UniCredit SpA

MIL:UCG

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the UniCredit Group Third Quarter 2019 Financial Results Presentation. [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. Good morning to all of you, and welcome to our third quarter 2019 call. Before we start, I would like to recall the profound sadness we all felt at the sudden passing of our esteem Chairman, Fabrizio Saccomanni, in August 2019, just one day after our last result call. I have personally lost a friend of great intelligence and humanity, highly competent with a fine sense of humor and wit. UniCredit has also lost a Chairman who expertly guided the Board through a period of intensive challenges, always maintaining a clear strategic vision and a strong sense of direction.

We welcome Cesare Bisoni, who was appointed Chairman in September. Cesare has been Vice Chairman since April 2018, and thus, already has an in-depth understanding of the bank and has closely followed the elaboration of the new Team 23 plan, which we will present in London on the 3rd of December. You will also have seen that last night, we sold our stake in Mediobanca. The financial impact is irrelevant, and the transaction is in line with our strategy to sell nonstrategic assets.

As regard for our financial performance, we had strong third quarter '19 with a net profit of EUR 1.1 billion. This is the best adjusted net profit in the third quarter in more than a decade. Our derisking continued at a vigorous pace, taking the group gross NPE ratio below 6% for the first time. Our CET1 ratio stood at 12.6%, translating into a 252 basis point buffer over MDA.

We are innovating this quarter. Due to popular demand, we will keep our remarks on the presentation much shorter to allow for a more comprehensive Q&A session. If you require more detail than we gave in this presentation in today's session, feel free as always to call our colleagues in Investor Relations who will tirelessly strive to help you.

Let's move to Slide 4. Group revenues are up 1.7% year-on-year, while costs are down 1.8% year-on-year resulting in a significant operating leverage. Cost of risk in Q3 '19 is 47 basis points, down both quarter-on-quarter and year-on-year.

Let's move to Slide 6. Since the second quarter '19 upgrade by rating agencies, our spreads have tightened considerably. We tactically anticipated next year funding, issuing a Tier 2 bond at half the spread compared to our February issuance. We completed more than EUR 5 billion of NPE disposal in the quarter, EUR 4 billion of which is Non Core. As a result, we now expect Non Core gross NPE to be below EUR 10 billion at the end of the year, a very significant reduction versus our original target of EUR 19.2 billion. And as of the third quarter '19, we have completed the branch closures and FTE reduction that were part of Transform 2019.

Let's move to Slide 7. We continue to actively support the real economy in the countries where we operate. In Italy, we launched the Made4Italy initiative and signed an agreement with the EIF for an additional EUR 60 million for Italian micro-enterprises. Our partnership with Allianz and an MoU with CEXIM are good examples of how we support our growth initiative.

Now let me hand over to Mirko.

[Mirko Bianchi, executive]

Thank you, Jean-Pierre, and good morning, everyone. I will now take you through our third Q 2019 financial performance. And as promised by Jean-Pierre, I will be much shorter than usual. Group core performance was strong with a return on equity above 10% for both the quarter and the year-to-date. We confirm the target above 10% for fiscal year 2019. We also confirmed the fiscal year 2019 group RoTE and all divisional return on allocated capital targets. In order to avoid any misunderstanding, confirming our RoTE or a return on allocated capital target has always meant that we will be at or above the announced figure.

Let's turn to Slide 10. Revenues were up 2.2% year-on-year, mainly driven by strong trading, thanks to higher client activity. While fees were remarkably strong, we saw no seasonality quarter-on-quarter. They could not completely offset the year-on-year decline in NII, mainly due to rate decreases. As a result, commercial revenues were resilient, up in the quarter, but down year-on-year. Group core cost of risk is stable and low at 35 basis points in the quarter and 37 basis points in the 9 months 2019. It is well below our fiscal year 2019 target of 43 basis points.

Let's turn to Slide 11. Let's now look at the figures for the group. You will notice that the stated net income is equal to the adjusted net income in the third Q 2019, up 25.7% as there were no adjustments. The tax rate in the 9 months 2019 is 25.8%, down from the first half 2019 level as per guidance. The main reason is a different geographic profit mix.

Let's turn to Slide 12. NII was flat in the quarter and down 0.9% without the days effects and FX, a very good result, given the lower Euribor affecting loan rates. The other drivers of the quarter NII were deposit rates positive by EUR 13 million, driven by the lower term deposit volumes since CEE; term funding contributed positively, thanks to the lower rates in Germany, Austria and CEE; and in the other bucket, we had a nonrecurring EUR 11 million item in factoring Italy.

Let's turn to Slide 13. Customer loan rates were down 6 basis points in the quarter, mainly driven by Commercial Banking Italy and CEE. Without one-offs, these 2 divisions showed declines in customer rates of 4 and 5 basis points, respectively. Euribor was the late largest contributor to the drop, coupled with some sustained competitive pressure in certain jurisdictions, including Italy.

Let's turn to Slide 14. Group core end of the period customer loan volumes were up EUR 1.3 billion quarter-on-quarter, while for the group, they were marginally down as Non Core continues to run off. The loan to the [indiscernible] due to the sale of Fineco last quarter is closing fast, down by more than EUR 7 billion quarter-on-quarter.

Let's turn to Slide 15. Group fees were up 3% year-on-year, a strong performance in investment fees and financing fees resulted in both being up quarter-on-quarter, which meant which means that there was no seasonality in the third Q 2019, which is remarkable. On a year-on-year basis, investment fees are up strongly, mainly driven by upfront fees, while financing fees are lower, driven by lower market volumes in corporate finance. The start of the fourth quarter was promising for financing fees.

Let's turn to Slide 16. TFAs stood at EUR 781.6 billion in the third Q 2019. AUM net sales were up EUR 2.5 billion, the highest quarterly level in more than 1 year with positive contribution from all divisions. Asset under custody net sales, however, were negative as clients took advantage of tighter spreads and realized some profit in their bond portfolio, mostly in Commercial Banking Italy. We were able to convert a good percentage of these flows into asset under management.

Let's turn to Slide 17. Trading income in the third Q 2019 was $378 million, up both quarter-on-quarter and year-on-year. Year-on-year, trading was up around 38% when excluding XVA, thanks to much stronger client activity. Quarter-on-quarter, trading had the full seasonality of the third quarter across a positive EUR 66 million swing in XVA. Regarding Yapi, the contribution to the dividend line almost doubled year-on-year at constant FX, mainly driven by lower loan loss provisions and strong fee generation. The CET1 sensitivity to FX remain negligible.

Let's turn to Slide 18. Our focus on cost efficiency is yielding tangible results quarter after quarter. Please remember that we expect higher cost in the fourth Q 2019 due to seasonality, both in terms of HR and non-HR cost. The overall fiscal year 2019 cost target of EUR 10.1 billion is confirmed.

Let's turn to Slide 20, as Slide 19 speaks for itself. Regarding group cost of risk, I would like to point out 2 items. First, group cost of risk was 47 basis points in the quarter, including minus 1 basis points of models and 49 basis points year-to-date. For fiscal year 2019, we confirm 55 basis points, including the 4 basis points from models.

Second, we have successfully disposed of our residential mortgage NPEs in Italy. We initially intended to sell substantially all bad loans, residential mortgages loans after the Non Core only. As this turned out to be a very successful transaction we took the opportunity to also sell substantially all bad residential mortgage loans in Commercial Banking Italy. This positive action will increase the cost of risk in commercial banking in Italy by 0.1 percentage points for fiscal year 2019, and as a result, the cost of risk is now expected to be in the low 70s basis points.

Let's turn to Slide 22. In the third Q, NII was up 0.2% quarter-on-quarter, driven by the days effect and an EUR 11 million nonrecurring item in factoring Italy. Fees were up 3.3% year-on-year. Strong investment fees from AUM products and transactional P&C insurance fees more than offset weak but improving financing fees from loans. The overall risk environment in Italy remains very supportive. The very successful residential mortgage transaction comprising of both Non Core and commercial banking Italy and fees confirms our approach of taking decisive actions to clean up our balance sheet.

As a result, as mentioned before, while the fiscal year 2019 divisional cost of risk will increase by circa 0.1 percentage points to be in the lower 70s. This action will have a very beneficial impact on our asset quality in Commercial Banking Italy. For the third Q 2019, the gross NPE ratio is 5.0%, already below our fiscal year 2019 target of 5.3%. Also expected loss from new business [ and store ] have improved in the quarter, despite the impact from models. The numbers are in the Annex on Page 16. Feel free to ask IR for more detailed explanations.

Let's turn to Slide 23. In Commercial Banking Germany, we saw a remarkable performance, up 1.7% quarter-on-quarter against the seasonal trend and up 7.5% year-on-year. The main drivers were investment fees. Loan loss provisions normalized in the quarter, and we expect a low cost of risk for fiscal year 2019.

Let's turn to Slide 24. In Commercial Banking Austria, NII was up 2.7% quarter-over-quarter better than expected [ and ] strong commercial dynamics. The costs were affected by nonrecurring items from DBO and holiday provisions. Excluding these items, costs were close to flat year-on-year.

Let's turn to Slide 25. In CEE, we again saw a good performance in NII and fees. The cost of risk was very low in the second Q 2019, but it gradually normalized in the third Q 2019 and

[Technical Difficulty]

2019. However, it still will be well below our fiscal year 2019 target of 102 basis points.

Let's turn to Slide 26. The CIB quarter-on-quarter performance showed strong commercial dynamics across all revenue components. Looking at the performance year-on-year, it was strong trading profit from robust client activity that led to the overall revenue growth. Please remember that Ocean Breeze is still contributing to the top line but not to the bottom line in the third Q 2019, as there is plus EUR 21 million in revenues offset by minus EUR 21 million in profit on investments. Cost of risk in the quarter was extraordinarily low and will normalize in the fourth Q 2019. The fiscal year 2019 cost of risk target is confirmed at 21 basis points.

Let's turn to Slide 27. In the Group Corporate Center, revenues were down year-on-year due to higher funding costs. In 2019, year-to-date, the group funding plan was executed for more than EUR 25 billion compared to our fiscal year 2018 execution of EUR 17.2 billion for the whole year.

Let's turn to Slide 28. Execution of 2021 Non Core runoff is progressing very well. At the end of fiscal year 2019, gross NPE will be below EUR 10 billion. Loan loss provisions in the quarter are in line with the average for the year and historic guidance.

Let's turn to Slide 30. We continuously work to derisk the balance sheet. The trend is very good primarily driven by disposals. Group core gross NPE decreased by 13.5% year-on-year and 6.5% quarter-on-quarter, mostly thanks to Italy. Also gross loans and UTPs were lower, both year-on-year and quarter-on-quarter. Our core gross NPE ratio improved to 3.6% in the third Q 2019, close to the EBA average. However, every time we sell, it pushes the EBA average down further.

Let's turn to Slide 31. The overall credit environment remains very supportive with default rate, cure rate, migration rate and recoveries improving year-on-year.

Let's turn to Slide 32. Overall, the risk environment in Commercial Banking Italy remains supportive and stable. The trend across all NPE categories is very good. With bad loans, UTP and total gross NPEs all down year-on-year as well as quarter-on-quarter. This was supported by strong disposal activity where we took advantage of a very successful transaction with residential mortgages in the Non Core to sell substantially all bad loans in that asset class in Italy. The gross NPA ratio of 5.0% is already below our fiscal year 2019 target of 5.3%, while the coverage ratio improved.

Let's turn to Slide 33. The supportive credit environment for Commercial Banking Italy led to a significant improvement in default rate, also the cure rate and migration rate have improved year-on-year. As a result, the underlying cost of risk is low, both quarter-on-quarter and year-on-year. And the modification of the fiscal year 2019 outlook for cost of risk is solely driven by the disposal of the residential mortgage, NPEs.

Let's turn to Slide 34. As already said, the execution of the 2021 Non Core runoff is progressing very well. We did the large transaction in residential mortgages NPEs out of the Non Core. As a result, gross book value in Non Core reduced by EUR 10.9 billion year-on-year down to only EUR 11.2 billion at the end of the third Q 2019.

Let's turn to Slide 35. As a result of the very successful execution of the Non Core runoff, we now expect less than EUR 10 billion of gross book value by the end of 2019. This represents a reduction in Non Core NPEs since the start of Transform 2019 of around EUR 40 billion. Net NPEs are already below EUR 4 billion in the quarter, making Non Core less and less relevant. The full runoff by 2021 is confirmed.

Let's turn to Slide 37. The group core Tier 1 ratio at quarter end stood at 12.6% or at 252 basis points buffer to MDA. The key positive items in the quarter were the Fineco deconsolidation for 31 basis points as per guidance and the net profit for 28 basis points. Gains from a fair value to OCI securities were offset by the DBO, which had a negative impact due to the discount rate lowered by 53 basis points on average in the quarter more than the 10-year swap rate.

We have reached our reduction target for BTP sensitivity that we announced in the third Q 2018. At all -- at that time, we had 2.5 basis point sensitivity post-tax that we wanted to reduce by 35 basis points by the end of fiscal year 2019. With 1.7 basis points today, we have reached our target a quarter early.

For the fourth Q 2019, there will be now no significant regulatory headwinds as they have shifted to the next year, reflecting the expected timing of ECB approvals. For fiscal year 2020 and beyond, we will update you -- our -- on our -- on the regulatory headwinds at our Capital Markets Day in December. Our CET1 MDA buffer at the end of 2019 will be at the upper end of our target range of 200 to 250 basis points, assuming BTP spreads remain at current levels.

Let's turn to Page 38. Risk-weighted asset in the quarter increased by EUR 0.6 billion to EUR 387.8 billion driven by FX, mainly from Turkish lira and U.S. dollars. For once, regulatory -- regulation was a positive in the quarter, as we rolled out a new advanced model in Italy, lowering the risk weights for that portfolio.

Let's turn to Slide 39. In the third Q 2019, our tangible equity grew by 1.7% to EUR 51.6 billion. This is the fourth consecutive quarter of growth in both tangible equity and tangible book value per share, both now above the fiscal year 2017 values.

Let's turn to Slide 40. As the only Italian GC fee, UniCredit has to comply with the TLAC regulation that entered into force in June. As of the end of the third Q 2019, we are well above our requirements with a TLAC ratio of 21.85%. This corresponds to an MDA buffer of 226 basis points, well above our target buffer range of 50 to 100 basis points, thanks also to prefunding.

We completed our fiscal year 2019 TLAC funding plan with the October senior preferred issuance of EUR 1 billion at a very tight spread. After Moody's recent upgrade of our Tier 2 instruments to investment grade, we tactically anticipated next year funding plan, issuing EUR 1.25 billion Tier 2 at the lowest spreads since 2011.

As regards to the senior bond exemption, questions were raised in a number of sell-side reports as to its availability to European banks, including UniCredit. To be very clear on this topic, as of today, UniCredit can benefit from these extensions according to CRR. And based on the interaction with resolution authorities, we are confident of benefiting from it from both TLAC and MREL.

Jean-Pierre, back to you.

[Jean-Pierre Mustier, executive]

Thank you very much, Mirko, Speedy Yankee. Before we go to Q&A, let me look back over the last 3 years of this quarter, the last one, before we present our new business strategy.

In December 2016, we gave you Transform 2019. This was a very ambitious business plan, including EUR 20 billion of equity raising, cutting in half our nonperforming exposure and more than doubling our profitability. We told you at that time, "We say what we do, and we do what we say." And we have kept our promises. Despite all the headwinds from geopolitical tension, macroeconomic volatility and higher regulatory pressure, we have delivered the plan.

As of financial year '19 guidance is confirmed, we will deliver the EUR 4.7 billion adjusted net profit that we promised 3 years ago. I remind you that it will be based on our 30% cash dividend payment. We will deliver an adjusted RoTE above 9%. And we will deliver 30% cash dividend of EUR 1.4 billion, up 120% on last year. We have been able to achieve our target, thanks to having always face reality, looking ahead and taking decisive action whenever needed, even if doing so was painful at the time.

The execution of Transform 2019 would not have been possible without the great team we have at UniCredit. Thanks to the unwavering commitment of the whole team and their willingness to walk the talk, we have executed Transform 2019 very successfully. We can trust this team to deliver the next plan. As a sign of recognition of everyone's commitment, we have decided to call the new business plan, Team 23. We hope to see you all on the 3rd of December in London to discuss Team 23 in all of its detail.

Now that we are at, the -- end of this shorter presentation, Mirko Speedy, the rest of the team and I are ready to take your questions. If you could please be so kind to limit your question to 2 each, many thanks.

Operator?

[Operator]

[Operator Instructions] The first question is from Mr. Domenico Santoro of HSBC.

[Domenico Santoro, analyst]

I do have a couple of questions. First of all, on customer spread evolution for next year. Can you please comment on the customer loan rate specifically and customer depos as well as rate; and particularly referring to the cost of replacing new issuance with [ old issuers that hold ] bonds that might probably be more expensive; and also including the potential new TLAC issuance that you might do next year, considering the regulatory headwinds?

Then I do have a question on the securitization disposal. If my calculation is correct, this portfolio might be -- might have a coverage of 60%, more or less, because you're including also SME position. So given that the disposal price is around 30%. I was just wondering whether the loss from the disposal should be minimal, and -- if my calculation is correct. And then also on the buyback of shares, we heard from the other call of banks in Europe specifically, that regulatory is more open to buyback of shares. So just to anticipate any of those ahead of the December plan?

[Jean-Pierre Mustier, executive]

Thank you very much. On the customer loan rates, I will hand over to the co-CEO of Western Europe, so that he can give you the feeling of the market activities and as well to our co-CEOs of CEE. And Mirko will comment on depo and cost of issuance. Just to comment this and you might have further question on that, but we use the current environment to shift our portfolio toward good credit. We think it's, I mean an opportunity now because some of the banks are hungry for yields. And so we can actually shift to the good credits and the higher-rated client, who actually give more side business. So consequence of maybe potentially lower rate is as well the fact that we increased the business and the risk profile of the portfolio, but [ the team ] will comment about the client evolution. I will just comment on the buyback very quickly, and Tj will comment about the disposal.

On the buyback, we will comment in our presentation in December, but our strategy in terms of dividend and mix of cash dividend and buyback, we said that we very open to look at buyback if our share price trade at discount to tangible book. And as you pointed out, the recent agreement of DCB for one specific bank to allow for a buyback and the communication we have with them, should DCB is very open to allow banks to do buybacks when they have the adequate capital position, of course. And so first, the co-CEOs of Western Europe on loan rate, then Mirko will comment on the funding side.

[Thiam Lim, executive]

On the loan rate across Western European countries, the absolute level has been following the fixed rate level in the market with a very [ low environment. ] Having said that, we have been able, across the 3 countries, to maintain a sustainable client spread in between our cost of funding and the level applied to the customers. So rates are following markets to sum up, but margin being maintained at a stable level from one quarter to the other.

[Jean-Pierre Mustier, executive]

In terms of outlook, what do you see in terms of evolution?

[Francesco Giordano, executive]

In terms of evolution, we expect to maintain in this very competitive environment, spread -- customer spread at the current level. The only exception being on the mortgage side, where we take some action to be less aggressive in the market, industry countries considering the evolution of the cost of risk.

[Jean-Pierre Mustier, executive]

Very good. Niccoló on CEE?

[Niccoló Ubertalli, executive]

For CEE, net of the one-off. We have seen some normalization of the spread. And we expect this normalization to continue in the next few quarters.

[Jean-Pierre Mustier, executive]

Mirko, on cost of issuance and depo?

[Mirko Bianchi, executive]

Yes. Cost of issuance. Of course, we expect cost of issuance to go down because of the base rate changes and reduction. Of course, we're going to be much more specific at Capital Markets Day. So you have to wait another month. But in general, in terms of, let's say, volumes, they will be slightly higher. But as you have seen, we tend to reduce execution risk, and we anticipated already one transaction this year in terms of Tier 2. So from that perspective, we are quite comfortable.

[Jean-Pierre Mustier, executive]

Tj, on the disposal.

[Thiam Lim, executive]

For the disposal to clarify, first of all, there's no SME included in the portfolio. This is all residential mortgages. Overall, our coverage are in line. And here, as Mirko has mentioned, that we -- because the transaction is very successful, we included the core component which clearly are not provisioned to sell like the Non Core. So they were -- hence, the expected so-called cost of risk increase for the core of the Italian parameter. But this transaction, we substantially dispose of all of our residential bad loan for the Italian parameter.

[Operator]

Our next question is from Adrian Cighi of RBC.

[Adrian Cighi, analyst]

Adrian Cighi from RBC. Two questions from my side as well, please. The Mediobanca sale makes sense in the context of simplifying the group structure. What's the list of remaining financial investments as opposed to strategic stakes? And where do you see the RP falling on the spectrum? And the second question on RoTE, again, group RoTE was between 8% and 9%, and the core was above 10% again in what was clearly a strong but a very clean quarter. Is this a reasonable figure to expect as part of the plan? Or do you see material headwinds to profitability from here?

[Jean-Pierre Mustier, executive]

Thank you. As we said, Mediobanca disposal is part of our disposal of nonstrategic asset. We have a strategy, which is to proactively manage our assets, when it makes sense to sell the nonstrategic one to simplify the group structure. We might have a very few left, actually, in the portfolio. So they should be not very meaningful per se, but you don't speak only about financial asset or investment. We have said that we will keep disposing, for instance, of real estate that we don't feel is strategic and could contribute in terms of our CET1 and so do in our financial strategies as well to very carefully manage our capital allocation, both on a top-down basis, looking at the profitability of our businesses and making sure that they cover the cost of capital. So debt and equity on an ongoing basis, and we make decision if we think that it is not the case on an ongoing basis as well as on a bottom-up basis to manage proactively our client business and our portfolio activities, either by subsegments of clients or even on an individual client basis.

We will give more explanation during the Capital Market Day on the 3rd of December. As far as the RoTE is concerned, we confirm a group RoTE above 9%. And you have seen our group co-RoTE, which is around 10.6%. It's clear that the RoTE is a ratio between the net income and regulatory capital. We will confirm during the capital market in December what is the regulatory capital evolution. You know that there are regulatory headwinds. We disclose fully. We were actually the only bank to disclose in December 2017 our regulatory headwinds for the next 10 years. And at that time, people said, "But you are the only one to have this regulatory headwinds."

I noticed with great interest on the third quarter that many other banks are not disclosing that there is an impact of Basel IV and any other issues. So with UniCredit, you can be sure that we are transparent. We say what we do, and we do what we say, and there's no surprise, basically. And so you have seen the EPA impact study which confirmed what we said. And we showed that for the European Bench, there's an increase of 25% of capital linked to Basel 3.5 or completion of Basel III, the so-called Basel IV, 1 over[ 125 ], basically, is 0.8%. So we say that going forward, [ if ] the EBA guidelines are correct, 8% will be the new 10% if you look at increase of capital coming from the regulatory side and assume the net income is going to be stable. As far as UniCredit is concerned, we will give you all the details at our Capital Markets Day.

[Operator]

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

[Alberto Cordara, analyst]

I have several questions. So the first question related to tiering and your strategy regarding the new TLTRO. And specifically, what I would like to know is, how much this can help your top line? And what kind of trends should be seen in 2020? And then the second question is more specific on Commercial Banking Italy. Your comment on the presentation implied that customer revenues in Italy from lending are flat. However, later in the presentation, you highlighted Q-on-Q decline in both the customer loan rate and lending volumes. So I would like to know how you can explain this difference? And how do you want to be positioned on the lending side?

[Jean-Pierre Mustier, executive]

Thank you very much. I will let Mirko comment on the tiering, and I might take up your second question now.

As I said earlier, we are increasing our activity with higher-rated clients. So basically, the client spread will tighten up because we move gradually to higher-rated clients. We feel it's a very good opportunity now. Some of the banks in [ many ] markets are desperate for yield and go for higher spread, which usually mean lower quality client. When we go for higher-rated clients, we actually deal with clients who give us more side business because these clients are usually exporters and are quite active.

So we use the opportunity today of the market to shift the portfolio towards the good credit, which might be slightly tighter in terms of spread, but should give us more side business in terms of commission going forward. While we are more aggressive for the better-rated clients, we can be -- as Francesco Giordano had mentioned, we can be less aggressive on some of the activities and give up market shares on lower-rated client, which is not only corporate client but also retail clients and mortgage.

We see on the mortgage market in some of the countries, including this one, I mean I've seen working in Rome recently on the -- in the branch of one of our largest competitor, 20-year mortgage at 0.7%. I mean that's something we don't do at UniCredit. We don't mortgage our future liquidity, basically. So you can see our market share evolving, but it is conscious decision in order to manage properly the quality of our credit portfolio and of our long-term liquidity.

So in summary, we are going to increase the market share of higher-rated class, potentially lower the market share of the lower-rated class. And in the Italian market, you have seen that the repricing in this quarter was impacted equally by the movement of the Euribor, which have the most impact, basically on the client rate, not speaking about the client spread but the client rate. And this has driven general drop in the Commercial Banking Italy customer rates, basically. From 2020 onwards, we launched managerial actions to compensate the interest-rate environment, such as we mentioned publicly, I mean the deposit facility rate and others. And I'll let Mirko comment on the TLTRO.

[Mirko Bianchi, executive]

First, I'm going to comment on the tiering question. So from a UniCredit Group perspective, we have about EUR 10 billion in terms of minimum reserve requirements. And on top, we have between EUR 25 billion and EUR 30 billion in available reserves. Of course, this number fluctuates over on a monthly basis. If we look at this type of a scenario, and we apply tiering we might get between EUR 80 million and EUR 100 million in terms of tiering profit and that will change, because depending on the reverse repo usage that we do into our treasury department, this number basically can fluctuate.

On the TLTRO side, first of all, the first comment is that we don't need TLTRO from a liquidity perspective, because the company is extremely well placed from a liquidity perspective. What we are going to do is potentially take up some of the allowance that we have in the new TLTRO. It's -- the allowance is EUR 52 billion. We will take, let's say, an economic view on that, and we're going to announce at Capital Markets Day what we intend to do from a TLTRO III perspective.

[Operator]

Next question is from Andrea Unzueta of Crédit Suisse.

[Andrea Unzueta, analyst]

On NII in Slide 12, you talked about EUR 23 million other impact. And you've explained that EUR 11 million out of those EUR 23 million come -- or are explained by Commercial Banking Italy. What are the other EUR 12 million? And am I correct to assume that those are within the CIB division? My second question is that on your guidance, on your EUR 4.7 billion [ clean ] profit guidance, which you are reiterating, I calculate EUR 1.4 billion in Q4. I understand that there are some tax provi benefits implied in there. So I'm wondering if you can explain again?

[Jean-Pierre Mustier, executive]

Okay. So let me take the second question and Mirko will comment on the NII one. We confirm the EUR 4.7 billion net income. We said that the second quarter that the underlying net income for the group should be, going forward, around EUR 4.3 billion, and you can see that this quarter confirms that. And so the difference between EUR 4.3 billion to EUR 4.7 billion is linked to some tax benefits in the fourth quarter as you pointed out, which are mostly one-off and which are linked to a detailed write-up for a large extent. I will let Mirko comment on the NII side.

[Mirko Bianchi, executive]

Yes, on the NII side, the plus EUR 23 million other, as you rightly said, EUR 11 million are coming from, let's say, one-off situation in factoring Italy. The remaining amount is due mainly through reconciliations and it's widespread among different divisions. So these are small bits and pieces. So nothing, let's say, worthwhile mentioning.

[Operator]

The next question is from Antonio Reale of Morgan Stanley

[Antonio Reale, analyst]

I've got 2 questions, please. First one on asset quality, in particular, I'm interested in what you're seeing with respect to potential risks increase in corporate credit quality in Germany? How do you see fundamentals holding up? And what you're seeing on the ground, particularly from small and mid corporates, please? And linked to that, in the Non Core, it's good to see the increased acceleration. You've now tackle the residential mortgage book, which, from memory, I think you're now left with some corporate SME and leasing loans. Some of these loans are liquid, some are [ less. ] So how comfortable do you feel with your marks in the division going forward? And do you expect any potential top-ups in light of the acceleration you've delivered in the Non Core rundown?

And the second question is on the sort of banking debate, which seems to be back on the agenda, well, at least on paper. From your perspective, how do you think you need -- or better, have you already adopted your strategy to face the new potential regulatory headwinds that may come. I'm referring here mainly to the strategy to reduce the domestic portfolio of UTPs if you expect the Basel proposal and solvency risk weighted to be implemented anytime soon?

[Jean-Pierre Mustier, executive]

I'll take the last question, and I'll let Tj comment on the Non Core side. On the regulatory headwinds, first of all, we welcome you to our Capital Market Day on the 30th of December in London. But to go back to what I said is, we were very transparent on all regulatory headwinds, and we are taking actions, and I would say, decisive action when needed in order to make sure we're at the upper end of our CET1 buffer of 200 to 250 basis points. We have looked with great interest at recent comment made by a certain number of politicians, namely in Germany, recently about convergence with the European deposit insurance scheme. But this, if I may say, headline comment was combined with condition precedent which are probably difficult to achieve in terms of convergence of the bankruptcy laws, in terms of the makeup of the -- in the portfolio of government bonds and disposal of NPLs.

As far as the government bond portfolio is concerned, we have said that we want to go back towards the European average, which is domestic portfolio between 50% to 60% of tangible equity. Our BTP portfolio went down by EUR 3.6 billion to EUR 44.9 billion over the quarter. The [ preparation ] is at 3.4 years. So you can see that over time it will amortize naturally, and we want to have natural amortization. And the L2 collect part of the portfolio is around EUR 20 billion. So whatever could be the evolution of this spread, we said the evolution of the spread on a post-tax basis is 1.7 basis point for 10 basis points. So it has been reduced by 35%. As we said late last year, in terms of de-risking of the portfolio, so we feel very, very comfortable should anything be decided, which we think is extremely unlikely on the comments made by one prominent politician in one of the countries where we're present.

On the asset quality side, you asked a question about what we see in the portfolio and the evolution of credit of our clients. You have seen that, actually, all the credit metrics are actually very good. When we look at the balance metrics, they all improved, actually, over the quarter. And should it be -- the NPE ratio, of course, is done meaningfully. And we have seen, as far as the core group is concerned, a default rate, which is, I mean stable to slightly lower. Cure rate, which is improving; migration rate, which is improving; recoveries, which are improving.

That's proof on the group core. It's proof as well for Commercial Banking Italy, which has a very much lower NPE ratio, which has a lower default rate in the quarter versus the previous quarter. A much improved cure rate and much improved migration rate as well. So no specific sign of credit deterioration. And we see our clients performing well. And on the Non Core, despite massive disposal, basically that we did again this quarter. You have seen that our coverage ratio is actually above last year and more or less in line, actually, with the second quarter. So high coverage, a very good performance of the credit portfolio.

Tj, on the Non Core breakdown?

[Thiam Lim, executive]

Yes. Thank you, Jean-Pierre. As you have seen on Page 58, you can see the EUR 11.2 billion of the Non Core sort of portfolios of Q3, EUR 7.9 billion in corporate SMEs and EUR 2.5 billion in leasing. And if you remember, we started on leasing well over EUR 4 billion. So this is going very, very, very well. And on the EUR 7.9 billion in corporate, we are very, very confident we will deliver. And if you can see on Page 35, of the EUR 11.2 billion, EUR 4.8 billion is in UTP. So in here, we are the largest player in terms of the platform, Sandokan, IBM, Pillarstone, we are well over EUR 2.3 billion. So again, as highlighted earlier by Mirko, that our target of EUR 19.2 billion originally, we are going to deliver below EUR 10 million. So we are highly, highly confident that we will deliver the Non Core rundown by 2021.

[Jean-Pierre Mustier, executive]

And just maybe focus to comment more specifically about Germany on the portfolio evolution. You have seen that the cost of risk for Germany for the quarter is 12 basis points, and it's in line with our projection for the full year, and we don't expect any evolution going forward. You -- if you go to Page 60, we give you the breakdown of expected loss, which will be a good indicator for the future. And we have an expected loss on the stock of 17 basis points in the new business, which is aligned with that 19 basis points. So no specific issues and surprise to be expected from Germany.

[Operator]

The next question is from Andrea Vercellone of Exane.

[Andrea Vercellone, analyst]

Two questions. First one is capital. In Q4, should we still expect the real estate gains you highlighted earlier in the year? And at current level of German bond deals and Austrian bond deals, is there still a negative drag on the DBO? Or it's not material?

Second one is on the guidance on regulatory capital drag. The old one, you said you will refresh that at the Capital Markets Day. But I'm just curious if on the old one, you can give us a little bit of clarity as to how much the 130 basis points cumulative goes through risk-weighted assets? How much is potentially in provisions? And how much potentially is capital reduction?

[Jean-Pierre Mustier, executive]

Thank you very much. On -- basically, on your first question, yes, there will be more real estate gain in the fourth quarter, and we will announce some transaction. But we will give the detail of the CET1 evolution between the real estate gains or specific transaction and evolution at the Capital Market Day in December. So you will have that in more details.

On the DBO side, we have adjusted our rate by 53 basis points, as Mirko mentioned. The adjustment brings our rate in Germany to 295 basis points, our discount rate for the portfolio; in Austria, 275 basis points; and in Italy, 255 basis points. And so we carefully look at the overall evolution of the rate and the portfolio. And today, I mean DBO reserves are almost flat. And so based on the evolution of the rate, there might be some additional convergence, but clearly not to the extent of where we have adjusted this quarter where we took, I mean into account the adjustment of the swap rate. We think that the swap right now are going to remain probably more stable. More detail as well on our projection on swap rate at the Capital Market Day in December.

For the detail on the regulatory capital headwinds, I will comment -- or we will comment about it at the Capital Market Day. The only thing I can say that for the value between 2017 and '19, we said that the regulatory impact would be around 210 basis point. And I think we will end up at 208 basis. So I think we were relatively close in our projection, and we expect to give you something which would be very close to reality as well from 2020 onward.

[Operator]

The next question is from Giovanni Razzoli at Equita.

[Giovanni Razzoli, analyst]

Question number one, you've done a very good job in terms of reduction in the Non Core portfolio. You confirm the full rundown in 2021. So -- but the Non Core portfolio is still generating something like EUR 600 million of losses accumulated in a month because of the, clearly, higher cost of risk. I was wondering whether in parallel with the rundown of the Non Core portfolio, shall we assume a part of the reduction in the cost of risk going down then to the bottom line? So that's my first question.

A second question, as we have the opportunity to have you on the line, there's been a lot of debate on your proposal to apply negative rates. So with the opportunity to have you on the line and to share with us your thoughts about it, my point is, shall we see it as an option to support the revenue generation? Or it's just a way to improve the monetary policy mechanism transition ?

[Jean-Pierre Mustier, executive]

On the Non Core, I mean we confirm the run-off by 2021. As we said, if you look at the net loan today, I mean Non Core is becoming less and less relevant. It will be even less relevant at the end of the fourth quarter as we'll be below EUR 10 billion on a gross basis and on a net basis, I mean even much lower than what we have today. So I think that -- the key focus, as you said, should be on the cost of risk of the core bank. And you have seen that the cost of risk of the core banks are actually in the 37, 39 basis points on quarterly and yearly basis. And so we will discuss at the Capital Market Day in more detail what we do with the Non Core, the provisioning and the focus on the core bank and cost of risk, so to be discussing a bit less than 1 month.

On the negative rate, I mean let me put things slightly differently. If the depo rate goes to minus 200 basis points, everybody will say the negative rates have to be passed to the client. I think that -- I mean I haven't met anybody who would say the opposite. Actually, when I meet central bankers and the prominent central bankers in any country where we operate, they all say, "Banks should pass negative rates to their client." They say, "We don't want to comment publicly about it, but for the transmission mechanism, it should be done." We have said that for 0.1% of our client base in Italy, which is a very, very small number for clients having a deposit of more than EUR 1 million, we will -- and I think it's important to go beyond the semantic of passing the negative rate because some of my friendly competitors say we don't pass negative rates to client. I could say we do not pass negative rates to clients either, but with clients above EUR 1 million, we tell them, "We give you the opportunity to invest in a money market fund, which has a target return of 0 plus and 0 commission because we will take care of the commission.

For us, it's a net gain, basically, of the 50 basis points in the move. And for the amount of liquidity, you leave above EUR 1 million we will discuss with you excess liquidity fee." And this is what all the banks are doing. So de facto, we do not pass negative rate to the client, if you purely on semantic basis say, "Are the rates on the account negative?" The answer is no, but we do pass negative rate by looking at excess liquidity fee that every bank is doing or by shifting the clients towards AUM and by seeking the trends towards AUM and going into a very low-risk portfolio initially.

We hope that, of course, we can move them into more risky portfolio, which then will allow us to charge commission, placement fees and to earn management fees as well. So I think it's as much a monetary policy transmission mechanism and look at an extreme scenario, and of course, what would be the spread, where, I mean everybody will say, "Yes, it has to be done." And it is an optimization of our NII. And that's what we are doing in the countries where we are present. And frankly speaking, I think that's what all the banks are doing today. And that is, I think, extremely healthy.

[Operator]

The next question is from Axel Finsterbusch of JPMorgan.

[Axel Finsterbusch, analyst]

My question is pretty simple. So there's speculation in the press about the potential creation of a holding company in Germany. So in that context, my question is if there is an intention to changing the relevant strategy of UniCredit to go for multiple point of entry? And in that context, what are the implications in terms of issuance, debt issuance programs, going forward?

[Jean-Pierre Mustier, executive]

Thank you very much. I think you should never believe what is written in some of the Italian news wire. I think that was a conspiracy theory as latest 2 days ago that we'll do with another shareholders of the bank, we dispose of things, which went extremely complex, which I did not understand about anything. I mean the conspiracy theory is suddenly gone. We never said that we wanted to have a holding company in Germany, and we never said we wanted to list the holding company. So we said we want to have an international holding. This international holding will be in Italy, and we don't intend to list it. I said it, I repeated it. So people should believe me and not believe what they see in some of the wires or some of the websites in Italy. And we said we want to be NPE-ready. And to do that, it will allow us to improve our MREL ratios and improve the resolution of the group. That's what we have in mind. So end of speculation, end of rumors and anything. And that's -- we say what we do and we do what we say. And we don't say what we do in website in whatever countries.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

I have 3 questions for me, if I may. The final one [ is real quick ] . The first one is on the possibility of Pillar 2 going down in the [ nearest comparison ] . . The second one is a recurrent one for me. If you can guide us a little bit better on threshold and hedge contribution [ for ] the NII? And the other one in terms of 3Q for the quarter, the other risk and charges provision outside of [indiscernible] was very low. So it's quite difficult to model this thing, but if you can let me know if there is any nonrecurring issue here?

[Jean-Pierre Mustier, executive]

Okay. On your first question, we cannot anticipate any decision of the regulator. And I suggest that we speak again at the Capital Markets Day. By then, we might have maybe a decision of the regulator that we can communicate. On the NII side, I will hand over to Mirko as well as the risk and charge provision.

[Mirko Bianchi, executive]

Yes, in terms of the replicating portfolio, I think you can see it on the Page 12. In terms of the first note, you can see what was the development there. Therefore, actually, we had actually an uptick for the quarter, and we were slightly down on a yearly basis, so the numbers are there. From a risk and charge perspective, there is nothing major, as we said, in terms of adjustments for the quarter. So most of the other charges and provisions, sorry, are basically dealt with the systemic charges.

[Operator]

The next question is from Christian Carrese of Intermonte.

[Christian Carrese, analyst]

I have just a strategic question. I understand your thoughts on the General Finance Minister's statement on the need for commerce scheme to protect sale of deposit. I'd like to hear from you your thoughts on Mr. [indiscernible] statement that the SSM is not against M&A, [ and in ] particular that is in favor of cross-border deals that will lead to higher diversification in terms of risk. As a matter of fact, over the last 3 years, action taken by UniCredit allowed bank to sharply lower gross NPE ratio close to the European average, net of Non Core bank, reduce the weight of Italian govies and on the total financial portfolio, bringing UniCredit more in line with your other European peers. Do you still think cross-border deals will be hard to fully implement due to lack of synergies? Or has something changed in European, especially considering a potentially more accommodating approach from the regulator?

[Jean-Pierre Mustier, executive]

As you know, we never comment on rumors and speculation. I've been always very clear about my view. I think clearly Europe needs a bigger bank. When you look at the combined market share of the top 5 banks in Europe, they don't even represent half of the market share of JPMorgan, for instance. So we [ clear for an ] economy in terms of GDP, which is more or less equivalent. This being said, I as well said that I cannot seek a transaction, M&A transaction, at this stage. And it's very simple, whatever the way you structure an M&A transaction, if you pay in cash or in shares, you usually have additional requirements to pay for restructuring costs, to pay for adjustments in the balance sheet.

At a level of discount, where European banks trade today, I mean it does not work in terms of EPS accretion; it just financially does not work. And today, what works very, very well is actually to buy back shares at a discount to tangible book. If you look at a bank which could be having 9% RoTE, if you buy shares at 50% discount, seen from the shareholders, it's an 18% RoTE transaction with 0 execution risk. So guess what we would prefer to do. And we will discuss that at the Capital Markets Day.

[Operator]

The next question is from Azzurra Guelfi of Citi.

[Azzurra Guelfi, analyst]

A couple of questions. One is on the funding plan. Can you give us some detail on the 2020 funding plan? The second one is on the CET1. With the year coming by, you will have more realization of the regulatory headwind. Is it fair to expect that you would be happy to have a lower MDA buffer above -- like versus the one that you currently have once these regulatory headwinds materialize?

[Jean-Pierre Mustier, executive]

Just on the funding plan, Mirko will comment very briefly. In terms of MDA buffer, I mean we have 2 MDA buffer: one on the CET1, the other one TLAC MREL. On the CET1, we confirm and we maintain our view that we want to be at the upper end of our 200 to 250 basis point CET1 buffer, and this applies for this year as well as for the new plan. On the MREL side, we have MDA buffer of 50 to 100 basis point. We are well above that, as we are close to 220 basis points, actually, 226 basis point because we did some pre-funding on a tactical basis in September, as Mirko mentioned, as market conditions are very favorable. So -- and we maintain our 2 buffer targets, and there should be no change in the new plan. On the funding side, Mirko, any comment?

[Mirko Bianchi, executive]

No comments. Azzurra, as I said before, from a funding plan 2020, you have to wait 1 month, where we're going to make it public, but don't expect anything dramatic change from what has been done in the past.

[Operator]

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

[Benjie Creelan-Sandford, analyst]

You can see from the note that the Italian sovereign bond holdings continue to fall this quarter, but financial assets overall in the balance sheet are up and up relatively meaningfully. And I was just wondering whether you could give us any more color on what assets you may be adding? And in particular, if there's any nonsovereign assets that you're adding? And also any guidance you can give on how you see financial assets and the balance sheet trending going forward?

[Jean-Pierre Mustier, executive]

Well, Mirko will give you more detail about the financial asset, but let me be very clear. We don't do carry trade. So that's super clear. And I very often said that the management of this bank has long-term incentive. We are long-term incentive plan. I, my side, have 0 bonus, only a long-term incentive plan. And I committed to all my shares for 7 years, and I bought a total of EUR 13 million with my own money of bank liability, shares and bonds, and I'm committed to all of them for 7 years. So we don't do short-term stuff, which might be artificially propping up our result on the short-term, which will create the net income volatility or put one type of assets in the balance sheet. So that's not what we do. We want to have clean business, which is purely recurring, and that's it basically. So on the financial asset evolution, Mirko can give you a little bit more detail.

[Mirko Bianchi, executive]

Yes -- no, on the evolution, let's say, from a -- on a quarter-to-quarter basis, the biggest, let's say, increase is actually coming from repos. So this is basically what is, let's say, making the financial asset higher from last quarter.

[Jean-Pierre Mustier, executive]

And so that's the normal volatility of repo, and it is not linked to carry trade, just to be very, very clear.

[Operator]

[Operator Instructions] Mr. Mustier, there are no questions registered at this time, sir.

[Jean-Pierre Mustier, executive]

If there's no more questions, thank you very much for taking a part of this call. As we mentioned, we tried to change slightly the format in order to be faster in the presentation and take more questions. And of course, our wonderful Investor Relation team is always available, and we will start going around with [ Jörg ] and Mirko and all the team from tomorrow to meet each of you directly. So see you very soon, and thank you very much for participating to this call.