OP Financial Group’s Interim Report for 1 January–31 March 2020: Earnings before tax EUR 129 million – income from customer business increased, changes in investment income and impairment loss weakened earnings

OP Financial Group
Interim report 1 January–31 March 2020
Stock Exchange Release 28 April 2020 09.00am EESTEarnings before tax amounted to EUR 129 million (194).Income from customer business increased: net interest income increased by 9% to EUR 319 million (294), net insurance income by 21% to EUR 131 million (109) and net commissions and fees by 4% to EUR 244 million (234).The Vallila property was sold on 31 January 2020. OP Financial Group recognised a capital gain of EUR 96 million on the sale. OP Financial Group will continue operating in the property under a long-term lease agreement.The effects of the coronavirus pandemic (COVID-19) on capital market developments weakened investment income. Investment income fell by 88% year on year, to EUR 11 million (90).Total income decreased by 16% to EUR 662 million (790) (including the overlay approach, income increased by 11%).Total expenses rose by 12% to EUR 518 million (465) due to higher ICT costs, ICT depreciation and amortisation and charges of financial authorities.Impairment loss on receivables totalled EUR 105 million (11). Impairment loss on receivables was especially increased by the adoption of the new definition of default and the effects of the coronavirus pandemic on credit risk outlook.In the year to March, OP Financial Group’s loan portfolio grew by 6% to EUR 93 billion (88) and deposits by 3% to EUR 65 billion (63). The CET1 ratio was 17.7% (19.5). The lower ratio was affected by the adoption of the new definition of default and the increase in the loan portfolio.Retail Banking earnings before tax fell by 85% to EUR 8 million (49). Net interest income increased by EUR 2 million, net commissions and fees by EUR 1 million and net investment income by EUR 14 million. Impairment loss on receivables, EUR 57 million, increased by EUR 49 million year on year. The loan portfolio increased by 4% and deposits by 6% in the year to March.Corporate Banking earnings before tax fell by 76% to EUR 14 million (56). Net interest income increased by 12% and net commissions and fees by 24%. Net investment income fell by 29%. The lower net investment income is explained by changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes. Impairment loss on receivables, EUR 47 million, increased by EUR 42 million year on year. The loan portfolio grew by 8% in the year to March.Insurance earnings before tax decreased by 33% to EUR 59 million (88). Net insurance income rose by 18% to EUR 138 million (117). Investment income decreased by EUR 51 million to EUR 21 million. The operating combined ratio was 92.7% (97.5).Other Operations earnings before tax were EUR 57 million (5). The sale of the Vallila property improved earnings by EUR 96 million.In January–March, OP Financial Group invested a total of EUR 82 million (74) in business development and improving customer experience.New OP bonuses accrued to owner-customers totalled EUR 65 million (69).The number of owner-customers in OP cooperative banks totalled 2.0 million. The number of OP Financial Group’s joint banking and insurance customers totalled 1.3 million.In its stock exchange release on 21 April 2020, OP Financial Group weakened its earnings outlook for 2020: Earnings before tax for 2020 are expected to be lower than those for 2019 (previously at the same level). For more detailed information on the outlook, see ‘Outlook towards the year end’.On 27 April 2020, OP Cooperative’s Board of Directors decided that OP Financial Group’s long-term strategic target for the CET1 ratio be at least the CET1 capital adequacy requirement plus four percentage points. The CET1 target calculated by applying the March-end capital adequacy requirement was 14.9%. At the end of June, the target is estimated to be 13.9%.OP Financial Group’s key indicators*In the fourth quarter of 2019, 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 the first three quarters of 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. For more information on this change, see the Financial Statements and the Financial Statements Bulletin for 2019.
**Change in ratio.Comments by President and Group Chief Executive Officer Timo RitakallioOur customer business developed favourably in January–March. Our net interest income, net insurance income and net commissions and fees increased clearly year on year. Overall, OP Financial Group’s income from customer business reached a record high level. Meanwhile, investment income fell sharply due to the weak development of the bond and equity markets. During the first quarter, the coronavirus crisis had a major impact on bond and equity markets.Over the last 12 months, OP Financial Group’s loan portfolio grew by 6% to EUR 93 billion. During the same period, the deposit portfolio grew by 3% to EUR 65 billion.OP Financial Group’s expenses increased by 12% year on year. This increase resulted mainly from higher ICT and development costs, regulation-related costs and personnel costs. Our ICT costs for 2020 will be further increased by a one-off investment in the IT infrastructure.Impairment loss on receivables increased to EUR 105 million. This was attributable in particular to regulatory changes. In addition, the effects of the coronavirus pandemic on the credit risk outlook increased the impairment loss on receivables.OP Financial Group’s earnings before tax for January–March amounted to EUR 129 million, which was EUR 66 million lower than a year earlier. Earnings were reduced in particular by higher impairment loss on receivables and the steep decline in investment income.The exceptional uncertainty caused by the coronavirus pandemic weakens OP Financial Group’s investment income and credit risk outlook. OP Financial Group’s earnings before tax for 2020 are expected to be lower than in 2019. Despite the coronavirus pandemic, OP Financial Group’s capital adequacy is at a solid level. In addition, our funding position and liquidity are good. In March, our CET1 ratio was 17.7%.We have taken several measures to support Finnish businesses and households in getting through the financial problems caused by the pandemic. We have offered repayment holidays for home loans and SMEs’ corporate loans, free of charge, to those customers whose finances have been affected by the pandemic. We have received a total of 92,000 applications from private and corporate customers and have adopted robotics to speed up their processing. The robots preprocess applications and make and implement decisions. We are investigating the use of robotics to tackle even other challenges arising from the coronavirus.OP cooperative banks provide separate service hours for people who need special support, and we have also opened a telephone helpline to support them in using our services during the coronavirus pandemic. We also implement our corporate responsibility by participating in an initiative to increase the coronavirus testing capacity and by donating the contribution of Pohjola Hospital staff to tasks that are critical to our society.To ensure the health and safety of our personnel, we have made various efforts to provide safe working conditions in our offices and branches. We also encourage those whose tasks allow it to work from home as much as possible. Through these measures, we have ensured that our services that are critical to society are available despite the coronavirus crisis.The coronavirus pandemic has derailed the global economy. Economic statistics cannot keep up with the current pace of change, and we cannot do much more than draw up scenarios of the future. We are facing extreme uncertainty in all respects.The atmosphere is tense in the international financial market. However, the banking sector is now in a better shape than during the financial crisis of 2008, and prompt and extensive measures taken by central banks have helped to stabilise the market. This time, the financial market is not at the centre stage of the crisis.Economic recovery depends first and foremost on the duration of restrictions implemented due to the exceptional situation caused by the coronavirus pandemic. The decisions that the Finnish Government will take in the next few months will have a major impact on our national economy, households and businesses for many years to come.January–MarchOP Financial Group’s earnings before tax amounted to EUR 129 million (194). The figure decreased by EUR 66 million over the previous year. Income from customer business, or net interest income, net insurance income and net commissions and fees, increased. In addition, the sale of the Vallila property increased earnings. Market developments caused by the coronavirus pandemic decreased investment income while increasing impairment loss on receivables. Earnings were also affected by the adoption of the new definition of default that increased impairment loss on receivables, and growth in expenses.Net interest income increased by 8.6% to EUR 319 million. Net interest income reported by the Retail Banking segment increased by EUR 2 million and that by the Corporate Banking segment by EUR 11 million. In the year to March, OP Financial Group’s loan portfolio grew by 5.7% to EUR 93.0 billion and deposits by 2.7% to EUR 64.8 billion.Net insurance income totalled EUR 131 million (109). The Insurance segment’s non-life insurance premium revenue increased by 3.6% to EUR 367 million. Claims incurred decreased by 3.8% to EUR 236 million. The operating combined ratio was 92.7% (97.5).Net commissions and fees were EUR 244 million, or EUR 10 million higher than the year before. Refunds based on unit-linked management fees increased by EUR 4 million. Net commissions and fees from mutual funds, asset management and securities brokerage increased by EUR 3 million.Net investment income decreased by EUR 285 million to EUR –140 million. Net income from financial assets recognised at fair value through profit or loss totalled EUR –131 million (261). As a result of the coronavirus crisis, the fair values of equities, and notes and bonds decreased significantly. 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 fell by 87.6% year on year, to EUR 11 million. Capital gains recognised totalled EUR 23 million (54). The combined return on investments at fair value of OP Financial Group’s insurance companies was –2.3% (2.6). The net change in the short-term life insurance supplementary interest rate provision increased earnings by EUR 10 million (11). Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes decreased earnings by EUR 15 million (–7).Other operating income rose by EUR 98 million year on year to EUR 107 million. The sale of the Vallila property increased other operating income. OP Financial Group recognised a capital gain of EUR 98 million on the sale in other operating income and an expense of EUR 2 million in other operating expenses. OP Financial Group will continue operating in the property under a long-term lease agreement, and the property was recognised as a right-of-use asset in the balance sheet. The value of the right-of-use asset under IFRS 16 was EUR 138 million and the lease liability was EUR 225 million. Total expenses increased by 11.5% to EUR 518 million. Personnel costs increased by 5.8% to EUR 208 million. Depreciation/amortisation and impairment loss on PPE and intangible assets increased by 11.4% to EUR 65 million. Planned depreciation/amortisation increased by 8.5% to EUR 63 million. This increase resulted from higher development expenditure recognised for prior years. Impairment write-downs were EUR 2 million.Other operating expenses increased by 16.8% to EUR 245 million. ICT costs increased by a total of EUR 26 million. Development costs were EUR 50 million (40). Charges of financial authorities increased by 21.9% to EUR 34 million. Impairment losses on loans and receivables and on investments recognised under various income statement items that reduced earnings amounted to EUR 113 million (19), of which EUR 105 million (11) concerned loans and receivables. The new definition of default adopted in March increased impairment loss on receivables by EUR 44 million. As a result of the coronavirus crisis, customers have actively applied for repayment holidays on their loans and changes to their repayment schedules. Combined with the changes in macroeconomic parameters applied in the calculation of expected credit losses, this increased impairment loss on receivables by EUR 29 million. The ratio of non-performing receivables in loans and receivables to the loan and guarantee portfolio was 1.5% (1.1).OP Financial Group’s current tax amounted to EUR 33 million (40). The effective tax rate was 25.7% (20.7). The effective tax rate was increased by the changes in deferred taxes arising from the sale and leaseback of the Vallila property.OP Financial Group’s equity amounted to EUR 12.3 billion (12.6). Equity included EUR 2.9 billion (3.0) in Profit Shares, terminated Profit Shares accounting for EUR 0.1 billion (0.2). The return target for Profit Shares for 2020 is 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 24 million. The amount of interest to be paid for 2019 in October 2020 totalled EUR 97 million.Comprehensive income of EUR –150 million (315) was decreased by changes in the fair value reserve. The fair value reserve declined by EUR 306 million to EUR –55 million from the end of 2019. Due mainly to the coronavirus crisis, the fair values of notes and bonds recognised through other comprehensive income decreased by EUR 271 million, and the fair values of equities within the scope of the overlay approach decreased by EUR 145 million.Outlook towards the year endMeasures to restrain the coronavirus pandemic threw the global economy into a recession during the first quarter. The early-year optimistic sentiment in the stock market turned into a sharp fall in prices. In the financial market, the funding costs of banks increased markedly. The market expects interest rates to remain somewhat unchanged towards the year end. However, uncertainty in the market is exceptionally high. The Government seeks to alleviate the direct effects of the corona crisis on the finances of banks’ and insurance companies’ customers, but, at this point, it is still difficult to evaluate the long-term effects of the crisis.The exceptional uncertainty caused by the coronavirus pandemic weakens OP Financial Group’s investment income and credit risk outlook. OP Financial Group’s earnings before tax for 2020 are expected to be lower than in 2019 (previously at the same level).All forward-looking statements in this Interim Report 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 conferenceOP Corporate Bank plc and OP Mortgage Bank plc will publish their own interim reports.Financial reporting in 2020
Helsinki, 28 April 2020OP CooperativeBoard 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 and Corporate Responsibility Officer, tel. +358 (0)10 252 2957
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op.fiOP Financial Group is Finland’s largest financial services group, with two million owner-customers and 12,000 employees. We provide a comprehensive range of banking and insurance services for private and corporate customers. OP Financial Group consists of OP cooperative banks, its central cooperative OP Cooperative, and the latter’s subsidiaries and affiliates. Our mission is to promote the sustainable prosperity, security and wellbeing of our owner-customers and operating region. www.op.fi