OP Mortgage Bank
Half Year Report for January-June 2011
3 August 2011, 9.00 am Finnish time (GMT+3)
HALF YEAR REPORT FOR 1 JANUARY - 30 JUNE 2011
OP Mortgage Bank's (OPA) loan portfolio grew to EUR 6,643 million in the January-June period (EUR 5,008 million at the end of 2010). The bank increased its loan portfolio in March and in June when it purchased housing loans from OP-Pohjola Group member cooperative banks. OPA launched a covered bond issue at a nominal valued of EUR 1 billion in April.
Earnings Development
| EUR thousand | Q1-Q2/2011 | Q1-Q2/2010 | Q2/2011 | Q2/2010 | 2010 |
| Income | |||||
| Net interest income | 11,870 | 8,043 | 6,670 | 3,952 | 16,350 |
| Net commissions and fees | -4,586 | -4,340 | -2,692 | -2,163 | -8,450 |
| Net income from trading | 0 | -1 | 0 | 0 | -1 |
| Net income from investments | 1 | 1 | 0 | 0 | 2 |
| Other operating income | 4 | 8 | 4 | 8 | 19 |
| Total | 7,289 | 3,711 | 3,982 | 1,797 | 7,920 |
| Expenses | |||||
| Personnel costs | 153 | 161 | 64 | 79 | 288 |
| Other administrative expenses | 1,046 | 711 | 497 | 338 | 1,396 |
| Other operating expenses | 729 | 578 | 437 | 350 | 1,398 |
| Total | 1,928 | 1,450 | 997 | 767 | 3,082 |
| Earnings before tax | 5,361 | 2,261 | 2,985 | 1,030 | 4,839 |
Net commissions and fees were negative with commission income increasing to EUR 1,712 thousand (1,357) and commission expenses to EUR 6,298 thousand (5,698). Commission expenses mainly comprise commissions paid to OP-Pohjola Group member banks for servicing housing loans. The bank's expenses amounted to EUR 1,928 thousand (1,450). Growth in expenses derived largely from the ICT-services and the professional services purchased in connection with the new covered bond issue. OPA did not recognise any loan losses for the first six months.
Net interest income for April-June grow to EUR 6,670 thousand (3,952) and earnings before taxes to EUR 2,985 thousand (1,030). The bank's expenses grow to EUR 997 thousand (767).
Balance Sheet and Off-balance Sheet Commitments
Change in Major Asset and Liability Items
| EUR Million | 30 June 2011 | 31 March 2011 | 31 Dec 2010 | 30 June 2010 |
| Balance Sheet | 6,820 | 6,948 | 5,191 | 4,624 |
| Receivables from customers | 6,643 | 6,713 | 5,008 | 4,398 |
| Receivables from financial institutions | 89 | 119 | 62 | 89 |
| Debt securities issued to the public | 4,246 | 3,217 | 3,287 | 3,332 |
| Liabilities to financial institutions | 2,245 | 3,350 | 1,640 | 1,070 |
| Shareholders' equity | 213 | 211 | 159 | 142 |
| Off-balance sheet commitments | 7 | 8 | 7 | 10 |
The loan portfolio increased from EUR 5,008 million on 31 December 2010 to EUR 6,643 million on 30 June 2011. OPA increased its loan portfolio in the review period when it purchased housing loans from OP-Pohjola-Group member banks for EUR 2,184 million.
On 30 June, households accounted for 99 % (99) of the loan portfolio and housing corporations for 1 % (1). The bank's non-performing loans amounted to EUR 1.4 million (1.4). No impairment losses on loans were recognised.
The carrying amount of bonds issued to the public totalled EUR 4,246 million (3,287) on 30 June.
OPA issued its fifth covered bond at a nominal value of EUR 1 billion on international capital markets in April. Moody's Investor Services and Standard & Poor's Rating Services have given the bond their highest credit ratings of Aaa and AAA. In addition to bonds, other funding was based on financing loans granted by Pohjola Bank plc (Pohjola). On 30 June, financing loans totalled EUR 2,245 million (1,640).
Shareholders' equity rose to EUR 213 million (159). Retained earnings amounted to EUR 17.8 million (13.8) at the end of the review period.
OPA has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate swaps, i.e. base rate cash flows from housing loans to be hedged are swapped to short-term Euribor cash flows. OPA has also swapped the fixed interest rates of the bonds it has issued to short-term variable rates. OPA's interest-rate derivative portfolio totalled EUR 12,461 million (9,622). All derivative contracts have been concluded for hedging purposes. Pohjola is the counterparty to all derivative contracts.
Development of Capital Adequacy
OPA's capital adequacy ratio stood at 9.6% on 30 June. Shareholder's equity increased by EUR 50 million in March when OP-Pohjola Group Central Cooperative made an additional investment in OPA. OPA calculates its capital adequacy in compliance with Basel II. Credit risk and the capital requirement for operational risk are calculated according to the standardised approach.
| OWN FUNDS, EUR thousand | 30 June 2011 | 31 Dec 2010 | 30 June 2010 |
| Tier I | 211,818 | 157,669 | 140,764 |
| of which capital loans | |||
| Tier II | 20,000 | 20,000 | 20,000 |
| Decreases | |||
| Total | 231,818 | 177,669 | 160,764 |
| Risk-weighted receivables, investments and off-balance sheet commitments | 2,423,763 | 1,836,279 | 1,627,208 |
| Capital adequacy ratio, % | 9,6 | 9,7 | 9,9 |
| Tier I ratio to risk-weighted receivables, investments and off-balance sheet commitments | 8,7 | 8,6 | 8,7 |
The increase in shareholders' equity arising from the measurement of pension liabilities and the assets covering them, under IFRS, is not considered own funds. Furthermore, intangible assets was also deducted from own funds.
| Risk-weighted receivables, investments and off balance-sheet commitments, EUR thousand | 30 June 2011 | 31 Dec 2010 | 30 June 2010 |
| Receivables and investments | 2,411,096 | 1,824,798 | 1,613,851 |
| Off-balance-sheet items | 2,177 | 2,748 | 2,505 |
| Market risk | - | - | - |
| Operational risks | 10,490 | 8,733 | 10,852 |
| Risk-weighted receivables, investments and off balance-sheet commitments, total | 2,423,763 | 1,836,279 | 1,627,208 |
The increase in the amount of risk-weighted receivables was due to an increased loan portfolio.
Joint Responsibility and Joint Security
Under the Act on Cooperative Banks and Other Cooperative Credit Institutions, the amalgamation of the cooperative banks comprises the organisation's central institution (OP-Pohjola Group Central Cooperative), the Central Cooperative's member credit institutions and the companies belonging to their consolidation groups. This amalgamation is monitored on a consolidated basis. The Central Cooperative and its member banks are ultimately responsible for each other's liabilities and commitments.
The Central Cooperative's members at the end of the report period comprised OP-Pohjola Group's 209 member banks as well as Pohjola Bank plc, Helsinki OP Bank Plc, OP Mortgage Bank and OP-Kotipankki Oyj. OP-Pohjola Group's insurance companies do not fall within the scope of joint responsibility.
The central institution is obligated to provide its member credit institutions with instructions on their internal supervision and risk management, their operations in securing liquidity and capital adequacy, and compliance with uniform accounting principles in preparing the coalition's consolidated financial statements.
The central institution and its member credit institutions are jointly responsible for the liabilities of the central institution or a member credit institution placed in liquidation or bankruptcy that cannot be paid from its assets. The liability is divided between the central institution and the member credit institutions in ratios following the balance sheet total.
In spite of the joint responsibility and the joint security, pursuant to Section 25 of the Act on Mortgage Credit Banks, the holder of a bond with mortgage collateral shall, notwithstanding the liquidation or bankruptcy of a mortgage credit bank, have the right to receive payment, before other claims, for the entire loan period of the bond, in accordance with the contract terms, from the funds entered as collateral for the bond.
Personnel
On 30 June, OPA had five employees. It purchases all key support services from Central Cooperative and its Group companies, which reduces the need for more staff.
Administration
The Annual General Meeting held in March confirmed the composition of the new Board of Directors. Mr. Mika Helin, Executive Vice President, Hämeenlinnan Seudun Osuuspankki and
Ms. Elina Ronkanen-Minogue, Senior Vice President, OP-Pohjola Group Central Cooperative were elected as new members of the Board of Directors. Mr. Jari Himanen, Senior Vice President, OP-Pohjola Group Central Cooperative and Matti Nykänen, Senior Vice President, OP-Pohjola Group Central Cooperative were left out of the Board of Directors. The Board composition is as follows:
Chairman:
Harri Luhtala,Chief Financial Officer, OP-Pohjola Group Central Cooperative
Vice Chairman:
Elina Ronkanen-Minogue, Senior Vice President, OP-Pohjola Group Central Cooperative
Members:
Sakari Haapakoski, Bank Manager, Oulun Osuuspankki
Mika Helin, Executive Vice President, Hämeenlinnan Seudun Osuuspankki
Hanno Hirvinen, Executive Vice President, Pohjola Bank plc
Heikki Kananen, Managing Director, Mäntsälän Osuuspankki
Mikko Hyttinen, Senior Vice President, OP-Pohjola Group Central Cooperative
Mikko Rosenlund, Managing Director, Tampereen Seudun Osuuspankki
Managing Director:
Lauri Iloniemi
Events after the balance sheet date
OPA launched a covered bond issue at a nominal valued of EUR 1,000 million 11 Julyl 2011.
Moody's Investor Services and Standard & Poor's Rating Services have given the bond their highest credit ratings of Aaa and AAA.
Prospects for the rest of the year
The overall quality of OPA's credit portfolio is expected to remain strong. The existing issuance programme will make it possible to issue new covered bonds in the end of 2011. The earnings before tax in 2011 are expected to higher than in 2010.
Income Statement
| EUR thousand | Q1-Q2/2011 | Q1-Q2/2010 | Q2/2011 | Q2/2010 | 2010 |
| Interest income | 53,753 | 28,171 | 31,633 | 14,177 | 63,314 |
| Interest expenses | 41,883 | 20,128 | 24,963 | 10,224 | 46,963 |
| Net interest income | 11,870 | 8,043 | 6,670 | 3,952 | 16,350 |
| Net commissions and fees | -4,586 | -4,340 | -2,692 | -2,163 | -8,450 |
| Net income from trading | 0 | -1 | 0 | 0 | -1 |
| Net income from investments | 1 | 1 | 0 | 0 | 2 |
| Other operating income | 4 | 8 | 4 | 8 | 19 |
| Personnel costs | 153 | 161 | 64 | 79 | 288 |
| Other administrative expenses | 1,046 | 711 | 497 | 338 | 1,396 |
| Other operative expenses | 729 | 578 | 437 | 350 | 1,398 |
| Earnings before tax | 5,361 | 2,261 | 2,985 | 1,030 | 4,839 |
| Income taxes | 1,394 | 589 | 776 | 269 | 1,264 |
| Profit for the period | 3,966 | 1,672 | 2,209 | 761 | 3,574 |
Key Ratios
| Q1-Q2/2011 | Q1-Q2/2010 | Q2/2011 | Q2/2010 | 2010 | |
| Return on equity (ROE), % | 4,3 | 2,4 | 4,2 | 2,2 | 2,4 |
| Cost/income ratio, % | 26 | 39 | 25 | 43 | 39 |
Calculation of key ratios
Return on equity, % = Annualised profit for the period / Equity capital (average equity capital at the beginning and end of the period) × 100
Cost/income ratio, % = (Personnel costs + Other administrative expenses + Other operating expenses) / (Net interest income + Net commission income + Net income from trading + Total net income from investments + Other operating income) × 100
Risk exposure
The most significant types of risk related to OPA are credit risk, liquidity risk and interest-rate risk. The indicators in use shows that OPA's credit risk exposure is stable. The limit for liquidity risk set by the Board of Directors has not been exceeded. The liquidity buffer for OP-Pohjola Group, managed by Pohjola Bank plc, is exploitable by OPA. OPA has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate swaps, i.e. base rate cash flows from housing loans to be hedged are swapped to short-term Euribor cash flows. OPA has also swapped the fixed interest rates of the bonds it has issued to short-term variable rates. The interest-rate risk may be considered to be low.
Balance Sheet
| EUR thousand | 30 June 2011 | 31 March 2011 | 31 Dec 2010 | 30 June 2010 |
| Receivables from financial institutions | 88,525 | 119,032 | 61,673 | 88,815 |
| Derivative contracts | 43,341 | 37,975 | 71,255 | 103,945 |
| Receivables from customers | 6,643,067 | 6,712,586 | 5,008,381 | 4,398,089 |
| Investments assets | 17 | 17 | 17 | 17 |
| Intangible assets | 745 | 829 | 914 | 942 |
| Tangible assets | 2 | 3 | 3 | 4 |
| Other assets | 43,850 | 77,383 | 48,790 | 32,441 |
| Tax receivables | ||||
| Total assets | 6,819,547 | 6,947,825 | 5,191,034 | 4,624,252 |
| Liabilities to financial institutions | 2,245,000 | 3,350,000 | 1,640,000 | 1,070,000 |
| Derivative contracts | 28,770 | 53,286 | 21,835 | 12,012 |
| Debt securities issued to the public | 4,246,175 | 3,216,903 | 3,286,747 | 3,331,736 |
| Reserves and other liabilities | 65,824 | 96,381 | 63,311 | 48,390 |
| Tax liabilities | 1,013 | 699 | 342 | 219 |
| Subordinated debt securities | 20,000 | 20,000 | 20,000 | 20,000 |
| Total liabilities | 6,606,782 | 6,737,269 | 5,032,235 | 4,482,356 |
| Shareholders' equity | ||||
| Share capital | 60,000 | 60,000 | 60,000 | 60,000 |
| Reserve for invested unrestricted . equity | 135,000 | 135,000 | 85,000 | 70,000 |
| Retained earnings | 17,765 | 15,557 | 13,799 | 11,896 |
| Total equity | 212,765 | 210,557 | 158,799 | 141,896 |
| Total liabilities and shareholders' equity | 6,819,547 | 6,947,825 | 5,191,034 | 4,624,252 |
Off-balance Sheet Commitments
| EUR thousand | 30 June 2011 | 31 March 2011 | 31 Dec 2010 | 30 June 2010 |
| Binding credit commitments | 6,700 | 7,676 | 7,456 | 9,939 |
Change Calculation on Shareholders' Equity
| EUR thousand | Share capital | Other reserves | Retained earnings | Total equity |
| Shareholders' equity 1 Jan 2010 | 60,000 | 70,000 | 10,224 | 140,224 |
| Reserve for invested unrestricted equity | - | - | - | - |
| Profit for the period | - | - | 1,672 | 1,672 |
| Other changes | - | - | - | - |
| Shareholders' equity 30 June 2010 | 60,000 | 70,000 | 11,896 | 141,896 |
| EUR thousand | Share capital | Other reserves | Retained earnings | Total equity |
| Shareholders' equity 1 Jan 2011 | 60,000 | 85,000 | 13,799 | 158,799 |
| Reserve for invested unrestricted equity | - | 50,000 | - | 50,000 |
| Profit for the period | - | - | 3,966 | 3,966 |
| Other changes | - | - | - | - |
| Shareholders' equity 30 June 2011 | 60,000 | 135,000 | 17,765 | 212,765 |
Cash Flow Statement
| EUR thousand | Q1-Q2/2011 | Q1-Q2/2010 |
| Liquid assets 1 January | 61,673 | 41,129 |
| Cash flow from operations | -1,020,132 | 40,147 |
| Cash flow from investments | 0 | -133 |
| Cash flow from financing | 1,046,984 | -6,226 |
| Liquid assets 30 June | 88,525 | 74,918 |
The cash flow statement presents the cash flows for the period on the cash basis, divided into cash flows from operations, investments and financing. Cash flows from operations includes the cash flows generated from day-to-day operations. Cash flow from investments includes payments related to tangible and intangible assets, investments held to maturity and shares that are not considered as belonging to cash flow from operations. Cash flow from financing includes cash flows originating in the financing of operations either on equity or liability terms from money or capital market. Liquid assets include cash in hand and receivables from financial institutions payable on demand. The statement has been prepared using the indirect method.
| Fair values of financial assets and liabilities | ||||
| EUR 1,000 | Loans and receivables | Recognised at fair value through profit or loss | Available for sale | Total |
| Financial assets | ||||
| Receivables from financial institutions | 88,525 | - | - | 88,525 |
| Derivative contracts | - | 43,341 | - | 43,341 |
| Receivables from customers | 6,643,067 | 6,643,067 | ||
| Equities | - | - | 17 | 17 |
| Other receivables | 43,850 | - | - | 43,850 |
| Balance at 30 June 2011 | 6,775,442 | 43,341 | 17 | 6,818,800 |
| Balance at 30 June 2010 | 4,519,345 | 103,945 | 17 | 4,623,306 |
| Balance at 31 December 2010 | 5,118,844 | 71,255 | 17 | 5,190,117 |
| EUR 1,000 | Recognised at fair value through profit or loss | Other liabilities | Total | |
| Liabilities to financial institutions | - | - | 2,245,000 | 2,245,000 |
| Derivative contracts | - | 28,770 | - | 28,770 |
| Debt securities issued to the public | - | - | 4,246,175 | 4,246,175 |
| Subordinated liabilities | - | - | 20,000 | 20,000 |
| Other liabilities | - | - | 66,837 | 66,837 |
| Balance at 30 June 2011 | - | 28,770 | 6,578,012 | 6,606,782 |
| Balance at 30 June 2010 | - | 12,012 | 4,470,345 | 4,482,356 |
| Balance at 31 December 2010 | - | 21,835 | 5,010,399 | 5,032,235 |
Debt securities issued to the public are carried at amortised cost. On 30 June 2011, the fair value of these debt instruments was approximately EUR 24,362 thousand higher than their carrying amount, based on information available in markets and employing commonly used valuation techniques. Subordinated liabilities are carried at amortised cost. Their fair value are substantially lower than their carrying amount, but determining fair values reliably is difficult in the current market situation.
Derivative Contracts 30 June 2011
| EUR thousand | Nominal values/the remaining maturity | Fair values | Credit counter-value | ||||
| Less than 1 year | 1-5 years | More than 5 years | Total | Assets | Liabilities | ||
| Interest rate derivatives | |||||||
| Hedging | 1,565,270 | 10,895,513 | - | 12,460,782 | 43,341 | 28,770 | 124,178 |
| Trading | - | - | - | - | - | - | - |
| Total | 1,565,270 | 10,895,513 | - | 12,460,782 | 43,341 | 28,770 | 124,178 |
Derivative Contracts 30 June 2010
| EUR thousand | Nominal values/the remaining maturity | Fair values | Credit counter-value | ||||
| Less than 1 year | 1-5 years | More than 5 years | Total | Assets | Liabilities | ||
| Interest rate derivatives | |||||||
| Hedging | 272,456 | 8,643,932 | - | 8,916,388 | 103,945 | 12,012 | 171,492 |
| Trading | - | - | - | - | - | - | - |
| Total | 272,456 | 8,643,932 | - | 8,916,388 | 103,945 | 12,012 | 171,492 |
All derivative contracts have been entered into for hedging purposes, regardless of their classification in accounting.
Related-party transactions
OPA's related parties include OP-Pohjola Group Central Cooperative and its subsidiaries, the OP-Pohjola Group pension insurance organisations OP-Pension Fund and OP-Pension Foundation, and the company's administrative personnel. Standard terms and conditions for credit are applied to loans granted to the related parties. Loans are tied to generally used reference rates. Related-party transactions have not undergone any substantial changes since 31 December 2010.
The Interim Report for 1 January-30 June 2011 has been prepared in accordance with IAS 34 (Interim Financial Reporting), as approved by the EU. The Financial Statements 2010 contain a description of the accounting policies applied. This Interim Report is based on unaudited figures. Given that all figures have been rounded off, the sum total of individual figures may deviate from the presented sums.
Helsinki, 3 August 2011
OP Mortgage Bank
Board of Directors
For further information, please contact Mr Lauri Iloniemi, Managing Director, tel. +358 10 252 3541