OP Mortgage Bank
Stock Exchange Release 7 May 2019 at 10.00 EEST
Interim Report

OP Mortgage Bank: Interim Report for January-March 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 increased to EUR 14,439 million (13,771)*. 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 intermediate loans. On 31 March 2019, 124 OP cooperative banks had a total of EUR 7,776 million (6,776)  in intermediate loans from OP MB.

The company's financial standing remained stable throughout the reporting period. Operating profit for January-March amounted to EUR 4.2 (4.2) million.

*The comparatives for 2018 are given in brackets. For income statement and other aggregated figures, January-March 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 March 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 Covered Bond Act (Laki kiinnityspankkitoiminnasta (688/2010)) totalled EUR 14,452 million.

Capital adequacy

OP MB's Common Equity Tier 1 (CET1) ratio stood at 130.9% (136.4) on 31 March 2019. The CET1 capital require-ment 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.

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 March 2019, OP Cooperative's member credit institutions comprised 155 OP cooperative banks as well as OP Corporate Bank plc, OP MB, OP Card Company Plc and OP Customer Services Ltd (formerly OP Process Services Ltd).

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 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 Covered Bond Act, 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 other receivables without this being prevented by OP MB's liquidation or bankruptcy.

Personnel

On 31 March 2019, OP MB had five 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.

Administration

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
  Hanno Hirvinen Head of Group Reasury, Op Corporate Bank plc

OP MB's Managing Director is Lauri Iloniemi, and his deputy is Sanna Eriksson.

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.

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 housing 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.

Outlook

On 25 April 2019, the ECB issued OP Financial Group with a decision on retail exposures as part of the TRIM project (Targeted Review of Internal Models). The decision, which took effect immediately, increases the risk weights of home loans applied in the capital adequacy measurement of OP Financial Group and its member credit institutions from their current level of 6% to approximately 12%. As a result of the increase in risk weights on home loans, the CET1 ratio of OP MB will decrease to approximately 60%. It is expected that OP MB's capital adequacy will still 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.

Schedule for Interim Reports in 2019

Interim Report H1/2019: 30 July 2019
Interim Report Q1-3/2019: 29 October 2019

Helsinki, 7 May 2019

OP Mortgage Bank
Board of Directors

For more information, please contact:
Lauri Iloniemi, Managing Director, tel. +358 (0)10 252 3541

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