UniCredit SpA

MIL:UCG

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the UniCredit Four Quarters and Full Year 2018 Group Results Conference Call. [Operator Instructions]

At this time, I would like to hand the call over to Mr. Jörg Pietzner, Head of Investor Relations, for introductory remarks. Please go ahead, sir.

[Jörg Pietzner, executive]

Good morning to you all, and welcome to our full year 2018 analyst call. Before I hand over to CEO, Jean-Pierre Mustier, for the main presentation, let me make a few remarks on an accounting topic on our fourth quarter stated net profit. As communicated at our first quarter '18 presentation, on Slide 39 of the market presentation, UniCredit took a gross impact of minus EUR 3.8 billion for the first time adoption, FTA, of IFRS 9 on the 1st of January, 2018. According to the established accounting practices, such impact was taken at equity, and had no impact on the group's P&L. UniCredit S.p.A. did not book any positive tax impact in Italy related to the IFRS 9 FTA.

Following the publication of the recent Italian budget law, it has been ruled that such IFRS 9 FTA shall become tax deductible over 10 years rather than to be taken all at once in the first year. Taking into account the relevant accounting treatment, this change will accelerate the booking of the positive tax effects associated with the IFRS 9 FTA at the current tax rate, as for all Italian banks of around 33%. For UniCredit, this results in a positive effect of EUR 887 million.

As the FTA was recognized at equity, a coherent representation for the related tax impact should have been at equity as well. However, based on the very recent indications received from the relevant authorities, UniCredit has now recognized such positive tax effect related to IFRS 9 FTA through its P&L in the fourth quarter, generating a positive extraordinary effect equivalent to EUR 887 million. The application of such accounting treatment has resulted in a stated fourth quarter net profit of EUR 1.73 billion. Excluding such positive tax effect, the fourth quarter '18 would've recorded a net profit of EUR 840 million.

In what follows, we will focus our analysis on the adjusted net profit that does not contain the above-mentioned positive one-off tax impact so as to reflect what UniCredit considers the economic performance of the group in the period. The regulatory capital and dividend implications will be clarified in the following pages. Thank you for your attention.

And now Jean-Pierre, over to you.

[Jean-Pierre Mustier, executive]

Thank you very much, Jörg, and good morning to everyone. Looking back, 2018 has been a year with core macro headwinds, which have impacted the profitability of UniCredit, while we have made a strong progress on the delivery of Transform 2019. This could not have been achieved without our very strong team, who have worked tirelessly and with extraordinary commitment throughout the year. Before we start, I would like to thank them all. And I would like, as well, to thank our loyal shareholders, who continue to ship offers as we made great strides on our Transform 2019 plan, ensuring UniCredit remains a pan-European winner.

Now let's take a quick look at the highlights of 2018 [therefore context ] for the figures. The underlying performance of the group remains very strong, and our adjusted results are up versus last year. Our net operating profit of EUR 6.4 billion was the best since 2008. And our adjusted net profit of EUR 3.9 billion is up 7.7% versus last year despite large additional provisions for U.S. sanctions.

As Jörg just mentioned, we will not comment further on the DTA IFRS 9 accounting treatment. And as Jörg said, the figures into this presentation represent the real underlying economic performance of the bank.

The core bank performed very well in this increasingly challenging macro environment. Our adjusted core RoTE reached 10.1%. Without the impact of the very large U.S. sanction provision, the profitability would have been materially, and I repeat, materially higher.

Our Transform 2019 plan is well ahead of schedule. We already achieved 100% of our planned FTE reduction and 93% of our planned branch closures. Both targets will be exceeded. Noncore gross NPEs reached EUR 18.6 billion, and now group NPE disposal reached EUR 4.4 billion, both better than target.

Our CET1 ratio reached 12.07%. Thanks to our decisive actions taken in December and early January, we are fully compliant with the TLAC requirement with a subordination ratio of 18.13% pro forma. The group has excellent capital market access, as demonstrated by recent issuances. Our principal equity increased to EUR 47.7 billion, up 3% from trough in the third quarter '18. We intend to focus to our AGM, a cash dividend of EUR 0.27 per share, which is equivalent to a 20% payout on offsetted net profit, excluding the IFRS 9 FTA tax impact mentioned earlier.

Before we move on, let me briefly mention the recently published EBA transparency exercise results, where many European banks are measured on a comparable basis with regard to a number of KPIs. We are pleased that in the EBA sample, we have the second-highest NPE coverage ratio of all eurozone banks and the highest in Italy. Our CET1 ratio is also the best compared to eurozone and Italian peers. You can find the chart in the annex on Page 70 to 74.

Let's move to Slide 5. This is UniCredit's best fourth quarter in a decade for the second time running. This statement is based on a adjusted net profit, i.e., without the EUR 887 million positive impact from the IFRS 9 FTA tax effect. We report an adjusted net profit of EUR 840 million, up 19.9% year-on-year. We saw sustained core commercial bank performance with fourth quarter '18 gross operating profit at EUR 2.2 billion, up 5.1% year-on-year. Fourth quarter '18 costs were down 2.7% year-on-year. Our fourth quarter '18 cost of risk came in at 79 basis points as we saw the first impact of the IFRS 9 macro scenario and for model changes. Our CET1 ratio saw a negative capital impact of 23 basis points from regulation, model and procyclicality in the first quarter.

Let's move to Slide 6. UniCredit showed a strong financial year '18 performance, thanks to sustained underlying commercial dynamics and the unwavering commitment to success by all our teams. We report an adjusted net profit of EUR 3.9 billion, which is up 7.7% versus last year. Our 2018 costs were down 5.6% versus last year, driven by both HR and non-HR costs. Our 2018 cost of risk was better than target at 58 basis point in a supportive risk environment, despite 5 basis point impact from model change and 3 basis point impact from the IFRS 9 macro change. Our adjusted group RoTE was 8% in the year, up almost one percentage point versus last year. If we also took out the large additional provision for U.S. sanction, our adjusted group RoTE will always be close to double digit, I repeat, close to double digit, and above 9% of financial year '19 target.

Let's turn to the next slide, and I will give you some details of the positive progress of Transform 2019. We ended the year with a CET1 ratio of 12.07%. We confirm our target of 12% to 12.5% at the end of 2019. During the course of 2019, we will initially be below 12% before remediation action and retained earnings bring the ratio back up again. We have just signed yesterday the sale of our real estate asset in Germany, which will have a 7 basis points positive CET1 ratio impact, which corresponds to 1/3 of the overall amount expected from real estate disposal, most of which will come in 2019. Mirko will give you more detail on the CET1 ratio development later.

On TLAC, we closed the year already fully compliant with the upcoming requirement on a stated basis. Pro forma, the recent sale pre-provisions, our subordination requirement stand at 18.13%, which are [indiscernible] slightly make sense of our target range of 50 to 100 basis points. Thanks to that, we are already compliant with the upcoming subordination requirements of MREL as well.

The derisking of our balance sheet continues. The group gross NPE ratio reached 7.7% in this quarter, less than half of what it has been when we launched Transform 2019. Group core NPE ratio stood at 4.1% close to the EBA average. Please be reminded that the EBA uses slightly different and less conservative definition of the NPE ratio that we have chosen to do. On the like-for-like basis, our group core NPE ratio last quarter would have been 0.4 percentage points lower. Our IR team is happy to walk you through the details.

The operating model transformation is well ahead of schedule, reaching 93% of the target for branch reduction and 100% for FTE reduction. We will exceed both targets in 2019, and as a result, we confirm our financial year '19 costs, which will be at EUR 10.4 billion.

Let's turn to Slide 9. As said earlier, commercial dynamics for the group are positive and sustained. Our clients continue to embrace our multichannel offers and increasingly use digital solutions. We recently launched Google Pay in Italy and now offer all forms of mobile payment solution to our clients. Our fully plugged-in CIB business model continue to be prove its success with leading European position in trade finance and debt capital market. And our corporate center streamlining is well on track and already below its target of [ 3.8% ] of total costs.

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

[Mirko Bianchi, executive]

Thank you, Jean-Pierre, and good morning to everyone. I will now take you through our UniCredit fiscal year 2018 and fourth quarter financial performance. Our group core has performed very well and shows a high profitability with an adjusted net profit of EUR 4.7 billion for fiscal year 2018 and EUR 1.1 billion in the quarter. The main divisional contributors to our strong performance this year were, once again, CEE and Commercial Banking Italy.

Adjusted group core return on tangible equity was 10.1% for fiscal year '18. Please remember that this number is not adjusted for the large provision for U.S. sanctions that we took in fiscal year 2018. Without these provisions, the return on tangible equity would have been materially, I repeat, materially higher. With this in mind, we confirm the 2019 core return on allocated -- equity target of above 10%.

Let's turn to Slide 12. We enjoyed a strong commercial performance in the core bank. Net interest was up 2.9% versus last year. Fees were resilient, up 0.8% versus last year. We are also enjoying sustained commercial dynamics across the group. We gained almost 2 million new clients in the year while writing EUR 105 billion of gross new loans in the same period.

The execution of Transform 2019 continues to deliver tangible results quarter after quarter. Costs are down significantly, 5.6% lower than last year. Loan loss provisions were down 14.1% versus last year, thanks to a supportive risk environment. The gross NPE ratio stands at 4.1%, down 99 basis points year-on-year and already well below our fiscal year 2019 target of 4.7%. Net operating profit in the year was a solid EUR 7.5 billion, up 12.3% versus fiscal year '17. Adjusted net profit was EUR 4.7 billion, up 9.1% versus last year.

Let's turn to Slide 13. Let's now look at the figures of the group. I would like to point out 3 items on this page. First, there was no impact from the expected U.S. sanctions in the quarter as we have not yet reached a settlement. We confirm that the impact of such settlement should be nonmaterial, plus or minus mid-single-digit basis points on our core Tier 1 ratio. Second, our stated fiscal year 2018 tax rate was impacted by DTA write-ups in Italy and Germany, the release of a tax provision in Germany and the IFRS 9 FTA tax effects. Our normalized fiscal year 2018 tax rate would have been around 17.8%. Third, for the fiscal year 2019, normalized tax rate we expect between 17% and 18%, neither numbers include the potential effect from the ongoing DTA assessments. The impact of the Italian budget law, on the other end, is included in this guidance.

Let's turn to Slide 14. NII was resilient in the quarter, up 0.4% stated, and down 0.3% adjusted for one-offs and FX. The main drivers in the quarterly NII walk were the following: first, average loan volumes were up 1.3% in the quarter at constant FX, compensating lower customer rates, which were down only 2 basis points quarter-on-quarter. For fiscal year 2019, loan volumes should grow, albeit at a lower pace than in fiscal year 2018; second, deposit rates continued -- contributed a negative EUR 18 million, mainly from higher U.S. dollar term deposits and rising rates in CEE. For fiscal year 2019, we have a mid-double-digit million of budgeted revenue increase at risk should this have been not high short-term rates in the second half; third, term funding contributed a negative EUR 6 million as we resumed capital markets issuance in the quarter; last, but not least, higher spreads on our 3Q 2018 bond investment contributed positively by around EUR 30 million to the investment portfolio and treasury total, offset by the NII leg of an FX swap unwinding.

Let's turn to Slide 15. I will highlight 3 points on this slide. First, I highlighted last quarter there were extraordinary recoveries in CIB in shipping in the third Q 2018, which did not recur in the fourth Q '18. We addressed the decline in customer rates is therefore, only 3 basis points. Second, the group average customer loan rates were down only 2 basis points, and we saw stabilization across the divisions. This is especially true in Commercial Banking Italy and Germany with short-term loans, even so, customer rate increases. Third, as we have indicated since the third Q 2017, customer rates are expect to have reached the bottom in the fourth Q 2018 and should go up in fiscal year 2019.

Let's move to Slide 16. End-of-period customer loan volumes for group core were up EUR 3.8 billion or 0.9% in the quarter. For fiscal year 2018, however, the growth was 7.1% year-on-year. This compares with the year-on-year growth of only 2.2% in fiscal year 2017 and underlines our strong current commercial dynamics across the group. The strong fiscal year 2018 loan growth was well spread across our different divisions. Expected loss of new business remains below the expected loss on the stock. As long levers are leading indicator of economic activity, the fiscal year 2018 number was typically high late-cycle growth, and we expect it to be lower in fiscal year 2019 and confirm our fiscal year 2019 target for the group loans of EUR 444 billion.

End-of-period customer deposit volumes for group core were up 0.4% in the quarter and 2.1% year-on-year. As mentioned last quarter, they were technically driven and extraordinary high single-digit billion deposit inflows from corporate clients in CIB in the third Q '18 that were reversed in the fourth Q '18. In Italy, deposits are up 3.8% year-on-year, which underlines the structural health of the savings culture in the country. Please note that our Commercial Banking divisions are essentially self-funded, which loan-to-deposit ratio is close to 100%.

Let's turn to Slide 17. Fees in the quarter were down 1.4% year-on-year as fees are seasonal. Let's look at the fees category separately on a year-on-year basis. Investment fees were down 14.5% year-on-year. This decline was mainly due to upfront fees in Italy. Management fees for the group were up as higher pricing compensated lower AUM volumes. AUM stock was down 2.7% year-on-year and 4.3% in the quarter, affected by negative market performance. For fiscal year 2019, in light of the macroeconomic environment, we expect investment fees flat versus fiscal year 2019. Financing fees were up 3.3% year-on-year, mainly thanks to good fees from loans in CEE and CIB. Transactional fees were up 11.8% year-on-year, driven by current accounts and insurance fees in Italy. Fiscal year 2019 growth should be closer to 2%. Overall, fiscal year 2019 fees should grow by around EUR 100 million, but we will refine this guidance in the coming quarters.

Let's turn to Slide 18. TFAs stood at EUR 811.1 billion in the quarter, decreasing 2.7% quarter-on-quarter. AUM in the quarter were EUR 212.3 billion, down 4.3% quarter-on-quarter. While we had good net sales of plus EUR 8.8 billion in fiscal year 2018, market performance was a negative EUR 14.6 billion. Commercial Banking Italy generated plus EUR 3.5 billion in AUM net sales in fiscal year 2018, which is down versus last year, while Commercial Banking Germany generated plus EUR 2.2 billion in AUM net sales, which is up more than twofolds on last year. AUCs decreased by 7.8% quarter-on-quarter. Fiscal year 2018 net sales of EUR 0.7 billion were impacted by negative market performance of EUR 18.7 billion. While we have strong client dynamics, a continued challenging market environment would result in TFAs to be lower than our EUR 858 billion target for the end of 2019.

Let's turn to Slide 19. Trading income in fiscal year 2018 was down 31.5% versus last year as the general market environment continued to be unfavorable, especially in the fourth Q '18. Almost all of the trading income was client driven in fiscal year 2018, which is a testimony of our fully plugged-in CIB business model.

Dividends were up 15.6% versus last year, and contribution of Yapi to our dividend line improved strongly from EUR 24 million in the third Q in 2018 to EUR 92 million in the fourth Q 2018 as the Turkish lira reversed some of its earlier losses against the euro. This contribution of EUR 92 million appears high. This is mainly due to the accounting treatment for FX translation at UniCredit Group level, which amplifies the recent FX moves. Discounting this accounting treatment, Yapi's P&L contribution would have been in the 30s. Feel free to call our IR team for more details.

Despite the external environment, Yapi posted a strong operational performance in Turkish lira terms. In fiscal year 2018, its contribution at constant FX is up 30.8% versus last year. Yapi's P&L is included in the Annex on Page 57. For fiscal year 2019, as we said last quarter, we have taken an extremely conservative view in estimating Yapi's contribution. Given the most recent performance and the signs of economic stabilization in the country, we could see some upside here. As of the fourth Q 2018, our core Tier 1 ratio sensitivity to Turkish lira moves is plus one basis point net for 10% adverse move in the Turkish lira.

Let's turn to Slide 20. Our focus on our cost efficiency is yielding tangible results quarter after quarter. Transform 2019 is well ahead of schedule. We have already achieved 100% of our planned FTE reduction, and 93% of our scheduled branch closures. Both targets will be exceeded by the end of 2019, allowing us to reach fiscal year 2019 cost of EUR 10.4 billion below the original EUR 10.6 billion target. The gross FTE reduction agreed with the union stands, but the net impact will be higher on more efficient turnover management. Operating expenses are down 5.6% versus last year, and our cost-to-income ratio is 54.2%, below the target for fiscal year 2018.

Let's turn to Slide 21. Both HR and non-HR costs are down versus last year, 7% and 3.5%, respectively. The fourth Q 2018 HR costs were down 5.9% year-on-year, but had a 1.7% seasonal increase quarter-on-quarter, driven by viable compensation and the release on unused holiday provisions in Austria. Fourth Q 2018 non-HR costs are seasonally up as well, both quarter-on-quarter and year-on-year. Please bear in mind, however, that fourth Q 2017 had a lower seasonality than usual due to lower expenses recoveries. Adjusted for that, they would have been down year-on-year.

Let's turn to Slide 22. Regarding group cost of risk, I would like to point out 4 items. First, the overall group risk environment was supportive in the year as demonstrated by a good underlying cost of risk of 53 basis points, spot-on on target. While we had a low cost of risk in CEE, Commercial Banking Austria and CIB, there was a relatively large impacts from models in Commercial Banking Italy.

Second, the impact from model charges in the year was limited to 5 basis points while, for the quarter, it was high at 13 basis points. As we said the last quarter, the reason for lowering the initial guidance was due to the FTA impact of IFRS 9. Consequently, this is not a time shift effect but a real reduction.

Third, we saw the first impact from the macro scenario changes, according to IFRS 9, our cost of risk figures, twice a year, we are evaluating our macro assumptions to see if they have changed and adapt the loan loss provisions accordingly. While at the end of the second Q there was no change, we adopted the macro scenario at the end of fourth Q 2018. As a result, we had an impact of 3 basis points on the fiscal year 2018 cost of risk while for the cost of risk in this fourth Q 2018 did impact was 10 basis points. We confirm the cost of risk target for fiscal year 2019 both on a divisional and at the group level.

Our overall quality is -- asset quality is steadily improving. The coverage ratio was stable in the quarter at 61%, but up 4.7 percentage point year-on-year. The group gross NPE ratio dropped to 7.7% in the fourth Q 2018, down 2.4 percentage points year-on-year. This is a great improvement considering we started Transform 2019 plan close to 16%.

Let's turn to Slide 24. In 2018, NII was down 5.6% versus last year as pressures on customer rates was only partially offset by increased loan volumes. NII started to stabilize in the fourth Q 2018, down only 0.2%.

There are encouraging signs regarding customer loan rates. They are starting to bottom out as repricing picks up speed. Customer loan rates were flat quarter-on-quarter after year-on-year reduction of 25 basis points. For fiscal year 2019, we expect small but steady increase in customer loan rates.

Gross new loan production was strong at EUR 24.9 billion while, at the same time, risk discipline remained very strict. Expected losses on new business was 35 basis points, well below the expected loss on stock.

Fees were up 0.8% versus last year, mostly thanks to strong transactional fees from current accounts and P&C insurance. In the fourth Q 2018, fees were down 4.5% year-on-year as the challenging market environment put pressure on AUM gross sales and, therefore, on upfront fees. Fourth Q 2018 investment fees were down 16% year-on-year. As a result, we now expect overall fiscal year 2019 investment fees for the group at the same level of fiscal year '18.

We attracted 363,000 gross new clients, notwithstanding the ongoing optimization of the branch network. Gross new clients give a good indication of the marketing dynamic of the network. Our stock of active performing clients is marginally lower as we review inactive accounts in our client database.

Cost of risk for the year was 74 basis points, up 3 basis points versus last year due to models and IFRS 9 macro, which, taken together, contributed 14 basis points. The underlying cost of risk improved.

Net profit in the quarter was affected by a number of items. Quarter-on-quarter adjusted for the sale of pawn business, it would have been down only 1.5%. Year-on-year net profit was impacted by higher other charges and provisions and lower integration costs in the fourth Q '18.

Normalized for the sale of the pawn business, Italy's return on allocated capital for the year was 11%. This double-digit return on capital is very good result, thanks to our low-cost base, a testament to the success of Transform 2019. Despite predicted higher net profit for Commercial Banking Italy in fiscal year 2019, we adjust our fiscal year 2019 return on allocated target to be stable at around 11% on higher risk-weighted assets.

Let's turn to Slide 25. In Commercial Banking Germany, adjusted commercial revenues were down 3.3%. NII, adjusted for the one-offs from the tax provisions releases, was down 4.2%. This was the result of customer rate pressure that were not compensated by rising volumes. Customer loan rates started to bottom out, although, they were down 2 basis points quarter-on-quarter and 19 basis points year-on-year. Fees were down 1.4% versus last year as higher transactional fees could not fully offset lower investment fees. Fourth Q 2018 fees were up 2% year-on-year as transactional fees compensated for lower investment fees. 75,000 gross new clients were added in the year, up 50% on last year. This was driven by the end-to-end redesign of the account opening process started last quarter and also resulted in a strong reversal of the net client acquisition. Cost of risk in the quarter was impacted by models and some single names. The net profit in fourth Q 2018 was affected by our tax release and DTA write-off, while second Q and third Q '18 suffered from the additional loss provisions from the expected U.S. sanctions. These were mainly booked in Commercial Banking Germany and CIB. Normalized for the sale of our participation in the tax rebate, fiscal year 2018 return on allocated capital was 4.1%. If we also adjusted for the U.S. sanctions provisions, normalized return on allocated capital would have been above the fiscal year 2019 target of 9.1%, which we confirm.

Let's turn to Slide 26. In Commercial Banking Austria, NII was down 5.1% versus last year, but adjusted for one-offs, down 3.3%. Fourth Q 2018 NII was down 3.1% quarter-on-quarter due to the nonrecurring prepayment penalties. Customer loan rates and average volumes were broadly stable, with volumes slightly up and rates slightly down. Fees for the year were resilient at minus 0.8% versus last year, while the fourth Q 2018 fees were down 5.3% year-on-year, mainly due to investment fees. Costs were down 5.9% versus last year, driven by both HR and non-HR cost. After net write-backs in the first half 2018, cost of risk was 6 basis points positive for fiscal year 2018. For fiscal year 2019, we expect a normalization in cost of risk and confirm the target of 16 basis points. The fiscal year 2018 net profit was down from last year as there were almost EUR 100 million less profit from discounted real estate operations. Return on allocated capital was 16% for fiscal year 2018. Expected fiscal year 2019 return on allocated capital on a normalized cost of risk will be close to the target of 13.3%.

Let's turn to Slide 27. CEE continues to be our growth engine with an inflow of 1.3 million gross new clients in the year. The division turned in a very good performance with NII at constant FX up 6.6% versus last year, thereby increased loan volumes. There was a low double-digit million one-off in NII from discounted funding related to the government subsidies in Hungary. Yapi dividend was affected by the FX translation accounting treatment. Fees were up 5% on last year at constant FX, mainly driven by transactional fees. Fourth Q 2018 fees were up 17.4%, primarily thanks to financing fees. The division's cost-income ratio remains best-in-class, only 36.7 percentage points for the full year. The cost of risk is at the low 73 basis points but is expected to normalize in fiscal year 2019. Derisking continues at a vigorous pace and the division's gross NPE ratio fell 1.5 percentage points year-on-year to 6.4%. Return on allocated capital for the year was 15.7%. We expect the fiscal year 2019 return on allocated capital to be lower due to normalized cost of risk and the impact from the new Romanian bank tax, which we estimate in the worst case to be mid- to high double-digit million amount before remediation actions. We confirm the fiscal year 2019 return on allocated capital target of 13.4%.

Let's turn to Page 28. CIB enjoyed a resilient performance in a very difficult market environment. Revenues were down 7.3% versus last year on lower trading. NII was up a 7.5% on last year due to the higher loan volumes and higher income from the bond portfolio. Fees were down 2.4% versus last year due to a sector-wide weak capital market business and only partially offset by structured finance fees. The same general trend holds true for the fourth Q 2018 fees year-on-year. Our leading franchise in debt capital markets was confirmed yet again with CIB ranking number 1 in "EMEA All Bonds in EUR" by number of transactions. Costs were down 3.9% versus last year and lead to a best-in-class cost income ratio at 41%. Cost of risk was at the low 7 basis point in fiscal year 2018, driven by nonrecurring write-backs in the second Q 2018. For fiscal year 2019, we expect a normalization and confirm our target of 21 basis points. Normalized return on allocated capital was 8.7% (sic) [ 8.6% ] for the year. If we take out the higher provision for expected U.S. sanctions, return on allocated capital would be well in the double digits, which -- we confirm the fiscal year 2019 return on allocated capital target of 11.7%.

Let's turn to Slide 29. As most of you will have listened to the Fineco results on the 5th of February, I will limit what I say on this slide. We are very satisfied with the overall financial performance of Fineco. Fineco saw a strong performance in management fees despite lower AUM volumes from negative market performance.

Let's turn to Slide 30. In the Group Corporate Centre, revenues improved significantly, mainly driven by lower-term funding cost, thanks both to lower volumes and spread. The profit on investment line was affected by the Yapi impairment in third Q 2018, while the tax line was affected by the IFRS 9 FTA tax effects. Costs are down significantly, mainly thanks to fewer FTEs. As a result, the ratio of the Group Corporate Centre cost to total cost is down to 3.4% in fiscal year 2018. The fiscal year 2019 target of 3.8% is confirmed. Let me reiterate that we ensure we allocate fairly and proportionately all operating and funding costs to our business divisions. So that we give a true and fair view of their operating performance and do not fracture the business divisions. The Corporate Centre only retains through centers of revenues and costs, which have dropped considerably in the last few quarters as Transform 2019 has progressed.

Let's turn to Slide 31. We accelerate the 2021 noncore rundown is progressing according to plan. As already indicated in the last quarters, the noncore division has transferred all remaining performing loans back to the core bank and is now a closed NPE book. Gross NPEs dropped by EUR 2 billion in the quarter, and stood at EUR 18.6 billion at the end of fiscal year 2018. Our fiscal year 2019 gross NPE target of EUR 14.9 billion is confirmed.

Let's turn to Slide 33. On this slide, I would like to recap our impressive progress in improving our asset quality. Thanks to our decisive actions, we have massively reduced our NPE stock, which is down EUR 38.6 billion since the third Q 2016, more than 50%. Net NPEs are down even more on a relative basis. We have done an incredible EUR 27 billion on NPE disposal in the quarter, while at the same time, increasing the NPE coverage by more than 8 percentage points. UniCredit today has the second-highest NPE coverage of all Eurozone banks in the recent EBA transparency exercise and the highest in Italy. At the same time, we have strengthened our underwriting process to contain as far as possible the creation of new NPEs. The expected loss of new business for the group is 34 basis points, below the expected loss on stock of 38 basis points. Our proactive and decisive derisking actions benefit all stakeholders, and we are well ahead of regulatory expectations and requirements. Another example of that is our voluntary partial anticipation of EBA guidelines.

Let's turn to Slide 34. We continuously work to derisk the balance sheet, to further more our cost of capital. Group Core gross NPE decreased by EUR 2.7 billion year-on-year and EUR 0.6 billion quarter-on-quarter. Our Core gross NPE ratio dropped to 4.1% in the fourth Q 2018, close to the EBA average, and is already well below our 2019 target of 4.7%. Our coverage ratio has improved by 2.4 percentage points year-on-year.

Let's turn to Page 35. Overall, the risk environment remains supportive as demonstrated by an improvement in the default rate year-on-year. The migration rates improved by 7.8 percentage points quarter-on-quarter due to single names in the third Q 2018.

Let's turn to slide 36. Gross NPEs in Commercial Banking Italy are down to EUR 8.7 billion, which is again a significant reduction in absolute terms versus last quarter and was mainly driven by disposals. The gross NPE ratio dropped to 5.7% thanks to both gross NPE reduction and higher loan volumes. The 2019 target is confirmed at 5.3%. The fourth Q 2018 coverage ratio was slightly up at 55.5% despite significant disposal activity.

Let's turn to Slide 37. The overall risk environment in Italy remains supportive. The default rate improved by 0.2 percentage point year-on-year. The cure rate was more than double than the same quarter last year, as fourth Q 2018 saw the return of 3 single names to perform. There was also a group trend of migration rates which stabilized at 20%.

Let's turn to Slide 38. The execution of the accelerated rundown of the Noncore is progressing very well. Gross loans in Noncore went down EUR 10.7 billion year-on-year and EUR 3.7 billion quarter-on-quarter. This reduction was thanks to a combination of disposals, write-offs and recoveries. Please remember, that there were extraordinary write-offs on residential mortgages in the first Q 2018 for EUR 1.4 billion. Performing exposures in Noncore are down to 0, turning the division into a closed NPE book.

Let's turn to Slide 39. Noncore loan volumes keep going down and are on track to meet our 2021 accelerated rundown targets. Net NPEs, which are good indicator of economic risk, were down significantly to EUR 6.6 billion euros, dropping by EUR 4.5 billion year-on-year. Gross NPEs decreased by EUR 7.4 billion year-on-year, standing at EUR 18.6 billion, better than our fiscal year 2018 target and below our original fiscal year 2019 target from Capital Markets Day 2016. We confirm our EUR 14.9 billion for fiscal year 2019 gross NPE target. NPE coverage was stable at 64.3% despite disposal activity.

Let's turn to Slide 41. The group's fully loaded Core Tier 1 ratio at year-end stands at 12.07%, down 4 basis points quarter-on-quarter. The key drivers were the net profit of 23 basis point in the fourth quarter as well as the regulation, models and procyclicality that had 23 points negative impact. Let me make a remark regarding our dividend payment, which is based on a 20% payout on the stated net profit excluding the tax effect from IFRS 9 FTA. As we did not take this tax effect through our profit and loss account in the first Q 2018, our shareholders did not suffer a negative impact on their dividend base. As a consequence and to keep up the same treatment, the related DTA benefit should not affect the dividend either. The impairment we took on the Yapi in the third Q 2018, however, is treated differently. It affected fiscal year 2018 dividend base negatively, but in turn, any potential future write-off of Yapi will impact the dividend base positively. The net impact of Yapi on our Core Tier 1 ratio this quarter was negligible, only 1 negative basis point, composed of plus 4 basis points from capital and minus 5 basis points from risk-weighted assets. The IFRS 9 FTA DTA write-off had only a very marginal combined initial impact of plus 5 basis points on our Core Tier 1 ratio for fiscal year 2018. The reason is that DTA resulted in risk-weighted assets and capital deductions for amounts exceeding the so-called combined DTA bucket. As the DTA bucket empties over time, some of this lost benefit will be regained in the future.

In fiscal year 2019, we expect a positive Core Tier 1 ratio contribution in the high single-digit basis points. Feel free to call our IR team for more details on this topic.

I'd like to make clear that we report our Core Tier 1 ratio as we report to our regulators. You can see that -- the example in the EBA transparency exercise in annex on Page 73. That also means we never pro forma our capital ratio for potential future positive DTA impacts. And as such, we will do it for the IFRS 9 FTA tax impacts this quarter. At UniCredit, what you see is what you get. Also, let me use this opportunity to remind you that our capital levels compare very well in the recent EBA transparency exercise. That puts all banks on equal footing. UniCredit has one of the best Core Tier 1 ratios in relation to eurozone and Italian peers. We confirm our end of 2019 Core Tier 1 ratio target of 12% to 12.5%, which corresponds to a target MDA buffer of 200 to 250 basis points. The expected evolution of our Core Tier 1 ratio during 2019 will be driven by the combined effect of regulatory headwinds, mainly expected in the second Q 2019 and fourth Q 2019 due to the timing of ECB approvals and tailwinds from retained earnings and capital gains from real estate sales. Overall, this should lead to a Core Tier 1 ratio trough at the end of second Q 2019 at around 11.7% at current BTP spreads before going back up to our target range of 12% to 12.5% by year-end 2019.

Let's turn to Slide 42. Risk-weighted assets in the quarter increased by EUR 7.6 billion to EUR 370.2 billion. The biggest drivers were increased credit risk-weighted asset from regulation, models and procyclicality. There was also around EUR 0.6 billion of risk-weighted assets from the 250% risk weighting off the deferred tax asset from IFRS 9 FTA not deducted from the Core Tier 1. Market risk-weighted assets were down due to lower inventory from market-making activities. Operational risk, risk-weighted assets decreased following the inclusion of the additional large provision for the expected U.S. sanctions into our loss database. Over the course of 2019, we expect risk-weighted assets to increase every quarter up to the -- our target of EUR 406 billion. Regulatory headwinds from EBA guidelines and regulation, models and procyclicality should account for roughly EUR 25 billion of risk-weighted assets increase, and should mainly be split between the second and fourth Q 2019.

Let's turn to Slide 43. After a number of quarters with declining tangible equity values, we consider the third Q 2018 was the trough. In fourth Q '18, our tangible equity grew by 3% or EUR 1.4 billion. The main driver was the net profit of the quarter. The IFRS 9 FTA tax impact from the DTA write-off also had a positive impact on tangible equity. We expect a steady increase of tangible equity and tangible book value per share throughout 2019. It should lend support to our share price going forward as tangible book value per share has increased to EUR 21.4.

Let's turn to Slide 44. As of the fourth Q 2018, we are fully compliant with the upcoming TLAC requirements with a subordination ratio of 17.42%. Pro forma for our senior non-preferred issuance executed in January 2019, our subordination ratio is 18.13%. This corresponds to a buffer of 107 basis points, slightly above our target of 50 to 100 basis points buffer range. Taking that into account, we are also already compliant with the upcoming subordination required for MREL. Our TLAC funding plan for 2019 is well advanced. Out of a total of EUR 9 billion, we only need to issue an additional EUR 3.9 billion of subordinated instruments in the full year. Our 2 large successful senior non-preferred transaction in recent months have also put us ahead of the curve in utilizing our substantial market capacity and are positioned well with our investors.

Jean-Pierre, back to you.

[Jean-Pierre Mustier, executive]

Thank you, Mirko. Before I get to the conclusion, I just wanted to say a few words on the senior management team reorganization project we announced last night. The change in the management structure aims to continue the streamlining process initiated with Transform 2019, and will ensure that the management team will deliver the next 2020-2023 plan, will have full ownership of the new strategy from the very outset of the planning process. As for our news of the achievement of our Transform 2019 key financial and operational targets, it is time to actively prepare for the next strategic cycle with the of objective to continue sustained value creation for all of our stakeholders. Gianni Papa [indiscernible], in agreement with the bank, he will be stepping down on the 1st of June, 2019. I would like to thank Gianni for his valuable contribution to the group over the last 39 years. Gianni has been integral to the first 2 years of the implementation of Transform 2019 and will, as he steps down, remain as an advisor to the CEO on the ongoing execution on the plan.

Let's turn to Page 47. Before we move to the Q&A, let me briefly recap our 2018 performance. In our second full year of Transform 2019 plan, we're seeing a continued strong core bank performance with group core net operating profit of EUR 7.5 billion, and an adjusted Group Core RoTE of 10.1%. If we adjust for the higher charges and provision on the expected U.S. sanctions, it would be materially higher. Transform 2019 continues to be well ahead of schedule and is delivering tangible results quarter after quarter. We have already achieved 100% of our planned FTE reduction and 93% of our branch reductions. Group costs are down EUR 10.7 billion, better than our EUR 11 billion target. The IFRS -- noncore run down is fully on track, already down to EUR 18.6 billion of gross NPE. The target for 2019 is confirmed at EUR 14.9 billion. For 2019, we also confirm our target of EUR 4.7 billion net profit, 9% RoTE and 10% core RoTE. As we said earlier, without the expected rent function, our 2018 adjusted group RoTE would have been close to double-digit and above the 9% target of 2019. We are confident our tangible equity will grow throughout the year. And last, but not least, we confirm our CET1 ratio range between 12% and 12.5% at the end of 2019, corresponding to an MDA buffer of 200 to 250 basis points. We expect real estate disposal to contribute towards 0.2 percentage point to our CET1 ratio, mainly in 2019. We continue to focus fully on Transform 2019 and work hard as one big team, one bank, one UniCredit to ensure UniCredit remains a true pan-European winner. As a sign of my personal conviction that Transom 2019 will successfully meet the stated target. I have decided to invest once more into UniCredit. I will invest the equivalent of the after-tax value of my long-term incentive planning shares. That means I will buy EUR 3.6 million worth of shares as well as EUR 3.6 million worth of AT1, holding both for the same length of time as the original LTIP awards.

Finally, let me announce that we shall present our new strategic plan for the period of '20 to '23 at the Capital Market in London on 3rd of December this year. So please put the date in the calendar. Needless to say, we much look forward to seeing you all there.

And now Mirko and I are ready to take your questions. If you could be so kind to limit your questions to 2 each. Many thanks. Operator?

[Operator]

[Operator Instructions] The first question is from Andrea Filtri with Mediobanca.

[Andrea Filtri, analyst]

I have 2 questions, capital and cost of risk. On capital, which of the 2 CET1 targets is senior to the other? Is it that 12% to 12.5% for 2019? Or is it 200 to 250 basis points MDA buffer? And do you reiterate your expectations given in December 2016 that your SREP should fall further? On the side, what are your IFRS 16 and prim impact expected for this year? On cost of risk, you indicated 10 basis points of loan loss provisions from IFRS 9 macro scenario. What macro scenario are you reflecting? Are you confirming the provision in guidance despite the deteriorated macro scenario. And will this also result in higher-than-expected risk-weighted assets from your IRB models?

[Jean-Pierre Mustier, executive]

Let me answer the CET1 question, and I will pass over to TJ for the cost of risk and the macro scenario. We have 2 targets, as you pointed out, in terms of CET1: 12% to 12.5% and 200 to 250 basis points buffer. We are very focused on the buffer as this is the important barometer for shareholders. And not only on the CET1 ratio, but also on the TLAC ratio. And we are known to buffer for the TLAC ratio of 50 to 100 basis points. And the management will make sure that we are within these targets. It is why we took actions as well in addition to our net earnings generation for 2019 to make sure we will be within the buffer. For 2019, the 2 ratios, 12% to 12.5%, 200 and 250 basis points stands, both. It is fair to say that we have SREP Pillar 2 requirements of 200 basis points, and we hope that this SREP Pillar 2 requirement will be able to lowered again, but that will not impact 2019. The decision will be made by the ECB in 2019 and it will impact 2020. And so if we have lower SREP Pillar 2 requirement, this means that we will have more room and to move between our 200 to 250 basis points buffer. On IFRS 16 and prim, it has been embedded into our capital projection. We already committed, I think, before capital market day that the impact should be on 10 basis points, so due to an increase of risk-weighted asset of EUR 2.7 billion. I hand over to TJ on the macro scenario. Just to remind you that the 10 bps for the fourth quarter is the fourth quarter impact, not an annualized impact. The annualized impact is 3 basis points. TJ, I hand over to you to explain on 1 side the parameters behind that and to give a sensitivity on further evolution. TJ?

[Thiam Lim, executive]

Thank you, Jean-Pierre. As Jean-Pierre mentioned, the case on the process point of view, twice a year, we update the macro scenario to reflect just on the IFRS 9 what the additional LLP would be. And for the so called second half of the year, we have greatly, particularly for the Italian parameter, we have downgraded the GDP to be more in line with our forecast. And that gives the so-called 10 basis points for Q4, and 3 basis points for the year. And this also, we are impacted also as well as by the BTP-Bund spread. We expect for sensitivity that if there's an additional 1% over the next 3 years in terms of Italian GDP, the forecast in terms of LLP would be quite small, between EUR 40 million to EUR 60 million. Cumulative, yes.

[Jean-Pierre Mustier, executive]

And just to clarify, the 1% is a cumulative 1% decrease, which if you look at it over a 3-year number, that should be 33 basis points per year, basically. And in terms of [ renewal ] revision, if you focus on the Italian GDP, we have revised for the next 3 years, the GDP for this IFRS 9 [ simulation ] to levels which are below 1%, with a trough in 2020 at [ 0.5%. ]

The next question, please.

[Operator]

The next question is from Adrian Cighi with RBC.

[Adrian Cighi, analyst]

I'll focus on 2 questions on net interest income and fee income. Can you, in terms of net interest income, provide us a more detailed outlook for the various moving parts, particularly your thoughts on repricing in Italy, some of the impacts from what you see on the wholesale funding movement, any time value outlook and potential TLTRO scenarios impacting NII in 2019? And then on fees, you're referring to the upfront fees decline as a key driver of the year-on-year performance. Can you disclose the amount of upfront fees, if possible, both absolute and present a -- to allow us to form our own estimates of potential future impacts?

[Jean-Pierre Mustier, executive]

I will hand over to Mirko for the detail. I'm not quite sure that he's going to give you all the details you want. But let me confirm on the cost figures and then Mirko will put on details afterwards. We confirm our 2019 revenues of EUR 19.8 billion. And of course, the net profit of EUR 4.7 billion. Just want to state again that the net profit of cost EUR 4.7 billion does not include a potential capital gain from real estate asset disposal. So we have here as well an additional buffer, if you want. And we said that we expect the real asset disposal to contribute to 0.2% of CET1, mostly in 2019. As far as the commercial performance is concerned, so NII plus fees, we should be within the EUR 18.1 billion that we have mentioned last quarter. We have said -- we said within the -- with the variation of maybe EUR 100 million. But we -- as well potentially less negative contribution that what we were focusing before. On Turkey we had a very tough projection for Turkey in terms of dividend. I mean, the figures of the first quarter showed potentially -- we have some upside here. And we have a very conservative view on the trading side. And so we could have some upside as well. So basically, the evolution -- and it's more now than a science, of the commercial revenues. It might be compensated by potentially better news on the dividend side and the trading side versus what we were expecting. But Mirko can give a few more details on the NII and the moving parts of NII, which are always difficult to anticipate. Mirko?

[Mirko Bianchi, executive]

Yes, thank you, Jean-Pierre. Yes, on the NII front, I think something that we need to take -- could take away from the 4Q performance is that for the first time we are seeing a positive impact if we combine the loan volumes and loan rates in terms of a positive number. We think the business going to continue. Of course, we are not expecting the loan to grow at the current level, like we have seen in EUR 3.8 billion for the quarter. Of course, due to the GDP environment in Italy, especially loan growth will be a little bit more subdued. But nevertheless, we are going to see loan growth. And as we said into the script before in terms of the loan rates, we are seeing a stabilization of rates, very important if it can be stabilized. And the stabilization is also supported by the repricing that we are doing in the Italian market. And therefore, we should see this trend continuing also in 2019. Now the line item that started to impact our NII is the term fund line item. You can see the minus EUR 6 million impact from this quarter due to the restarting of our funding. Expect going forward on a quarterly basis to have that same mid-single-digit millions higher impact from cost of funding because our funding plan is mostly focused on subordinated deck to maintain a strong, let's say, subordination ratio. In terms of TLTRO benefit. We are not planning in our budgeting further TLTRO. Of course, there are rumors about a potential new TLTRO. If there is one, of course, it will be a positive element for us in our development of the NII. But even absent this, we will see 2019 slightly increasing. In terms of fees, fees as we said, the fee side, investment fees are the ones that are under pressure. If I look at the composition, it's mostly driven by AUM, especially on the upfront side, which we see lower volumes and also lower pricing. So a very competitive environment there. And nevertheless, there is some counterbalancing from management fees that actually are flat. And also there is a kind of a stabilizing aspect of the investment fees. Nevertheless, as our guidance for you, a flat development for 2019 should be the best case going forward -- sorry, investment fees. For the financing fees, we have seen a good performance, especially on the quarterly performance since CIB on loan fees and also CEE on loan fees and guarantees have performed quite well, we have plus EUR 31 million there. So it should be sustained also into 2019. And on the transactional fees front, we had a very strong, let's say, increase in fiscal year 2018, mainly driven by the current account repricing that we have done. Nevertheless, for 2019, we are going to continue to see potentially around 2% growth of this segment of the fees line item. So overall, fees will be around the level of 2018, plus EUR 100 million.

[Operator]

The next question is from Jean Neuez with Goldman Sachs.

[Jean-Francois Neuez, analyst]

I just wanted to ask firstly about the dividend policy going forward. I welcome your comments on the explanation for the basis of calculation and the underlying versus taken. I just wanted to clarify the path going forward because of the slight revision compared to, recently, in the plan of the capital ratio, whether we are still on track for 30% in 2019 and 50% thereafter subject to capital reaching 12.5%. And into this, whether going into the plan that you're going into for next year or so with the management changes that you are -- whether you're budgeting annual restructuring charge that could or would -- that could impact dividend. And my second question is more conceptual. As you go into the next business plan, we are seeing a lot of banks doing business plans these days. Some are favoring more growth, some are favoring more returns. And I just wanted to understand from where you stand and considering your geographic footprint also, where you're tilting in terms of your preference, in terms of maximizing returns, or otherwise now that you've restructured successfully, looking for growth opportunities.

[Jean-Pierre Mustier, executive]

Thank you very much, Jean-Francois. Remind you that our Capital Market Day is on Dec. 3 of this year, so we are not going to have this now but I will give you some information. First, on the dividend policy, we confirm that we will increase for 2019. So -- and the dividend paid in 2020, our dividend payout to 30% to be applied to our net income. And it will be a cash dividend, of course. In terms of the increase to 50% thereafter, we always said that we aim to increase, as fast as possible, the payout to 50%. We didn't say we will increase it in 2020 to 50%. And that will be based on the forecast of our CET1 evolution. And based on the question, we asked from Andrea before, we will focus mostly on the MDA preference, so not on the 12.5% CET1 ratio, but making sure that we can be on the upper end of our buffer of 200 to 250 basis points. So that's it. As I said, what will drive our strategy is not as much the absolute CET1 ratio than the buffer to CET1. So 200 to 250 basis points. And if we reach the upper end of the buffer, then we can increase the dividend payout closer to 2019. As far as the strategic plan is concerned. We will communicate about it on the 3rd of December but I think it's important to say that we have reviewed that it is important to be credible in the projection we give. I think, so far, we have delivered on the KPI of Transform 2019, because we gave objective, which were ambitious but credible. So growth on the top line in Europe cannot grow well above the overall nominal growth of the economy. So we are not going to permit growth for activities, which would not be consistent with what the real world is, no doubt. We lend to SME, we lend to retail, individuals and we are very focused on the real world basically. So in terms of profitability and as stated, that return on equity of European banks is probably not going to be well above the cost of capital going forward. We are now seeing actually adjustment of various bank in terms of their targeted return on capital. And we feel that reaching the cost of capital will be a very good target. So there is 2 ways to reach it. You try to make sure that the RoTE increases and you need to make sure that the cost of capital decreases, basically. And that would be as well the focus of the plan. So what we have in mind is reasonable growth, which is realistic and not based on assumptions, which might be too optimistic. On the CIB side, we have a plugged in CIB, which is serving our businesses. So no complex business, no complex derivative, not seeing a cost income, which is 41% each year, so it's an extremely good cost income. And that we're not banking on even a big assumption there as well. And profitability and outlook is -- which should be close to our cost of capital.

[Operator]

The next question is from Delphine Lee with JPMorgan.

[Delphine Lee, analyst]

So 2 as well on my side. If I can just go back on the revenue target from 2019. Thanks for just confirming again the EUR 18.1 billion. But just looking a little bit at your comments on NII and fees and commissions, which were quite helpful, just wondering where the, let's say, EUR 500 million pickup from this year to next year is coming from. You seem to suggest a little bit of NII pickup and CEE pickup as well, but if you can just give us a little bit more guidance versus your old published targets, that would be quite helpful. The second question is just going back to capital, just trying to understand a little bit the range of 12% to 12.5%. Are you assuming a little bit of buffer for EBA guidelines to be delayed or any impact from BTP-Bund spreads widening? I'm just -- or the timing of disposal. I'm just trying to think about where was the pickup coming from in terms of the bottom of 12.7% and if Q2, to 12%, 12.5% in just 1 half?

[Jean-Pierre Mustier, executive]

Thank you very much. Mirko and I will answer your question. First, we don't have a pickup on revenues of EUR 500 million. We have mentioned in the third quarter that we have a target for 2019 revenues, which were around EUR 19.8 billion, basically. We lowered on the third quarter our revenue target for 2019 by EUR 600 million. But nevertheless, we confirm our commercial revenues, I said, around EUR 18.1 million. Around, meaning that it is, as I said, an up -- or not a science to any adjustment potentially, let's say, of EUR 100 million, which might be the variability, we think can be compensated outside of the commercial revenues by potentially a higher dividend, that's what we were planning, and potentially higher credit revenues as both of them were set at very conservative level when we confirm the EUR 19.9 billion of total revenues. So we have a fee, which would be EUR 100 million higher versus this year. On the NII side, as Mirko mentioned, they are positive, I think, in terms of funding cost. We have some comments of analyst saying [indiscernible] preferred issued we're at the high level, is it going to immediately impact your NII? First of all, when we have a window, we shoot, and that's our policy, and we'll keep doing it. Two is the issuance that we have done on senior nonpreferred in December and in January. We are at levels, which were below what we have projected to come up with our NII projections. So these do not impact negatively but actually positively on projection. As you know, we always are extremely conservative in our projections. So I think there is, potentially, on the NII side, a good news on the funding cost. We have not planned a TLTRO, it has happened. That might be as well positive, so let's see. And on the NII, Mirko commented on loan rates and loan volume. On the CET1 ratio, we said that we will have a trough of 11.7% in the second quarter. We have a slight delay vis-à-vis some translation of the impact of model change and the EBA guideline from the first to the second quarter. So we expect to have, all in all, for 2019 an overall impact of 75 basis points of combined model for 35 basis points and EBA guideline for 41 basis points. That's for the full year. The first quarter we expect toward 10, 12 basis points. And on the second quarter, we expect that we should have more important impact of roughly 39 basis points, which could impact the second quarter. So the combination of this negative regulatory impact with earnings on one side and potentially some manage -- or action like disposal of real state orders, in that we have crossed that 11.7%. And we go back up to 12% at the end of the year. The second impact of regulatory change will be mostly on the fourth quarter. We have a very little impact on the third quarter of any regulatory change. So we move into combined impact to the second quarter, 51 basis points, so 12 and 39 on first and second, roughly. Not seeing on the third and the final 25 basis points on the fourth. So that should guide you in terms of your CET1 projection. We are, I mean, very confident that we will deliver on our 12% to CET1 ratio and our 200 to 250 basis points MDA buffer. As I said, it is I think important to look at the MDA buffer going forward for the dividend policy and the absolute CET1.

[Delphine Lee, analyst]

Sorry, if I can just clarify, what I meant for the revenues was the EUR 500 million pickup was on the core revenues, so -- because you had EUR 17.6 billion in '18, and you're targeting EUR 18.1 billion in 2019. So if fees and commissions are going up only EUR 100 million, it just implies quite a bit on NII. So I just wanted to understand a bit the trends in NII basically.

[Jean-Pierre Mustier, executive]

The trends in NII, if you look at the Group Core, we have for the net interest for 2018 at EUR 10.7 billion. And we have fees of EUR 6.8 billion. So we are actually not very far from the EUR 18.1 billion. So I'm quite sure that I understand your EUR 500 million evolution. What I suggest that the IR team speaks to you directly afterwards.

[Operator]

The next question is from Andrea Vercellone with Exane.

[Andrea Vercellone, analyst]

I have 2 questions. First one on capital, second one on tax. On capital, you have already taken a lot of the negative impact related to NPL sales, whether it's due to FINO or disposals, which should happen afterwards. Now if the revised version of the BRRD was to include an LGD waiver on massive NPL disposals, does it mean that you'll have a benefit from your -- in your fully loaded Core Tier 1 ratio? Or what is done is done. Second, on tax, how long can the 17%, 18% tax rate last for, like 2020, 2021 or longer than that? And specifically on this, can you disclose how much potential you still have for DTA like that, specifically in Austria and in Germany?

[Jean-Pierre Mustier, executive]

I will let Mirko comment on the tax rate. And afterwards TJ and I will comment on the massive disposal issue. But Mirko, can you first comment on the tax rate?

[Mirko Bianchi, executive]

Yes. On the tax rate, yes, we have a 17.8 percentage point, a normalized percentage point. I think for 2019, this is going to be between 17% and 18%. Post 2019, I think we should start modeling 23% to 24% normalized tax rate because this will depend a lot on the DTA checks that we need to do on a regular basis depending on the various performances in, like you said, in Austria and in Germany. And so there's a -- it's been where we are comfortable in basically guiding in terms of tax rate.

[Andrea Vercellone, analyst]

How much have you still got in potential cushion?

[Mirko Bianchi, executive]

Yes, the cushion is around, between, if I look at Germany and Austria, it's around EUR 450 million.

[Jean-Pierre Mustier, executive]

I will hand over to TJ on the massive disposal and the impact on the model MDA and LGD impact it will have on the stock. But I think that on the flow, which was not your question, but which I think is important is, what is important for me is that we don't negatively impact our competitive positioning when we advance. Because we're conserve -- the disposal of NPL and [ save the thing first ]. So we are discussing with the regulator. But the LGD waiver will allow us when we look at the said forecast, if I must say, of loans to lower the LGD on future origination to make it more consistent with our current underwriting policy, so that we can remain competitive and not be impacted by past history, which has nothing to do with what the bank is today. So I think the future origination capabilities and competitivity is what is important. And together with the team, we are making sure that this -- the negative impact of disposal on asset, which have no relation with underwriting, will have de minimis impact. On the stock -- adjustment when you say -- of the LGD, TJ, I'll let you comment.

[Thiam Lim, executive]

Just one for clarification. This waiver is not really a full waiver, it's an adjustment for massive disposal. We're still in final consultation, we expect this to be in the next few months. Clearly, if that happens, it will have positive impact on our capital sort of walk, but it depends on the number of factors including the actual fall versus a good shortfall, the shortfall evolution. During the CMD in December 3, we will then give you a projection of this insight because it's not fully signed off. And we are clearly working. We have estimated impact and this impact has been embedded into the 2019 guidance that we have given. But going forward, clearly, this is a future as well. And we will articulate this further on December 3.

[Operator]

The next question is from Giovanni Razzoli with Equita.

[Giovanni Razzoli, analyst]

Two clarifications, if I may. Back on the cost of risk, you've mentioned that you had intended this quarter-on-quarter increase in the cost of risk because of the updated GDP estimates. I was just asking whether this increase reflects an increase only on the Italian Commercial Banking business or at group level. And the second question as we go -- in 2019, I was wondering whether we may have some updates on the litigation with OFAC administration on the potential liabilities?

[Jean-Pierre Mustier, executive]

On the IFRS 9 cost of risk impact. As we said, the impact has to be looked at on an annualized basis. So it's 3 basis points, incorporates GDP adjustment for all European countries. So if we have mentioned as far as Italy is concerned what has been the specific impact, TJ can mention that on the Italian call, like we said, but we have more minor impact on the other countries. But before TJ speaks, let me comment on the litigation side. We are not taking any additional provision in the first quarter for U.S. litigation. We expect it will probably taken to be in line with what could be the final decision. And another, we had a minor low single digit impact on our CET1, plus or minus 5 basis point, basically. So that should not be a specific issue. TJ, on the cost of risk for the IFRS 9 adjustment?

[Thiam Lim, executive]

Yes, on the cost of risk, we clearly updated all of the GDPs and all of the parameters across our entire group. And the most impacted, really, is the Italian side of the -- for instance, from where it contributes more than 2/3 of the impact for the entire group. So overall, it's 3 basis points for the year. And if you look through all the group, the most impacted area is Italy. There are some minor impact in Austria and Finland.

[Operator]

The next question is from Azzurra Guelfi with Citi.

[Azzurra Guelfi, analyst]

Something on cost and something on NPL, so just a little bit different. When I look at your cost target for 2019, given that the progress that you have showed in '17 and '18, it's not particularly demanding. And I just wanted to know if you could just split for us what are cost saving and potential investment that instead that you are considering to do during the year, and if you see that there could be more space for optimization, or you would leave some more for the next plan. And the second one is on NPL. As you said, you have one of the highest coverage and you have done a lot of work on NPLs. And could you increase disposal for 2019? And in case any update on the workout because the results that you showed so far are quite encouraging?

[Jean-Pierre Mustier, executive]

I might take a strategy from you and use on your not-particularly-demanding cost prediction, and that's the failures. Okay. We reduced our cost in a massive way. The team is focused on that. It's coming from the top. We are massively outperforming our cost reduction for 2018, and we're down to EUR 10.7 billion when our target was EUR 11 billion, while reducing further cost and our target to EUR 10.4 billion. So I know it's easy when you have an Excel worksheet to say why not reducing the cost. We are managing people, won't cheat clients, so please, recognize to what we have been doing, and don't make this kind of comment.

[Azzurra Guelfi, analyst]

Well, assuming...

[Jean-Pierre Mustier, executive]

No, that's it. On the NPL disposal, we have a target to reduce our noncore groups to 0 by 2021. We are on track. We are working in the most efficient way in terms of reduction. It is a combination of recovery, of write-off and disposal. And we said that the contribution should be more or less 1/3, 1/3, 1/3. And if we can reduce further and more quickly, we will do it. But don't expect us to be massively below our target for 2019 on EUR 14.9 billion for the noncore. It is -- or I mean, a challenging target, and it is very challenging to reduce to 0 by 2021. And so we have reduced that massively from what we mentioned at the Capital Market Day. And we stick to our projection.

[Operator]

The last question is from Ignacio Cerezo with UBS.

[Ignacio Cerezo Olmos, analyst]

A couple of quick ones for me. First one on NPL income within a net interest income from both high value money and the UTPs. If you can give us the weight, within the group. And then second, in terms of update on the Turkey book value and the intergroup exposure you have as of December.

[Jean-Pierre Mustier, executive]

Sure, on the term value of UTP, I don't know if TJ can have any answer now. Otherwise, the IR team will call you back. To say that you are challenging us with this question, but well done. On the Turkish, the value of Yapi Kredi is unchanged. There is no specific additional impairment in our Q4 result. And we don't expect additional evolution for the Turkish -- for Yapi Kredi book value. TJ, on -- no, TJ is waving desperately saying that the IR team will call you.

[Thiam Lim, executive]

We will need to get back with the time plan.

[Jean-Pierre Mustier, executive]

On the time plan for NPL, yes.

[Operator]

There are no more questions registered at this time.

[Mirko Bianchi, executive]

Maybe let me just make one remark from the outside on the dividend that we just announced, so. The upcoming date for the dividend will be the 23rd of April is the ex-dividend date. The 24th of April will be the record date and the 25th of April will be the payment date. And any other specific communication regarding these dates and the dividend will be available on our website.

[Jean-Pierre Mustier, executive]

Any other questions?

[Operator]

Gentlemen, I'm showing there are no questions.

[Jean-Pierre Mustier, executive]

Thank you very much. So if there is no other question, thank you very much for having taken the time to listen to us. We'll be, from tomorrow, on the road, Mirko and I, and being able to meet with you and with investors for the next 1.5 weeks or 2 weeks. Thank you very much.

[Operator]

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