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Regulatory press release

OP Financial Group's Half-year Financial Report for 1 January–30 June 2019: Earnings before tax EUR 415 million – income increased by five percent year on year

OP Financial Group
Half-year Financial Report 1 January-30 June 2019
Stock Exchange Release 30 July 2019 at 09.00 am EEST

OP Financial Group's Half-year Financial Report for 1 January–30 June 2019: Earnings before tax EUR 415 million – income increased by five percent year on year

  • Earnings before tax amounted to EUR 415 million (425).
  • Net interest income increased by 3% to EUR 587 million and net commissions and fees by 1% to EUR 450 million. Net insurance income decreased by 2% to EUR 274 million.
  • Investment income of EUR 185 million was at the previous year’s level. Capital gains were EUR 26 million higher than the year before.  
  • Expenses of EUR 953 million (956) decreased from the previous year.
  • Impairment losses on receivables totalled EUR 39 million (7).
  • In the year to June, OP Financial Group’s loan portfolio grew by 6% to EUR 90 billion and deposits by 3% to EUR 63 billion. 
  • The CET1 ratio was still strong at 19.5% (20.5).
  • Retail Banking earnings before tax decreased by 23% to EUR 94 million. Net interest income increased by 5%, net commissions and fees by 4% and expenses by 2%. Net investment income decreased by EUR 14 million. The loan portfolio increased by 5% and deposits by 8% in the year to June.
  • Corporate Banking earnings before tax fell by 34% to EUR 139 million. Net interest income increased by 9%, but net commissions and fees decreased by 21% and net investment income fell by 42%. The lower net investment income is explained by changes in the valuation models of derivatives made at the beginning of the year and lower capital gains on investments than a year ago. The loan portfolio grew by 11% in the year to June.
  • Insurance earnings before tax increased by 38% to EUR 192 million. Net insurance income decreased by 2% to EUR 283 million. The operating combined ratio was 92.5% (91.9). Investment income increased by 85% to EUR 111 million, of which capital gains on investments accounted for EUR 55 million (–3).
  • Other Operations earnings before tax were EUR –10 million (–40). An increase of 13% in other operating income and a decrease of 4% in expenses improved earnings.
  • OP Financial Group’s first-half investments in business development and improving customer experience totalled EUR 157 million (215).
  • OP bonuses totalled EUR 129 million.
  • In the first half, the number of OP cooperative banks' owner-customers increased by 42,000 to 1.95 million and that of OP Financial Group's joint banking and insurance customers by 28,000 to over 1.8 million.
  • At its meeting in June, the Supervisory Board of OP Financial Group's central cooperative confirmed the Group's updated strategy. OP Financial Group has adopted a new type of strategy process in which it is continuously reshaping, reformulating and implementing its strategy.
  • Earnings before tax for 2019 are expected to be lower than in 2018. "Outlook towards the year end" describes the outlook in greater detail.
 H1/2019H1/2018Change, %Q1–4/2018
Earnings before tax, EUR million415425-2.51,017
  Retail Banking94121-22.8421
  Corporate Banking139211-34.0408
  Insurance19214037.5260
  Other Operations-10-40--64
New OP bonuses accrued to owner-customers-129-11313.8-230
     
Return on economic capital, %**20.418.42.0*20.8
Return on equity (ROE), %5.66.0-0.5*6.9
Return on equity, excluding OP bonuses, %7.27.6-0.4*8.5
Return on assets (ROA), %0.470.480.0*0.57
Return on assets, excluding OP bonuses, %0.610.610.0*0.70
 30 June 201930 June 2018Change, %31 Dec 2018
CET1 ratio, %19.519.8-0.3*20.5
Ratio of capital base to minimum amount of capital base (under the Act on the Supervision of Financial and Insurance Conglomerates, or Fico), % ***137146-9*147
Loan portfolio, EUR billion89.784.46.287.1
Deposits, EUR billion63.361.43.061.3
Ratio of non-performing receivables to loan and guarantee portfolio, %****1.11.2-0.1*1.0
Owner-customers (1,000)1,9531,8654.71,911

*Change in ratio
**12-month rolling
***The FiCo ratio has been calculated for insurance companies using transition provisions included in solvency regulation.
****Non-performing receivables refer to receivables that are more than 90 days past due, other receivables classified as risky and forborne receivables related to such receivables due to the customer's financial difficulties.

Comments by President and Group Executive Chair Timo Ritakallio

OP Financial Group’s first-half financial performance was in line with our targets. Our customer business was on a good note and customer business income, especially net interest income and net commissions and fees, showed growth. Insurance premium revenue increased at a rate above the market average. The deposit portfolio increased in the year to June by 3% to EUR 63.3 billion. The loan portfolio increased by over 6% to EUR 89.7 billion.

January–June earnings before tax amounted to EUR 415 million, or well over two per cent lower than a year ago. Extraordinary items reduced earnings, such as changes made in the valuation models of derivatives and changes in the accounting practice of charges of financial authorities.

One of our strategic priorities is to make income grow faster than expenses. We took a turn for the better in the first half and the income growth rate was over five per cent while expenses decreased slightly. I am happy with this change of direction. At the same time, we need to bear in mind that we must continue to take various measures to manage costs in order to secure our price competitiveness.

Thanks to favourable market developments, assets under management increased, amounting to over EUR 77 billion at the end of June. Investment income remained good. Impairment loss on receivables was low and our capital base remained strong.

Our market share developed favourably during the first half and the number of our owner-customers increased to 1.95 million. As specified in our strategy, this year we aim to exceed the two-million owner-customer base.

Our customers’ logins to OP-mobile increased substantially during the first half. The usage growth rate was over 26% compared with the corresponding period a year ago. The ease of use of the service and its extent sped up the growth of its use. The use of the Pivo mobile payment application, too, increased markedly, with the year-on-year growth rate being 65%.

Specifying the Pohjola Hospital strategy was completed during the second quarter. The related sale of the occupational healthcare service business to Mehiläinen was finalised on 1 June 2019. In the future, Pohjola Hospitals will focus on orthopaedics and sports clinic services.

We at OP Financial Group have adopted a new type of strategy process in which we are continuously reshaping, reformulating and implementing the strategy. The Group will systematically assess its operating environment and operating model to be able to make new strategic choices when needed and put them into practice. We followed through successfully our strategy review applying our new model for the first time and engaged on an extensive basis both the administration of OP cooperative banks and all OP Financial Group’s personnel in this review. At its meeting in June, the Supervisory Board of OP Financial Group's central cooperative confirmed the Group's updated strategy.

Economic growth is still slowing down moderately and confidence in the economic outlook is deteriorating. In the near future, economic development will remain moderate but uncertainty will remain over the economic outlook. Risks are especially associated with the international political arena.

Economic growth in Finland will continue to slow down next year and corporate investments in Finland will remain low. To boost investments, Finland needs to pursue an economic policy that is predictable and supports competitiveness. This will be increasingly important during globally uncertain times. For sustainable growth in Finland, it would be particularly important to take measures to make work and entrepreneurship more attractive and lucrative.

January–June

OP Financial Group's earnings before tax amounted to EUR 415 million (425). The figure decreased by EUR 10 million over the previous year. Net interest income, net commissions and fees and net investment income increased. The earnings were reduced by lower net insurance income and higher impairment loss on receivables.

Net interest income increased by 3.2% to EUR 587 million. Net interest income reported by the Retail Banking segment increased by EUR 21 million and that by the Corporate Banking segment by EUR 15 million. In the year to June, OP Financial Group’s loan portfolio grew by 6.2% to EUR 89.7 billion and deposits by 3.0% to EUR 63.3 billion.

Net insurance income totalled EUR 274 million (278). Non-life insurance premium revenue dropped by 0.9% to EUR 726 million. The operating combined ratio was 92.5% (91.9). Excluding the Baltic business sold in 2018, insurance premium revenue reported by non-life insurance increased by 3.6% year on year.

Net commissions and fees were EUR 450 million, or EUR 6 million higher than the year before. Payment transfer net commissions and fees increased by EUR 10 million, whereas asset management net commissions and fees decreased by EUR 6 million.

Net investment income increased by 21.5% to EUR 252 million. Net income from financial assets recognised at fair value through profit or loss totalled EUR 212 million (66). The overlay approach is applied to certain equity instruments of insurance companies. Changes in the fair value of investments within the scope of the overlay approach are presented under the fair value reserve under equity. Total investment income of EUR 185 million was at the previous year’s level. Capital gains recognised totalled EUR 63 million (37). The combined return on investments at fair value of OP Financial Group's insurance institutions was 7.1% (0.8). The net change in the short-term life insurance supplementary interest rate provision improved earnings by EUR 23 million (18). Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes decreased earnings by EUR 15 million over the previous year.

Other operating income rose by EUR 14 million year on year to EUR 35 million. This rise is explained by the sale of occupational healthcare service business in the second quarter.

Total expenses decreased by 0.2% to EUR 953 million. Personnel costs decreased by 2.1% to EUR 404 million as a result of lower pension costs. Development costs were EUR 91 million (110). Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 2.5% to EUR 127 million. Planned depreciation/amortisation increased by 15.4% to EUR 122 million. This increase resulted from higher development expenditure recognised for prior years. Impairment write-downs decreased by EUR 19 million year on year. Other operating expenses increased by 2.3% to EUR 421 million. The EU stability contribution increased by EUR 14 million over the previous year, due to a change in the accounting practice. However, the stability contribution for the full year 2019 will be smaller than a year ago.

Impairment losses on loans and receivables and on investments recognised under various income statement items that reduced earnings amounted to EUR 45 million (17), of which EUR 39 million (7) concerned loans and receivables. Growth in the loan portfolio and the transfer of loans between impairment stages affected the increase in impairment loss on receivables. The ratio of non-performing receivables in loans and receivables to the loan and guarantee portfolio was low, at 1.1% (1.0).

OP Financial Group's current tax amounted to EUR 81 million (91). The effective tax rate was 19.6% (21.3).

OP Financial Group's equity amounted to EUR 12.3 billion (11.8). Equity included EUR 3.0 billion (3.0) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.3). The return target for Profit Shares for 2019 is 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 48 million (47). The amount of interest paid for 2018 in June 2019 totalled EUR 94 million. The fair value reserve grew by EUR 295 million to EUR 301 million from the end of 2018.

Outlook towards the year end

The financial-sector operating environment has remained fairly favourable. Low interest rates and abundant liquidity made stock prices shoot up during the first quarter although geopolitical uncertainties and fears of world economic slowdown did cast a shadow over market sentiment. Then again, low interest rates are expected to slow growth in banks’ net interest income further and reduce income from insurance institutions’ fixed-income investments.

OP Financial Group's earnings before tax for 2019 are expected to be lower than in 2018. The most significant uncertainties in respect of the financial performance relate to changes in the interest rate and investment environment, market growth rate, changes in the competitive situation and impairment losses.

All forward-looking statements in this Half-year Financial Report expressing the management's expectations, beliefs, estimates, forecasts, projections and assumptions are based on the current view on developments in the economy, and actual results may differ materially from those expressed in the forward-looking statements.

Press conference

OP Financial Group's financial performance will be presented to the media by President and Group Executive Chair Timo Ritakallio in a press conference on 30 July 2019 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc and OP Mortgage Bank plc will publish their own Half-year Financial Reports.

Financial reporting in 2019

OP Amalgamation Capital Adequacy Report H1/2019 will be published during week 32 at www.op.fi/web/raportit/op-financial-group-publications.            
                                                                                                           
Schedule for Interim Reports in 2019:

Interim Report Q1-3/2019                             29 October 2019

Helsinki, 30 July 2019

OP Cooperative
Executive Board

Additional information:
Timo Ritakallio, President and Group Executive Chair, tel. +358 (0)10 252 4500
Vesa Aho, Chief Financial Officer, tel. +358 (0)10 252 1427
Tuuli Kousa, Chief Communications Officer, tel. +358 (0)10 252 2957

DISTRIBUTION
Nasdaq Helsinki Ltd
Euronext Dublin (Irish Stock Exchange)
London Stock Exchange
SIX Swiss Exchange
Major media
op.fi

OP Financial Group is Finland's largest financial services group whose mission is to promote the sustainable prosperity, security and wellbeing of its owner-customers and the surrounding society. OP Financial Group consists of 153 member cooperative banks, its central cooperative OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000 and 1.95 million owner-customers. www.op.fi

 

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