OP Mortgage Bank : Half-yearly report

OP Mortgage Bank
Half year report for January-June 2012
1 August 2012, 9.00 am EEST

HALF YEAR REPORT FOR JANUARY-JUNE 2012

OP Mortgage Bank's (OPA) loan portfolio grew to EUR 8,841 million in the January-June period (EUR 7,535 million at the end of 2011). The bank increased its loan portfolio in February, in March and in May when it purchased housing loans from OP-Pohjola Group member cooperative banks. OPA launched a covered bond issue at a nominal valued of EUR 1.25 billion in May.

Earnings Development

Net commissions and fees were negative with commission income increasing to EUR 2,451 thousand (1,712) and commission expenses to EUR 7,874 thousand (6,298).  Commission expenses mainly comprise commissions paid to OP-Pohjola Group member banks for servicing housing loans. The bank's expenses amounted to EUR 1,750 thousand (1,926).

Net interest income for April-June grow to EUR 7,571 thousand (6,670) and earnings before taxes to EUR 3,708 thousand (2,986). The bank's expenses amounted to EUR 973 thousand (996). Net income from investments was negative and totalled EUR 180 thousand (0). In May OPA used as short term collateral German State bonds whose price risk was hedged by futures.

Balance Sheet and Off-balance Sheet Commitments

Change in Major Asset and Liability Items

The loan portfolio increased from EUR 7,535 million on 31 December 2011 to EUR 8,841 million on 30 June 2012. OPA increased its loan portfolio in the review period when it purchased housing loans from OP-Pohjola-Group member banks for EUR 1,943 million.

On 30 June, households accounted for 99.6 % (99.3) of the loan portfolio and housing corporations for 0.4 % (0.7). The bank's non-performing loans amounted to EUR 2.3 million (2.1). The impaired amount for an impairment loss on an individual basis recognised in the review period was fully covered by collateral.

The carrying amount of bonds issued to the public totalled EUR 5,716 million (5,423) on 30 June.
OPA issued its seventh covered bond at a nominal value of EUR 1.25 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. The covered bond issued in 2007 at a nominal value of EUR 1 billion matured and were paid off in June. In addition to bonds, other funding was based on financing loans granted by Pohjola Bank plc (Pohjola). On 30 June, financing loans totalled EUR 3,100 million (2,070).

Shareholders' equity rose to EUR 310 million (256). Retained earnings amounted to EUR 24.5 million (21.3) 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 15,995 million (14,409). 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 8.7% on 30 June. Capital ratio excluding transition rules stood at 39.6%. Shareholder's equity increased by EUR 30 million in March and by EUR 20 million in May when OP-Pohjola Group Central Cooperative made an additional investment in OPA. In May OPA called in the Tier 2 debenture issued in 2007 at a nominal value of EUR 20 million.

OPA calculates its capital adequacy in compliance with Basel II. In its calculation of capital requirements for credit risk, OPA has adopted the Internal Ratings Based Approach (IRBA). With respect to the capital adequacy requirement for operational risks, OPA adopted the Standardised Approach in the report period. Before 31 December comparison for credit risk here below are presented according to the Standardised Approach.

The increase in shareholders' equity arising from the additional investment and 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. The Impairments - shortfall of expected losses total EUR 7.2 million.

The increase in the amount of risk-weighted receivables was due to an increased loan portfolio. The amount of risk-weighted receivables is expected to decrease during the next quarter, in which case OPA's capital adequacy ratio will in September be over 9%, which is the target.

Joint Responsibility and Joint Security
       

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 six 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. Lars Björklöf, Managing Director, Osuuspankki Raasepori was elected as a new member of the Board of Directors. Mr. Heikki Kananen, Managing Director, Mäntsälän Osuuspankki and Mr. Mikko Rosenlund, Managing Director, Tampereen Seudun Osuuspankki were left out of the Board of Directors. The Board composition is as follows:

Managing Director       Lauri Iloniemi.

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.

Prospects for the rest of the year

The existing issuance programme will make it possible to issue new covered bonds in 2012. It is expected that the Company's capital adequacy will remain strong, risk exposure will be favourable and the overall quality of the credit portfolio will remain strong.

Income Statement

Statement of comprehensive income

Key Ratios

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

Balance Sheet

Off-balance Sheet Commitments

Change Calculation on Shareholders' Equity

Cash Flow Statement

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 include 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.

Debt securities issued to the public are carried at amortised cost.  On 30 June 2012, the fair value of these debt instruments was approximately EUR 242,330 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 2012

Derivative Contracts 30 June 2011

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 2011.

Accounting policies

The Interim Report for 1 January-30 June 2012 has been prepared in accordance with IAS 34 (Interim Financial Reporting), as approved by the EU. In the preparation of this Interim Report, OPA substantially applied the same accounting policies as in the financial statements 2011, except a change in the recognition of actuarial gains and losses on defined benefit pension plan.

Change in accounting policies

OPA has decided to voluntarily abandon as of the beginning of 2012 the so-called corridor method in the recognition of actuarial gains and losses on defined benefit pension plans. In accordance with the revised recognition method under IAS 19, actuarial gains and losses are recognised outside profit or loss in comprehensive income as a debit item or credit item in equity for the period during which they occur. When recognising actuarial gains and losses in other comprehensive income, these gains and losses cannot be reclassified through profit or loss in subsequent periods. OPA has applied the change in the accounting policy retrospectively. The effects of the changed accounting policy on the comparatives of the consolidated balance sheet, income statement and statement of comprehensive income shown in this Interim Report are as follows:

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, 1 August 2012

OP Mortgage Bank
Board of Directors

For further information, please contact Mr Lauri Iloniemi, Managing Director, tel. +358 10 252 3541
[1]  For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of 2011. For income statement and other cumulative figures, the point of comparison is the figure for January-June period in the previous year.
[2]  For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of 2011. For income statement and other cumulative figures, the point of comparison is the figure for January-June period in the previous year.