OP Financial Group’s Financial Statements Bulletin for 1 January–31 December 2020: Earnings before tax EUR 785 million – net interest income and net insurance income increased in an uncertain business environment

OP Financial Group
Financial Statements Bulletin 1 January–31 December 2020
10 February 2021 09.00 am EET

OP Financial Group’s Financial Statements Bulletin for 1 January–31 December 2020: Earnings before tax EUR 785 million – net interest income and net insurance income increased in an uncertain business environment

• Earnings before tax amounted to EUR 785 million (838).

• In customer business, net interest income increased by 4% to EUR 1,284 million (1,241) and net insurance income by 36% to EUR 572 million (421). Net commissions and fees totalled EUR 931 million (936).

• The effects of the Covid-19 pandemic on capital market developments weakened investment income, particularly in the first quarter. Investment income fell by 58% year on year, to EUR 181 million (425).

• Total income decreased by 3% to EUR 3,103 million (3,181).

• Total expenses decreased by 3% to EUR 1,839 million (1,903). The transfer of the remaining statutory earnings-related pension liability to Ilmarinen Mutual Pension Insurance Company at the end of 2020 reduced OP Financial Group’s pension costs by EUR 96 million. Excluding the transfer, total expenses increased by 2% to EUR 1,935 million.

• Impairment loss on receivables was EUR 225 million (87), accounting for 0.23% (0.09) of the loan and guarantee portfolio. Impairment loss on receivables was increased by the effects of the Covid-19 pandemic on the loan portfolio quality and by the adoption of the new definition of default based on a regulatory change.

• OP Financial Group’s loan portfolio grew year on year by 2% to EUR 94 billion (91) and deposits by 11% to EUR 71 billion (64).

• The CET1 ratio was 18.9% (19.5). The lower ratio was affected by the increase in the loan portfolio and the adoption of the new definition of default.

• Retail Banking earnings before tax decreased by 51% to EUR 115 million (235). Net interest income increased by EUR 3 million and net commissions and fees decreased by EUR 10 million. Impairment loss on receivables increased by EUR 136 million to EUR 172 million (36). The loan portfolio increased by 2% and deposits by 9% year on year.

• Corporate Banking earnings before tax increased by 13% to EUR 349 million (311). Net interest income increased by 3%, net commissions and fees by 22% and net investment income by 20%. Impairment loss on receivables totalled EUR 53 million (51). The loan portfolio grew by 1% year on year.

• Insurance earnings before tax decreased by 7% to EUR 348 million (373). Net insurance income grew by 35% to EUR 582 million (431). Investment income decreased by EUR 247 million to EUR 84 million (331). The operating combined ratio improved to 87.8% (92.7). The transfer of statutory earnings-related pension liability reduced pension costs by EUR 85 million.

• Other Operations earnings before tax were EUR 3 million (–37). The sale of the Vallila property on 31 January 2020 improved earnings by EUR 96 million. OP Financial Group continues operating in the property under a long-term lease agreement.

• In 2020, OP Financial Group invested a total of EUR 282 million (313) in business development and improving customer experience.

• New OP bonuses accrued to owner-customers totalled EUR 255 million (254).

• The number of owner-customers in OP cooperative banks totalled 2.0 million (2.0). OP Financial Group had a total of 1.3 million (1.2) joint banking and insurance customers.

• OP Financial Group complies with the recommendation of the European Central Bank (ECB) in its profit distribution. Following the recommendation, the Group discussed the level of profit distribution with the ECB Joint Supervisory Team, and the interest on Profit Shares for 2019 was paid to holders of those shares on 8 February 2021.

• Earnings before tax for 2021 are expected to be lower than in 2020. For more detailed information on the outlook, see “Outlook for 2021”

OP Financial Group’s key indicators

	Q1–4/2020	Q1–4/2019	Change, %
Earnings before tax, € million	785	838	-6.3
Retail Banking	115	235	-51.2
Corporate Banking	349	311	12.5
Insurance	348	373	-6.5
Other Operations	3	-37	-
New OP bonuses accrued to owner-customers, € million	-255	-254	0.4
Return on equity (ROE), %	5.0	5.5	-0.5*
Return on equity, excluding OP bonuses, %	6.6	7.1	-0.6*
Return on assets (ROA), %	0.42	0.47	-0.05*
Return on assets, excluding OP bonuses, %	0.55	0.60	-0.06*
	31 Dec 2020	31 Dec 2019	Change, %
CET1 ratio, %	18.9	19.5	-0.6*
Loan portfolio, € billion	93.6	91.5	2.4
Deposits, € billion	70.9	64.0	10.8
Ratio of non-performing receivables to loan and guarantee portfolio, %	2.0	1.1	0.9*
Ratio of impairment loss on receivables to loan and guarantee portfolio, %	0.23	0.09	0.14*
Owner-customers (1,000)	2,025	2,003	1.1

*Change in ratio

Comments by President and Group Chief Executive Officer Timo Ritakallio

OP Financial Group’s customer business grew in 2020 despite the challenging business environment. Net interest income and net insurance income increased year on year, and our market share remained strong in home loans and corporate loans as well as in the non-life insurance business. Our loan portfolio grew by 2% to EUR 94 billion and deposit portfolio by 11% to EUR 71 billion.

The decrease in net investment income had a negative effect on our earnings, particularly in the first quarter as the Covid-19 pandemic caused a decline in the capital market. Impairment loss on receivables also reduced earnings. In addition to the Covid-19 crisis, regulatory changes increased the impairment loss on receivables.

Earnings before tax for 2020 amounted to EUR 785 million, which was EUR 53 million lower than the year before. The sale of the Vallila property improved earnings by EUR 96 million. In addition, the transfer of the remaining statutory earnings-related pension liability to Ilmarinen Mutual Pension Insurance Company reduced OP Financial Group’s pension costs by EUR 96 million, which had a positive impact on earnings.

Our capital adequacy is still on a very solid basis: our CET1 ratio was 18.9% at the end of 2020.

The number of OP cooperative bank owner-customers continued to grow in 2020. In 2021, we will continue to focus on improving owner-customers’ experience of benefits.

In 2020, more than 200,000 persons were registered as new unitholders in mutual funds. More than half of them, almost 60%, started investing through OP’s mutual funds.

During the Covid-19 crisis, we granted repayment holidays to 115,000 private customers and 11,000 corporate customers. Demand for repayment holidays from households and enquiries for loan modifications from corporate customers levelled off to their pre-crisis levels towards the end of the year.
The exceptional year 2020 changed customer behaviour. Cash withdrawals decreased by more than 20% from the previous year. The use of OP-mobile and OP Business mobile shows strong growth. In 2020, logins to OP-mobile increased by 34% and those to OP Business mobile by as much as 50%. We are expecting the same trend to continue as well as a further decline in visits to branches.

In 2021, the big question is how the economy will recover from the Covid-19 crisis. Interest rates are expected to remain unchanged. The Covid-19 shock of spring 2020 hit Finland less than feared, and the economy began to recover already during summer. Since autumn, the second wave of the Covid-19 pandemic has slowed down the recovery but the outlook is brighter following the gradual increase in vaccination coverage. However, the business environment will continue to involve major uncertainties. For some businesses, the recovery may be too late. Meanwhile, the financial market is looking further into the future, to the economic pickup expected in autumn 2021.

As regards the finances of businesses and households overall, they have done relatively well during the crisis. In addition to measures taken by businesses themselves, rapid actions in the economic policy have helped them in navigating through the pandemic. The next challenge is to see what the development will be like after the economic growth spurt that will follow the end of the pandemic. The medium-term growth outlook is sluggish, and weaknesses exposed by the crisis will pose risks. The heavy indebtedness of public finances is one of our biggest concerns.

January–December

OP Financial Group’s earnings before tax amounted to EUR 785 million (838). The figure decreased by EUR 53 million over the previous year. As regards income from customer business, net interest income and net insurance income increased. Earnings were also increased by the sale of the Vallila property as well as the transfer of the management of the remaining statutory earnings-related pension cover and the related insurance portfolio to Ilmarinen Mutual Pension Insurance Company.

The effects of the Covid-19 pandemic on loan portfolio quality increased impairment loss on receivables. Market developments caused by the pandemic decreased investment income, particularly in the first quarter. Earnings were also affected by the adoption of a new definition of default in the first quarter, based on a regulatory change, that increased impairment loss on receivables.

Net interest income increased by 3.5% to EUR 1,284 million. Net interest income reported by the Retail Banking segment increased by EUR 3 million and that by the Corporate Banking segment by EUR 11 million. OP Financial Group’s loan portfolio grew by 2.4% to EUR 93.6 billion and deposits by 10.8% to EUR 70.9 billion, year on year. New loans drawn down by customers in 2020 totalled EUR 22.6 billion (25.1).

Net insurance income increased by 35.9% to EUR 572 million. The Insurance segment’s non-life insurance premium revenue increased by 1.9% to EUR 1,506 million. Claims incurred decreased by 11.7% to EUR 951 million. The reduction in the discount rate for insurance liability increased claims incurred by EUR 45 million (136). Claims incurred as a result of the Covid-19 pandemic totalled EUR 37 million. The operating combined ratio improved to 87.8% (92.7).

Net commissions and fees totalled EUR 931 million (936). Net commissions and fees for mutual funds increased by EUR 11 million and those for payment transfer services by EUR 10. Meanwhile, net commissions and fees for asset management fell by EUR 27 million.

Net investment income decreased by 65.3% to EUR 184 million. Net income from financial assets at fair value through other comprehensive income totalled EUR 37 million (192). Capital gains were EUR 93 million lower than the year before. Capital gains on all financial instruments totalled EUR 43 million (197).

Net income from financial assets recognised at fair value through profit or loss totalled EUR 438 million (726). The fair value of equities, and notes and bonds decreased significantly in the first quarter. However, after that the situation in the securities market improved. An item corresponding to the decrease in the discount rate of the insurance liability for non-life insurance, EUR 45 million (136), was shown as positive value change in net investment income. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes decreased earnings by EUR 19 million (–12).

Net income from investment property totalled EUR –30 million (19). Fair value on investment property decreased by EUR 35 million, whereas a year ago they increased by EUR 17 million.

An 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 shareholders’ equity. The overlay approach decreased investment income by EUR 3 million (–105). Total investment income fell by 57.6% year on year, to EUR 181 million. The combined return on investments at fair value of OP Financial Group's insurance companies was 4.9% (8.9).

Other operating income rose by EUR 78 million year on year to EUR 132 million. The sale of the Vallila property increased other operating income in the first quarter. OP Financial Group recognised a capital gain of EUR 98 million on the sale in other operating income and an expense of EUR 2 million in other operating expenses. The Group will continue operating in the property under a long-term lease agreement, and the property was recognised as a right-of-use asset in the balance sheet. The value of the right-of-use asset under IFRS 16 was EUR 138 million and the lease liability was EUR 225 million. A year ago, the rise in other operating income was explained by the sale of occupational healthcare service business.

Total expenses decreased by 3.4% to EUR 1,839 million and personnel costs decreased by 8.6% to EUR 715 million. The transfer of the remaining statutory earnings-related pension liability at the end of 2020 reduced OP Financial Group’s pension costs by EUR 96 million. Excluding the effect of this transfer, total expenses increased by 1.7% to EUR 1,935 million and personnel costs by 3.7% to EUR 811 million. Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 1.7% to EUR 273 million. Planned depreciation/amortisation increased by 6.6% to EUR 260 million due to higher development expenditure recognised for prior years. Impairment write-downs were EUR 13 million (33).

Other operating expenses increased by 0.9% to EUR 852 million. ICT costs increased by EUR 41 million to EUR 395 million. A one-off investment in the IT environment increased ICT costs for 2020. Development costs were EUR 183 million (183). Charges of financial authorities increased by 16.6% to EUR 52 million as a result of a higher EU stability contribution.

Impairment loss on loans and receivables and on investments recognised under various income statement items that reduced earnings amounted to EUR 244 million (110), of which EUR 225 million (87) concerned loans and receivables. During the Covid-19 crisis, customers actively applied for repayment holidays on their loans and changes to their repayment schedules. Combined with Covid-19 related extra provisions related to certain sectors and the changes in macroeconomic parameters applied in the calculation of expected credit losses, this increased impairment loss on receivables by EUR 88 million. The adoption of the new definition of default in the first quarter increased impairment loss on receivables by EUR 44 million. Rearrangement of receivables increased final net loan losses that came to EUR 107 million (45). Loss allowance was EUR 708 million (585) at the end of the reporting period. The ratio of non-performing receivables in loans and receivables to the loan and guarantee portfolio was 2.0% (1.1). Impairment loss on loans and receivables accounted for 0.23% (0.09) of the loan and guarantee portfolio.

OP Financial Group's income tax amounted to EUR 144 million (168). The effective tax rate was 18.3% (20.1). The rate decreased due to the transfer of statutory earnings-related pension liability and the group contributions provided.

OP Financial Group’s equity amounted to EUR 13.1 billion (12.6). Equity included EUR 3.0 billion (3.0) in Profit Shares, terminated Profit Shares accounting for EUR 0.3 billion (0.3). The return target for Profit Shares for 2020 was 3.25%. Interest payable on Profit Shares is estimated to total EUR 95 million. The amount of interest paid for 2019 on 8 February 2021 totalled EUR 97 million.

Comprehensive income totalled EUR 734 million (926). A year ago, comprehensive income was increased by changes in the fair value reserve.

Outlook for 2021

The number of Covid-19 infections increased in most countries over the autumn. As a result of this, the economic recovery that started last summer faltered somewhat. Towards the end of the year, the effects of the pandemic on the economy began to ease off, mainly affecting the service sector. Economic recovery will continue as the pandemic will continue to subside. In financial markets, expectations are positive. Policy actions by central banks are expected to calm down markets and keep interest rates low.

The Covid-19 pandemic will continue to cause uncertainty over the economic outlook. A sudden worsening of the pandemic would affect OP Financial Group in three ways: economic uncertainty and uncertainty in the financial and capital market would increase, a rise in financial difficulties among customers would increase credit risk and decrease the demand for services, and a worsening disease situation could make it more difficult for OP Financial Group to run its operations efficiently.

The Covid-19 pandemic will cause uncertainty in the amount of impairment loss on receivables and investment income. OP Financial Group's earnings before tax for 2021 are expected to be lower than in 2020.

All forward-looking statements in this financial statements bulletin 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 Chief Executive Officer Timo Ritakallio via a webcast on 10 February 2021 at 11am. Media enquiries: OP Corporate Communications, tel. +358 10 252 8719, viestinta@op.fi

OP Corporate Bank plc and OP Mortgage Bank plc will publish their own financial statements bulletins.

Financial reporting in 2021

Time of publication of 2020 reports:

OP Financial Group's Report by the Board of Directors and Financial Statements for 2020	Week 10
OP Financial Group's Corporate Governance Statement 2020	Week 10
OP Financial Group's Annual Review 2020 (incl. CSR Reporting)	Week 10
OP Financial Group’s Capital Adequacy and Risk Management Report 2020	Week 10
Remuneration Report for Governing Bodies at OP Financial Group 2020	Week 10
Remuneration Policy for Governing Bodies at OP Financial Group	Week 10

Schedule for Interim Reports in 2021:

Interim Report Q1/2021	28 April 2021
Half-year Financial Report H1/2021	28 July 2021
Interim Report Q1−3/2021	27 October 2021

Helsinki, 10 February 2021

OP Cooperative
Board of Directors

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

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OP Financial Group is Finland’s largest financial services group, with over two million owner-customers and more than 12,000 employees. We provide a comprehensive range of banking and insurance services for private and corporate customers. OP Financial Group consists of OP cooperative banks, its central cooperative OP Cooperative, and the latter's subsidiaries and affiliates. Our mission is to promote the sustainable prosperity, security and wellbeing of our owner-customers and operating region. www.op.fi