UniCredit SpA

MIL:UCG

Earnings Call Transcript 2019-Q4

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the UniCredit Group's Fourth Quarter and Full Year 2019 Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Jean-Pierre Mustier, UniCredit Group's Chief Executive Officer. Please go ahead, sir.

[Jean-Pierre Mustier, executive]

Thank you very much. Good morning to you all, and welcome to our analyst call for the fourth quarter '19 and the full year 2019. The last time we saw you, we presented our new plan, Team 23, at our Capital Markets Day in London last December. But today, we present the last quarter and the last full financial year of our previous plan [ transformed ] 2019. I am really proud to say that we ended the plan on a high note, delivering a strong full year '19 result, including our target of EUR 4.7 billion underlying net profit. This result would not have been possible without the dedication and the hard work of the whole team. I am very grateful to all our colleagues. Thank you.

The EUR 4.7 billion underlying net profit is the basis of our proposed capital distribution for FY '19 paid in 2020 of EUR 1.9 billion; cash dividend of EUR 1.4 billion; and a share buyback of EUR 0.5 billion, subject, of course, to AGM and supervisory approval.

CRD V Article 104a has been communicated last week by the ECB to be applied in the [ strike ] valid from 1st of January, 2021. Thanks to this and our strong pro forma CET1 ratio at year-end 2019 of 13.09%, we will consider to increase our capital distribution to 50% for FY '20 paid in 2021 and for the remainder of the plan. This implies more than EUR 1 billion of additional capital distribution to our shareholders over the course of Team 23.

With that, we deliver on our commitments since the beginning of Transform 2019 by the increase of the capital distribution to 50% as soon as we can have better visibility on the regulatory headwinds. At UniCredit, we say what we do, and we do what we think.

Let's turn to Slide 4. The underlying fourth quarter '19 net profit of the group was EUR 1.4 billion. This is a record for fourth quarter for the third time in a row. Derisking the quarter continued at a vigorous pace, taking the group gross NPE ratio to 5% for the first time, but again significantly down year-on-year. 4Q '19 was affected by a number of nonoperating items, as per the Capital Markets Day '19. We have also recasting the first 3 quarters of FY '19 and all the quarters of FY '18 for the revaluation of real estate. You can find details of these topics in the Annex from Page 45 and onwards.

You will have also seen that last night, we sold another stake in Yapi, taking our shareholding to 20%. We expect to stay at that level for the remainder of the year. We are confident that this transaction will allow us to deconsolidate Yapi from a regulatory perspective in the first quarter of '20 and have contacted the potential supervisors. The overall impact on the first quarter of '20 of the transaction in Yapi, assuming regulatory deconsolidation, is expected to be around 0.5 percentage points of CET1 ratio.

Let's move to Slide 5. The fourth quarter '19 group revenues are up 3.4% year-on-year, while Q4 '19 costs are down 4.4% year-on-year, resulting in significant operating leverage. Group gross NPEs are EUR 25.3 billion, down almost 2/3 since the start of Transform 2019 and beating the original target by almost EUR 20 billion.

Let's move to Slide 7. Our pro forma 4Q '19 CET1 ratio stood at 13.09%, representing a buffer of 300 basis points of our MDA. In the last 12 months, our spreads have tightened considerably. We continued our proactive funding strategy and issued more than EUR 3 billion in subordinated TLAC instrument in January this year at very attractive spreads. The Non Core rundown continues at a brief pace, with Non Core gross NPE reaching EUR 8.6 billion at the end of FY '19, well ahead of guidance.

Let's turn to Slide 8. We continue to enhance our multichannel offer to deliver an enhanced customer experience as illustrated by the continued successful rollout of our Western European mobile banking app. We have published our comprehensive ESG strategy late November last year, which is fully integrated in 2023. This demonstrates our very strong commitment to sustainability.

Let's turn to Slide 9. As we said earlier, we have successfully delivered Transform 2019, despite challenging macro headwinds. We overachieved on the reduction of NPEs, the capital and cost reduction, including the FTE and branch closures. While we beat the absolute cost reduction target by EUR 700 million, the adverse macro environment led to low revenues, and first the cost income ratio was slightly above target. We are very proud of the increase in our profitability, capitalization level and risk profile that, together, resulted in the improvement of SREP P2R ratio by 75 basis points since the beginning of the plan, which is the biggest decrease of any European bank.

Now let me hand over to Mirko.

[Mirko Bianchi, executive]

Thank you, Jean-Pierre, and good morning to everyone. I will now take you through our 4Q 2019 and fiscal year 2019 financial performance. You will see we have stopped reporting the group core P&L numbers. We communicated at our Capital Markets Day 2019 about the EUR 1 billion Non Core loan loss provisions for the updated rundown strategy booked in the 4Q. As a result, Non Core is essentially closed from a P&L perspective, and therefore group core numbers will be materially the same as group from the 1Q 2020 onwards. As regards to the asset quality KPIs, we will continue to make the distinction between group excluding Non Core, and Non Core, until the full rundown by the end of 2021. Group profitability was strong with an underlying RoTE of 10.8% in the quarter and 9.2% for fiscal year 2019, better than our 9% target.

Let's turn to Slide 12. As we will go through the P&L items up to [ NOC ] on the following pages I will focus my comments on this page on the below-the-line items. The systemic charges were slightly higher than our guidance of approximately EUR 850 million due to one-off items like bank levy in Romania. For fiscal year 2020, our guidance is below EUR 900 million. The integration costs include the restructuring charges for FTE reductions, mainly in Germany and Austria as well as nonrecurring write-off of intangible assets related to software. The profit on investment includes the impact from the unwinding of the Yapi joint ventures as disclosed in the press release in November.

The tax rate, the stated tax rate in fiscal year 2019 is 29%, driven by the nondeductibility of various nonoperating items. The underlying tax rate in 2019 is below 20% as per guidance. For Team 23, its stated tax rate is expected between 23% and 25%, while the underlying tax rate, as previously said, is between 18% and 20%. Our colleagues in IR will be happy to give you more details on this if you need it.

Let's turn to Slide 13. Commercial dynamics in the quarter were resilient, although NII was down to noncommercial items. The main drivers of the quarterly NII were loan volumes down, mainly driven by Commercial Banking Italy and CIB. In Commercial Banking Italy, we proactively managed our credit exposures with net negative clients, which explains 80% of the loan reduction. In CIB, there were some large repayments from corporates with excess liquidity. The contribution from deposit rates was a positive EUR 45 million, driven by lower term deposit volumes, mainly in Russia.

In the other bucket, 3Q '19 was affected by a nonrecurring positive EUR 11 million item in [ factory ] Italy. In addition, there was a technical accounting adjustment in the quarter-on-quarter change for negative EUR 13 million.

Let's turn to Slide 14. Commercial Banking Germany customer loan rates were up 3 basis points in the quarter, while for the group, they were 2 basis points lower. The main reason being our focus on better-rated clients and continued competitive pressure. Deposit rates at group level were down 4 basis points in the quarter, mainly driven by the lower-term deposits in CED.

Let's turn to Slide 15. End-of-the-period customer loan volumes in group, excluding Non Core, were lower quarter-on-quarter in all divisions except Commercial Banking Austria. The reasons were slightly different. In Commercial Banking Italy, we proactively managed our credit exposures with EVA-negative clients, which explains 80% of the loan reduction.

In Commercial Germany, there was active balance sheet management by clients over year-end with early repayments in real estate and short-term loan reduction from large corporates. In CIB, some large corporates with excess liquidity repaid their loans, and we exited the CEE division Baltic leasing business for EUR 800 million. The gap between customer loans and customer deposits that resulted from the sale of Fineco is almost completely closed, improving from more than EUR 17 billion in the 2Q 2019 to less than EUR 3 billion in the 4Q '19.

Let's turn to Slide 16. Group fees were up 5.1% year-on-year, driven by investment fees. There was a strong contribution from AUM fees, both from upfront and management fees. This is true for the development across Western Europe, both quarter-on-quarter and year-on-year. It confirms the success of our strategy on converting AUCs into AUMs. Transaction fees would have been flat quarter-on-quarter had they not being affected by a nonrecurring success fee paid to a third party in the 4Q 2019. For fiscal year 2020, we expect a positive contribution to transaction fees from current account repricing.

Let's turn to Slide 17. TFAs stood at EUR 793.9 billion in the 4Q 2019. We had strong AUM net sales of plus EUR 2 billion in the quarter, mostly in Italy. We continued to see successful conversion of AUC into AUMs as clients realized capital gains from BTPs and certificates, and invested a good percentage of these flows into AUMs. As a result, AUC net sales in the quarter stood at a negative EUR 2.4 billion.

Let's turn to Slide 18. Trading income in the fiscal year 2019 was EUR 1.5 billion, up 20.2% on last year, driven by strong client activity. This is even more impressive considering there was a negative swing in XVA of almost EUR 150 million. Excluding XVA, the increase in trading income would have been 35%. We confirm expected average rate quarterly figure of around EUR 300 million. This number excludes XVA. The contribution of Yapi was EUR 220 million in the fiscal year 2019 with a mere EUR 9 million in the fourth quarter, mainly driven by higher loan loss provision in the local accounts. As we said before, we expect a share ownership level of Yapi at 20% for the remainder of the year.

Let's turn to Slide 19. Our focus on cost efficiency is yielding tangible results quarter after quarter, with costs better by 3.7% fiscal year on fiscal year. As we said at our Capital Markets in December last year, Team 23 is more about bottom-up process optimization. As a result, our cost efficiency will be more back-ended to offset cost inflation leading to overall flat cost over the planned period. For fiscal year 2020, the cost target is confirmed below EUR 10.2 billion.

Let's turn to Slide 20. We experienced the usual 4Q seasonality in both HR and non-HR expenses. While the latter is driven by year-end invoicing of vendors, the former is affected by variable compensation and the new labor contract in Italy. Please also note that the intangible asset write-off in the 4Q 2019 was reclassified from non-HR expenses to integration costs, due to its nonrecurring nature.

Let's turn to Slide 21. Regarding group asset quality, I would like to point out 3 items. First, in the 4Q 2019, for the first time, the group gross NPE ratio improved to 5%. This was thanks to a 12% quarter-on-quarter reduction in the gross NPE in the numerator and an increase in the denominator from higher repo volumes that are more volatile in nature. With more normalized repo volumes, the ratio would have been 5.2%.

Second, the underlying cost of risk was 49 basis points with no models impact for fiscal year 2019, better than our original target of 55 basis points, including 4 basis points of models. On a stated basis, the Non-Core loan loss provision for the updated rundown strategy inflated the number.

Third, the underlying risk environment remains supportive, and we confirm the fiscal year 2020 guidance given at the Capital Markets Day '19 of 46 basis points, including 12 basis points of regulatory headwinds. This drop in cost of risk is driven by Non-Core no longer contributing to loan loss provisions in a material way. For reference, the fiscal year 2019 cost of risk for group, excluding Non Core, was 37 basis points.

Let's turn to Slide 23. In fiscal year 2019, NII was down due to pressure on loan rates and volumes and higher deposits. The quarter-on-quarter drop in loans in the 4Q 2019 was due to our proactive management of credit exposure with EVA negative clients, which explains 80% of the loan reduction. On the fee side, fiscal year 2019 investment fees were stable versus the previous year, that showed a meaningful acceleration towards the end of the year. 4Q 2019 investment figures were up 19.5% year-on-year, thanks to better upfront fees from significantly better gross sales and management fees. Fiscal year 2019 cost of risk was 73 basis points, down 1 basis points versus last year. This was affected positively by lower impacts from models in the IFRS 9 macro scenario, and negatively by disposals of residential mortgage NPEs in the 3Q 2019.

Let's turn to Slide 24. In Commercial Banking Germany, fiscal year 2019 total revenues were down 2.2%, driven by trading, while commercial revenues were resilient. The drop in trading was almost completely due to a swing in XVA. 4Q 2019 NII was lower quarter-on-quarter due to a negative EUR 13 million from the technical accounting adjustment we mentioned earlier. Please note that the first 3 published quarters were meaningfully affected by the recast for the revaluation of real estate. Details can be found in the Annex on Page 49 and following.

Let's turn to Slide 25. In Commercial Banking Austria, 4Q 2019 fees included a high single-digit performance fee. As we did not have net write-backs in the second half of 2019, cost of risk started normalizing, and we ended the year below the 16 basis points fiscal year 2019 target.

Let's turn to Slide 26. In CEE, fiscal year 2019 fees were up 2.3% on last year. The underlying fee growth, adjusted for accounting changes on CPI 3 accruals, is around 4%. The contribution of ERP was lower due to the increased loan loss provisions. Please remember that we still include the clients and branches of ERP in the divisional numbers. We will stop doing this once we get the regulatory deconsolidation.

Let's turn to Slide 27. Financing fees in fiscal year 2019 were down 10%. This was driven mainly by lower loan fees from reduced client activity and lending volumes. For fiscal year 2019, trading profit is up a strong 26.6%, driven by strong underlying client activity, mainly in FICC and equity derivatives. This is despite an adverse mid-double-digit move in XVA. Excluding XVA, trading profit would have been up more than 35%.

Let's turn to Slide 28. In the Group Corporate Center, we delivered on our Transform 2019 KPI of Group Corporate Center cost to total cost. While the revenues were down year-on-year due to increased subordinated issuance, we expect fiscal year 2020 funding cost to come down, thanks to the spread tightening experienced last year. Please bear in mind that the sale of Fineco in the 2Q 2019 is in discontinued operations.

Let's turn to Slide 29. After we took in the 4Q 2019 the loan loss provision related to the updated rundown of Non Core, the division is essentially closed from an economic and P&L perspective. Therefore, we expect only nonmaterial P&L impacts for fiscal year 2020 and 2021. We have also improved our fiscal year 2020 gross NPE target to less than EUR 4.3 billion, which is half the gross NPEs at the end of 2019.

Let's turn to Slide 31. We continuously work to derisk the balance sheet. The trend is very good, primarily driven by disposals. Our gross NPE ratio for the group, excluding Non Core, improved to 3.4% in the 4Q 2019. Calculated using the EBA definition, we were at 3.0%, very close to the EBA average of 2.9%.

Let's turn to Slide 32. The overall credit environment remains supportive as demonstrated by the default rate being down significantly year-on-year and stable quarter-on-quarter. The year-on-year decrease in the cure rate, and the increase in the migration rate for the same period, are both mainly due to Commercial Banking in Italy, which we'll discuss in a minute.

Let's turn to Slide 33. The gross NPE ratio in Commercial Banking Italy was 5.1%, down 67 basis points year-on-year, while the coverage ratio improved to 57.3% in the same period. The absolute stock of NPEs, both gross and net, is decreasing year-on-year and are stable in the quarter. The small uptick in the gross NPE ratio quarter-on-quarter is essentially due to the lower denominator.

Let's turn to Slide 34. Overall, the risk environment in Commercial Bank in Italy remains supportive and stable. This is evidenced by stable year-on-year default rates and an improved expected loss on the stock. The year-on-year decrease in the cure rate is due to 4Q 2018 having an extraordinary outflow to performing of 2 single names for around EUR 200 million. Without that, the 4Q 2018 cure rate would have been very similar to the one in the 4Q 2019. The year-on-year increase in the migration rate is mainly affected by the 4Q 2018 being exceptionally low as a result of proactive actions taken in the 3Q 2018. Without those, the 4Q 2018 migration rate would have been 28%, very close to the historical average for quarterly migration rates of around 27% and in line with the 4Q 2019.

Let's turn to Slide 35. Non Core gross NPEs continued to drop by almost EUR 10 billion in fiscal year 2019 and ending at EUR 8.6 billion. This is more than 50% better than the original Transform 2019 target of EUR 19.2 billion and a drop of more than EUR 40 billion since the launch of Transform 2019. The team's superb execution of the Non Core rundown fully confirms [ daily ] ability to deliver the final runoff of 2021.

Let's turn to Slide 36. The loan loss provisions for the updated rundown strategy of Non Core have resulted in a greatly improved coverage and the net NPEs below EUR 2 billion in the 4Q 2019. With this improved coverage ratio of above 78%, we are positioned to sell on all Non Core asset classes. The economic risk stemming from the remaining Non Core runoff is therefore not material. We also reconfirmed the full runoff by 2021. In FY '20, we are confident to at least halve the exposure, to below EUR 4.3 billion gross NPEs in Non Core.

Let's turn to Slide 38. The group's pro forma CET1 ratio at quarter end stood at 13.09% or a 300 basis points buffer to MDA. This number is pro forma for the share buyback, which is technically will only be deducted once approved. Two factors explain the increase of CET1 ratio. Around plus 0.1 percentage points of the increase comes from market-related items, which could reverse based on the environment such as DBO. Approximately plus 0.4 percentage points come from the drop in loan volumes, as previously explained.

Also, let me remind you that the lower SREP P2R only came into effect on January 1, 2020. As regards to the CET1 MDA buffer guidance for 2020, we expect it to be at a similar level to today throughout the year, while the final pro forma CET1 MDA buffer at the end of 2020 should be closer to the upper end of our target range, assuming an increased capital distribution to 50%.

Let's turn to Slide 39. Risk-weighted assets in the quarter decreased by EUR 9.1 billion to EUR 378.7 billion. The main driver was the business evolution from lower lending volumes due to the proactive management of EVA negative clients relationships.

Let's turn to Slide 40. In the 4Q 2019, our tangible equity grew by 1.9% quarter-on-quarter to EUR 53 billion. It is the fifth consecutive quarter of growth in both tangible equity and tangible book value per share, both now above fiscal year 2017 values. We expect tangible equity to drop in the first 2 quarters of fiscal year 2020 due to the integration costs in Italy and the dividend payments, but we are confident that at the end of 2020, tangible equity will be higher than fiscal year 2019. In terms of cash dividend payments for fiscal year 2019, we expect that to be EUR 0.63 per share or EUR 1.4 billion, to be paid out in April 2020.

Let's turn to Slide 41. As of the end of the 4Q 2019, we are well above our requirements with a TLAC ratio of 22.35%. This corresponds to an MDA buffer of 276 basis points, well above our target buffer range of 50 to 100 basis points. We have rebalanced our fiscal year 2020 funding plan following the communication of the revised timing of the CRD V, as we intend to utilize the possibility granted by CRD V Article 104a to cover up to 44% of the P2R with AT1s and Tier 2s. We now target a total issuance of around EUR 13 billion, out of which around EUR 6 billion will be subordinated. In January, we issued EUR 1.25 billion in Tier 2 and a EUR 2 billion senior nonpreferred dual tranche, all in Europe -- all in the Europe markets. These very successful transactions confirm our well-diversified market access and strong debt capital markets franchise. Following these transactions, we had only EUR 2.6 billion of subordinated instruments left to issue.

Jean-Pierre, back to you.

[Jean-Pierre Mustier, executive]

Thank you, Mirko. We've transformed 2019 successfully behind us. We are now dedicating our full focus and energy on delivering our new plan, Team 23, with all targets achieved. Ahead of reporting our first quarter of Team 23 performance in May, we will submit the request for the initial share buyback to the ECB and to our AGM in April. As already mentioned, CRD V Article 104a has been communicated last week by the ECB to be applied in the SREP valid from the 1st of January, 2021. Thanks to this, and our strong pro forma CET1 ratio at year-end 2019 of 13.09%, we will consider to increase our regular capital distribution to 50% for FY '20 to be paid in 2021 and for the remainder of the plan. This means more than EUR 1 billion of additional capital distribution over the course of Team 23 and is, of course, subject to shareholder and supervisory approval.

With that, we delivered on our commitment since the beginning of Transform 2019, that we'll increased the capital distribution to 50% as soon as we have better visibility on regulatory headwinds. Our medium- to long-term CET1 MDA buffer target for Team 23 remains 200 to 250 basis points.

Consequently, once all the regulatory headwinds will be clear, including the impact of Basel IV, we might consider on top of the assumed regular 50% capital distribution, an extraordinary distribution in 2021 and/or in 2022 to our shareholders based on our estimate of the projected CET1 MDA buffer excess for the duration of Team 23. Also, this one is subject to shareholder and supervisory approval.

You should also remember that we prefer share buyback over M&A any day of the week. For the avoidance of any doubt and to prevent any speculation, there will be no M&A for the duration of our plan.

Before taking your question, let me again extend my deepest thanks and appreciation to all UniCredit team members, whose commitment and hard work led to the successful delivery of Transform 2019. Together we now approach the execution of Team 23 with the same spirit and energy, doing the right thing for all our stakeholders.

Thank you. Now Mirko, Director of the team and I are ready to take your question. If you could please be so kind and limit your question to 2 each. Many thanks. Operator?

[Operator]

[Operator Instructions] The first question comes from Delphine Lee of JPMorgan.

[Delphine Lee, analyst]

So 2 from my side then. First of all, just wanted to come back on your comment about potentially distributing extra dividends for full year '21 and '22. Just in terms of the thought process, is it just Basel IV clarity you're waiting for until year-end? Or is there anything else we should consider in terms of headwinds or any other usage of that extra capital you may get, that we might have missed? Just to clarify. The second question is on the net interest income, and particularly, just if you could give us a little bit of color about 2020 in terms of the headwinds coming from the investment portfolio, the replicating portfolio? And maybe just a little bit also on the commercial side. Just how customer rates are evolving so far?

[Jean-Pierre Mustier, executive]

Thank you very much, Delphine. If you have a third question, we can answer it as well. But just to go back to the comments we made about the capital evolution and distribution to shareholders, I mean clearly, the CRD V Article 104 is an important parameter in our view of our capital base, as it will free up around 80% -- 80 basis points of CET1. As Mirko mentioned, we will use our facility to fill in the P2R, up to 44% of the P2R, with AT1 and Tier 2 instead of CET1. This extra 80 basis points -- it's actually 77 -- capital, coupled with the strong capital level we have at the end of 2019, most of it is a part and is solid but it's only 10 basis points which are linked to market activity, which might fully trade based on the curve, [ essentially ] interest rate curve. Meaning that we have excess capital above the buffer on the P2R, which we confirm to be 200 to 250 basis points over the course of the plan. And so this extra capital above our buffer allows us to consider 2 things: one is to increase the distribution to 50% of the net income starting [ being a good plan ]. So for 2020 net income and so get the distribution to be done in 2021 and for the remainder of the plan. And this is something we consider, and we are very comfortable to put that in place. It was a commitment we gave to our shareholders when we raised our [ cap on ] increase. And for the excess capital beyond that, we will consider in '20 -- in '21 and/or '22. So '21 and/or '22. That can be in '21, that could be in '22 or in '21 and '22, extraordinary distribution to the shareholders, which can be either in the form of dividends or either in the form of share buyback. And for the moment, no decision is made, and we'll decide that when the time comes. And this extraordinary distribution will be quantified based on the excess capital that we will have when we project all our capital evolution for the duration of the plan. So what will impact our excess capital, it's mostly regulatory headwinds. We have already communicated, and I think we are the only bank to communicate, regulatory headwinds up to 2027, meaning up to the full impact of Basel IV. We have made some assumption in these regulatory headwinds, and we think our assumptions are fairly valid. I was in Brussels 2 weeks ago and confirmed with members of the Commission that what we think is actually what they have in mind, but the Commission will confirm that by the end of June -- so by the end of June this year, there will be much more visibility about Basel IV. Besides Basel IV, there are very little impact to be looked at in terms of regulatory headwinds, and we detailed everything in our Capital Markets Day. So we are confident that we will have this excess above our MDA buffer of 200 and 250 basis points. And then we'll make a decision. The board will look at the issue in early 2021 to submit the proposal to the shareholders and to the regulator, and so that we can move on this excess capital distribution.

On the NII side, just to confirm, we said at the Capital Markets Day that the NII will go down close to EUR 10 billion a year, and we'll have a trough in 2021 before rebounding. Rebounding thanks to increase of [ converging ] as well as the rate curve, which Euribor are getting less negative. And so there is no reason to change the guidance that we gave on NII. So of course, in 2020 and '21, around EUR 10 billion, and then an increase, and we'll finish at the end of the plan at a level very similar to 2018, around EUR 10.5 billion.

[Operator]

The next question is from Jean Neuez of Goldman Sachs.

[Jean-Francois Neuez, analyst]

My question actually has been partially answered with your last comment. But the question I wanted to ask is, for example this quarter, there was probably 30, 40 basis points of capital that formed unexpectedly with the RWA dynamics as well as probably EUR 200 million worth of cost that were below the original guidance of the last quarter. My question is just, in terms of reemployment of cost and capital resources in a business that has now been successfully restructured. Obviously, you've hinted that you would spend extra resources on some capital return. I just want -- and not on M&A either. I just wanted to understand, for example, if you find these cost efficiencies just like you did, is there any area where you'd like to invest? Try to boost revenues? Try to maximize operating leverage beyond these extra distributions? Or would you -- if you had these extra resources just in the future, even hike the regular capital distribution, where is the trade-off here in terms of franchise development versus essentially fall through to shareholders?

[Jean-Pierre Mustier, executive]

Thank you very much. Just -- we said at the Capital Markets Day that we want to have a proactive capital allocation. We said both top down and bottom up. Top down, you have seen what we announced this morning with a placement of Yapi, so we go down to 20% stake in Yapi. We confirmed that we should have regulatory deconsolidation. But on the bottom-up side, during the Capital Markets Day, we said that we want to proactively allocate capital to 2 things: one is to growth projects, and then we let the co-CEOs of Western Europe on one side and of CEE on the other side, comment about our growth projects, both on retail and corporate. But also to make sure that we proactively manage our capital allocation to clients, which might not cover over time their cost of capital. And we have identified a certain number of cluster of clients in various activities which over time have a negative EVA, which we think cannot be filled. So we increased our condition for that.

And if they refinance with others, then it frees up capital that we can look to redeploy with other clients. And if we can't find a redeployment which is matching our own cost of capital, we keep the capital for share buyback. So that's the bottom-up for active management of our balance sheet. We clearly would prefer to reemploy the capital towards growth in clients and the co-CEOs of Western Europe and CEE will comment about it in 1 minute. But we don't want to do loan volume. We don't want to push for transaction which have a short-term impact on NII and which have a negative impact overall in terms of risk profile. So we are very, very disciplined. And if a client does not cover its cost of capital, we don't do it.

And at the same time, and the co-CEOs can comment about it, we are taking advantage of the current market environment to shift the portfolio to better-rated clients and then we let the team comment about it. The current environment is actually a very good environment because some banks have been desperate for yield. So they go towards a client which have a higher spread, which are not the best profile in terms of credit, and we use that to rebalance the portfolio. But I will let my colleagues comment. So maybe first, Francesco Giordano and Olivier Khayat for Western Europe. And then Niccoló Ubertalli and Gianfranco Bisagni for CEE. So Francesco, Olivier, if you want to comment on your approach on Western Europe in terms of growth, risk allocation, please?

[Francesco Giordano, executive]

Thank you, Jean-Pierre. First of all, in terms of risk allocation, as you said, we are allocating our resources to the best rating, and we would like to make sure that any growth is not mortgaging the future. As an illustration, more than 70% of last year origination in the corporate network Italy was made of investment grade credit, which is a massive improvement versus the year before. Where we would like to allocate and what are the direction of capital allocation, we have, on a regional basis, a growth plan in Germany where we are on a tack. We have just completed the hiring of around 200 bankers to increase our footprint in the country, which [ could bring ] to be one direction on a regional basis. And on the services, we strongly believe and we are going to allocate more liquidity deployment into working capital type of services, which is the real service into the real economy that the bank shall provide. I'll let my colleagues from CEE complement.

[Gianfranco Bisagni, executive]

The CEE regional banks are performing well, and our return on capital is well above the cost of equity. The reallocation, the excess capital is directed to the business with the best return in the region and by country. For example corporate, we are expecting moderate growth in -- during the plan, and we will focus on the best-rated clients. So no volume lending. Niccoló on retail?

[Niccoló Ubertalli, executive]

On the retail, we have a very strong customer franchise, and we are going to work on to better penetrating these current customer franchise that we have today.

[Jean-Pierre Mustier, executive]

So as a summary, you can see that top-down but also bottom-up, we are very, very focused on the right allocation of capital and resources towards our clients to create value. And as I mentioned, if we cannot find the proper redeployment of the capital, we keep it to do basically share buyback or increase distribution to the shareholders. And that's the strategy of Team 23, and we think that makes a lot of sense. In addition, improve dramatically the risk profile of the portfolio, which is an added bonus.

[Operator]

The next question is from Hugo Cruz of KBW.

[Hugo Cruz, analyst]

I think you mentioned the potential to reprice current accounts in terms of fees. Can you give guidance for the benefit of that, please?

[Jean-Pierre Mustier, executive]

Well, the current account repricing is part of the different actions we take in order to manage the impact of negative rates on our clients. So I will let my colleagues in Western Europe comment on the various actions that we are taking with all our clients. The large clients above EUR 1 million deposit, we already commented about it, for which we have a proactive management of the impact of negative rates. And then we have an ongoing repricing as well on current accounts. So Francesco and Olivier, if you want to comment about your negative rate strategy. And of course we can give more figures on the impact on a quarterly basis.

[Francesco Giordano, executive]

Thanks, Jean-Pierre. As you said, we have a comprehensive strategy to address negative rates, while supporting the franchise and defending our client position. You can see that also from the very successful growth in assets under management. So the basic of our strategy, which is converting deposits to assets under management, which we did successfully. As part of the strategy, as we mentioned, we have done some fairly moderate repricing of current account fees in line with the rest of the market. And we are approaching proactively large customer and depositors, both on the private and wealth side and the corporate side, offering alternative market day solutions with limited fees as cash substitutions.

[Olivier Khayat, executive]

I think that the impact in terms of current account repricing on a full year basis should be around EUR 60 million to EUR 65 million.

[Hugo Cruz, analyst]

Sorry, is that for 2020?

[Francesco Giordano, executive]

Correct. Which is fully included into our projection for Team 23. So that's something which is part of the figures we communicated in December. Just to -- for the clarification.

[Operator]

The next question, sir, is from Mr. Domenico Santoro of HSBC.

[Domenico Santoro, analyst]

Thanks for the presentation and for giving the guidance on the NII. Two questions on my side. Given the -- what you commented in the call that your Non Core now MDA stock is marked to market, and you don't expect any losses. I was just wondering whether the underlying provisioning level from now on, it will be better compared to the target that you have given for 2023. I understand that you've already given an underlying of 34 basis points for next year vis-à-vis the 37 of this year, but I'm just wondering from -- beyond 2020, if -- which could be a bit more positive on the provisions side. And then a question on liquidity and situation of liquidity in the country in which you operate.

Last week, the regulator made very clear the point that some countries in Europe, they still limit the liquidity waivers, especially on intra-group exposure. So I'm just wondering whether in view of more integrated markets and banking union, of course, the removal of this limitation could be kind of positive for your group. And whether you have made any calculation on this? Or alternatively, operationally wise, you are already enjoying these liquidity synergies?

[Jean-Pierre Mustier, executive]

Thank you. I will just take the question on liquidity now, and I will let my colleague, Tj Lim, comment on the Non Core evolution and our cost of risk going forward. On the liquidity side, the -- I mean the head of the SSM commented on local rules which prevent liquidity to free flow within a banking group, as there are large group exposure in banks. For instance, in our bank in Germany, there is a maximum 25% of capital which limits the overall exposure to any entity, including the holding of the book. And so that's -- if you want a legal constraint which is not under the control of the regulator. So this is why the regulator is trying to see if there could be some waivers to this lack of exposure when you're within one single banking group.

This being said, at this stage, and if I may say going forward as well, we don't need to shift liquidity between our different legal entities. And we don't need to shift liquidity for various reasons. All our banks are actually very well funded on the balance E&M. And we don't -- we want to make sure that they remain very well funded on the balance in [ E%M ] because the consequence here is not the regulator, but it's the rating agencies. And in other words, we don't want to fund our Italian curve with German deposits because otherwise, our German curves becomes an Italian curve, and we are less efficient in order to develop our business in Germany. So our approach is to make sure that we fund on a subsidiary basis in the balance ALM. We have excess funding in other countries, and we make sure that we target our excess funding appropriately. And the liquidity constraint is not a constraint. This is why I have been saying many times that the European deposit insurance scheme is not a prerequisite to run a pan-European bank, because we don't need it. And so what is important to complete the banking union is not the European deposit insurance scheme. We are a pan-European bank, and whether we have it or not, you're not going to change our life, actually.

What is important for the completion of banking union is to make sure that we have more homogeneous rule between the various countries, so that the banking sector can be seen as one banking sector and bank can attract capital, debt and equity, and European banks can compete against U.S. banks to attract capital. But that's a different story, and I'm going off track. That's just your liquidity question. All our subsidiaries are properly funded -- balance ALM in each of the subsidiaries. No need to upstream liquidity, and that's it. There will be [ some kind ] of downstreaming of liquidity, if I may say, with MREL and internal MREL. As you know, there will be issuance of some of our subsidiaries towards the holding for resolution rules basically. And so the holding is raising MREL-eligible securities and then internal MREL. I mean that's -- we will -- at each subsidiary level, they will issue to the holding, which will subscribe these securities for internal MREL reason, as we have SPE strategy that we have confirmed and we maintain.

Tj, on the cost of risk at the group level stated for the full year and the fourth quarter. Then evolution for the group at Non Core going forward, which is the relevant reference.

[Thiam Lim, executive]

Yes. Thank you, Jean-Pierre. As already stated at the CMD, we guided the market for a cost of risk of EUR 46 million. Now this includes 12 basis points of models, and next year, we will have the new definition [ default ]. So the underlying cost of risk is EUR 34 million. And if you compare that to the Core, it's actually an improvement. And then over Team 23, we have mentioned at the CMD that it will be around 40 basis points at the end of the plan.

[Jean-Pierre Mustier, executive]

But just -- maybe before we take the next question, it's just to clarify because in the stated figures of cost of risk for 2019, we have the authorization of provision of the Non Core. If you look at the cost of risk ex authorization of provision of the Non Core, meaning the cost of risk of 49 basis points includes the group ex Non Core and the Non Core. When you look at the group ex Non Core, I mean we are at around 37 basis points for 2019. And the figure that Tj gave of 34 basis points, which is ex regulatory headwinds for 2020 is comparable to the 37 basis points of 2019. So there's a 3 basis points improvement in 2020 versus the comparable figure for the provisions on the group ex Non Core for 2019. So marginal improvement, good improvement but very consistent.

[Operator]

The next question is from Mr. Antonio Reale of Morgan Stanley.

[Antonio Reale, analyst]

I've got 2 questions and one clarification, please. The first question is, your comments on preferring buybacks over M&A are very clear. My question is, I guess, how should we think about the total payout mix going forward between cash dividend and share buybacks? I realize it's early stage, but I'm just keen to hear your reasoning of this throughout the plan. The clarification was on the capital comment and on CRD V. I mean of course, you have a strong track record on providing guidance on regulatory capital, and your comments on the 80 bps are pretty clear.

I guess my question is, do you expect any additional add-ons or any changes such as countercyclical buffers or any other headwinds that are not currently included in your slide on capital requirements? And then the second question is on NII and commercial banking. Can you give us an update in terms of what you're seeing on loan demand, spread dynamics and funding costs across Italy, Germany and Austria? Were there any one-offs that affected NII in Q4 that we should be aware of?

[Jean-Pierre Mustier, executive]

Thank you very much. I will let Mirko comment on the NII question, and I just will comment on your first question on the payout to shareholders and additional regulatory headwinds. We have said at the Capital Markets Day and reiterated, that we prefer share buyback to M&A. We said no M&A and only small bolt-on acquisition in the CEE side for a few hundred million euros. So what we said at the Capital Market Day stands. No M&A. So we just want to kill any speculation because we have seen too many things. And you know that we never comment on rumors and speculation. We never comment on rumor and speculation. When I say no M&A, I think that couldn't be any more rumors and speculation. That's to deal with that. But we said as well, we prefer share buyback to M&A, which can give you a strong hint about how the additional distribution to shareholders will be made. But of course, it will depend on the market environment going forward.

As far as the countercyclical buffer or concern of additional regulatory headwind, I mean there has been comment on increase of countercyclical buffers by some members of the ECB. We have, in some of the countries where we are present, there is already a small countercyclical buffer and the weighted average today for our capital leverage of 9 basis points basically might increase marginally, but we have taken that into account into our capital projection. If we have additional regulatory headwinds, I mean we have taken that, to a large extent, into account as well in our projection, but I cannot see anything coming in the next 2 years. There might be maybe other development from '22 onwards. We'll see how the Commission comes back on Basel IV. And if there are additional developments coming afterwards, it will be maybe 10, 20 basis points maximum. So nothing of an amount which will change our view and what we said about first, increase to 50% payout, which is what we promised to investors, and then payout of the excess capital above the 250 basis points buffer. So it will be a marginal adjustment, but we are -- we think we have a good visibility on that.

I'll let Mirko comment on the NII side.

[Mirko Bianchi, executive]

Yes. So on the NII, as we said, we are targeting around EUR 10 billion in NII. That's perfectly in line with what we said at the Capital Markets Day. In terms of loan growth, in the last quarter Italy and CIB were the ones that grew less. And we would expect going forwards overall loan growth to be modest. On the client rate side we think, let's say, the competitive environment will continue to be very tough. So we continue -- we will continue to see a client rates pressure also into 2021. And so what you have seen in the 4Q probably is something that is going to stay there for at least 2021. The big pressure is more on the short-term end, then the medium and long-term end. And that's where the most of the competitive pressure is actually coming.

On funding costs, you're going to see we created the lower funding costs. You've seen already a big reduction in 2019. If you look at our funding cost also in January, also our spreads have decreased more. So the expectation is that we will continue to adjust lower in terms of funding cost.

On the other 2 big items in NII is, one, of course, is in the investment portfolio that you asked the question also before. There, there will be pressure in terms of rates or spreads. We are investing slightly higher volumes. So we are able to partially counterbalance the full impact. And the same is for replicating portfolio, meaning rates are coming down or are lower. Nevertheless, we have higher volumes that we can ascribe to.

[Jean-Pierre Mustier, executive]

But all that has been taken into account in our NII projections. So that we have always, as you know, a conservative approach of the guidance we give to the market. And I just want to reiterate again, I think it's important that we come very clean about the NII projection. We don't want to push for volume lending. We don't want to push for carry trade. We think these are the wrong type of answer to NII pressure because you put in your balance sheet assets you do not want and which impact your risk profile. So it's better for us just to complain about it and to make sure that we work to improve the profile of our balance sheet. And this being said, this is also a golden opportunity, as the co-CEOs of Western Europe mentioned, to shift the portfolio towards the best rating, because for banks which are desperate for yield, they basically refinance clients which are of lower quality in terms of rating, and we can achieve the portfolio better. And you have seen that as well in improvement of the expected loss.

[Operator]

The next question is from Ms. Azzurra Guelfi of Citi.

[Azzurra Guelfi, analyst]

We already got the comments on capital, so my question will be mostly focusing on the profitability and P&L. If I look at cost, you have an excellent track record of beating your already challenging target. Can you give us some indication of what are the major action that you are planning for 2020, both on the investment side and any update on further efficiency? And when I look at revenue, what do you think is the main challenge for revenue? Is it the ability to find loans that are actually worth writing, given the return? Or is it something else that you think? And are you considering repricing on banking fees?

[Jean-Pierre Mustier, executive]

Thank you very much. Well, I will just give you a small introduction on the cost side, and I will let my 2 colleagues on the Western European side to comment about some actions taken in the network. And then my co-CEO colleagues to comment on what is being done on the operations side and IT side, actually, in terms of cost. You are right to say that we actually went well better than the guidance we gave on cost at the beginning of the plan by around EUR 700 million in absolute cost reduction. We have said that our cost target for 2020 will be below EUR 10.2 billion. And this is a combination of HR cost and non-HR cost, which are going to increase versus the end level of 2019. So why do we have a cost increase in 2020 when we should cost decrease for all of Transform 2019? Well, first of all, we have -- you need to look at the breakdown by geography that we communicated at the Capital Markets Day. The compound average growth rate for Western Europe will be minus 0.6%. So with the actions, we think [ we'll see ] a reduction of around EUR 8,000, actions on the non-HR cost. In Western Europe, in negative rates Western Europe, we decreased cost on an absolute basis, so minus 0.6%, while inflation is supposed to be around plus 1.4%. So you can see that we have a positive operating leverage. In the CEE side, we have a cost which are increasing by 1.8% because it's countries where there's growth and there's inflation of 3.3%. And so overall the target revenues increased by 2%. So there as well, a positive operating leverage.

On the cost actions, it's -- we said that the impact of Team 23 will be a little bit more back-loaded than Transform 2019 because a lot of the actions are coming from bottom-up initiatives, which are done both on the network and actually on the operations side and IT side. So I'll let Francesco and Olivier comment on bottom-up actions, enablers, end-to-end what we have on the Western Europe and Carlo and Ranieri comment on the operations and IT.

[Francesco Giordano, executive]

Thanks, Jean-Pierre. We have a significant number of initiatives, aimed both at increasing efficiencies and improving customer experience. Some of them were described in the Team 23 presentation. I will remind you, for example, that we confirm our target to have all Italian retail branches paperless by the mid of this year. This is an ambitious target that we confirm and requires, of course, a lot of work on digitalizing processes and reducing some of the administrative tasks. We have launched successfully our end-to-end rooms, which across Western Europe, we are redesigning processes in areas such as current account, consumer credit, SME lending. And with those, we expect also to deliver important, greater efficiency in the course of the plan.

[Jean-Pierre Mustier, executive]

Carlo and Ranieri on what we do on the operation IT side.

[Carlo Vivaldi, executive]

Yes. If we -- if I can -- thank you, I can take the operations side. Of course, the initiatives that have been done on the business are fully integrated with the operations. So the paperless initiative will benefit, of course, all the operations. I would like to remind that we come from a Transform 2019 extremely successful in terms of productivity and cost takeout. We will continue to invest in cost, notwithstanding the headwind in terms of the contract renegotiations, and we expect to generate significant productivity by continuous centralization of our activities and leverage [ on our ] assuring operations but also and specifically about the process, the redesign, digitalization of the process. The paperless initiative, for example, will benefit tremendously our back office because we will effectively limit the amount of work that will be done on data entry and paper management and focus much more on activities of control. So we will expect effectively to continue the positive trend in terms of cost and productivity that we have already in the Transform 2019 plan.

[Ranieri De Marchis, executive]

On the IT side also, that is fully integrated with the rest of the strategy. We are raising the bar on the investments. We have 17% increase in the total amount of investments vis-à-vis the previous plan, and those are allocated to support the digital transformation, to support the end-to-end. And so also the efficiency measures of the group.

[Operator]

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

[Alberto Cordara, analyst]

I have a couple of questions. The first one related to Slide 39. I see that there is a RWA drop that is related also to regulation, EUR 1.9 billion down. And the same happened also in Q3, minus EUR 1 billion after a regulation was the cause of an increase in risk-weighted assets in the first half of the year. So I just would like to clarify what is this related to? And also, if you can give us some clarity of the minus EUR 1.3 billion drop in risk-weighted assets that related to other credit? Then my second question is more on the business. I think at group level, we see that there is a remarkable stability of default rates. So despite some softening economic environment and the fact that 12 months ago, Italy suffered a mini recession environment in Q3 and Q4 '18. So the question is, does this softening economic environment translate more into weak lending volumes than default rates? And what is the outlook of NPE formation that you expect to see in the course of 2020?

[Jean-Pierre Mustier, executive]

Okay. Thank you very much. Just on Page 39, if you want to have much more detail than what I'm going to say now, feel free to contact our wonderful IR team. But basically, on the regulation bucket, the minus EUR 1.9 billion, we put in this bucket the disposal of the Non Core resi portfolio, which was done -- closed on the fourth quarter. So that explain basically all the reduction. And on the other credit, it's a disposal of some assets. We had Ocean Breeze, which was the wind farm that we disposed. We have a Mediobanca stake in others. So that explain mostly why discontinuity because we sold assets which lowered the risk-weighted asset. On the credit risk and credit evolution, I'll let Tj comment specifically. We focus on Italy, and we might explain or just go back to the explanation on evolution of the cost of risk in Italy, plus the different ratios we have in Italy, which explain most of the group evolution. Tj?

[Thiam Lim, executive]

Thank you, Jean-Pierre. Firstly, for the default rate, we are seeing very stable sort of evolution as you have seen. So we do not expect any deterioration, plus also a lot of proactive action in managing sort of our stock. And in terms of outlook, clearly, 2020, we have the new definition of default. We're expecting an increase in NPE ratio just mathematically with the new definition of default. But still, we're going to be proactively managing it. It will hover around the so-called, it's 5% sort of level, 5.1% to 5.4% over the so-called 2020 sort of horizon. And in terms of the underwriting standard, you've seen that in the expected loss side, we are very stable outside of the model effect over the course of 2019. And then this year, we're also expecting to be some slight migration upward, but still stable outside of the so-called model effect.

[Operator]

The next question is from Mr. Giovanni Razzoli of Equita.

[Giovanni Razzoli, analyst]

Just a couple of clarifications, not to bother you on your renewed dividend strategy. You mentioned EUR 1 billion of extra shareholder remuneration as a part of the increase in payout from 40% to 50% in the course of the plan. And this EUR 1 billion will take the form of buyback or dividend. So you have these options. This is my understanding, and want to know whether this understanding is correct. The second question is, on Slide #38, you have a 300 basis point of MDA buffer today, if I'm not mistaken, and this amount should increase further in 2020, thanks to the deconsolidation of Yapi Kredi. You don't have any particular regulatory headwinds in the short term.

If I'm not mistaken, in 2020 is going to have EUR 1.1 billion of restructuring charges in Italy, which amounted to something like 30 basis points of capital, more or less. So the MDA buffer will increase further vis-à-vis the 300 basis points we see today. I was wondering whether in the context of the possible dividend, the extra dividend and distribution that you announced today, you are going to look at the Basel IV, the 80 basis points of fully phased Basel IV, the impact on a fully phased basis or a phasing. Clearly, my question is in that, trying to understand what the potential today of the extra dividend distribution.

[Jean-Pierre Mustier, executive]

Just on the extra dividend -- or shareholder payout because it's more the adequate theme over the duration of the fund with the increase to 50%. It's -- we said over EUR 1 billion should be -- strictly speaking, I think more EUR 1.3 billion. So -- but that's the order of magnitude. So your understanding is correct.

On the buffer or the MDA buffer, we are at more than 300 basis points at the end of the year, and we said that we should stay at around the same level for the duration of the plan or the year, right? And while at the end of the first quarter, we will have to provision the extra distribution, basically dividends and/or share buyback. And so we'll be below 300 basis points and closer to the upper part of the 250 basis points. And you can do the calculation, if you do the adjustment yourself basically, that's easy to do.

On the question on Yapi and restructuring charge. The benefit we get on Yapi will, I mean cover maybe slightly in excess, the restructuring charge in Italy and the restructuring charge in Italy are representing around 40 basis points of CET1, while Yapi will generate something which is a little bit more than that, but not very different. We have around 48 basis points for the first quarter. And the Yapi disposal and the restructuring in Italy were fully taken into account into our capital book and fully taken into account in the guidance we gave. We still want 200 basis points of CET1 MDA buffer, and you have to deduct at the end of the year for this 200 basis points, the extra distribution that we will have.

[Operator]

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

[Andrea Filtri, analyst]

Very, very clear capital return strategy, yet we see very little followership from other banks so far, to your approach to Article 104a of CRD V. Are you worried that the validation of the Article could be partly offset by the ECB through an increase in P2R requirements? Or can we still hope for a reduction in P2R for UniCredit over the course of the plan, given your big improvement in asset quality and capital strengths? Second question, on Yapi. Could you decide to hold onto the Yapi stake beyond 2020, given you will already get most of the CET1 benefits in Q1 2020? And finally, just a confirmation on your message on the tax rate for 2020. I didn't understand exactly if we should continue to expect a reported tax rate in the 18% to 20% bracket.

[Jean-Pierre Mustier, executive]

Thank you very much. I will let Mirko comment on the tax rate, and I will take the first 2 questions. I mean we -- as I said earlier, we are the only bank which has been communicating very, very clearly about our expectation about Basel IV. When you complain about Basel IV, then you can complain about CRD V Article 104a. If you comment about the positive of Article 104a, the immediate question for an analyst is, okay, but what about Basel IV? And we have seen very few banks commenting about Basel IV. And so I think the reason why we have been one of the few banks to be very clear about Article 104a, is that because we are clear about Basel IV. So I think during the course of this year, you will see other banks coming out with the impact on Basel IV when the Commission have clarified what should be the transposition into European rules. We don't expect that the ECB will try to claw back the Article 104a CRD V by an increase in the P2R. And Mr. Andrea was very clear when he communicated that that's the load, that's the impact, and this is what is going to be done. And we cannot comment on what the regulator will do. As far as our P2R ratio is concerned, we had the reduction starting from the 1st of January of 25 basis points, and we will keep working very hard to improve on all the criteria that the ECB is looking at to make sure that our regulatory capital charge is as optimized as possible. But let's see what the future brings. And for the moment, we focus on 2020.

As far as Yapi is concerned, I would like to guide you to Slide 52 in the Annex of the presentation, where we have put footnotes which are an answer to your question. If you look at the net profit for 2020, the net profit for 2020 includes the contribution of Yapi for 20%. And we have footnoted for 2023, the net profit of EUR 5 billion, saying that the net profit of 2023 does not include any contribution of Yapi, and it is not by mistake. So basically, I think it's an answer to your question. In 2020, we said that we keep our 20% stake. And in 2023, Yapi does not contribute to the net income. Mirko, on the tax.

[Mirko Bianchi, executive]

Yes. Andrea, in terms of, first of all, the underlying tax rate on the monthly year plan, it's confirmed between 18% and 20%. And this is due to the positive contribution from DTA on tax loss carryforwards in Italy. When we look at the stated number, the stated number between '20 and '21 will be around 24%, 25%, and this is basically affected by the nontaxable deductibility of nonoperating items. Then in 2022 to 2023, the stated and the underlying will converge to the 18% to 20%, since we don't have any more material nontax deductible, nonoperating items that are foreseen.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

So a couple of quick clarifications for me. If you can actually give us the maths behind the Turkish capital benefits. What is offsetting the EUR 22 billion RWA deconsolidation? Because we would say that actually the capital benefit is larger than that. Second, if you can give us an update on the trade union agreement for the redundancies in Italy. And third, if full year results were basically a final hurdle for the ECB to give the approval on the buyback and the Turkish deconsolidation?

[Jean-Pierre Mustier, executive]

Thank you. On the Yapi side and the math behind the capital benefits, I will let our specialist, Mirko Bianchi, to comment about it. On the trade union agreement in Italy, our HR team is -- will start very soon the discussion with the union. So I mean that's should start and be done in the near future. As far as the Yapi side is concerned, Mirko, can you comment?

[Mirko Bianchi, executive]

Yes. On the Yapi side, in terms of the impact on capital, once we have the deconsolidation, the impact will be basically 32 bps in capital in addition to, basically, the effect of the 9% closing that we have done and realized in the 1Q. So overall, the impact will go up to 48 bps. And then depending on what happens to the stake going forwards, in theory it goes up to the same of 70 bps that we mentioned in Capital Markets Day. From a P&L perspective, you have the FX recognition that is going to flow through the P&L, not through the capital, that we'll announce by the end of the 1Q 2020 once the deconsolidation is reached, of around EUR 1.4 billion.

[Jean-Pierre Mustier, executive]

And just a reminder, but you probably remember that Yapi had a strange consolidation situation. We were from an accounting point of view consolidated quickly, while we were from a regulatory point of view, pro rata consolidated. And it's something which is strange because usually, there's a convergence between accounting and regulatory consolidation. This is why when we sell the stake, we have this -- I mean over-impact, if I may say, on the regulatory side, which frees up a lot of capital. And that's a positive consequence, if I may say, of the action we took. You asked for the regulatory process for deconsolidation. We said that we are confident that Yapi, from a regulatory point of view, will be deconsolidated as of the first quarter, and we expect a feedback from the regulator to match this deadline. And so we would not have been doing the transaction if we didn't think that we would have the regulatory deconsolidation, basically. As far as the buyback, ECB authorization on the buyback, we said our board validated yesterday the buyback. And so we are going to send the application to the ECB, which will be processed. And in parallel, we need to have the agreement of our shareholders at the AGM, which will be in April. So the 2 process work in parallel, so we are confident that this will happen.

[Operator]

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

[Andrea Vercellone, analyst]

The 2 questions are, the first one is on tax or mostly on the one-off tax items. What's this EUR 400 million one-off in Q4 that you mentioned before? And if so, I'd like to know whether you've got the capital benefit from it or if it's still deducted? Same question, going forward, as you're going to have, as you just said, the tax benefits in Italy for x number of years, do these benefits accrue to capital immediately in the year when they're booked? Or you continue to deduct them from a regulatory capital point of view; i.e. do you write up DTAs? Or are they current tax assets? The second is just some clarifications on net interest income. You mentioned in the presentations -- apology, I missed the beginning of the call -- several times, Italy impacted by nonrecurring items and other divisions impacted by noncommercial items. Can you just quantify a little bit what these nonrecurring items were in the various divisions in Q4?

[Jean-Pierre Mustier, executive]

Okay. I will let Mirko comment on the nonrecurring item. If you go to the presentation, the Annex, you have a list of those. But Mirko will elaborate a little bit more. But before that, I will let our co-CFO, Stefano Porro with -- working with Mirko and with our specialists on the tax treatment, to comment on the various requests that you have. Stefano, all yours.

[Stefano Porro, executive]

Yes. We experienced DTA write-up in Italy and in Austria in Q4 '19. The DTA write-up in Italy was around EUR 500 million, out of which the vast majority of these went through equity, not through P&L. All the amount of DTA write-up is related to tax loss carryforwards, so it's neutral from a capital perspective. During the plan, we are going to have recurring DTA write-up for around EUR 400 million per year. The DTA write-up is related to tax loss carryforward in Italy. The amount is relevant for P&L perspective, not for capital perspective, because the amount of tax loss carryforward DTA write-up is going to be deducted from the capital.

[Mirko Bianchi, executive]

On the one-off items in the NII, there are 2. One is an EUR 11 million, let's say, contribution in the 3Q, and it's factoring Italy. So that's why the delta is coming out into the NII quarter-on-quarter. And the second one is due to a technical account treatment shift between NII and fees. So from a, let's say group P&L perspective, this is a 0 effect.

[Operator]

The next question is from Mr. Andrea Unzueta of Credit Suisse.

[Andrea Unzueta, analyst]

If we go back to your Slide 52, you mentioned that the contribution of ERP is on the net profit line, but there is a note on the revenues. Am I right to understand that within your EUR 18.2 billion revenue figure, you do not have anything from ERP for 2020? And if you can confirm that you cannot reduce this further until 2021? And then I wanted to go back to your comment on volumes and specifically in Italy. You effectively said that 80% of the loan reduction was voluntary. How shall we think about volumes in Italy, in particular, going forward? Do you expect volumes to stabilize, grow or decline further?

[Jean-Pierre Mustier, executive]

On the volume evolution, we'll let the co-CEO of Western Europe to comment. On the Slide 52, the revenue side, if you look at footnote #1, we said that it does not include the contribution from Yapi. So in other words, the EUR 18.2 billion in 2020 are not the end total revenues for the group. The total revenues from the group will be EUR 18.2 billion plus our pro rata. So 20% of the forecasted net income of Yapi, that's for 2020. And -- so it will be what it is basically. And we said that in 2023, the net income of EUR 5 billion does not include the contribution of -- any contribution of Yapi, while in 2020, the EUR 4.3 billion include the contribution of Yapi. So we put in the EUR 4.3 billion, the contribution of Yapi, which is a net income issue, so it's already planned.

But we didn't put it in the revenue side as it would be for Yapi to commit it, and we wanted to make sure that 2020 could be comparable to 2023 as far as the revenues are concerned. So you have the true evolution at either perimeter between 2020 and 2023 on the revenue side. That's why we didn't put the contribution of Yapi in 2020, just to make comparison possible. While on the net income -- on the net profit side, we wanted to make sure that you have the proper net profit, including everything as it is relevant for dividend distribution, okay? So that's why we add this little [ 30 ], actually, to help analysts with the Excel worksheet, if I mention it. On the volume, on the Italian side and client activity, I let the co-CEOs of Western Europe comment.

[Francesco Giordano, executive]

And the question was mostly related to Italy. Just to remind you that in the last quarter, more than 3/4 of the decrease in lending was coming from very, very disciplined and strict action on the negative EBA lending and especially on the short term. We are confident with Francesco that this year, we might progressively have a slight growth in lending, to be coherent with the plan of Team 23 resulting from this adjustment that has been done this quarter.

[Operator]

The next question is a follow-up from Mr. Hugo Cruz of KBW.

[Hugo Cruz, analyst]

A question around the revaluation of real estate. You're kind of indicating that there are going to be further disposals. So how likely is it that you could see further capital gains in 2020 or later years coming from these?

[Jean-Pierre Mustier, executive]

I will let Mirko comment on that.

[Mirko Bianchi, executive]

Yes. On the revaluation of the real estate, we think that we have taken, let's say, a conservative approach to it and because we are cognizant of potential volatility into the P&L. But from what we have done and what we see, we don't see -- we're not forecasting any major volatility in the various country. Here, we are talking more Germany and Italy.

[Unknown Executive]

But Hugo, I'm sorry, on the Capital Markets Day, we had the one real estate gain in 2020 and beyond that we talked about in the Annex of Mirko's Page 27.

[Operator]

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

[Jean-Pierre Mustier, executive]

Okay. So I'll leave you a few more seconds. Anything in answer to any additional question, clarification?

[Operator]

[Operator Instructions]

[Jean-Pierre Mustier, executive]

Okay. If not a question, thank you very much for your attention, and we'll see some of you tomorrow in London and in the coming weeks during the road shows, where Mirko and I will be traveling the world. Thank you very much, and have a good day and a good weekend.

[Operator]

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