UniCredit SpA

MIL:UCG

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen. Before I hand over to Magda Palczynska, Head of Investor Relations, a reminder that today's conference call is being recorded. Madam, you may begin.

[Magda Palczynska, executive]

Good morning, and welcome to UniCredit's Third Quarter 2021 Results Conference Call. Andrea Orcel, our CEO, will lead the call. Then Stefano Porro, our CFO, will take you through the financials in more detail. Following Andrea's closing remarks, there will be a Q&A session. Please limit yourself to two questions.

With that, I will hand over to Andrea.

[Andrea Orcel, executive]

Thank you, Magda. Good morning to everyone. Since the start of my tenure, my ambition for UniCredit has been clear, to deliver risk-adjusted profitable growth with the overriding aim of achieving sustainable returns above the cost of equity and across the cycle.

One of the ways we will achieve this is through simpler and more empowered organization when fully accountable for demonstrating clear discipline on costs as well as renewed focus on net revenue growth, meaning revenues, minus loan loss provisions, and capital efficiency.

Although, we are making good progress and delivering tangible results, and we will provide more detail at our upcoming Strategy Day. At the same time, we're building a strong and cohesive team able to execute on our strategic levers, laying the foundation that will shape our future.

Now before getting to our financial results, I want to comment about the recent developments with Banca Monte dei Paschi di Siena. We have announced that after a period of due diligence and negotiations with Italian Ministry of Economy and Finance, Banca Monte dei Paschi di Siena will not be a part of our future strategy.

The discussions have been long and detailed, but despite the efforts on both sides, we could not reach an agreement that met all of the parameters set out in the agreed memorandum of understanding.

As a result, negotiations have been terminated, and we continue our focus on unlocking the significant value with UniCredit. I have been clear about the role that M&A can play in the bank's new strategy. It is not the purpose in itself. Rather, it can be an accelerator and a potential improver of our strategic outcome under right conditions that are value accretive and where we have full confidence in our ability to execute.

That will remain our guiding approach. I have also been clear that the most value that we can create is organically, and that has been and remains our unwavering focus. These results prove this, indicating once again the inherent value of our franchise, albeit this quarter, they were supported by particularly positive economic and market conditions.

Performance was excellent with strong commercial revenues, continued cost discipline and better asset quality. Underlying net profit reached EUR 1.1 billion in the quarter and EUR 3.1 billion for the first 9 months of the year.

This is equivalent to an underlying return on tangible equity of 7.9%. Our balance sheet remains very strong, and we enable -- and we ended the quarter with a CET1 ratio of 15.5%, absorbing regulatory headwinds and deducting our second share buyback of EUR 652 million. The latter has been approved by both shareholders and the supervisor, and is expected to commence in the fourth quarter.

UniCredit has a strong capital position, and one of my priorities is to return attractive levels of capital to shareholders while maintaining appropriate buffers in line with supervisory expectations.

I will discuss this further and in detail at the upcoming strategy day. Let's turn to Slide 4. My priority since I joined the bank has been to drive the performance of the business in filling a renewed focus on cost, revenue growth within our disciplined risk appetite and capital efficiency for the benefit of our shareholders, whilst in parallel, develop a new strategy for UniCredit based upon 3 strategic levers, namely simplification, client centricity and digitalization.

This will help us unlock the significant value inherent in the existing UniCredit business by building a simple and integrated organization with clients at the center, powered by digital and data. Simplification involves reducing complexity, eliminating self-serving bureaucracy and empowering colleagues while retaining clear lines of control and oversight.

In July, we announced the first wave of the simplification program by creating a new organizational structure and management team. This included a number of actions that we took within our Italian [indiscernible] entity, but we have now replicated group-wide, improving the efficience and effectiveness of the organization, improving decision-making and speeding up execution.

Important not only itself, but with respect to the message and energy it releases within our organization. At the heart of everything we do are our 60 million clients. In order to serve them in an enhanced, more consistent manner, we are harmonizing client segments across all main geographies. We're also reviewing our global product and service talk to ensure a scalable offering.

On the digital front, we have appointed a leadership team who will foster a true partnership across regions and business segments. They have commenced their work towards our digital future with a sense of urgency. Their goal is to invest technology and data into the fabric of the business, making it central to every decision and strategic choice.

These decisive actions are not only positively impacting our current performance, but are also laying the foundation to our future, all of which I will speak more at our strategy day. Let's turn to Slide 5. Our bank has many strengths. Our unique geographic footprint, the distribution power of our commercial network but the strength of our balance sheet and last, but not least, our exceptional talent.

Our network spans 13 core markets with top 3 rankings in Italy, Germany, Central Europe and Eastern Europe. Our knowledge and underspending at the local level of each one of these diverse markets means we can leverage their unique strengths in building a truly pan-European franchise. We have aligned our financial segment reporting with our 4 main geographies.

Each of our geographies is doing well on its own and is fully on track to deliver returns on its own in excess of their respective cost of capital. As you can see on the slide, all 4 have strongly contributed to the underlying net profit in the first 9 months.

The returns on current allocated capital, which are calculated based on our current capital targets, are solid. Germany's return on allocated capital is close to 9%, and all the other regions operating at double-digit returns. The group's return on allocated capital, which includes corporate center cost, is above 10%.

The group's underlying return on tangible equity for the first 9 months of the year is 7.9%, reflecting our high level of capitalization. I would also like to highlight the sustained growth thus far in 2021 and the resulting increase in the group's gross operating profit of 11.5% in the first 9 months of the year.

Let's turn to Slide 6. Finally, let me comment on some highlights of our 9 months results. The economic recovery as our region continue to reopen and recover from the pandemic has been supportive for us and for European banks in general. Eurozone GDP is likely to expand by 5% in 2021 and return to its pre-pandemic level by year-end. Italian GDP growth this year of about 6% is a major tailwind for 2021.

At the same time, however, we continue to navigate a low rate environment with credit in the market. With that as a backdrop, the bank delivered a strong performance year-to-date with signs of recovery throughout our franchise and less pronounced third quarter seasonality than usual.

Revenues in the first 9 months of the year are up 4.8%, fees are up 12.3% in the same period, thanks to investment fees. The bank's strong cost discipline remained evident in the first 9 months of the year, with total costs stable year-to-date, despite the impact of mutation and investments. The cost/income ratio improved by 2.7 points to 54.2% in the first 9 months of the year, demonstrating the inherent discipline and positive operating leverage within the business.

Our underlying cost of risk reached 18 basis points for the first 9 months of the year and continues to benefit from our large risk discipline and better asset quality. The strength of the balance sheet can also be seen in our extremely healthy capital position.

Our internal capital generation allows us to absorb a significant part of the expected regulatory headwinds for the year. Capturing greater capital efficiencies will form a central part of our new strategic plan. Combined solid commercial performance, cost discipline, improving asset quality and our strong balance sheet underpinned a solid [indiscernible]. I will now hand over to Stefano, who will take you through the 3 quarter 2021 results in more detail. Stefano, the floor is yours.

[Stefano Porro, executive]

Thank you, Andrea, and good morning, everyone. Let's turn to Slide 8. As Andrea mentioned before, and in line with new organizational setup, we have changed our primary segment reporting.

As regards to the reconciliation from all to new segment reporting, these changes mainly impact the CIB division and some parts of the Group Corporate Center, both of which are now reallocated to their respective geographies in Western Europe.

Austria will now be included in Central Europe, whereas Russia will be included in Eastern Europe. Needless to say, this only affects the segment reporting but not the group totals. As a reminder, we also published a divisional database recurs on our website to make results from prior quarters available on a like-for-like basis.

In third quarter '21, we delivered a sound underlying net profit of EUR 1.1 billion, up 0.5% quarter-on-quarter. This is a remarkable result a quarter that is usually a seasonally weak. Revenues reached EUR 4.4 billion in third quarter '21 up 1.9% year-on-year, reflecting strong commercial revenues, up 4% year-on-year.

The group's strong cost discipline and continued focus on cost efficiency, resulted in third quarter '21 costs equal to EUR 2.4 billion, almost flat 9 months on 9 months. Our stated cost of risk reached 27 basis points in third quarter '21, reflecting better asset quality dynamics.

The CET1 ratio was flat quarter-on-quarter at 15.5%, implying an MDA buffer of 647 basis points. This already factor in our second share buyback of EUR 652 million. The key financial events after quarter '21 include the following.

We have received supervisory approval for the second share buyback program in 2021 for EUR 652 million. Execution is expected to commence in the fourth quarter 2021. UniCredit canceled in aggregate around 17 million shares repurchased in first half '21 as part of the first buyback program. This was neutral on our capital ratio as these shares were already deducted.

UniCredit Bank in Germany issued its inaugural green mortgage cover a bond for EUR 500 million under the recently established group-wide sustainability bond framework with a very attractive book. UniCredit, Ireland will be merged into UniCredit SpA as part of our strategy to simplify operations.

Let's now look at the profit and loss in more detail, starting with the group net interest income on Slide 9. Net interest income was up 3.1% quarter-on-quarter. This was mainly supported by a nonrecurring item in Germany and the extra day in the quarter.

The contribution from commercial dynamics is stable quarter-on-quarter. Once again, this quarter, like prior ones, was characterized by massive excess liquidity in the system. Market rates. However, we are almost stable and did not impact the quarter much. Let me make a few brief comments on the drivers.

Demand for credit is showing signs of recovery. As far as lending volumes are concerned, we have seen a continued positive origination dynamic for individuals, especially in Italy, where our front book market share in the residential mortgages and consumer lending are normalizing towards our natural market share.

On the overall loan book, but especially in Italy and Germany, dynamics remain impacted by client repayments and prepayments, which are offsetting a better gross new production. Customer loan rates in the quarter remained fairly stable at group level. Front book prices continues to be typically below the back book on a like-for-like basis especially in Italy and Eastern Europe.

This is expected to last until the system-wide excess liquidity range with possible headwinds for the net interest income until then. The economic upswing will drive with some delay, a recovery in the demand for credit a progressive reduction of the excess liquidity in client accounts as deposit gets spent or invested as well as an improvement in our lending mix.

Let's turn to Slide 10. We fees deliver another very strong performance well above pre-COVID levels. Despite the third quarter usually being seasonally weak, fees in third quarter '21 were only 1.4% below the level of the prior quarter, which remember, was our highest quarterly fee income in over 5 years.

Year-on-year, there was a pronounced increase of 12.5%, also reflecting the material impact of the pandemic and lockdowns a year ago. Let's look at the component parts of the fees more in detail. investment fees generated another exceptional performance and were up 20% year-on-year.

This was driven by higher assets under management upfront fees thanks to the abuses activity across the network and higher management fees as average assets under management volumes were up 12.3% year-on-year, mainly in Italy and Germany.

Financing fees were up 10% year-on-year, thanks to a strong capital markets activity and higher credit protection insurance sales, which benefited from the recovery in the new residential mortgages production and consumer finance in Italy. Transactional fees were up 6.7% year-on-year and 8.2% up on the quarter, thanks to a recovery in cards and payment services in Italy and Eastern Europe as these GDP sensitive subcategories responded to a pickup in economic activity.

In terms of outlook, let me make some general remarks. For investment fees, we expect ongoing positive contribution from management fees. While the upfront component is expected to normalize over time from the recent exceptional high levels. Financing fees will be correlated to the demand for credit.

The recovery in transaction fees continues as [indiscernible] in particular, in Western Europe. Let's turn to Slide 11. Trading income in third quarter '21 was EUR 354 million with no impact from XVA. This is in line with our run rate guidance of around EUR 350 million on average per quarter, excluding XVA. Trading income in 9 months '21 was strong, reaching EUR 1.4 billion, over 40% up versus the level of 9 months '20, mainly thanks to a recurring client activity, also coupled with a positive contribution from XVA.

Client-driven trading was excellent, contributing EUR 1 billion in 9 months '21, up 26.6% 9 months on 9 months, excluding the volatile XVA component. This strong performance were primarily supported by fixed income and currencies. The higher contribution from dividends in third quarter '21 was thanks to our financial investment in Yapi as well as other equity investments.

Let's turn to Slide 12. Our continued focus on cost efficiency and strong cost discipline led to 9 months '21 cost of EUR 7.3 billion, down 0.2% 9 months on 9 months. This resulted in significant operating leverage with a cost/income ratio of 54.2%, an improvement of 2.7 percentage points versus 9 months '20.

HR costs were 0.5% lower 9 months on 9 months, mainly thanks to a decrease in full-time equivalents in Italy. Non-HR costs were almost flat 9 months on 9 months with lower credit recovery expenses, real estate costs and consulting partially offsetting higher IT expenses and the appreciation connected to investment to foster digitalization.

Third quarter '21 total costs amounted to EUR 2.4 billion, 0.5% lower than the previous quarter, thanks to savings in non-HR costs, mainly consulting. Please remember that we expect higher costs in fourth quarter '21 due to seasonality. For full year '21, we confirm our guidance of costs in line with full year '19 at EUR 9.9 billion.

Let's turn to Slide 13. Before looking at the quarter and our revised cost of risk guidance, let me once again remind you of our approach to provisioning that we introduced during 2020 given the pandemic. We did not change our provisioning approach in general, but rather the aim is to proactively capture the future cost of default in the loan portfolio and properly reflect the forward-looking economic impact of COVID-19. Loss provisions, therefore, include overlays as well as specific provisions and regulatory headwinds. As a result, you should always look at the cost of risk for full year '20 and '21 together, just as you should for the underlying macroeconomic assumptions.

Our stated cost of risk reached 27 basis points in third quarter reflecting a better portfolio performance, including write-backs and limited impact from regulatory headwinds of 7 basis points. This was mostly driven by overlay provisions for clients who opted in to the moratory extension in Italy, reflecting our proactive provisioning approach.

Our underlying cost of risk was 20 basis points in third quarter '21 and 18 basis points in 9 months '21. As mentioned before, we are experiencing economic tailwinds at the moment and better asset quality dynamics Therefore, we now expect a stated cost of risk in full year '21 below 40 basis points, equivalent to stated loan loss provisions below EUR 1.6 billion.

Underlying cost of risk in full year '21 is expected to be around 30 basis points. Let's turn to Slide 14. In third quarter '21, both gross NPEs and the gross NPA ratio decreased to EUR 20.7 billion and 4.5%, respectively, mainly thanks to the continued rundown of the noncore.

Based on the EBA definition, the gross NPE ratio for the group, excluding the noncore, is 2.7% and compares well with peers. The coverage ratio decreased 0.5 percentage point to 57.1% in third quarter '21, mainly due to a mix effect.

Higher provision, bad loans have been reduced, thanks to the noncore run down, and the relative weight of lower provision and like to pay loans has increased. Our underlying asset quality remains sound.

Let's turn to Slide 15. We maintain our fully loaded CET1 ratio at 15.5%, equivalent to MDA buffer of 647 basis points, absorbing 19 basis points regulatory headwinds, and after deducting our second share buyback of EUR 652 million. This has recently been approved by the supervisor and is expected to commence in the fourth quarter.

The total capital distribution in 2021 will be EUR 1.1 billion, equivalent to a yield of around 4.3%. Our ordinary capital distribution is 50% of full year '21 underlying net profit, comprising cash dividends and share buybacks.

We are currently accruing for the cash dividend at a rate of 30%. On this slide, we also show that third quarter '21 CET1 ratio of 15.31% pro forma for the remaining 20% of the ordinary capital distribution that is related to share buybacks.

Regulatory headwinds, which we successfully partially mitigated in the first 9 months, were 0.6 percentage points, and we expect them to be below 1.2 percentage points for full year '21 overall. Our MDA buffer in full year '21 is expecting to remain well above 400 basis points.

I will now hand back to Andrea.

[Andrea Orcel, executive]

Thank you, Stefano. Let's turn to Slide 17. Let me start by highlighting our recent ESG announcements. In line with our commitment to a climate positive future, we're proud to have signed up to a net zero banking allowance and are pledging to align ourselves as well as our lending and investment portfolios with net zero emission by 2050.

At the Women's Forum G20 Italy in October, we also made an important pledge to gender equality and diversity, equity and inclusion. In the transition towards the zero gender gap, we have made the commitment to define and communicate our aspirational gender diversity targets for 2030 and to track our progress every year.

To date, our results are strong, both because of the performance of our franchise and the exceptional economic tailwinds, although these are expected to moderate. We are optimistic about the future and are equally mindful of the headwinds affecting our industry. The shaped by notable low rate environment excess liquidity and the continuing management and monitoring of COVID.

However, given where we stand today, and that we are seeing a good start to the fourth quarter, it gives us confidence to improve our full year 2021 revenue guidance to around EUR 17.5 billion. Full year 2021 costs are expected to be in line with full year '19 levels at EUR 9.9 billion, consistent with our previous guidance.

Our full year 2021 underlying cost of risk guidance is now expected to be around 30 basis points, reflecting our recent asset quality experience. We have already reached EUR 3.1 billion of underlying net profit in the first 9 months of the year and are increasing our guidance for full year 2021 to above EUR 3.7 billion.

This is a performance that we're definitely proud of, which is a testament to the commitment and drives inherent in the business and our people. Looking at beyond, we will be hosting our virtual Strategy Day on the 9th of December 2021.

I hope that you will participate to hear about the next phase of UniCredit's journey and how we will unlock the significant inherent value of our franchise. I am really looking forward to sharing this with you. Details will be provided ahead of the event.

Moderator, could you please open the line for questions?

[Operator]

[Operator Instructions]

The first question is from Antonio Reale with Morgan Stanley.

[Antonio Reale, analyst]

I've got 3 questions, please. The first one on capital, second on M&A, and lastly on revenues. On capital, if I take the EUR 3.7 billion underlying net profit and plus that you guide for this year, that's a 7% RoTE and above already. Now the market doesn't believe you make that level of RoTE not given by the end of 2023. Now you've had high upfront fees and loan loss provisions, but just by normalizing the excess capital, you've had you can significantly improve your RoTE going forward. Can you remind us, just on that point, how you're thinking about that extra capital and extra deployment between cash dividends, buybacks and M&A?

The second question on M&A, I think we've seen -- it was good to see that you did stand for the conditions you stated on the with the past negotiations with the government. It wasn't for granted. You then restated and repeated your comments on M&A that it's not a purpose in itself, but you see it doesn't accelerate a bit on the strategic outcome.

Now despite the good numbers, the last structural elements, I'm looking at and I need to look, for instance, that still remain weak. So my question for you is, what do you see most needs to improve the strategic outcome? Is it the network in Italy, the Monte dei Paschi was going to address the North South skew? Is it in product factories repositioning the bank outside of Italy? Any color you can share on top of what you've said would be very welcome.

And lastly, on revenues, your guidance for the year of circa EUR 17.5 billion for '21 implies quite a sharp production in Q4 compared to your run rate in the 9 months. Is it still to be taken as a EUR 17.5 billion plus or minus EUR 200 million, or what are the key drivers for core revenues from here?

[Andrea Orcel, executive]

Thank you. So first of all, capital. How do we think about capital? At the moment, I can maybe give you our current capital position, which will obviously be refined and updated at the Strategy Day.

Our capital distribution policy is at 50% ordering payout based on underlying net profit through a combination of cash dividend, maximum 30%, and share buyback minimum 20%. Obviously, we need to comply with ECB payout recommendation, et cetera, et cetera.

So in general, that's how we look at it. At Investor Day, we will update you on our new view on all of that. On M&A, you -- so we always discuss about M&A. So where do I see the greatest potential? I continue to see the greatest potential in our own franchise. UniCredit has a natural market share that is in most markets in excess of where we are today, given that we come portion restructuring and type mix.

And the first thing to do is to make ourselves more on the front foot is to reempower our franchise while maintaining the acquired cost discipline and try to rebut the organization. We think we have substantial upside by doing that.

Now more specifically on NII and on the M&A strategy in general. I will spend a lot more time on NII at the Strategy Day, but I would encourage you to think about -- we're not focused on NII. We're focused on maximizing returns.

As an example, I may increase my loan volume, I may increase my NII. But I may reduce my return on equity if the capital absorbed by that NII is not rewarded appropriately. If you have a view to maximize return on equity, you may grow your NII less for [indiscernible] loans if those loans do not fit the returns metric that you have. So is NII important? Absolutely.

Are we focused on it? Absolutely. But we're focusing on NII, net of non-loan provisions, net of capital absorbed at a certain cost of equity.

We -- you asked about whether we are happy or not happy with our position in Italy and in other market and in target factories. What I would answer with that is what I answered before. UniCredit has an 11% market share in Italy. We have scale.

UniCredit is demonstrating that we can -- that we are profitable uniquely, and we can grow profitability. So are we under pressure or do we need M&A to generate more value from new -- for new investors? We do not.

Is there M&A, but at the right conditions can both strengthen our franchise among which we balance it. And create even more value for investors. That's why I called it an accelerator. Yes, there is, if the terms and conditions are the right ones. Otherwise, it will destroy that, and we will not do that. Revenues. You talked about the new guidance of EUR 17.5 billion implies a sharp reduction in Q4. Look, I would say, we sit around EUR 17.5 billion, at around [indiscernible].

So I would leave it at that. I would just add that the dynamics that you're seeing on the revenue side are results of a the revival of the franchise and more focus on the segments and the businesses we want to drive fee income, for example.

But at the same time, some tailwinds from the economic situation in Italy and in our other economies. And a number of other, let's say, extremely factors that we are expecting to moderate in the near term. Is the near term Q4? We don't know.

Is the near terms throughout 2022? Potentially so, which is why we're cautious. We prefer to be cautious then to put numbers that we then have to retract. I hope that answers your questions.

[Operator]

The next question is from Jean Neuez with Goldman Sachs.

[Jean-Francois Neuez, analyst]

I wanted to ask, first and foremost, when I look at UniCredit for the next few years, should I look at UniCredit as a bank which is simply priming itself for growth now that the cost-to-income ratio has reached a very good level of 55%, the capital is high, NPEs are low, and you're starting to regain market share, or do you think that at the same time as you're trying to achieve this, there is still, to an extent, a phase of restructuring maybe above and beyond what your major European competitors are doing in your respective key markets?

And the reason why I'm asking this is essentially just trying to understand whether you think that there is potential for some level of distraction -- detraction as you resume growth and/or essentially items that may hamper the tangible book value growth that would be implied by the returns you're posting today because of essentially nonrecurring items and these type of things.

And the second question that I had was very simply on net interest income. Even if you took the one-off away -- the level that is implied annualized as of this third quarter is consistent with what consensus has next year. And I just wanted to understand whether you -- that makes you comfortable with the level of expectations that people like myself have for your net interest income going forward.

[Andrea Orcel, executive]

Thank you, Jean-Francois. Okay. Restructuring or no restructuring, I would say -- let me tell you what I think. I think that we have left a period of infrastructuring. I think that we are transitioning to a period of profitable growth. So that's point number one. Point number two, a profitable growth does not mean stepping on the accelerator, and that's all it is.

Although there is an element of that, which is why we're reempowering the first line within strict risk and control guidance framework. I believe there is further value to be created in -- for shareholders in terms of our efficiency, and in terms of supporting the first line in our entire business with a better and more supportive technology.

So while we will be -- while we are setting up the foundation for growth, the 4 regions, the reempowering of the first one, the simplification of the organization, the evolution of layers, the front-loading of some cost reductions et cetera, et cetera, to make sure that at least all of our front line is clear on the objectives and is empowered to achieve them within risk metrics that are clear and understood.

At the same time, I think that there is hard work to be made on continuing to improve our efficiency and on improving our digital and data footprint. Do I think that will diverge the focus of the organization? No. Do I think that would require, in certain places, significant additional investment? Yes. Am I attempting to self-finance most of that additional simply investment, hence, efficiency improvement? Also true. More than that, I'll tell you at Investor Day.

NII, if you took one-off away, the level is consistent, et cetera. So what do I think about NII? And as I said -- and if you want more detail, I'm sure Stefano can dig in more of that. Consider, rates remain low, pricing is extremely competitive, especially in the CEE. We are not bending our risk appetite from the past.

We are clarifying it. We're empowering people within it. But the risk appetite we had in 2019, for example, is the risk appetite we have today. We're not going to compromise what we have achieved. And add to that, that the way I look at any activity that absorbs capital or generates risks is the revenue from that activity mines the cost of bad risk minus the cost of that equity.

And if that does not hurdles above the cost of equity, or at least not close, we are reticent to pursue it. So that will put an element of drag. But on the other hand, it will create much greater capital generation than otherwise. And Jean, I hope that, that answered. But if there is anything, Stefano, that you want to add?

[Stefano Porro, executive]

Thank you, Andrea. So in relation to the contribution of the net interest income in the quarter, the contribution from the commercial part of the balance sheet was stable. As a matter of fact, we stabilized the net interest income. More specifically, there is an increase in the average volumes in the quarter is around EUR 2.5 billion on one end, and this is in all the geographies. On the other hand, as we were commenting, on the customer rate, we are, I mean, fundamentally stable. We are down 1 basis point, but with some differentiation, meaning still the reduction of the average customer rate in Italy in Eastern Europe, taking into consideration the level of competition that Andrea was highlighting before.

So with an eye to the future, we are still seeing some potential headwinds to the customer rate, especially in Italy and Eastern Europe. On the other hand, we have the contribution of volumes when will be a more sustained recovery. I will differentiate between individuals, so retail and corporate. On retail, we are already in Italy on the new production above 10% in consumer financing and well above 10% in mortgages, while on the corporate side, the dynamic is more flattish and stable.

[Jean-Francois Neuez, analyst]

Okay. Great. I just wanted a clarification on -- Andrea, you said self-finance the investments into IT, et cetera. What does that mean, self-finance, in your own mind?

[Andrea Orcel, executive]

In my own mind is that I'm going to try not to pass the bill of additional investment in as much as possible to shareholders, and I'm going to try to improve my efficiency to be able to create capacity to finance my team. Put it in another way, I'm trying to keep my costs under control, notwithstanding the investment.

[Operator]

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

[Alberto Cordara, analyst]

My first question is on the regulatory headwind. If you can please provide us with an update with what is left to be taken in the last quarter? And also, in regard to the share buyback, what is the one-off capital impact that we should expect in the last Q?

The second question relates to a past comment in past calls from Stefano about a cost of risk in 2022 that should be somewhere between 2020, 2021. Now given the fact that 2020 has been materially lower from the original guidance, now we are 30 bps underlying, before 40. But in the past, it was, I think, 60 and then even more, I think, originally was around 80. How should look at 2022 because the difference between 2020, 2021 is very material?

And the other question I would like to ask you is coming from an investor, and it is regarding the cash. [indiscernible] would like to know if the cash is -- can be converted into equity before 2050. Given the present MDA buffer of 647 bps, that would imply some capital erosion of around 30 bps, but it would save -- or save the coupon of EUR 120 million per year.

And finally, there is the point, [indiscernible], a good friend in Eastern Europe, but still some weakness in Italy based on your database. Also volumes, R&D, too weak in Italy. How we should see this evolving, i.e., when we're going to see inflection point in NII, and when we should expect the volumes to come back, also by the recovery plan?

[Stefano Porro, executive]

Okay. I will start with regulatory and in shares buyback. In relation to the regulatory headwinds, we had around basis points of regulatory headwinds in the first 9 months. We are expecting, as delighted before, to be below 120 in the year. That means that in the last quarter, we are expecting to be below 60 basis points in terms of impact on the common equity Tier 1.

What we're referring to, our regulatory headwinds connected to some model changes, remaining EBA guidelines implementation for this year and calendar provisioning.

In relation to the buyback, the buyback impact for the EUR 652 million is already included in the 15.5%. So it's around 20 basis points.

In the slide on the common equity ratio evolution, the work you can see also the pro forma impact connected let's say, the shares buyback portion in relation to the 50% distribution, meaning the 20% out of 50%. That is just a pro forma.

In terms of basis point impact on the capital, the share buyback that has been approved and will be executed in 2021 is already factored in. While the future buyback on net with the distribution policy in relation to fiscal '21 will be affecting capital in 2022.

In relation cost of risk 2022, as we were commenting, we need to look -- 2021, looking also to what we did in 2020. Having said that, if we are looking the dynamic of the asset quality, and the expected loss of new business and the stock that is around 30 basis points.

We are not expecting a deterioration of the cost of risk. So we are expecting normalization of the cost of risk in the next years, including 2022. In relation to the cash is conversion into the equity. I mean the conversion rate is in the hands of investors. So we cannot convert the cashes and in relation to which our type of potential actions in relation bank capital instrument that is assessed, taking into consideration the value creation approach for the group for every type of actions.

In relation to the net interest income Eastern Europe and Italy. In Eastern Europe, the situation is the following: We had in the quarter a positive dynamic in relation to volumes. There was some specific customer rate pressure, especially in some countries like Croatia and Bulgaria.

We do think that some of pressure carrying in the future for competition reasons as delighted by Andrea. Having said that, with the development of the GDP, we are also expecting to have an increase of the volumes. In relation to Italy, the customer front book pricing is lower than the back book on one hand.

On the other hand, there is pressure on rates, especially on short-term lending towards corporate. As I was commenting before, we do expect that this type of pressure on rates will remain also in the near future. While on the lending side, we see a better dynamic on the rather than corporate. And as highlighted before, by Andrea, especially when we are looking to corporates, we are not only looking to the contribution to the net interest income, but we are looking and the unallocated capital of the specific business.

So in subsegments where we do see pricing pressure and where we might not have the appropriate capital, we will not follow up with volumes.

[Magda Palczynska, executive]

This is Magda. I just want to remind everyone to limit yourself to 2 questions and 1 follow-up, please, as we have quite a long list of people who want to ask things of the management.

[Operator]

Thanks. Next question is from Andrea Filtri with Mediobanca.

[Andrea Filtri, analyst]

The first one is, if you can remind us of the NII sensitivity to interest rate increases in Central and Eastern Europe? And the second one is about our later vision usage. We're starting to see other banks updating their macro scenarios and writing back overlay provisions.

You're kind of thinking in that, but if you could make it a bit more explicit where you are in terms of having utilized the macro and book assessment over the provisions? How many have you already utilized [indiscernible] or written back? And when do you see the time horizon, whereby, auditors will ask you to decide whether to utilize the [indiscernible] come back [indiscernible].

[Stefano Porro, executive]

Thank you, Andrea. So on the NII sensitivity, I will start from the group one for a 10 basis point increase, the group is around 95 -- between EUR 95 million and EUR 100 million. The Central Eastern Europe one I would mention you the main 3 currencies, meaning is EUR 5 million, every 10 basis point for Czech Republic, around EUR 4 million for Croatia and a couple of millions of euro or 10 basis points up referring to the short-term rates for Hungary, more specifically taking into consideration the dynamic of the rates already happened and expected to more relevant ones are Czech Republic and Hungary.

In relation to the overlay provisions and macro. As a matter of fact, last year, we had macro provision for around EUR 900 million as overlays. We are updating twice per year, the macro provisions. So the next one will be at year-end.

So far, we are meaning with a portion of the amount, even if it is a relevant one. So it's around EUR 700 million in terms of provision related to the macroeconomic update. So far, I mean, that was in second quarter and also in this quarter with mainly write-backs not primarily connected with some position that were classified to unlikely to pay that started repay and as a console of that we move back to performing. But the portion of overlay connected either to macro or to the movement in Stage 2 is still in our reserves.

[Operator]

The next question is from Delphine Lee with JPMorgan.

[Delphine Lee, analyst]

So my first question would be to come back on M&A. Just wanted to understand a little bit that you talk about the right metrics. If you just can -- just remind us what the criteria for M&A are? I would assume that some of the parameters you have highlighted for Monte Dei Paschi are -- were specific to that deal? So if you could just give us a bit of clarification on that point. And on M&A more generally, would you look at other banks post the discussion with Monte like Bank of [ EPM ] or is M&A for now not high on your agenda?

My second question is on capital and Basel IV because the text from the European Commission, which is out yesterday. So I was just wondering if you could provide a bit of an update, if any, on your previous guidance that you gave quite a long time ago, actually?

[Andrea Orcel, executive]

So M&A. So I think foundationally, it either add value or it doesn't. If we refer to Italy because, let's call it, the potential combinations are maybe clear, and it's a homogeneous market. For me, it needs to reinforce our franchise where we need it, and it needs to be done in terms that increased value for investors. And how do we look at value, I look at a number of metrics, return on investment, EPS accretion, tangible book per share increase and so on and so forth. In Italy, it's quite homogeneous because the targets are homogeneous. In other places, it could be different.

But ultimately, it either adds value strategically. But given that a number of times, strategically is used as an alibi to not adding financial value or economic value, it needs to also add value from a financial and economic standpoint. So this is the overriding parameter. Depending on different partners, the quality of the franchise, the risk in the deal, the work to be performed for integration et cetera, may require a higher or lower price for it to be making it worse the value creation that we expect.

At this juncture for UniCredit, there was a timing issue that I made clear in my second quarter results. We see most of the value organically. We already have a very strong platform. We can make it stronger. There are a number of things that we're implementing in parallel and one of your colleagues and -- before said, are you going to be diverted. I think the front line is not diverted, the center is working very hard on those things. So anything else we take up and that has the potential of diverting third of the center or even the front line has taken very seriously and cautiously.

So I believe it is my job to add value, whichever way I can. At the moment, I see a lot more value organically and inorganically. That does not mean that if I find the right deals at the right term, I won't do it. Yes, I will do it. It is my duty to propose it to investors and to try and do it. It is not at the right terms, we have plenty to do work on. I hope that, that answers your question.

The second question was about Basel IV. I would say this is a little bit too early to comment as it was just published. The direction of travel, however, appears to be, let's say, positive and provides us all with longer-waited clarity. So I do think that, that is a net positive. Let me maybe answer your question in detail in whatever, in 1.5 months or so at Strategy Day because we will embed our views about that in our capital projection.

[Operator]

Next question is from Adrian Cighi with Crédit Suisse.

[Adrian Cighi, analyst]

I have a few follow-ups, please, on NII capital and your M&A framework. On capital, the regulatory headwinds this quarter were much lower than flags. Is there a delayed aspect you have previously estimated headwinds? Or was the original estimate too conservative?

On sort of the NII, the -- it's a small clarification. You had a positive development coming from treasury this quarter. In principle, given the lower reinvestment yields, I would expect the headwind from line. What explains this development? Is there a one-off nature to it? And lastly, on your M&A framework, do you feel under the framework you just outlined that you have the right size and product capabilities? Or are you targeting specifically either an increasing size or potentially a product capability where you don't have a particular strength right now?

[Andrea Orcel, executive]

Maybe let me pick up on M&A and then Stefano will integrate my answers. But -- so on M&A, I think in all markets where we are or most markets where we are, we have scale. How do I look at scale is, do I have 10% market share more in the segments of [ asset trends ]. So not overall segment by segment, area by area. That for me, provides you with enough pricing power and enough, let's say, gravitas in the market. You can always get more. But when you are lower than that, you start struggling but you can always get more. I do believe that in most of my markets or the market of reference of UniCredit and segments were above that.

So as such, we have scale. So as such, we're not forced to do M&A. Going back to the organic for a second because it's important, what we need to demonstrate to you is that we can create scale across from tiers of countries. We have 60 million clients. If we look at it as 16 million clients in one geographic area, you would all say we have massive scale, and we're fine. As we fragmented in multiple markets, the view is you don't have scale and it's fragmented and it's complicated and it's complex. And what we want to prove to you is that is neither or, i.e., we have scale, not 100%, as if it was sold in one market, but we can achieve a significant amount of scale if we organize ourselves differently, which is some of the groundwork that we're doing. For example, in technology, it's not bound by boundaries. In procurement, it's not bound by boundaries and so on and so forth.

So how do I look at my capability or the capability and size of UniCredit. I do believe that UniCredit has a very, very strong position in distribution and in client access. That's where our strength lies primarily in the affluent segment in retail and in the SME segment in corporate. And we have that across the franchise more or less.

We had a lot of the discussion of factors. I would put it in another way. Do we have the right product and services that are required by our clients to provide them with the solutions, the products and the service that they require, number one. And number two, how much of the value chain in that product or service do we capture to be rewarded for our distribution. Put in another way, insurance. In insurance, if I'm fully integrated, I capture 100% of the value chain. If I'm not fully integrated, I capture a fraction. I, however, do not have a cost, do not have the tier risk, do not have these other things. When I compare those 2 models, they both can be defensible. If the distribution model is capable of being rewarded with enough of the value chain, that does not justify us building the factory. So that's how we look at everything that is not internal. Look at it as an ecosystem. Some things we produce inside because we best-in-class at doing it, some other things, but we can distribute it to a client seamlessly with our partners and secure a lion's share of the value chain, then it's fine. If we cannot, we need to internally integrate them. Am I at the moment looking at the purchase of factories? No, not.

I think on capital headwinds, I will just mention an introduction, and then Stefano is going to pick it up. I do believe that the franchise has started looking at capital as a scarce commodity in the sense of we need to be capital efficient. Headwinds, there are headwinds, but a headwind can be absorbed to either partially or in totally by shifting the mix of the business, by improving the way we look at things. And if you start looking at return on equity and capital return, as an override on revenues, you will incorporate those capital headwinds and shift the way you do business to try and reduce the capital headwinds itself and absorb some of the shock. So I think that's how I look at it in general. And I think that the franchise in these 6 months has started looking at it in the same way, and you're seeing some of those benefits. It's not only about that. And Stefano will give you the other things, but it's also about that. Stefano?

[Stefano Porro, executive]

Thank you, Andrea. In relation to the regulatory headwinds, as a matter of fact, in third quarter, we had around a 19 basis point impact. Primarily connected with model changes in Austria, the impact is around EUR 4 billion risk-weighted asset that is in line with the expectation in relation to the impact, per se. On top of the capital efficiency and portfolio optimization action that Andrea was mentioning, as a matter of fact, the PD procyclicality that we had so far is better than expected. And so also in this quarter, fundamentally was negligible. So the impact was around EUR 200 million risk-weighted assets, so fundamentally negligible.

In relation to the net interest income, in the work for the quarter, as a matter of fact, yes, we do have a positive contribution from treasury. That's come from the results from some hedging activity in Central Europe and Eastern Europe. It's not a recurring one. If you look the overall contribution of the investment portfolio in the quarter, quarter-on-quarter is flat and there is not a relevant change quarter-on-quarter neither on volumes or in rates.

[Operator]

The next question is from Giovanni Razzoli with Deutsche Bank.

[Giovanni Razzoli, analyst]

Two questions and one follow-up, please. The first question, you've been very clear on the improvement in the guidance for '21 both in terms of revenues and the profits, and you sound relatively confident about the future outlook. So I was wondering if we shall consider those as guidance starting base also for 2022?

The second question relates to your comments that you've made on the evolution of the market shares in Italy, especially on consumer credit, you said that you front book market share is now at around 10%, which seems a little bit lower than what you had in the last years in terms of market shares in the new business generation. So it seems that there is still there, a lot of scope to increase the volume growth. Is my understanding correct?

And the follow-up, Stefano can please repeat what is the sensitivity of the NII to raise increase in Czech Republic and Hungary?

[Andrea Orcel, executive]

Okay. So the improvement in guidance on revenue and profits and are we confident on the future? And is it a starting point for 2022? So I would say we are confident to the future, but the revised guidance for '21 is driven by both strong performance this year, thanks to franchise and I think a renewed energy and clarity of purpose for our colleagues, but also by macro tailwinds. And those macro tailwinds, we expect that they will moderate. I don't think anybody expects the GDP of our economies to continue to grow at this level and at this pace. Does that mean we think that they're not going to grow? No. But I think there will be a moderation of pace, and that will have an impact.

At the same time, we have a continued impact from a negative -- low rate environment or negative rate environment from order deposits. And as we reprice our book, that impacts us. So the key question is whether or not we were focusing on return on equity and not only on revenues. We're capable of growing our business at a pace, and we have a discipline that absorbs some of these, let's say, tailwinds -- sorry, reduction of tailwinds, GDP and others and some continued headwinds. And this is what we're working on, and this is what we will share when we meet 1.5 months.

Market share in Italy at 10% in new business generation. Actually, I may have phrased this incorrectly. We are mostly above. Total market share in Italy is slightly above 10%. Funding market share include the repos and bonds is 11.5-plus. Funding market share in Italy, it's still -- repos and bonds is almost 11% and so on and so forth. So we are slightly above 10%. If I take certain segments, we are rebounding significantly. The consumer finance in Italy were well above 10% at the moment.

In other segments, as Stefano has indicated, we are not rebounding. And by the way, there are segments where the volume is greater than corporate or we're not rebounding to the same extent because of our attention to return on equity rather than purely volume. Is there scope to do more? That is exactly the point, there is. The natural market share of UniCredit in Italy, but also in most of its suburb economy is higher than where we are at the moment because we have purposely restricted that market share during the time of restructuring, following by an even greater restriction during COVID. As we focus on recovering that natural market share, keeping the discipline on the risk, but also keeping the discipline on return on equity, we think there is scope to improve that organically to a significant extent because it's already -- these are already our clients.

I don't know, Stefano, if you want to add into?

[Stefano Porro, executive]

Yes. I mean, just one integration in relation to the market charge, Giovanni, I think your question was related to consumer financing. As a matter of fact, the consumer financing, I mean if we are looking to the Assofin statistics, consider that pre-pandemic, our monthly market share on new production was ranging between 10% and 12%, and we are there. So as highlighted by Andrea, I mean if you look, the last statistic, we are around 11% on personal loans, and we are higher than that on salary loans. Having said that, we need to take in consideration the lending also with the appropriate risk discipline because, as you know, also in the consumer financing space, as a matter of fact, I mean the crisis for pandemic is not finished. So are also properly taking into consideration this when we are originating.

In relation to the NII sensitivity for Central Eastern Europe countries, so I was mentioning Czech Republic and Hungary. Czech Republic for every 10 basis point up, and the short-term rate is around EUR 5 million impact on the net interest income in a real horizon and EUR 2 million in the case of Hungary, around EUR 2 million.

[Operator]

The next question is from Domenico Santoro with HSBC.

[Domenico Santoro, analyst]

Everything is very clear. Just to follow up on strategy and numbers. First of all, another to, I mean, walking away from M&A, focusing organically. I got your comment on the product companies before. It's very clear that you are not building internally or you are not buying product factors. But in the context of the strategy of maximizing revenues in business with low capital allocation, it would be typically very -- is in a way to increase the exposure in this business. So I just wonder what is the state-of-the-art of the renegotiation, at least, of this partnership in the asset management? I know that is a market-sensitive matter and insurance as well, if you can tell us a bit more ahead of the Investor Day?

There's a -- second follow-up is on the COVID-related provision of market, overlay provision. I understand that the number that you are referring to is always this EUR 700 million, but you booked I mean, more than EUR 1.7 billion of overlay last year. How should we look at that? And I was wondering also if there is other part of provision that can be reversed into the P&L? What would be the next time when you will update the model? And if there is any, also element of this question, to revise this provision into the P&L? And whether we should consider those distributable to shareholders or just a one-off, so we should take them off the recurring numbers?

[Andrea Orcel, executive]

Thank you, Domenico. So we're indeed focused organically. We indeed are not a believer at this point of buying factories nor full of starting the full internal integration of the same. But we're very, very focused on improving our fee income generation and improving the capture of the entire value created by these fees vis-à-vis what it is today. Can we do that? I believe we can do that. We need to be -- to provide our colleagues on the front line with a simple set of products and services provided by our partners, which today is a little bit less clear. And that will allow more effectiveness in selling those products.

Let me give you just an example to support my point. If I'm selling a mortgage, I would need to have there and then on my iPad or whatever it is, the insurance products for home content or health insurance or other insurance product that allow me to provide the client with a full service around my mortgage discussion. It also allows me to make trade-offs in terms of what is the adequate profitable package for me to offer. So today, we're not in a position to do that. If we go to in a position to be doing that, I think the ability of the people on the front line to offer more effectively solutions rather than these aggregated products will improve both the client experience, the client pricing and our ability to distribute more.

The last -- the other thing that I would say that you need to keep in mind is it's true that when you're a distributor, you share on the value chain between your sales and your partner. It is also true, you're simpler. You don't have conflict of interest. You do not -- you can -- you do not have tail risk. You don't have to manage best product, look at MiFID and everything else. So all of these things go away. And I would leave you with one thought. If you are a partner in insurance and asset management, et cetera, et cetera and you want to have a strong partnership with an operator in Italy or in Germany or in Austria or in the sea, how many are there? That can provide you with that, not many. And that should be reflected in the terms of the distribution agreement. So I think I have given you plenty on that topic, and we will discuss it to a greater degree at the Strategy Day. On the LLPs, I'll leave it to Stefano.

[Stefano Porro, executive]

Thank you, Andrea. So Domenico, as you highlighted that in 2020, the amount of provision that we recognized was EUR 5 billion. EUR 2.2 billion of these EUR 5 billion were overlays. As a matter of fact, I think it's important to distinguish because in overlays, we do have macro, but we have also the movement of position in stage 2. So if we put ourselves in -- at the end of '19, the amount of stage 2 loans of the group were EUR 44 billion. Currently, we are at EUR 71 billion. And in relation to that, clearly, the amount of provision in stage 2 and stage 2 moved to something like around EUR 2.5 billion, EUR 2.6 billion at the end of '19 to around EUR 4.2 billion at the end of this quarter. You have the detail on Page 31 of the market presentation.

I need to say what that in the next quarters clearly some of the position in stage 2 will migrate to stage 3, but some of the position will migrate to stage 1. And so as a concept of that, some of the provisions will be simply utilized, and some of the provision will be released. When we are commenting on the cost of risk either on 2021 or for the future years, we are taking in consideration all the dynamics that are having from the staging as well. And all the profit connected with such a dynamic is distributable to shareholders.

[Operator]

The next question is from Christian Carrese with Intermonte.

[Christian Carrese, analyst]

I have a question on cost of risk, in particular, on regulatory headwinds expected for the fourth quarter? And for 2022, I was wondering if you can give us an idea of what kind of default rate in Italy you are embedding in your projection compared to the 2% -- the current 2%?

The second question is on M&A. You said M&A has to be seen as an accelerator. There are some tax benefit in Italy now that I think could accelerate EPS accretion going forward. I was wondering if there is any kind of similar tax benefit or benefit in general terms in other geographies in Europe that we could use in case of M&A? And you said on product factories and you focus on banks. Could you share with us your thoughts on a different kind of deal, let's say, the creation of a financial conglomerate? So I proper tie up with insurance companies rather than just renegotiate current partnership.

[Andrea Orcel, executive]

Okay. So I think M&A has to be an accelerator and tax benefit, et cetera. To be honest, I'm not aware of cover tax benefits. I would just say that maybe my view on DTA is a little bit different from the view of DTA of the market. DTA is something that you have -- if you have the profitability to front load it, you need to pay 25% of their value. So that's a reduction of value as an increase. And secondly, it depends who is bringing the tax asset to the table. Is it the acquirer? Or is it the seller or the target? So depending on that, you may value a little those DTAs or you can value to a great extent. And let's remember what they are. So I don't see it as particularly as an accelerator. And if the market is efficient, prices of all organizations should be sensitive to a change in that policy.

The second thing is a better fit in other geographies, I don't know. But as I said, you're right to say that there is a tax benefit it may have a positive impact on the transaction. But I don't see that, and that's not what we're looking at present. On product factories, focus on banks, can you do more of the conglomerate, et cetera, et cetera. Strategically personally, I do not believe in mergers between banks and insurance companies or things like that. I think the client base is -- the client service models, the business is very different. Can there be a strong partnership long term between insurance company and banks and vice versa? Absolutely, where we all stick to what we do well. And I haven't said we are renegotiating and just said -- in my remarks, I said that you can build a strong partnership with both partners in insurance or in other places, long term and to the mutual benefit. Obviously, the partnership need to reflect what each party brings to the table.

And my personal view is if you achieve a seamless integration from a technology standpoint and from a product design standpoint between your partner and us in the delivery of those products and solutions to your clients and the respective contribution to the value creation is appropriately shared, you get stable, long-term value created partnership. In the past, people have focused too much on if I award your access to my distribution, how much are you going to pay me, instead of can we build a partnership that is mutually beneficial that is stable and adds value for the long term. I think that in the second frame, the impact on what we can do for clients and therefore, the profitability of your network over time is quite beneficial. And on reg headwinds, I'll leave it to Stefano.

[Stefano Porro, executive]

Thank you, Andrea. So in relation to regulatory headwinds and the implication on cost of risk. So far in the 9 months, the regular headwind cost of risk was around 6 basis points. We do expect some model changes also in Q4. So we might have something also in Q4. The overall amount that we are expecting for the year is around 10 basis points. That's the difference why between the stated cost of risk guidance and the underwriting cost of risk guide that is around 30 basis points.

In relation to the default rate, the default rate that we have currently is 1.2% at group level, excluding the noncore and it's below the level of last year, that was 1.6% and it's below the level in all the countries. We are expecting to be either in line or below the level of 2020 in all the countries. And we are not expecting significant changes neither in the default rate. And as I added before, also we are expecting normalization of the cost of risk also in 2022.

[Operator]

The next question is from Andrea Lisi with Equita.

[Andrea Lisi, analyst]

A couple of questions from my side. The first one is on fees. We have seen that there was a really stronger contribution from upfront fees and growing contribution from transition and financing fees. Just wanted to understand how much of the evolution we have seen so far, do you think is sustainable also for the next years knowing other lots of moving parts? Just wanted to understand that.

And the second one is a question on the calendar provisioning. We have seen that there was some impact on capital due to calendar provisioning. And just wanted to understand what do we expect for the next year if you think that it may represent for the banks overall [ after it ] for the next years, especially considering maybe some increase in the [ fees ] despite of moratorium? And can you remind us which initiatives have you put in place to address these risks?

[Stefano Porro, executive]

Yes. In relation to fees. As a matter of fact, in the quarter, we had already normalization of the upfront fees still strong, but lower than the level that we had in Q3 -- in Q2, sorry. In Q2, we were close to EUR 300 million of upfront fees. The gross sales that we had of asset management insurance product during this quarter were strong because we were at around EUR 14 billion, down from EUR 15.5 billion. So as we were commenting, we are expecting a normalization trend also during the next quarters in relation to the dynamic. This, in relation to the upfront fee and the gross sales activity, as commented before, like April, during this quarter, we are expecting a positive from the dynamic of asset management fee, taking in consideration the growing asset under management that we have in the group.

In relation to the calendar provisioning, as I was commenting before, we are expecting regulatory headwinds in Q4. And among the item where we will have regulatory headwinds is calendar provisioning. And we are also expecting calendar provisioning impact in 2022. So the 2 items where we are expecting regulatory headwinds in '22 are model changes also following the final implementation of some of the big headwinds and calendar provisioning.

[Operator]

Next question is from Manuela Meroni with Intesa Sanpaolo.

[Manuela Meroni, analyst]

I have a couple. The first one is on the noncore NPL, your operator strategy was to get rid of all the noncore NPL by year-end. So I'm wondering if this strategy is still in place? And how do you expect to implement it? So disposal full coverage or what else? And the second question is just a follow-up on the upfront fees, could you please remind us how much are upfront fees accounted for in the last quarter?

[Stefano Porro, executive]

Yes. In relation to the noncore, on the core at the end of the quarter, we are at EUR 2.7 billion. In terms of net exposure, the coverage is 79%. We do expect the full rundown of the noncore by the end of the fourth quarter, and we will close the division accordingly. It will be a combination of activities, including sales. So it will be a combination of sales, write-off and recoveries.

In relation to the upfront fees. In the quarter, the amount of upfront fees was slightly above EUR 250 million in comparison with the number that I was highlighting before that was around EUR 290 million for Q2.

[Operator]

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

[Benjie Creelan-Sandford, analyst]

Two for me, please. The first was just on corporate lending. I mean, look, you've been very clear about your criteria for lending going forward. I was wondering perhaps if you could just turn that around a little and give us some color on what you're seeing or hearing from clients currently, particularly in Italy, is the sort of lackluster corporate growth trend being driven by a lack of willingness on the side of corporate to invest at this point? Or is it simply just an excess of liquidity in the corporate sector post the COVID-related drawdown last year?

And my second question, just a quick follow-up on the treasury and bond contribution to NII. I was just wondering on the basis of the current yield curve, if you could give us any color on how you expect the bond portfolio and the structural hedge contribution to trend going forward?

[Stefano Porro, executive]

Yes. So some color on the corporate lending standpoint by country. Let's say, in this quarter, as a matter of fact, we saw a reduction of the stock towards corporate investment banking and corporate clients in Italy. So the reduction is around EUR 3 billion. We do see abundant liquidity. So many clients will utilize before the liquidity they have for the working capital before asking money for acquisition financing or for fixed investment. This is a trend that we are seeing, by the way, not only in Italy, but in Germany as well. As we were commenting, there is, however, some of change, for example, in the corporate lending in Germany, were up quarter-on-quarter for a little bit more than EUR 1 billion.

In relation to the pricing standpoint in Italy, we see a higher competition also on the short-term lending pricing, and this also affected the customer dynamic in Q3.

In relation to the current yield curve and, let's say, contribution to the NII of the portfolio, a comment on volumes. So the volumes are flat. So we are around -- the overall investment portfolio is around EUR 144 billion. We are not expecting significant changes in the short term. And the same for the BTP investment portfolio that is remaining around EUR 44 billion. The contribution of the investment portfolio to the net interest income will be slightly lower in 2022. So some tens of million of euro due to the fact that the rollover for some of the position, especially on the Italian bonds portfolio will be done at a lower level. Having said that, we will also see a reduction over time of the contribution to the net interest income on the interest expenses deriving from the term funding because the funding cost will be lower in 2020 when comparing with '21.

[Operator]

The next question is from Ignacio Cerezo with UBS.

[Ignacio Cerezo Olmos, analyst]

So a couple of questions from me on the capital. First one is in terms of the capital return composition, what balance do you need to strike between the different types of shareholders? I'm thinking that maybe foundations retail might prefer cash dividends, institutional seems to be preferring buybacks these days. So how are you thinking about that?

The second one is if you can share with us how do you think about the right level of capital, the bank needs if you think about absolute CET1s? What do you think about MDA buffers and any color on the magnitude of the capital ratio?

[Andrea Orcel, executive]

Thank you, Ignacio. Okay. So most of this, I think, it's a better answered in about 1.5 months. But just to frame it, capital return composition, let's say that I'm well aware about different shareholders are attractive different things. I think currently, our current policy is trying to find a balance on that. Obviously, the balance sheet dynamic and it depends on what is your own valuation. But let me just say that I'm well aware of a different classes of shareholders are expecting different way for the capital to be returned to them and that we will take that. This is the critical, let's say, variables for us to define a capital return policy, and we will define it in detail in December.

Right level of capital, MDA and give buffers and so on and so forth. I think we all think about MDA buffers. But I also do believe that there is an element, let's call it, a psychological element that when you go much below that psychological element, everybody questions whether you have enough capital or not. So I think the right level of capital is, number one, takes into consideration these 2 things. And number two, critical in my view, takes into consideration what is your current capability to organically generate capital within the year and how that capability is affected by stress scenarios. So a bank that is capable of having a high generation power of capital. And that generation power is relatively immune or affected less than possible stress event can afford to run a lower level of capital. The bank at the average stream that has very limited on non-generation power and which generation power is affected very significant by stress event requires a higher buffer to operate.

So I think one of the things that I'm very focused on is to confirm the ability of UniCredit to generate capital organically and to hopefully have that generation solid enough that it can withstand certain shocks and therefore, that will be a key driver in being able to, let's say, share and get approved, the capital distribution that is consistent with that. I don't know if I answered your question, but I tried to frame it in [ addition ] very much greater detail. I know you would have like more, but I cannot do more until I get there.

[Operator]

The next question is from Fabrizio Bernardi with Bestinver.

[Fabrizio Bernardi, analyst]

There were many questions on M&A, sorry, but my priority is to understand whether you are definitely out of the MPS saga or you may reenter it a little later via another different door, let's say. It seems that DTA law has been postponed by 6 months. So you may be right back with a different bill to present to the government, and this was my question.

Second question is, I was wondering if you can share with us your very deep knowledge about the MPS issue and suggest us how it may end any flavor, any color would be great to all of us, I guess. And then if I can, I know 2 questions, but I have a third one. Will the strategic plan will be on 3 years or maybe something else, something different?

[Andrea Orcel, executive]

Okay. Yes, indeed, you need to try. Look, when we announced the mutual intend to find a path towards a successful combination the MPS and UniCredit. I said clearly that one of the advantages was that the window was open at the moment. And that if a deal could be executed quickly, in mutual interest with no resistance, but actually mutual embracing, it could be fit, it could fit in our agenda. And I said very clearly that we have a number of initiatives in-flight in Italy and that we thought that we could -- if we executed a deal quickly, we could apply those initiatives at the combined franchise. Now that window has closed for us. And it has closed -- now windows close and open, but for the time being, it has closed. As you may have gathered, we have moved down on the geometry of our network. We're in flight on a number of technology initiatives. We are quite focused on the principal initiatives that we have to rationalize certain things. We'll focus on other things, et cetera, et cetera, and we need to be 100% focused in executing that. So I would say, this is where we are at the moment. So timing is everything at times. And I would say we have recovered our total focus on our standalone strategy. So that's what I would say today. Then with respect to Monte dei Paschi, I cannot comment. And I would say that as an Italian and a group that has a significant operation in Italy, I wish the outcome is as positive as possible because it's in the interest of everybody.

[Fabrizio Bernardi, analyst]

And the plan will be 3 years -- sorry.

[Andrea Orcel, executive]

I'm sorry, on the plan, yes. I never see plan as 3 years. I think what I would say is I see plan as medium-term, long-term plans, but there is a set, let's say, that is reasonable that you can forecast correctly that usually is, as I always tell people, you probably have a high degree of content on year 1, a medium 1; on year 2, year 3 starts becoming good projection. If you start lengthening, there are so many things that are moving, especially in our sector, it becomes very directional.

But my view is, so I will describe a 3-year plan, but I do not consider 2024 as a point of arrive. I think there is life, and a lot of it [ probably trade ] after 2024. So I will detail what I believe we can do in this for years. But part of what we do in these 2 years will underpin and support the performance going forward as well. And we will share 3 years, not more than that.

[Operator]

Mr. Orcel, there are no more questions registered at this time. The floor is back to you for any closing remarks.

[Andrea Orcel, executive]

Well, thank you very much to all of you for your patients. And I hope we will be able to respond to the questions that we were not able to respond to at the Strategy Day on the 9th of December. We'll provide you with all the information we need to us for the format. And yes, I am really looking forward to see you there and hopefully get you as excited as I am on the prospects for the bank. Thank you very much to everyone.

[Operator]

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