2017-11-01 08:00:00 CET
2017-11-01 08:00:31 CET
REGULATED INFORMATION
OP Yrityspankki Oyj - Interim report (Q1 and Q3)
OP Financial Group's Interim Report for 1 January-30 September 2017: We are continuing to invest in present-day business reform; stable financial performance and in line with expectations
OP Financial Group
Interim report 1 January-30 September 2017
1 November 2017 09.00 am EET
OP Financial Group's Interim Report for 1 January-30 September 2017: We are
continuing to invest in present-day business reform; stable financial
performance and in line with expectations
Earnings level in line with expectations, deposits and assets under management
on the increase
* Earnings before tax amounted to EUR 873 million (921). Expenses rose and
non-recurring income was lower than a year ago.
* Total income was 4% higher than a year ago. Net interest income increased by
2% and net commissions and fees by 6%. Net insurance income decreased by
19%.
* Expenses increased as expected, being 12% higher than a year ago, due mainly
to an increase in investments related to the reform of the present-day
business.
* Impairment loss on receivables, EUR 28 million (36), remained low and
accounted for 0.04% of loans and receivables.
* The CET1 ratio was 19.2% (20.1) on 30 September 2017.
* Banking: The loan portfolio increased by 4% and deposits by 9% in the year
to September. Banking net interest income increased by 5% and earnings
before tax by 14%, supported by investment income.
* Non-life Insurance: Insurance premiums from private customers increased by
3%, while those from corporate customers decreased slightly. Non-life
Insurance earnings were eroded particularly by lower net insurance income
resulting from bringing forward the plan to reduce the discount rate.
* Wealth Management: Assets under management increased by 6%. Wealth
Management earnings before tax increased by 4% as a result of higher net
commissions and fees.
* Other Operations: Significant investments in the development of services
reduced earnings.
* Timo Ritakallio, LL.M., MBA and D.Sc. (Tech.), has been appointed OP
Financial Group's new President and Executive Chairman. He will take up his
duties in March 2018. President and Executive Chairman Reijo Karhinen will
retire on 1 February 2018, based on his executive contract.
* Full-year earnings for 2017 are expected to be about the same as or lower
than those for 2016 due to increasing development costs and other expenses
arising from strategy implementation.
* Our development programme at annual level of over EUR 400 million is
proceeding as planned.
* * Alongside the basic system reforms of our present-day business,
development projects originating from the relevant authorities and
legislation are still at the core of development work.
* The service range related to housing widened as OP Home marketplace and
related housing service search were launched. OP also introduced several
new investment solutions into the market as well as an equity-based
crowdfunding service. OP continued the development work in the field of
mobility services and fully digital insurance services.
* In operational efficiency enhancement, steps were taken to utilise
robotics more.
* During the reporting period, OP Financial Group opened Pohjola Hospitals in
Oulu and Kuopio.
* In the reporting period, the number of OP cooperative banks' owner-customers
increased by almost 63,000 to 1.8 million and that of OP Financial Group's
joint banking and insurance customers by 30,000 to 1.8 million.
* OP bonuses increased by 6% to EUR 164 million (154).
* OP Financial Group is currently building a new and proactive operating model
for updating employee competencies in an effort to prepare for a change and
reduction in work performed by individuals caused by digitisation and
automation.
OP Financial Group's key indicators
Q1-3/2017 Q1-3/2016 Change, % Q1-4/2016
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EBT, EUR million 873 921 -5.1 1,138
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Banking 513 448 14.4 574
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Non-life Insurance 137 206 -33.4 244
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Wealth Management 190 183 4.3 226
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Other Operations 32 83 -61.3 95
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New OP bonuses accrued to 208
owner-customers 164 154 6.0
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30 Sept. 2017 30 Sept. 2016 Change, % 31 Dec. 2016
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Common Equity Tier 1 (CET1)
ratio, % 19.2 19.7 -0.5* 20.1
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Return on economic capital,
% ** 21.4 22.2 -0.8* 22.7
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Ratio of capital base to
minimum amount of capital
base (under the Act on the
Supervision of Financial
and Insurance
Conglomerates), % *** 146 164 -18* 170
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Ratio of impairment loss on
receivables to loan and
guarantee portfolio, % 0.04 0.06 0.0* 0.09
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Owner-customers (1,000) 1,810 1,719 5.3 1,747
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Comparatives deriving from the income statement are based on figures reported
for the corresponding period in 2016. Unless otherwise specified, balance sheet
and other cross-sectional figures on 31 December 2016 are used as comparatives.
In the reporting period, non-recurring items included VAT refunds of EUR 22
million and a 19-million-euro profit from the sale of the portfolio of
agreements and POS terminals of merchant acquiring and POS terminal services. A
non-recurring item a year ago included a gain from the sale of Visa Europe Ltd,
totalling EUR 71 million.
* Change in ratio
** 12-month rolling
*** The FiCo ratio has been calculated under Solvency II transitional
provisions.
Comments by Reijo Karhinen, President and Group Executive Chairman
OP Financial Group's financial performance remained strong and in line with
expectations. January-September earnings were close to those reported for prior
years while being close to all-time high earnings, despite a significant
increase in development expenditure. The exceptionally large increase in
expenses is a direct consequence of our dedicated efforts to reinvent ourselves
as specified in our strategy. I find it particularly positive that net
commissions and fees increased and growth in net interest income strengthened in
an exceptionally challenging interest rate environment. Banking and Wealth
Management improved their earnings supported by strong income performance. Non-
life Insurance earnings and growth did not reach the levels reported for
previous years. Wealth Management volume growth was brisk across the board. In
Banking, the growth rate of deposits was clearly and that of the loan portfolio
was slightly faster than the market average.
It is gratifying to see that our corporate image and employer brand have
remained the best in the sector according to a survey conducted this autumn. The
role of reputation, trust and attraction will only increase in a digital
operating environment where customers and stakeholder groups will require of a
company not only increasingly better customer experience but also action and
values that are relevant to them.
During the reporting period, we continued building service packages in the field
of health and wellbeing, mobility and housing, as specified in our strategy,
that go beyond industry boundaries. We launched several new products and
services. By giving a weighting to our business in a new way, we want to respond
to change in customer behaviour, create conditions for improved customer
experience and diversify our revenue generation. At the same time, we offered a
considerable number of new career opportunities.
OP has a strong earnings power when facing a drastic financial-sector
transformation that entails significant costs. During the next few years, we
need to implement a very extensive investment programme, create new business
models and new revenue generation as well as a large-scale update of employee
competencies. Meanwhile, we must also ensure our price competitiveness. The
speed of the change and increasing efficiency requirements will make our
reinvention challenging.
In this moment too, a real driver of change lies in a new way of thinking and
readiness to reinvent oneself. In reinvention, the enhancement of employee
competencies is gathering pace along with the development of systems. The
ability to learn new things is everyone's key asset in the future.
Transformation in the employment landscape and increasingly accelerating
digitisation will in the years to come shake up not only businesses but also
entire sectors. The acute and profound change is not based on economic trends
and will require of the entire society reforms never seen before. Jobs will
disappear and new ones be created, but more and more often work duties and the
skills they require will change.
As one of the pioneers in digitisation, OP will be at the forefront in
encountering the transformation in the employment landscape. In this situation,
OP's strong earnings power and values will direct us to bear greater
responsibility for the enhancement of competencies of our personnel and for
their new career paths. It is everyone's interests that the force and speed of
change will not take us by surprise: it is necessary to be more open and more
proactive in communicating changes in competence needs. It is crucial to find
tools to prevent job displacement together with the personnel.
While digitisation challenges us, it will, however, benefit the Finnish economy
significantly. Finland will face the change in the operating environment in a
favourable economic situation. Our economy has just gathered momentum and the
growth is on a broad basis. The virtuous upward spiral is likely to strengthen
next year. Now it is high time to make reforms. Sufficient energy must be found
in the economic policy not only in respect of efforts to reform health and
social services but also of conditions for managing and succeeding in the
digital world.
January-September
OP Financial Group's earnings before tax amounted to EUR 873 million (921). The
figure decreased by EUR 47 million over the previous year. Earnings were reduced
by a decrease in non-recurring items, lower net insurance income and higher
expenses. The reported earnings included EUR 41 million (71) in non-recurring
income. In the meantime, net commissions and fees and net investment income
increased year on year.
Net interest income increased by 2.0% to EUR 815 million. Net interest income
from Banking rose by almost 5%, but the Group's net interest income was reduced
by lower net interest income from the Other Operations segment. Net insurance
income fell by 18.5% to EUR 341 million, resulting especially from bringing
forward the plan to reduce the discount rate and from poorer claims developments
than a year ago. The reduced discount rate increased claims incurred by EUR 102
million (41). Net commissions and fees were EUR 674 million, or EUR 37 million
higher than the year before. Mutual fund commissions increased by EUR 11 million
and Life Insurance commissions by EUR 10 million. Commission expenses declined
by a total of EUR 15 million.
Net investment income increased by 43.9% to EUR 405 million. Income from equity
investments under available-for-sale assets increased by a total of EUR 105
million year on year. Impairment losses on available-for-sale assets fell by EUR
15 million. Positive value changes in Credit Valuation Adjustment (CVA) in
derivatives owing to market changes improved net income from securities trading.
Life Insurance net investment income was reduced by lower capital gains.
Other operating income decreased by 20.9% year on year to EUR 82 million. Non-
recurring VAT refunds for prior years, interest included, totalled EUR 22
million. In the second quarter, OP Financial Group sold its portfolio of
agreements and POS terminals of acquiring and POS terminal services to Nets.
Non-recurring gain of EUR 25 million on the transaction was recognised in other
operating income. OP Financial Group recognised extra amortisation and other
expenses of EUR 6 million related to the transaction. OP Financial Group
recognised EUR 71 million in non-recurring gain a year ago as a result of the
Visa Europe Ltd transaction in the second quarter.
Total expenses increased by 11.7% to EUR 1,269 million (1,136). This increase is
mainly explained by higher development costs of present-day business, higher
operating expenses of new businesses and higher amortisation/depreciation and
impairment losses. OP Financial Group's significant investments in service
development increased development costs by EUR 50 million. Development costs
totalled EUR 146 million (96). New businesses accounted for EUR 19 million of
the increase in total expenses. Depreciation/amortisation and impairment losses
increased by EUR 43 million to EUR 159 million year on year as a result of
higher amortisation on computer software and impairment loss on real property in
own use. Personnel costs remained at the previous year's level at EUR 564
million.
Impairment losses recognised under various income statement items that reduced
earnings amounted to EUR 50 million (84), of which EUR 28 million (36) concerned
loans and receivables. Net impairment loss on loans and receivables were very
low, at 0.04% (0.06) of the loan and guarantee portfolio.
OP Financial Group's current tax amounted to EUR 171 million (183). The
effective tax rate was 19.6% (19.8).
OP Financial Group's equity capital increased by 6.9% to EUR 10.9 billion
(10.2). The reported earnings and Profit Shares were behind the increase. Equity
capital included EUR 2.8 billion (2.7) in Profit Shares, terminated Profit
Shares accounting for EUR 0.2 billion (0.3). The return target for Profit Shares
for 2017 and 2018 is 3.25%. Interest payable on Profit Shares accrued during the
reporting period is estimated to total EUR 67 million (62). The amount of
interest paid for 2016 totalled EUR 83 million in June 2017. The fair value
reserve decreased by EUR 84 million to EUR 234 million.
Outlook towards the year end
The world economy showed favourable development during the third quarter. The
euro-area economy has grown at a brisker pace than expected, but the inflation
rate has remained moderate and the interest rate outlook has remained low. The
Finnish economy continued to grow strongly and on a broad basis. Economic
sentiment is still improving. Improvement in employment will support consumer
confidence and better business profitability will increase fixed investments.
Favourable economic development is expected to continue in the near future.
Geopolitical risks, in particular, are casting a shadow over the outlook. In
Finland, the risk is that a longer-term economic growth will remain modest if
adequate reforms that support an increase in the employment rate cannot be
implemented.
The financial sector has adjusted rather well to the new type of low interest
rate environment. While low interest rates have retarded growth in banks' net
interest income and eroded insurance institutions' income from fixed income
investments, they also have improved customers' repayment capacity. Impairment
losses have remained low despite the slow growth that has lasted for several
years now. The most significant strategic risks in the financial sector are
currently associated with changing customer behaviour, operating environment
digitisation and more complex regulation. Industry disruption is threatening to
slow down growth and erode income generation in the years to come. In the next
few years, the financial sector will be faced with a strong need to reinvent
itself. Changes in the operating environment will emphasise the necessity of
reinvention with a long-term approach as well as the role of the management of
profitability and capital adequacy.
OP Financial Group expects its full-year earnings before tax for 2017 to be
about the same as or lower than those for 2016 due to increasing development
costs and other expenses arising from strategy implementation. Uncertainty that
is still related to the operating environment may cause short-term earnings
volatility, which will have an effect on the predictability of OP Financial
Group's earnings performance. The most significant uncertainties in respect of
the financial performance towards the year end relate to changes in the interest
rate and investment environment as well as impairment losses.
All forward-looking statements in this interim report expressing the
management's expectations, beliefs, estimates, forecasts, projections and
assumptions are based on the current view of 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 Chairman Reijo Karhinen in a press conference on
1 November 2017 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.
OP Corporate Bank plc will publish its own interim report.
Financial reporting in 2018
Schedule for Financial Statements Bulletin for 2017 and Interim Reports in 2018:
Financial Statements Bulletin 2017 8 February 2018
Interim Report Q1/2018 3 May 2018
Interim Report H1/2018 1 August 2018
Interim Report Q1-3/2018 31 October 2018
Helsinki, 1 November 2017
OP Cooperative
Executive Board
Additional information:
Reijo Karhinen, President and Group Executive Chairman, tel. +358 (0)10 252 4500
Harri Luhtala, CFO, tel. +358 (0)10 252 2433
Carina Geber-Teir, Executive Vice President, Corporate Communications, tel.
+358 (0)10 252 8394
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op.fi
OP Financial Group is Finland's largest financial services group whose mission
is to create sustainable prosperity, security and wellbeing for its owner-
customers and in its operating region by means of its strong capital base and
efficiency. OP Financial Group consists of about 170 member cooperative banks,
its central cooperative OP Cooperative, and the latter's subsidiaries and
affiliates. The Group has a staff of 12,000 and approximately 1.8 million owner-
customers and 4.4 million customers. www.op.fi
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