Significant investments for the benefit of customers
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During 2018, OP will invest around EUR 400 million in developing its operations and improving customer experience. During the reporting period, OP introduced a digital home loan service where customers can receive a home loan decision online on a real-time basis.
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In May 2018, OP opened Pohjola Health`s fifth hospital, in Turku. Pohjola Health has started building its own network of medical centres. The first ones will be opened in Pori and Lappeenranta during 2018.
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New granted OP bonuses rose by 5% to EUR 113 million (108).
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In the first half, the number of OP cooperative banks` owner-customers increased by 32,000 to almost 1.9 million and that of OP Financial Group`s joint banking and insurance customers by 19,000 to over 1.8 million.
OP Financial Group`s key indicators
| | Q1-2/2018 | Q1-2/2017 | Change, % | Q1-4/2017 |
| Earnings before tax, EUR million | 425 | 560 | -24.0 | 1,031 |
| Banking | 333 | 314 | 5.9 | 619 |
| Non-life Insurance | 64 | 107 | -40.1 | 210 |
| Wealth Management | 94 | 93 | 1.5 | 247 |
| Other Operations | -66 | 45 | | -45 |
| New OP bonuses accrued to owner-customers | -113 | -108 | 4.5 | -220 |
| | 30 June 2018 | 30 June 2017 | Change, % | 31 Dec. 2017 |
| CET1 ratio, % | 19.8 | 19.1 | 0.7* | 20.1 |
| Ratio of capital base to minimum amount of capital base (under the Act on the Supervision of Financial and Insurance Conglomerates), % ** | 146 | 145 | 1* | 148 |
| Return on economic capital, %*** | 18.3 | 21.3 | -3.0* | 20.4 |
| Return on equity (ROE), % | 6.0 | 8.8 | -2.8* | 7.7 |
| Return on assets (ROA), % | 0.48 | 0.69 | -0.2* | 0.6 |
| Ratio of non-performing receivables to loan and guarantee portfolio, %**** | 1.2 | 1.3 | -0.1* | 1.2 |
| Owner-customers (1,000) | 1,865 | 1,786 | 4.5 | 1,833 |
On 1 January 2018, OP Financial Group adopted IFRS 9 Financial Instruments. Comparatives deriving from the income statement are based on figures under IAS 39 reported for the corresponding period in 2017. Unless otherwise specified, balance sheet and other cross-sectional figures under IAS 39 on 31 December 2017 are used as comparatives.
* Change in ratio
** The FiCo ratio has been calculated for insurance companies using transition provisions included in solvency regulation.
*** 12-month rolling
**** Non-performing receivables refer to receivables that are more than 90 days past due, other receivables classified as risky and forborne receivables related to such receivables due to the customer`s financial difficulties.
Comments by President and Group Executive Chair Timo Ritakallio
The first-half OP Financial Group`s earnings were still quite good although they decreased markedly from the previous year. A marked decrease in investment income and a substantial increase in operating expenses lay behind by the weaker earnings. What was especially positive in the first half financial performance was the fact that the actual customer business performance remained at the same level as a year ago. Customer business income - net interest income, net insurance income and commission income - increased by 5% year on year. Our heavy investments in improving customer experience and business development increased our operating expenses by 12% over the previous year. Impairment loss on receivables was exceptionally low. At the end of the reporting period, OP Financial Group still had a strong capital base, providing a solid basis for a long-term business development while the financial sector transformation continues.
In the first half, OP Financial Group showed a business growth that was clearly faster than a year ago. The loan portfolio and Non-life premiums written increased to a rate of 3% and deposits increased to up to 6%. Corporate customer business showed strong growth in particular. Growth in client assets under our management was slower according to the general market trend, and therefore assets under management at the end of June were at the 2017 end level.
OP Financial Group is there for all of its customers. The world is digitalising at an ever faster pace, but we at OP Financial Group will continue to cater for customers with different needs for services. We want to offer a first-rate customer experience to both digital natives and those who are not so apt or accustomed to managing their affairs online. We aim to blaze the trail in building user-friendly services, and actually in early July we launched a stripped-down and easy-to-use OP Accessible online service to customers who are, for some reason or another, unable to use, say, the op.fi service or OP-mobile. The new service enables us to promote equal use of banking services among all customers and make their daily life easier. We have developed this service too in cooperation with our customers.
The representative assembly of OP Bank Group Pension Fund has decided to transfer statutory earnings-related pension insurance portfolio to Ilmarinen Mutual Pension Insurance Company. The transfer of the pension liability still awaiting regulatory approval will improve not only the capital base but also the current year`s earnings of OP Financial Group. According to the current estimate, the transfer would improve earnings by around EUR 240 million on a non-recurring basis. The transfer of the pension liability would take place at the end of the year and its final effect on earnings will especially depend on developments in bond markets towards the end of the year. So, this is how we further specify OP Financial Group`s earnings outlook for this year so that full-year earnings are expected to be at the same level as in 2017 - almost the record earnings ever reported.
OP Financial Group aims to transform in line with changing customer needs. In early June, the Supervisory Board of OP Cooperative decided on the composition and areas of responsibility of OP Financial Group`s senior management. The reorganisation is aimed at sharpening the strategic focus, maximising the benefit for customers and speeding up business success. This reorganisation will involve simplified organisations and operating models and quicker decision-making. OP`s new Executive Board started to work on 11 June 2018 and has been built around private and corporate customer business. The core of the business is still banking and insurance business. The new division of responsibilities and the Executive Board is aimed at improving strategic and operational agility while offering excellent customer experience and added value to our customers. The next stages in the reorganisation will take place during the upcoming autumn.
Alongside digitisation and the changing competitive environment, regulation is one of the factors shaping our sector drastically. We want to contribute to developments in the financial sector and be involved in building cooperation not only in Finland but also internationally. We have applied for the membership of Finance Finland as of the beginning of 2019 because a more intense cooperation is in the interests of all actors.
World economic development has continued favourably but more unevenly during the second quarter. The threat of a trade war, in particular, has caused uncertainty about economic development. The Finnish economy has continued to grow at a brisk rate in the spring and improved employment, in particular, has been gratifying. Economic surveys, however, suggest that the strongest stage of growth is about to be behind us. The economic outlook is still relatively favourable but we cannot pass over lightly especially international political woes.
On the whole, the Finnish macroeconomic stability is still in reasonably good shape. The current account shows surplus and there are no signs of overheating. Private sector indebtedness is increasing moderately as a whole - it is particularly worth noting that household wealth is still growing faster than debt. Debate about indebtedness will, however, continue. That is good. To support political decisions, an accurate snapshot of growth in household wealth is also needed.
January-June
OP Financial Group`s earnings before tax amounted to EUR 425 million (560). The figure decreased by EUR 134 million over the previous year. This earnings decrease came from lower net investment income and other operating income as well as higher expenses. Meanwhile, income from customer business, or net interest income, net insurance income and net commissions and fees, rose year on year.
Net interest income increased by 6.8% to EUR 571 million. Banking net interest income increased by EUR 18 million and that by the Other Operations segment by EUR 22 million. Net insurance income amounted to EUR 278 million (261). A year ago, the reduction in the discount rate reduced net insurance income by EUR 26 million. An increase in corporate customer insurance premium revenue supported an increase in net insurance income. Net commissions and fees were EUR 444 million, or EUR 9 million higher than the year before. Refunds based on unit-linked management fees increased by EUR 6 million and commission expenses declined by EUR 20 million. However, payment transfer fees decreased by EUR 17 million. A year ago, OP Financial Group sold its portfolio of agreements and POS terminals of merchant acquiring and POS terminal services to Nets. Due to the sale, payment transfer commission income decreased by EUR 10 million and commission expenses by EUR 12 million over the previous year.
Net investment income decreased by 16.7% to EUR 206 million. A temporary exemption (overlay approach) is applied to certain equity instruments of insurance companies, which reduced earnings for the reporting period by EUR 22 million. Total investment income declined by EUR 63 million. The combined return on investments at fair value of OP Financial Group`s insurance institutions was 0.5% (1.4).
Net income recognised at fair value through other comprehensive income (net income from available-for-sale financial assets a year ago) decreased by EUR 52 million over the previous year. As a result of the adoption of IFRS 9 at the beginning of 2018, investments recognised at fair value through other comprehensive income and capital gains decreased. In the reporting period, capital gains recognised totalled EUR 32 million (81). However, investments recognised at fair value in the income statement increased. Net trading income resulting from positive value changes in Credit Valuation Adjustment (CVA) in derivatives credit and counterparty risk owing to market changes was EUR 9 million lower than a year ago. Short-term supplementary Life Insurance interest rate provisions that were lower than a year ago improved net investment income by EUR 28 million over the previous year.
Other operating income fell by EUR 41 million year on year to EUR 21 million. Non-recurring VAT refunds for prior years, interest included, totalled EUR 22 million a year ago. In addition, non-recurring income of EUR 24 million from the sale of the portfolio of agreements and POS terminals of acquiring and POS services was recognised a year ago in other operating income and extra amortisation recognised related to the sale totalled EUR 3 million and other expenses EUR 3 million.
Total expenses increased by 12.4% to EUR 956 million (851). This increase is mainly explained by higher development costs of present-day business, higher expenses of new businesses and higher amortisation/depreciation and impairment losses. OP Financial Group`s significant investments in service development increased development costs by 13.3%. Direct development costs totalled EUR 110 million (97). New businesses accounted for EUR 13 million of the increase in total expenses. Planned depreciation/amortisation increased by 18.2% to EUR 105 million. This increase resulted from higher development expenditure recognised for prior years. Impairment write-downs increased by EUR 19 million year on year. The expenses were also increased by charges of financial authorities by EUR 20 million year on year and a 5.2% increase in personnel costs to EUR 413 million.
Impairment losses on loans and receivables recognised under various income statement items that reduced earnings amounted to EUR 17 million (37), of which EUR 7 million (23) concerned loans and receivables. Considering that impairment losses on receivables are calculated in 2018 based on IFRS 9, they are not fully comparable with those calculated under the previous IAS 39. The ratio of non-performing receivables in loans and receivables to the loan and guarantee portfolio was low, at 1.2% (1.2).
OP Financial Group`s current tax amounted to EUR 91 million (101). The effective tax rate was 21.3% (18.0).
OP Financial Group`s equity amounted to EUR 11.3 billion (11.1). Equity was increased by the reporting period`s earnings. Equity included EUR 2.9 billion (2.9) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.3). The return target for Profit Shares for 2018 is 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 47 million. The amount of interest paid for 2017 totalled EUR 90 million in June 2018.
Outlook towards the year end
The world economic and euro area economic outlook still look favourable although the euro area economic growth slightly fell short of expectations during the second quarter. Owing to strong economic growth, the European Central Bank is gradually normalising its monetary policy. Finnish economic development has been favourable as well. Economic growth has been strong and built on a broad basis, employment has improved, the current account has shown surplus and the economic confidence index has been high.
Economic growth is expected to continue in the near future too although the Finnish economic growth rate is anticipated to slow down. The largest risks in the near future are associated with greater uncertainty in financial markets and with the political environment. A longer-term risk is that economic growth will remain modest if Finland is not able to restructure its economy to a sufficient extent when the population is ageing and digitisation is proceeding.
The operating environment in the financial sector on the whole has been quite favourable. While low market interest rates have retarded growth in banks` net interest income and eroded insurance institutions` income from fixed income investments, they also have improved customers` repayment capacity. Impairment losses are very low. The most significant strategic risks in the financial sector are currently associated with changing customer behaviour, operating environment digitisation, competition from outside of the traditional financial sector and more complex regulation. Industry disruption is threatening to slow down growth and erode income generation in the years to come. In the next few years, the financial sector will be faced with a strong need to reinvent itself. Changes in the operating environment will emphasise the necessity of reinvention with a long-term approach as well as the role of the management of profitability and capital adequacy.
OP Financial Group`s earnings before tax for 2018 are expected to be at about the same level as in 2017 (lower in the previous estimate). This outlook change has been motivated by a significant non-recurring item from the transfer of OP Financial Group`s personnel`s statutory earnings-related pension insurance portfolio and the final amount to be recognised in the income statement will be affected by the market conditions prevailing during the second half of the year.
The most significant uncertainties in respect of the financial performance relate to changes in the interest rate and investment environment, market growth rate, changes in the competitive situation and impairment losses. IFRS 9 adopted at the beginning of 2018 is expected to increase short-term earnings volatility and decrease investment income soon after its adoption.
All forward-looking statements in this report expressing the management`s expectations, beliefs, estimates, forecasts, projections and assumptions are based on the current view on 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 Chair Timo Ritakallio in a press conference on 1 August 2018 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.
OP Corporate Bank plc will publish its own interim report.
Financial reporting in 2018
Schedule for Interim Reports in 2018:
Interim Report Q1-3/2018 31 October 2018
Helsinki, 1 August 2018
OP Cooperative
Executive Board
Additional information:
Timo Ritakallio, President and Group Executive Chair, 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
www.op.fi
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op.fi
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 160 member cooperative banks, its central cooperative OP Cooperative, and the latter`s subsidiaries and affiliates. The Group has a staff of 12,000 and 1.9 million owner-customers.
OP Financial Group Interim Report Q2 2018
OP Amalgamation Capital Adequacy Report Q2 2018
OP Financial Group Q2 2018 background material
This announcement is distributed by Nasdaq Corporate Solutions on behalf of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: OP Yrityspankki Oyj via GlobeNewswire
HUG#2208388
