OP Financial Group
Half-year Financial Report 1 January–30 June 2020
Stock Exchange Release 21 July 2020, 09.00am EEST

OP Financial Group’s Half-year Financial Report for 1 January–30 June 2020: Earnings before tax EUR 287 million – income from customer business increased in an uncertain business environment

OP Financial Group’s key indicators

  H1/2020 H1/2019 Change, % Q1–4/2019
Earnings before tax, € million 287 396* -27.6 838
  Retail Banking 28 94 -69.8 235
  Corporate Banking 103 139 -25.9 311
  Insurance 130 192 -32.4 373
  Other Operations 43 -10 - -37
New OP bonuses accrued to owner-customers -129 -129 0.1 -254
         
Return on equity (ROE), % 3.6 5.4 -1.8** 5.5
Return on equity, excluding OP bonuses, % 5.2 7.0 -1.8** 7.1
Return on assets (ROA), % 0.29 0.45 -0.16** 0.47
Return on assets, excluding OP bonuses, % 0.42 0.59 -0.17** 0.60
  30 June 2020 30 June 2019 Change, % 31 Dec 2019
CET1 ratio, % 17.7 19.5 -1.8** 19.5
Loan portfolio, € billion 93.7 89.7 4.6 91.5
Deposits, € billion 69.2 63.3 9.3 64.0
Ratio of non-performing receivables to loan and guarantee portfolio, %  

1.6 		 

1.1 		0.5**  

1.1
Ratio of impairment loss on receivables to loan and guarantee portfolio, % 0.34 0.08 0.26**
0.09
Owner-customers (1,000) 2,013 1,953 3.1 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

Our customer business developed favourably in January–June despite the challenging market conditions. Our net interest income, net insurance income and net commissions and fees increased clearly year on year. Investment income fell sharply year on year due to the economic uncertainty caused by the COVID-19 pandemic and the fluctuations in fixed-income and equity markets. In April–June, however, net investment income recovered and grew on a year-on-year basis.

In the year to June, OP Financial Group’s loan portfolio grew by 5% to EUR 94 billion and deposits by 9% to EUR 69 billion.

In January–June, OP Financial Group’s expenses rose by 4%. This resulted mainly from higher ICT costs, development costs, regulation-related costs and personnel costs. Our ICT costs for 2020 are increased by a one-off investment in the IT environment.

The COVID-19 pandemic weakens the economic outlook and the credit risk outlook. As a result of this, impairment loss on receivables increased clearly, by EUR 127 million to EUR 166 million. In addition to the COVID-19 crisis, regulatory changes increased the amount of impairment loss.

OP Financial Group’s earnings before tax for January–June amounted to EUR 287 million, which was EUR 109 million lower than a year earlier. Earnings were reduced in particular by higher impairment loss on receivables and the steep decline in investment income.

In June, our capital ratio (CET1) remained strong at 17.7%.

In January–June, the COVID-19 pandemic affected OP Financial Group’s operations in many ways. The Group offered households the opportunity to get repayment holidays of up to 12 months on their loans. As many as 120,000 households applied for a repayment holiday, but the number of applications fell to a normal level at the end of June. Meanwhile, 20,000 corporate customers applied for changes in their loan repayment plans, but the number of these applications also began to decline by the end of June.

In the Insurance segment, property claims expenditure increased due to event interruptions and interruptions caused by the epidemic, as well as travel insurance claims submitted due to interrupted or cancelled journeys. Meanwhile, a halt in travel, a significant decline in driving and lower activity in general reduced the number of claims by up to 25% from the normal level in April–June. At the end of June, the claims trend normalised. Based on current estimates, the total effect of the COVID-19 pandemic on net insurance income will remain minor.

Economic development was weak during the second quarter. In the Finnish market, the general activity in service industries plunged dramatically, but the situation began to improve surprisingly quickly in early summer. A similar trend was seen in the housing market. Finland’s industry and construction did not suffer from COVID-19-related restrictions as much as those of many other countries.

In financial markets, the crisis peaked already in March. Determined stimulus measures taken by central banks calmed down the markets, and credit spreads narrowed significantly in fixed-income markets. Stock prices rebounded quickly, too.

For the time being, the economic outlook continues to be characterised by large uncertainty. In spring, we managed to avoid the worst economic implications of the COVID-19 pandemic, but worldwide the pandemic is not over yet. The performance of the export market may still weaken more than anticipated, and the pandemic may tighten its grip again in Finland, too. Towards the end of the year, we must ensure a return towards normal life where people feel safe about using services and public transport and returning to workplaces. OP Financial Group participates in efforts aimed at returning this confidence, which we consider vital for the recovery of the Finnish economy and the functioning of our society.

Economic policy has played an important role in supporting businesses to get beyond the worst phase of the crisis. Now efforts should focus on measures that support economic recovery and a favourable economic development in the long term. Particular attention should be paid to ensuring that the competitiveness of our export companies will not decline due to the crisis. Structural reforms are necessary for Finland's long-term economic resilience, and it is high time to get them through.

January–June

OP Financial Group's earnings before tax amounted to EUR 287 million (396). The figure decreased by EUR 109 million over the previous year. Income from customer business, or net interest income, net insurance income and net commissions and fees, increased. In addition, the sale of the Vallila property increased earnings. Market developments caused by the COVID-19 pandemic decreased investment income particularly in the first quarter and contributed to the increase in impairment loss on receivables. Earnings were also affected by the adoption of a new definition of default that increased impairment loss on receivables, and growth in expenses.

Net interest income increased by 7.2% to EUR 646 million. Net interest income reported by the Retail Banking segment increased by EUR 3 million and that by the Corporate Banking segment by EUR 17 million. In the year to June, OP Financial Group’s loan portfolio grew by 4.6% to EUR 93.7 billion and deposits by 9.3% to EUR 69.2 billion. New loans drawn down by customers during January–June totalled EUR 5.5 billion (7.0).

Net insurance income totalled EUR 295 million (274). The Insurance segment’s non-life insurance premium revenue increased by 1.9% to EUR 740 million. Claims incurred decreased by 1.6% to EUR 451 million. The operating combined ratio was 89.3% (92.5).

Net commissions and fees were EUR 455 million, or EUR 6 million higher than the year before. Net commissions and fees from payment transfers increased by EUR 19 million, those from mutual funds by EUR 6 million and those from securities brokerage by EUR 4 million. Meanwhile, commission income from lending decreased by EUR 3 million and life insurance total expense loading by EUR 4 million.

Net investment income decreased by EUR 246 million to EUR – 28 million. Net income from financial assets recognised at fair value through profit or loss totalled EUR 118 million (473). The fair values of equities, and notes and bonds decreased significantly in the first quarter as a result of the COVID-19 crisis. In the second quarter, however, the situation in the securities market improved, and net income from financial assets recognised at fair value through profit or loss totalled EUR 249 million (212) in the second quarter. 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 equity. Total investment income fell by 59.9% year on year, to EUR 61 million. Capital gains recognised totalled EUR 32 million (63). Net income from investment property decreased by EUR 18 million to EUR – 11 million. The combined return on investments at fair value of OP Financial Group's insurance companies was 1.6% (7.1). The net change in the short-term life insurance supplementary interest rate provision improved earnings by EUR 21 million (23). Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes decreased earnings by EUR 21 million (–7).

Other operating income rose by EUR 78 million year on year to EUR 112 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 sale of occupational healthcare service business increased other operating income.

Total expenses increased by 4.1% to EUR 993 million. Personnel costs increased by 2.6% to EUR 415 million. Depreciation/ amortisation and impairment loss on PPE and intangible assets increased by 1.0% to EUR 129 million. Planned depreciation/ amortisation increased by 4.2% to EUR 127 million due to higher development expenditure recognised for prior years. Impairment write-downs were EUR 2 million (6).

Other operating expenses increased by 6.6% to EUR 449 million. ICT costs increased by a total of EUR 33 million. A one-off investment in the IT environment will further increase ICT costs for 2020. Development costs were EUR 100 million (91). Charges of financial authorities increased by 21.4% 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 175 million (45), of which EUR 166 million (39) concerned loans and receivables. As a result of the COVID-19 crisis, customers have actively applied for repayment holidays on their loans and changes to their repayment schedules. Combined with the changes in macroeconomic parameters applied in the calculation of expected credit losses, this increased impairment loss on receivables by EUR 65 million.
When the new definition of default was adopted in the first quarter, impairment loss on receivables increased by EUR 44 million. Final net loan losses recognised totalled EUR 26 million (26). Loss allowance was EUR 731 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 1.6% (1.1). Impairment loss on loans and receivables accounted for 0.34% (0.08) of the loan and guarantee portfolio.

OP Financial Group's current tax amounted to EUR 62 million (77). The effective tax rate was 21.8% (19.5). The effective tax rate was increased by the changes in deferred taxes arising from the sale and leaseback of the Vallila property.

OP Financial Group's equity amounted to EUR 12.5 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 47 million (48). The amount of interest to be paid for 2019 in October 2020 will total EUR 97 million, unless new restrictions on interest payment become applicable due to recommendations by the authorities.

Comprehensive income of EUR 158 million (594) was decreased by changes in the fair value reserve. The fair value reserve fell by 27.4% to EUR 182 million from the end of 2019. Due mainly to the COVID-19 crisis, the fair values of notes and bonds recognised through other comprehensive income decreased by EUR 65 million, and the fair values of equities within the scope of the overlay approach decreased by EUR 85 million.

Outlook towards the year end

Due to the COVID-19 pandemic, the global economy declined sharply in the second quarter. However, it began to recover already in early summer as restrictions were eased. The financial market picked up during the second quarter as well, helped by central banks’ sizeable support measures. While the Finnish economy directly suffered less from restrictions than the economies of many other countries, Finland’s GDP also plunged in the spring.

The economic outlook is still exceptionally uncertain in spite of the tentative recovery. Uncertainties in the financial market may increase rapidly if the pandemic outbreak worsens again. Recession in the export markets may also affect the Finnish economy with a lag, even if the direct effects of the pandemic gradually waned. A recession caused by the pandemic may have lagged effects on banks and insurance companies, if customers’ financial difficulties persist.

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 Half-year Financial 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 21 July 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 half-year financial reports.

Financial reporting in 2020

Interim Report Q1-3/2020 22 October 2020


OP Amalgamation Capital Adequacy Report 30 June 2020 Week 31
OP Amalgamation Capital Adequacy Report 30 September 2020 Week 44

Helsinki, 21 July 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.fi


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