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OP Mortgage Bank (76YF)

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Wednesday 28 October, 2015

OP Mortgage Bank

OP Mortgage Bank Interim Report for January-September 2015

OP Mortgage Bank Interim Report for January-September 2015

OP MORTGAGE BANK
Stock exchange release 28 October 2015 at 9.00 EET
Interim Report

OP Mortgage Bank Interim Report for January-September 2015

OP Mortgage Bank (OP MB) is part of OP Financial Group. Together with Pohjola Bank plc, it is in charge of OP's funding from the money and capital markets. OP MB is responsible for OP's funding for the part of covered bond issuance.

Financial standing

The loan portfolio of OP Mortgage Bank (OP MB) decreased to EUR 9,195 million (9,329)* during the reporting period. The company increased its loan portfolio by buying mortgage-backed loans from OP Financial Group's member banks worth a total of EUR 1,119 million. The reporting period saw an issue of a 1,000-million euro fixed-rate covered bond with a maturity of seven years in international capital markets. The bond got the highest credit ratings from credit rating agencies.

The company's financial standing remained stable throughout the reporting period. Operating profit for January-September amounted to EUR 18.6 (14.4) million.

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 and interest on issued bonds into the same basis rate. OP MB has entered into all derivative contracts for hedging purposes, with Pohjola Bank plc being their counterparty.

* The comparatives for 2014  are given in brackets. For income statement and other aggregated figures, January-September 2014 figures serve as comparatives. For balance sheet and other cross-sectional figures, figures at the end of the previous reporting period (31 December 2014) serve as a comparative.

Collateralisation of bonds issued to the public

The last covered bond issued under the Finnish Act on Mortgage Credit Banks (1240/1999) before 1 August 2010 matured on 15 June 2015 and the programme was consequently terminated and the free collaterals of Cover Asset Pool A were transferred to Cover Asset Pool B.

Mortgages collateralising covered bonds issued after 1 August 2010, under the Finnish Covered Bonds Act (688/2010), are included in Cover Asset Pool B. The balance of Pool B was EUR 8,839 million at the end of September.

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.

OP MB's Common Equity Tier 1 (CET1) ratio stood at 138.3% (133.0%) on 30 September. The CET1 capital requirement is 4.5% and the fixed additional capital requirement is 2.5%, or a total of 7%.

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

Joint liability of amalgamation

Under the Act on the Amalgamation of Deposit Banks (Laki talletuspankkien yhteenliittymästä), the amalgamation of the cooperative banks comprises the organisation's central institution (OP Cooperative), the central institution'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 September 2015,

OP Cooperative's members comprised 181 cooperative banks as well as Pohjola Bank plc, Helsinki OP Bank Ltd, OP Mortgage Bank plc, OP Card Company Plc and OP Process Services Ltd. The central institution 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. Companies belonging to the amalgamation are legally responsible for each other's debts. OP Financial Group's insurance companies do not fall within the scope of joint liability. The amalgamation's central institution OP Cooperative is obliged, if necessary, to assist member banks with a sum that prevents them from going into liquidation. The central cooperative is liable for the debts of a member bank which cannot be paid using the member bank's capital.

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 bank in proportion to their last adopted balance sheets.

According to the Covered Bonds Act, section 25, the holder of a covered bond has the right to receive a payment for the entire loan term of the bond from the assets entered as collateral without other receivables without this being prevented by OP Mortgage Bank's liquidation or bankruptcy.

Personnel

On 30 September, OP MB had five employees. The Bank purchases all the most important support services from OP Cooperative and its Group members, reducing the Bank's need for its own personnel.

Administration

The Board composition is as follows:

Chairman Harri Luhtala  Chief Financial Officer, OP Cooperative, Financial Group

 
Members  Elina Ronkanen-Minogue  Head of Asset and Liability Management and Group Treasury, OP Cooperative, Financial Group
  Hanno Hirvinen Group Treasurer, Pohjola Bank plc

                                                                

OP MB's Managing Director is Lauri Iloniemi and Hanno Hirvinen is his deputy.

Risk exposure

The most significant types of risks related to OP MB are credit risk, structural funding risk, liquidity risk and interest rate risk. The key 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 Pohjola Bank Plc, is exploitable by OP MB. OP MB 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. The interest rate risk may be considered to be low.

Outlook

The existing issuance programme will makes it possible to issue new covered bonds in 2015. 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 good.

Accounting policies

The Interim Report for 1 January-30 September 2015 has been prepared in accordance with IAS 34 (Interim Financial Reporting) and with the accounting policies presented in the financial statements 2014.
The Interim Report is based on unaudited figures. Given that all of the figures have been rounded off, the sum total of individual figures may deviate from the presented sums.

OP MB's related parties include the parent company OP Cooperative and its subsidiaries, the OP Financial Group pension insurance organisation OP Bank Group Pension Fund and OP Bank Group Pension Foundation, and the company's administrative personnel. Standard loan terms and conditions apply to loans granted to the related parties. Loans are tied to generally used reference rates. Related-party transactions did not undergo any substantial changes during the reporting period.

Calculation of key ratios

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 + Other administrative expenses + Other operating expenses) / (Net interest income + Net commissions and fees + Net trading income + Total net investment income+ Other operating income) × 100

Income statement, TEURQ1-Q3/2015Q1-Q3/2014Q3/2015Q3/20142014
           
Interest income 80,044 89,464 25,298 31,248 117,550
Interest expenses 26,563 49,377 6,647 16,187 62,539
Net interest income53,48240,08618,65215,06155,011
Impairment loss on receivables 245 -148 -48 17 -150
Net commissons and fees -32,033 -22,404 -11,900 -10,114 -32,394
Net trading income 0 -1 0 0 -1
Net investment income 22 1 21 0 1
Other operating income 1 1 0 0 1
Personnel costs 288 283 84 92 385
Other administrative expenses 1,800 1,736 619 600 2,300
Other operating expenses 1,059 1,100 305 312 1,506
Earnings before tax18,57114,4165,7173,96018,277
Income tax expense 3,709 2,882 1,139 791 3,657
Profit for the period14,86211,5344,5783,16914,619

Statement of comprehensive
income, TEUR
Q1-Q3/2015Q1-Q3/2014Q3/2015Q3/20142014
     
Profit for the period 14,862 11,534 4,578 3,169 14,619
           
Items that will not be reclassified to profit
or loss
         
Gains/(losses) arising from remeasurement of defined benefit plans         -17
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans         3
Total comprehensive income14,86211,5344,5783,16914,606

Key ratiosQ1-Q3/2015Q1-Q3/2014Q3/2015Q3/20142014
Return on equity (ROE), % 5.5 4.5 5.0 3.7 4.2
Cost/income ratio, % 15 18 15 20 19

Cash flow statement, TEURQ1-Q3/2015Q1-Q3/2014
Cash and cash equivalents 1 Jan109,046110,550
Total comprehensive income for the period 14,862 11,534
Adjustments to profit for the period 2,277 2,207
Increase (-) or decrease (+) in operating assets 207,108 -1,661,091
Increase (+) or decrease (-) in operating liabilities -177,227 133,220
A. Cash flow from operating activities47,019-1,514,130
Shares and participations    
Purchase of intangible assets -681 -675
B. Cash flow from investing activities-681-675
Increases in debt securities issued to the public 20,465 1,993,580
Decreases in debt securities issued to the public    
Reserve for invested unrestricted equity   10,000
Dividends paid -4,996  
C. Cash flow from financing activities15,4702,003,580
Net increase/decrease in cash and cash equivalents (A+B+C)61,808488,775
Cash and cash equivalents
30 Sep
170,854599,325

Balance sheet, TEUR30 Sep 201530 Sep 201431 Dec 2014
       
Receivables from credit institutions 200,823 599,325 119,046
Derivative contracts 200,981 252,120 261,346
Receivables from customers 9,194,581 9,521,936 9,329,077
Investments assets 40 40 40
Intangible assets 2,784 2,266 2,610
Other assets 58,208 92,283 90,047
Tax assets 3 61 380
Total assets9,657,42010,468,0319,802,546
Liabilities to credit institutions 1,425,000 1,935,372 1,505,000
Derivative contracts 5,639 9,295 8,298
Debt securities issued to the public 7,770,710 8,043,326 7,810,673
Provisions and other liabilities 87,863 125,890 122,116
Tax liabilities 1,883 762  
Total liabilities9,291,09510,114,6449,446,086
Shareholders' equity      
  Share capital 60,000 60,000 60,000
  Reserve for invested unrestricted equity 245,000 245,000 245,000
  Retained earnings 61,325 48,387 51,459
Total equity 366,325 353,387 356,459
Total liabilities and shareholders' equity9,657,42010,468,0319,802,546

Off-balance-sheet commitments, TEUR30 Sep 201530 Sep 201431 Dec 2014
Irrevocable commitments given on behalf of customers 1,583 3,467 3,252

Statement of changes in equity, TEURShare capitalOther reservesRetained earningsTotal equity
         
Shareholders' equity 1 Jan 201460,000235,00036,853331,853
Reserve for invested unrestricted  equity   10,000   10,000
Profit for the period     11,534 11,534
Total comprehensive income        
Other changes        
Shareholders' equity 30 Sep 201460,000245,00048,387353,387
         
Shareholders' equity 1 Jan 201560,000245,00051,459356,459
Reserve for invested unrestricted equity        
Profit for the period     14,862 14,862
Total comprehensive income        
Other changes     -4,996 -4,996
Shareholders' equity 30 Sep 201560,000245,00061,325366,325

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 Sep 201531 Dec 201430 Sep 2014
       
Shareholders' equity 366,325 356,459 353,387
Common Equity Tier 1 (CET1) before deductions366,325356,459353,387
Intangible assets -2,784 -2,610 -2,266
Excess funding of pension liability, indirect holdings and deferred tax assets for losses -54 -55  
Planned profit distribution / profit distribution as proposed by the Board   -5,000 -2,250
Share of unaudited profits -14,862    
Unrealised gains under transitional provisions      
Impairment loss - shortfall of expected losses -2,212 -1,898 -2,026
Common Equity Tier 1 (CET1)346,414346,897346,845
Instruments included in other Tier 1 capital      
Additional Tier 1 capital (AT1)   
Tier 1 capital (T1)346,414346,897346,845
Debenture loans      
Unrealised gains under transitional provisions      
Tier 2 Capital (T2)   
Total Capital base 346,414346,897346,845
    
Risk-weighted assets   
Credit and counterparty risk 222,611 237,258 253,331
Market risk      
Operational risk 27,846 23,527 23,527
Total250,458260,785276,858
    
Key ratios, %   
CET1 capital ratio 138.3 133.0 125.3
Tier 1 capital ratio 138.3 133.0 125.3
Capital adequacy ratio 138.3 133.0 125.3
       
Basel I floor   
Capital base 346,414 346,897 346,845
Basel I capital requirements floor 300,245 304,995 315,857
Capital buffer for Basel I floor 46,169 41,901 30,989

Classification of financial assets
and liabilities, TEUR
      
Financial assetsLoans and  other receivablesRecognised at fair value through profit or loss Available
for sale
Total
Receivables from credit institutions 200,823     200,823
Derivative contracts   200,981   200,981
Receivables from customers 9,194,581     9,194,581
Shares and participations     40 40
Other receivables 58,208     58,208
Other assets 2,787     2,787
Balance at 30 Sep 20159,456,400200,981409,657,420
Balance at 30 Sep 201410,215,871252,1204010,468,031
Balance at 31 Dec 20149,541,160261,346409,802,546
        
Financial liabilities Recognised at fair value through profit or loss Other liabilitiesTotal
Liabilities to credit institutions     1,425,000 1,425,000
Derivative contracts   5,639   5,639
Debt securities issued to the public     7,770,710 7,770,710
Subordinated liabilities        
Other liabilities     89,746 89,746
Balance at 30 Sep 2015 5,6399,285,4569,291,095
Balance at 30 Sep 2014 9,29510,105,34910,114,644
Balance at 31 Dec 2014 8,2989,437,7899,446,086
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 30 Sep 2015     251,962 251,962

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 table.

Derivative contracts 30 Sep 2015, TEUR Nominal values/residual term to maturity
  Less than
1 year
1-5
years
More than
5 years
Total
Interest rate derivatives        
Hedging 2,402,198 7,179,977 7,238,168 16,820,343
Trading        
Total2,402,1987,179,9777,238,16816,820,343

    Fair values Credit
  Assets Liabilities equivalent
Interest rate derivatives      
Hedging 200,981 5,639 393,589
Trading      
Total200,9815,639393,589

Derivative contracts 31 Dec 2014, TEUR Nominal values/residual term to maturity
  Less than
1 year
1-5
years
More than
5 years
Total
Interest rate derivatives        
Hedging 4,496,752 9,141,000 4,396,000 18,033,752
Trading        
Total4,496,7529,141,0004,396,00018,033,752

    Fair values Credit
  Assets Liabilities equivalent
Interest rate derivatives      
Hedging 261,346 8,298 449,799
Trading      
Total261,3468,298449,799

Grouping of the balance sheet according to the valuation method, TEUR    
    
30 Sep 2015 Valuation of fair value at the end of the period
 Balance sheet valueLevel 1Level 2Level 3
Assets recognised at fair value    
Derivate contracts 200,981   200,981  
Total200,981 200,981 
Liabilities recognised at fair value        
Derivate contracts 5,639   5,639  
Total5,639 5,639 
Financial liabilities not recognised
at fair value
       
Debt securities issued to the public 7,770,710 7,884,708 137,965  
Total7,770,7107,884,708137,965 
     
     
31 Dec 2014 Valuation of fair value at the end of the period
 Balance sheet valueLevel 1Level 2Level 3
Assets recognised at fair value        
Derivate contracts 261,346   261,346  
Total261,346 261,346 
Liabilities recognised at fair value        
Derivate contracts 8,298   8,298  
Total8,298 8,298 
Financial liabilities not recognised
at fair value
       
Debt securities issued to the public 7,810,673 7,995,455 142,607  
Total7,810,6737,995,455142,607 
     
OP MB does not hold any transfers between the levels of fair value valuation.  

Helsinki, 28 October 2015

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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Source: OP Mortgage Bank plc via Globenewswire

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