UniCredit SpA

MIL:UCG

Earnings Call Analysis

UniCredit Achieves Record Results and Upgrades 2024 Guidance

UniCredit has reported record results, achieving a 5x increase in net profit since 2021, with a 31% rise in EPS this quarter. The bank's net interest income (NII) remained stable, while fee income surged by 7.2% over nine months. Cost efficiencies led to a record cost-to-income ratio of 36.6%. Looking ahead, UniCredit upgraded its 2024 net profit guidance to EUR 10 billion, around EUR 500 million higher than 2023. The bank aims for a return on tangible equity of circa 17% and plans to increase dividend payments from 40% to 50% of net profit, reflecting its confidence in sustainable financial performance.

Strong Financial Performance and Growth Trajectory

Recently, UniCredit released its third-quarter results, marking a continued trajectory of exceptional financial performance. The bank reported a net profit growth of 16% in the past nine months, reaching a total of EUR 10.1 billion, and an 8% increase for the quarter alone. This consistent growth is reflective of a robust operating model that combines net interest income (NII) and fee generation effectively.

Cost Management and Operational Efficiency

An essential part of UniCredit's strategy has been its focus on cost efficiency. The bank has successfully decreased its absolute costs by 1.4% year-on-year in the latest quarter, achieving an impressive cost-to-income ratio of 36.6%. This metric not only outperforms many peers but also underscores the ongoing commitment to operational excellence.

Asset Quality and Risk Management

UniCredit has maintained a low cost of risk, currently at just 9 basis points for the nine-month period. This stability has been aided by prudent risk management and significant write-backs in nonperforming loans, which is crucial in ensuring the ongoing health of the balance sheet. The relatively flat performance of gross nonperforming exposures at 2.7% speaks volumes about the bank's careful asset management.

Revenue and Fee Growth

Total net revenues increased by 5.4% to EUR 18.6 billion over the past nine months, driven primarily by an encouraging rise in fee income, which grew by 7.2% year-on-year. This uplift in fee-generating activities contributes to the overall revenue diversification and stability against the backdrop of fluctuating interest rates.

Strategic Investments and Future Outlook

UniCredit remains poised for future growth through strategic investments, particularly in digital assets and insurance. The bank anticipates maintaining an impressive return on tangible equity, now projected to increase to approximately 17%, reflecting confidence in sustainable profitability. Moreover, the management has upgraded the 2024 net profit guidance to EUR 10 billion, a figure that suggests a strong operational backbone even in the face of external pressures.

Commitment to Shareholder Returns

In a favorable move for shareholders, UniCredit has announced its intention to raise the dividend accrual to 50% of net profits from the previous 40%. This decision highlights the bank's commitment to returning value to its investors, backed by a solid capital base and strong earnings performance.

Emerging Markets and Strategic Challenges

While the Western European markets such as Italy and Germany have delivered strong profits, UniCredit is also navigating complexities, particularly in the Russian market, where the bank aims to wind down its operations seamlessly. As it reduces local deposits which are down by 27% this quarter, it remains on track to meet its 2025 liquidity targets.

Conclusion: A Strong Investment Case

With a comprehensive strategy emphasizing profitability, operational efficiency, and risk management, UniCredit showcases one of the strongest investment cases in the European banking sector. Its consistent performance and commitment to shareholder returns present an attractive opportunity for investors looking for stability and growth amid a challenging economic environment.

Earnings Call Transcript 2024-Q3

[Andrea Orcel, executive]

Good morning, and thank you for joining us today as we present another record set of results, ushering UniCredit in a new era of sustainable quality growth. I apologize in advance for my voice, but I'm a little bit under the weather.

Over the last 4 years, UniCredit has undergone a successful transformation, achieving 15 consecutive quarters of quality growth and improvement, outperforming peers across all KPIs and poised to establish a new sustainable run rate in 2024, a base from which we intend to grow.

Our record-breaking results in Q3 and over the past 9 months are further testament to our success, driven by the contribution of our people. Sustainable quality growth for us means a growing bottom line but does not sacrifice a top line of exceptional quality, driven by profitable NII and growing weight of fees, combined with operational and capital excellence. This delivers best-in-class profitability and organic capital generation, enabling us to return outsized distribution to our stakeholders. This is the benchmark we intend to set.

Our transformation has ushered us into a new era where the work we have undertaken to strengthen our business will become even more apparent, and the full extent of our transformation will finally be for everyone to see.

With our structural strength fueled by unique accelerators and a clear quality growth trajectory, we are well prepared to navigate a challenging macro environment. We're excited about the future and look forward to continuing to deliver exceptional results for all our stakeholders, as confirmed by our upgraded 2024 guidance and future ambition.

UniCredit Unlocked has proven to be a winning flexible strategy built to adapt to a changing environment. Anchored by our vision of becoming the bank for Europe's future, it delivered consistent value to all stakeholders, setting a new benchmark in banking.

Our strategy is entirely client-centric. We empower our people in a streamlined organization. We offer best-in-class products both in-house and through partners, benefiting from group-wide scale. We leverage reliable digital and data capabilities to enhance the client experience, all to serve our clients where and when they need us across full integrated channel. All this is underpinned by a culture of empowerment, accountability and continuous improvement.

Over 15 consecutive quarters, this strategy and the dedication of our people allowed us to achieve sector leadership across key metrics. We lead in net revenue to RWA, cost/income ratio and return on tangible equity of 13% CET1. Our EPS growth and total distributions are also best-in-class.

We are operating on a completely new run rate versus 2021. Our net profit is 5x higher. Our return on tangible, 3x higher. Our organic capital generation, 2x higher and so are our distributions.

This quarter, we again achieved impressive results, driven by our focus on profitable NII, increased fees and improve operational and capital efficiency. All this leads to superior return on tangible equity and organic capital generation to support best-in-class distributions.

Given the backdrop of rates and pass-through normalization, the profitable growth in NII of 3% in the 9 months and almost flat performance sequentially quarter-on-quarter is particularly impressive. This performance is a direct result of our diversified geographic mix, a continued shift to higher risk-adjusted profitability clients and products and our strict discipline on deposit pass-through.

Overall cost of risk remained well below our target at 9 basis points for 9 months, thanks to continued significant write-backs, again underscoring the conservativeness of our provisioning policy. As such, net NII dynamics mirror gross NII. Our fee income grew 7.2% in the 9 months and an impressive 8.5% in the quarter year-on-year with fees to revenue reaching 33% and 32%, respectively, thanks to our investment in the business and the focus of our people and our clients.

Our focus on operational efficiency while investing and capital efficiency while targeting profitable growth continue to set the benchmark for the industry. Absolute costs declined by 1.2% over 9 months and 1.4% in the quarter year-on-year, with our cost-to-income ratio at industry-leading level of 36.6%, 2.5 percentage points better than a year ago.

Our net revenue to RWA reached 8.9%, up circa 1 percentage point from a year ago. RWAs were reduced to EUR 278 billion. It is this combined performance across multiple levers that allowed us to reach a record return on tangible equity of 13% CET1 of circa 23.3%, about 20% reported for both the 9 months and the quarter, a record organic capital generation of EUR 10.1 billion or 357 basis points for the 9 months while increasing our CET1 ratio to 16.4% pre-investment, net profit growth of 16% in the 9 months and 8% in the quarter.

In the 9 months, our EPS increased by 31%, accrued EPS by 48% and tangible book per share by 20%.

Let's now look at the P&L in detail. Net revenue increased 5.4% to EUR 18.6 billion in the 9 months and 2.6% to EUR 6 billion in the quarter. This is our result of one, resilient NII despite lower rates and best-in-class NII RoAC at circa 19% in the quarter, well above the cost of equity; two, top tier fee to revenue, which continues to gain momentum; three, LLPs still a little point and stable, still benefiting from write-back confirming quality origination and conservative provisioning; four, trading and others continues to be solid despite the impact from the Commerzbank investment.

Despite the reduction in rates, we have successfully maintained a stable NII both quarter-on-quarter and year-on-year. This achievement is a testament to our effective deposit pass-through management resulting in pass-through rate of 32% in the third quarter and growth strategies in selected areas.

Our focus on quality has led to constrained overall volume growth, but it has also resulted in our NII RoAC, reaching approximately 19%, well above our cost of equity. This has put us in a position of strength as we weather the impact of rates normalization. This approach has been crucial in maintaining our financial stability and ensuring our continued success.

Our cost of risk remained low at 9 basis points for the first 9 months, in line with the same period last year. This achievement is largely due to significant write-backs in Russia and elsewhere. This will eventually abate, bringing our cost of risk closer in line with our expectation.

Our performing portfolio is highly covered and is of high quality. Our gross nonperforming exposure stock and net NPE stock remain stable at 2.7% and 1.4%, respectively. This stability reflects our disciplined approach to managing nonperforming exposures and maintaining a healthy balance sheet.

Our fees have experienced a significant increase across all main categories, growing by 7% over the first 9 months of the year and 8.7% excluding the current account and securitization costs and 8.5% year-over-year. Our fee to revenue ratio stands at a top tier 33%, highlighting the quality and diversification of our fee base. We continue to see strong momentum in assets under management and non-life insurance, driven by increased client appetite and a broader product offering. Payments and current account performance is driven by payment, up 6% over 9 months. While down 3% in the quarter due to a change in contractual incentive features in Italy, we expect to catch up by year-end.

Our advisory and financing services have also seen strong acceleration reflecting the benefit of our past investments and a supportive environment. We believe we are the only bank that has consistently reduced our absolute cost base during the last 2 years, offsetting inflation across our footprint while increasing revenues and investing in the business quarter-over-quarter. This quarter and 9 months are no exception with costs down, respectively, 1.4% and 1.2% year-over-year. Our cost-to-income ratio has improved to 36.6%. We lead in our peer group. This achievement is a result of strong discipline combined with a targeted approach to streamlining our organization and reducing unnecessary overhead. Our operational excellence has been a key factor in our success, and we intend to defend it.

Our best-in-class organic capital generation of EUR 10.1 billion in the 9 months and EUR 3.5 billion in the quarter has allowed us to accrue 100% of net profit for distribution while increasing CET1 to 16.4% pre-investment versus 15.9% in full year 2023.

This quarter, we have also absorbed the initial capital impact of very strategic investment that will propel our results in the future. These include building a stake in Commerzbank, committing towards our insurance internalization acquisition of Aion/Vodeno and of Alpha Bank in Romania. Some further capital consumption is expected from the stakes in the future.

Group RWA increased slightly as almost EUR 5 billion of reduction was more than offset by the impact of strategic investments. We expect RWA to increase by a few billion next quarter.

Looking to Basel IV, the full year impact is expected at around 70 basis points as we implement mitigation action on credit risk while the initial impact in Q1 '25 will be around 90 basis points.

As we look at our region and product factories, I would like to remind you that UniCredit is more than the sum of its part. Our achievements stem from a collective effort across regions and factories, each contributing to our overall strengths but all coming together as 1 group, but is worth far more than the sum of its part.

Italy. Italy continued to deliver high profitability and growth underpinned by earnings quality and operational and capital excellence. Net revenues were up 5% in the 9 months, reaching EUR 8.2 billion with a quarter up 3%. NII was up 5% in the 9 months and remarkably, 1% in the quarter with rates reduction more than compensated by the continued improvement in the mix of our business and strong management of the pass-through.

Cost of risk remained mild at 28 basis points for the 9 months and the quarter, showing continued stability. Fees were up 7% in the 9 months and 9% in the quarter, with all product contributing and particular strength in investments, nonlife insurance where we continue to grow our market share and advisory and capital market.

Operational excellence was maintained. Costs were broadly flat in spite of the salary contract renewal, inflation and investment in growth within the business.

Cost/income ratio was reduced yet again to 34% in the 9 months. Our focus on capital efficiency further increased our net revenue to RWAs by 1.4 percentage points to 10.5%.

Profit before tax rose 17% in the 9 months to reach EUR 5 billion, up 19% in the quarter.

RoAC reached 33% in the 9 months. The region generated EUR 4.4 billion or 156 basis points of capital organically, confirming it as a quality earnings powerhouse.

Our client and community remained at the heart of our operation. As we rolled out the third iteration of UniCredit per l'Italia ’ to support individuals and SMEs in navigating the continued challenging external environment.

With the recent flooding in the Centros region, UniCredit provided a program of financial support and flex for individual small businesses as well as providing financial and practical help for people. The full benefit of the investment in UniCredit University became more apparent this year, increasing its access to training and upskilling for our people. The university also played a critical part on the landmark agreement with the Italian unions, which sold 600 employees moving into a bespoke reskilling and redeployment program.

Germany, Germany remains an anchor country for UniCredit and have once again surpassed expectations delivering its best 9 months and third quarter profit in over a decade. These results are thanks to continued discipline in improving the quality and profitability of our top line and the increased efficiency of our operations. These factors undercover strength of this franchise both within Swiss country and as a core contributor to UniCredit.

Net revenue were slightly down 1% in the 9 months as strong fees only partially compensated for a slight higher cost of risk. The quarter was up 6%. NII was down 5% in the 9 months, driven by higher funding costs in client risk management. The quarter was up 7% as this trend started reversing.

Cost of risk was marginally up in the 9 months to 19 basis points, driven by 2 large corporate default in Q1 and Q2, mitigated by a prudent coverage ratio. Q3 was back to trend line at 16 basis points.

Fees were up 2% in the 9 months, accelerating to 7% year-on-year, driven by investment, financing and payments of a strong base.

Operational efficiency continued to improve with costs down 7% in the 9 months and 9% in the quarter. This led to a cost/income ratio of 39.4% in the 9 months.

Our capital efficiency improved further with net revenue over RWA increasing 0.8 percentage point to 8% in the 9 months.

Profit before tax rose 17.5% in the 9 months to EUR 2.3 billion and up 17% on a year-on-year basis, RoAC reached 22%. Germany generated EUR 2.3 billion or 82 basis points of capital organically in the 9 months.

Germany continued to deliver on its commitment to investing in its business with a particular focus on the network. Training and upskilling was rolled out for 1,300 employees, enabling us to retain our talent, providing the opportunity for our people to broaden their skill set and adapt to a new role in our private and corporate banking divisions.

Germany was this year named top employer in Germany and was instrumental in UniCredit being the first bank in Europe to achieve a Global Edge Certificate. It picked up 7 Euromoney awards for its performance across all of its key markets.

Central Europe continues to be a dynamic region, delivering resilient growth and continuing to improve operational and capital excellence. Net revenue were up 3% in the 9 months reaching EUR 3.3 billion, driven by strong fees and resilient NII while slightly down in the quarter due to lower rates and higher deposit pass-through. NII was up 1% in the 9 months, remaining resilient amidst a declining rates environment.

The quarter was down 8.5% year-on-year due to lower rates higher deposit pass-through, particularly in Austria and Hungary and a time delay in repricing savings account in Austria that shall be reversed in at a later date. Cost of risk had net reversal of 4 basis points in the 9 months due to write-backs in Q1 and Q2 while at 0 basis points for the quarter. Fees were up an impressive 10% in the 9 months, thanks to strong investment services and a large advisory mandate in check-in Q2. Excluding such mandate, fees were up 8%.

As with all our markets, the striving for operational excellence continued with cost slightly decreasing in the quarter and growing by only 1% in the 9 months. Cost/income ratio reduced yet again by 1 percentage point to 36.5% in the 9 months, reaching 36.6% in the quarter.

Our focus on capital efficiency led to an increase in our net revenue to RWA of 0.3 percentage points to 7.4%. Pretax profit rose 9% in the 9 months to -- in excess of EUR 1.9 billion, resulting in a RoAC of 24%. The region generated record EUR 1.7 billion or 61 basis points of capital organically in the 9 months.

As the core growth engine of a group within our 13 markets, Eastern Europe delivered again across all revenue streams. Net revenues were up 14%, reaching EUR 2.2 billion in the 9 months with flat performance in the quarter due to LLP normalization. NII was up 11% in the 9 months, driven by strong commercial growth with a quarter plus 2% year-over-year with strong business growth across the region and good path-through control compensated for rate reductions.

Cost of risk had a net reversal of 34 basis points in 9 months due to Q1 and Q2 write-backs. Q3 cost of risk moved towards trend line at 12 basis points as most of our write-backs reduced.

Fees were up 10% in the 9 months with a quarter up 5% year-over-year, driven by positive momentum across all categories and supported mainly by client hedging fees and payments.

As with all our market, operational excellence remain a focus, balanced with investment in our business, people and technology. This commitment saw cost increased just 3.5% in the 9 months and in the quarter, offsetting most of the region high inflation due to wage drift.

Cost/income ratio reduced yet again to 30.3% in the 9 months. And our focus on capital efficiency further increased our net revenue to RWA by 0.3 percentage points to 9.8%.

Pretax profit rose 20% in the 9 months to EUR 1.5 billion with flat performance in the quarter due to LLP's normalization, resulting in a RoAC just below 40%.

As with all our markets, our banks across the CEE remain focused on supporting those communities within which they operate with Austria, along with Czech and Slovakia, providing emergency aid packages for those sadly impacted by the recent flooding.

Our cross-market partnership with Teach for All and Junior Achievement Europe continue to receive both financial and practical support from the teams on the ground. Internally, our next generation of employees were supported through bespoke peer-to-peer training for junior and digital skill training at all levels to ensure advanced skills and tools to thrive in a digital era.

Our strategy in Russia has been to work towards an orderly sold and wind down as quickly as possible, always within both the letter and the spirit of complex legal, regulatory and sanction limitation. Last quarter, we communicated our targets for full year 2025. We have already nearly met them. Local deposits are down 27% this quarter and 77% since Q1 2022 from EUR 8.3 billion to EUR 1.9 billion, already below our 2025 target.

Local loans are down 31% this quarter and 78% since Q1 '22 from EUR 7.3 billion to EUR 1.6 billion, closing on our below EUR 1 billion target for 2025. Cross-border exposure remained flat this quarter as most of the position will mature next year. Since Q1 2022, we are down 95% from EUR 4.5 billion to EUR 300 million whilst minimizing our loss to 11% of principal. Cross-border payments are down 19% this quarter and 64% since Q1 '22 from EUR 25.3 billion to EUR 9 billion, almost at our 2025 target. Cross-border payments are now strongly concentrated in U.S. dollar cleared by JPMorgan and Europe cleared by us. Our Europe payment volumes, which account for under 1/3 of the total, were almost 55% between Western multinationals and socially oriented companies.

We have reduced the capital impact of a full write-down of Russia from circa 130 basis points on a 14% CET1 ratio in Q1 2022 to circa 50 basis points on a 16.1% CET1 ratio today. Given the progress made, we will review further next steps regarding Russia, and we'll communicate them in due course.

Turning to our product factories. We see strong performance across the board. Client Solutions revenue grew by 8% in the 9 months to EUR 8.6 billion, 2/3 are fees, growing at the same pace and well balanced across all our factories. Corporate Solutions revenues rose by 7% to EUR 4.1 billion in the 9 months, driven by advisory and financing up 6%, 18%, excluding securitization costs and CRM up 11%.

Payment Solutions rose by 4% to EUR 2 billion, driven by payments up 9%. Individual Solutions rose by 13% to EUR 2.5 billion, driven by investments, up 17%.

One market grew to EUR 11.6 billion AUM, also supported by the Azimut partnership in Italy, confirming the attractiveness for clients of our offering.

Our transformation has led to remarkable results. We have focused on superior quality top line growth, coupled with best-in-class operational and capital efficiency, resulting in best-in-class profitability and distribution. By making this our focus, we have registered the highest NII RoAC at 20%, almost double the peer average.

Our stated fees and insurance income growth for full year '21 to the first half of '24 was an impressive 24%, 5 points higher than the peer average. Additionally, our fees to revenue ratio for the same period was 34%, 7 points higher than our peers.

We have reduced our cost/income ratio to 36%, 15 points below the peer average. We have improved our net revenue to RWA ratio to 9%, 2 points above our peers.

Delivering on our 3 levers has led to superior profitability and distribution. Our return on tangible equity at 13% CET1 ratio was over 23%, 10 points higher than the peer average. Our distribution yield at circa 14% is 5 percentage points higher than our peer average.

As the industry faces headwinds UniCredit stands ready to reveal its true differential value, qualities that were previously masked by a favorable market environment. We acknowledge the challenges at NII headwinds, inflationary pressure on cost, cost of risk normalization, compression of Russia and digital evolution, but we are confident in our ability to leverage our unique levers to overcome them.

Differently from 4 years ago, we start from a leadership position in terms of performance. We know our strengths, our geographic client and product mix, but we have been able to unify and leverage as 1 group. Powering this are several accelerator the transformation initiatives in flight, our lines of defense and our strategic flexibility. Finally, we have a quality growth trajectory, which is relentlessly executed by people proven to be able to deliver alpha.

Our unique geographical reach is one of our structural strengths providing us with a diversified presence across 13 European markets, where 1 federation of individually empowered banks all executing independently while leveraging significant cross-border flows.

Simplifying, 41% of our net profit comes from Italy, a quality earnings powerhouse that combines a fee to revenue ratio in excess of 40%, pro forma for insurance internalization and increasingly profitable NII with outstanding operational and capital efficiency.

The next 30% comes from Germany and Austria, both highly rated economy that act as anchors of resiliency for the group and that are well advanced in an operational efficiency and greater client-focused turnaround. The final 29% comes from Central and Eastern Europe, our proven engine for profitable growth, all within Europe, which increasingly puts our group's growth expectation at a premium to the peer group. We have the perfect combination of highly capital-generative and resilient regions balance with dynamically growing ones all truly coming together in 1 group. This allows us to benefit from our global product offering, procurement and technology infrastructure at scale, further enhancing our competitive edge. This has enabled us to occupy a dominant position across Europe with their individual leading position in each country, all significantly beating their cost of equity and connecting clients across Europe like no other.

Our client franchise and product mix are core to our quality growth strategy. While we maintain our focus on large corporates and mass market individual, we have been decisively tilting our client mix towards SMEs and private and affluent individuals. We have also been building our factories to provide our clients with a broader array of products and services that they require. This strategy has been successful as demonstrated by our gaining market share in payments, in investments, in insurance, in consumer finance and in trade finance.

In parallel, we continue to enhance our distribution model towards a fully integrated distribution offering that combines digital innovation with personalized human interaction in various forms. This is at the origin of the work we have done on call centers, digital branch with body, physical brands and Internet and mobile.

Last but not least, we're investing in our people some of the best in the industry, retraining them were necessary at the UniCredit University and providing them with a product distribution channel and tool such as new risk models and clients data that they need.

Whilst we have transformed into an industry leader focusing on delivering quality growth, we still have unique accelerators to propel us further. We're making transformative investment that will drive our progress and ensure we remain at the forefront of our industry. Our lines of defense are strong and ready to protect or propel our continued growth and success. Strategic investment remain a potential accelerated, helping us to achieve our goals faster, more efficiently and effectively. We're committed to making this investment but always within our strict investment criteria.

UniCredit has invested in Commerzbank because we believe it can be a much better and stronger bank, particularly in and for Germany, better and stronger for its people, for its customers and for its communities. This is true stand-alone where most of the potential improvement lies and even more so as a combined entity with HVB.

As an industrial investor that has successfully overcome the same challenges, our aim is to see Commerzbank unlock its significant unrealized potential.

Indeed, as we all know, having potential on paper is not the same as crystallizing it. UniCredit Unlocked and indeed HVB Unlocked is a blueprint of what can be done, but we are open to alternative solution and await these being outlined at Commerzbank Investor Day.

As a possible additional trend, the combination of Commerzbank and HVB could generate even greater value and opportunities for all employees, clients and communities. But as we said before, this will depend on the outcome of engagement with Commerzbank, its management Supervisory Board as well as its wider stakeholders in Germany.

A combination could offer Germany, a bank operated by a fully empowered German legal entity but could more effectively compete in its home market and beyond. It will also insert mBank and Poland within the broader UniCredit franchise, both in the CEE and Europe as a whole. mBank would be provided with a capital product and services and indeed, client connection across our 13 countries, plus 1, to accelerate its growth and achieve its full potential. For UniCredit, such a combination would further transform the group and accelerate its path to become the bank for Europe's future whilst crystallizing significant additional value creation to our base case.

Italy, Germany, Austria and Central and Eastern Europe would have a balanced contribution to the group and set its direction, strategy and ambition for the future that they would then be fully empowered to individually achieve.

Above and beyond what I just said, I would like to highlight a number of facts with respect to the 2 banks that support our strongly held views. HVB and Commerzbank, excluding mBank and the opaque assets held at Corporate Center are mirror images of each other. They are identical in many ways, but also highly complementary, our respective geographic presence makes us a perfect match.

HVB covers mainly the Southern and the Northern part of the country, while Commerzbank is mostly present elsewhere in Germany.

In corporate, we're all about the same. We both cover large corporate as do many other banks, most Europeans through branches or U.S. banks. Whilst the combined institution would have the scale, product and services to better support large corporates in Germany, it is the Mittelstand clients who would benefit most from a combination. We would be able to provide deeper and broader support and services to these companies who are at the heart of so many German communities and are the life blood of the economy. Commerzbank Mittelstand client could gain access to our market-leading suite of products and more comprehensive financing solution, boosting their opportunity for growth domestically and internationally. Combined with our enhanced technology offering, we have the potential to become a larger, more profitable one-stop shop of a Mittelstand in Germany across Europe and beyond.

On the retail side, Commerzbank revenues are 2.1x HVBs, although HVB has 4x the revenue per retail client, both because of mix and because it can rely on our group product factories. The 2 banks are commentary geographically and by client segment with HVB more focused on private wells and affluent.

The larger weight of retail in Commerzbank Germany operation would nicely balance HVB higher weight of corporate. Having now addressed the point on similarity and complementarity of the 2 franchises that would support a potential combination with minimal impact on its client and frontline employees, let me now address with facts some of the other concerns that have been raised around this potential combination.

Let's start with risk, both of protection of deposit and in terms of financial strength. Far from being a concern, in the unlikely situation where deposit protection would be needed, HVB deposits are insured by the same German government deposit scheme as Commerzbank. In fact, during the crisis, HVB and UniCredit, at group level continued to function without any need for government support, maintaining an orderly service to our clients. In addition, clients of both banks benefited from additional protection of Penny Capital and other resources, which are greater in the case of HVB, both stand-alone and relying on UniCredit Group. Indeed, both HVB and UniCredit have a greater Common equity Tier 1 ratio than Commerzbank. Above 23% and 16%, respectively, Commerzbank stands at 14.8%. This is further underpinned by a far greater level of profitability and efficiency UniCredit Group and HVB versus Commerzbank.

This brings us to ratings. At group level, UniCredit has recorded a consistently steady improvement in its ratings, with Fitch only last week, raising again the rating of UniCredit to 1 notch above Italy's on par to Commerzbank. At HVB local legal entity level, the relative comparator to Commerzbank, but 2 banks are practically on par as underscored by very similar cost of funding in Germany.

Finally, Moody's has already indicated that a merger far from leading to a rating downgrade could warrant a rating increase at the parent company level benefit all banks. And as it relates to concern for stakeholders, we take pride in the investment we make in our employees and the commitment we have made to reskilling and retraining all colleagues to ensure that they can grow and develop in line with our industry. Where efficiency had been -- have to be looked at the challenging yet constructive dialogue that we have with employees representative have resulted in outcome but have worked well for all those involved. And to our clients and the notion of overlap, far from being duplication, HVB and Commerzbank are highly complementary, so concentration should not be an issue. This client commitment is reflected in the federal nature of our business were to be clear with day-to-day running and decision making for Germany occurs in Germany, and it could not be otherwise given regulation.

This is also consistent with UniCredit Unlocked and our approach to empowerment of those closest to the client or the matter at hand as opposed to those at the center. Our shareholders have benefited from 15 quarters of consistent growth and financial rewards repaying us with their long-term and often vocal support. Any discussion around current investment and future option must be underpinned by facts rather than unsubstantiated views and opinion, hence, the need for this clarification.

If we now go back to the symmetry already outlined, all stakeholders should be able to compare relative performance of Commerzbank Germany, ex corporate center in HVB and HVB like-for-like, based on simple KPIs even before discussing the benefit of a potential combination.

Let me now go through a comparison of the operating performance of the 2 banks in Germany as this is the real crux of the issue. If we take as reference, the 2021 first half to first half '24 period, but so both UniCredit and Commerzbank deliver on their respective plans, the performance of both banks in Germany speaks for itself. HVB delivered much greater revenue growth mostly driven by fees achieved with much greater capital and cost efficiency. These all Visa led to twice the net profit growth and RoAC of Commerzbank, notwithstanding Commerzbank benefiting to a much higher degree from the positive rate environment given the greater weighting to retail. As such, HVB has been able to distribute its yearly net profit in 2022 and 2023 while increasing its CET1 to circa 24% as of the third quarter of '24. While Commerzbank has debuted on average over the same period, only 40% of its net profit, reaching a CET1 of 14.8%. There is no reason why Commerzbank in Germany should not have the ambition to at least match what has been achieved by HVB, which is still progressing further as a result of today demonstrate.

Our investment in Commerzbank is both strategically and financially justified given what I have just taken you through. The potential to generate substantial value for both institutions is there. The question remains whether it shall be unlocked by Commerzbank alone, through a combination or not at all. We have purposely structured our investment to provide us with optionality to either benefit from the crystallization of Commerzbank potential or to exit with protected downside for our shareholders' benefit.

We have clear managerial action that will allow us to offset the headwinds from the normalization of the environment and the compression of Russia to eventually secure sustainable quality growth. Our aim is to further strengthen the unparalleled quality and profitable mix of our top line, increasing our fee base to 40% of total revenue while keeping NII RoAC well above our internal cost of equity. To achieve this, we will continue our client and product mix shift, further leverage our product factories and better integrate them with our front lines. The internalization of insurance and retention of the asset management value chain will provide a further boost. We are committed to operational excellence while investing in business optimization. Our replicating strategy and quality approach will help us benefit from lower sensitivity to rates. We will maintain a cost of risk at 20 to 25 basis points over the cycle, also leveraging overlays.

Our financial projection mean we are confident in upgrading our 2024 guidance. If we compare our performance like-for-like with our guidance at the beginning of 2024, so excluding integration and average charges and investment, we currently expect our net profit to be around EUR 10 billion, with NII more or less flat year-over-year. Like-for-like, this is more than EUR 500 million higher than 2023. That said, we anticipate closing the year with a net profit above EUR 9 billion. Although the ultimate number depends on our decision on integration and other charges, integration charges are expected to exceed EUR 500 million.

There is much discussion as to the impact on the bottom line of European banking sector due to the much lower rate environment and higher cost of risk. For us, there is also the compression from Russia to be considered. As a result of our unique levers, fee and geographical diversification and the decisive action taken over recent years, we are confident that we will maintain a run rate of at least EUR 9 billion in each of '25 and '26 million. For now, that is a strong ambition of the people of UniCredit. This is a testament to how well our underlying business is performing.

We expect costs to remain broadly flat in the next couple of years, on the same perimeter. The perimeter as such, will change as we internalize life insurance, complete the merger in Romania and integrate Aion/Vodeno. And therefore, group fixed cost will increase, all with no impact on the net profit guidance for '25 and '26.

We're increasing our return on tangible equity ambition to circa 17% and are looking to continued EPS and DPS strong growth. Annual average distribution for 2025 and 2026 of greater event for 2024 means that our shareholders will continue to be rewarded handsomely.

We also have recently announced that we will increase the dividend accrual from next year to 50% of net profit from 40% as a sign of our confidence in the sustainability of our financial performance. And we remain with EUR 6.5 billion of excess capital, which will -- we will return or deploy strictly within our metrics by 2027 latest.

The investment case for UniCredit remains exciting and compelling. To conclude, I will leave you with 5 key reflection on today's results. Today's number reflects the output of a fully transformed bank, one that has moved away from retrenchment and is industry-leading across all KPIs. These results prove the success of our UniCredit Unlocked strategy and usher in a new era of quality growth.

Two, these are record results. We are best ever with our best ever Q3 and 9 months results marking 15 consecutive quarter of profitable growth with improvement across all key metrics. We have upgraded our guidance for '24 given we are operating on a completely new run rate compared to '21. Our net profit is 5x higher, a return on tangible 3x. Our organic capital generation over 2x, supporting our distribution that are more than 2x higher.

This new era of sustainable quality growth will be powered by conditions that are unique to our bank. We start from a position of strength, and our structural strengths as a pan-European group are accelerated such as a strategic investment in Vodeno and Commerzbank and our clear growth trajectory will support that quality growth.

Structural strengths include unique geographic, client and product mix underpinned by empowered countries, leveraging group scale and scope. Idiosyncratic accelerated, defined by our continued transformation initiatives our line of defense release and strategic flexibility, which has allowed us to invest in Vodeno, Romania and Commerzbank. And our clear growth trajectory executed by people passionate about our business, proven repeatedly to be able to deliver alpha.

Finally, thanks to our new run rate and the investment we are making, we have great confidence in meeting our '25 and '26 ambition.

Thank you, everyone. Let's move to questions.

[Operator]

[Operator Instructions]

The first question is from Antonio Reale, Bank of America.

[Antonio Reale, analyst]

It's Antonio from Bank of America. I have two questions, please. The first one on the NII outlook and secondly, on the strategic investment in Commerzbank. So you've increased revenue guidance for this year, and I suspect was mainly driven by NII, though I haven't seen reference to guidance on NII or next. Now Russia has been growing still deposit remuneration has been stable. Italy and Germany have had a strong quarter and you still have tailwinds from the replicating portfolio. Can you maybe just talk us through your expectation for NII into 2025, please? That's my first question.

The second question is on the investment. You bought a stake that gives you optionality. I think you've said that clearly, this may or may not lead to a deal. I think in your remarks this morning to the media, you've also talked about this being a long process, and you've cautioned it will take time, and you want to convince Commerzbank stakeholders that M&A can create value, sort of implying that not all of the stakeholders are on the same page.

Now we're talking about an intra-market deal, and I think it's important not just for unique and commencement but for Europe as a whole in terms of signaling. So, my question for you is what hurdles do you think we still need to come for this to move forward, given that I suspect by now, you've engaged with all the key stakeholders.

[Andrea Orcel, executive]

Okay. So let me take NII first. So we expect a moderate reduction of NII next year. And this will -- this should be partially offset by fees but we confirmed that next year bottom line will not budge or beat this year. So there are a number of other dynamics in the P&L that will allow us to do that.

With respect to Commerzbank, this started as an investment and is an investment today and nothing else. So we are the largest investor in Commerzbank today. And as such, we are positive and excited that Commerzbank is now setting a course to improve its performance.

With respect to anything else, like in any of the situation, there will need to be a discussion with all the stakeholders at Commerzbank or around Commerzbank before we move any further. If you look at the time line, the time line is, by definition, longer than many people have been considering but has a limit at some point, given that we cannot be invested forever without taking a decision of in or out. But I would not look at that decision being taken before a year from now.

[Operator]

The next question is from Delphine Lee, JPMorgan.

[Delphine Lee, analyst]

Yes. So I got two as well. First of all, just to come back again, sorry, on Commerzbank. Would you rather consider going hostile? And do you see German trade union that confine as a hurdle to delivering cost synergies? And what concessions do you think you have to offer, to get them on board? And then, sorry, just to clarify on the NII also could just mention on the modest reduction. What rate assumptions do you make for next year? And if we're looking at 2% on average ECB rates for next year, can you provide just like where you think the offset is on the sensitivity to rates? What else can you highlight to help us understand why that resilience on NII?

[Andrea Orcel, executive]

Okay, Delphine, I'll take Commerzbank and then Stefano will take on the NII. So on Commerzbank, I think the definition of hostility is a matter of exactly that definition. So I think there are a number of stakeholders that are critical to the success of the transaction. First and foremost, the employee representatives in Germany, but also Germany institution, German clients, German public opinion. So it takes time for the facts to sink. And for all of these constituencies to being able to discuss openly what a transaction would mean. And therefore, it's very premature to discuss anything about that.

There isn't anything on the table at the moment. There never was. At the moment, what there is, is an investor that has bought 21% and is very keen that, that investment yields positively to us. But the process of engaging with all the key stakeholders will take some time.

At the end of that period or of that time, we will assess where we are. And as a function of that, we will take a decision as to whether we will do something more or stay as we are or sell out.

[Stefano Porro, executive]

So that net interest income. So '24 will be more or less in line with 2023. Average your LIBOR for the year is 3.6% under our assumption. In relation to the EURIBOR assumption for next year, we are expecting, first of all, deposit facility rate, let's say, around 3% this year, so end of '24, going around 2% at the end of 2025. All in all, we are expecting that the average Euribor next year will be below 2.5%. You can assume on average between 2.2% and 2.3%.

In relation to the commercial trend, we're expecting all in all, stability of volumes, both on loans and deposit side with a slight increase in the credit spread. So we have already experienced during this quarter, an increase in the credit spread. We are also expecting a slight increase in the credit spread next year. Just a reminder, 1 basis point increase in the credit spread for us is around EUR 40 million more net interest income.

In relation to Russia, due to the compression but also a different assumption in relation to rates, we are expecting a few hundreds less of -- few hundreds million less of contribution from Russia next year.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

I've got two. First one is on Germany. I think you've seen it like a 20% increase of the NPL number in this quarter. There doesn't seem to be any impact on provisions. So just understanding basically why that is? And how concerned actually might you be about German asset quality continuing to deteriorate?

And the second one, actually, if you can give us a little bit more information about the impact on capital this quarter from the different transactions and how much pending impact are you expecting from each of them in Q4.

[Stefano Porro, executive]

So Germany, first of all, important to take into consideration that German asset quality and also default rate this quarter has been impacted by a big ticket. We experienced in the 9 months, the impact that having from a couple of big tickets. The overall risk of Germany in the quarter was around 60 basis points.

When we look to the full trade, the full rate was above 1 including this effect of this ticket, so it was around 1.4. But indeed, if you are taking consideration the full trade year-to-date, adjusted for these big tickets, that's our large corporate the full trade is below 1. So it's 0.7. So in a way, is in line with the same of last year. And so this is confirming that overall, the performance of the portfolio is not deteriorating. So we are not seeing such deterioration.

Like, let's say, in other countries, we do have overlays in Germany as well. The overall stock overlays is remaining flat at the end of this quarter to around EUR 1.7 billion.

In relation to the impact that having from strategic transactions. So I will start from this quarter. So in this quarter, we had around 26 basis points in terms of impact that having from strategic transactions. Slightly more than 10 basis point is connected with Commerzbank, around 15 basis point is connected to the commitment that we have to purchase. Aion/Vodeno, Allianz Life in Italy and Alpha in Romania. We will have further impacts from this acquisition in Q4 and during the course of '25.

In Q4, such an impact can arrive up to 30 basis points, 3-0. There have been fundamentally from the finalization of Alpha in Romania and from Aion/Vodeno. Aion/Vodeno cana also across the year, but currently, we are assuming to have the impact by year-end.

Next year, we will have the finalization of the internalization of the insurance. We will have -- until the full application of the Danish compromise, a further impact of around 20 basis points to 0, that will be completely offset by the application of the Danish Compromise.

[Operator]

The next question is from Chris Hallam Goldman Sachs.

[Chris Hallam, analyst]

So two quick questions from me. So the first one, more broadly, if we were to see tariffs imposed on European exports, how would that impact the outlook for your corporate clients, both in terms of credit cost, but also loan demand?

And then second, on asset productivity, how would you expect the revenue to RWA picture to evolve in Italy over the next 12 months? Clearly, the progress there has been very strong. But as you start to absorb the impact of falling rates, are there some other levers you can pull to limit the decline in asset productivity. And perhaps how do you think that picture? Will the picture on that topic more broadly compares to your peers in Italy, you may be a bit more focused on revenues versus asset productivity itself?

[Stefano Porro, executive]

So I will start from the second. So in relation to the impacts from rates that are having -- so -- and the effect on profitability for sure, there will be an impact, but let's consider the impact they're having from the strategy. So the strategy is assuming a further increase in fees for the group, but for it as well, coped with a lending that is a profitable lending. So we have commented more than once the net interest income return on the capital. So we will have an impact in Italy, deriving from the Euribor reduction. All in all, this will impact net interest income. However, we're expecting to have revenue to risk-weighted asset average above 9% also from 2025 onwards.

In relation to the lending trends and also the explanation of the lending trend for the future, what -- let's start from this quarter. So this quarter, the average loan stock was down around EUR 3 billion. More specifically, a part of that was Russia. So EUR 700 million of that was Russia, we grew more than 1 in Eastern Europe, and we had a reduction in Germany and in Italy. The reduction is mainly on the corporate side, and the phenomenon is also different in compared to what we experienced in the first part of the year.

The expectation is connected to the level of the rates and the GDP in the sense that on the level of the rates we have already commented before, that's positive for the lending. The GDP in the Western Europe countries, we believe, will be around 1. So all in all, we are expecting stability in the stock of lending with demand growing up, especially on the short term. and progressively our in '25 or so in the medium, long term, we will grow in Central and Eastern Europe, where we are expecting more stability in terms of dynamic of the stock in Italy and Germany.

The improvement in the demand for credit, we will believe it will be progressive. So it will not be sharp immediately after the reduction of the rate, but it will be progressive during the course of '25.

[Operator]

The next question is from Andrea Filtri, Mediobanca.

[Andrea Filtri, analyst]

Yes. We noticed a very strong NII in Germany this quarter. I just wondered if there are any recurring -- nonrecurring items that you can flag to us. Secondly, could you tell us when you envisage to obtain full FICO status? And what do you think about the option of the Danish Compromise square, i.e, leaving good reduction at the insurance unit when acquiring companies above book value be the insurance unit?

Finally, just a clarification, [indiscernible]. When we said before about timing on a divisional Commerzbank, was it within 1 year or not before 1 year?

[Stefano Porro, executive]

So we start from Germany net interest income in the quarter. So first of all, there was a positive effect around EUR 40 million, just slightly less than that. That was negative for Germany -- was positive for Germany, negative from the Group Corporate Center because we started transferring a part of the trading-related activity from Germany to the parent company. So this is around EUR 40 million. Then there is close to EUR 10 million effect deriving from some write-backs on nonperforming loans that positively impacted the quarter. However, I have to say that there was also a positive trend from the commercial perspective, especially when we are looking to the pricing. So if we look at the average credit spread of the loan book in Germany, there was an increase of around 3 basis points quarter-on-quarter that as a consequence, positively impact to the net interest income.

[Andrea Orcel, executive]

With respect to Danish compromise, I think I was wrong once, and you were right, Andre in the past. So -- but I will give you my opinion on the Danish compromise squared. I think that the Danish compromise is, let's say, an arbitrage. And I do think that for -- if it's abuse too much, it's going to reviewed. So my view is there are some things where we could argue that the RWA density is excessive, et cetera. This is one where we have an advantage, and it all balances. But if it becomes too much, I think we can see repercussion. That would be my view of it.

So we are internalizing insurance, bank insurance activities. They have a certain dynamic. And within the broader risk profile of the group, it works. I think if that starts becoming excessive, we may have regulators taking a different position on it. But this is just a perception for me.

With respect to Germany, definitely within 1 year.

[Operator]

The next question from Marco Nicolai, Jefferies.

[Marco Nicolai, analyst]

First question on capital distribution. In case you decided to go for a full acquisition of commerce, do you think you will be always able to maintain the above EUR 8.6 billion distribution guidance also in the year of the integration or not? And related to this, do you think that the combined bank requires lower -- higher common equity Tier 1 target compared to the 12.5%, 13% you referred before?

And a question on commission income. So year-on-year growth remains pretty strong, close to 9%. So how do you see this trend in the coming quarters and in the coming years? And also this quarter, you had quite a bit of support from client hedging fees. And how recurring is this type of income?

[Stefano Porro, executive]

So we start from fees. So effectively, in the quarter, we had double-digit growth in many categories. So including the client hedging one. So on the investment side, on financing and advisory side and also on the client hedging fee. All in all, in the client hedging fee, I have to say that apart from some volatility deriving from some specific moment or some quarters, all in all we're able to generate a pretty, let's say, resilient stock of fees over time.

In relation to the dynamic in future, we are expecting that a part, the volatility we're having from the market and the rebalancing of the portfolio by the clients that will affect the investment fees. If you look at the investment fees and the gross sales this year, on average, we have done by quarter, around EUR 13 billion of gross sales in every quarter, right? So quarter 1, quarter 2, quarter 3. I don't believe that we can have repetition of that, let's say, every year. Having said that, the stock of the assets under management will grow and so the asset under management fee will grow up.

In relation to the other component, we are expecting a contribution from advisory financing also during the course of '25 and '26 in. And the client hedging fees, as I told you, apart from general effect, I mean, from volatility, we believe that, thanks to increasing the perimeter coverage of the clients, we can also assume a growth rate in '25 in relation to the specific items. Having said that, we believe that there are items like non-life insurance and payments that can generate a higher growth in comparison to client agency.

[Andrea Orcel, executive]

Let me take the other two. So capital. A few things. One, my conviction is that you don't make profitability and distribution by leveraging your capital. So you will always have us as on the conservative end of the capital in terms of CET1. Then to consideration, however, the first consideration is Basel IV. The, most of our Basel IV impact is operational risk. But if you think about it, we have the same operational risk today that we will have next year and the years after that. The operational risk today is evaluated through advanced models and through a historic series that put it quite low. It is -- if I may, artificial that it gets boosted so much in a standardized way, it doesn't differentiate between institution. So like-for-like, my 12.5, 13 should be 60, 70 basis points lower. We're not doing that, but just for you to understand how we think about it.

With respect to a larger acquisition, again, we would not leverage ourselves to do an acquisition. Over time, we need to look at what is the right capital for the business. And we note that some competitors are at 12 or just at 12, some others are 12.5. We have not had to address that issue because we've been so much higher than we were targeting. But I think these are all considerations. But the pressure of we need to get to a certain profitability or we need to get to certain distribution, therefore, we take capital down and we leverage is not going to be one that we do.

On distributions, first of all, there is no deal on the table. Second of all, quite difficult to have a crystal ball of what the deal could be. I would go with principles, which usually are more binding than the numbers. We're very committed to rewarding our shareholders. We understand that the level of distribution is a key driver. And whatever we do should be viewed in a way that within a realistic period of time, our distribution, on a per share basis, go up, not down, because otherwise, as we all went through school in finance, why would we do that, the cash flows or the dividends decline, okay? It would be a destruction of value.

So we're very committed to giving a best-in-class distribution to our shareholders. But best-in-class distribution was mostly share buyback in the first 3 years of activity because we viewed so much on express value in our shares that, in my opinion, it was a no-brainer. As we move up and the rate of growth is less, we have gradually tilted towards cash dividends because it is probably better reflective of a sustainable growth path that we want to have going forward. And that concept will remain.

Now to answer your question more directly, we will do everything we can do to not dilute -- well, firstly, we acquisition, our dividend payout does not move. It's 50%. It stays 50%. Secondly, we will do everything we can to maintain the dividend per share to at least equal to what we have before the acquisition, but does not mean we will succeed in year 1, but we're very, very confident we can do that or better in year 2 and beyond.

Thirdly, with respect to share buyback, I'll give you an alternative interpretation. Until today, we've done share buybacks. Why? We've done share buybacks to reduce the share count under the attractive rate and propel further the EPS and the DPS going forward, right? So we've done that to inject more growth into our EPS and our DPS. But there is an alternative view of things. I could keep the share count stable and increase further my EPS and DPS by having more earnings and more dividends.

An acquisition is the use of my excess capital and to a certain extent, it could also be the use of some of the share buyback at the initial point. To buy more earnings, we generate more dividend and therefore propel my EPS and DPS. So it's just an alternative few of things.

When we stabilize -- let's take it like that. And I tell people that if they talk to me about 5 years or whatever, I'm not listening for me stabilize is year 2 onwards. The first year is always a little bit like that. When we stabilize, our philosophy of distributions should not move a lot, which means we will have distribution that are a high percentage of net income generated in which mix, well, we will see what is the, what is best for our shareholders. Is it 50% cash dividend and 50% share buyback? Is it 60% cash dividend and 40% share buyback? I cannot say today it's too much speculation.

But I think if you look at the principal I know and the management team and the Board know full well that we have a distribution policy. It needs to be defended. And if we find a way to strengthen the bank, grow the bank, and improve the distribution policy a little bit later by taking maybe a little bit of uncertainty in the year 1, that is something we can do. If it takes more than that, this touches on our strict criteria of investment, and we will not do that. And I hope that, that answers your question.

[Operator]

The next question is from Azzurra Guelfi, Citi.

[Azzurra Guelfi, analyst]

One quick question on your organic capital generation. You continue quarter-after-quarter to surprise us on the strength of this, which is linked to your profitability but also to the capital efficiency measure. I read the comment about supported by organic capital generation [indiscernible] ambition for '25 and '26. Can you give us a little bit of color on what this organic capital generation could be look like also in light of the fact that maybe there could be some lending growth?

[Andrea Orcel, executive]

So I will give you a broad picture, and I'm sure Stefano will add. So organic capital generation, the organic capital generation comes from 2 sources. One is, let's call it, commercial or current, and that is the earnings quality. If I go for volume in NII, I will now have a lot of capital generation. If I have more fee to revenue, I will have a lot of capital generation.

So what we have done in these last 4 years is to improve the profitability of NII to prepare for the time when due to rates decline and cost of risk increase, NII will be contributing less to our profitability because, obviously, we will be making a lower margin in general. And we have also done that by continuously increase our fees because fees have a one-to-one capital generation. That's the commercial one.

The commercial one will slightly tilt in the future. On the one hand, you're going to have the exact mirror image of what you've had in the last 4 years. In these last 4 years, most European banks have had declining volume increasing margin that is paradise for capital generation. As rates go down, you're going to have increasing volume and decreasing margin. This is how it goes exactly in the opposite direction, i.e., in order to maintain to do more volume to do more volume, you're consuming more capital. Well, we come from we're declining, so we consume less capital, but the margin is carrying the revenue to RWAs. So every bank will have pressure on revenue to RWAs going forward.

we think that, that pressure we can minimize by the mix of clients and products. So moving the mix of products towards consumer, away from mortgages, allows us to have more insulation in the margin, which allows us to be less hit by a compression of margins that would happen later. So we've worked on that on one side. On the fees, obviously, the more fees you have as a total of revenue, those are capital neutral and those generate 1:1. So this is the commercial on how you do it.

So if you look at the commercial for the next 3 years, the overall revenue making $1 of revenue or EUR 1 revenue, it will generate less capital organically than what it has generated in the 3 years. That's true from everybody. Our job is to minimize that class.

Then there is another driver. The other driver was that we had was that in 2021, we had a very inefficient portfolio of lending and usage of capital. And over the last 4 years, we have made it more and more and more and more efficient. So now I would say that most of our lending book is adjusted for risk above the cost of equity, I would say, probably 70%, 75% of it. Can we take it to 80%, 85%? Yes. Can we take it to 100? No. It's never the case because you will have decision on I'll do this loan to this client is below my cost of equity, but I'll give in 3 years to mature because I want the growth, et cetera.

So the advantage we have been crystallizing through that is going to run to 0. When will it run to 0? Well, it depends, but we think that by the end of '25, we're probably done with that. So that extra boost that has allowed us to do something that seems to defy gravity, i.e., to generate more capital than our net income is going to converge down from '26 onward.

However, because there is always a however, Stefano will also give you a view on infamous DTAs, which are going to be capital positive from sometime in '26 over the next 2 or 3 years. And so the relay from the portfolio of -- from the old portfolio will be taken by the crystallization of the value on capital of the DTAs, and this is a good point to pass it to Stefano.

[Stefano Porro, executive]

So some data points. The organic capital generation is around 400 basis points adjusted for extraordinary transactions, so not taking into consideration extraordinary transaction. After this, more than EUR 300 million is the profit and then the balance is risk-weighted asset.

When we look to 2025, as we have already highlighted, both for '25 and '26, we are guiding for a profit. So our ambition is to have a profit of above 9. So with an organic capital generation from the profit above 300 basis points. As related by Andrea, during the course of '25, we're expecting to be able to generate further capital by the management of the risk-weighted asset portfolio. This should be able to compensate some model changes effect and the potential growth that are from the business, so from the lending.

In relation to the model changes, we are expecting to have a few billions that are in fund the model changes in terms of risk-weighted asset increase in Q4 and a few billion also during the course of 2025. Having said that, this amount as highlighted will be offset by the active portfolio management action that we will put in place.

From 2026 onwards, we are, in a way, a target, i.e., with something more than 300 basis points of capital generated by the profit and active portfolio management action that should be to a lower extent, able to fund the growth of the lending, but the difference is not meaningful in terms of basis point difference.

With regards to DTAs, so where the benefit to the capital from DTA is coming from? It's coming from utilization of tax loss carryforward. Currently, we have recognized in our balance sheet around EUR 3.4 billion of assets that are related to tax loss carry forward.

When we're going to utilize these assets, we are going to have not any more in the balance sheet and asset that is deducted from the capital. All in all, the contribution to the common equity Tier 1 starting from next year can be between 15 and 20 basis points of contribution to the common equity ratio positive per year. So again, the reason is sources, utilization of the tax loss carryforward DTA that you have is fundamental in Italy, positive effect is between 15 and 20 basis points per year starting from 2025 onwards.

[Operator]

The last question is from Hugo Cruz, KBW.

[Hugo Moniz Marques Da Cruz, analyst]

Just two questions. So first of all, on Commerzbank, can you give us a deadline for you to make a decision on the financial instruments that would raise your stake to 21%, i.e., how long can you wait? And I think you said that you will wait for the Commerz Investor Day. I'm not sure if I'm to correct. And second, on cost of risk. And can you remind us of your guidance for the guidance for 2025, and if it assumes any overlay usage?

[Andrea Orcel, executive]

So let me start with Commerzbank. So I think let's not confuse two different things. The first one is, we have asked the ECB for authorization to move our participation in Commerzbank from 9.5% to up to a maximum of 29.9%, which is the level before you need to launch a bid. We would not be able to move or to convert what you call financial instruments into physical shares or into having the physical shares under our control until we have ECB approval.

ECB approval takes 60 days, but the 60 days gets stopped every time there is a new question or there is a new doubt or whatever, and we need to give them back. So we're not 60 days, they're actually longer. If you tell me when the process will be finished, I will tell you when we move on the financial instrument. I don't know.

I don't think at this point in time, it makes much of a difference because at some point, within the time that interest us, we will have [indiscernible] control of the shares and everything else.

The second thing that is important is that this is a process that we started to have maximum flexibility. But if there were a process for an acquisition, that follows a completely different process. So fundamentally, this car in ECB approval is not relevant for a full bid on Commerzbank. If we were to do that, that will follow a completely different process, which may go in parallel after before the 29.9% approval. So the two are not on the critical path of each other.

Then we -- I just said with respect to Investor Days that given we believe that the 2 banks are the mirror image of each other, and we're pretty convinced of what can be done, we are quite interested as a shareholder that has a lot of money on the plate to see what the Investor Day will deliver on bridging some, all or more than all of the gap that Commerzbank has with HVB in Germany.

The second question, cost of risk and overlays. So firstly, on cost of risk, we have said that we are confident we can maintain a cost of risk of 20 to 25 basis points through the cycle. Clearly, at the moment, we're running a lot lower. In keeping the cost of risk at 20 to 25 basis points through a cycle, we said that there could be two scenarios to simplify. Scenario A, we have all particularly I've been too nervous about the credit cycle in Europe, and it's relatively benign. If it is relatively benign, we will be able to keep the cost of risk of our group to 20% to 25%, either not touching or touching the overlays to a minimum level or to a limited level. In this case, we would still need to release them because the overlays are tied, very strictly tied to specific event and to specific situations. And therefore, you would have a profitability of the bank that is actually propelled by the release of the lion's share of the overlays.

In the other scenario, we've chased the other extreme that the credit cycle is as we all think going to be a little bit more daunting. If that is the case, we will cover the 20 to 25 basis points of cost of risk through the cycle through normal LLPs through the years and the excess to 20% to 25% would be insured by releasing the overlays on those situations that we have already identified.

So really, you have really two situations, above and beyond the fact that we believe that the quality of our loan portfolio is quite good, and we've really scrubbed it a lit and that our ordinary provisions on the conservative side. So we are confident. If the credit cycle is very negative, then we have the overlays to keep it at 20% to 25%. If it's relatively mild, then the overlays still need to be released, but instead of going to cover the excess provision, they will go directly to the bottom line to propel our net income.

This is why when we talked about idiosyncratic accelerator, we use line of defense as one of them because the overlays will either ensure that our cost of risk is below most of our peers, other peers or if that's not necessary propel directly the bottom line by being released. I hope I make sense.

[Operator]

So that was the last question. I turn the conference back to the management for any closing remarks.

[Andrea Orcel, executive]

So thank you very much, everybody, for your time, and we'll see you at the next quarterly results. Thank you.