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OP Mortgage Bank (76YF)

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Wednesday 02 August, 2017

OP Mortgage Bank

OP Mortgage Bank: Interim Report for January-June 2017

OP Mortgage Bank: Interim Report for January-June 2017

OP MORTGAGE BANK
Interim Report
2 August 2017 at 10.00 am EEST 

OP Mortgage Bank: Interim Report for January-June 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 12,358 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 as intermediate loans. On 30 June, OP cooperative banks had a total of EUR 3,853 million (1,853) in intermediate loans from OP MB.

The company's financial standing remained stable throughout the reporting period. Operating profit for January- June amounted to EUR 8.5 (11.0) million.

*The comparatives for 2016 are given in brackets. For income statement and other aggregated figures, January-June 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 30 June 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 11,944 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 113.1 % (109.5) on 30 June 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 increased capital conservation buffer.

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 35.3 million in June. Information on the Basel I floor and capital surplus can be found in note "Capital base and capital adequacy".

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. OP MB's loan portfolio comprises low-risk home loans on which the minimum risk weight will have the strongest effect in relative terms. Based on an assessment, OP MB's capital adequacy will, however, remain solid even after the entry into force of the floor since CET1 is estimated to be 27% and clearly above the minimum requirements set by the authorities.

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 30 June 2017, OP Cooperative's members comprised 168 member cooperative banks as well as OP Corporate Bank plc, OP Mortgage Bank, OP Card Company Plc and 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 30 June 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    Group Treasurer, 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 to be low.

Outlook

It is expected that the bank'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 2017.

Accounting policies

The Interim Report for 1 January-30 June 2017 has been prepared in accordance with IAS 34 (Interim Financial Reporting).

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.

The Interim Report 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 financial year saw no major changes in related-party transactions.

The income statement layout grouping has been updated for the Interim Report 1 January-30 September 2016. Comparatives have been restated to correspond to the new grouping.

New standards and interpretations

IFRS 9 Financial Instruments

OP MB will for the first time apply IFRS 9 as of 1 January 2018. The comparatives will not be restated.

The quantitative effect of the application of the standard on the 2018 financial statements cannot yet be assessed reliably since it will depend on the amount of the financial instruments held at that time, the financial position at that time and the choice of the calculation principles and management judgement. The new standard requires OP Mortgage Bank to examine the calculation and monitoring processes for financial instruments. The changes to be made in them are not yet completed. OP Mortgage Bank will update the effects of the IFRS 9 transition presented in the financial statements for 2016, as follows:

Classification and measurement

The changes in the classification of OP Mortgage Bank's financial instruments will be small and will have no significant effect on OP MB's CET1 ratio.

Impairment

The expected credit loss are calculated on all balance sheet items amortised at cost and those recognised at fair value through other comprehensive income (FVOCI) and on off-balance-sheet loan commitments.

OP MB's credit risk models and the development of related systems are still underway. The expected credit loss are calculated using modelled risk parameters and formula PDxLGDxEAD for the majority of the portfolios. The expected credit loss are 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 (such as forbearance measures) and they are primarily taken into account in credit rating models. Credit ratings influence for lifetime the PD value used as the basis for assessing the quantitative change. In addition, credit risk has increased significantly if payment is over 30 days past due.
In assessing significant credit risk increase, OP MB applies the transitional provision permitted by IFRS 9 for the contracts for which the original lifetime PD cannot be calculated without incurring unreasonable costs and workload. In the definition of default, OP MB uses a uniform definition in capital adequacy measurement.

OP MB will include forward-looking information and macroeconomic scenarios in the model. The macroeconomic scenarios are the same that OP MB uses otherwise in its financial annual planning.

Expected credit loss provisions under IFRS 9 are assessed to increase significantly from their current level based on IAS 39 and they vary by portfolio. The provisions will reduce equity capital on the date of transition. Based on preliminary assessments, the increase in expected credit loss provisions is not expected to have any significant effect on OP MB's CET1 ratio on the transition date because the IFRS 9 compliant expected credit loss provisions are not expected to exceed the expected loss calculated in capital adequacy and the effect of used floors. The European Commission's proposal under preparation to amend the calculation of the CET1 ratio by gradually phasing in the effects of impairment loss measurement under IFRS 9 will, if implemented, also reduce the effects on capital adequacy.

Hedge accounting

For portfolio hedges, OP MB will continue to apply hedge accounting under IAS 39. OP MB has not yet made the decision to adopt IFRS 9 compliant hedge accounting.

IFRS 15 Revenue from Contracts with Customers

OP MB will apply IFRS 15 as of 1 January 2018. The new standard has no effect on the recognition of financial instruments but mainly applies to various commissions and fees. Based on the current assessment, OP Mortgage Bank will adopt IFRS 15 applying the cumulative effect method and will not restate comparative periods but will restate equity capital on 1 January 2018. In addition, it will present the amounts affecting each financial statement item when applying IFRS 15. The transition methodology will be confirmed after the completion of the final impact assessment. In OP Mortgage Bank, IFRS 15 mainly applies to fees not included in the calculation of the effective interest rate. The adoption of IFRS 15 has no significant financial effect. 

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, TEURH1/2017H1/2016Q2/2017Q2/2016Q1-Q4/2016
Net interest income 36,258 38,039 18,102 19,173 76,171
  Interest income 34,199 45,898 16,486 21,598 84,978
  Interest expenses -2,059 7,859 -1,615 2,425 8,807
Net commissions and fees -24,892 -24,176 -12,499 -12,020 -47,757
Net investment income 1 2 0   7
Other operating income 1 1 0 0 22
Total income11,36813,8665,6037,15328,443
Personnel costs 169 171 76 82 321
Depreciation/amortisation and impairment loss 418 418 209 209 836
Other operating expenses 2,130 2,111 1,029 1,156 4,243
Total  expenses2,7182,7001,3141,4475,400
Impairment loss on receivables -132 -158 -212 -91 -400
Earnings before tax8,51911,0074,0775,61622,643
Income tax expense 1,703 2,240 815 1,161 4,566
Profit for the period6,8158,7683,2624,45518,077

Statement of comprehensive income, TEURH1/2017H1/2016Q2/2017Q2/2016Q1-Q4/2016
      
Profit for the period 6,815 8,768 3,262 4,455 18,077
           
Items that will not be reclassified to profit or loss          
Gains/(losses) arising from remeasurement of defined benefit plans         -138
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans         28
Total comprehensive income6,8158,7683,2624,45517,967

Key ratiosH1/2017H1/2016Q2/2017Q2/2016Q1-Q4/2016
Return on equity (ROE), % 3.7 4.8 3.5 4.9 4.8
Cost/income ratio, % 24 19 23 20 19

Cash flow from operating activities, TEURH1/2017H1/2016
Profit for the financial year 6,815 8,768
Adjustments to profit for the financial year 6,046 3,213
Increase (-) or decrease (+)
in operating assets
-1,467,167-554,857
Receivables from credit institutions -2,000,000 -1,119,400
Receivables from the public and public-sector entities 534,961 546,245
Other assets -2,128 18,298
Increase (+) or decrease (-)
in operating liabilities
377,263122,491
Liabilities to credit institutions and
central banks
370,000 143,000
Other liabilities 7,263 -20,509
     
Income tax paid -1,947 -3,163
Dividends received 1 2
A. Net cash from operating activities-1,078,988-420,385
Cash flow from investing activities  
Purchase of PPE and intangible assets    
B. Net cash used in investing activities  
Cash flow from financing activities  
Increases in debt securities issued
to the public
1,986,645 243,488
Decreases in debt securities issued to the public -1,250,000  
Dividends paid and interest on cooperative capital -9,038 -16,282
C. Net cash used in financing activities727,608227,206
D. Effect of foreign exchange rate changes on cash and cash equivalents00
Net change in cash and cash equivalents (A+B+C+D)-351,381-193,180
Cash and cash equivalents at year-start451,787245,120
Cash and cash equivalents at year-end100,82452,359
Change in cash and cash equivalents-350,963-192,762
     
Interest received 32,310 64,074
Interest paid -8,945 28,411
Adjustments to profit for the financial year  
Non-cash items    
Unrealised net gains on foreign exchange operations 0 0
Impairment losses on receivables 131 160
Other 5,915 3,053
Total adjustments6,0463,213
Cash and cash equivalents  
Receivables from credit institutions payable on demand 100,824 52,359
Total cash and cash equivalents100,82452,359

Balance sheet, TEUR30 June 201730 June 201631 Dec. 2016
Receivables from credit institutions 3,953,593 1,915,128 2,304,556
Derivative contracts 151,770 315,908 220,461
Receivables from customers 8,504,785 9,063,453 9,039,563
Investments assets 40 40 40
Intangible assets 1,322 2,157 1,739
Other assets 58,340 60,525 56,212
Tax assets 703 0 460
Total assets12,670,55311,357,21111,623,031
Liabilities to credit institutions 2,258,000 1,518,000 1,888,000
Derivative contracts 40,330 6,039 6,233
Debt securities issued to the public 9,916,185 9,380,372 9,277,801
Provisions and other liabilities 84,638 87,976 77,375
Tax liabilities   402  
Total liabilities12,299,15310,992,78911,249,409
Shareholders' equity      
  Share capital 60,000 60,000 60,000
  Reserve for invested unrestricted equity 245,000 245,000 245,000
  Retained earnings 66,399 59,422 68,622
Total equity 371,399 364,422 373,622
Total liabilities and shareholders' equity12,670,55311,357,21111,623,031

Off-balance-sheet commitments, TEUR30 June 201730 June 201631 Dec. 2016
Irrevocable commitments given on behalf of customers 8 51 8

Statement of changes in equity, TEURShare
capital
Other reservesRetained earningsTotal
equity
         
Shareholders' equity 1 Jan. 201660,000245,00066,937371,937
Reserve for invested unrestricted equity        
Profit for the period     8,768 8,768
Total comprehensive income        
Other changes     -16,282 -16,282
Shareholders' equity 30 June 201660,000245,00059,422364,422
         
Shareholders' equity 1 Jan. 201760,000245,00068,622373,622
Reserve for invested unrestricted equity        
Profit for the period     6,815 6,815
Total comprehensive income        
Other changes     -9,038 -9,038
Shareholders' equity 30 June 201760,000245,00066,399371,399

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, TEUR30 June 201731 Dec. 2016
     
Shareholders' equity 371,399 373,622
Common Equity Tier 1 (CET1) before deductions371,399373,622
Intangible assets -1,322 -1,739
Excess funding of pension liability -67 -67
Share of unaudited profits -6,815 -18,077
Impairment loss - shortfall of expected losses -2,722 -2,612
Common Equity Tier 1 (CET1)360,473351,126
Tier 1 capital (T1)360,473351,126
Total capital base 360,473351,126
     
Total risk exposure amount  
Credit and counterparty risk 278,177 286,845
Operational risk 40,554 33,898
Total318,730320,743
     
Key ratios, %    
CET1 capital ratio 113.1 109.5
Tier 1 capital ratio 113.1 109.5
Capital adequacy ratio 113.1 109.5
   
Basel I floor    
Capital base 360,473 351,126
Basel I capital requirements floor 325,144 322,006
Capital buffer for Basel I floor 35,329 29,120

Classification of financial assets and liabilities 30 June 2017, TEUR
Financial assetsLoans and  other receivablesRecognised at fair value through
profit or loss
Available
for sale
Total
Receivables from credit institutions 3,953,593     3,953,593
Derivative contracts   151,770   151,770
Receivables from customers 8,504,785     8,504,785
Shares and participations     40 40
Other receivables 58,340     58,340
Other assets 2,025     2,025
Total12,518,742151,7704012,670,553
        
Financial liabilities Recognised at fair value through
profit or loss
Other liabilitiesTotal
Liabilities to credit institutions     2,258,000 2,258,000
Derivative contracts   40,330   40,330
Debt securities issued to the public     9,916,185 9,916,185
Other liabilities     84,638 84,638
Total 40,33012,258,82312,299,153
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 30 June 2017     173,663 173,663

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 30 June 2017, TEUR Nominal values/residual term to maturity
  Less than
1 year
1-5
years
More than
5 years
Total
Interest rate derivatives        
Hedging 443,506 8,049,977 9,237,466 17,730,949
Total443,5068,049,9779,237,46617,730,949
     
    Fair values Credit equivalent  
  Assets Liabilities  
Interest rate derivatives        
Hedging 151,770 40,330 384,367  
Total151,77040,330384,367 
     
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
       
30 June 2017Fair value measurement at year end
 Balance sheet valueLevel 1Level 2
Recurring fair value measurements of assets   
Derivate contracts 151,770   151,770
Total151,770 151,770
Recurring fair value measurements of liabilities      
Derivate contracts 40,330   40,330
Total40,330 40,330
Financial liabilities not measured at fair value      
Debt securities issued to the public 9,916,185 9,729,156 360,692
Total9,916,1859,729,156360,692
 
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 2017

Schedule for Interim Reports in 2017:

Interim Report Q1-3/2017                            1 November 2017

Helsinki, 2 August 2017

OP Mortgage Bank
Board of Directors

For more information, please contact Managing Director Lauri Iloniemi, tel. +358 (0)10 252 3541

DISTRIBUTION
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Major media
op.fi




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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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