OP Financial Group’s Financial Statements Bulletin for 1 January–31 December 2019: Earnings before tax EUR 838 million – income increased by 10% and comparable expenses decreased

OP Financial Group
Financial Statements Bulletin 1 January – 31 December 2019
Stock exchange release 4 February 2020 09.00 am EET

OP Financial Group’s Financial Statements Bulletin for 1 January–31 December 2019: Earnings before tax EUR 838 million – income increased by 10% and comparable expenses decreased

• Earnings before tax amounted to EUR 838 million (959).
• Net interest income increased by 5% to EUR 1,241 million and net commissions and fees by 6% to EUR 936 million. Net insurance income decreased by 26% to EUR 421 million.
• Investment income rose year on year by EUR 214 million, to EUR 425 million.
• Income increased by a total of 10% (by 6% including the overlay approach).
• Total expenses increased by 13% to EUR 1,903 million. OP Financial Group transferred the management of the majority of the personnel’s statutory earnings-related pension insurance and the related portfolio to Ilmarinen Mutual Pension Insurance Company at the end of 2018, which lowered expenses by EUR 286 million in that year’s income statement. In view of this, comparable expenses decreased by 3% to EUR 1,903 million.
• Impairment loss on receivables was EUR 87 million (46).
• OP Financial Group’s loan portfolio grew by 5% to EUR 91 billion and the deposit portfolio by 4% to EUR 64 billion.
• The CET1 ratio was strong at 19.5% (20.5). The planned adoption of a new definition of default in March 2020 is expected to weaken the CET1 ratio by 1.3 percentage points.
• Retail Banking earnings before tax decreased by 44% to EUR 235 million. Excluding the effect of the transfer of earnings-related pension liability, earnings before tax increased by 6%. Net interest income increased by 4% and net commissions and fees by 5%. Net investment income decreased by EUR 26 million. The loan portfolio increased by 5% and deposits by 7%.
• Corporate Banking earnings before tax decreased by 24% to EUR 311 million. Excluding the effect of the transfer of earnings-related pension liability, earnings before tax decreased by 17%. Net interest income increased by 10%, but net commissions and fees decreased by 3% and net investment income fell by 28%. The lower net investment income is explained by changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes and by changes in the valuation models of derivatives made at the beginning of the year. The loan portfolio increased by 6%.
• Insurance earnings before tax increased by 43% to EUR 373 million. Net insurance income decreased by 26% to EUR 431 million. The reduction in the discount rate for insurance liability reduced net insurance income by EUR 136 million. Investment income rose by EUR 239 million to EUR 331 million. The operating combined ratio was 92.7% (92.0).
• Other Operations earnings before tax were EUR –37 million (–64).
• In 2019, OP Financial Group invested EUR 313 million (384) in business development and improving customer experience.
• OP bonuses totalled EUR 254 million.
• In 2019, OP Financial Group achieved its strategic target of 2 million owner-customers in OP cooperative banks. The Group had a total of 1.2 million joint banking and insurance customers.
• On 31 January 2020, OP Cooperative, OP Financial Group’s central cooperative, sold the Vallila property to a South Korean-Finnish consortium. The sale of the property will improve OP Financial Group’s CET1 ratio by some 0.2 percentage points.
• Earnings before tax for 2020 are expected to be at about the same level as in 2019. For more detailed information on the outlook, see “Outlook for 2020”.

             
OP Financial Group’s key indicators

*In Q4, OP Financial Group adopted an amortisation-based revenue recognition method for the customer margin related to a derivative clause attached to loans with an interest rate cap or interest rate collar. The effect of this change was adjusted retrospectively in OP Financial Group’s retained earnings (under equity). In addition, the income statements and balance sheets for 2018 and 2019 were restated to reflect the new revenue recognition practice. The change had no effect on segment reporting. Capital adequacy measurement was not adjusted retrospectively.
**Change in ratio

***12-month rolling
****The FiCo ratio has been calculated for insurance companies using transition provisions included in solvency regulation.
*****Non-performing receivables refer to receivables that are more than 90 days past due, other receivables classified as risky and forborne receivables related to such receivables due to the customer’s financial difficulties.

Comments by President and Group Chief Executive Officer Timo Ritakallio

Our customer business continued to develop favourably in 2019. Income increased by 10% year on year, and our market share developed positively in home loans and corporate loans as well as in the non-life insurance business. Our loan portfolio grew by 5% to EUR 91 billion and deposit portfolio by 4% to EUR 64 billion. Investment income was excellent, thanks to favourable market developments.

We have also managed to cut down our expenses. Comparable expenses decreased by 3% year on year. Impairment loss on receivables increased clearly in 2019 but still remained low.

Earnings before tax for 2019 amounted to EUR 838 million, which was EUR 121 million lower than the year before. In 2018, earnings were higher due to the transfer of the statutory earnings-related pension liability to Ilmarinen. In comparable terms, excluding the effect of the pension liability transfer, the earnings for 2019 increased by EUR 165 million.

Our capital ratio (CET1) remained strong at 19.5%.

At the end of 2019, the number of OP Financial Group’s owner-customers exceeded two million. During the year, we got 92,000 new owner-customers. In the future, we aim to ensure that we provide our owner-customers with the best benefits in banking and insurance services.

We have taken determined steps to improve customer experience and managed to shorten response times in our telephone services and to improve customer satisfaction. More than one million of our customers have adopted the Mobile key, a secure identification method. In January 2020, the use of the Mobile key was extended to op.fi.

At OP Financial Group’s central cooperative, we have implemented a more self-directed way of working. The purpose of this change is to achieve better customer and employee experience and cost savings. This has required us to revise job descriptions in all of our business segments. At the end of the year, we completed the Information and Consultation of Employees process in centres of excellence and in the service centre. Approximately 1,900 employees worked in the functions affected by the process. As a result, around 460 roles ceased to exist and some 190 new roles were created. The negotiations were held in good cooperation with employee representatives.

In 2020, cost management will be our challenge. Banks’ results will be under pressure due to low interest rates and tightening banking regulation. This year, we expect our earnings to be at about the same level as in 2019.

In 2019, political uncertainty had a negative impact on the world economy and global trade suffered from the expanding trade war. In financial markets, sentiments varied sharply, but eventually the year was favourable for investors. Measures taken by central banks supported financial markets and bolstered confidence in the world economy.

Economic growth in Finland decelerated only slightly, thanks to the favourable development of the service sector. The overall economic picture remained relatively positive, although consumer confidence declined during the year.

Economic risks have decreased since last year’s gloomiest sentiment. However, the outlook is subdued, and we can expect slow growth. There is no favourable economic situation to boost economic policy. Many long-term challenges remain to be solved, and new ones arise due to issues such as climate change. This is a challenging operating environment, both for governments and businesses.

January–December

OP Financial Group’s earnings before tax amounted to EUR 838 million (959). The figure decreased by EUR 121 million over the previous year. Net interest income, net commissions and fees and net investment income increased. The earnings were reduced by lower net insurance income and higher impairment loss on receivables. OP Financial Group transferred the management of the majority of the personnel’s statutory earnings-related pension insurance and the related portfolio to Ilmarinen Mutual Pension Insurance Company at the end of 2018, which lowered expenses by EUR 286 million in that year’s income statement. Excluding the effect of this transfer, expenses decreased by 3.3% year on year.

Net interest income increased by 4.6% to EUR 1,241 million. Net interest income reported by the Retail Banking segment increased by EUR 36 million and that by the Corporate Banking segment by EUR 33 million. OP Financial Group’s loan portfolio grew by 5.1% to EUR 91.5 billion and deposits by 4.4% to EUR 64.0 billion.

Net insurance income totalled EUR 421 million (566). The Insurance segment’s non-life insurance premium revenue increased by 0.9% to EUR 1,479 million. Excluding the Baltic business sold in 2018, non-life insurance premium revenue increased by 4.0%. Claims incurred increased by 17.4% to EUR 1,077 million. The reduction in the discount rate for insurance liability increased claims incurred by EUR 136 million (0). The operating combined ratio was 92.7% (92.0).

Net commissions and fees were EUR 936 million, or EUR 49 million higher than the year before. Net commissions and fees for payment transfer services increased by EUR 17 million, those for lending by EUR 6 million and asset management fees by EUR 23 million.

Net investment income increased by EUR 345 million to EUR 530 million. Net income from financial assets recognised at fair value through profit or loss totalled EUR 726 million (115). Derivatives have been used to hedge against interest rate risk associated with non-life insurance liability. As a result of this, an item worth EUR 136 million (0), which corresponds to the reduction in the discount rate, is shown as a positive value change in net investment income. An overlay approach is applied to certain equity instruments of insurance companies. Changes in the fair value of investments within the scope of the overlay approach are presented under the fair value reserve under equity. Total investment income grew by 101.5% year on year, to EUR 425 million. Capital gains recognised totalled EUR 197 million (36). The combined return on investments at fair value of OP Financial Group’s insurance companies was 8.9% (0.7). The net change in the short-term life insurance supplementary interest rate provision decreased earnings by EUR 2 million. In the previous year, the net change in the short-term supplementary interest rate provision improved earnings by EUR 43 million. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes decreased earnings by EUR 21 million over the previous year.

Other operating income fell by EUR 8 million year on year to EUR 53 million. The sale of occupational healthcare service business to Mehiläinen in the second quarter increased other operating income. A year ago, the entire share capital of the Baltic subsidiary Seesam Insurance AS was sold to Vienna Insurance Group (VIG). OP Financial Group recognised a total of EUR 16 million in non-recurring capital gain on the sale.

Total expenses increased by 13.2% to EUR 1,903 million. Excluding the effect of the transfer of earnings-related pension liability, total expenses decreased by 3.3% to EUR 1,903 million, personnel costs decreased by 2.6% to EUR 781 million and pension costs decreased by 26.2% to EUR 114 million. At the beginning of 2019, accounting for pensions transferred to Ilmarinen changed from defined benefit plans to defined contribution plans.

Development costs were EUR 183 million (203). Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 14.6% to EUR 278 million. Planned depreciation/amortisation increased by 11.7% to EUR 244 million. This increase resulted from higher development expenditure recognised for prior years and from the adoption of IFRS 16 Leases on 1 January 2019. Impairment write-downs decreased by EUR 73 million year on year.

Other operating expenses increased by 0.5% to EUR 844 million. ICT production costs increased by EUR 24 million. Lease expenses decreased by EUR 16 million due to the application of IFRS 16 in 2019.

Impairment losses on loans and receivables and on investments recognised under various income statement items that reduced earnings amounted to EUR 111 million (70), of which EUR 87 million (46) concerned loans and receivables. Changes in credit risk parameters, final loan losses, growth in the loan portfolio and the transfer of loans between impairment stages affected the increase in impairment loss on receivables. The ratio of non-performing receivables in loans and receivables to the loan and guarantee portfolio was low, at 1.1% (1.0).

OP Financial Group’s current tax amounted to EUR 168 million (212). The effective tax rate was 20.1% (22.1).

In the third quarter, the Vallila property was classified as a non-current asset held for sale. The property’s assets recognised in the balance sheet totalled EUR 314 million and liabilities EUR 6 million. The Vallila property comprises a block located in Vallila, Helsinki.

OP Financial Group’s equity amounted to EUR 12.6 billion (11.7). Equity included EUR 3.0 billion (3.0) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.3). The return target for Profit Shares for 2019 was 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 97 million. The amount of interest paid for 2018 in June 2019 totalled EUR 94 million. The fair value reserve grew by EUR 244 million to EUR 251 million.

Outlook for 2020

Risks in financial markets were seen to ease during the latter half of the year. Interest rates rose from the August bottom but remained lower than in early 2019. Stock prices continued their rise in the fourth quarter. Stock markets strengthened markedly during the year. The European Central Bank (ECB) cut the deposit rate from –0.4% to –0.5% in September and began in early November its asset purchases worth EUR 20 billion a month. The ECB announced that it would keep the main refinancing rate unchanged or lower until the inflation outlook is in line with the inflation target. Prolonged exceptionally low interest rates are a strain on financial institutions.

OP Financial Group expects its earnings before tax for 2020 to be at about the same level as in 2019. The most significant uncertainties in respect of the financial performance relate to interest rates, developments in capital markets and impairment losses.

All forward-looking statements in this financial statements bulletin expressing the management’s expectations, beliefs, estimates, forecasts, projections and assumptions are based on the current view on developments in the economy, and actual results may differ materially from those expressed in the forward-looking statements.

Press conference

OP Financial Group’s financial performance will be presented to the media by President and Group Chief Executive Officer Timo Ritakallio in a press conference on 4 February 2020 at 11am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc and OP Mortgage Bank will publish their own Financial Statements Bulletins.

Financial reporting in 2020

Time of publication of 2019 reports:

Schedule for Interim Reports in 2020:

Helsinki, 4 February 2020
OP Cooperative
Board of Directors

Additional information:
Timo Ritakallio, President and Group Chief Executive Officer, tel. +358 (0)10 252 4500
Vesa Aho, Chief Financial Officer, tel. +358 (0)10 252 1427
Tuuli Kousa, Chief Communications Officer, tel. +358 (0)10 252 2957

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OP Financial Group is Finland’s largest financial services group whose mission is to promote the sustainable prosperity, security and wellbeing of its owner-customers and business environment. OP Financial Group consists of 147 OP cooperative banks, its central cooperative OP Cooperative, and the latter’s subsidiaries and affiliates. The Group has a staff of 12,000 and 2 million owner-customers. www.op.fi