OP Yrityspankki Oyj - Interim report (Q1 and Q3)

OP Financial Group's Interim Report for 1 January-31 March 2017: Financial standing in good shape, transformation still underway

OP Financial Group
Interim report 1 January-31 March 2017
27 April 2017 09.00 am EEST

OP Financial Group's Interim Report for 1 January-31 March 2017: Financial
standing in good shape, transformation still underway

Earnings before tax improved, the loan portfolio and assets under management on
the increase

  * Earnings before tax increased by 4% to EUR 295 million (284).
  * Total income rose by 7%: net commissions and fees were up by 6%, whereas net
    interest income decreased by 3% and net insurance income by 9%. Expenses
    rose by 11%, as expected.
  * Impairment loss on receivables, amounting to EUR 8 million, continued to
    fall from their already low level.
  * The CET1 ratio was 18.8% (20.1) on 31 March 2017. The 1.8 percentage point
    decrease in the ratio is explained by the decision of the European Central
    Bank (ECB) in February to raise the risk weights of OP Financial Group's
    retail exposures for a fixed period.
  * The loan portfolio increased by 5% and deposits by almost 3%. New home loans
    drawn down were 6% and corporate loans 5% higher than a year ago. Banking
    net interest income increased by 5%.
  * Insurance premiums from private customers increased by 3%, whereas those
    from corporate customers decreased almost by as much. Non-life Insurance
    earnings for the reporting period were eroded by large claims that were
    higher than usual.
  * Assets managed by Wealth Management increased by 13% over the previous year.
    Wealth Management earnings were eroded by short-term interest rate
    provisions related to insurance liabilities.
  * 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.

Strategy implementation in full swing

  * OP Financial Group continues to implement its strategy through 15 strategic
    initiatives. Development expenditure will rise to EUR 400 million on an
    annualised basis.
  * The number of OP cooperative banks' owner-customers increased by 19,000 to
    1.8 million in the first quarter. Their number increased by almost fifth in
    the year to March.
  * The number of joint banking and non-life insurance customers increased by
    12,000 during the reporting period, totalling 1.8 million on 31 March 2017.
  * New OP bonuses totalled over EUR 54 million, up by 6% year on year.
  * In January, the Group signed with the European Investment Fund a new SME
    financing programme worth EUR 150 million.
  * In March, OP Financial Group opened a new social customer media for its
    owner-customers and corporate customers (op.media). Op.media encourages its
    various communities to contribute to its content production.
  * The transforming OP Financial Group has improved its employer brand.

OP Financial Group's key indicators
                                   Q1/2017       Q1/2016 Change, %    Q1-4/2016
-------------------------------------------------------------------------------
 Earnings before tax, EUR                                                 1,138
 million                               295           284       4.0
-------------------------------------------------------------------------------
   Banking                             174           144      20.7          574
-------------------------------------------------------------------------------
   Non-life Insurance                   49            61     -19.3          244
-------------------------------------------------------------------------------
   Wealth Management                    34            73     -53.9          226
-------------------------------------------------------------------------------
   Other Operations                     38             5                     95
-------------------------------------------------------------------------------
 New OP bonuses accrued to                                                  208
 owner-customers                        54            50       6.4
-------------------------------------------------------------------------------
                             31 March 2017 31 March 2016 Change, % 31 Dec. 2016
-------------------------------------------------------------------------------
 CET1 ratio, %                        18.8          19.5     -0.7*         20.1
-------------------------------------------------------------------------------
 Return on economic capital,                                               22.7
 % **                                 22.5          21.1     1.4 *
-------------------------------------------------------------------------------
 Ratio of capital base to
 minimum amount of capital
 base (under the Act on the
 Supervision of Financial
 and Insurance
 Conglomerates), % ***                 142           160      -18*          170
-------------------------------------------------------------------------------
 Ratio of impairment loss on
 receivables to loan and
 guarantee portfolio, %               0.04           0.05     0.0*         0.09
-------------------------------------------------------------------------------
 Owner-customers (1,000)             1,766          1,507     17.1        1,747
-------------------------------------------------------------------------------


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.
* 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

Our first quarter was reflected by the implementation of the strategy boldly
transforming OP Financial Group as well as the sustained strong financial
performance. Our earnings improved year on year, being the second best ever
recorded for the first quarter. Earnings were improved by higher capital gains
from investment and net commissions and fees. Of the business segments, Banking
showed clearly better earnings than a year ago.  Earnings were eroded by not
only weak first-quarter claims development but also higher expenses due to
strategy implementation. Net interest income that lowered slightly at Group
level resulted from a reduction in Group Treasury net interest income. However,
Banking net interest income continued to rise. Comparable earnings by Wealth
Management were almost at the same level as a year ago.

Good Banking performance was augmented by the loan portfolio growth rate that
outpaced the market. Wealth Management too showed strong growth. However, Non-
life Insurance did not reach the growth rate seen in previous years. New
businesses continued to make progress. The health and wellbeing business is
continuing to expand on a nationwide basis: three new hospitals are currently
under construction. In mobility services, we focused on preparing for subsequent
openings.

In addition to ensuring that daily customer business runs smoothly, the drastic
change underway in customer behaviour is challenging us. For a traditional
financial services provider, this means a considerable need for reinvention and
thereby significant investments in product and service development.  At the same
time, continuously increasing regulation requires more and more investments in
systems. The combined effect of these investments on our expenses will be
significant. Our strong earnings power helps us in this respect.

As one of the Finnish pioneers in exploiting digitisation, we are at the
forefront facing pressures for change in terms of employee competence profiles.
Mobile technology, artificial intelligence, robotisation and automation will
create new service and competence needs in the financial sector as well as
business models that jettison conventional practices. New jobs are being created
while old ones are disappearing faster than ever before.

This transformation with the customer at the core is proceeding apace. We must
accept the fact that a number of structures, norms and operating models in our
society no longer meet the needs of the changing employment landscape. Value-
based choices too will play a pronounced role amid the fierce change. A
responsible and successful company must now look for new operating models and
solutions if it intends to withstand competition and safeguard its employees'
competencies in the future. This will require a new way of thinking and attitude
of employees, employers and our society as a whole.

January-March

OP Financial Group's earnings before tax amounted to EUR 295 million (284). The
figure improved by EUR 11 million over the previous year. This earnings
improvement was particularly due to higher net investment income and other
operating income.

Net interest income decreased by 3.4% to EUR 258 million. Net interest income
was reduced by lower net interest income from trading operations. Net insurance
income declined by 9.4% to EUR 117, due to weak claims developments. Net
commissions and fees were EUR 237 million, or EUR 13 million higher than the
year before. Fees from payment services and securities brokerage fees increased
by EUR 3 million, respectively, and commission expenses decreased by a total EUR
4 million.

Net investment income increased by 41.4% to EUR 122 million. Capital gains on
equity instruments contributed to higher net income from available-for-sale
assets. Positive value changes in Credit Valuation Adjustment (CVA) in
derivatives owing to market changes improved net income from securities trading.
Short-term supplementary interest rate provisions of Life Insurance reduced net
investment income by EUR 32 million over the previous year, which to a large
extent also explains lower Wealth Management earnings.

Other operating income rose by EUR 24 million year on year to EUR 34 million.
Other operating income included EUR 20 million in non-recurring VAT refunds for
prior years.

Total expenses increased by 10.6% to EUR 417 million. OP Financial Group's
significant investments in service development increased development costs by
EUR 16 million. Development costs totalled EUR 41 million (25). New businesses
accounted for EUR 6 million of the increase in total expenses.
Depreciation/amortisation increased by EUR 5 million year on year to EUR 42
million. Personnel costs remained at the previous year's level at EUR 202
million.

Impairment losses recognised under various income statement items that reduced
earnings amounted to EUR 17 million (30), of which EUR 8 million (11) concerned
loans and receivables. Net impairment loss on loans and receivables were very
low, at 0.04% (0.05) of the loan and guarantee portfolio.

OP Financial Group's current tax amounted to EUR 55 million (54). The effective
tax rate was 18.8% (19.1).

OP Financial Group's equity capital increased by 1.4% to EUR 10.4 billion.
Equity capital was increased by the reporting period's earnings. Equity capital
included EUR 2.7 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 is 3.25%. Interest payable on the Profit Shares accrued during the
reporting period is estimated to total EUR 22 million (20). The amount of
interest to be paid for 2016 totals EUR 83 million. The fair value reserve
decreased by EUR 27 million to EUR 292 million.

Outlook towards the year end

The world economy and world trade showed a marked recovery in the first quarter.
Economic growth in the euro area too picked up. Recovery in the export market
made a strong contribution to Finnish exports.  On the whole, the Finnish
economic outlook has brightened in the first quarter and is now more optimistic
than for many years. Consumer confidence has improved and the housing market has
perked up. Political uncertainty both in export markets and Finland is still,
however, casting a shadow over economic recovery.

The financial sector has had to adjust to a new type of low interest rate
environment. Low interest rates retard growth in banks' net interest income and
erode insurance institutions' income from fixed income investments. 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 and operating environment
digitisation. 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 role of the management of operational
reinvention, profitability and capital adequacy with a long-term approach.

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, impairment loss developments and the rate of
business growth.

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
27 April 2017 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc will publish its own interim report.

Financial reporting in 2017

Schedule for Interim Reports in 2017:

Interim Report H1/2017                              2 August 2017
Interim Report Q1-Q3/2017                        1 November 2017

Helsinki, 27 April 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

DISTRIBUTION
Nasdaq Helsinki Ltd
London Stock Exchange
SIX Swiss Exchange
Major media
op.fi and pohjola.com

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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Attachments:

OP Financial Group Interim report Q1 2017.pdf

OP Financial Group Q1 2017 background material.pdf