OP Financial Group's Interim Report for 1 January-30 June 2016: Excellent earnings, strong growth and updated strategy with a bold approach

OP Financial Group
Stock Exchange Release 3 August 2016 at 9.00 am EEST
Interim Report for 1 January-30 June 2016

OP Financial Group's Interim Report for 1 January-30 June 2016: Excellent earnings, strong growth and updated strategy with a bold approach

Good half-year business performance: earnings at record levels and the lending growth rate above the market average  

• Earnings before tax were EUR 614 million (627), or the second best half-year figure ever recorded.
• Banking and Non-life Insurance earnings decreased while those by Wealth Management and Other Operations improved.
• In the second quarter, OP Financial Group reported earnings before tax of EUR 331 million, including non-recurring items, which is an all-time quarterly high. 
• Net interest income and net insurance income increased but net commissions and fees decreased. Expenses were at the previous year's levels. 
• The CET1 ratio was 19.4% (19.5) on 30 June 2016.
• The home loan portfolio increased by 4%, the corporate loan portfolio by 5% and deposits by 5% in the year to June. Home and corporate loans drawn down increased by over 12%.
• Non-life Insurance recorded an operating combined ratio of 88.2% (87.8). Insurance premium revenue rose by 3%.
• Assets managed by Wealth Management increased by 4% over the previous year. 
• Full-year earnings for 2016 are expected to be of about the same size as the record earnings reported in 2015. 

190,000 new OP Financial Group owner-customers and a new strategy leading the Group into the 2020s  

• 77,000 new banking customers, or 17% more than a year ago. The increase focused on the second quarter.
• The number of owner-customers increased by 190 thousand to almost 1.7 million.
• In April, the Group launched a new #Suominousuun (Putting Finland on a new growth path) initiative targeted at families with children, under which OP offers health and living allowance insurance for an unborn child for 12 months free of charge.
• New OP bonuses totalled over EUR 100 million, up by almost 5% year on year.
• OP Financial Group confirmed a new strategy that is to respond to the historically drastic transformation underway in the sector, on the basis of which OP will gradually change from a plain financial services provider to a diversified services company of the digital era.

OP Financial Group's key indicators

Comparatives deriving from the income statement are based on figures reported for the corresponding period in 2015. Unless otherwise specified, balance-sheet and other cross-sectional figures on 31 December 2015 are used as comparatives.
* Change in ratio
** 12-month rolling, change in percentage
*** The FiCo ratio has been calculated under Solvency II transitional provisions and the comparatives have been adjusted

Comments by Reijo Karhinen, President and Group Executive Chairman

OP Financial Group posted an excellent first-half financial performance. Our strategic goal is to strengthen our capital base through good financial results. We did well in that respect. Our strong financial position was also witnessed by the results of the stress test conducted by the European Banking Authority. We rank among the strongest banks in Europe.

The favourable development in overall profitability was supported by an increase in net interest income and net insurance income, successful cost control and low loan losses. However, capital market uncertainty reduced income generation.

The stress test results prove that we will withstand instability. Enabled by our strong capital base, we have for several years now reported vigorous growth in customer lending despite the unstable operating environment. In the first half of 2016, the growth rate of our home loans and corporate financing was again above the market average. This development was supported by an exceptionally brisk growth in the number of owner-customers and banking customers.

The #Suominousuun (Putting Finland on a new growth path) initiatives with a broad impact that we have implemented in our social role represent concrete actions and true examples of our strength. At the same time, they show our will to commit ourselves to the success of our operating region and the promotion of our customers' prosperity.

The successful first-half was crowned by our forward-looking strategy published in June. We will have a long and profound transformation process ahead of us from a plain financial services provider to a diversified services company. Our basic assumption is that the actors with the courage to genuinely and boldly reinvent themselves by listening to their customers will be winners.

Like OP Financial Group, the whole of Finland is in the face of a new beginning. With an open-minded approach, we will need to build something completely new on the strong foundation. Meanwhile, it is necessary to have the courage to leave behind many patterns that have been adopted in a Finland that no longer exists. Norms in society and the structures of various actors must be updated swiftly so as to respond to changes arising from profound digital transformation and consumer behaviour while being sustainable for future generations. We have the world's best society in place. I believe that new unconventional initiatives and a forward-looking approach will form the key to success for Finland's journey into the next 100 years.

January-June

OP Financial Group's earnings before tax were EUR 614 million (627), or the second best half-year figure ever recorded. A year ago, the Group recorded its all-time high half-year EBT.

Net interest income increased by 3.3% to EUR 528 million and net insurance income rose by 4.4% to EUR 272 million. Net commissions and fees decreased by 2.3% to EUR 437 million. Net commissions and fees were reduced by lower brokerage fees due to the Invest in Finland initiative as part of the #Suominousuun (Putting Finland on a new growth path) initiative, and to higher commission expenses.

Net investment income decreased by 36.8% to EUR 182 million. This decline was affected by lower net investment income in Banking and Non-life Insurance and lower market valuations in the unstable market situation. Net income from securities trading was reduced by negative value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes. Lower returns on equity instruments and impairment losses had an effect on a reduced net income from available-for-sale assets.  

Other operating income rose by EUR 69 million year on year to EUR 94 million. In January 2016, OP Cooperative's Executive Board, for its part, approved a bid submitted by Visa Inc. in November 2015 to acquire Visa Europe Ltd. In the second quarter, OP Financial Group recognised EUR 71 million in non-recurring gain as a result of the transaction.

Total expenses of EUR 779 were at the same level as a year ago (776). Purchased services increased by EUR 19 million to EUR 54 million and ICT costs by EUR 17 million to EUR 115 million. The Group has increased its development expenditure on services significantly.

A non-recurring provision recognised in the first quarter a year ago for personnel costs totalled EUR 9 million, related to the reorganisation of the central cooperative consolidated. In addition, other operating expenses a year ago included the non-recurring expenses totalling EUR 19 million related to the intra-Group ownership reorganisation and the reconstruction of the Vallila premises. 

Impairment losses recognised under various income statement items that reduced earnings amounted to EUR 62 million (52), of which EUR 23 million (37) concerned loans and receivables. Net impairment loss on loans and receivables were low, at 0.06% (0.10) of the loan and guarantee portfolio.

The Group's income tax before change in deferred tax amounted to EUR 122 million (156). The effective tax rate was 19.8% (24.9). A year ago, OP Financial Group's tax rate was increased by capital gains tax on OP Financial Group's internal transactions.

Equity capital amounted to EUR 9.6 billion (9.3) on 30 June 2016. Group earnings added to equity capital. On June 30 2016, EUR 2.5 billion (2.5) in Profit Shares were included in equity, terminated Profit Shares accounting for EUR 0.2 billion (0.3).

Outlook towards the year end

The Finnish economy has begun a slight rebound in the first half of the year. This has been based on a recovery in the domestic market, especially construction. Weak world economic growth has not been sufficient to stimulate Finnish exports. A number of major uncertainties are threatening the fragile economic growth in the euro area and Finland: Brexit, the situation in the Italian banking sector, economic slowdown in emerging countries and greater political instability. In addition, the slow progress of structural reforms in the Finnish economy will slow down Finnish economic recovery. On the whole, the Finnish economy is expected, however, to continue its recovery although risks of growth coming to a halt have mounted during the summer.   

The continued reduction in market interest rates that have in part turned negative places a further burden on the net interest income of banks and erodes the investment income of insurance institutions. Then again, low interest rates support customers' loan repayment capacity, which has kept banking impairment loss low despite the prolonged period of slow economic growth. Digitisation in the financial sector, upgrading fragmented information system infrastructures and change in customer behaviour will require significant development investments in the sector in the next few years that will increase expenses and weaken profitability in the short term. Changes in the operating environment will highlight the role of operational efficiency and profitability as well as a strong capital base.    

OP Financial Group's full-year 2016 earnings before tax are expected to be of about the same size as the record earnings reported in 2015. Greater uncertainty related to the operating environment has further increased short-term earnings volatility, which will also have an effect on the predictability of the entire OP Financial Group's full-year earnings performance. The most significant uncertainties are related to changes in the interest rate and investment environment. 

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 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 President and Group Executive Chairman Reijo Karhinen in a press conference on 3 August 2016 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc will publish its own Financial Statements Bulletin.

Financial reporting in 2016

Schedule for Interim Reports in 2016:

Interim Report Q1-3/2016 2 November 2016

Helsinki, 3 August 2016

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

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OP Financial Group is Finland's largest financial services group whose mission is to create sustainable prosperity, security and wellbeing for its owner-customers and in its operating region by means of its strong capital base and efficiency. OP Financial Group consists of about 180 member cooperative banks, its central cooperative OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000 and approximately 1.7 million owner-customers and 4.3 million customers. www.op.fi