk of future impairment. We also have increased other charges and provision, mainly for U.S. sanctions as we are nearing a settlement. The impact of the settlement should be nonmaterial, plus or minus, mid-single-digit basis points on our core Tier 1 ratio.

Second, our normalized year-to-date tax rate would have been around 16%. For the fiscal year 2018 normalized tax rate, we expect a similar level, while for fiscal year 2019, we expect between 18% and 17%. Both numbers are not including the potential effects from ongoing DTA assessments.

Third, as we said before, we have decided to address our net profit for the nonrecurring impairment on Yapi. As a result, our adjusted net profit for the quarter is EUR 875 million while the stated net profit is EUR 29 million. We did not adjust for the higher charges and provision from U.S. sanctions.

Let's turn to Slide 12. NII was strong in the quarter, up 3.2% on a stated basis and up 2.3% when adjusted for days and foreign currency effects. The main driver of NII were the following: Average loan volumes were up 2.5% at constant FX, although not quite offsetting lower customer rates, which were down 8 basis points. Term funding costs were lower by EUR 41 million, driven by both volumes and rates. As we resume issuance of capital market bonds, this benefit should decrease. The investment portfolio and treasury contributed EUR 49 million to the quarterly increase in NII. The higher spreads on our bond investment done in the second Q 2018 contribute a large part of this. In the fourth Q 2018, we expect that contribution to go down.

Let's turn to Slide 13. I will highlight 3 points on this slide. First, in group core, average loan were up by EUR 10.8 billion or 2.8% in the quarter. That is the result of the good commercial dynamics we saw in the last 2 quarters, which include a large transaction in factoring in the third Q 2018. Second, the average customer loan rates were down 8 basis points for the group. We saw stabilization in commercial banking also in CIB. In CEE, while customer rates fell, they remain high. In Commercial Banking Italy and Germany, we continue to experience competitive pressure. We still expect a bottoming out of customer loan rates at group level by the end of the year as we have indicated since the third Q 2017. Third, in CIB, there were extraordinary recoveries in shipping in the third and the second quarter 2018, which are not expected to recur in the next quarter.

Let's turn to Slide 14. End-of-period customer loan volumes for the group core were up EUR 10.3 billion or 2.5% in the quarter and 6.7% year-on-year. This compares with the EUR 9.6 billion for the whole year in 2017 and underlines our current strong commercial dynamics across the group. In commercial banking Germany, CIB and CEE, the loan growth was particularly strong. We do not expect loan growth to the same extent in the next quarter. End-of-period customer deposit volumes for group core were up 1.7% for the quarter and 5.5% year-on-year. The decreases in deposit in commercial banking Germany and Austria are the result of our decision to extend negative rates to more corporate clients. Deposits in Commercial Banking Italy are steadily increasing, especially on the retail side. There were technically driven and extraordinary high single-digit billion deposit inflows for corporate clients in CIB that are expected to reverse in the next few months.

Let's turn to Slide 15. Fees in the quarter were up 2.5% year-on-year. As there is seasonality in the third quarter, let's look at the fees category separately on a year-on-year basis. Investment fees were down 3.1% year-on-year. This decline was due to a different AUM product mix, which leads to lower upfront fees but higher management fees. This should make investment fees overall more stable and resilient in the future. AUM stock was up 4.9% year-on-year and 0.9% in the quarter, driven by positive net sales.

Financing fees were up 1% year-on-year, thanks to good fees from debt capital markets and better results from factoring end consumer protection insurance in Italy. Transactional fees were up 10% year-on-year, driven by card services and current account fees in Italy. Given the volatility in the market and the negative impact on investment fees, we revised our guidance for total fees growth fiscal year '18 over fiscal year '17 to a similar level as the 9 months over 9 months fees growth.

Let's turn to Slide 16. TFAs reached EUR 833.8 billion in the quarter, increasing 3.4% year-on-year. AUM in the quarter were EUR 221.9 billion, benefiting from net sales of EUR 1.5 billion. Commercial Banking Italy had positive net AUM sales in the quarter and outperformed the market in the first 9 months.

AUM stock in all commercial banking divisions was up both quarter-on-quarter and year-on-year. This is an outstanding achievement considering the very challenging market environment in the quarter. AUCs decreased year-on-year, driven by retail bond runoffs and the market performance in Commercial Banking Italy.

Let's turn to Slide 17. Trading income in the quarter was down 27% versus last year as the general market environment continues to be unfavorable. Spread widening across the board led to lower client activity. There was also a negative impact in the trading line of about EUR 30 million from the mark-to-market of our mandatory convertible into Pekao shares. A similar amount was received in the dividend line on the shares underlying the convertible. Going forwards, we expect our trading results to be at the lower end of our previously guided EUR 350 million to EUR 400 million quarterly run rate, implying a fiscal year 2018 target of around EUR 1.4 billion.

One of the biggest contributors to our dividend line is Yapi. Yapi is a very good bank and has a very good underlying performance in the quarter. Revenues and gross operating profits in euro are up both quarter-on-quarter and year-on-year. Loan loss provisions were also up in the quarter as Yapi conservatively increased the stage 2 loan classification and coverage. Yapi P&L is included in our annex on Page 51. Yapi's third Q EUR 24 million contribution to our dividend line appears low. This is mainly due to the accounting treatment of FX translation at UniCredit Group level, which amplifies the recent FX moves. Discounting this account treatment, Yapi's P&L contribution would have been in the middle double digits range. Thanks to the decisive actions taken in the quarter, we have reduced the core Tier 1 ratio sensitivity to future FX volatility. After the impairment and the currency moves in the third Q 2018, our sensitivity has turned positive at 1 plus 1 basis point net or 10% adverse move in the Turkish lira from now on. The plus 1 basis point net impact is composed of minus 2 basis points from capital and plus 3 basis points from risk-weighted assets.

Let's turn to Slide 18. Our focus on cost efficiency is yielding tangible results quarter after quarter. We have already achieved 93% of our planned FTE reduction, 88% of our scheduled branch closures. As a result, operating expenses are down 7.7% year-on-year and down 2.4% in the quarter. We expect the usual seasonal increase in both HR and non-HR expenses in the fourth quarter after a third quarter that was seasonally low. As Jean-Pierre said earlier, we will see an improvement in our cost base of around EUR 200 million by the end of fiscal year 2019 versus the original targets. As a result, expenses for 2018 will be below EUR 11 billion despite the fourth Q seasonality. And for 2019, we'll be below EUR 10.6 billion.

Let's move to the next slide. Both HR and non-HR costs are down on a year-on-year basis and on a quarter-on-quarter basis. HR costs are down 7.6% year-on-year and non-HR costs are down 8%.

Let's turn to Slide 20. Regarding group asset quality, I would like to point out 3 items. First, the overall group risk environment was supportive in the quarter as demonstrated by a good underlying cost of risk of 59 basis points. While we had write-backs in commercial banking Germany and the low cost of risk in CEE, there was an increase in Commercial Banking Italy due to single names. For the fiscal year '18, cost of risk should be around 60 basis points.

Second, the impact from model changes in the first 9 months of this year was limited to 2 basis points. Even with the remaining impact on models in the fourth Q 2018, we expect the model impact for fiscal year '18 to be in the mid-single-digit range. The reasons for these decrease from the initial guidance of 15 basis points in the first -- is the first time adoption impact of IFRS 9. Consequently, this is not a time shift effect but a real reduction. Underlying cost of risk is confirmed at 53 basis points for fiscal year 2018.

Third, we confirm the cost of risk target of 55 basis points for fiscal year 2019, 4 basis points of which are coming from models.

Our overall asset quality is steadily improving. The coverage ratio was stable in the quarter at 60.9% but up 4.3 percentage points year-on-year. The group's gross NPE ratio dropped to 8.3% in the third Q 2018, down 2.5 percentage points year-on-year. This is a great improvement considering we started Transform 2019 at a close 16%.

Let's turn to Slide 22. In Commercial Banking Italy, NII was down 1.4% quarter-on-quarter while average volumes were up 3.7%. Competitive pressures remain high, leading to a decline in customer loan rates of 16 basis points. Adjusted for some one-offs, customer rates were down 12 basis points. Repricing in the Italian loan market is starting, and we still expect a bottoming out of customer loan rates in the fourth Q 2018. The new business has a low expected loss, well below the expected loss of the stock. Fees were up 3.7% year-on-year, mostly thanks to strong transactional fees from current accounts and card services. Productivity went up with fees per FTE increasing almost 15% year-on-year. AUM net sales were positive, and AUM stock is up quarter-on-quarter and year-on-year above the market performance year-to-date.

We were able to attract 93,000 gross new clients despite the ongoing optimization of the branch network. Cost of risk in the quarter was 89 basis points, up 26 basis points due to single names. The impact from models on cost of risk in the fourth Q 2018 should be around 30 basis points. Normalized for the sale of the pawn business, the return on allocated capital for the first 9 months was 12.3%.

Let's turn to Slide 23. In commercial banking Germany, NII was stable quarter-on-quarter. Customer rates remain under pressure but are compensated by higher loan volumes. Fees were flat year-on-year as higher transactional fees from increased client activity offset lower fees from AUCs. The drop in revenue year-on-year is mainly due to trading, which included a EUR 39 million capital gain in the third Q 2017. 20,000 gross new clients were added in the quarter, up 50% over last year. This was supported by the end-to-end redesign of account opening process, which was exported from Italy to Germany. It reduces the time for opening an account, significantly lowers the cost and facilitates new client acquisition.

Cost of risk was impacted by nonrecurring write-backs. The net profit was affected by higher other charges and provision that I mentioned earlier. This were mainly booked in commercial banking Germany and CIB. Normalized for the sale of the participation in the second Q 2018, return on allocated capital was 5% for the 9 months '18. If we also adjusted for the higher charges and provision, return on allocated capital would be above the fiscal year 2019 target of 9.1%, which we confirm.

Let's turn to Slide 24. In commercial banking Austria, NII was up 6.9% versus last quarter, thanks to higher nonrecurring prepayment penalties from corporates. Customer loan rates and average volumes were stable. We gained 14,000 gross new client in the quarter, up 5.2% year-on-year. The client share rate is dropping further after the conclusion of the branch network restructuring. Costs were down 8% year-on-year after net write-backs in the first half. Thanks to a healthy loan book in both retail and corporate, cost of risk began to normalize in the quarter and should continue to do so. Return on allocated capital was 16.6% for the first 9 months 2018. Considering one-offs in NII, in cost and normalizing cost of risk, the recurring fiscal year 2018 return on allocated capital is around 13%, in line with the 2019 target and above cost of capital.

Let's turn to Slide 25. CEE continues to be our growth engine with an inflow of 334,000 gross new clients in the quarter. The division turned in a very good performance, with NII up 2.5% in the quarter at constant FX driven by increased loan volumes. Yapi dividends were affected by the FX translation accounting treatment mentioned earlier while the Yapi impairment was done in group corporate center.

Fees were up 3% on last year at current FX. Excluding the change in the accounting treatment of fees accrued in the Czech Republic and Romania, fees would have been up by around 6%. Our cost-to-income ratio remains best in class, only 36.6 percentage points in the first 9 months. The cost of risk is at the low 58 basis points but should increase in the next quarter. Derisking continues at a vigorous pace and the division gross NPE ratio fell another 229 basis points year-on-year to stand at 6.5%. Return on allocated capital for the first 9 months was 15.9%. We expect return on allocated capital for the full year to normalize at closer to 14%, still above the fiscal year 2019 target.

Let's now turn to Slide 26. CIB had a good quarter. Net operating profit was up 5.8% year-on-year. NII was up 5.3% in the quarter, driven by a rebound in volumes and stable rates. Even adjusted for extraordinary interest from shipping, it was up almost 3% and shows the sustainability of NII. Fees were up 11.4% year-on-year, thanks to strong structured finance and GTB businesses.

Our leading franchise in loans and bonds was confirmed with CIB ranking #1 in EMEA all bonds in euro by number of transactions, which demonstrates the success of our fully plugged-in business model. Costs were down 6.5% year-on-year and led to best-in-class cost income ratio at 40% in the first 9 months. Loan loss provisions started to normalize in the quarter, and we continue to do so in the fourth Q 2018. Normalized return on allocated capital was 8.3% in the first 9 months. If we take out the higher provision for U.S. sanctions, return on allocated capital would be well in the double digits.

Let's turn to Slide 26 -- 27. As most of you will have listened to the Fineco results on the 6th of November, I will limit what I say on this slide. We are very satisfied with the overall performance of Fineco. Fineco show a strong performance in AUM volumes and management fees.

Let's turn to Slide 28. In the group corporate center, revenues improved significantly, mainly driven by lower term funding cost, thanks both to lower volumes and spreads. Costs are down significantly, mainly thanks to fewer FTEs. As a result, the ratio of the group corporate center cost to total cost is down to 3.4% in the first 9 months. The re-casted fiscal year 2019 target of 3.8% is confirmed. The division made a net loss of EUR 882 million this quarter, negatively affected by the Yapi impairment.

Let's turn to Slide 29. The accelerated 2021 noncore rundown is progressing according to plan, and our gross NPE target are confirmed. Performing loans continue to decrease as they are transferred back to the core bank. Gross NPEs dropped by EUR 1.1 billion in the quarter, and our end fiscal year 2018 EUR 19 billion gross NPE target is also confirmed.

Let's turn to Slide 31. We continue to derisk the balance sheet to further lower our cost of capital. Group cost gross NPE decreased by EUR 2.6 billion year-on-year and EUR 0.7 billion quarter-on-quarter. Our core gross NPE ratio dropped to 4.3% in the third Q close to the EBA average.

Let's turn to Slide 32. Overall, the risk environment remains supportive. The default rate worsened year-to-year due to single names in Commercial Banking Italy.

Let's turn to Slide 33. Gross NPEs in Commercial Banking Italy were EUR 9.2 billion, which is a significant reduction in absolute terms versus last quarter and was driven by disposals. The gross NPE ratio was down to 6.2%, driven both by gross NPE reduction and higher loan volumes. The 2019 gross NPE ratio target is confirmed at 5.3%. As we have said before, please keep in mind that the reduction of NPEs will not always be linear. The third Q 2018 coverage ratio was broadly stable at 55%.

Let's turn to Slide 34. We continue to see the overall risk environment in Italy as supportive, also evidenced by higher recoveries year-on-year. The default rate was stable at 2.1% in the quarter.

Let's turn to Slide 35. The execution of our accelerated rundown of noncore is progressing smoothly. Gross loans in noncore were down EUR 9.6 billion year-on-year and EUR 1.8 billion quarter-on-quarter. This reduction was done through a combination of disposal, write-offs and recoveries. Performing exposures in noncore are down EUR 1.8 billion year-on-year and set only at EUR 1.7 billion. As we stated before, all performing exposure in noncore will be gone by the end of 2018, and the division will become a closed NPE book.

Let's turn to Slide 36. Noncore loan volumes kept going down and are on track to meet the 2021 accelerated rundown targets. Net NPE were down EUR 4.8 billion year-on-year to EUR 7.8 billion. Gross NPE decreased by EUR 7.8 billion year-on-year, reaching EUR 20.6 billion. We are confident to reach our EUR 19 billion gross NPE end of the year target. NPE coverage improved to 64.3% despite disposal activity.

Let's turn to Slide 38. The group's fully loaded core Tier 1 ratio is 12.11%, down 39 basis points quarter-on-quarter. The key drivers were, apart from the low net profit impacted by Yapi and U.S. sanctions, the fair value through OCI and FX reserves. Out of the 11 basis points impact on the fair value through OCI reserves, 9 basis points came from the Italian sovereign bond portfolio. On the FX side, depreciation of the Turkish lira was the main reason with minus 14 basis points gross. As the risk-weighted assets from Yapi also went down, the net impact on our core Tier 1 ratio was only minus 5 basis points in the quarter. Regulation, models and procyclicality had an 8 basis points negative impact. As we said earlier, we expect our core Tier 1 ratio at year-end 2018 to be between 11.5% and 12%. This will be the result of BTP spread movements since the end of the last quarter. The increased credit risk-weighted asset from model recalibration and EBA guidelines as well as high operating risk-weighted assets.

We updated our fiscal year 2019 core Tier 1 ratio to 12% to 12.5%, which corresponds to an MDA buffer target of 200 to 250 basis points. As we have communicated at our Capital Markets Day, this fiscal year 2019 target is on a fully basis loaded and valid from the end of 2019 and beyond. During the year 2019, we will be below that level. We will reach the lowest point of our core Tier 1 ratio in the first Q 2019, slightly below the end of fiscal year 2018 due to the EBA guidelines phasing in. During the course of fiscal year 2019, we will steadily increase the Core Tier 1 ratio to return earnings in our other remediation actions.

Let's turn to Slide 39. Risk-weighted assets increased by EUR 1.9 billion to EUR 362.6 billion. The biggest drivers were increased credit risk-weighted asset from higher loan volumes and regulation, models and procyclicality. The risk-weighted asset contribution from Yapi went down due to the FX development.

Jean-Pierre, back to you.

[Jean-Pierre Mustier, executive]

Thank you very much, Mirko. As I said in the beginning, we're ahead of schedule on the execution of Transform 2019. Basically, we took advantage of an extremely strong operating performance to take decisive actions on Turkey and U.S. sanctions to put them behind us.

We have as well announced a number of remediation measures. As such, we confirm the EUR 4.7 billion 2019 net profit as lower revenues will be compensated by lower cost and an improvement in the normalized tax rate to between 17% and 18%. We also confirm our 2019 RoTE targets.

As the composition of our net income is different because of the challenging macro environment, we are updating some of our planned targets. Our '18 and '19 revenue targets are EUR 19.7 billion and EUR 19.8 billion, respectively, based on expected lower trading and dividends. Regarding the latter, as mentioned earlier, we have taken a very conservative view of Turkey. The combined commercial revenues from NII fees is confirmed around EUR 18.1 billion.

On the cost side, as already mentioned, we'll be delivering an improved reduction at the end of 2019 of around EUR 200 million versus the original cost target. As a result, we slightly revised our '19 cost-to-income ratio target to between 52% to 53%.

Our 2018 stated net profits will be at least EUR 2.8 billion. And adjusted net profit will be at least EUR 3.6 billion. Our asset quality targets, which we have already improved twice in the past year, are all confirmed.

Regarding capital, as I explained earlier, we now target a CET1 ratio of 11.5% to 12% for the fourth quarter '18 at today's BTP spread and a range of 12% to 12.5% at the end of 2019. This corresponds to an MDA buffer of 200 to 250 basis point as of the year 2019.

Let's now turn to Page 42. Before we move to the Q&A, let me briefly recap our first 9 months '18. We have seen an ongoing strong core bank performance, with group core net operating profit of EUR 6 billion and an adjusted group core RoTE of 10.4%. If we adjusted for the higher charge and provision U.S. sanction, it would be meaningfully higher.

Transform 2019 continues to be ahead of schedule and delivers tangible results quarter after quarter. Group costs are down 7.7% year-on-year and will be below EUR 11 billion in 2018. The accelerated noncore rundown is fully on track, now down to EUR 20.6 billion of gross NPE.

We have taken decisive actions on Yapi and provisioned for the U.S. sanctions. Any potential impact from the U.S. settlement is expected to be nonmaterial, plus or minus mid-single-digit basis points. We expect a full year 2018 adjusted net profit of more than EUR 3.6 billion and a CET1 ratio between 11.5% and 12%. We will continue to focus fully on Transform 2019 and work hard as one team to achieve our objective of making One Bank, One UniCredit a true pan-European winner.

And now Gianni, Mirko and I are ready to take your questions. [Operator Instructions] Operator, over to you.

[Operator]

[Operator Instructions] The first question comes from Paola Sabbione of Deutsche Bank.

[Paola Sabbione, analyst]

Two questions then. First is on your funding plan, if you could give us some update on that given the current context in particular in Italy. And the second, I'm not sure if you can comment. But given the current share price, could you as management team consider buying UniCredit shares?

[Jean-Pierre Mustier, executive]

Thank you very much. On the funding side, I will let Mirko comment. On buying shares, as we have now been coming out with the impairment on Yapi and the U.S. sanction, I will be buying shares, and we'll announce that tonight for the equivalent of my gross salary. I will buy, as I did when I joined the group, a mix of between shares and AT1. I think it's important on my side, know that I can do that from the company's point of view to show a very strong confidence not only in UniCredit, but also in Italy and the country. Mirko, for the funding plan?

[Mirko Bianchi, executive]

Yes. On the funding plan side, we're basically 50% done for the year. We have -- actually, if I look at the risk-weighted asset development of the bank, we actually need a smaller amount of the funding plan that we announced at the Capital Markets Day. So that's one point. You're going to see us continuing to do secured funding as a group, including a fund brief, a supernatural funding, private placement and wholesale funding that is TLAC related. Now in terms of that TLAC funding plan, we are probably going to access the market now that we have behind our sales the Yapi impairment and also the U.S. sanctions. We are free also to go to the market. And because of this, you're going to see probably EUR 3 billion to EUR 5 billion in TLAC-related funding by the end of the first Q next year.

[Operator]

The next question comes from Mr. Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

A couple questions for me. If you can sort of clarify the different impacts you're expecting basically in terms of procyclicality, regulation, EBA guidelines in the fourth quarter. I mean, if I have the EUR 700 million implied profit for the fourth quarter, retained earnings will be around 15 basis points. You're still going for a maximum reduction of core capital in the revenue of 60, 70 basis points. So I just wanted to clarify whether you are shifting back some of the '19 impact back into '18? And the second question is on the treasury net interest income, if you can comment how you expect that part of the net interest income to evolve in coming quarters?

[Jean-Pierre Mustier, executive]

Thank you very much. I will let Mirko comment on the NII side. I will comment quickly on the capital impact on regulatory headwinds.

As we mentioned, we have taken a combined regulatory impact up to the third quarter '18 of 19 basis points of CT1 ratio, which is basically split and mostly from the model side, basically, including 8 basis points for the third quarter.

For the first quarter, we should have an additional 24 basis points of regulatory headwind, 15 basis points coming from the model side and 9 basis points coming from ABA guidelines, which means that the total will impact from model and ABA guidelines for 2018 will be 44 basis points, split 34 basis points for model and 10 basis points for ABA guidelines. As we communicated during the Capital Market day '17, we will have -- and that's taking into account a time translation of some of the impact which was expected for '18 -- we will have for 2019 roughly 80 basis points, exactly 79 basis points of total regulatory impact, 34 basis points for model and 45 basis points for ABA guidelines. And we should have 48 basis points of this 79 basis points coming on the first quarter, 14 basis point for model and 34 for ABA guideline. If you want further detail, you can speak to IR team, but I give you the bulk and the overview of the value regulatory impact. As far as NII, I'll let Mirko comment.

[Mirko Bianchi, executive]

Yes, in terms of NII, and I think you were looking for NII going forwards. We see that the fourth Q NII probably will be in line with the third Q NII, so that's the guidance that we can give. And for further down the road, fiscal year 2019, we have announced that the NII plus fees are confirmed at around EUR 18.1 billion. So that's the second guideline that I can give you that includes the NII development.

[Ignacio Cerezo Olmos, analyst]

I was asking specifically about a treasury component, the financial component within the net interest income has been a big plus in the quarter.

[Mirko Bianchi, executive]

Yes, we had a -- if you look investment portfolios and market and treasuries plus 49, EUR 32 million are coming from the investment portfolio. Of course, going forwards you're going to see more a flattening of the impact on the NII, and that's what you should expect.

[Jean-Pierre Mustier, executive]

I think we can say from the investment portfolio that we should expect higher NII contribution as the team has been working very well in terms of turning the portfolio. We keep the duration short -- actually, shorter than before at 3.1 years while the income from the portfolio has been increasing meaningfully. And now we are 50% above what it was at the beginning of the year. So very good work done by the treasury team which would have a lasting impact on the NII side. On the projection for 2019, I just want to state again the EUR 18.1 billion of NII plus fees are confirmed. The operating performance of the group is very good; you saw that on the third quarter. So we confirm, going forwards, the operating performance, NII plus fees. And we have adjusted our revenues based on a very conservative view of Yapi contribution and a normalized contribution of the trading to EUR 1.4 billion. But the operating performance of the group is doing very, very well.

[Operator]

The next question comes from Mr. Alberto Cordara of Merrill Lynch.

[Alberto Cordara, analyst]

I have a couple of questions. The first one is related to your NPE exposures and in particular related to your bad loan also. You had EUR 23 billion of bad loans with a coverage of EUR 16.8 billion. So the coverage ratio is 72.8%, it is extremely high. But I want to ask you an additional question, if you can give us also the number for the write-offs. Because including the write-offs, the coverage would be reduce that level. So you have [ NPEs ] that are really at market value or over market value. The second question relates to the confirmed target for next year, EUR 4.7 billion. So you dream the revenue have been turned, but you give us better guidance on cost and a significant better guidance on tax rate than what you are saying before. But just an additional point, I think, in your initial speech, you mentioned also some real estate disposals this year. Just wanted to make sure, is this included in the EUR 4.7 billion or not? And if yes, what would be potentially this capital gain?

[Jean-Pierre Mustier, executive]

Thank you. I will let TJ comment on the write-off impact. On the EUR 4.7 billion confirmation of our net income, as I said, we have an adjustment of the top line, which is coming from a conservative view on Yapi, and an adjustment, I mean, of the trading expectation to the lower range of the expectation for trading we communicated at the Capital Market day at EUR 1.4 billion. The underlying commercial performance, as I said, is very good. And we claw back this lower top line performance, thanks to cost saving of EUR 200 million and a tax rate between 17% and 18%. You are absolutely right to say that we should have potential upside on our net income as we did not take into account the capital gain which should come with our disposal of some related asset. We are always extremely conservative, so there we have, let's say, a buffer, if the environment was a little bit more negative than what we're expecting. And I would say, we probably have also an upside on the Yapi side as well taking a very conservative view. So all in all, that's why we are confident that we can deliver on the EUR 4.7 billion net income. TJ, for the write-off.

[Thiam Lim, executive]

Based on the Q3, as you said, the EUR 23 billion bad exposure, if we consider EUR 3.9 billion of the group write-off, the coverage would move from 72.8% to 76.7%, so almost a 4% improvement if we consider the write-off.

[Operator]

The next question is from Mr. Andrea Filtri of Mediobanca.

[Andrea Filtri, analyst]

What businesses could you dispose of and what effects do you want to obtain from it? And on liquidity, are you seeing any signs of liquidity tensions in Italy, either from other banks or from clients' behavior? And do you consider a third TLTRO plan likely? Finally, just a very quick one, a curiosity here, do the changes in targets have any implications for the LTIP plan?

[Jean-Pierre Mustier, executive]

Thank you very much. I will basically -- on the TLTRO, I will let Mirko comment. On the last question, I will take it, and I will let Gianni comment on the first part, potentially. On the target -- the change of target do not impact the LTIP plan, basically. The LTIP plan, just to remind everybody, that's the long-term incentive plan for the management team which includes around 150 people. We have roughly, I mean, within the managers, 100% of the LTIP allocation for Gianni and myself, so that's all our remuneration, for the executive management committee 50% and, after which, for other managers in the management group, 30%. The 3 core parameters are the RoTE of more than 9%, which we confirm. The cost income of at or below 52% will be marginally higher than that, and we have a progressive reduction impact on the LTIP on that and the disposal and the net NPE level of EUR 20.2 billion and will be meaningfully lower than that. I will let Gianni comment on our commitment to commercial banking activities. I can say that on the disposal of asset, we are looking at assets which are mostly related, as we mentioned, but we are absolutely comfortable, and I'm not going to do anything on our commercial banking activities. I'll let Gianni comment on that.

[Gianni Papa, executive]

Thank you very much, Jean-Pierre. Now as Jean-Pierre mentioned, we have the target that we gave, the EUR 4.7 billion, financial year for -- net profit for next year is without including the positive contribution in real estate assets. It's coming from pure commercial activity. We are very committed to all the countries where we're having activities. So we are talking about the division and the countries. And then for the different segments of the market, we are growing very nicely in retail business in all the countries, so in Italy, in Germany, in Austria and in Central Eastern Europe. As presented by Jean-Pierre and Mirko, we have a very positive contribution coming from CIB, where we are one of the major player in a particular segment part of the market. We don't see much tension in terms of liquidity in the sense that, even since the beginning of the Italian bond spread widening, commercial deposit base in Italy, in Germany and in Austria are either stable or increasing. And this is true in particular as far as retail and corporate customers are concerned. So we do have our -- we confirm our strong commitment to be a Pan-European commercial bank with a fully CIB -- with a full plug-in CIB.

[Mirko Bianchi, executive]

Yes, on the TLTRO topic. First of all, we have a pretty much evenly spread redemption amounts into -- in basically in 2 different periods. And we are going to manage smoothly the TLTRO redemptions and ensure that we have a strong LCR and a stable funding ratio. Our best case scenario includes basically our execution of our funding plan, the usage of short-term paper and also our deposit commercial growth that we have in the plan. Of course, if there is a potential TLTRO from the ECB in order to smooth this structure liquidity maturities, of course, we would also use that in case. But our best case scenario is based on normal market access and development of our liquidity position.

[Operator]

The next question is from Jean Neuez of Goldman Sachs.

[Jean-Francois Neuez, analyst]

I would like to ask, first question on the changing targets. I just wanted to understand a little bit better the drivers of the change in the tax rate guidance and its potential sustainability or not after 2019. And also the geographic split, pluses and minuses of the revenue change, if that was possible. And secondly, I wanted to ask about the capital requirements, when you said the new target of 12% to 12.5% is at least 200% above MDA, I guess that means an unchanged -- an assumption for an unchanged capital requirement going forward. And in light of the stress test results, I just wanted to know whether you would be able to share an opinion on the direction of the [ swap forms ] here or if it has any impact at all?

[Jean-Pierre Mustier, executive]

I will comment on the capital requirements and let Mirko give you more detail on the tax rate. We might not go too much into details and feel free, of course, to call our IR team. It is important for us to maintain a high buffer in terms of MDA requirement. I want to have a buffer which is high, but which gives us as well the ability to manage, if I may say, our own countercyclical buffer. Meaning that, in good time, we want to be at around 250 basis point buffer. And in a more adverse environment, we can go down to 200 basis points, which is what will happen. And we said we should look at the MDA level at the end of 2019 at 11.5% CT1. In potentially first quarter '19, we will be at only 150 basis points. But we think it is important specifically, until we have not run off completely the non-core, we want to maintain a high buffer to MDA. We are at already a Pillar 2 requirement reduction this year which was applying for 2017. I think in the current environment, it is probably too optimistic to expect that the ECB will lower again our Pillar 2 requirement for 2018 to apply from 2019. But based on the evolution of our ratios, knowing that with the last actions we took with Turkey and U.S. sanctions, we should have put behind us all negative impacts we are expecting, and we will push very hard next year to have a further reduction of our Pillar 2 requirement. But once again, we are planning to have a high capital level, and we are focusing on the MDA requirement, which is we feel the MDA buffer is the right things to look at between 200 to 250, which is why we are taking managerial action to reach back again to 200 or above at the end of '19.

[Mirko Bianchi, executive]

Yes, on tax rate, first of all, on the third Q, the impact on the stated tax rate that is high at 32% is because of the Yapi impairment is not tax-deductible, so that impacted the third Q. And therefore, the normalized is more in line with the 10% rate. Now if we look at the 9 months horizon, also here, the stated is around 18.3%. If we normalize for the various disposals and nondeductibility of some items in Germany, you land at a 16.3% group normalized tax rate that is also the tax rate that we think we are going to maintain for the full year 2019 -- for 2018, sorry. For 2019, we are guiding between 17% and 18%, and that will depend on the various, let's say, legal jurisdictions in terms of the various tax rates impacting slightly higher tax rate as for 2018.

[Jean-Pierre Mustier, executive]

I will comment as well that this number do not include the potential effect from ongoing DTA assessment which could come on top and show a further improvement.

[Jean-Francois Neuez, analyst]

And on the geographic changes in the revenue targets, is this possible?

[Jean-Pierre Mustier, executive]

Well, the -- I think we have -- I mean, in terms of the revenue target, we said that, I mean, Italy will keep performing very well. So we are targeting a ROC, which is in the -- between 12% to 13%, which was what we communicated at Capital Market day.

Germany, after the impact we had on the U.S. sanction, should go back to the 9% or above ROC. Austria had a ROC which was a bit too high at this stage because we had provision went back -- and exceptional and will go back to the Capital Market day target of around 13% and slightly above 13%. CEE, which is for a part booked in Germany, for a part booked in Italy, will be -- sorry, CIB will be at around 12%, which is what we communicated at Capital Market day, and CEE will be roughly around the target we communicated as well, above 13%. So we'll, if you look at the ROC, which would give you a good geographic breakdown of the revenues, we are going to target the normalized view of the Capital Market day. As we communicated, to try and do the true normalized profitability for the 9 months to date, you have to take into account not only the impact of Yapi impairment on one side, but also the impact on the U.S. sanction, which is split between commercial bank in Germany and CIB. If you were to take out the impact of the U.S. sanctions, and remind you that we as well took provision the second quarter for sanctions, part of that was for the U.S. side, I mean, you can see that the normalized profitability for Germany would actually be very, very good. And CIB, as we said, would be in the mid-teens, so a very good profitability as well. So to cut a long story short, we took advantage of an extremely strong operating performance to put things behind us and to have a clean 2019. And we have, as we said, a little bit of potential buffer and a good projection of Turkey evolution, the potential capital gain of the disposal of real estate and potentially a good surprise on the DTA side.

[Operator]

Next question is from Adrian Cighi of RBC.

[Adrian Cighi, analyst]

I have 2 follow-up questions on net interest income. So you're planning to reduce the BTP sensitivity by 35% by end of next year. Will you achieve this by reducing the amount of BTPs or further hedging? And if so, what are the implications you have on either the NII outlook or NII sensitivity? And then on Italian NII, specifically, your quarter-on-quarter move in asset yields have been quite high in a slightly LIBOR environment. Can you give us a little bit more insight into how much of this is driven by mix and whether there are any other drivers that are at play? You're growing specifically in Italy quite a bit higher than the market. One could look at this as sort of chasing volumes at potentially discounted prices. Is this a fair way to look at the strategy or is there a different explanation?

[Jean-Pierre Mustier, executive]

I'll just comment very briefly on the BTP side, and then I'll let Mirko comment on the NII. On the BTP side, as we said, we have roughly EUR 12 billion of expiries of BTP of redemption next year, and we will reinvest part of this redemption into -- directly into the held to collect. We cannot reclassify the portfolio. It is not allowed from an accounting point of view, so we'll work with the flow. If you look at our current BTP portfolio, we have a BTP portfolio, when you look at the available for sale portfolio, which is on the third quarter marginally lower than what we had on the second quarter but which is meaningfully lower than what we had at the end of last year. So if I may say, CT1, a sensitive part of the portfolio, is lower, and that's what we are going to keep doing. We have EUR 44 billion more or less of BTP at fair value, and we had EUR 50 billion at the end of last year of BTP at fair value. So EUR 50 billion are going down to EUR 44 million, but we are increasing the held to collect, and we had EUR 8 billion of held to collect at the end of the quarter versus EUR 3.3 billion at the end of last year. So you can see already that we have engineered the shift. And we will keep doing that, targeting more or less an amount of BTP which should be equivalent. We might temporarily go slightly higher to take benefit of market environment and not just afterwards, but that's up to our treasury team to manage that. The move towards held to collect allows us to reduce by the end of next year the sensitivity of the available for sale by 35%. The sensitivity of the available for sale right now is 2.5 basis points for 10 basis points move of the BTP spread posttax and a 3.5 basis points for 10 basis points move pretax. So we will be at 35% lower than these figures at the end of next year.

The duration, as I said, which I think is an extremely important component of the evolution or the sensitivity and our ability to be mobile on the portfolio, has been reduced at the end of the quarter from 3.3 years at the end of Q2 to 3.1 years. So reduction of the duration while the yield on the portfolio has increased, as we mentioned, versus the yield we had last year by roughly 50%. So that's it. Maybe a quick comment before Mirko comments on the NII side is you have seen that we have a very robust loan growth in most of the -- our activities in most of our countries. This is testimony of the very good performance of our commercial activities. We are up 6.7% on a year-on-year basis on the core bank, 2.5% on a quarter-to-quarter basis. And we increase in Italy 5.5%, for instance, on a year-on-year basis and 1.5% on a quarter-to-quarter basis. But Gianni and I are very, very focused on the quality of new origination. Gianni looks at it, I would say, realtime and we review together the quality of our origination on a monthly and quarterly basis. Just to give you some figures, I mean, the expected loss on the new business for the group is, for the 9 months to date, 34 basis points versus a portfolio which is at 38 basis points. For Italy, where we increase by 5.5% on a normal-to-normal basis, we have expected loss on new business of 35 basis points versus an expected loss on the performance stock of 53 basis points. So you can see that the new business, which comes in into the portfolio, improve the risk profile of the group. And we look, together with Gianni, on a very detailed basis, as we already mentioned, at the expected loss origination by bucket and focus on the lower quality bucket to make sure that we limit that. This is why we can drive the new origination towards a very high quality client, and we can show an improvement on the risk profile of the portfolio. A long answer to a short question, and I let now Mirko comment on your NII question.

[Mirko Bianchi, executive]

Yes, one question was the NII impact in terms of the sensitivity change, if these impacts are in the [ right ] production going forwards, this not, doesn't have a negative impact on our NII. Then second, basically, as Jean-Pierre responded, meaning it's not a volume chase. We are getting back to our natural market share in Italy and the type of business that we are doing is nicely spread over the corporate and the retail business. And here, the NII development is really more driven from client rates in which we continuously see pressure from client rates, but if we look at the trend on a monthly basis, we start seeing a slow reduction of that. So that's why we are still guiding for stabilization of client rates going forward.

[Operator]

The next question is from Mr. Hugo Cruz of KBW.

[Hugo Cruz, analyst]

Just wanted to ask about the intergroup funding exposure to Turkey, if you could give us an update?

[Jean-Pierre Mustier, executive]

Of course, we mentioned, and I think it is important in the introduction as some of our remediation action, one of them will be that we want each legal entities to become self-funded by progressively minimizing intragroup exposure. And so this applies to all our subsidiaries and to the group. And specifically towards YapiKredi, there are a certain number of upcoming expiries which are expecting to have our third quarter 2018 intragroup exposure within the next 24 months. YapiKredi is a listed company so I will just mention the figure they gave on intragroup exposure of EUR 2.6 billion. And we are saying that within 24 months, so within 2 years, we should have this exposure so basically it will be down to EUR 1.3 billion.

[Operator]

The next question is from Delphine Lee of JPMorgan.

[Delphine Lee, analyst]

So just 2 questions. First of all, on the litigation, just wondering if you could give us a little bit more color in terms of what stage of the discussions you are with the U.S. authorities and just to give -- just to have an idea of the size of the outstanding for the provisions that you have allocated to U.S. sanctions. And also related to litigation, I've seen you've taken the EUR 150 million or EUR 200 million in Germany. Just wondering if you could also give us a bit maybe of an update of the litigation issues or cum-ex, anything that you can provide in terms of color would be quite helpful to understand if there's anything more coming in the next 2 quarters. And my second question is just on -- just briefly on capital, for your target of 12%, 12.5% at the end of 2019, so this includes some disposals, so you mentioned real estate disposals. But I just wonder sort of just the magnitude of the contribution in terms of capital benefit to the ratio, if you could provide a little bit more on the assumptions you've made.

[Jean-Pierre Mustier, executive]

Right. As you can understand, we are still discussing with U.S. authorities, so we cannot give any specific detail about the size of the provisions or to state where we are. The only thing we comment about was first to say that we expect to have a resolution of this discussion by the first quarter of next year. We are not the master of the time, basically; it's up to the U.S. authorities. But based on our discussion, we can expect that to be resolved. And we said, and I think it's important, that we have taken, I mean, assumptions. And so any additional impact on CT1 based on the final resolution can bring a plus or minus single-digit basis point impact on CT1. I'm saying plus or minus, which means that there could be write-back, basically, or there could be very marginal additional provision. It's very difficult to estimate what should be the final figures, but we are confident that we are well covered, basically.

As far as the cum-ex transaction, HVB has been settling with the German authorities the cum-ex issues, and you can find a detailed statement on the subject on the first half 2018 HVB financial report and for the specialist, it's on Page 42. And what we can say that all communal proceedings against HVB which are relating to the claim for resulting tax credit have been terminated, basically. And we -- so that's what we can say. So I think that behind us. On the capital target of 12 to 12.5 basis points for 2019, some of the remediation action include the disposal of some real estate asset which, I mean, we will sell in the course of next year. We don't give a precise indication on that because we are still negotiating. It is not small, basically, but we have to -- we'd rather wait for the transaction to close to communicate to the market as we don't want here as well to put ourself in a weaker position with the various entities we negotiate with. So -- but we are confident we can deliver the 12% to 12.5% target.

[Operator]

The next question is from Mr. Andrea Vercellone of Exane.

[Andrea Vercellone, analyst]

Just one question for me, and I like to have a little bit more detail on tax. Appreciate it's boring, but the drop in the projected tax rate from, I believe, somewhere around 22%, 23% to somewhere around 17%, 18% for next year is quite big in euro million terms. So number one, I like a little bit more color on how I can square this. You said that there is no positive benefit from a reassessment of DTAs in that number. At the same time, if we look geographically, you have 33% tax rate in Italy, 31% and a bit in Germany, 25% in Austria. CEE is lower, somewhere 13%, 14%, but how can you have an average tax rate, 17% or 18%? What am I missing? And the actual legislation in Italy is probably also being scrapped so that's another negative. I'm surely missing something, so I'd like to see, to also to know, beyond 2019, is this a number which is sustainable or not?

[Jean-Pierre Mustier, executive]

I will let Mirko comment on the tax rate to give you more detail. I think it would probably be more appropriate after the comment of Mirko that you speak directly to the IR team or to Mirko off-line as he might go a bit to detail. But just to be clear, I mean, if you look at our current tax rate for the year, we mentioned that it will be between 16% and 17%, 16.3%, I think. So that's clearly what we have targeted for '19 is not very different from what we will have for '18 even if without some reason to have a 16% tax rate for '18. I confirm that there is no DTA impact on the tax rate and that the tax rate which was communicated at Capital Market day was probably based on net income assumptions which were probably, I mean, conservative as far as the tax rate is concerned. But I'll let Mirko comment in more detail about the assumptions.

[Mirko Bianchi, executive]

Yes, so first of all, the sustainability of this level of tax rate beyond 2019 is a yes. So this is sustainable also going forward. So beyond 2019. And then I would say that there are legal entities like Italy and Austria that are well below the nominal tax rate. And that changes your mix when you start comparing one tax legal entity from the other one. As I said, let's go back in with a specific call because it's very technical because every legal entity has its own logics behind it. But overall, in what we are telling to you, we are guiding probably pretty well for fiscal year 2018 and '19, and we are very comfortable with what we are telling you in terms of 17% to 18% going forward, ex DTAs, of course.

[Operator]

The next question is from Christian Carrese of Intermonte.

[Christian Carrese, analyst]

Could you share with us your thoughts on business confidence in Italy? Because we saw some negative elements, GDP equal to 0, [ PNI ] down. And according to your guidance 2018, it seems that we are not expecting any yield down in Italy, just a matter of trading and specific for Turkey. What is the trends that you are seeing in terms of business confidence for the -- in the last couple of months? And what do you expect to be the loan's growth in 2019? And second question is on dividends. If you can remind us your dividend policy, remind us 2018 net profit will be lower than expected.

[Jean-Pierre Mustier, executive]

Thank you. I'll take the dividend question, and we'll hand over to Gianni on the Italian business and the reaction of our clients. On the dividend side, we confirm our payout ratio of 20% of net income for '18, so dividend to be paid on '19, and 30% of net income of dividend for '19 to be paid in 2020. So no change in the dividend policy. We as well said that based on the capital level and ability to maintain the MDA buffer, we will increase the dividend payout to 50% as soon as we can afterwards. On business confidence and client dynamic in Italy, Gianni, over to you.

[Gianni Papa, executive]

Thank you, Jean-Pierre. So -- well, the business is growing very nicely; as mentioned before, we had a very nice growth in the third quarter and also year-on-year in terms of new production of loans and this both in retail and corporate, not to mention also the business for the CIB customers that are part of the CIB Italian business. We are growing the number also of customers, so not only market share in segments such as, for instance, mortgage business. But also if we look at corporate business in Italy, we have been growing in market share in Italy overall and also in CIB, thanks to the very strong commercial dynamic of our colleagues, all the teams and the fact that also in terms of structure of business, we are seen by customers, by our customers as the bank that can really deliver what they need. In as much as 2019 is concerned, which is -- was also your question, we believe that we'll be -- keep on growing.

We see our positive positioning and growing position in terms of customers acquisition, both in as much as retail and the corporate business is concerned. So we are very confident that we will be able to keep on assisting our customers and, as mentioned by Jean-Pierre also at the beginning, we are assisting the real economy, the Italian real economy in developing the business. On top of that, thanks to the network of banks and the fact that we are a Pan-European bank, we are able to assist our customers also in as much as their internationalization drive we have. And in fact, we see more and more, for instance, corporate customers becoming very active in terms of export activity, but also setting up bank companies abroad. So we are confident on the Italian business.

[Operator]

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

[Benjie Creelan-Sandford, analyst]

I just want to go back onto capital again, continues to have a lot of moving parts. So I just wanted to check. I'd heard probably earlier that, for the fourth quarter, you were expecting a 24 basis points headwind from regulation. And if that's the case, could you just spell out what the additional potential negative you are thinking of given the buffer that seems to be embedded in the 11.5% to 12% year-end target? My second question was just on YapiKredi. If you were to write that, the sort of the remaining investment, if you were to write that down entirely, can you just please quantify what the expected impact would be on both the book value and the CT1 for your net credit? I'm just trying to think or understand the moving parts around the existing FX reserves in particular.

[Jean-Pierre Mustier, executive]

I think on the capital side, as mentioned earlier, we expect to have on the first quarter, 24 basis points impact of regulatory impact model and ABA guideline, 15 basis points from model and 9 basis points of ABA guidelines, so which will move the total impact for FY '18 to 44 basis points. We already add more or less 20 -- or 19 basis points. And as I said, we expect to have, for the first half '18, probably in the first quarter, 48 basis points of impact, 14 on model and 34 on ABA. On the Yapi side, I mean, first of all, I mean Yapi is a very good bank. We're going for now normalized, if I may say, adjustment of the cycle. What I mean by normalized is, over the summer, that was the normal adjustment of the economy in Turkey, which is always deeper than what we can see in other economy because they have a high current account deficit. And on top of that, we had the tension with the U.S. The tension with the U.S. have disappeared or about to disappear with the release of the pastor and with the withdrawal of the sanction against some Turkish ministers and vice versa. So I think we are now in a cycle adjustment as usual, which is always bigger than in some other economies. On -- so as such, writing off our stake in Yapi to 0 is an absolute no go. I mean, that's -- but if you want to know what the mark-to-market value of our stake, and it is around EUR 1.2 billion. And when the market cap -- in euros, when the market cap of Yapi is around EUR 1 billion. So why didn't we write down to the market cap? Because market cap is not a reference point for the valuation of our stake. We use a model which is based on our own assumption in terms of profitability, value-in-use-model, and the valuation of Yapi, which has to be taken up the highest between the market cap and the model. And we don't intend to change the valuation of our stake based on the market cap every day. So the 200 buffer, if I may say, or the 200 gap, one, it's completely nonsignificant at group level; two, I mean, we know that the situation in Turkey will improve, that we know. We are part -- I mean, if you have looked at the or the cycle adjustment, we all know that we have in Turkey an adjustment usually which lasts between 1 year and 18 months, and afterwards the economy turns and improve. And so we know that the situation will improve. And as such, nevertheless, we have taken, as I said, extremely conservative assumption, not only to value the stake, but also to look at the future contribution of Yapi next year to be conservative. We have an extremely low contribution to our revenues. Remind you that Yapi contribution for the dividend line, where we take a per quarter our share in the net income.

We consolidate Yapi at equity from an accounting point of view, but we consolidate Yapi proportionally from a regulatory point of view, which mean that our sensitivity to FX has actually changed. And we now have, let me say, a positive sensitivity to the FX evolution, which means that, that if the FX is improving, if the Turkish lira is improving versus the U.S. dollar, it will reduce by 1 basis point our CT1 ratio, will improve our tangible book because we have a benefit, as far as the valuation is concerned. But it will reduce marginally our CT1 ratio because we look at the improvement on one side of the value of the stake and the other side the impact on risk-weighted assets because the risk-weighted assets are consolidated from a regulatory point of view, which is why we have this asymmetric behavior, if I may say, when you look at CT1 ratio. But I think we can say today with what we've done on Turkey, the Turkish issue is behind us and, as we said, we are extremely confident that there will be no other move as far as Turkey is concerned. And we are extremely confident that our projection for next year are extremely conservative.

[Operator]

At this time, there are no questions registered.

[Jean-Pierre Mustier, executive]

Okay, if there is no other question, thank you very much for your time. I just want to reiterate again that we had extremely strong operational performance, as you have seen. We have been using this extremely strong operating performance in order to put behind us these headwinds which are harder for control, Turkey and the U.S. side. We think that all these headwinds are behind, and we can work and keep delivering on Transform 2019, which is clearly showing extremely strong sign of implementation. We are 93% done on the FTE reduction, 88% done on the branch reduction. We see a very strong commercial dynamic on the loans side, on the client side, and we look forward with confidence for Q4 and 2019. Thank you, and have a good day.

[Operator]

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