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OP Financial Group’s Interim Report for 1 January–30 September 2021: Earnings before tax EUR 858 million – strong increase in income from customer business

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OP Financial Group
Interim Report 1 January–30 September 2021
Stock Exchange Release 27 October 2021 09.00am EEST

OP Financial Group’s Interim Report for 1 January–30 September 2021: Earnings before tax EUR 858 million – strong increase in income from customer business

  • Earnings before tax improved by 63% to EUR 858 million (526).

  • Income from customer business increased by a total of 7% to EUR 2,274 million (2,116). Net interest income increased by 1% to EUR 971 million (960), net insurance income by 14% to EUR 542 million (476) and net commissions and fees by 12% to EUR 761 million (679).

  • Investment income rose by EUR 128 million, to EUR 204 million (76) year on year. on year.

  • Total income increased by 14% to EUR 2,573 million (2,268).

  • Total expenses remained at the previous year’s level at EUR 1,420 million (1,414).

  • Impairment loss on receivables was EUR 95 million (183), or 0.13% (0.25) of the loan and guarantee portfolio. A year ago, impairment loss on receivables was increased by the effects of the Covid-19 pandemic on 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 by 1% to EUR 95 billion (94) and deposits by 6% to EUR 75 billion (71) year on year.

  • The CET1 ratio was 19.0% (18.9).

  • Retail Banking earnings before tax improved to EUR 224 million (100). Net interest income increased by 3% and net commissions and fees by 8%. Impairment loss on receivables decreased by EUR 48 million to EUR 70 million (118). The loan portfolio grew by 2% and deposits by 6% in the year to September.

  • Corporate Banking earnings before tax improved to EUR 356 million (221). Net interest income increased by 3%, net commissions and fees by 38% and net investment income by 23%. Impairment loss on receivables decreased by EUR 41 million to EUR 25 million (66).

  • Insurance earnings before tax improved to EUR 380 million (195). Net insurance income grew by 14% to EUR 552 million (485). Investment income rose by EUR 127 million to EUR 135 million (8). The operating combined ratio improved to 81.8% (86.0) in non-life insurance.

  • Other Operations earnings before tax were EUR –70 million (39). A year ago, the sale of the Vallila property improved earnings by EUR 96 million.

  • New OP bonuses accrued to owner-customers totalled EUR 157 million (194). The accrual of OP bonuses was changed as of 1 November 2020.

  • OP Financial Group paid interest on Profit Shares for 2020 to holders of those shares on 4 October 2021. In its profit distribution, OP Financial Group has complied with the ECB’s recommendation that expired on 30 September 2021.

  • Pohjola Insurance Ltd, part of OP Financial Group, will sell Pohjola Hospital Ltd to Pihlajalinna Terveys Oy for EUR 31.8 million. The transaction is subject to approval by the Finnish Competition and Consumer Authority.

  • OP Financial Group announced in a stock exchange release on 16 August 2021 that it has improved its earnings outlook for 2021. Earnings before tax for 2021 are expected to be higher than in 2020. For more detailed information on the outlook, see "Outlook towards the year end".

OP Financial Group’s key indicators

Q1–3/2021

Q1–3/2020

Change, %

Q1–4/2020

Earnings before tax, € million

858

526

63.1

785

Retail Banking

224

100

123.3

115

Corporate Banking

356

221

60.6

349

Insurance

380

195

95.4

348

Other Operations

-70

39

-278.8

3

New OP bonuses accrued to owner-customers, € million

-157

-194

-

-255

Return on equity (ROE), %

6.9

4.4

2.5*

5.0

Return on equity, excluding OP bonuses, %

8.1

6.0

2.1*

6.6

Return on assets (ROA), %

0.56

0.36

0.20*

0.42

Return on assets, excluding OP bonuses, %

0.66

0.49

0.16*

0.55

30 Sep 2021

30 Sep 2020

Change, %

31 Dec 2020

CET1 ratio, %

19.0

18.3

0.7*

18.9

Loan portfolio, € billion

95.2

94.2

1.1

93.6

Deposits, € billion

74.6

70.7

5.5

70.9

Ratio of non-performing exposures to exposures, %**

2.4

2.1

0.3*

2.5

Ratio of impairment loss on receivables to loan and guarantee portfolio, %

0.13

0.25

-0.12*

0.23

Owner-customers (1,000)

2,045

2,021

1.2

2,025

Comparatives deriving from the income statement are based on figures for the corresponding periods a year ago. Unless otherwise specified, balance-sheet and other cross-sectional figures on 31 December 2020 are used as comparatives.
*Change in ratio
** The name and content of the ratio was changed in Q1/2021. Comparatives have been adjusted accordingly. More detailed information on the change can be found under table Non-performing and forborne exposures in the Risk exposure section of this Interim Report.

Comments by President and Group Chief Executive Officer Timo Ritakallio

OP Financial Group's customer business continued to grow strongly in the third quarter. Earnings before tax for January–September were excellent at EUR 858 million, representing growth of 63% from a year earlier. All three business segments improved their earnings markedly.

Income from customer business increased by a total of 7%, particularly due to higher net commissions and fees and net insurance income. Investment income increased markedly too. Total expenses remained at the previous year’s level. Impairment loss on receivables was lower than a year ago.

OP Financial Group’s capital adequacy continued to be strong. At the end of September, the CET1 ratio was 19.0%, ranking among the best ratios reported by European banks.

Investment in mutual funds continued to grow strongly. In January–September, OP’s mutual funds attracted around 150,000 new unitholders and more than 125,000 new agreements were made on systematic investment. In August, we passed the milestone of 500,000 active agreements on systematic investment directly in mutual funds. Customers are increasingly interested in responsible investment products: the number of unitholders in OP-Climate, our most popular fund since the beginning of 2021, had grown almost 64% by the end of September. Trading in equities has also been record high.

OP Financial Group’s strategy further emphasises the importance of responsible business. Guided by growing stakeholder expectations and responsibility regulation in the financial sector, we are embedding corporate responsibility even more firmly in our investment and lending processes. The proportion of responsible products and services is constantly growing.

Merger projects between OP cooperative banks are underway around Finland. In their September meetings, the Representative Assemblies of Helsinki Area Cooperative Bank, Itä-Uudenmaan Osuuspankki and Uudenmaan Osuuspankki decided to merge to form a single, more competitive bank in the Helsinki Metropolitan Area, offering even better services. The main goal is to improve the customer experience in Finland’s key growth area.

In line with our strategy, over the past three years we have considerably simplified the structure of the central cooperative consolidated, achieving major cost savings through these actions. We will complete the restructuring by the end of 2021.

Economic recovery from the recession caused by the Covid-19 pandemic continued in Finland and globally in the third quarter. The recovery has been exceptionally rapid despite being hampered by problems in production chains, for example. However, the Covid-19 pandemic continues to overshadow the economic outlook. Rising energy prices, which increase the risk of inflation accelerating in the long term, are also raising concerns. In the financial market, uncertainty and expectations of a rise in long-term interest rates have increased.

Economic policy has been unable to keep up with the sheer rapidity of the economic upturn, which is also posing challenges to businesses. Unfortunately, the structural reforms urgently needed in the Finnish economy seem to have been postponed and there is a risk that short-sighted solutions will damage Finland’s competitiveness. Without structural reforms, we face the risk of a curtailed growth spurt in the Finnish economy.

January–September

OP Financial Group’s earnings before tax amounted to EUR 858 million (526), up by EUR 332 million from the previous year. Income from customer business, or net interest income, net insurance income and net commissions and fees, showed strong growth. Earnings were also improved by higher investment income and lower impairment loss on receivables.

Net interest income increased by 1.1% to EUR 971 million. Net interest income reported by the Retail Banking segment increased by 3.0% and that by the Corporate Banking segment by 2.7%. Meanwhile, net interest income reported by the Other Operations segment decreased by EUR 18 million. OP Financial Group’s loan portfolio grew by 1.1% to EUR 95.2 billion and deposits by 5.5% to EUR 74.6 billion, year on year. New loans drawn down by customers during the reporting period totalled EUR 18.3 billion (16.6).

Net insurance income increased by 13.7% to EUR 542 million. The Insurance segment’s non-life insurance premium revenue increased by 2.1% to EUR 1,151 million. Claims incurred decreased by 6.3% to EUR 635 million. Operating combined ratio reported by non-life insurance improved to 81.8% (86.0).

Net commissions and fees totalled EUR 761 million (679). Net commissions and fees for payment transfer services increased by EUR 14 million and those for deposits by EUR 16 million. Fund and management fees grew by EUR 33 million.

Net investment income increased by EUR 222 million to EUR 253 million. Net income from financial assets at fair value through other comprehensive income totalled EUR 52 million (31), of which capital gains accounted for EUR 10 million (16).

Net income from financial assets recognised at fair value through profit or loss totalled EUR 98 million (259). Net income from financial assets held for trading decreased by a total of EUR 348 million due to changes in the fair value of derivatives. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes improved earnings by EUR 15 million (–11). The figure a year ago has been adjusted to correspond to the current accounting. Income from equity instruments recognised at fair value in the income statement increased by a total of EUR 180 million year on year. When the Covid-19 crisis broke out a year ago, the fair value of equities decreased significantly. Life insurance items, which include, for example, changes in technical items, increased net investment income by EUR 335 million to EUR 98 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 48 million, while a year ago it increased investment income by EUR 45 million. Total investment income rose by EUR 128 million year on year, to EUR 204 million. Capital gains on all financial instruments recognised through fair value reserve totalled EUR 128 million (26). The combined return on investments at fair value of OP Financial Group’s insurance companies was 0.5% (3.2).

Other operating income decreased year on year to EUR 47 million (121). The sale of Checkout Finland Ltd to Paytrail Oyj on 30 April 2021 increased other operating income. A year ago, the sale of the Vallila property increased other operating income, for which OP Financial Group recognised a capital gain of EUR 98 million 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.

Total expenses of EUR 1,420 million (1,414) were at the previous year’s level. Personnel costs increased by 10.4% to EUR 656 million due to higher provisions for performance-based bonuses and a higher headcount. Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 2.1% to EUR 192 million.

Other operating expenses decreased by 8.2% to EUR 573 million. ICT costs decreased by EUR 35 million to EUR 251 million. A one-off investment in the IT environment increased ICT costs a year ago. Development costs were EUR 128 million (135). Charges of financial authorities increased by 26.4% to EUR 53 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 98 million (200), of which EUR 95 million (183) concerned loans and receivables. A year ago, customers actively applied for repayment holidays on their loans and changes to their repayment schedules due to the Covid-19 crisis. Combined with the changes in macroeconomic parameters applied in the calculation of expected credit losses, this increased impairment loss on receivables by EUR 72 million in January–September 2020. In addition, the adoption of the new definition of default in the first quarter of 2020 increased impairment loss on receivables by EUR 44 million in January–September 2020. Final net loan losses recognised totalled EUR 98 million (82). Loss allowance was EUR 702 million (708) at the end of the reporting period. Non-performing exposures accounted for 2.4% (2.5) of the exposures. Impairment loss on loans and receivables accounted for 0.13% (0.25) of the loan and guarantee portfolio.

OP Financial Group’s income tax amounted to EUR 164 million (110). The effective tax rate was 19.2% (20.9).

Non-life insurance will focus on its core business and sell its hospital business. In the second quarter, Pohjola Hospital was classified as a non-current asset held for sale. Hospital business assets recognised in the balance sheet totalled EUR 9 million and liabilities EUR 7 million at the end of the reporting period.

OP Financial Group’s equity amounted to EUR 13.7 billion (13.1). Equity included EUR 3.0 billion (3.0) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.3). The return target for Profit Shares for 2021 is 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 72 million (71). The amount of interest paid for 2020 on 4 October 2021 totalled EUR 95 million and that paid for 2019 on 8 February 2021 totalled EUR 97 billion.

Comprehensive income totalled EUR 672 million (435). Changes in the fair value reserve decreased comprehensive income by EUR 65 million. A year ago, changes in the fair value reserve increased comprehensive income by EUR 32 million.

Outlook towards the year end

The world and Finnish economies continued their recovery in the third quarter, but the speed of recovery began to tail off. The recovery was strengthened by the lifting of Covid-19 restrictions, which boosted the service sectors in particular. However, industry suffered from supply chain problems caused by the rapid economic recovery and partly by the Covid-19 pandemic.

Prices of many raw materials have risen as a result of the fast recovery, pushing up inflation. Although the inflationary surge is largely expected to be transient, a rise in energy prices in the autumn revived inflation concerns in the market. Uncertainty in the stock market grew in the early autumn and interest rate expectations rose.

The recovery is expected to continue in the near term. Household and corporate finances in Finland are healthy and the mood on the housing market should remain favourable. The outlook for short-term market rates is stable. However, several factors are expected to increase uncertainty about the future. Restrictions due to the Covid-19 pandemic may still be resumed, slowing the recovery. Higher energy prices may weaken spending power, and production chain problems could lead to interruptions in manufacturing. Uncertainty may also be reflected in the financial market.

A sudden worsening of the pandemic would affect OP Financial Group in three ways: economic, financial and capital market uncertainty 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.

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

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 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 Executive Chair Timo Ritakallio in a press conference on 27 October 2021 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc and OP Mortgage Bank plc will publish their own interim reports.


Financial reporting

Time of publication of 2021 reports:

OP Amalgamation Capital Adequacy Report 30 September 2021

Week 44


OP Financial Group's Report by the Board of Directors and Financial Statements for 2021

Week 10

OP Financial Group's Corporate Governance Statement 2021

Week 10

OP Financial Group's Annual Review 2021 (incl. CSR Reporting)

Week 10

OP Financial Group’s Capital Adequacy and Risk Management Report 2021

Week 10

Remuneration Report for Governing Bodies at OP Financial Group 2021

Week 10

Remuneration Policy for Governing Bodies at OP Financial Group

Week 10

Schedule for Financial Statements Bulletin 2021 and Interim Reports and Half-year Financial Report in 2022:

Financial Statements Bulletin 2021

9 February 2022

Interim Report Q1/2022

4 May 2022

Half-year Financial Report H1/2022

27 July 2022

Interim Report Q1−3/2022

26 October 2022

OP Amalgamation Capital Adequacy Report 31 March 2022

Week 19

OP Amalgamation Capital Adequacy Report 30 June 2022

Week 31

OP Amalgamation Capital Adequacy Report 30 September 2022

Week 44

Helsinki, 27 October 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

DISTRIBUTION
Nasdaq Helsinki Ltd
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London Stock Exchange
Major media
op.fi

OP Financial Group is Finland’s largest financial services group, with 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


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