OP Mortgage Bank

OP Mortgage Bank: Interim Report for January-June 2018

OP Mortgage Bank: Interim Report for January-June 2018

OP MORTGAGE BANK
Stock exchange release 1 August 2018
Interim Report

OP Mortgage Bank:
Interim Report for January-June 2018

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 intermediary loans and loan portfolio of OP MB were EUR 13,608 million (13,580)* in total during the reporting period. OP MB issued one fixed-rate covered bond with a maturity of 7.25 years in international capital markets in June. The proceeds of the bond were intermediated in its entirety to OP cooperative banks in the form of intermediary loans. On 30 June 2018, 116 OP cooperative banks had a total of EUR 5,776 million (4,776) in intermediary loans from OP MB.

The company's financial standing remained stable throughout the reporting period. Operating profit for January- June amounted to EUR 7,6 (8,5) million.

*The comparatives for 2017 are given in brackets. For income statement and other aggregated figures, January-June 2017 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2017) serve as comparatives.  

Collateralisation of bonds issued to the public

On 30 June 2018, 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 Covered Bond Act (Laki kiinnityspankkitoiminnasta (688/2010)) totalled EUR 13,410 million.

Capital adequacy

The Common Equity Tier 1 (CET1) ratio stood at 125.7 % (109.5) on 30 June 2018. 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 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.

The Financial Supervisory Authority has set a 15% minimum risk weight on housing loans from the beginning of 2018 for at least two years. According to the Authority, this floor is aimed at preparing for a systemic risk related to household indebtedness. The minimum risk weight floor does not apply to OP MB but applies only to OP Financial Group level.

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 30 June 2018, OP Cooperative's members comprised 157 member 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 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 30 June 2018, 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 Harri Luhtala Chief Financial Officer, OP Cooperative
Members Elina Ronkanen-Minogue Head of Asset and Liability Management and Group Treasury,
OP Cooperative
  Hanno Hirvinen Head of Group Treasury, OP Corporate Bank plc

OP MB's Managing Director is Lauri Iloniemi, and his deputy was Hanno Hirvinen until 2 July 2018 and is Sanna Eriksson as of 3 July 2018.

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, intermediary 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 interest rate risk of OP MB may be considered low and it has been within the set limit.

Outlook

It is expected that the OP MB'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 2018.

Accounting policies

The Interim Report for 1 January-30 June 2018 has been prepared in accordance with IAS 34 (Interim Financial Reporting).

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.

The Interim Report 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 reporting period saw no major changes in related-party transactions.

New standards and interpretations

IFRS 9 Financial Instruments

On 1 January 2018, OP MB adopted IFRS 9 Financial Instruments, published by the IASB in July 2014 and adopted by the EU in November 2016. For OP MB, the most significant change is that impairment losses are recognised on a more front-loaded basis, based on expected credit losses (ECL). IFRS 9 also entails changes to accounting policies, adjustments of receivables recognised earlier in the balance sheet and changes to classification of financial instruments. Adjustments made to carrying amounts were recognised in retained earnings in the opening balance sheet on the adoption date. The effects of transition to IFRS 9 on the classification and measurement of financial instruments have been presented in OP MB's Notes to the Financial Statements 2017 and Interim Report for 1 January-31 March 2018. OP MB has not adjusted comparatives for prior years.

Adoption of IFRS 15 on 1 January 2018

OP MB has applied IFRS 15, Revenue from Contracts with Customers, since 1 January 2018. In OP MB, IFRS 15 mainly applies to fees not included in the calculation of the effective interest rate.

Net commissions are presented in the notes to the Interim Report. Net commissions are divided into groups according to commission income and expenses recorded from customer agreements.

IFRS 15 did not change the revenue recognition time of the fees included in the scope of application of the standard in comparison with the previous practices. The adoption of IFRS 15 did not have any significant effect on OP MB's financial result. OP MB started to apply IFRS 15 using the retrospective transition method.

Changes made to the specification of net commissions that previously were only presented in the Financial Statements are presented below:

Formulas for Alternative Performance Measures

The Alternative Performance Measures are presented to illustrate the financial performance of business operations and to improve comparability between reporting periods.

The formulas for the used Alternative Performance Measures are presented below.

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, TEURH1/2018H1/2017Q2/2018Q2/2017Q1-Q4/2017
Net interest income 36,338 36,258 17,531 18,102 74,984
  Interest income 28,512 34,199 13,707 16,486 65,692
  Interest expenses -7,826 -2,059 -3,824 -1,615 -9,292
Net comissions and fees -25,923 -24,892 -12,759 -12,499 -49,910
Net investment income 1 1 0 0 2
Other operating income 2 1 0 0 232
Total income10,41911,3684,7725,60325,309
Personnel costs 185 169 97 76 328
Depreciation/amortisation and impairment loss 418 418 209 209 836
Other operating expenses 2,381 2,130 1,170 1,029 4,528
Total  expenses2,9832,7181,4761,3145,692
Impairment loss on receivables 168 -132 112 -212 -276
Earnings before tax7,6048,5193,4084,07719,341
Income tax expense 1,520 1,703 682 815 3,868
Profit for the period6,0836,8152,7263,26215,473

*Impairment losses on receivables have been calculated under IFRS 9 in 2018.

Statement of comprehensive income, TEURH1/2018H1/2017Q2/2018Q2/2017Q1-Q4/2017
      
Profit for the period 6,083 6,815 2,726 3,262 15,473
           
Items that will not be reclassified to profit or loss          
Gains/(losses) arising from remeasurement of defined benefit plans         1
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans          
Total comprehensive income6,0836,8152,7263,26215,473

Key ratiosH1/2018H1/2017Q2/2018Q2/2017Q1-Q4/2017
Return on equity (ROE), % 3.2 3.7 3.0 3.5 4.1
Cost/income ratio, % 29 24 31 23 22

Cash flow from operating activities, TEURH1/2018H1/2017
Profit for the financial year 6,083 6,815
Adjustments to profit for the financial year 5,893 6,046
Increase (-) or decrease (+)
in operating assets
-39,467-1,467,167
Receivables from credit institutions -1,000,000 -2,000,000
Receivables from the public and public-sector entities 972,933 534,961
Other assets -12,400 -2,128
Increase (+) or decrease (-)
in operating liabilities
-957,048377,263
Liabilities to credit institutions and
central banks
-967,000 370,000
Other liabilities 9,952 7,263
     
Income tax paid -1,392 -1,947
Dividends received 1 1
A. Net cash from operating activities-985,929-1,078,988
Cash flow from investing activities  
Purchase of PPE and intangible assets 0 0
B. Net cash used in investing activities 0 0
Cash flow from financing activities  
Increases in debt securities issued
to the public
995,413 1,986,645
Decreases in debt securities issued to the public 0 -1,250,000
Dividends paid and interest on cooperative capital -15,472 -9,038
C. Net cash used in financing activities979,940727,608
D. Effect of foreign exchange rate changes on cash and cash equivalents00
Net change in cash and cash equivalents (A+B+C+D)-5,989-351,381
Cash and cash equivalents at year-start363,609451,787
Cash and cash equivalents at year-end358,038100,824
Change in cash and cash equivalents-5,571-350,963
     
Interest received 18,412 32,310
Interest paid -19,210 -8,945
Adjustments to profit for the financial year    
Non-cash items    
Unrealised net gains on foreign exchange operations 0 0
Impairment losses on receivables -168 131
Price difference recognised on debt securities issued to the public 4,542 4,213
Other 1,519 1,702
Total adjustments5,8936,046
Cash and cash equivalents  
Receivables from credit institutions payable on demand 358,038 100,824
Total cash and cash equivalents358,038100,824

Balance sheet, TEUR30 June 201830 June 201731 Dec. 2017
Receivables from credit institutions 6,134,207 3,953,593 5,139,778
Derivative contracts 124,424 151,770 129,810
Receivables from customers 7,832,253 8,504,785 8,803,822
Investments assets 40 40 40
Intangible assets 486 1,322 904
Other assets 61,786 58,340 49,386
Tax assets 554 703 705
Total assets14,153,75012,670,55314,124,444
Liabilities to credit institutions 1,871,000 2,258,000 2,838,000
Derivative contracts 16,722 40,330 38,025
Debt securities issued to the public 11,813,060 9,916,185 10,796,102
Provisions and other liabilities 82,211 84,638 72,259
Tax liabilities      
Total liabilities13,782,99312,299,15313,744,387
Shareholders' equity      
  Share capital 60,000 60,000 60,000
  Reserve for invested unrestricted equity 245,000 245,000 245,000
  Retained earnings 65,756 66,399 75,057
Total equity 370,756 371,399 380,057
Total liabilities and shareholders' equity14,153,75012,670,55314,124,444

Off-balance-sheet commitments, TEUR30 June 201830 June 201731 Dec. 2017
Irrevocable commitments given on behalf of customers 2 8 3

Statement of changes in equity, TEURShare
capital
Other reservesRetained earningsTotal
equity
         
Shareholders' equity 1 Jan. 201760,000245,00068,622373,622
Reserve for invested unrestricted equity        
Profit for the period     6,815 6,815
Other comprehensive income for the period        
Other changes     -9,038 -9,038
Shareholders' equity 30 June 201760,000245,00066,399371,399
      
Shareholders' equity 31 Dec. 201760,000245,00075,057380,057
Effect of IFRS 9 transition 1 Jan. 2018  9090
Shareholders' equity 1 Jan. 201860,000245,00075,147380,147
Reserve for invested unrestricted equity        
Profit for the period     6,083 6,083
Other comprehensive income for the period        
Other changes     -15,474 -15,474
Shareholders' equity 30 June 201860,000245,00065,756370,756

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, TEUR30 June 201831 Dec. 2017
     
Shareholders' equity 370,756 380,057
Common Equity Tier 1 (CET1) before deductions370,756380,057
Intangible assets -486 -904
Excess funding of pension liability -66 -65
Share of unaudited profits -6,083 -15,473
Impairment loss - shortfall of expected losses -2,641 -2,676
Common Equity Tier 1 (CET1)361,481360,940
Tier 1 capital (T1)361,481360,940
Total capital base 361,481360,940
     
Total risk exposure amount  
Credit and counterparty risk 255,023 289,070
Operational risk 32,602 40,554
Total287,626329,623
     
Key ratios, %    
CET1 capital ratio 125.7 109.5
Tier 1 capital ratio 125.7 109.5
Capital adequacy ratio 125.7 109.5
   
Capital requirement    
Capital base 361,481 360,940
Capital requirement 30,201 34,610
Buffer for capital requirements 331,280 326,329

Net commissions and fees, TEURH1/2018H1/2017Q2/2018Q2/2017Q1-Q4/2017
      
Commission income          
Lending 3,107 3,489 1,556 1,660 6,465
Total3,1073,4891,5561,6606,465
           
Commission expenses          
From lending to OP cooperative banks 3,023 3,416 1,511 1,625 6,336
Loan management fee to OP cooperative banks 25,970 24,941 12,771 12,514 49,936
Issue of bonds 30 16 27 15 92
Other 7 7 6 5 11
Total29,03028,38114,31514,15856,375
      
Net commissions and fees-25,923-24,892-12,759-12,499-49,910

Classification of financial assets and liabilities 30 June 2018, TEUR
Financial assetsAmortised costRecognised at fair value through profit or loss Fair value through other comprehensive incomeTotal
Receivables from credit institutions 6,134,207     6,134,207
Derivative contracts   124,424   124,424
Receivables from customers 7,832,253     7,832,253
Shares and participations     40 40
Other receivables 61,786     61,786
Other assets 1,040     1,040
Total14,029,285124,4244014,153,750
        
Financial liabilities Recognised at fair value through
profit or loss
Amortised costTotal
Liabilities to credit institutions     1,871,000 1,871,000
Derivative contracts   16,722   16,722
Debt securities issued to the public     11,813,060 11,813,060
Other liabilities     82,211 82,211
Total 16,72213,766,27113,782,993
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 30 June 2018     140,453 140,453

Classification of financial assets and liabilities 31 Dec. 2017, TEUR
Financial assetsLoans and  other receivablesRecognised at fair value through
profit or loss
Available
for sale
Total
Receivables from credit institutions 5,139,778     5,139,778
Derivative contracts   129,810   129,810
Receivables from customers 8,803,822     8,803,822
Shares and participations     40 40
Other receivables 49,386     49,386
Other assets 1,609     1,609
Total13,994,594129,8104014,124,444
        
Financial liabilities Recognised at fair value through
profit or loss
Other liabilitiesTotal
Liabilities to credit institutions     2,838,000 2,838,000
Derivative contracts   38,025   38,025
Debt securities issued to the public     10,796,102 10,796,102
Other liabilities     72,259 72,259
Total 38,02513,706,36213,744,387
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 31 Dec. 2017     158,358 158,358

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 30 June 2018, TEUR Nominal values/residual term to maturity
  Less than 1 year 1-5 years More than 5 years Total
Interest rate derivatives        
Hedging 4,556,703 8,092,527 6,453,674 19,102,904
Total4,556,7038,092,5276,453,67419,102,904
   Fair values Credit equivalent  
  Assets Liabilities  
Interest rate derivatives        
Hedging 124,424 16,722 317,485  
Total124,42416,722317,485  

Derivative contracts 31 Dec. 2017, TEUR Nominal values/residual term to maturity
  Less than 1 year 1-5 years More than 5 years Total
Interest rate derivatives        
Hedging 2,648,299 7,824,977 8,561,488 19,034,765
Total2,648,2997,824,9778,561,48819,034,765
   Fair values Credit equivalent  
  Assets Liabilities  
Interest rate derivatives        
Hedging 129,810 38,025 334,303  
Total129,81038,025334,303  

Financial instruments classification, grouped by valuation technique, TEUR
       
30 June 2018Fair value measurement at year end
 Balance sheet valueLevel 1Level 2
Recurring fair value measurements of assets   
Derivate contracts 124,424   124,424
Total124,424 124,424
Recurring fair value measurements of liabilities      
Derivate contracts 16,722   16,722
Total16,722 16,722
Financial liabilities not measured at fair value      
Debt securities issued to the public 11,813,060 11,711,042 242,471
Total11,813,06011,711,042242,471

31 Dec. 2017Fair value measurement at year end
 Balance sheet valueLevel 1Level 2
Recurring fair value measurements of assets   
Derivate contracts 129,810   129,810
Total129,810 129,810
Recurring fair value measurements of liabilities      
Derivate contracts 38,025   38,025
Total38,025 38,025
Financial liabilities not measured at fair value      
Debt securities issued to the public 10,796,102 10,710,871 243,589
Total10,796,10210,710,871243,589

OP MB does not hold any transfers between the levels of fair value valuation.

Financial reporting 2018

Schedule for Interim Reports in 2018:
Interim Report Q1-3/2018                                                  31 October 2018

Helsinki, 1 August 2018

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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Source: OP Mortgage Bank plc via Globenewswire