OP: Strong financial performance and excellent lending capacity


OP Financial Group
Stock Exchange Release 5 August 2015 at 8.00 am
Interim Report

OP: Strong financial performance and excellent lending capacity

  • The Group's earnings before tax totalled EUR 627 million (488), or 29% higher than a year ago and the best ever half-year earnings.  
  • Total income increased by 8% while expenses decreased by 3% year on year.
  • Supported by the strong financial performance, the CET1 ratio improved to 18.1% (15.1). The strong capital base made it possible to increase lending faster than the market average.
    • The home loan portfolio grew by 3.0% year on year
    • The corporate loan portfolio increased by 7.5%
    • The total loan portfolio increased by 5.9% and the number of loans drawn down by 13%
  • The home loan repayment grace period under the "Putting Finland on a new growth path" campaign was used for almost 100,000 loans.
  • New customer bonuses totalled EUR 97 million, up 4.5% year on year.
  • Equity investments by owner-customers increased to EUR 2.4 billion (1.9). 
  • Each of the three business segments improved its performance:
    • Banking earnings before tax increased by 23% to EUR 356 million (289). The cost/income ratio improved by over 4 percentage points to 52%. The deposit portfolio grew by 6.9%. Impairment loss on receivables was low at 0.10% of the loan and guarantee portfolio. 
    • Earnings before tax by Non-life Insurance increased by 8.1% to EUR 144 million (133). The operating combined ratio was 87.8%. Insurance premium revenue rose by 4.6%.
    • Wealth Management earnings before tax increased by 25% to EUR 128 million (102). Assets under management grew by 16% to EUR 66 billion.
  • Six former POP Group member banks became members of OP Financial Group's central cooperative in May. 
  • Change in the outlook: Full-year earnings for 2015 are expected to be higher than in 2014. (Previous estimate: "to equal or exceed"). For more detailed information, see "Outlook towards the year end."

       
OP Financial Group's key indicators

  H1/2015 H1/2014 Change, % 2014
Earnings before tax, € million 627 488 28.5 915
  Banking 356 289 23.2 571
  Non-life Insurance 144 133 8.1 223
  Wealth Management 128 102 24.9 167
         
New accrued customer bonuses 97 93 4.5 189
         
  30 June 2015 30 June 2014 Change, % 31 Dec. 2014
Common Equity Tier 1 (CET1) ratio, % 18.1 12.8 5.3* 15.1
Ratio of capital base to minimum amount of capital base (under the Act on the Supervision of Financial and Insurance Conglomerates), % 178 169 10* 189
Ratio of receivables more than 90 days past due to loan and guarantee portfolio, % 0.42 0.41 0.01* 0.37
Joint banking and
insurance customers  (1,000)
1,618 1,554 4.1 1,590

Comparatives deriving from the income statement are based on figures reported for the corresponding period in 2014. Unless otherwise specified, balance-sheet and other cross-sectional figures on 31 December 2014 are used as comparatives.
* Change in ratio

Comments by Reijo Karhinen, President and Group Executive Chairman

Achieving the capital adequacy and profitability targets crowned OP Financial Group's good first-half performance. Achieving our demanding and high capital adequacy targets ahead of time - only about one year after the purchase of Pohjola shares that required a significant amount of capital - is a strong message of our Group's status and performance. Our all-time high half-year results are explained by our long-term approach. Income increased and expenses decreased. Our income grew on a wide front, with each key income item increasing year on year.

We have once again demonstrated our strength. We pay particular attention to our capital base that we are building primarily through our financial performance in the long term. Profit Shares have had a significant impact on strengthening our capital base during the last twelve months. I would like to express my warmest thanks to our owner-customers for this commitment they have shown.

OP's good results safeguard customers' finances through our excellent lending capacity. Through concrete action, we have shown our commitment to Finland. Our home and corporate loan portfolio continued to increase at a rate above the market average. Our friendly gesture to our home loan customers in terms of the loan repayment grace period also received a positive reception. Thanks to our strong capital base, our capacity to provide our customers with financing in future too is on a firm basis. It is just natural for our role as a major Finnish player to carry out new "Putting Finland on a new growth path" campaigns.

OP exists to serve its customers. Following a comprehensive internal strategic discussion, the Supervisory Board of OP Cooperative updated in June the basic strategic principles that sharpen the cooperative focus. As specified in its new, updated mission, the Group creates by means of its strong capital base and efficiency sustainable prosperity, security and wellbeing for its owner-customers and in its operating region.  Our being is crystallised in our customer promise: "We exist to serve our customers". We want to be the world's best financial services group owned by customers. We measure our success through customer experience.

The financial sector does not see a day without news reporting on the progress of digitisation in Finland and elsewhere in the world. 

As the year progresses, the signs of the advancement of the digital revolution has become increasingly clearer, in both the financial sector and in society on the whole. We are most likely at a turning point from which onwards the slope related to the visible changes arising from digitisation is strongly becoming steeper. As a result of changing customer behaviour, customers increasingly use digital services. We need to learn to look many things with new eyes.

Up to 94% of OP's daily service encounters take already place in digital service channels. As financial services group owned by customers, we will reform ourselves on our customers' terms and by listening to them - without forgetting customers who appreciate the existing transaction opportunities and services. We need to prepare for significantly increasing our development expenditure and for continuing to improve our operational efficiency substantially.

The Finnish economy will not rebound on a sustainable basis without bold decisions that contribute to a pick-up in exports. Not this year either has economic development in Finland met expectations. The Finnish government has taken a firm grip on taking fiscal consolidation measures. However, Finland need to boost its price competitiveness.

In the single currency regime, putting the economy back on a healthy path requires of the policymakers in charge an unconventional attitude, exceptionally strong determination and a solution-seeking approach and the ability to focus on what is essential. We at OP promise, for our part, to assume responsibility for the availability of financing.

Financial performance in the report period

Earnings before tax increased by 29% to EUR 627 million (488). This was the Group's best-ever half-year result. This improvement was due especially to strong growth in income. Life Insurance's and Non-life Insurance's net income increased the most. Net income posted by Life Insurance increased due to improved insurance profitability and that by Non-life Insurance as a result of higher investment income. Net commissions and fees were higher due to higher fees from mutual funds. Capital gains on securities added to net trading and investment income. 

Total expenses decreased by 3.3%, being EUR 27 million lower than a year ago. A non-recurring provision was recognised for personnel costs of EUR 9 million related to the reorganisation of the central cooperative consolidated announced in February. Higher personnel costs are also explained by social expenses rising by EUR 10 million. Non-recurring expenses of EUR 19 million were recognised in other operating expenses for the reporting period resulting from the intra-Group ownership reorganisation and the reconstruction of the Vallila premises. In the first half a year ago, statutory contributions to the Deposit Guarantee Fund and the bank levy (EUR 36 million) plus the non-recurring expenses incurred due to the purchase of Pohjola Bank plc shares (EUR 8 million) increased other operating expenses.

Impairment losses recognised under various income statement items that reduced earnings amounted to EUR 52 million (42), of which EUR 37 million (33) concerned loans and receivables. Net impairment loss on loans and other receivables were low, at 0.10% (0.09) of the loan and guarantee portfolio.

On 19 May 2015, six former POP Group member banks joined OP Financial Group. Their accounts have been consolidated for the first time into the Group's accounts from the date when they joined the Group. As a result of the consolidation, both the Group's income and expenses grew by EUR 2 million, and their effect on earnings was slightly positive as a whole. As a result of the consolidation, the Group's loan portfolio grew by EUR 643 million and deposit portfolio by EUR 694 million.

Earnings before tax at fair value amounted to EUR 505 million (560). OP Financial Group's fair value reserve before tax totalled EUR 393 million (531) on 30 June.

Equity capital amounted to EUR 8.4 billion (7.2) on 30 June. The Group's earnings and the issuance of Profit Shares added to equity capital. On 30 June, EUR 2.1 billion (1.6) in Profit Shares were included in equity. In March 2015, the central cooperative's Supervisory Board decided to raise the target level of Profit Shares by EUR 0.4 billion to EUR 2.3 billion.

Outlook towards the year end

The euro-area economy has continued to grow at a moderate rate supported by the ECB's expansionary monetary policy measures. The fragile economic growth is expected to continue during the second half too. Economic development in Finland is expected to remain weak. Structural problems in the Finnish economy, international political tensions, the Greek debt crisis that has escalated again and poorer prospects for the emerging economies will cause major uncertainty to the economic rebound in Finland.

Growth expectations are still moderate in the financial sector. Low interest rates will erode banks' net interest income and weaken insurance institutions' investment income. Then again, low interest rates support customers' loan repayment capacity that has remained stable despite the prolonged period of slow growth. Capital adequacy and profitability in the financial sector have come to play an ever-increasing role because of the unstable operating environment and the tighter regulatory framework.   

In spite of the uncertainty involved in the operating environment, OP Financial Group expects its earnings before tax for 2015 to be higher than in 2014 (previous estimate: "to equal or exceed"). The most significant uncertainties associated with the earnings estimate are related to the effects of low interest rates, impairment loss on receivables and unfavourable 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 Financial Group's financial performance will be presented to the media by Executive Chairman and CEO Reijo Karhinen in a press conference on 5 August 2015 at 11 a.m. at Teollisuuskatu 1 b, Vallila, Helsinki.

Pohjola Bank plc will publish its own Interim Report.

Financial reporting in 2015

Schedule for Interim Reports in 2015:
Interim Report Q1-3/2015: 28 October 2015

OP Cooperative
Executive Board

ADDITIONAL INFORMATION
Reijo Karhinen, President and Group Executive Chairman, tel. +358 (0)10 252 4500
Harri Luhtala, CFO, tel. +358 (0)10 252 2433
Carina Geber-Teir, Executive Vice President, Corporate Communications, tel. +358 (0)10 252 8394

DISTRIBUTION
NASDAQ OMX Helsinki Ltd
London Stock Exchange
SIX Swiss Exchange
Major media
op.fi and pohjola.fi

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


Attachments

OP Financial Group Q2 2015 OP Financial Group Q2 background material