OP: solid earnings to build tomorrow's Finland

OP Financial Group
Stock Exchange Release
5 February 2015 at 8.00 am
Financial Statements Bulletin

OP: solid earnings to build tomorrow's Finland

• Earnings before tax for 2014 were EUR 915 million (701), year-on-year improvement 31%.
• Group total income increased by 8%, while expenses decreased.
• Impairment loss on receivables totalled EUR 88 million (84), that is, at a low level of 0.12% of the loan and guarantee portfolio.
• The Group's owner-members and OP bonus customers received bonuses and income from equity investments in 2014 to an estimated total of EUR 216 million (193).
• The Group's taxes for the financial year were EUR 337 million (120).
• Each of the three business segments improved its performance markedly.
  • Banking earnings before tax increased by 45% to EUR 587million (404). The cost/income ratio improved by 6 percentage points to 56%. The loan portfolio grew by 3.8% and deposits by 3.0% during the year.
  • Earnings before tax by Non-life Insurance increased by 34% to EUR 223 million (166). The operating combined ratio reached a record level of 84.7%. Premiums written increased in the financial year by 5%.
  • Wealth Management earnings before tax increased by 43% to EUR 161 million (113). Mutual fund assets increased during the year by 21% and unit-linked insurance savings by 21%.
  • The number of joint banking and non-life insurance customers increased by 72,000 to 1,590,000.
• During 2014, OP Financial Group redeemed Pohjola Bank plc shares held by shareholders outside the Group by EUR 2.4 billion, and Pohjola Bank plc's shares were delisted from Helsinki Stock Exchange on 30 September 2014.
• Despite the purchase of Pohjola Bank plc shares, the Group's capital adequacy is strong. On 31 December, Common Equity Tier 1 (CET1) was 15.1% (17.1). Profit shares that support CET1 were issued by the end of the year for EUR 1,561 million.
• Earnings before tax in 2015 are expected to be equal or higher than in 2014. For more information, see "Outlook for 2015".

OP Financial 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
Within OP Financial Group 2014 involved big decisions, new initiatives and many successes. Our transformation into a genuine financial group owned by its customers has proceeded according to plan not only in terms of our values and but also from legal and operational perspectives. Our transforming group structure will more clearly support our mission. We exist to serve our customers. In addition to reporting good financial results, how we use our annual earnings is also essential.

In our business role, we continued to manage to improve our earnings significantly. Total income showed a strong increase and total expenses were lower than a year ago. Our profit target will be demanding in the future too. The new regulatory framework requires a sound business basis and a strong capital base of a financial services provider. As a financial group owned by customers, we will continue to fulfil the tightening capital adequacy requirements to a significant extent just by showing good results.

Supported by our strong capital base, we continued to implement our mission successfully to fulfil our customers' financing needs. Not only our corporate financing business but also home loans increased at a higher rate than the market average. Our good performance figures in Wealth Management and Non-life Insurance give an indication of our improved market positions and of the competitiveness of our products and services.

A strong financial performance enables us to also build Finland of tomorrow.  In our business role we create prosperity that we utilise in our social role associated with our business owned by customers. We allocated half of our last year's total earnings to improve our capital adequacy, a fifth for customer bonuses and interest amounts of our customer-owners' capital contributions. The rest of the earnings, or around 30%, was paid in taxes.  Last year our income taxes were record high. Our tax footprint is one of the largest one in Finnish society.

The operating environment in the financial sector has been undergoing drastic changes for several years now. This trend is going on and deepening. Economic growth is slow, interest rates will remain record low, regulation will become tighter and customer behaviour will change. Digitisation will, however, act as the most significant change driver that will shake up our business in the next few years. Particularly mobile services in the financial sector have great potential and demand for them is on the increase. Amid this revolution, successful actors will be those which have a solid capital base, are price competitive and are able to transform themselves and create value in new ways. We must prepare ourselves for changes and requirements that the digital revolution will entail. The way of granting loans, for example, will be very different in a few years' time.

Putting Finland on a new growth path - OP is ready. As the clear market leader in Finland, we are a remarkable service provider on a nation-wide basis. Our corporate form not only allows but also obliges us to bear responsibility for Finland. We are willing and able to support Finnish economic development. The time is ripe to put an end to the current stagnation and do something new and different. We will offer our private customers loan repayment grace periods on an extensive basis during 2015. The planned grace periods have the potential of giving a stimulus worth about one billion euros in the Finnish economy.

Financial performance in the report period

OP Financial Group's earnings before tax grew by 31% to EUR 915 million (701). Earnings were boosted especially by an increase in net interest income and Non-life Insurance's net income. Net commissions and fees and net income from Life Insurance increased, too. Expenses no longer increased, which improved results of the entire Group. 

Net interest income increased by 14%. The increase in net interest income was the result of an increase in the average margin and the growth of the balance sheet. The favourable development of net interest income from capital market products and the decrease in deposit funding costs also promoted the growth of net interest income.

The Group's total expenses decreased by 0.4%, being EUR 6 million lower than a year ago. Other operating expenses were increased in the financial year by non-recurring expenses incurred by the purchase of Pohjola Bank plc shares, amounting to a total of EUR 12 million. Without these non-recurring items' effect on comparability, the decrease in expenses was 1.1%.

OP Financial Group's fair value reserve before tax totalled EUR 531 million (409) on 31 December. Earnings before tax at fair value were EUR 1,067 million (662).

Equity capital amounted to EUR 7.2 billion (7.7) on 31 December. The purchase of Pohjola Bank plc shares in the financial year reduced the Group's equity capital by EUR 2.4 billion. On the other hand, equity capital was increased by the Group's earnings and the issuance of Profit shares. On 31 December, EUR 1.6 billion (0) of Profit shares were included in the equity.

Outlook for 2015 

The euro area's economy is still growing at a slow rate and is susceptible to disruptions despite the European Central Bank's easy monetary policy and other measures taken to support economic growth. Economic growth is also expected to be weak in Finland, although exports are slowly increasing. Tension in international politics is still a significant factor of uncertainty for the Finnish economy, slowing Finland's recovery from recession.

Modest economic development combined with the tensions of international politics are weakening growth prospects in the financial sector. Historically low interest rates will erode banks' net interest income and weaken insurance institutions' investment income. The significance of measures that support capital adequacy and profitability is heightened by changes in the operating environment and the tightening of regulation. 

Despite the challenging operating environment, OP Financial Group's earnings before taxes are expected to be equal or higher than in 2014. The greatest sources of uncertainty relate to the earnings estimate concern the effects of low interest rates, impairment losses on receivables and unfavourable changes in the investment environment. 

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 Executive Chairman and CEO Reijo Karhinen in a press conference on 5 February 2015 at 12 noon at Vääksyntie 4, Vallila, Helsinki.

Pohjola Bank plc will publish its own Financial Statements Bulletin.

Financial reporting in 2015

Schedule for Interim Reports in 2015:
Interim Report Q1/2015      29 April 2015
Interim Report H1/2015        5 August 2015
Interim Report Q1-3/2015   28 October 2015

OP Cooperative, Financial Group
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

DISTRIBUTION
NASDAQ OMX Helsinki Ltd
London Stock Exchange
SIX Swiss Exchange
Major media
op.fi and pohjola.com
  
OP Financial Group is Finland's leading financial services group providing a unique range of banking, wealth management and insurance services. OP's mission is to promote the sustainable prosperity, security and wellbeing of its customer-owners, customers and operating regions. Its objective is to offer the best and most versatile package of loyal customer benefits on the market. OP Financial Group consists of about 180 member cooperative banks, its central institution OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000. OP Financial Group has 4.3 million customers.

As laid down in the applicable law, OP Cooperative and its member credit institutions are ultimately jointly and severally liable for each other's debts and commitments. The joint liability in the OP Financial Group is prescribed by the Act on the Amalgamation of Deposit Banks. Pohjola Bank plc and OP Mortgage Bank are responsible for OP's funding operations on money and capital markets.

www.op.fi