Kuntarahoitus Oyj - Interim report (Q1 and Q3)

INTERIM REPORT BULLETIN 1 January - 30 June 2013

Municipality Finance's financial result developed as planned

Municipality Finance Plc (MuniFin) maintained its position as the most
important financier for Finnish municipalities and government-subsidised
housing production in the first half of the year. With a market share of
approximately 80 per cent, the company remained the most significant financier
for its customers and practically bore sole responsibility for financing
government-subsidised housing production. 

MuniFin continued to strengthen its balance sheet during the period to ensure
the availability of competitive funding to its customers in the future. The
company's aim is to satisfy the potentially higher leverage ratio requirements
brought about by stricter regulation of the financial industry primarily by
ensuring that it continues to achieve a strong result. 

Municipality Finance Group's net operating profit increased by 27% reaching EUR
80.7 million (1 January - 30 June 2012:  EUR 63.7 million) and net interest
income was EUR 78.6 million (1 January - 30 June 2012: EUR 67.9 million). The
Group's risk-bearing capacity continued to strengthen, with capital adequacy at
35.73% at the end of June (31 December 2012: 33.87%) and the capital adequacy
ratio for Tier 1 capital at 31.09% (31 December 2012: 26.22%). 

Competition in the supply of financing to the local government sector
has continued to decrease substantially
There was a significant change in the supply of financing to the local
government sector during the period under review, as the banking sector
substantially reduced the supply of long-term loans to municipal customers.
Municipality Finance's lending to municipalities, however, continued as normal. 

In the first half of 2013, investments by municipalities and municipal
federations and the resulting financing requirements of the municipal sector
remained at the previous year's level. The rate of increase in lending for
housing construction, on the other hand, was higher than anticipated at the end
of last year. This increase in the demand for housing financing is largely due
to customers looking to refinance their old state-subsidised housing loans with
new market-based loans. As interest rates remained low, customers continued to
actively use short-term financing. 

Total lending volume at the end of the period stood at EUR 16.8 billion, which
is 7.0 per cent higher than at the end of 2012 (31 December 2012: EUR 15.7
billion). The amount of new loans withdrawn during the period increased by 17
per cent to EUR 1.9 billion (1 January - 30 June 2012: EUR 1.6 billion). 

Higher funding acquisition due to normal refinancing

During the period, the company acquired EUR 7.1 billion in funds from
international investors (1 January - 30 June 2012: EUR 4.9 billion), with total
funding now amounting to EUR 22.9 billion (31 December 2012: EUR 22.0 billion).
The majority of the growth is due to normal refinancing of maturing loans and
does not as such reflect an increase in local government sector funding
requirements. 

In April the company issued its largest ever bond transaction, which also
marked the company's inaugural issue in the United States capital market under
the rule 144A . The transaction was met with very high demand and the final
issue size was USD 1.75 billion. The largest group of investors were central
banks and other official institutions. The geographical distribution of the
investors was well balanced across the world.  In total, the company carried
out 160 funding arrangements during the period. 

President and CEO Pekka Averio:
“In comparison to recent years, the first half of 2013 was relatively stable in
the international financial markets. The measures initiated by the European
Central Bank in late 2012 to stabilise the situation noticeably calmed the
markets, particularly with respect to the European crisis countries. At the
same time, there are signs emerging in Central Europe that suggest that the
general economic situation is beginning to improve. However, there are still
substantial differences between countries. 

In Finland, the weakening of the general economic situation has resulted in
increased uncertainty about the future. A decline in industrial orders and a
slowing down of exports are serious signs that the economic trends in Finland
continue to deteriorate and decisions aimed at promoting new growth are
urgently needed.” 

“The funding requirements of Municipality Finance's customers remained largely
unchanged from the previous year. Municipality Finance continues to be the most
significant financier for its customers, with a market share of approximately
80 per cent. Total lending volume at the end of the period stood at EUR 16.8
billion, which is 7% higher than at the end of 2012 (31 December 2012: EUR 15.7
billion). 

Our customers are facing a challenging situation. Extensive ongoing reforms in
the local government sector are yet to be completed, which has an impact on the
long-term development of municipalities and their investment decisions in
particular. It is therefore very important that these reform projects are
completed quickly. Local government investments are highly significant to the
functioning of society as a whole, particularly in the healthcare and energy
sectors, which are the two industries most affected by the ongoing reforms. 

“During the review period EU's development of financial market regulation in
response to the financial crisis also progressed. The European Parliament
decided on reforms to the regulation of banks' capital requirements (known as
the CRR and CRD IV package) based on the Basel III agreement, but postponed its
decision on the implementation of a leverage ratio requirement, which is the
most significant component of these new regulations to Municipality Finance. 

The positive aspect of the European Parliament's decision is that the risk
profile of a credit institution's operations is likely to have an effect on the
leverage ratio requirement applied to it. The unfortunate aspect, however, is
that we will now have to wait until 2017 for final confirmation of the minimum
leverage ratio required of Municipality Finance. As a result, we must prepare
for the strictest possible requirements and accumulate the required funds
through our operations in the coming years.” 

Municipality Finance Plc

Further information:
Pekka Averio, President and CEO, tel. +358 500 406 856
Esa Kallio, Executive Vice President, Deputy to CEO, tel. +358 50 337 7953
Marjo Tomminen, Senior Vice President, CFO, tel. +358 50 386 1764

Attachments:

Munifin_OVK_2013_20130809_ENG_Final.pdf