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OP CorporateBank plc (31VN)


Wednesday 31 October, 2018

OP CorporateBank plc

OP Financial Group's Interim Report for 1 Jan-30 Sep 2018: Customer business developed favourably, EBT decreased to EUR 687 million - full-year earnings expected to be at about the same level as 2017

OP Financial Group's Interim Report for 1 Jan-30 Sep 2018: Customer business developed favourably, EBT decreased to EUR 687 million - full-year earnings expected to be at about the same level as 2017

OP Financial Group
Stock Exchange Release 31 October 2018 09.00 am EET
Interim report 1 January-30 September 2018

OP Financial Group's Interim Report for 1 January-30 September 2018: Customer business developed favourably, but EBT decreased to EUR 687 million - full-year earnings are expected to be at about the same level as in 2017

  • Earnings before tax amounted to EUR 687 million (838).
  • Income from customer business showed favourable development. Net interest income increased by 6% to EUR 867 million and net commissions and fees by 3% to EUR 655 million. Net insurance income increased by 27% to EUR 432 million - comparable change was -2%.
  • Investment income fell by 39% to EUR 255 million and other operating income by 38% to EUR 46 million. Investment income was affected by a year-on-year decrease of EUR 151 million in capital gains.  
  • Expenses rose by 9% to EUR 1,378 million, due mainly to higher costs arising from development.
  • Impairment losses on receivables were still low: EUR 24 million (28).  
  • CET1 ratio was 20.0%, or at the previous year-end level.  
  • Banking earnings before tax increased by 2% to EUR 489 million. Net interest income increased by 3% and net commissions and fees decreased by 6%. Expenses rose by 7%. The loan portfolio increased by 6% and deposits by 4% in the year to September.
  • Non-life Insurance earnings before tax decreased by 5% to EUR 131 million. Insurance premium revenue increased by 3% and expenses by 10%. Investment income fell by EUR 98 million. The reduction in the discount rate for insurance liability increased claims incurred by EUR 102 million a year ago.
  • Wealth Management earnings before tax decreased by 28% to EUR 136 million. Net commissions and fees decreased by 4%, investment income fell by 33% and expenses rose by 6%. Assets under management increased by 2% in the year to September.
  • Other Operations earnings before tax were EUR -69 million (32). Earnings were eroded by higher expenses arising from development investments and lower net investment income. Non-recurring income of EUR 42 million was included in income a year ago.
  • During 2018, OP will invest over EUR 400 million in developing its operations and improving customer experience.
  • OP bonuses given out rose by 5% to EUR 171 million.
  • In January-September, the number of OP cooperative banks' owner-customers increased by 55,000 to almost 1.9 million and that of OP Financial Group's joint banking and insurance customers by 18,000 to over 1.8 million.
  • OP Financial Group decided to transfer its statutory earnings-related pension insurance portfolio to Ilmarinen Mutual Pension Insurance Company. The transfer is expected to take place by the end of 2018. The transfer will improve the Group's capital adequacy by an estimated 0.4 percentage points and earnings before tax by EUR 240 million, based on the current estimate.
  • On 26 September 2018, the Supervisory Board of OP Financial Group's central cooperative decided on the strategic focus areas for the strategy period that ends at the end of 2019.   
  • Earnings before tax for 2018 are expected to be at about the same level as in 2017. "Outlook towards the year end" describes the outlook in greater detail.

OP Financial Group's key indicators

  Q1-3/2018Q1-3/2017Change, %Q1-4/2017
EBT, EUR million 687 838 -18.0 1,031
  Banking 489 478 2.2 619
  Non-life Insurance 131 137 -4.5 210
  Wealth Management 136 190 -28.3 247
  Other Operations -69 32 -315.4 -45
New OP bonuses accrued to owner-customers -171 -164 4.6 -220
  30 Sept. 201830 Sept. 2017Change, %31 Dec. 2017
CET1 ratio, % 20.0 19.2 0.8* 20.1
Ratio of capital base to minimum amount of capital base (under the Act on the Supervision of Financial and Insurance Conglomerates), % ** 149 146 3* 148
Return on economic capital, %*** 18.7 20.8 -2.1* 20.4
Return on equity (ROE), % 6.5 8.5 -2.0* 7.7
Return on assets (ROA), % 0.53 0.67 -0.1* 0.6
Ratio of non-performing receivables to loan and guarantee portfolio, %**** 1.1 1.3 -0.1* 1.2
Owner-customers (1,000) 1,888 1,810 4.3 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

OP Financial Group's customer business and related income made favourable progress during the third quarter. However, January-September earnings before tax lagged the pace recorded a year ago. A marked year-on-year fall in investment income and an increase resulting from development expenditure, in particular, lay behind the lower earnings. Nevertheless, the earnings for the third quarter were clearly better than those for the first two quarters. 

Impairment loss on receivables still remained very low. OP Financial Group's capital base is still strong, which provides solid foundations for long-term business development and investments that digitilisation in the financial sector necessitates.

OP Financial Group has continued to strengthen its market share in both loans and deposits, as evidenced by our ability to meet our customers' needs. The number of our owner-customers is increasing. At the end of the reporting period, OP Financial Group had almost 1.9 million owner-customers.

In July, the Representative Assembly of OP Bank Group Pension Fund decided to transfer the portfolio of OP Financial Group's statutory employee pension insurance to Ilmarinen, effective as of the turn of the year. This transfer will have a positive effect on OP Financial Group's earnings for 2018. We expect our full-year earnings to be at about the same level as in the previous year.

As the world changes even faster, it is important to keep the strategy up to date. During the third quarter, we revised OP Financial Group's vision and sharpened our strategic focus areas for the strategy period terminating at the end of the 2019. Our vision is to be the leading and most attractive financial services group in Finland. We aim to be both a leading actor in terms of the number of customers, and a forerunner that others look up to. We want to be the most attractive player for our customers, employees and partners.

During the remaining strategy period, we will focus on ensuring the competitiveness of our core business, and will review our service range with the emphasis on owner-customer benefits, in particular. Our strategic focus areas include creating excellent employee experience and the best customer experience, exceeding two millions of owner-customers before the 2020s, faster growth in income than in expenses and maximisation of benefits from our development investments. 

During the third quarter, we continued our reorganisation. In early October, we initiated an Information and Consultation of Employees process covering 6,000 central cooperative consolidated employees. The planned changes apply to organisational structures, duties and practices. As a result of the reorganisation, some of the existing jobs will cease to exist or change substantially, but at the same time a significant number of new job opportunities will become available. We at OP Financial Group aim to become more agile in terms of practices and organisation where the value generated to the customer is guiding all what we do. In this reform, job descriptions will become more independent in nature and decision-making will become quicker.

In September, we launched a cost-cutting programme whereby our goal is to achieve annual cost savings of a hundred of million by sharpening the focus of our strategy, focusing on our core businesses and optimising the relation of inhouse and out-of-house services.

Pohjola is one of the most renowned brands in Finland and the brand among customers is strongly associated with insurance services. During 2019, OP Insurance will become Pohjola Insurance. As part of the focus of our health services business, Pohjola Health will change to Pohjola Hospital. OP Financial Group has the plan that the company would in future focus on the development of its hospital business and would not open new medical centres as specified in its previous plan.

The Finnish and world economy still continued to grow briskly in the third quarter. However, the growth was uneven and economic confidence was subdued. Financial market uncertainty has increased markedly since early autumn and stock markets have shown an obvious correction.

The near-future economic outlook is still relatively bright but the nightmare scenarios are growing. The euro-area inflation is increasing and monetary policy normalisation is progressing. Signs that the best growth stage is behind us have become stronger. The uncertainty is enhanced by the Italian political situation which is threatening to increase the interest rate differences of the Italian government bonds relative to other euro-area countries. The situation also impedes the refinancing of Italian banks. This will create significant uncertainty for the European economy. The global trade war is gathering dark clouds in respect of the world economy.


OP Financial Group's earnings before tax amounted to EUR 687 million (838). The figure decreased by EUR 151 million over the previous year. Income from customer business, or net interest income, net insurance income and net commissions and fees, rose year on year. This earnings decrease was explained by lower net investment income and other operating income as well as higher expenses.

Net interest income increased by 5.7% to EUR 867 million. Banking net interest income increased by EUR 27 million and that by the Other Operations segment by EUR 24 million. Net insurance income amounted to EUR 432 million (341). A year ago, the reduction in the discount rate for insurance liability reduced net insurance income by EUR 102 million. Comparable net insurance income changed by -2%. An increase in corporate customer insurance premium revenue supported an increase in net insurance income. Net commissions and fees were EUR 655 million, or EUR 18 million higher than the year before. Refunds based on unit-linked management fees increased by EUR 7 million and payment transfer net commissions and fees by EUR 9 million. 

Net investment income decreased by 32.0% to EUR 284 million. A temporary exemption overlay approach is applied to certain equity instruments of insurance companies. Changes in the fair value of investments within the scope of the overlay approach are presented under fair value reserve under equity. Total net investment income decreased by 39.1% to EUR 255 million. The combined return on investments at fair value of OP Financial Group's insurance institutions was 1.2% (3.1).

Net income recognised at fair value through other comprehensive income (net income from available-for-sale financial assets a year ago) decreased by EUR 150 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. However, investments recognised at fair value in the income statement increased and their earnings effect was EUR 184 million (202). In the reporting period, capital gains recognised totalled EUR 24 million (175). A year ago, the capital gains were mainly used to supplement insurance liability. The net change in the short-term life insurance supplementary interest rate provision improved earnings by EUR 33 million (0). 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 8 million lower than a year ago.

Other operating income fell by EUR 28 million year on year to EUR 46 million. The third quarter saw the completion of the sale of all share capital of the Baltic subsidiary Seesam Insurance AS to Vienna Insurance Group (VIG). OP Financial Group recognised a total of EUR 16 million in non-recurring capital gain on the sale. Non-recurring VAT refunds for prior years, interest included, totalled EUR 22 million a year ago. In addition, non-recurring income of EUR 25 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 and other expenses recognised related to the sale totalled EUR 6 million.

Total expenses increased by 9.0% year on year to EUR 1,378 million as a result of higher personnel costs, other operating expenses and depreciation/amortisation and impairment losses. OP Financial Group's investments in service development increased development costs by 2.3% to EUR 149 million. New businesses accounted for EUR 20 million of the increase in total expenses. Planned depreciation/amortisation increased by 9.8% to EUR 161 million. This increase resulted from higher development expenditure recognised for prior years. Impairment write-downs increased by EUR 16 million year on year. The expenses were also increased by charges of financial authorities by EUR 28 million and a 4.9% increase in personnel costs to EUR 592 million.

Impairment losses on loans and receivables recognised under various income statement items that reduced earnings amounted to EUR 44 million (50), of which EUR 24 million (28) concerned loans and receivables. Considering that impairment losses on receivables are calculated in 2018 based on IFRS 9, they are not 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 1.1% (1.2).

OP Financial Group's current tax amounted to EUR 135 million (164). The effective tax rate was 19.6% (19.6).

OP Financial Group's equity amounted to EUR 11.6 billion (11.1). The reported earnings and Profit Shares were behind the increase. Equity included EUR 3.0 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 70 million. The amount of interest paid for 2017 totalled EUR 90 million in June 2018.

Outlook towards the year end

World economic growth has remained brisk but more uneven than before. The US economy has continued to grow strongly but economic growth in the euro area has slowed down. The differences in economic growth have also been reflected in financial markets. Stock prices and market interest rates in the US have risen more strongly than in Europe. Based on the ECB policy line, the main refinancing rates will remain at their present level at least through the summer of 2019.

The Finnish economy has continued to develop favourably. A plenty of new jobs have been created and consumer confidence has remained steady. Sales in the housing market have focused on new homes and, as a whole, the volume has been slightly lower than a year ago. Home prices have risen slightly on average.

The economy is expected to show favourable development in the near future but the strongest growth is for now about to be behind us. Greater international trade barriers pose the greatest risk to the economic outlook. Financial market uncertainty is expected to increase, for example, by the gradually tightening monetary policy on a global scale and Italy's deviation from commitments to the EU's fiscal policy principles.

The operating environment in the financial sector on the whole has been quite favourable. While low market interest rates have slowed down growth in banks' net interest income and eroded insurance institutions' income from fixed income investments, they have also improved customers' repayment capacity. Impairment losses have been very low for a long time now. 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. Changes mean that financial sector players will be faced with an obvious requirement to improve customer and employee experience, enhance the agility of their operations and related development as well as improve productivity.   

OP Financial Group expects its earnings before tax for 2018 to be at about the same level as in 2017. The most significant uncertainties related to the earnings for the rest of the year are associated with the amount of the non-recurring item arising from the transfer of the portfolio of the statutory earnings-related pension insurance for OP Financial Group's personnel, with other potential effects of significant changes in the interest rate and investment environment as well as impairment losses.

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 31 October 2018 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc and OP Mortgage Bank plc will publish their own interim reports.

Schedule for Financial Statements Bulletin for 2018 and Interim Reports 2019:

Financial Statements Bulletin for 1 January - 31 December 2018 5 February 2019
Financial Statements and the Report by the Executive Board 2018 week 9, 2019
Interim report for Q1/2019 7 May 2019
Interim report for Q1-2/2019 30 July 2019
Interim report for Q1-3/2019 29 October 2019

Helsinki, 31 October 2018

OP Cooperative
Executive Board

Additional information:
Timo Ritakallio, President and Group Executive Chair, tel. +358 (0)10 252 4500
Tuuli Kousa, Chief Communications Officer, tel. +358 (0)10 252 2957

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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 156 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.

This announcement is distributed by West Corporation on behalf of West Corporation 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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