OP-Pohjola Group has strong first half

OP-Pohjola Group
Stock Exchange Release 6 August 2014 at 8.00 am (EEST)
Interim Report

OP-Pohjola Group has strong first half

• The Group's earnings before tax for the first half of 2014 were EUR 488 (395), that is, up by about 25% year on year. It was also the second-highest first-half performance of all time.
• Net interest income continued to increase strongly, by 16%. Total income grew by 9%.
• Expenses excluding direct expenses caused by the purchase of Pohjola Bank plc shares increased by 1.6% year on year. Impairment losses on receivables remained at the same low level as last year, EUR 33 million (32).
• Every three business segment improved its performance markedly:
  • Banking earnings before tax increased by 56% to EUR 294 million (188). The cost/income ratio improved by over 7 percentage points to 56%. The loan portfolio grew by 2.8% and deposits by 2.5% in the year to June.
  • Earnings before tax by Non-life Insurance improved by 34% to EUR 133 million (99). The operating combined ratio reached a record level of 84.5%. Premiums written increased in the report period by 7%.
  • Wealth Management earnings before tax increased by 29% to EUR 99 million (77). Mutual fund assets increased in the year to June by 21% and unit-linked insurance savings by 20%.
  • The number of joint banking and non-life insurance customers increased by 86,000 in the year to June.      
• The implementation of OP-Pohjola Group's biggest-ever investment, totalling EUR 2.4 billion, that is, the acquisition of all Pohjola Bank plc shares, is proceeding according to plan.
• Despite the purchase of Pohjola Bank plc shares, the Group's capital adequacy has remained strong.  The CET1 ratio was 12.8% (17.1) at the end of June. By the end of July, profit shares supporting capital adequacy had been issued, as planned, worth EUR 851 million.
• Change in the outlook: Earnings in 2014 are estimated to be clearly higher than in 2013. Previously only "higher". For more details, see "Outlook towards the year end" below.

OP-Pohjola Group's key indicators

* Change in ratio
** The comparatives are presented based on the regulatory framework that came into effect on 1 January 2014.

Comments by Reijo Karhinen, Executive Chairman and CEO

The first half of 2014 was one of OP-Pohjola Group's best of all times in terms of earnings. We reached these record figures in a demanding operating environment, managed to grow, rewarded our customers more than before and continued our bold reforms - all of this while maintaining a solid capital base. I am particularly happy about the great enthusiasm and engagement with which the entire Group has begun to build a new start for us. We are proceeding apace in accordance with the plans and promises we have made.

Our decision to return to our roots of customer ownership as a financial investment is highly significant - even by European standards. The principle behind this decision was also one of the most significant and far-reaching in the Group's history going back more than a century. We have chosen our own path, one that is different from the mainstream. Our business success should in the future be assessed primarily on the basis of what kind of added value we can provide to our customers.

The Group's significant earnings improvement in the first half stemmed from healthy business development, emphasising growth and efficiency in a balanced way. Volumes have been growing steadily for a long time, which has created a foundation for increased total income, and increased net interest income in particular.  At the same time, we managed to keep our expense growth moderate and impairment losses at last year's level. All of our three business segments improved their earnings substantially, Banking more than the others. We estimate the full-year earnings to be clearly better than last year.

The first half's most significant product launch was the profit share, an equity investment which has become tremendously popular. This is how a cooperative bank can strengthen its capital base and at the same time channel good earnings to its customer-owners. It is also great news that we were able to set a new record in the amount of customer bonuses we paid out. Customer-ownership is clearly receiving more impetus, witnessed by the fact that the number of our bonus customers has risen by more than a hundred thousand in the last 12 months.

Our solid performance creates a sense of security to meet our rapidly changing operating environment with its moderate economic growth, low interest rates, tighter regulation and rapidly proceeding digitalisation. In a way it is the digital aspect that is the most challenging as its operates across sector boundaries and is so clearly visible in the everyday lives of both consumers and businesses not only as a technological change but also in the form of new business models, investment needs, new customer behaviour and a way of meeting the customer.  The massive growth of mobile services is a concrete manifestation in this respect. We have responded to this challenge by increasing the amount of development investments, and will continue to do so. We want to upgrade not only our operating models and structures but also the services we offer to our customers - reflecting friendly customer service and a pioneering spirit.

Increasing measures taken in recent weeks in the global economic warfare has presented new threats over Finland's already fragile economy. Since Finland's economy is largely dependent on exports and Russian trade in particular, we are facing serious challenges beyond our control. Be that as it may, there is a lot we can influence ourselves. Our problems are more of a structural nature than to do with the economic situation. I am concerned that we may lag too much behind from developments in the rest of the euro area. It is now increasingly important that economic policy decisions be made to boost people's confidence in the economy. Promoting the structural programme and ensuring the operating conditions of businesses is now more important than ever. Creating a favourable investment climate is the right kind of actions and encouraging messages from the policy-makers.

Financial performance in the report period

OP-Pohjola Group earnings before tax grew by 24% to EUR 488 million (395). This was the second-best first-half result in the Group's history. Earnings were boosted especially by an increase in net interest income and Non-life Insurance's net income. Net commissions and fees and Life Insurance's net income increased, too. However, the Group's earnings were eroded by higher expenses.

Net interest income increased by 16%. The increase in net interest income can be attributed to higher average margin of the loan portfolio and to growth in the balance sheet. Market interest rates in the report period were another factor that contributed to higher interest income.

The Group's expense growth slowed down to 2.6%. A non-recurring EUR 8 million expense related to the tender offer for Pohjola Bank plc shares was entered under 'Other operating expenses' during the report period.  Excluding this expense, the Group's expenses would have increased by 1.6%.

Thanks to efficiency-enhancement measures and outsourcing of ICT services, the Group's personnel costs decreased by 6.9%.  Outsourcing and the reform of related operating models, on the other hand, increased ICT and other costs. 

OP-Pohjola Group's fair value reserve before tax totalled EUR 452 million (409) at the end of the report period. Earnings before tax at fair value amounted to EUR 560 million (235).

Equity capital amounted to EUR 6.2 billion (7.7) on 30 June. The purchase of Pohjola Bank plc shares in the report period reduced the Group's equity capital by EUR 2.4 billion. Equity capital was also decreased by profit distribution outside the Group. On the other hand, equity capital was increased by the Group's earnings and the issuance of profit shares. At the end of June, EUR 696 million (0) of profit shares were included in the equity.

Outlook towards the year end

The world economy is estimated to continue growing at a below-average rate. Measures taken by the European Central Bank will aid recovery in the euro area, but economic growth is expected to be modest. In Finland, too, economic growth in full year 2014 is expected to be equally modest, although there are some positive signs of a gradual recovery. The crisis in Ukraine that reignited in July has created some more political risks and made it much more difficult to predict economic developments. As a result, the risk has increased for poorer-than-expected Finnish economic development.

Despite the modest economic recovery, the operating environment in the financial sector is gradually becoming more stable although a new record has again been set in terms of low interest rates, which will continue to erode banks' net interest income and weaken insurance institutions' investment income. Economic uncertainty also reduces growth expectations in the financial sector. Changes in the operating environment and the more rigorous regulatory framework will highlight even more the role of measures to strengthen the capital base and improve profitability.   

Without a significant worsening of the operating environment against what was forecast, OP-Pohjola Group earnings before tax are expected to be clearly higher (previously higher) than in 2013. The most significant uncertainties affecting earnings in 2014 relate to the rate of business growth, impairment loss on receivables and changes in the investment environment.      

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

Press conference
OP-Pohjola Group's financial performance will be presented to the media by Executive Chairman and CEO Reijo Karhinen in a press conference on 6 August 2014 at 12 noon at Vääksyntie 4, Vallila, Helsinki.                                                                                                    
                                                                                                            
Pohjola Bank plc will publish its own Interim Report.                                                                    
                                                                                                            
Financial reporting in 2014                                                                                                         
Schedule for  Interim Reports in 2014:                                                                                          
Interim Report Q1-3/2014: 29 October 2014                                    
                                                                                                            
OP-Pohjola Group Central Cooperative                                                                                   
Executive Board                                                                                                     
                                                                                                            
                                                                                                            
ADDITIONAL INFORMATION:
Reijo Karhinen, Executive Chairman and CEO, tel. +358 (0)10 252 4500                                   
Harri Luhtala, CFO, tel. +358 (0)10 252 2433                                                                               
Carina Geber-Teir, Chief Communications Officer, tel. +358 (0)10 252 8394                                                                                                                                                                                     
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Major media                                                                                        
op.fi and pohjola.com                                                                                                                                                                                                             
OP-Pohjola Group is Finland's leading financial services group providing a unique range of banking, investment and insurance services. The Group's mission is to promote the prosperity, well-being and security of its owner-members, customers and operating regions through its local presence. Its objective is to offer the best and most versatile package of loyal customer benefits on the market. OP-Pohjola Group consists of some 180 member cooperative banks and the Group's central institution, OP-Pohjola Group Central Cooperative, with its subsidiaries and closely-related companies, the largest of which is the listed company Pohjola Bank plc. The Group has a staff of 12,000. OP-Pohjola Group posted earnings before tax of EUR 705 million in 2013 and had total assets of EUR 101 billion on 31 December 2013. The Group has 4.3 million customers.

www.op.fi