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OP CorporateBank plc (31VN)


Thursday 03 May, 2018

OP CorporateBank plc

OP Financial Group's Interim Report for 1 January - 31 March 2018: Earnings before tax EUR 239 million - full-year earnings will be lower than a year ago

OP Financial Group's Interim Report for 1 January - 31 March 2018: Earnings before tax EUR 239 million - full-year earnings will be lower than a year ago

OP Financial Group
Stock Exchange Release 3 May 2018 09.00 am EEST
Interim Report 1 January-31 March 2018

OP Financial Group's Interim Report for 1 January - 31 March 2018: Earnings before tax EUR 239 million - full-year earnings will be lower than a year ago

  • Earnings before tax amounted to EUR 239 million (283).
  • Income from customer business showed strong growth. Net interest income increased by 8%, net insurance income by 9% and net commissions and fees by 3%.
  • Investment income decreased by EUR 26 million. The decrease was affected by IFRS 9 adopted at the beginning of the year.
  • Development investments increased expenses that were 10% higher than a year ago.
  • Impairment loss on receivables, EUR 4 million (8), were very low due to recovery of impairments.
  • CET1 ratio was 20.0%, or at the previous year-end level.
  • Banking earnings before tax increased to EUR 184 million (163). Net interest income increased by 2% and net commissions and fees decreased by 2%. Expenses rose by 5%. The loan portfolio increased by 4.5% and deposits by 8.5% in the year to March.
  • Non-life Insurance earnings before tax decreased to EUR 38 million (49). Insurance premium revenue increased by 2% and expenses by 7%.
  • Wealth Management earnings before tax increased to EUR 47 million (34). Net commissions and fees were at the previous year's level. Expenses declined by 2% year on year. Assets under management increased by 1% in the year to March.
  • Other Operations earnings before tax were EUR -31 million (38). Earnings were eroded by higher expenses arising from development investments. A significant non-recurring item was included in income a year ago.
  • Timo Ritakallio, LL.M., MBA and D.Sc. (Tech.), took up his duties as OP Financial Group's new President and Group Executive Chair on 1 March 2018.
  • In its stock exchange release on 24 April 2018, OP Financial Group weakened its earnings outlook for 2018: Earnings before tax for 2018 are expected to be lower than those for 2017 (previously at the same level or lower). "Outlook towards the year end" describes the change in greater detail.

Significant development investments in operations

  • During 2018, OP will invest around EUR 400 million in developing its operations and improving customer experience. During the reporting period, OP piloted a digital home loan service where customers can receive a home loan decision online on a real-time basis.
  • In May 2018, OP will open 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.
  • In the reporting period the number of OP cooperative banks' owner-customers increased by 15,000 to over 1.8 million and that of OP Financial Group's joint banking and insurance customers by 3,000 to almost 1.8 million.
  • New granted OP bonuses rose by 5% to EUR 56 million (54).

OP Financial Group's key indicators

  Q1/2018Q1/2017Change, %Q1-4/2017
EBT, EUR million 239 283 -15.8 1,031
  Banking 184 163 13.5 619
  Non-life Insurance 38 49 -23.1 210
  Wealth Management 47 34 40.0 247
  Other Operations -31 38   -45
New OP bonuses accrued to owner-customers -56 -54 5.1 -220
  31 March 201831 March 2017Change, %31 Dec. 2017
CET1 ratio, % 20.0 18.8 1.2* 20.1
Ratio of capital base to minimum amount of capital base (under the Act on the Supervision of Financial and Insurance Conglomerates), %** 147 142 6* 148
Return on economic capital, %*** 19.6 22.2 -2.6* 20.4
Return on equity (ROE), % 6.8 9.1 -2.2* 7.7
Return on assets (ROA), % 0.55 0.69 -0.1* 0.6
Ratio of non-performing receivables to the loan and guarantee portfolio, %**** 1.2 1.2 -0.1* 1.2
Owner-customers (1,000) 1,848 1,765 4.7 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 first-quarter earnings were at a good level although they declined year on year, especially as a result of lower investment income and higher expenses. What was particularly positive in the first-quarter financial performance was a marked increase in our customer business income, i.e. net interest income, net insurance income and net commissions and fees in comparison with the first quarter in the previous year. Development and new businesses' costs made total expenses grew by 10%. According to the current estimate, OP Financial Group's full-year earnings for 2018 are expected to remain good but lower than the last year's almost record earnings. Accordingly, we specified our earnings outlook towards the year end in a release published on 24 April 2018.

Our business developed steadily during the first half. It was especially gratifying to see growth in our corporate customer business: both corporate financing and Non-life Insurance premiums written among corporate customers grew strongly. OP Financial Group's capital adequacy remained solid. Credit risks were at a moderate level: the first-quarter impairment loss on receivables in net terms was only EUR 4 million.

Increasing financial and other benefits for our owner-customers is at the core of our strategy. Business reinvention based on our strategy progressed as planned. We are upgrading technology platforms and basic systems in the card business, payment transfers, private customer financing and in motor vehicle insurance. At the same time, we are investing, for example, in utilising analytics, artificial intelligence, voice control and blockchain technology.

Our customers' needs and the operating environment in the financial sector are changing constantly, and we need to continually ensure the maintenance of our competitiveness in respect of both the quality of customer service and of price competitiveness. Our investments in conditions for growth and reinvention are significant, which highlights the need to continuously improve development productivity and agility. The main emphasis in our development investments is on strengthening the competitiveness of our three business lines - we must continuously keep the core of our business in tip-top condition. Moreover, we are developing new services supplementing these businesses to respond to our customers' needs, especially in the field of health and wellbeing, housing, mobility and commerce.

In the first quarter, we piloted a digital home loan service in which customers receive a home-loan decision online within a few minutes, for example during a showing. This marks a major step in modernising the entire home loan process. We want to live up to our customers' expectations of faster and more flexible service.

Transformation underway will be performed together, in close cooperation with our customers and personnel. When I took up my duties as OP Financial Group's President and Group Executive Chair at the beginning of March, I asked our personnel what is particularly good at OP and what things OP should improve further. Good and skilled fellow workers, first-line management work, brand and strong values that materialise in daily work emerged as clear strengths. We can be proud of these and we want to stick to them. There is also room for improvements in our operations in many respects, and we will put our energy into these areas in need of improvement in the upcoming months.

The cyclical upswing continued in the first quarter, and economic outlook is still favourable. Nevertheless, uncertainty has increased in financial markets. Anxiety has been caused by both inflationary pressures in the USA and potentially increasing trade barriers. The euro-area economy is growing nicely but, for example, a strong euro dims the outlook.

The Finnish economy has continued to grow at a brisk rate and the improved employment rate, in particular, has been gratifying. The trend is expected to remain favourable during the rest of the year as well. However, there has been a pronounced concern about early slowdown of growth due to labour bottlenecks. To guarantee the sustainability of public finances, Finland should continue to increase measures that improve the employment rate. Public finances have benefitted from the upswing but the buffer for the following recession is not at a sufficient level. Now we therefore need specific perseverance and a strong ability in our public policy decision-making to carry out the necessary structural reforms. This is how we can best safeguard not only the footing of our welfare society but also our economic competitiveness in an increasingly intensifying global competition.


OP Financial Group's earnings before tax amounted to EUR 239 million (283). The figure decreased by EUR 45 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 8.2% to EUR 282 million. Banking net interest income increased by EUR 7 million and that by the Other Operations segment by EUR 9 million. Net insurance income rose by 9.2% to EUR 127 million, supported by higher insurance premium revenue from corporate customers. A year ago, the reduction in the discount rate reduced net insurance income by EUR 13 million. Net commissions and fees were EUR 232 million, or EUR 6 million higher than the year before. Asset management net commissions and fees increased by EUR 2 million, mutual fund net commission and fees by EUR 1 million and payment transfer net commissions and fees by EUR 2 million.

Net investment income decreased by 36.1% to EUR 79 million. A temporary exemption overlay approach is applied to certain equity instruments of insurance companies, which improved earnings for the reporting period by EUR 19 million. Net investment income declined by EUR 26 million.

Net income recognised at fair value through other comprehensive income (net income from available-for-sale financial assets a year ago) decreased by EUR 71 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 36 million (58). However, investments recognised at fair value in the income statement increased. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes decreased net trading income by a total of EUR 8 million over the previous year. Short-term supplementary Life Insurance interest rate provisions that were lower than a year ago improved net investment income by EUR 29 million over the previous year.

Other operating income fell by EUR 19 million year on year to EUR 12 million. A year ago, other operating income included EUR 20 million in VAT refunds for prior years.

Total expenses increased by 9.8% to EUR 456 million (415). 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 31.7%. Direct development costs totalled EUR 54 million (41). New businesses accounted for EUR 6 million of the increase in total expenses. Planned depreciation/amortisation increased by 23.5% to EUR 52 million. This increase resulted mainly from higher development expenditure. Impairment write-downs increased by EUR 13 million year on year.

Impairment losses on loans and receivables recognised under various income statement items that reduced earnings amounted to EUR 8 million (17), of which EUR 4 million (8) concerned loans and receivables. Considering that impairment losses on receivables was 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 50 million (53). The effective tax rate was 22.0% (18.7).

OP Financial Group's equity amounted to EUR 11.1 billion (11.1). Equity was increased by the reporting period's earnings. Equity included EUR 2.8 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 23 million. The amount of interest to be paid for 2017 in June 2018 totals EUR 90 million. The IFRS 9 transition reduced equity by EUR 57 million on 1 January 2018.

Outlook towards the year end

Economic growth in the euro area is expected to have continued during the first few months of the year but at a slightly slower rate than in late last year. Inflation continued to remain moderate. The European Central Bank continued its accommodative policy although it cut asset purchases. The Finnish economy too is expected to have grown at a brisk rate during the first few months of the year. The growth has been broad-based. Employment has improved, exports have grown and confidence indicators are strong. Economic development is anticipated to remain favourable in the euro area in the near future too. Monetary policy normalisation is progressing steadily and a rise in short-term market interest rates is expected to be moderate. 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 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 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.

Earnings before tax for 2018 are expected to be lower than those for 2017 (previously at the same level or lower). 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 Interim 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 3 May 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 H1/2018          1 August 2018
Interim Report Q1-3/2018       31 October 2018

Helsinki, 3 May 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

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 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 1.8 million owner-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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