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OP Mortgage Bank (70ZM)

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Wednesday 01 August, 2012

OP Mortgage Bank

OP Mortgage Bank : Half-yearly report

OP Mortgage Bank : Half-yearly report

OP Mortgage Bank
Half year report for January-June 2012
1 August 2012, 9.00 am EEST

HALF YEAR REPORT FOR JANUARY-JUNE 2012

OP Mortgage Bank's (OPA) loan portfolio grew to EUR 8,841 million in the January-June period (EUR 7,535 million at the end of 2011). The bank increased its loan portfolio in February, in March and in May when it purchased housing loans from OP-Pohjola Group member cooperative banks. OPA launched a covered bond issue at a nominal valued of EUR 1.25 billion in May.

Earnings Development

EUR thousandQ1-Q2/2012Q1-Q2/2011Q2/2012Q2/20112011
Income
Net interest income14,33911,8707,5716,67024,147
Net commissions and fees-5,423-4,586-2,676-2,692-10,207
Net income from trading00000
Net income from investments-1791-1800487
Other operating income04045
Total8,7377,2894,7153,98214,432
Expenses
Personnel costs20215010663278
Other administrative expenses8421,0463904972,054
Other operating expenses7077294774371,397
Total1,7501,9269739963,729
Impairments of receivables-360-350-358
Earnings before tax6,9515,3633,7082,98610,345

The net interest income for January-June totalled EUR 14,339 thousand (11,870)[1]. Earnings before tax amounted to EUR 6,951 thousand (5,363). Increase in net interest income was due to the growth in the loan portfolio. Impairment loss on loans on a collective basis of EUR 36 thousand was recognised.

Net commissions and fees were negative with commission income increasing to EUR 2,451 thousand (1,712) and commission expenses to EUR 7,874 thousand (6,298).  Commission expenses mainly comprise commissions paid to OP-Pohjola Group member banks for servicing housing loans. The bank's expenses amounted to EUR 1,750 thousand (1,926).

Net interest income for April-June grow to EUR 7,571 thousand (6,670) and earnings before taxes to EUR 3,708 thousand (2,986). The bank's expenses amounted to EUR 973 thousand (996). Net income from investments was negative and totalled EUR 180 thousand (0). In May OPA used as short term collateral German State bonds whose price risk was hedged by futures.

Balance Sheet and Off-balance Sheet Commitments

OPA's balance sheet total amounted to EUR 9,263 million on 30 June (EUR 7,912 million) [2].  

Change in Major Asset and Liability Items

EUR Million 30 June 201231 March 201231 Dec 201130 June 2011
Balance Sheet9,2638,4277,9126,820
Receivables from customers8,8418,0007,5356,643
Receivables from financial institutions93728289
Debt securities issued to the public5,7165,4405,4234,246
Liabilities to financial institutions3,1002,4902,0702,245
Shareholders' equity310287256213
Off-balance sheet commitments11847

The loan portfolio increased from EUR 7,535 million on 31 December 2011 to EUR 8,841 million on 30 June 2012. OPA increased its loan portfolio in the review period when it purchased housing loans from OP-Pohjola-Group member banks for EUR 1,943 million.

On 30 June, households accounted for 99.6 % (99.3) of the loan portfolio and housing corporations for 0.4 % (0.7). The bank's non-performing loans amounted to EUR 2.3 million (2.1). The impaired amount for an impairment loss on an individual basis recognised in the review period was fully covered by collateral.

The carrying amount of bonds issued to the public totalled EUR 5,716 million (5,423) on 30 June.
OPA issued its seventh covered bond at a nominal value of EUR 1.25 billion on international capital markets in April. Moody's Investor Services and Standard & Poor's Rating Services have given the bond their highest credit ratings of Aaa and AAA. The covered bond issued in 2007 at a nominal value of EUR 1 billion matured and were paid off in June. In addition to bonds, other funding was based on financing loans granted by Pohjola Bank plc (Pohjola). On 30 June, financing loans totalled EUR 3,100 million (2,070).

Shareholders' equity rose to EUR 310 million (256). Retained earnings amounted to EUR 24.5 million (21.3) at the end of the review period.  

OPA has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate swaps, i.e. base rate cash flows from housing loans to be hedged are swapped to short-term Euribor cash flows. OPA has also swapped the fixed interest rates of the bonds it has issued to short-term variable rates. OPA's interest-rate derivative portfolio totalled EUR 15,995 million (14,409). All derivative contracts have been concluded for hedging purposes. Pohjola is the counterparty to all derivative contracts.

Development of Capital Adequacy

OPA's capital adequacy ratio stood at 8.7% on 30 June. Capital ratio excluding transition rules stood at 39.6%. Shareholder's equity increased by EUR 30 million in March and by EUR 20 million in May when OP-Pohjola Group Central Cooperative made an additional investment in OPA. In May OPA called in the Tier 2 debenture issued in 2007 at a nominal value of EUR 20 million.

OPA calculates its capital adequacy in compliance with Basel II. In its calculation of capital requirements for credit risk, OPA has adopted the Internal Ratings Based Approach (IRBA). With respect to the capital adequacy requirement for operational risks, OPA adopted the Standardised Approach in the report period. Before 31 December comparison for credit risk here below are presented according to the Standardised Approach.

OWN FUNDS, EUR thousand30 June
2012
31 Dec
2011
30 June 2011
Equity capital309,538256,475212,765
Intangible assets-809-587-745
Excess funding of pension liability and
fair value measurement of investment property
-13-248-
Planned dividend distribution--2,001-246
Shortfall of impairments - expected losses-3,586-3 ,937-
Shortfall of other Tier 1 capital-3,586--
Core Tier 1 capital301,543249,703211,774
Shortfall of Tier 2 capital- 3,586--
Transfer to core Tier 1 capital3,586--
Tier 1 capital301,543249,703211,774
Debenture loans-20,00020,000
Shortfall of impairments - expected losses-3,586-3 ,937-
Transfer to Tier 1 capital3,586--
Tier 2 capital-16,06320,000
Total capital base301,543265,765231,774
Capital ratio including transition rules
Capital adequacy ratio, %8.79.09.6
Tier 1 ratio to risk-weighted commitments8.78.58.7
Core Tier 1 ratio8.78.58.7
Capital ratio excluding transition rules
Capital adequacy ratio, %39.640.4-
Tier 1 ratio to risk-weighted commitments39.640.0-
Core Tier 1 ratio39.640.0-

The increase in shareholders' equity arising from the additional investment and from the measurement of pension liabilities and the assets covering them, under IFRS, is not considered own funds. Furthermore, intangible assets was also deducted from own funds. The Impairments - shortfall of expected losses total EUR 7.2 million.

Risk-weighted receivables, investments and off balance-sheet commitments,  EUR thousand30 June
2012
31 Dec
2011
              30 June 2011
 Receivables and investments740,174644,7032,411,096
  Off-balance-sheet items6,7742,0632,177
 Market risk---
 Operational risks14,04310,49010,490
 Requirement for period of transition2,714,9172,283,433-
Risk-weighted receivables, investments and off balance-sheet commitments, total3,475,9082,940,6882,423,763

The increase in the amount of risk-weighted receivables was due to an increased loan portfolio. The amount of risk-weighted receivables is expected to decrease during the next quarter, in which case OPA's capital adequacy ratio will in September be over 9%, which is the target.

Joint Responsibility and Joint Security
       

Under the Act on Cooperative Banks and Other Cooperative Credit Institutions, the
amalgamation of the cooperative banks comprises the organisation's central institution
(OP-Pohjola Group Central Cooperative), the Central Cooperative's member credit
institutions and the companies belonging to their consolidation groups. This
amalgamation is monitored on a consolidated basis. The Central Cooperative and its
member banks are ultimately responsible for each other's liabilities and commitments.
The Central Cooperative's members at the end of the report period comprised
OP-Pohjola Group's 198 member banks as well as Pohjola Bank plc, Helsinki OP Bank Plc, OP Mortgage Bank and OP-Kotipankki Oyj. OP-Pohjola Group's insurance companies do not fall within the scope of joint responsibility.

The central institution is obligated to provide its member credit institutions with instructions on their internal supervision and risk management, their operations in securing liquidity and capital adequacy, and compliance with uniform accounting principles in preparing the coalition's consolidated financial statements.

The central institution and its member credit institutions are jointly responsible for the liabilities of the central institution or a member credit institution placed in liquidation or bankruptcy that cannot be paid from its assets. The liability is divided between the central institution and the member credit institutions in ratios following the balance sheet total.

In spite of the joint responsibility and the joint security, pursuant to Section 25 of the Act on Mortgage Credit Banks, the holder of a bond with mortgage collateral shall, notwithstanding the liquidation or bankruptcy of a mortgage credit bank, have the right to receive payment, before other claims, for the entire loan period of the bond, in accordance with the contract terms, from the funds entered as collateral for the bond.

Personnel

On 30 June, OPA had six employees.  It purchases all key support services from Central Cooperative and its Group companies, which reduces the need for more staff.

Administration

The Annual General Meeting held in March confirmed the composition of the new Board of Directors. Mr. Lars Björklöf, Managing Director, Osuuspankki Raasepori was elected as a new member of the Board of Directors. Mr. Heikki Kananen, Managing Director, Mäntsälän Osuuspankki and Mr. Mikko Rosenlund, Managing Director, Tampereen Seudun Osuuspankki were left out of the Board of Directors. The Board composition is as follows:

ChairmanHarri LuhtalaChief Financial Officer, OP-Pohjola
Group Central Cooperative
Vice ChairmanElina Ronkanen-MinogueSenior Vice President, OP-Pohjola
Group Central Cooperative
MembersSakari HaapakoskiBank Manager, Oulun Osuuspankki
Mika HelinExecutive Vice President, Hämeenlinnan
Seudun Osuuspankki
Hanno HirvinenExecutive Vice President, Pohjola Bank plc
Mikko HyttinenBank Manager, OP-Pohjola Group
Central Cooperative
Lars BjörklöfManaging Director, Osuuspankki Raasepori

Managing Director       Lauri Iloniemi.

Risk exposure

The most significant types of risk related to OPA are credit risk, liquidity risk and interest-rate risk. The indicators in use shows that OPA's credit risk exposure is stable. The limit for liquidity risk set by the Board of Directors has not been exceeded. The liquidity buffer for OP-Pohjola Group, managed by Pohjola Bank plc, is exploitable by OPA.  OPA has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate swaps, i.e. base rate cash flows from housing loans to be hedged are swapped to short-term Euribor cash flows. OPA has also swapped the fixed interest rates of the bonds it has issued to short-term variable rates. The interest-rate risk may be considered to be low.

Prospects for the rest of the year

The existing issuance programme will make it possible to issue new covered bonds in 2012. It is expected that the Company's capital adequacy will remain strong, risk exposure will be favourable and the overall quality of the credit portfolio will remain strong.

Income Statement

EUR thousandQ1-Q2/2012Q1-Q2/2011Q2/2012Q2/20112011
Interest income70,52553,75333,58431,633133,180
Interest expenses56,18641,88326,01324,963109,034
Net interest income14,33911,8707,5716,67024,147
Impairments of receivables-36-35-358
Net commissions and fees-5,423-4,586-2,676-2,692-10,207
Net income from trading0000
Net income from investments-1791-1800487
Other operating income04045
Personnel costs20215010663278
Other administrative expenses8421,0463904972,054
Other operative expenses7077294774371,397
Earnings before tax6,9515,3633,7082,98610,345
Income taxes1,7011,3959077772,687
Profit for the period5,2503,9682,8012,2097,658

Statement of comprehensive income

EUR thousandQ1-Q2/2012Q1-Q2/2011Q2/2012Q2/20112011
Profit for the period5,2503,9682,8012,2097,658
Actuarial gains/losses on post-employment benefit obligations--19---38
Income tax on actuarial gains/losses on post-employment benefit obligations-5--6
Other Statement of comprehensive income items -----
Total comprehensive income5,2503,9542,8012,2027,626

Key Ratios

Q1-Q2/2012Q1-Q2/2011Q2/2012Q2/20112011
Return on equity (ROE), %3.74.33.84.23.7
Cost/income ratio, %2026212526

Calculation of key ratios

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

Cost/income ratio, % = (Personnel costs + Other administrative expenses + Other operating expenses) / (Net interest income + Net commission income + Net income from trading + Total net income from investments + Other operating income) × 100

Balance Sheet

EUR thousand30 June 201231 March 201231 Dec 201130 June 2011
Receivables from financial institutions92,82372,06082,43488,525
Derivative contracts247,456215,138198,38043,341
Receivables from customers8,841,1287,999,7547,534,5576,643,067
Investments assets17171717
Intangible assets809739587745
Tangible assets---2
Other assets80,854139,59096,06043,625
Tax receivables19813-
Total assets9,263,1068,427,3067,912,0486,819,323
Liabilities to financial institutions3,100,0002,490,0002,070,0002,245,000
Derivative contracts21,54515,71611,21228,770
Debt securities issued to the public5,716,1005,439,8375,423,0854,246,175
Reserves and other liabilities114,829175,032131,21365,824
Tax liabilities1,112-267954
Subordinated debt securities-20,00020,00020,000
Total liabilities8,953,5858,140,5867,655,7776,606,723
Shareholders' equity
  Share capital60,00060,00060,00060,000
  Reserve for invested unrestricted           . equity225,000205,000175,000135,000
  Retained earnings24,52121,72021,27117,599
Total equity309,521286,720256,271212,599
Total liabilities and shareholders' equity9,263,1068,427,3067,912,0486,819,323

Off-balance Sheet Commitments

EUR thousand30 June 201231 March 201231 Dec 201130 June 2011
Binding credit commitments10,8837,8693,6926,700

Change Calculation on Shareholders' Equity

EUR thousandShare capitalOther reservesRetained earningsTotal equity
Shareholders' equity 1 Jan 201160,00085,00013,646158,646
Reserve for invested unrestricted  equity-50,000-50,000
Profit for the period--3,9543,954
Other changes----
Shareholders' equity 30 June 201160,000135,00017,559212,599
EUR thousandShare capitalOther reservesRetained earningsTotal equity
Shareholders' equity 1 Jan 201260,000175,00021,271256,271
Reserve for invested unrestricted equity-50,000-50,000
Profit for the period--5,2505,250
Other changes---2,001-2,001
Shareholders' equity 30 June 201260,000225,00024,521309,521

Cash Flow Statement

EUR thousandQ1-Q2/2012Q1-Q2/2011
Liquid assets 1 January82,43461,673
Cash flow from operations-263,621-1,020,132
Cash flow from investments-3900
Cash flow from financing274,4001,046,984
Liquid assets 30 June92,82388,525

The cash flow statement presents the cash flows for the period on the cash basis, divided into cash flows from operations, investments and financing. Cash flows from operations include the cash flows generated from day-to-day operations. Cash flow from investments includes payments related to tangible and intangible assets, investments held to maturity and shares that are not considered as belonging to cash flow from operations. Cash flow from financing includes cash flows originating in the financing of operations either on equity or liability terms from money or capital market. Liquid assets include cash in hand and receivables from financial institutions payable on demand.  The statement has been prepared using the indirect method.

Fair values of financial assets and liabilities
EUR 1,000 Loans and  receivablesRecognised at fair value through profit or loss Available for saleTotal
Financial assets
Receivables from financial institutions92,823--92,823
Derivative contracts-247,456-247,456
Receivables from customers8,841,128--8,841,128
Equities--1717
Other receivables80,873--80,873
Balance at 30 June 20129,014,824247,456179,262,297
Balance at 30 June 20116,775,21743,341176,818,575
Balance at 31 December 20117,713,064198,380177,911,461
EUR 1,000Recognised at fair value through profit or loss Other
liabilities
Total
Liabilities to financial institutions--3,100,0003,100,000
Derivative contracts-21,545-21,545
Debt securities issued to the public--5,716,1005,716,100
Subordinated liabilities---
Other liabilities--115,941115,941
Balance at 30 June 2012-21,5458,932,0408,953,585
Balance at 30 June 2011-28,7706,577,9546,606,723
Balance at 31 December 2011-11,2127,644,5647,655,777

Debt securities issued to the public are carried at amortised cost.  On 30 June 2012, the fair value of these debt instruments was approximately EUR 242,330 thousand higher than their carrying amount, based on information available in markets and employing commonly used valuation techniques. Subordinated liabilities are carried at amortised cost. Their  fair value are substantially lower than their carrying amount, but determining fair values reliably is difficult in the current market situation.

Derivative Contracts 30 June 2012

EUR thousandNominal values/the remaining maturityFair valuesCredit counter-value
Less than 1 year1-5 yearsMore than 5 yearsTotalAssets Liabilities
Interest rate derivatives
Hedging3,994,53210,000,0002,000,00015,994,532247,45621,545379,793
Trading-------
Total3,994,53210,000,0002,000,00015,994,532247,45621,545379,793

Derivative Contracts 30 June 2011

EUR thousandNominal values/the remaining maturityFair valuesCredit counter-value
Less than 1 year1-5 yearsMore than 5 yearsTotalAssets Liabilities
Interest rate derivatives
Hedging1,565,27010,895,513-12,460,78243,34128,770124,178
Trading-------
Total1,565,27010,895,513-12,460,78243,34128,770124,178

All derivative contracts have been entered into for hedging purposes, regardless of their classification in accounting.

Related-party transactions

OPA's related parties include OP-Pohjola Group Central Cooperative and its subsidiaries, the OP-Pohjola Group pension insurance organisations OP-Pension Fund and OP-Pension Foundation, and the company's administrative personnel. Standard terms and conditions for credit are applied to loans granted to the related parties. Loans are tied to generally used reference rates. Related-party transactions have not undergone any substantial changes since 31 December 2011.

Accounting policies

The Interim Report for 1 January-30 June 2012 has been prepared in accordance with IAS 34 (Interim Financial Reporting), as approved by the EU. In the preparation of this Interim Report, OPA substantially applied the same accounting policies as in the financial statements 2011, except a change in the recognition of actuarial gains and losses on defined benefit pension plan.

Change in accounting policies

OPA has decided to voluntarily abandon as of the beginning of 2012 the so-called corridor method in the recognition of actuarial gains and losses on defined benefit pension plans. In accordance with the revised recognition method under IAS 19, actuarial gains and losses are recognised outside profit or loss in comprehensive income as a debit item or credit item in equity for the period during which they occur. When recognising actuarial gains and losses in other comprehensive income, these gains and losses cannot be reclassified through profit or loss in subsequent periods. OPA has applied the change in the accounting policy retrospectively. The effects of the changed accounting policy on the comparatives of the consolidated balance sheet, income statement and statement of comprehensive income shown in this Interim Report are as follows:

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Balance sheet 1 Jan 2011
Assets
Other assets48,79048,583-207
Liabilities
Tax liabilities342288-54
Shareholders' equity
Retained earnings13,79913,646-153

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Balance sheet 31 Dec 2011
Assets
Other assets96,30196,060-241
Tax assets-1313
Liabilities
Tax liabilities313267-46
Shareholders' equity
Retained earnings21,45421,271-183

Income statement 2011
Personnel costs282278-4
Income tax expense2,6862,6871
Statement of comprehensive income 2011
Actuarial gains/losses on post-employment benefit obligations--38-38
Income tax on actuarial gains/losses on post-employment benefit obligations-66

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Balance sheet 30 June 2011
Assets
Other assets43,85043,625-224
Liabilities
Tax liabilities1,013954-58
Shareholders' equity
Retained earnings17,76517,599-166

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Income statment Q1-Q2/2011
Personnel costs 153150-2
Income tax expense1,3941,3951
Statement of comprehensive income Q1-Q2/2011
Actuarial gains/losses on post-employment benefit obligations--19-19
Income tax on actuarial gains/losses on post-employment benefit obligations-55

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.

Helsinki, 1 August 2012

OP Mortgage Bank
Board of Directors

For further information, please contact Mr Lauri Iloniemi, Managing Director, tel. +358 10 252 3541
[1]  For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of 2011. For income statement and other cumulative figures, the point of comparison is the figure for January-June period in the previous year.
[2]  For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of 2011. For income statement and other cumulative figures, the point of comparison is the figure for January-June period in the previous year.




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Source: OP Mortgage Bank via Thomson Reuters ONE

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