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OP CorporateBank plc (31VN)


Thursday 08 February, 2018

OP CorporateBank plc

OP Financial Group's Financial Statements Bulletin for 1 January-31 December 2017: Transformation still underway, earnings almost at record level

OP Financial Group's Financial Statements Bulletin for 1 January-31 December 2017: Transformation still underway, earnings almost at record level

OP Financial Group
Stock Exchange Release 8 February 2018 09.00 am EET
Financial Statements Bulletin 1 January-31 December 2017

OP Financial Group's Financial Statements Bulletin for 1 January-31 December 2017: Transformation still underway, earnings almost at record level 

Earnings before tax over one billion euros for the third year in a row, strong growth in business

  • Earnings before tax amounted to EUR 1,077 million (1,138), being 5% lower than the record earnings a year ago.
  • Income increased by a total of 4%. Net interest income increased by 3%, net commissions and fees by 8% and net investment income by 27%. Net insurance income decreased by 14%.
  • Expenses rose by 13%. The rise in expenses stemmed mainly from higher development investments related to the modernisation of the present-day business and from an increase in other expenses related to strategy implementation.
  • Impairment loss on receivables, EUR 48 million (77), were low, accounting only for 0.06% of loans and receivables.
  • CET1 ratio was 20.1%, or at the previous year-end level. 
  • Banking: The loan portfolio increased by 5% and deposits by 6%. Both net interest income and net commissions and fees increased by 4%. Supported by strong growth in income, earnings before tax increased by 16%.
  • Non-life Insurance: Insurance premiums from private customers increased by 2%, while those from corporate customers decreased slightly. Earnings before tax decreased by 14%. The earnings were eroded by a reduction of the discount rate to 1.5% in September and more unfavourable claims development than a year ago.
  • Wealth Management: Assets under management increased by 5%. Earnings before tax increased by 9%, aided by strong improvement in net commissions and fees.  
  • Other Operations: Earnings were weakened by higher investments in the development of services and other strategy implementation. 
  • President and Executive Chairman Reijo Karhinen retired on 31 January 2018, based on his executive contract. Timo Ritakallio, LL.M., MBA and D.Sc. (Tech.), will take up his duties as OP Financial Group's new President and Group Executive Chairman on 1 March 2018.
  • Earnings before tax for 2018 are expected to be at about the same level as or lower than in 2017. 

Business development and sense of community for the benefit of owner-customers

  • In 2017, development investments worth around EUR 450 million focused on ensuring compliance with requirements set by the authorities and legislative requirements, improving operational efficiency and smoothness as well as developing business.
  • In 2017, OP Financial Group opened Pohjola Hospitals in Oulu and Kuopio. The construction of a hospital in Turku is progressing as planned.
  • The number of OP cooperative banks' owner-customers increased by 86,000 to over 1.8 million and that of OP Financial Group's joint banking and insurance customers by 40,000 to almost 1.8 million.
  • In November, OP held the biggest electronic voting in Finland. Almost 2,400 owner-customers were elected to Representative Assemblies in 81 OP cooperative banks for the next four years.
  • OP Financial Group had the objective of donating 100 person-years of volunteering in honour of the centenary of Finland's independence. Volunteer work performed with partners totalled 274 years.
  • OP bonuses increased by 6% to EUR 220 million (208). 

OP Financial Group's key indicators

 Q1-4/2017Q1-4/2016Change, %  
EBT, EUR million 1,077 1,138 -5.4
  Banking 666 574 16.0
  Non-life Insurance 210 244 -13.9
  Wealth Management 247 226 9.2
  Other Operations -45 95  
New OP bonuses accrued to owner-customers 220 208 5.7
  31 Dec. 201731 Dec. 2016Change, %
CET1 ratio, % 20.1 20.1 0.0*
Return on economic capital, %** 21.3 22.7 -1.4*
Ratio of capital base to minimum amount of capital base (under the Act on the Supervision of Financial and Insurance Conglomerates), %*** 148  

Ratio of impairment loss on receivables to loan and guarantee portfolio, % 0.06 0.09 0.0*
Owner-customers (1,000) 1,833 1,747 4.9

Comparatives deriving from the income statement are based on figures reported for the corresponding period in 2016. Unless otherwise specified, balance sheet and other cross-sectional figures on 31 December 2016 are used as comparatives.

*Change in ratio                             
**12-month rolling
***The FiCo ratio has been calculated for insurance companies using transition provisions included in solvency regulation.

Comments by Executive Board Chair Tony Vepsäläinen

The year 2017 was a success for OP Financial Group in many respects. Implementing our strategy, which will transform our business on an in-depth basis, proceeded on a wide front, our financial position strengthened further, our business continued to grow steadily on the whole, and in our social role we produced visible and tangible results.

OP has stabilised its annual financial results at the level one billion euros. In spite of growth in expenses related to strategy implementation, EBT of almost EUR 1.1 billion is the third best ever recorded by OP Financial Group. Thanks to our strong results, the Group's CET1 ratio was back to over 20%.

Earnings were strengthened by growth in income on a broad basis. Not only net interest income but also commission income and investment income showed an increase. The quality of the loan portfolio remained good, which is why loan losses remained very low. The loan portfolio continued to grow at a rate above the market average, especially in corporate loans and housing corporation loans.

In 2017, our development expenditure totalled around EUR 450 million, the majority of the investments being allocated to ensuring regulatory compliance as well as to large-scale basic system upgrades and enhancing operational efficiency. The most visible improvements to our customers included our redesigned service and new versatile mobile payment solutions.

We took a number of steps to build new service packages based on our strategy. We opened a new hospital in Oulu and Kuopio, introduced new mobility services to our customers and opened an OP Home marketplace as a platform of housing-related services.

We celebrated Finland's 100 years of independence through volunteering characteristic of OP Financial Group: we encouraged our employees, administrative staff, customers and everyone in the country to donate a day of volunteering to Finland. In the end, the gift given by OP Financial Group and its partners to Finland was 274 years of volunteering., a meeting place for volunteering, will continue to combine tasks and their performers this year too.

OP Financial Group is there for its customers. In 2017, the number of the Group's owner-customers increased by over 86,000. In November 2017, we organised the biggest electronic voting in Finland where a total of almost 2,400 members out of the candidates were elected to the OP cooperative banks' Representative Assemblies. As part of our mission and social role, we are active in promoting prosperity in our operating regions, sense of community, responsibility and cooperation based on a people-first approach throughout Finland.

Working for OP Financial Group during five decades and heading the Group as President and Group Executive Chairman from 2007, Reijo Karhinen retired at the end of January 2018, based on his executive contract. Reijo Karhinen's career in OP Financial Group is unrivalled. During his term of being President and Group Executive Chairman, OP became Finland's leading financial services group, became fully owned by its customers and reinvented itself in a bold and responsible way. We therefore express our warmest thanks to Reijo for his unique life's work. OP Financial Group will continue reinventing itself and implementing its mission based on customer ownership. We are happy to welcome Timo Ritakallio as OP Financial Group's new President and Group Executive Chairman at the beginning of March - best of luck and success together!

Financial performance in the report period 

OP Financial Group's earnings before tax exceeded one billion euros for the third year in a row, totalling EUR 1,077 million (1,138). Compared with the record EBT in 2016, it declined by 5.4% due to higher expenses resulting from the implementation of the strategy. The figure was also reduced by lower net insurance income and non-recurring income. The reported earnings included EUR 41 million (76) in non-recurring income. In the meantime, net interest income, net commissions and fees and net investment income increased year on year.

Net interest income increased by 3.4% to EUR 1,094 million. Net interest income from Banking rose by 4.4%, but the entire Group's net interest income was reduced by lower net interest income from the Other Operations segment. Net insurance income fell by 14.4% to EUR 478 million, resulting especially from the discount rate reduction larger than the year before and from poorer claims developments than a year ago. The reduced discount rate increased claims incurred by EUR 102 million (55). Net commissions and fees were EUR 928 million, or EUR 69 million higher than the year before. Mutual fund commissions increased by EUR 12 million and asset management performance-based fees by EUR 33 million. Payment transfer net commissions and fees increased by EUR 11 million as commission expenses decreased by EUR 29 million. Commission expenses declined by a total of EUR 24 million.

Net investment income increased by 26.9% to EUR 495 million. Income from equity investments under available-for-sale assets increased by a total of EUR 172 million year on year. Capital gains totalled EUR 263 million (201). Impairment losses on available-for-sale assets fell by EUR 13 million. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes increased net income from securities trading by a total of EUR 33 million over the previous year. Supplementary Life Insurance interest rate provisions decreased net investment income by EUR 67 million over the previous year.

Other operating income decreased by 23.3% year on year to EUR 94 million. Non-recurring VAT refunds for prior years, interest included, totalled EUR 22 million. In the second quarter, OP Financial Group sold its portfolio of agreements and POS terminals of acquiring and POS terminal services to Nets. Non-recurring gain of EUR 25 million on the transaction was recognised in other operating income. OP Financial Group recognised extra amortisation and other expenses of EUR 6 million related to the transaction. A year ago, OP Financial Group recognised EUR 76 million in non-recurring gain as a result of the Visa Europe Ltd transaction. Associated companies improved their earnings by EUR 26 million year on year as a result of the larger number of associated companies consolidated into OP Financial Group.

Total expenses increased by 13.1% to EUR 1,773 million (1,567). 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 62.2%. Direct development costs totalled EUR 219 million (135). New businesses accounted for EUR 30 million of the increase in total expenses. Planned depreciation/amortisation increased by 24.5% to EUR 191 million. This increase resulted mainly from higher development expenditure. Impairment losses increased by EUR 49 million year on year to EUR 55 million. Impairment losses recognised on property in own use totalled EUR 39 million (6). Personnel costs of EUR 758 million (762) were lower than a year ago.

Impairment losses on loans and receivables recognised under various income statement items that reduced earnings amounted to EUR 89 million (136), of which EUR 48 million (77) concerned loans and receivables. Net impairment loss on loans and receivables were very low, at 0.06% (0.09) of the loan and guarantee portfolio.

OP Financial Group's current tax amounted to EUR 223 million (223). The effective tax rate was 20.7% (19.6).

OP Financial Group's equity capital increased by 8.6% to EUR 11.1 billion (10.2). The reported earnings and Profit Shares were behind the increase. Equity capital included EUR 2.9 billion (2.7) in Profit Shares, terminated Profit Shares accounting for EUR 0.3 billion (0.3). The return target for Profit Shares for 2017 and 2018 is 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 90 million. The amount of interest paid for 2016 totalled EUR 83 million in June 2017. The fair value reserve decreased by EUR 142 million to EUR 176 million.

Outlook for 2018

Last year, the euro-area economy reached its best growth rate recorded during the current decade. Nevertheless, inflation remained moderate and the European Central Bank's monetary policy accommodative. Economic growth in Finland continued swiftly and on a broad basis. Fixed investments increased strongly and business profitability improved. Consumer confidence remained high and growth in employment sped up. Favourable economic development is expected to continue in the near future, both in Finland and the rest of the euro area. The monetary policy is expected to tighten in 2018 but short-term rates are anticipated to rise moderately. 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 financial sector has adjusted very well to the new type of low interest rate environment. While low 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 have remained low despite the slow growth that has lasted for several years now. The most significant strategic risks in the financial sector are currently associated with changing customer behaviour, operating environment digitisation 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 or lower than in 2017. 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 earnings volatility in the short term. 

All forward-looking statements in this Financial Statements Bulletin 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 Executive Board Chair Tony Vepsäläinen in a press conference on 8 February 2018 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc will publish its own Financial Statements Bulletin.

Financial reporting in 2018

Time of publication of 2017 reports:

OP Financial Group's Report by the Executive Board and Financial Statements for 2017 Week 9
OP Amalgamation Capital Adequacy Report 2017 Week 9
OP Financial Group's Corporate Governance Statement 2017 Week 9
OP Financial Group's Annual Review 2017 (incl. Csr Report) Week 9

Schedule for Interim Reports in 2018:
  Interim Report Q1/2018         3 May 2018
  Interim Report H1/2018         1 August 2018
  Interim Report Q1-3/2018      31 October 2018

Helsinki, 8 February 2018

OP Cooperative
Executive Board

Additional information:
Tony Vepsäläinen, Chair of the Executive Board, 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

Nasdaq Helsinki Ltd
London Stock Exchange
SIX Swiss Exchange
Major media

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 170 member cooperative banks, its central cooperative OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000 and approximately 1.8 million owner-customers and 4.4 million customers.

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

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