OP Mortgage Bank
Stock Exchange Release 4 February 2020 at 10.00 am EET
Financial Statements Bulletin
OP Mortgage Bank: Financial Statements Bulletin for 1 January‒31 December 2019
OP Mortgage Bank (OP MB) is part of OP Financial Group and its role is to raise, together with OP Corporate Bank plc, funding for OP from money and capital markets. OP MB is responsible for the Group's funding for the part of covered bond issuance.
Financial standing
The intermediary loans and loan portfolio of OP MB totalled EUR 14,335 million (13,771) on 31 December 2019. OP MB issued a 1.25 billion-euro fixed-rate covered bond with a maturity of 10 years in international capital markets in February. Out of the proceeds of the bond, one billion euros were intermediated to OP cooperative banks in the form of intermediary loans. In addition, OP MB issued a 1 billion-euro fixed-rate covered bond with a maturity of seven years in international capital markets in November. Out of the proceeds of the bond, 929.7 million euros were intermediated to OP cooperative banks in the form of intermediary loans. On 31 December 2019, 122 OP cooperative banks had a total of EUR 8,706 million (6,776) in intermediary loans from OP MB.
The company's financial standing remained stable throughout the reporting period. Earnings before tax amounted to EUR 14.9 million (16.2).
*The comparatives for 2018 are given in brackets. For income statement and other aggregated figures, January–December 2018 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2018) serve as comparatives.
Collateralisation of bonds issued to the public
On 31 December 2019, loans as collateral in security of the covered bonds issued under the Euro Medium Term Covered Note programme worth EUR 20 billion established on 12 November 2010 under the Act on Mortgage Credit Banks (688/2010) totalled EUR 14,551 million.
Capital adequacy and capital base
OP MB’s Common Equity Tier 1 (CET1) ratio stood at 69.8% (136.4) on 31 December 2019. The CET1 ratio decreased due to the decision issued by the ECB in April concerning covered retail exposures. The decision practically doubled the average risk weights on mortgages. The minimum CET1 capital requirement is 4.5% and the requirement for the capital conservation buffer is 2.5%, i.e. the total CET1 capital requirement is 7%. The minimum total capital requirement is 8% and 10.5% with increased capital conservation buffer. Earnings for the financial year were not included in CET1 capital.
OP MB uses the Internal Ratings Based Approach (IRBA) to measure its capital adequacy requirement for credit risk. OP MB uses the Standardised Approach to measure its capital adequacy for operational risk.
As part of OP Financial Group, OP MB will adopt a new definition of default. The process based on the new definition recognises defaulted customers earlier, for example, based on information in external credit registers, or in retail customers by extending the default to cover all exposures of an individual obligor. This new definition is expected to mean a larger number of default observations and to weaken credit risk parameters. When adopting the new definition, a so-called Two-Step Approach will be applied. The first step involves the change of the definition of default, which is planned to take place in March 2020. The second step to be taken later involves the calibration of credit risk parameters. The supervisory obligation related to the adoption of the new definition of default is expected to weaken OP MB’s CET1 ratio by 16 percentage points in the first stage. Growth in the expected credit losses (ECL) caused by the change in the definition of default has been taken into account in the effect on capital adequacy. The growth is estimated to be less than 5% of the earnings for 2019.
Joint and several liability of amalgamation
Under the Act on the Amalgamation of Deposit Banks, the amalgamation of the cooperative banks comprises the organisation’s central cooperative (OP Cooperative), the central cooperative's member credit institutions and the companies belonging to their consolidation groups as well as credit and financial institutions and service companies in which the above together hold more than half of the total votes. This amalgamation is supervised on a consolidated basis. On 31 December 2019, OP Cooperative's member credit institutions comprised 147 OP cooperative banks as well as OP Corporate Bank plc, OP MB and OP Card Company Plc.
The central cooperative is responsible for issuing instructions to its member credit institutions concerning their internal control and risk management, their procedures for securing liquidity and capital adequacy as well as for compliance with harmonised accounting policies in the preparation of the amalgamation’s consolidated financial statements.
As a support measure referred to in the Act on the Amalgamation of Deposit Banks, the central cooperative is liable to pay any of its member credit institutions an amount that is necessary to prevent the credit institution from being placed in liquidation. The central cooperative is also liable for the debts of a member credit institution which cannot be paid using the member credit institution's assets.
Each member bank is liable to pay a proportion of the amount which the central cooperative has paid to either another member bank as part of support action or to a creditor of such member bank in payment of an amount overdue which the creditor has not received from the member bank. Furthermore, in the case of the central cooperative’s default, a member bank has unlimited refinancing liability for the central cooperative’s debts as referred to in the Co-operatives Act.
Each member bank’s liability for the amount the central cooperative has paid to the creditor on behalf of a member bank is divided between the member banks in proportion to their last adopted balance sheets. OP Financial Group’s insurance companies do not fall within the scope of joint and several liability.
According to section 25 of the Act on Mortgage Credit Banks, the holder of a covered bond has the right to receive a payment for the entire term of the bond from the assets entered as collateral before receivables without this being prevented by OP MB's liquidation or bankruptcy.
Personnel
On 31 December 2019, OP MB had six employees. OP MB has been digitising its operations and purchases all the most important support services from OP Cooperative and its Group members, reducing the need for its own personnel.
Management
The Board composition is as follows:
| Chair | Vesa Aho | Chief Financial Officer, OP Cooperative | ||
| Members | Kaisu Christie | Director, Mortgages and Housing-related Services, OP Cooperative | ||
| Lauri Iloniemi | Head of Treasury and Asset and Liability Management, OP Corporate Bank plc | |||
OP MB's Managing Director was Lauri Iloniemi until 31 May 2019. On 1 June 2019, Sanna Eriksson became OP MB's Managing Director.
The deputy Managing Director was Sanna Eriksson until 31 May 2019. As of 1 June 2019, the deputy Managing Director is Pekka Moisio, Head of Funding and Liquidity Management.
On 28 February 2019, member of the Board Elina Ronkanen-Minogue resigned from OP Financial Group and, consequently, from membership of the Board of Directors of OP Mortgage Bank.
Kaisu Christie, Director of Mortgages and Housing-related Services, was appointed to member of the Board of Directors to replace Elina Ronkanen-Minogue as of 19 March 2019.
Board member Hanno Hirvinen resigned from OP MB’s Board of Directors on 31 May 2019.
To replace Hirvinen on the Board, Lauri Iloniemi, Head of Treasury and Asset and Liability Management, was appointed Board member on 1 June 2019.
The Annual General Meeting of 19 March 2019 re-elected KPMG Oy Ab, an audit firm, to act as the auditor for the financial year 2019, with Tiia Kataja, APA, acting as the chief auditor, appointed by KPMG Oy Ab.
Risk exposure
The most typical types of risks related to OP MB are credit risk, structural funding risk, liquidity risk and interest rate risk. The key credit risk indicators in use show that OP MB's credit risk exposure is stable and the limit for liquidity risk set by the Board of Directors has not been exceeded. The liquidity buffer for OP Financial Group, managed by OP Corporate Bank, is exploitable by OP MB. OP MB has used interest rate swaps to hedge against its interest rate risk. Interest rate swaps have been used to swap home loan interest, intermediary loan interest and interest on issued bonds into the same basis rate. OP MB has concluded all derivative contracts for hedging purposes, with OP Corporate Bank plc being their counterparty. The interest rate risk of OP MB may be considered low and it has been within the set limit.
Events after the reporting period
In January 2020, OP MB issued a one-billion euro bond with a maturity of 8.25 years in international capital markets.
Outlook
It is expected that OP MB’s capital adequacy will remain extremely strong and the overall quality of the loan portfolio good. This will make it possible to issue new covered bonds in the future as well.
Time of publication of 2019 reports
Report by the Board of Directors and Financial Statements 2019 Week 9
Corporate Governance Statement 2019 Week 9
Schedule for Interim Reports in 2020
Interim Report Q1/2020 28 April 2020
Half-year Financial Report H1/2020 21 July 2020
Interim Report Q1–3/2020 22 October 2020
Helsinki, 4 February 2020
OP Mortgage Bank
Board of Directors
For more information, please contact:
Sanna Eriksson, Managing Director, tel. +358 10 252 2517
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