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OP Mortgage Bank (76YF)

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Thursday 08 February, 2018

OP Mortgage Bank

OP Mortgage Bank: Financial Statements Bulletin for 1 January-31 December 2017

OP Mortgage Bank: Financial Statements Bulletin for 1 January-31 December 2017


OP MORTGAGE BANK
Stock exchange release 8 February 2018 at 10.00 am EET
Financial Statements Bulletin

OP Mortgage Bank: Financial Statements Bulletin for 1 January-31 December 2017

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 intermediate loans and loan portfolio of OP MB increased to EUR 13,580 million (10,892)* during the reporting period. OP MB issued one fixed-rate covered bond with a maturity of seven years in international capital markets in March and another with a maturity of ten years in June. OP MB intermediated the bonds with a nominal value of EUR 1,000 million in intermediate loans in their entirety to OP cooperative banks. In November, OP MB issued a bond with a maturity of 5.25 years, of which EUR 913.4 million were intermediated to OP cooperative banks as intermediate loans. On 31 December 2017, 118 OP cooperative banks had a total of EUR 4 776 million (1,853) in intermediate loans from OP MB.

The company's financial standing remained stable throughout the reporting period. Operating profit for January- December amounted to EUR 19.3 (22.6) million.

*The comparatives for 2016 are given in brackets. For income statement and other aggregated figures, January-December 2016 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2016) serve as comparatives.  

Collateralisation of bonds issued to the public

On 31 December 2017, 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 Laki kiinnityspankkitoiminnasta (688/2010) (Covered Bond Act) totalled EUR 13,266 million.

Capital adequacy

OP MB has presented its capital base and capital adequacy in accordance with the EU capital requirement regulation and directive (EU 575/2013). 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 Common Equity Tier 1 (CET1) ratio stood at 109.5 % (109.5) on 31 December 2017. 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's highest minimum capital requirement is determined by the Basel I floor. OP MB's capital base exceeded the Basel I floor by EUR 11 million in December. Information on the Basel I floor and capital surplus can be found in note "Capital base and capital adequacy". The Basel I floor will not apply as of the beginning of 2018.

The Financial Supervisory Authority has decided to 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 31 December 2017, OP Cooperative's members comprised 167 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 31 December 2017, OP MB had five employees. OP MB 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:

Chairman       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 Hanno Hirvinen is his deputy.

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, intermediate 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.

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.

Proposal by the Board of Directors for the allocation of profit

OP Mortgage Bank's shareholders' equity capital on 31 December 2017:

+ Share capital                                                                                       60,000,000.00
+ Reserve for invested non-restricted equity                                        245,000,000.00
+ Profit for the financial year                                                                  15,472,841.90
+ Retained earnings                                                                               59,584,633.65
Total                                                                                                      380,057,475.55

Distributable funds totalled 319,153,868.99 EUR.

As shown in the financial statements of 31 December 2017, the company's distributable funds, which include EUR 15,472,841.90 in profit for the financial year, totalled EUR 74,153,868.99. The Board of Directors proposes to the Annual General Meeting that a dividend of 202.01 EUR be distributed per share, totalling 15,472,349.92 EUR. Following dividend distribution, 59,585,125.63 EUR are entered in retained earnings. 303,681,519.07 EUR remain in the company's distributable equity.

The company's financial position has not undergone any material changes since the end of the financial year 2017. The company's liquidity is good and will not be jeopardised by the proposed profit distribution, in the Board of Directors' view.

Accounting policies

The Financial Statements Bulletin for 2017 has been prepared in accordance with IAS 34 (Interim Financial Reporting).

This Financial Statements Bulletin 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 Financial Statements Bulletin 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.

OP MB continues to apply hedge accounting under IAS 39 after adoption of IFRS 9. Comparatives for the financial statements included in the first opening balance sheet of 1 January 2018 were not adjusted. Changes in the notes to the financial statements arising from the application of IFRS 9 are only presented for the financial year 2018.

Since the amount of expected credit losses, EUR 0.8 million, was below the expected loss (EL) calculated in capital adequacy measurement, EUR 4 million, the ECL provision had no impact on OP MB's CET1 on 1 January 2018.

The allowance for expected credit losses under equity capital on 1 January 2018 totalled EUR 786 thousand. Impairment loss on receivables assessed individually and collectively on 31 December 2017, amounting to EUR 263 thousand, was reversed to retained earnings. In addition, total equity capital on 1 January 2018 was affected by a deferred tax change concerning these items.

ECL calculation includes many estimates which have significant impacts on the amount of the ECL provision, such as:

  • Defining significant increases in credit risk (SICR)
  • Various assumptions used in 12-month and lifetime ECL calculation
  • Macroeconomic estimates used in the calculation.

Since the adoption of IFRS 9 occurs while Finland is enjoying a favourable economic outlook, the amount of expected credit loss was below impairment loss for loans under IAS 39. The expected credit loss is anticipated to be sensitive to changes in macroeconomic estimates, and it may increase significantly when the economic outlook deteriorates.

The effects presented in this report resulting from the adoption of IFRS 9 may still be specified further because OP MB will continue further developing ECL models and related IT systems and strengthening the control environment.
New accounting policies, assessment methods and items subject to management's judgment may change until OP MB publishes its first financial statements which include the opening balance sheet of 1 January 2018.

Classification and measurement

OP MB has classified its financial assets under IFRS 9, on the basis of how loans are managed to achieve their business objectives. Following the adoption of IFRS 9, OP MB's loans remained within the measurement category recognised at amortised cost.

Impairment

ECL is calculated on all balance sheet items amortised at cost and on off-balance-sheet loan commitments.

ECL is calculated using modelled risk parameters and formula PDxLGDxEAD for the majority of the portfolios. ECL is calculated for each contract for 12 months or lifetime, depending on whether the instrument's credit risk on the reporting day has increased significantly from the original one. Both qualitative and quantitative criteria are used to assess whether the credit risk has increased significantly. Qualitative factors consist of various credit risk indicators (e.g. forbearance measures) to be mainly taken into account in credit rating models. Credit ratings will affect the lifetime PD used for assessing the quantitative change. In addition, credit risk has increased significantly if payment is over 30 days past due. Contracts are classified into three stages. Stage 1 includes contracts whose credit risk has not increased significantly from the original level and for which a 12-month ECL is calculated. Stage 2 includes contracts whose credit risk has increased significantly from the original level and for which a lifetime ECL is calculated. Stage 3 includes defaulted contracts for which a lifetime ECL is also calculated.

In the definition of default, OP MB uses the same definition as used in capital adequacy measurement.

The calculation model includes forward-looking information and macroeconomic scenarios. The macroeconomic scenarios are the same that OP MB uses otherwise in its financial annual planning. Three scenarios are used: baseline, upside and downside.

IFRS 15 Revenue from Contracts with Customers

OP MB has applied IFRS 15 as of 1 January 2018. This standard has replaced the current IAS 11 and IAS 18. In OP MB, IFRS 15 mainly applies to fees not included in the calculation of the effective interest rate. The new standard had no effect on the revenue recognition of financial instruments. IFRS 15 lead to added information presented in the notes to the financial statements for 2018. The grouping of commission income and expenses is specified in the notes. IFRS 15 will not change the revenue recognition time of the fees included the scope of application of the standard in comparison with the current practices. The adoption of IFRS 15 therefore had no financial effect on OP MB's result. OP MB applies IFRS 15 using the retrospective transition method.

Formulas for Alternative Performance Measures

The Alternative Performance Measures Guidelines issued by the European Securities and Markets Authority (ESMA) came into force on 3 July 2016. The Alternative Performance Measures are presented to illustrate the financial performance of business operations and to improve comparability between reporting periods. They should not be considered to be replacements for the performance measures defined in IFRS governing financial reporting.

The formulas for the used Alternative Performance Measures are presented below and they correspond to the previously presented performance indicators in terms of content.

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, TEURQ4/2017Q4/2016Q1-Q4/2017Q1-Q4/2016
Net interest income 20,249 19,570 74,984 76,171
  Interest income 16,286 19,539 65,692 84,978
  Interest expenses -3,964 -31 -9,292 8,807
Net commissions and fees -12,830 -11,647 -49,910 -47,757
Net investment income 1 5 2 7
Other operating income 232 0 232 22
Total income7,6527,92925,30928,443
Personnel costs 87 78 328 321
Depreciation/amortisation and
impairment loss
209 209 836 836
Other operating expenses 1,175 801 4,528 4,243
Total expenses1,4711,0885,6925,400
Impairment loss on receivables -38 -221 -276 -400
Earnings before tax6,1446,62119,34122,643
Income tax expense 1,229 1,323 3,868 4,566
Profit for the period4,9155,29715,47318,077

Statement of comprehensive income, TEURQ4/2017Q4/2016Q1-Q4/2017Q1-Q4/2016
     
Profit for the period 4,915 5,297 15,473 18,077
         
Items that will not be reclassified to profit
or loss
       
Gains/(losses) arising from remeasurement of defined benefit plans 1 -138 1 -138
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans 0 28 0 28
Total comprehensive income4,9165,18715,47317,967

Key ratiosQ4/2017Q4/2016Q1-Q4/2017Q1-Q4/2016
Return on equity (ROE), % 5.2 5.7 4.1 4.8
Cost/income ratio, % 19 14 22 19

Cash flow
from operating activities, TEUR
Q1-Q4/2017Q1-Q4/2016
Profit for the financial year 15,473 18,077
Adjustments to profit for the financial year 12,335 12,649
Increase (-) or decrease (+)
in operating assets
-2,681,266-517,538
Receivables from credit institutions -2,923,400 -1,109,400
Receivables from the public and public-sector entities 235,309 569,251
Other assets 6,826 22,611
Increase (+) or decrease (-)
in operating liabilities
944,884481,863
Liabilities to credit institutions and
central banks
950,000 513,000
Other liabilities -5,116 -31,137
     
Income tax paid -4,113 -6,323
Dividends received 2 7
A. Net cash from operating activities-1,712,685-11,264
Cash flow from investing activities    
B. Net cash used in investing activities  
Cash flow from financing activities  
Increases in debt securities issued
to the public
2,982,709 1,243,488
Decreases in debt securities issued
to the public
-1,350,000 -1,010,000
Dividends paid and interest on cooperative capital -9,037 -16,392
C. Net cash used in financing activities1,623,671217,095
D. Effect of foreign exchange rate changes on cash and cash equivalents00
Net change in cash and cash equivalents (A+B+C+D)-89,014205,831
Cash and cash equivalents at year-start451,787245,120
Cash and cash equivalents at year-end363,609451,787
Change in cash and cash equivalents-88,178206,667
   
Interest received 73,705 107,476
Interest paid -2,469 39,919
Adjustments to profit for the financial year    
Non-cash items   
Unrealised net gains on foreign exchange operations 0 0
Impairment losses on receivables 277 405
Price difference recognised on debt securities issued to the public 8,192 7,685
Other 3,866 4,559
Total adjustments12,33512,649
Cash and cash equivalents  
Receivables from credit institutions payable on demand 363,609 451,787
Total cash and cash equivalents363,609451,787



Balance sheet, TEUR31 Dec. 201731 Dec. 2016
     
Receivables from credit institutions 5,139,778 2,304,556
Derivative contracts 129,810 220,461
Receivables from customers 8,803,822 9,039,563
Investments assets 40 40
Intangible assets 904 1,739
Other assets 49,386 56,212
Tax assets 705 460
Total assets14,124,44411,623,031
Liabilities to credit institutions 2,838,000 1,888,000
Derivative contracts 38,025 6,233
Debt securities issued to the public 10,796,102 9,277,801
Provisions and other liabilities 72,259 77,375
Total liabilities13,744,38711,249,409
Shareholders' equity    
  Share capital 60,000 60,000
  Reserve for invested unrestricted equity 245,000 245,000
  Retained earnings 75,057 68,622
Total equity 380,057 373,622
Total liabilities and shareholders' equity14,124,44411,623,031

Off-balance-sheet commitments, TEUR31 Dec. 201731 Dec. 2016
Irrevocable commitments given on behalf of customers 3 8

Statement of changes in equity, TEURShare capitalOther reservesRetained earningsTotal equity
         
Shareholders' equity 1 Jan. 201660,000245,00066,937371,937
Reserve for invested unrestricted equity        
Profit for the period     18,077 18,077
Other comprehensive income for the period     -110 -110
Other changes     -16,282 -16,282
Shareholders' equity 31 Dec. 201660,000245,00068,622373,622
         
Shareholders' equity 1 Jan. 201760,000245,00068,622373,622
Reserve for invested unrestricted equity        
Profit for the period     15,473 15,473
Other comprehensive income for the period     1 1
Other changes     -9,038 -9,038
Shareholders' equity 31 Dec. 201760,000245,00075,057380,057

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, TEUR31 Dec. 201731 Dec. 2016
     
Shareholders' equity 380,057 373,622
Common Equity Tier 1 (CET1) before deductions380,057373,622
Intangible assets -904 -1,739
Excess funding of pension liability -65 -67
Share of unaudited profits -15,473 -18,077
Impairment loss - shortfall of expected losses -2,676 -2,612
Common Equity Tier 1 (CET1)360,940351,126
Tier 1 capital (T1)360,940351,126
Total capital base 360,940351,126
   
Total risk exposure amount  
Credit and counterparty risk 289,070 286,845
Operational risk 40,554 33,898
Total329,623320,743
   
Key ratios, %  
CET1 capital ratio 109.5 109.5
Tier 1 capital ratio 109.5 109.5
Capital adequacy ratio 109.5 109.5
     
Basel I floor  
Capital base 360,940 351,126
Basel I capital requirements floor 349,700 322,006
Capital buffer for Basel I floor 11,240 29,120

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
     
Classification of financial assets and liabilities 31 Dec. 2016, TEUR
Financial assetsLoans and  other receivablesRecognised at fair value through profit or loss Available
for sale
Total
Receivables from credit institutions 2,304,556     2,304,556
Derivative contracts   220,461   220,461
Receivables from customers 9,039,563     9,039,563
Shares and participations     40 40
Other receivables 56,212     56,212
Other assets 2,199     2,199
Total11,402,530220,4614011,623,031
        
Financial liabilities Recognised at fair value through profit or loss Other liabilitiesTotal
Liabilities to credit institutions     1,888,000 1,888,000
Derivative contracts   6,233   6,233
Debt securities issued to the public     9,277,801 9,277,801
Other liabilities     77,375 77,375
Total 6,23311,243,17611,249,409
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 31 Dec. 2016     277,485 277,485
     
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 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 
     
Derivative contracts 31 Dec. 2016, TEUR Nominal values/residual term to maturity
  Less than
1 year
1-5
years
More than
5 years
Total
Interest rate derivatives        
Hedging 2,759,875 8,216,977 6,838,247 17,815,099
Total2,759,8758,216,9776,838,24717,815,099
     
    Fair values Credit equivalent  
  Assets Liabilities  
Interest rate derivatives        
Hedging 220,461 6,233 414,976  
Total220,4616,233414,976 

Financial instruments classification, grouped by valuation technique, TEUR
    
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
       
    
31 Dec. 2016Fair value measurement at year end
 Balance sheet valueLevel 1Level 2
Recurring fair value measurements of assets      
Derivate contracts 220,461   220,461
Total220,461 220,461
Recurring fair value measurements of liabilities      
Derivate contracts 6,233   6,233
Total6,233 6,233
Financial liabilities not measured at fair value      
Debt securities issued to the public 9,277,801 9,189,185 366,101
Total9,277,8019,189,185366,101
    
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 Q1/2018 3 May 2018     
Interim Report H1/2018 1 August 2018     
Interim Report Q1-3/2018 31 October 2018    
      
      
Helsinki, 8 February 2018      
      
OP Mortgage Bank     
Board of Directors     
      
For more information, please contact:
Lauri Iloniemi, Managing Director, tel. +358 (0)10 252 3541
 
      
DISTRIBUTION     
LSE London Stock Exchange      
OAM (Officially Appointed Mechanism)     
Major media      
op.fi      



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 Mortgage Bank plc via Globenewswire


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