OP Mortgage Bank: Interim Report for 1 January–30 September 2020

OP Mortgage Bank
Interim Report
Stock Exchange Release 22 October 2020 at 10.00am EEST

OP Mortgage Bank: Interim Report for 1 January–30 September 2020

OP Mortgage Bank (OP MB) is part of OP Financial Group and its role is to raise, together with OP Corporate Bank plc, funding for OP from money and capital markets. OP MB is responsible for the Group's funding for the part of covered bond issuance.

Financial standing

The intermediary loans and loan portfolio of OP MB totalled EUR 15,056 million (14,335)* on 30 September 2020. OP MB issued a 1 billion-euro fixed-rate covered bond with a maturity of 8.25 years in international capital markets in January. Out of the proceeds of the bond, EUR 984 million were intermediated to 77 OP cooperative banks in the form of intermediary loans in April. In February, a new extension of an intermediary loan model was performed on a bond issued in February 2019 that will mature in 2029. As part of this extension, seven OP cooperative banks applied for an intermediary loan from OP MB at a total amount of EUR 185 million.

In April, OP MB issued a 500 million-euro retained covered bond with a maturity of two years. Out of the proceeds of the bond, EUR 100 million was intermediated to an OP cooperative bank in the form of an intermediary loan in June. In April, OP MB also issued a 300 million-euro retained covered bond with a maturity of eight years. The proceeds of the bond were intermediated in full to five OP cooperative banks in the form of intermediary loans. The bond issues in April were performed as internal issues within OP Financial Group.

On 30 September 2020, 120 OP cooperative banks had a total of EUR 10,255 million (8,706) in intermediate loans from OP MB.

Impairment loss on receivables increased to EUR 1.3 million (0.0). As a result of the coronavirus crisis, customers have actively applied for repayment holidays on their loans. Combined with the changes in macroeconomic parameters applied in the calculation of expected credit losses, this increased the amount of expected credit losses. The new definition of default adopted in March also increased the amount of expected credit losses.

The company's financial standing remained stable throughout the reporting period. Earnings before tax amounted to EUR 6.3 million (11.8).

*The comparatives for 2019 are given in brackets. For income statement and other aggregated figures, January–September 2019 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2019) serve as comparatives.

Collateralisation of bonds issued to the public

On 30 September 2020, loans as collateral in security of the covered bonds issued under the Euro Medium Term Covered Note programme worth EUR 20 billion established on 12 November 2010 under the Act on Mortgage Credit Banks (Laki kiinnityspankkitoiminnasta (688/2010)) totalled EUR 15,392 million.

Capital adequacy and capital base

OP MB’s Common Equity Tier 1 (CET1) ratio stood at 61.0% (69.8) on 30 September 2020. The lower ratio was affected in particular by the rise in risk weights caused by the adoption of the new definition of default. The minimum CET1 capital requirement is 4.5% and the requirement for the capital conservation buffer is 2.5%, i.e. the total CET1 capital requirement is 7%. The minimum total capital requirement is 8% and 10.5% with increased capital conservation buffer. Earnings for the financial year were not included in CET1 capital.

OP MB uses the Internal Ratings Based Approach (IRBA) to measure its capital adequacy requirement for credit risk. OP MB uses the Standardised Approach to measure its capital adequacy for operational risk.

OP MB has presented its capital base and capital adequacy in accordance with the EU Capital Requirements Regulation (EU 575/2013).

Capital base and capital adequacy, TEUR	30 Sep 2020	31 Dec 2019
Shareholders' equity	369,781	376,616
Common Equity Tier 1 (CET1) before deductions	369,781	376,616
Excess funding of pension liability	-69	-69
Share of unaudited profits	-5,055	-11,892
Shortfall of ECL minus expected losses	-3,815	-5,589
Common Equity Tier 1 (CET1)	360,841	359,066
Tier 1 capital (T1)	360,841	359,066
Tier 2 Capital (T2)
Total capital base	360,841	359,066
Total risk exposure amount
Credit and counterparty risk	556,575	476,138
Operational risk	34,748	38,237
Total	591,323	514,375
Key ratios, %
CET1 capital ratio	61.0	69.8
Tier 1 capital ratio	61.0	69.8
Capital adequacy ratio	61.0	69.8
Capital requirement
Capital base	360,841	359,066
Capital requirement	62,089	54,012
Buffer for capital requirements	298,751	305,055

Joint and several liability of amalgamation

Under the Act on the Amalgamation of Deposit Banks, the amalgamation of the cooperative banks comprises the organisation’s central cooperative (OP Cooperative), the central cooperative's member credit institutions and the companies belonging to their consolidation groups as well as credit and financial institutions and service companies in which the above together hold more than half of the total votes. This amalgamation is supervised on a consolidated basis. On 30 September 2020, OP Cooperative's member credit institutions comprised 138 OP cooperative banks as well as OP Corporate Bank plc, OP MB and OP Card Company Plc.

The central cooperative is responsible for issuing instructions to its member credit institutions concerning their internal control and risk management, their procedures for securing liquidity and capital adequacy as well as for compliance with harmonised accounting policies in the preparation of the amalgamation’s consolidated financial statements.

As a support measure referred to in the Act on the Amalgamation of Deposit Banks, the central cooperative is liable to pay any of its member credit institutions an amount that is necessary to prevent the credit institution from being placed in liquidation. The central cooperative is also liable for the debts of a member credit institution which cannot be paid using the member credit institution's assets.
Each member bank is liable to pay a proportion of the amount which the central cooperative has paid to either another member bank as part of support action or to a creditor of such member bank in payment of an amount overdue which the creditor has not received from the member bank. Furthermore, in the case of the central cooperative’s default, a member bank has unlimited refinancing liability for the central cooperative’s debts as referred to in the Co-operatives Act.

Each member bank’s liability for the amount the central cooperative has paid to the creditor on behalf of a member bank is divided between the member banks in proportion to their last adopted balance sheets. OP Financial Group’s insurance companies do not fall within the scope of joint and several liability.

According to section 25 of the Act on Mortgage Credit Banks, the holder of a covered bond has the right to receive a payment for the entire term of the bond from the assets entered as collateral before receivables without this being prevented by OP MB's liquidation or bankruptcy.

Personnel

On 30 September 2020, OP MB had six employees. OP MB has been digitising its operations and purchases all the most important support services from OP Cooperative and its Group members, reducing the need for its own personnel.

Management

The Board composition is as follows:

Chair	Vesa Aho	Chief Financial Officer, OP Cooperative
Members	Kaisu Christie	Director, Retail Customer Financing and Housing-related Services, OP Cooperative
	Lauri Iloniemi	Head of Group Treasury and Asset and Liability Management, OP Corporate Bank plc

OP MB's Managing Director is Sanna Eriksson. Until 30 June 2020, the deputy Managing Director was Pekka Moisio, Head of Funding and Liquidity Management. As of 1 July 2020, the deputy Managing Director is Tuomas Ruotsalainen, Senior Covered Bonds Manager at OP MB.

Risk exposure

When entering 2020, OP MB had a strong capital base, capital buffers and risk-bearing capacity. The coronavirus pandemic that spread widely in early 2020 had a global effect on societies, which has further affected economic development and operating conditions in the financial sector. This is the case in Finland too.

The pandemic may especially affect risks associated with lending, liquidity maintenance and business processes. OP MB’s capital base is sufficient to secure business continuity.

The most typical types of risks related to OP MB are credit risk, structural funding risk, liquidity risk and interest rate risk. The key credit risk indicators in use show that OP MB's credit risk exposure is stable and the limit for liquidity risk set by the Board of Directors has not been exceeded. The liquidity buffer for OP Financial Group, managed by OP Corporate Bank, is exploitable by OP MB. OP MB has used interest rate swaps to hedge against its interest rate risk. Interest rate swaps have been used to swap home loan interest, intermediary loan interest and interest on issued bonds into the same basis rate. OP MB has concluded all derivative contracts for hedging purposes, with OP Corporate Bank plc being their counterparty. The interest rate risk of OP MB may be considered low and it has been within the set limit.

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.

It is expected that OP MB’s capital adequacy will remain extremely strong and the overall quality of the loan portfolio good. This will make it possible to issue a new covered bond at the end of the year.

Time of publication of 2020 reports

Report by the Board of Directors and Financial Statements 2020	Week 10, 2021
Corporate Governance Statement 2020	Week 10, 2021

Schedule for Financial Statements Bulletin 2020 and Interim Reports in 2021

Financial Statements Bulletin 1 January‒31 December 2020	10 February 2021
Interim Report 1 January–31 March 2021	28 April 2021
Half-year Financial Report 1 January–30 June 2021	28 July 2021
Interim Report 1 January–30 September 2021	27 October 2021

Helsinki, 22 October 2020

OP Mortgage Bank
Board of Directors

For more information, please contact:
Sanna Eriksson, Managing Director, tel. +358 10 252 2517

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