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OP Mortgage Bank (76YF)

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Thursday 03 May, 2018

OP Mortgage Bank

OP Mortgage Bank: Interim Report for January-March 2018

OP Mortgage Bank: Interim Report for January-March 2018


OP MORTGAGE BANK
Stock exchange release 3 May 2018 at 10.00 am EEST
Interim Report

OP Mortgage Bank: Interim Report for January-March 2018

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 were EUR 13,061 million (13,580)* during the reporting period. On 31 March 2018, 118 OP cooperative banks had a total of EUR 4 776 million (4,776) in intermediate loans from OP MB.

The company's financial standing remained stable throughout the reporting period. Operating profit for January- March amounted to EUR 4.2 (4.4) million.

*The comparatives for 2017 are given in brackets. For income statement and other aggregated figures, January-March 2017 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2017) serve as comparatives.  

Collateralisation of bonds issued to the public

On 31 March 2018, 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 Covered Bond Act (Laki kiinnityspankkitoiminnasta (688/2010)) totalled EUR 12,737 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 120.5 % (109.5) on 31 March 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.

The Financial Supervisory Authority has 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 March 2018, OP Cooperative's members comprised 157 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 March 2018, OP MB had five employees. OP MB has been digitising its operations and 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:

Chair              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 and it has been within the set limit.

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.

Accounting policies

The Interim Report for 1 January-30 September 2018 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 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.

OP MB shifted from the calculation of impairment on an individual basis to that of the expected credit loss calculated using models under IFRS 9. Consequently, prior impairment losses on an individual and collective basis under IAS 39 have been revoked, and expected credit losses under IFRS 9 have been recognised.

 

Table listing changes in impairment losses on receivables 1 January 2018
 

Balance sheet items, TEURImpairment loss on receivables (IAS 39/IAS 37) 31. Dec. 2017RemeasurementExpected credit losses (IFRS 9) 1. Jan. 2018
Receivables from customers 898 112 -786
Total898112-786

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 equity capital due to expected credit losses on 1 January 2018 totalled EUR 786 thousand. Impairment loss on receivables assessed individually and collectively on 31 December 2017, amounting to EUR 898 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.

Changes in shareholders' equity, TEURShare capitalOther reservesRetained earningsTotal 
Equity capital 31 Dec. 2017 60,000 245,000 75,057 380,057  
Reversal of previous IAS 39 impairment provision   898 898 
 
ECL under the new IFRS 9   -786 -786 
Net change in deferred tax     -22 -22 
Equity capital 1 Jan. 201860,000245,00075,147380,147 

The most significant changes in OP MB's accounting policies arising from applying IFRS 9 have been described in the notes to the Financial Statements for 2017.

Adoption of IFRS 15 on 1 January 2018

OP MB has applied IFRS 15, Revenue from Contracts with Customers, since 1 January 2018. In OP MB, IFRS 15 mainly applies to fees not included in the calculation of the effective interest rate. IFRS 15 will lead to added information presented in the notes to the Financial Statements.

Net commissions are presented in the notes to the Interim Report. Net commissions are divided into groups according to commission income and expenses recorded from customer agreements.
IFRS 15 did not change the revenue recognition time of the fees included in the scope of application of the standard in comparison with the previous practices. The adoption of IFRS 15 did not have any significant effect on OP MB's financial result. OP MB started to apply IFRS 15 using the retrospective transition method.

Changes made to the specification of net commissions that previously were only presented in the Financial Statements are presented below:

  • Commission expenses "From lending" have been named "From lending to OP cooperative banks"
  • Commission expenses "Service charges to banks" have been named "Loan management fee to OP cooperative banks"
  • Commission expenses from "Securities" have been named "Issue of bonds"

Formulas for Alternative Performance Measures

The Alternative Performance Measures are presented to illustrate the financial performance of business operations and to improve comparability between reporting periods.

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, TEURQ1/2018Q1/2017Q1-Q4/2017
Net interest income 18,807 18,156 74,984
  Interest income 14,805 17,713 65,692
  Interest expenses -4,002 -443 -9,292
Net commissons and fees -13,164 -12,393 -49,910
Net investment income 1 1 2
Other operating income 2 1 232
Total income5,6475,76525,309
Personnel costs 88 93 328
Depreciation/amortisation and impairment loss 209 209 836
Other operating expenses 1,211 1,102 4,528
Total expenses1,5071,4045,692
Impairment loss on receivables* 56 80 -276
Earnings before tax4,1964,44119,341
Income tax expense 839 888 3,868
Profit for the period3,3573,55315,473

*Impairment loss on receivables has been calculated under IFRS 9 in 2018.

Statement of comprehensive income, TEURQ1/2018Q1/2017Q1-Q4/2017
   
    
Profit for the period 3,357 3,553 15,473
       
Items that will not be reclassified to profit
or loss
     
Gains/(losses) arising from remeasurement of defined benefit plans     1
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans     0
Total comprehensive income3,3573,55315,473

Key ratiosQ1/2018Q1/2017Q1-Q4/2017
Return on equity (ROE), % 3.6 3.8 4.1
Cost/income ratio, % 27 24 22

Cash flow
from operating activities, TEUR
Q1/2018Q1/2017
Profit for the financial year 3,357 3,553
Adjustments to profit for the financial year 2,986 2,817
Increase (-) or decrease (+)
in operating assets
512,251 -548,394
Receivables from credit institutions   -1,000,000
Receivables from the public and public-sector entities 519,106 465,039
Other assets -6,855 -13,433
Increase (+) or decrease (-)
in operating liabilities
-498,854 -818,083
Liabilities to credit institutions and
central banks
-500,000 -830,000
Other liabilities 1,146 11,917
     
Income tax paid -1,140 -1,251
Dividends received 1 1
A. Net cash from operating activities18,601-1,361,356
B. Net cash used in investing activities  
Cash flow from financing activities  
Increases in debt securities issued
to the public
0 992,263
Dividends paid and interest on cooperative capital -15,472 -9,038
C. Net cash used in financing activities-15,472983,225
D. Effect of foreign exchange rate changes on cash and cash equivalents0 
Net change in cash and cash equivalents (A+B+C+D)3,129-378,132
Cash and cash equivalents at year-start363,609451,787
Cash and cash equivalents at year-end366,94773,864
Change in cash and cash equivalents3,338-377,923
Interest received 10,121 9,089
Interest paid -6,733 -12,193
Adjustments to profit for the financial year  
Non-cash items    
Unrealised net gains on foreign exchange operations 0  
Impairment losses on receivables -56 -80
Price difference recognised on debt securities issued to the public 2,205 2,011
Other 837 887
Total adjustments2,9862,817
Cash and cash equivalents  
Receivables from credit institutions payable on demand 366,947 73,864
Total cash and cash equivalents366,94773,864

Balance sheet, TEUR31 Mar. 201831 Mar. 201731 Dec. 2017
Receivables from credit institutions 5,143,116 2,926,634 5,139,778
Derivative contracts 113,306 181,599 129,810
Receivables from customers 8,284,697 8,574,074 8,803,822
Investments assets 40 40 40
Intangible assets 695 1,531 904
Other assets 56,241 69,644 49,386
Tax assets 995 823 705
Total assets13,599,08811,754,34414,124,444
Liabilities to credit institutions 2,338,000 1,058,000 2,838,000
Derivative contracts 43,072 17,299 38,025
Debt securities issued to the public 10,776,570 10,221,615 10,796,102
Provisions and other liabilities 73,405 89,292 72,259
Tax liabilities 11 0 0
Total liabilities13,231,05911,386,20713,744,387
Shareholders' equity      
  Share capital 60,000 60,000 60,000
  Reserve for invested unrestricted equity 245,000 245,000 245,000
  Retained earnings 63,030 63,137 75,057
Total equity 368,030 368,137 380,057
Total liabilities and shareholders' equity13,599,08811,754,34414,124,444

Off-balance-sheet commitments, TEUR31 Mar. 201831 Mar. 201731 Dec. 2017
Irrevocable commitments given on behalf of customers 2 8 3

Statement of changes in equity, TEURShare capitalOther reservesRetained earningsTotal
 equity
         
Shareholders' equity 1 Jan. 201760,000245,00068,622373,622
Reserve for invested unrestricted equity        
Profit for the period     3,553 3,553
Other comprehensive income for the period     0 0
Other changes     -9,038 -9,038
Shareholders' equity 31 Mar. 201760,000245,00063,137368,137
     
         
Shareholders' equity 31 Dec. 201760,000245,00075,057380,057
Effect of IFRS 9 transition 1 Jan. 2018  9090
Shareholders' equity 1 Jan. 201860,000245,00075,147380,147
Reserve for invested unrestricted equity        
Profit for the period     3,357 3,357
Other comprehensive income for the period        
Other changes     -15,474 -15,474
Shareholders' equity 31 Mar. 201860,000245,00063,030368,030

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 Mar. 201831 Dec. 2017
     
Shareholders' equity 368,030 380,057
Common Equity Tier 1 (CET1) before deductions368,030380,057
Intangible assets -695 -904
Excess funding of pension liability -65 -65
Share of unaudited profits -3,357 -15,473
Impairment loss - shortfall of expected losses -2,646 -2,676
Common Equity Tier 1 (CET1)361,267360,940
Tier 1 capital (T1)361,267360,940
Total capital base 361,267360,940
     
Total risk exposure amount    
Credit and counterparty risk 267,111 289,070
Operational risk 32,602 40,554
Total299,713329,623
     
Key ratios, %    
CET1 capital ratio 120.5 109.5
Tier 1 capital ratio 120.5 109.5
Capital adequacy ratio 120.5 109.5
     
Capital requirement    
Capital base 361,267 360,940
Capital requirement 31,470 34,610
Buffer for capital requirements 329,798 326,329

Net commissions and fees, TEURQ1/2018Q1/2017Q1-Q4/2017 
     
Commission income        
Lending 1,552 1,830 6,465  
Total1,5521,8306,465 
         
Commission expenses        
From lending to OP cooperative banks 1,511 1,791 6,336  
Loan management fee to OP cooperative banks 13,199 12,427 49,936  
 
Issue of bonds 3 1 92  
Other 2 3 11  
Total14,71514,22356,375 
     
Net commissions and fees-13,164-12,393-49,910 

Classification of financial assets and liabilities 31 March 2018, TEUR
Financial assetsAmortised costRecognised at fair value through profit or loss Fair value through other comprehensive incomeTotal
Receivables from credit institutions 5,143,116     5,143,116
Derivative contracts   113,306   113,306
Receivables from customers 8,284,697     8,284,697
Shares and participations     40 40
Other receivables 56,241     56,241
Other assets 1,689     1,689
Total13,485,743113,3064013,599,088
     
Financial liabilities Recognised at fair value through profit or loss Other liabilitiesTotal
Liabilities to credit institutions     2,338,000 2,338,000
Derivative contracts   43,072   43,072
Debt securities issued to the public     10,776,570 10,776,570
Other liabilities     73,416 73,416
Total 43,07213,187,98613,231,059
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 31 March 2018     117,851 117,851

Classification of financial assets 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

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 Mar. 2018, TEUR Nominal values/residual term to maturity
  Less than 1 year 1-5 years More than 5 years Total
Interest rate derivatives        
Hedging 2,677,342 8,839,577 7,030,674 18,547,593
Total2,677,3428,839,5777,030,67418,547,593
         
    Fair values Credit equivalent  
  Assets Liabilities  
Interest rate derivatives        
Hedging 113,306 43,072 310,689  
Total113,30643,072310,689  

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  

Financial instruments classification, grouped by valuation technique, TEUR
    
31 Mar. 2018Fair value measurement at year end
 Balance sheet valueLevel 1Level 2
Recurring fair value measurements of assets   
Derivate contracts 113,306   113,306
Total113,306 113,306
Recurring fair value measurements of liabilities      
Derivate contracts 43,072   43,072
Total43,072 43,072
Financial liabilities not measured at fair value      
Debt securities issued to the public 10,776,570 10,651,882 242,539
Total10,776,57010,651,882242,539

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

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 H1/2018          1 August 2018
Interim Report Q1-3/2018     31 October 2018

Helsinki, 3 May 2018

OP Mortgage Bank
Board of Directors

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

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Major media
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Source: OP Mortgage Bank plc via Globenewswire


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