OP Financial Group’s Interim Report for 1 January–30 September 2020: Earnings before tax EUR 526 million – net interest income and net insurance income increased in an uncertain business environment

OP Financial Group
Interim Report 1 January–30 September 2020
Stock Exchange Release 22 October 2020 09.00 am EEST

OP Financial Group’s Interim Report for 1 January–30 September 2020: Earnings before tax EUR 526 million – net interest income and net insurance income increased in an uncertain business environment

• Earnings before tax amounted to EUR 526 million (676).

• In customer business, net interest income increased by 4% to EUR 960 million (923) and net insurance income by 16% to EUR 476 million (412). Net commissions and fees, EUR 679 million, were at the previous year’s level (679).

• The effects of the COVID-19 pandemic on capital market developments weakened investment income particularly in the first quarter. Investment income fell by 64% year on year, to EUR 76 million (208).

• Total income decreased by 3% to EUR 2,268 million (2,328) (including the overlay approach, income increased by 2%).

• Total expenses rose by 4% to EUR 1,414 million (1,365) due to higher ICT costs, ICT depreciation and amortisation and charges of financial authorities.

• Impairment loss on receivables, EUR 183 million (36), accounted for 0.25% (0.05) of loans and receivables. 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.

• In the year to September, OP Financial Group’s loan portfolio grew by 4% to EUR 94 billion (91) and deposits by 13% to EUR 71 billion (63).

• The CET1 ratio was 18.3% (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 48% to EUR 100 million (193). Net interest income increased by 1% and net commissions and fees decreased by 3%. Impairment loss on receivables increased by EUR 93 million to EUR 118 million (25). The loan portfolio increased by 3% and deposits by 9% in the year to September.

• Corporate Banking earnings before tax decreased by 4% to EUR 221 million (232). Net interest income increased by 6%, net commissions and fees by 19% and net investment income by 45%. Impairment loss on receivables increased by EUR 55 million to EUR 66 million (11). The loan portfolio grew by 4% in the year to September.

• Insurance earnings before tax decreased by 30% to EUR 195 million (278). Net insurance income rose by 15% to EUR 485 million (421). Investment income decreased by EUR 145 million to EUR 8 million (153). The operating combined ratio was 86.0% (91.8).

• Other Operations earnings before tax were EUR 39 million (3). The sale of the Vallila property on 31 January 2020 improved earnings by EUR 96 million. OP Financial Group will continue operating in the property under a long-term lease agreement.

• In January–September, OP Financial Group invested a total of EUR 208 million (219) in business development and improving customer experience.

• New OP bonuses accrued to owner-customers totalled EUR 194 million (191).

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

• OP Financial Group’s earnings before tax for 2020 are expected to be lower than in 2019. "Outlook towards the year end" describes the outlook in greater detail.

OP Financial Group’s key indicators

	Q1–3/2020	Q1–3/2019	Change, %	Q1–4/2019
Earnings before tax, € million	526	676*	-22.2	838
Retail Banking	100	193	-47.9	235
Corporate Banking	221	232	-4.4	311
Insurance	195	278	-30.1	373
Other Operations	39	3	-	-37
New OP bonuses accrued to owner-customers	-194	-191	1.8	-254
Return on equity (ROE), %	4.4	6.0	-1.6**	5.5
Return on equity, excluding OP bonuses, %	6.0	7.6	-1.6**	7.1
Return on assets (ROA), %	0.36	0.51	-0.14**	0.47
Return on assets, excluding OP bonuses, %	0.49	0.64	-0.15**	0.60
	30 Sep 2020	30 Sep 2019	Change, %	31 Dec 2019
CET1 ratio, %	18.3	19.6	-1.3	19.5
Loan portfolio, € billion	94.2	91.0	3.5	91.5
Deposits, € billion	70.7	62.6	12.8	64.0
Ratio of non-performing receivables to loan and guarantee portfolio, %	1.7	1.1	0.6**	1.1
Ratio of impairment loss on receivables to loan and guarantee portfolio, %	0.25	0.05	0.20**	0.09
Owner-customers (1,000)	2,021	1,979	2.1	2,003

*In the fourth quarter of 2019, OP Financial Group adopted an amortisation-based revenue recognition method for the customer margin related to a derivative clause attached to loans with an interest rate cap or interest rate collar. The effect of this change was adjusted retrospectively in OP Financial Group’s retained earnings (under equity). In addition, the income statements and balance sheets for the first three quarters of 2019 were restated to reflect the new revenue recognition practice. The change had no effect on segment reporting. Capital adequacy measurement was not adjusted retrospectively. For more information on this change, see the Financial Statements and the Financial Statements Bulletin for 2019.
**Change in ratio

Comments by President and Group Chief Executive Officer Timo Ritakallio

OP Financial Group’s customer business developed favourably in January–September despite the uncertain business environment caused by the COVID-19 pandemic. Net interest income increased by 4% and net insurance income by 16%. Net commissions and fees were at the previous year's level.

In the year to September, our loan portfolio grew by 4% to EUR 94 billion. The growth rate of deposits accelerated to 13% with the deposit portfolio amounting to EUR 71 billion at the end of September. The number of loan repayment holidays applied for by households and SMEs grew strongly in the spring but returned to its normal level in the summer.

Insurance premium revenue reported by non-life insurance grew by almost 2%. Claims incurred were down by 6% year on year as a result of lower economic activity. In non-life insurance, the operating combined ratio was excellent at 86%.

During the early part of 2020, the capital market decline that resulted from the COVID-19 pandemic decreased our investment income, particularly in the first quarter. In January–September, investment income totalled EUR 76 million, down by 64% compared to the EUR 208 million a year ago. The combined return on investments at fair value reported by the Group's insurance companies was 3.2% (10.4).

Our expenses increased by 4% year on year due to, for example, higher personnel and ICT costs and costs arising from regulatory requirements. Our ICT costs for 2020 are increased by a one-off investment in the IT environment.

OP Financial Group’s earnings before tax for January–September totalled EUR 526 million, down by EUR 150 million year on year. Earnings were reduced in particular by lower investment income and higher impairment loss on receivables. Impairment loss on receivables was increased by the changes in the quality of the loan portfolio that resulted from the COVID-19 pandemic. Despite the prolonged crisis, the number of customers who have run into financial difficulties has remained low. The increase in impairment loss on receivables clearly slowed down in the third quarter. In the first half of 2020, the higher figure resulted from the adoption of the new definition of default, in addition to the COVID-19 pandemic. Earnings before tax for the third quarter, EUR 239 million, were clearly better than in the previous quarters of 2020.

Our capital adequacy is still on a solid basis at 18.3%.

In the last few months, we have launched several new services that further improve customer experience. OP was the first bank in Finland to provide corporate customers with the opportunity to make real-time mass payments in the form of SEPA instant credit transfers. Thanks to this service, companies are able to make urgent payments to payees’ accounts in real time if needed. In asset management, investors showed strong interest in our recently launched special common fund that invests in alternative investment products. We also participated in channelling funding to businesses that promote sustainable development by means of corporate green bonds.

The worst fears of a collapse of the Finnish economy voiced during the first half of 2020 didn’t materialise, and the economy has started to recover from the steep fall experienced in the spring. Nevertheless, the recovery of the Finnish economy to its pre-crisis level will take long. In the last few weeks, the number of COVID-19 infections has again started to increase, and large uncertainty prevails. However, the financial market is stable, largely thanks to the accommodative monetary policy measures taken by central banks. The financial situation of households remains good; so far, there are no signs of a new wave of temporary layoffs.

Similarly to other crises, the recession caused by the COVID-19 pandemic will have long-term consequences. The crisis both accelerates and decelerates existing megatrends. Businesses and governments must adapt to a new kind of economic environment. Decisions taken today may have long-ranging consequences. Good crisis management is important, but even during a crisis we must remember to renew ourselves and look into the future. We must learn to operate in a way that secures both our health and the functioning of our society and economy.

January–September

OP Financial Group's earnings before tax amounted to EUR 526 million (676). The figure decreased by EUR 150 million over the previous year. In customer business, net interest income and net insurance income increased. In addition, the sale of the Vallila property increased earnings. The effects of the COVID-19 pandemic on the 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, and growth in expenses.

Net interest income increased by 4.1% to EUR 960 million. Net interest income reported by the Retail Banking segment increased by EUR 3 million and that by the Corporate Banking segment by EUR 16 million. In the year to September, OP Financial Group’s loan portfolio grew by 3.5% to EUR 94.2 billion and deposits by 12.8% to EUR 70.7 billion. New loans drawn down by customers during January–September totalled EUR 16.6 billion (18.6).

Net insurance income totalled EUR 476 million (412). The Insurance segment’s non-life insurance premium revenue increased by 1.9% to EUR 1,127 million. Claims incurred decreased by 6.1% to EUR 664 million. The operating combined ratio was 86.0% (91.8).

Net commissions and fees of EUR 679 million remained at the same level as a year ago. Net commissions and fees from mutual funds increased by EUR 7 million, those from securities issuance by EUR 5 million and those from securities brokerage by EUR 5 million. Meanwhile, commission income from lending decreased by EUR 7 million and net commission and fees from insurance brokerage by EUR 6 million.

Net investment income decreased by EUR 242 million to EUR 31 million. Net income from financial assets at fair value through other comprehensive income totalled EUR 31 million (146). Capital gains recognised totalled EUR 26 million (127).

Net income from financial assets recognised at fair value through profit or loss totalled EUR 259 million (683). 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. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes decreased earnings by EUR 13 million (–15). In life insurance, the net change in short-term supplementary interest rate provisions decreased earnings by EUR 9 million (–12). Net income from investment property decreased by EUR 33 million to EUR –8 million.

The 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 equity. Total investment income fell by 63.5% year on year, to EUR 76 million. The combined return on investments at fair value of OP Financial Group's insurance companies was 3.2% (10.4).

Other operating income rose by EUR 80 million year on year to EUR 121 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 increased by 3.6% to EUR 1,414 million. Personnel costs increased by 3.7% to EUR 594 million. Depreciation/amortisation and impairment loss on PPE and intangible assets increased by 3.6% to EUR 196 million. Planned depreciation/amortisation increased by 6.1% to EUR 194 million due to higher development expenditure recognised for prior years. Impairment write-downs were EUR 2 million (6).

Other operating expenses increased by 3.5% to EUR 624 million. ICT costs increased by EUR 32 million to EUR 286 million. A one-off investment in the IT environment further increases ICT costs for 2020. Development costs were EUR 135 million (125). Charges of financial authorities increased by 21.2% to EUR 42 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 200 million (48), of which EUR 183 million (36) concerned loans and receivables. During the COVID-19 crisis, customers have actively applied for repayment holidays on their loans and changes to their repayment schedules. Combined with the COVID-19 related changes in macroeconomic parameters applied in the calculation of expected credit losses, this increased impairment loss on receivables by EUR 72 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 of EUR 82 million (42). Loss allowance was EUR 690 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 1.7% (1.1). Impairment loss on loans and receivables accounted for 0.25% (0.05) of the loan and guarantee portfolio.

OP Financial Group's current tax amounted to EUR 110 million (134). The effective tax rate was 20.9% (19.9).

OP Financial Group's equity amounted to EUR 12.8 billion (12.6). Equity included EUR 2.9 billion (3.0) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.2). The return target for Profit Shares for 2020 is 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 71 million (72). The amount of interest to be paid for 2019 in January 2021 totalled EUR 97 million.

Comprehensive income for the period totalled EUR 435 million (869). A year ago, comprehensive income was increased by changes in the fair value reserve.

Outlook towards the year end

During the third quarter, the world economy began to recover from the collapse experienced in spring. However, the recovery was uneven with GDP clearly below last year’s level almost everywhere in the world. In autumn, the number of COVID-19 infections rebounded but so far the consequences have been less severe than in spring. The financial market has remained calm, partly due to major support from central banks. Interest rates are exceptionally low throughout.

A gradual recovery of the economy is expected to continue if the COVID-19 pandemic remains reasonably under control. However, the outlook is still uncertain both in the domestic and the export market. 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 exceptional uncertainty caused by the COVID-19 pandemic increases impairment loss on receivables and weakens investment income at OP Financial Group. OP Financial Group’s earnings before tax for 2020 are expected to be lower than in 2019.

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 Chief Executive Officer Timo Ritakallio via a webcast on 22 October 2020 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 interim reports.

Time of publication of 2020 reports:

OP Financial Group's Report by the Board of Directors
and Financial Statements for 2020 Week 10, 2021
OP Financial Group's Corporate Governance Statement 2020 Week 10, 2021
OP Financial Group's Annual Review 2020 (incl. CSR Reporting) Week 10, 2021
OP Financial Group’s Capital Adequacy and Risk Management Report 2020 Week 10, 2021
Remuneration reporting Week 10, 2021

Schedule for Financial Statements Bulletin 2020 and Interim Reports and Half-year Financial Report in 2021:

Financial Statements Bulletin 2020 10 February 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, 22 October 2020

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 two million owner-customers and 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