OP Mortgage Bank

OP Mortgage Bank: Financial Statements Bulletin for 1 January-31 December 2016

OP Mortgage Bank: Financial Statements Bulletin for 1 January-31 December 2016


OP MORTGAGE BANK
Stock exchange release 2 February 2017 at 10.00 am EET
Financial Statements Bulletin

OP Mortgage Bank: Financial Statements Bulletin for 1 January-31 December 2016

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 the Group from money and capital markets. OP MB is responsible for the Group's funding for the part of covered bond issuance.

Financial standing

The intermediate loans and loan portfolio of OP MB increased to EUR 10,892 million (10,354)* during the reporting period. The company increased its on-balance sheet loan portfolio by buying mortgage-backed loans from OP Financial Group's member banks worth a total of EUR 1,294 million. In May, OP MB issued a fixed-rate covered bond with a maturity of seven years in international capital markets. Out of the bond with a nominal value of EUR 1,250 million, OP MB intermediated EUR 1,119 million in intermediate loans to OP Financial Group member cooperative banks. A total of 84 member cooperative banks have intermediate loans from OP MB, worth a total of EUR 1,853 million (743).

The company's financial standing remained stable throughout the reporting period. Operating profit for January- December amounted to EUR 22.6 (25.3) million.

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, intermediate loan interest and interest on issued bonds into the same basis rate. OP MB has entered into all derivative contracts for hedging purposes, with OP Corporate Bank plc being their counterparty.

*The comparatives for 2015 are given in brackets. For income statement and other aggregated figures, January-December 2015 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2015) serve as comparatives.  

Collateralisation of bonds issued to the public

On 31 December 2016, loans as collateral in security of the covered bonds issued under the Euro Medium Term Covered Note programme worth EUR 15 billion established on 12 November 2010 under the Laki kiinnityspankkitoiminnasta (688/2010) (Covered Bond Act) totalled EUR 10,407 million.

Capital adequacy

OP MB has presented its capital base and capital adequacy in accordance with the EU capital requirement regulation and directive (EU 575/2013). 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.

The Common Equity Tier 1 (CET1) ratio stood at 109.5% (140.2) on 31 December 2016. The 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.

OP MB's highest minimum capital requirement is determined by the Basel I floor. OP MB's capital base exceeded the Basel I floor by EUR 29.1 million in December. Information on the Basel I floor and capital surplus can be found in note "Capital base and capital adequacy".

The Finnish Financial Supervisory Authority continues to take measures to set a 10% minimum risk weight on housing loans in an effort, according to the Authority, to prepare for an increased systemic risk. OP MB's loan portfolio consists of low-risk home loans, on which the Authority's possible decision will relatively have the strongest impact. Based on an assessment, OP MB's capital adequacy will, however, remain solid even after the entry into force of the floor and be clearly above the minimum requirements set by the authorities; the minimum level of capital will continue to be determined according to the Basel I floor even after the setting of the floor. The Financial Supervisory Authority's decision will probably take effect in July 2017.

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 2016, OP Cooperative's members comprised 173 member cooperative banks as well as OP Corporate Bank plc, OP Mortgage Bank, OP Card Company Plc and 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 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 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 December 2016, OP MB had five employees. The Bank 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:

Chairman       Harri Luhtala  Chief Financial Officer, OP Cooperative
Members       Elina Ronkanen-Minogue    Head of Asset and Liability Management and Group Treasury, OP Cooperative
                    Hanno Hirvinen   Group Treasurer, OP Corporate Bank plc    
                     
OP MB's Managing Director is Lauri Iloniemi and Hanno Hirvinen is his deputy.

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 plc, 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, intermediate loan interest and interest on issued bonds into the same basis rate. The interest rate risk may be considered to be low.

Outlook

It is expected that the bank's capital adequacy will remain strong, risk exposure favourable and the overall quality of the loan portfolio good. This will make it possible to issue new covered bonds in 2017.

Accounting policies

The Financial Statements Bulletin for 2016 has been prepared in accordance with IAS 34 (Interim Financial Reporting).

This Financial Statements Bulletin 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.

The Financial Statements Bulletin is available in Finnish and English. The Finnish version is official that will be used if there is any discrepancy between the language versions.

OP MB's related parties include the parent company OP Cooperative and its subsidiaries, the OP Financial Group pension insurance companies OP Bank Group Pension Fund and OP Bank Group Pension Foundation, and the company's administrative personnel. Standard loan terms and conditions are applied to loans granted to the related parties. Loans are tied to generally used reference interest rates. The financial year saw no major changes in related-party transactions.

The income statement layout grouping has been updated for the Financial Statements Bulletin 2016. Comparatives have been restated to correspond to the new grouping. This has no effect on profit for the period. Comparatives have not been presented in a separate table due to the minor effect of the update on the income statement.

Changes caused by the new grouping are as follows:

Net interest income after impairment loss is not presented separately. Impairment loss on receivables is presented in its own line after expenses. "Net trading income" previously presented in its own line has been incorporated into "Net investment income". Expenses have been divided into personnel costs, amortisation/depreciation and other operating expenses. Expenses were previously divided into personnel costs, other administrative expenses and other operating expenses.

Formulas for Alternative Performance Measures

The Alternative Performance Measures Guidelines issued by the European Securities and Markets Authority (ESMA) came into force on 3 July 2016. The Alternative Performance Measures are presented to illustrate the financial performance of business operations and to improve comparability between reporting periods. They should not be considered to be replacements for the performance measures defined in IFRS governing financial reporting.

The formulas for the used Alternative Performance Measures are presented below and they correspond to the previously presented performance indicators in terms of content.

Return on equity (ROE), % = Annualised profit for the period / Equity capital (average equity capital at the beginning and end of the period) × 100

Cost/income ratio, % = (Personnel costs + Depreciation/amortisation and impairment loss + Other operating expenses) / (Net interest income + Net commission and fees + Net investment income + Other operating income) × 100

Income statement, TEURQ4/2016Q4/2015Q1-Q4/2016Q1-Q4/2015
Net interest income 19,570 19,873 76,171 73,355
  Interest income 19,539 26,317 84,978 106,362
  Interest expenses -31 6,444 8,807 33,007
Net commissions and fees -11,647 -11,329 -47,757 -43,361
Net investment income 5 0 7 22
Other operating income 0 0 22 1
Total income7,9298,54428,44330,016
Personnel costs 78 94 321 382
Depreciation/amortisation and
impairment loss
209 209 836 716
Other operating expenses 801 1,469 4,243 3,821
Total expenses1,0881,7725,4004,918
Impairment loss on receivables -221 -35 -400 210
Earnings before tax6,6216,73722,64325,308
Income tax expense 1,323 1,311 4,566 5,020
Profit for the period5,2975,42618,07720,288

Statement of comprehensive income, TEURQ4/2016Q4/2015Q1-Q4/2016Q1-Q4/2015
     
Profit for the period 5,297 5,426 18,077 20,288
         
Items that will not be reclassified to profit
or loss
       
Gains/(losses) arising from remeasurement of defined benefit plans -138 231 -138 231
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans 28 -46 28 -46
Total comprehensive income5,1875,61117,96720,473

Key ratiosQ4/2016Q4/2015Q1-Q4/2016Q1-Q4/2015
Return on equity (ROE), % 5.7 5.9 4.8 5.6
Cost/income ratio, % 14 21 19 16

Cash flow
from operating activities, TEUR
Q1-Q4/2016Q1-Q4/2015
Profit for the financial year 18,077 20,288
Adjustments to profit for the financial year 12,649 9,372
Increase (-) or decrease (+)
in operating assets
-517,538-1,005,090
Receivables from credit institutions -1,109,400 -733,369
Receivables from the public and public-sector entities 569,251 -282,945
Other assets 22,611 11,224
Increase (+) or decrease (-)
in operating liabilities
481,863-143,399
Liabilities to credit institutions and
central banks
513,000 -130,000
Other liabilities -31,137 -13,399
     
Income tax paid -6,323 -3,362
Dividends received 7 22
A. Net cash from operating activities-11,264-1,118,830
Cash flow from investing activities    
Purchase of PPE and intangible assets   -681
B. Net cash used in investing activities -681
Cash flow from financing activities  
Increases in debt securities issued
to the public
1,243,488 1,260,582
Decreases in debt securities issued
to the public
-1,010,000  
Dividends paid and interest on cooperative capital -16,392 -4,996
C. Net cash used in financing activities217,0951,255,586
D. Effect of foreign exchange rate changes on cash and cash equivalents00
Net change in cash and cash equivalents (A+B+C+D)205,831136,074
Cash and cash equivalents at year-start245,120109,046
Cash and cash equivalents at year-end451,787245,120
Change in cash and cash equivalents206,667136,074
   
Interest received 107,476 117,954
Interest paid 39,919 46,724
Adjustments to profit for the financial year    
Non-cash items   
Unrealised net gains on foreign exchange operations 0 0
Impairment losses on receivables 405 -207
Other 12,244 8,863
Total adjustments12,6498,656
Cash and cash equivalents  
Receivables from credit institutions payable on demand 451,787 245,120
Total cash and cash equivalents451,787245,120

Balance sheet, TEUR31 Dec 201631 Dec 2015
     
Receivables from credit institutions 2,304,556 988,490
Derivative contracts 220,461 192,206
Receivables from customers 9,039,563 9,610,252
Investments assets 40 40
Intangible assets 1,739 2,575
Other assets 56,212 78,823
Tax assets 460  
Total assets11,623,03110,872,386
Liabilities to credit institutions 1,888,000 1,375,000
Derivative contracts 6,233 12,971
Debt securities issued to the public 9,277,801 9,002,669
Provisions and other liabilities 77,375 108,485
Tax liabilities   1,325
Total liabilities11,249,40910,500,450
Shareholders' equity    
  Share capital 60,000 60,000
  Reserve for invested unrestricted equity 245,000 245,000
  Retained earnings 68,622 66,937
Total equity 373,622 371,937
Total liabilities and shareholders' equity11,623,03110,872,386

Off-balance-sheet commitments, TEUR31 Dec 201631 Dec 2015
Irrevocable commitments given on behalf of customers 8 858

Statement of changes in equity, TEURShare capitalOther reservesRetained earningsTotal equity
         
Shareholders' equity 1 Jan 201560,000245,00051,459356,459
Reserve for invested unrestricted equity        
Profit for the period     20,288 20,288
Total comprehensive income     185 185
Other changes     -4,996 -4,996
Shareholders' equity 31 Dec 201560,000245,00066,937371,937
         
Shareholders' equity 1 Jan 201660,000245,00066,937371,937
Reserve for invested unrestricted equity        
Profit for the period     18,077 18,077
Total comprehensive income     -110 -110
Other changes     -16,282 -16,282
Shareholders' equity 31 Dec 201660,000245,00068,622373,622

OP MB has presented its capital base and capital adequacy in accordance with the EU capital requirement regulation and directive (EU 575/2013).

Capital base and capital adequacy, TEUR31 Dec 201631 Dec 2015
     
Shareholders' equity 373,622 371,937
Common Equity Tier 1 (CET1) before deductions373,622371,937
Intangible assets -1,739 -2,575
Excess funding of pension liability, indirect holdings and deferred tax assets for losses -67 -74
Share of unaudited profits -18,077 -20,288
Impairment loss - shortfall of expected losses -2,612 -2,046
Common Equity Tier 1 (CET1)351,126346,954
Tier 1 capital (T1)351,126346,954
Total capital base 351,126346,954
   
Risk-weighted assets  
Credit and counterparty risk 286,845 219,560
Operational risk 33,898 27,846
Total320,743247,407
   
Key ratios, %  
CET1 capital ratio 109.5 140.2
Tier 1 capital ratio 109.5 140.2
Capital adequacy ratio 109.5 140.2
     
Basel I floor  
Capital base 351,126 346,954
Basel I capital requirements floor 322,006 324,461
Capital buffer for Basel I floor 29,120 22,493

Classification of financial assets and liabilities 31 Dec 2016, TEUR
Financial assetsLoans and  other receivablesRecognised at fair value through profit or loss Available
for sale
Total
Receivables from credit institutions 2,304,556     2,304,556
Derivative contracts   220,461   220,461
Receivables from customers 9,039,563     9,039,563
Shares and participations     40 40
Other receivables 56,212     56,212
Other assets 2,199     2,199
Total11,402,530220,4614011,623,031
        
Financial liabilities Recognised at fair value through profit or loss Other liabilitiesTotal
Liabilities to credit institutions     1,888,000 1,888,000
Derivative contracts   6,233   6,233
Debt securities issued to the public     9,277,801 9,277,801
Other liabilities     77,375 77,375
Total 6,23311,243,17611,249,409
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 31 Dec 2016     277,485 277,485
     
Classification of financial assets and liabilities 31 Dec 2015, TEUR
Financial assetsLoans and  other receivablesRecognised at fair value through profit or loss Available
for sale
Total
Receivables from credit institutions 988,490     988,490
Derivative contracts   192,206   192,206
Receivables from customers 9,610,252     9,610,252
Shares and participations     40 40
Other receivables 78,823     78,823
Other assets 2,575     2,575
Total10,680,140192,2064010,872,386
        
Financial liabilities Recognised at fair value through profit or loss Other liabilitiesTotal
Liabilities to credit institutions     1,375,000 1,375,000
Derivative contracts   12,971   12,971
Debt securities issued to the public     9,002,669 9,002,669
Other liabilities     109,810 109,810
Total 12,97110,487,47910,500,450
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 31 Dec 2015     219,641 219,641
     
Debt securities issued to the public are carried at amortised cost. The fair value of these debt instruments has been measured using information available in markets and employing commonly used valuation techniques. The difference between the fair value and carrying amount is presented as valuation difference in the "Classification of financial assets and liabilities" note.

Derivative contracts 31 Dec 2016, TEUR Nominal values/residual term to maturity
  Less than
1 year
1-5
years
More than
5 years
Total
Interest rate derivatives        
Hedging 2,759,875 8,216,977 6,838,247 17,815,099
Total2,759,8758,216,9776,838,24717,815,099
     
    Fair values Credit equivalent  
  Assets Liabilities  
Interest rate derivatives        
Hedging 220,461 6,233 414,976  
Total220,4616,233414,976 
     
Derivative contracts 31 Dec 2015, TEUR Nominal values/residual term to maturity
  Less than
1 year
1-5
years
More than
5 years
Total
Interest rate derivatives        
Hedging 2,387,456 8,816,977 7,118,958 18,323,391
Total2,387,4568,816,9777,118,95818,323,391
     
     Fair values Credit equivalent  
  Assets Liabilities  
Interest rate derivatives        
Hedging 192,206 12,971 411,985  
Total192,20612,971411,985 

Financial instruments classification, grouped by valuation technique, TEUR
    
31 Dec 2016Fair value measurement at year end
 Balance sheet valueLevel 1Level 2
Recurring fair value measurements of assets   
Derivate contracts 220,461   220,461
Total220,461 220,461
Recurring fair value measurements of liabilities      
Derivate contracts 6,233   6,233
Total6,233 6,233
Financial liabilities not measured at fair value      
Debt securities issued to the public 9,277,801 9,189,185 366,101
Total9,277,8019,189,185366,101
OP MB does not hold any transfers between the levels of fair value valuation.  
    
31 Dec 2015Fair value measurement at year end
 Balance sheet valueLevel 1Level 2
Recurring fair value measurements of assets      
Derivate contracts 192,206   192,206
Total192,206 192,206
Recurring fair value measurements of liabilities      
Derivate contracts 12,971   12,971
Total12,971 12,971
Financial liabilities not measured at fair value      
Debt securities issued to the public 9,002,669 8,872,880 349,430
Total9,002,6698,872,880349,430

Financial reporting 2017

Schedule for Interim Reports in 2017:

Interim Report Q1/2017                               27 April 2017
Interim Report H1/2017                                2 August 2017
Interim Report Q1-3/2017                            1 November 2017

Helsinki, 2 February 2017

OP Mortgage Bank
Board of Directors

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

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Source: OP Mortgage Bank plc via Globenewswire