2017-08-02 08:00:41 CEST
2017-08-02 08:00:41 CEST
REGULATED INFORMATION
OP Yrityspankki Oyj - Half Year financial report
OP Financial Group's Interim Report for 1 January-30 June 2017: Strong operational transformation while maintaining the good earnings level
OP Financial Group
Interim report 1 January-30 June 2017
2 August 2017 09.00 am EEST
OP Financial Group's Interim Report for 1 January-30 June 2017: Strong
operational transformation while maintaining the good earnings level
Earnings were strong as expected, business grew on a broad basis
* Earnings before tax were EUR 583 million (614). Earnings adjusted for non-
recurring items were at the previous year's level.
* Total income grew by over 3%. Net interest income was at the previous year's
level, net commissions and fees increased by 5% and net insurance income
decreased by 3%.
* Expenses increased as expected, being 10% higher than a year ago, due mainly
to an increase in investments related to operational reform.
* Impairment loss on receivables, EUR 23 million (23), remained low accounting
for 0.06% of loans and receivables.
* The CET1 ratio was 19.1% (20.1) on 30 June 2017.
* Banking: The loan portfolio increased by 4% and deposits by 6% in the year
to June. Banking net interest income increased by 5% and earnings before tax
by almost 20%, supported by investment income.
* Non-life Insurance: Insurance premiums from private customers increased by
3%, while those from corporate customers decreased by one per cent. Non-life
Insurance earnings were eroded particularly by weaker claims development
than in the year before.
* Wealth Management: Assets under management increased by 11%. Wealth
Management earnings were reduced by lower investment income than a year ago.
* Other Operations: Earnings before non-recurring items were at the previous
year's level.
* 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.
* Development focuses on present-day businesses - over 90% of our development
expenditure goes to Banking, Non-life Insurance and Wealth Management.
* Through our large-scale basic system upgrades, we will improve the
competitiveness or our basic business and enable the development of new
digital services. The most important system upgrades concern payment
transactions, card business, non-life insurance and financing.
* Furthermore, there are a large number of development projects underway
originating from the relevant authorities and legislation related
particularly to data protection and anti-money laundering legislation as
well as MiFID II regulation.
* Online services for private and corporate customers (op.fi) were
redesigned. Private customer logins to mobile services increased by
almost a quarter in the first half and new functionalities were
implemented, sch as Siirto payment and Pivo's new mobile payment
methods. OP took its first steps in creating fully digital businesses by
launching OP Nano Insurance.
* OP introduced a record number of new products, services and
functionalities onto the market. In particular, a new motor liability
insurance and products protecting against a rise in interest rates met
with a very favourable reception.
* A third hospital was opened in Oulu and several new mobility initiatives
were launched.
* In the first half, the number of OP cooperative banks' owner-customers
increased by almost 40,000 to 1.8 million and that of OP Financial Group's
joint banking and insurance customers by 22,000 to 1.8 million.
* New OP bonuses increased at a rate of 6%. In the first half, they totalled
EUR 108 million (102).
OP Financial Group's key indicators
Q1-2/2017 Q1-2/2016 Change, % Q1-4/2016
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Earnings before tax, EUR
million 583 614 -5.1 1,138
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Banking 338 283 19.5 574
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Non-life Insurance 107 120 -11.2 244
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Wealth Management 93 135 -31.3 226
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Other Operations 45 76 -40.7 95
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New OP bonuses accrued to 208
owner-customers 108 102 6.1
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30 June 2017 30 June 2016 Change, % 31 Dec. 2016
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Common Equity Tier 1 (CET1)
ratio, % 19.1 19.4 -0.3* 20.1
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Return on economic capital, %
** 21.8 22.4 -0.6* 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), %
*** 145 163 -17* 170
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Ratio of impairment loss on
receivables to loan and
guarantee portfolio, % 0.06 0.06 0.0* 0.09
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Owner-customers (1,000) 1,786 1,682 6.2 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 an 18-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 first half of the year is characterised by success in terms
of transformation and financial performance. Our earnings were slightly lower
than a year ago, as expected, but still very strong. Development investments
that are growing heavily, according to our strategy, added to expenses
significantly. Growth in income was based on favourable development in
commission income while net interest income remained at the previous year's
level. Favourable development in investment income compensated for a slight drop
in net insurance income. Banking improved its financial performance the most,
supported by volume growth, investment income and net interest income.
The historically broad-based and fast transformation in the financial sector -
change in customer behaviour and transformation in the competitive arena -
require remarkable reinvention of OP Financial Group too. Comprehensive
reinvention in such a traditional business will necessitate huge amounts of
resources, boldness and a bright future vision. Updating competencies too will
become challenging.
In this transformation, our strong earnings power and in-depth customer insight
as well as our genuine desire to work for customers' best interests is a clear
strength of OP Financial Group owned by customers. Our challenge is to allocate
development resources properly and ensure that sufficient emphasis will be put
on the increasing role of customer experience as a competitive factor in all
development work.
Based on our strategy confirmed in summer 2016, we have increased our annual
product and service development expenditure to around EUR 400 million. The
majority of this amount will be spent on extensive system upgrades and product
and service development for our traditional businesses - Banking, Non-life
Insurance, and Wealth Management - and for the utilisation of digitisation. This
work is currently underway on an extensive basis.
As specified in our strategy, we have also taken our first bold steps in
completely new businesses. We opened a third Pohjola Hospital in Oulu in May and
introduced several new, innovative mobility services during the spring.
Broad-based economic recovery in Finland is a great and hoped-for thing. In the
fast changing operating environment, we cannot, however, take a breathing space.
Now we need creative solutions and bold initiatives in society. Digitisation is
changing a whole heap of industries, conventional operating models and consumer
behaviour in a way never seen before. At the same time, the ongoing update of
competencies will provide all of us with the best protection. Alongside
technology and new tools, there will be a need for a completely new type of
abilities to understand an ecosystem mindset, sharing economy, new value chains
and revenue generation models. Digitisation at its best makes it possible to
create new businesses, increase employment and Finnish prosperity during the
next 100 years as well.
January-June
OP Financial Group's earnings before tax amounted to EUR 583 million (614). The
figure decreased by EUR 32 million over the previous year. Lower non-recurring
items reduced the earnings. The reported earnings included EUR 40 million (71)
in non-recurring income. Higher expenses also reduced earnings over the previous
year. In the meantime, net commissions and fees and net investment income
increased year on year.
Net interest income increased by 0.4% to EUR 530 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 declined by 2.8% to EUR 261, due to weak claims developments in the first
quarter, in particular. Net commissions and fees were EUR 458 million, or EUR
20 million higher than the year before. Mutual fund commissions increased by EUR
4 million and commission expenses decreased by a total of EUR 9 million.
Net investment income increased by 29.0% to EUR 235 million. Income from equity
investments under available-for-sale assets increased by a total of EUR 29
million year on year. Impairment losses on available-for-sale assets fell by EUR
19 million. Positive value changes in Credit Valuation Adjustment (CVA) in
derivatives owing to market changes improved net income from securities trading.
Wealth Management net investment income was reduced by lower capital gains and
short-term supplementary interest rate provisions of Life Insurance made for the
reporting period that were higher than a year ago.
Other operating income decreased by 26.1% year on year to EUR 69 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 24 million on the transaction was recognised in other
operating income. OP Financial Group recognised extra amortisation of EUR 3
million and other expenses of EUR 3 million related to the transaction. A year
ago, OP Financial Group recognised EUR 71 million in non-recurring gain as a
result of the Visa Europe Ltd transaction.
Total expenses increased by 10.1% to EUR 854 million. This increase is mainly
explained by higher development costs, operating expenses of new businesses and
depreciation/amortisation. OP Financial Group's significant investments in
service development increased development costs by EUR 35 million. Development
costs totalled EUR 97 million (62). New businesses accounted for EUR 14 million
of the increase in total expenses. Depreciation/amortisation increased by EUR
20 million year on year to EUR 95 million. Personnel costs decreased by 0.7% to
EUR 393 million.
Impairment losses recognised under various income statement items that reduced
earnings amounted to EUR 37 million (58), of which EUR 23 million (23) concerned
loans and receivables. Net impairment loss on loans and receivables were low, at
0.06% (0.06) of the loan and guarantee portfolio.
OP Financial Group's current tax amounted to EUR 106 million (122). The
effective tax rate was 19.0% (19.8).
OP Financial Group's equity capital increased by 4.9% to EUR 10.7 billion. 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 is 3.25%. Interest payable on Profit Shares accrued during the reporting
period is estimated to total EUR 44 million (40). The amount of interest paid
for 2016 totalled EUR 83 million in June 2017. The fair value reserve decreased
by EUR 40 million to EUR 278 million.
Outlook towards the year end
Both the world economy and the euro-area economy developed favourably in the
first half of the year. Economic growth in Finland was strong and broad-based:
exports and the home market rebounded, the housing market picked up and
confidence in the Finnish economy strengthened. Tailwinds in the Finnish economy
are estimated to continue for the second half of the year too. If realised,
political risks and uncertainties both in Finland and in the export markets can,
however, weaken the outlook. A threat to the Finnish economy's positive long-
term development is posed by many structural problems that still remain
unresolved.
The financial sector has adjusted very well to the new type of low interest rate
environment. While low market 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, impairment losses 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
2 August 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 Q1-Q3/2017 1 November 2017
Helsinki, 2 August 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
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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