Notes to OP Financial Group Financial Statements

Notes to risk management


OP Financial Group's capital adequacy and risk management principles are described in Note 2. OP Financial Group's exposure is presented in notes 60–63; Banking risk exposure, including capital adequacy information in accordance with Pillar III, in notes 64–94;Non-life Insurance's risk exposure in notes 95–106 and that of Life Insurance in notes 107–115.


OP Financial Group’s risk exposure

Note 60. OP Financial Group’s risk limits

The limit system ensures that the Group or any of its entity does not take excessive risks to endanger the Group's or the entity's capital adequacy, profitability, liquidity and continued operations. The limits define the boundary for implementing risk appetite under the strategy. OP Cooperative's Supervisory Board annually confirms risk limits related to the Group’s capital adequacy and credit and liquidity, market and underwriting risks. These limits are used to control the Group’s risk-taking. The Group's risks have been within the set limits.


Indicator Risk limit 31 Dec.
31 Dec.
Capital adequacy    
  Capital adequacy ratio, (Act on the Supervision of Financial and Insurance Conglomerates) 1.30 1.89 2,19 *)
  CET1, % 10.0 15.11 17,11 *)
  Capital adequacy/economic capital requirement 1.20 1.42 1.65
Credit risks    
  Largest single customer risk / capital resources, % 10.0 6.6 5.8
  Total of significant customer risks / capital resources under RAVA, % 75.0 23.8 5.8
  Industry risk / corporate receivables and commitments, % 15.0 11.8 11.1
  Ratio of receivables over 90 days overdue and zero-interest receivables to the loan and guarantee portfolio, % 1.00 0.38 0.42
  Expected losses / exposure in default, % 0.6 0.22 0.37
Liquidity risks
  Funding liquidity risk, days    

Adequacy of primary liquidity buffer, days 30 pv 82 46

Adequacy of liquidity buffer, days 30 pv 117 56

Banking structural funding risk, EUR million    
  ≤ 12 months net funding position -2,000 2,197 -890
  1−2 yrs net funding position 0 6,256 5,768
  2−3 yrs net funding position 0 2,411 4,919
  3−5 yrs net funding position 0 2,657 2,589
Market risks    
  Financing interest income risk, EUR million 150 54.0 99.0
  Banking book present value risk to 2-pp change in interest rate, % -20 -9.2 -12.7
  Trading VaR, 99%, 1 day, EUR million 5 2.3 2.2
  Insurance market risks / capital resources, % 30 20.9 16.1
Underwriting risks    
  Non-life Insurance underwriting risk / capital resources, % 8 5.5 5.0
  Life Insurance underwriting risk / capital resources, % 8 2.9 5.4

* According to regulation entered into force on 1 January 2014


Credit risks

OP Financial Group uses credit risk limits to spread risk by sector and counterparty and to limit the formation of doubtful receivables. The Group's sector and customer risks are diversified. At the end of 2014, customer risk deriving from an individual counterparty and the total of significant customer risk was clearly within the limits. Any customer exposure that accounts for at least 5% of the Group’s capital base covering customer exposure under the Act on the Supervision of Financial and Insurance Conglomerates is taken into account in measuring significant customer exposure. In calculating sector risk the Group uses its internal sector breakdown and, in addition to Banking receivables and commitment, takes account of direct investments by insurance institutions, incomplete housing associations and guarantees from public sector entities. At the end of 2014, trade constituted the greatest sector risk.

The ratio of expected losses to exposure (EAD) is clearly within the risk limit. Expected losses are an estimate of the average annual losses caused by credit risks calculated using the Group’s own credit risk models. Net impairment loss on receivables recognised in 2014 amounted to EUR 88 million (84), accounting for 0.12% of the loan and guarantee portfolio (0.12).


  31 Dec. 2014 31 Dec. 2013
Ratio of receivables more than 90 days past due and impairment losses to loan and guarantee portfolio EUR million % EUR million %
Net receivables more than 90 days past due     279 0.38 295 0.42
Net impairment loss on receivables from year start 88 0.12 84 0.12

Liquidity risk

OP Group’s risk limit for liquidity risk has been set for net cash flows by maturity that guide the structural funding risk and for funding liquidity risk indicator.


The risk indicator for the structural funding risk indicates the maximum portion of the net cash flows in the Group’s balance sheet that may mature in different maturities. On 31 December 2014, the maturing net cash flows in the Group’s balance sheet were in all maturity periods within the limits of risk limits.

The funding liquidity risk indicator shows for how long the primary liquidity buffer will cover the Group's net cash flows paid out daily that are known or expected, and an unexpected liquidity stress scenario. At the end of the year, the primary liquidity buffer and the entire buffer were sufficient to cover a period that was considerably longer than the 30 days that was used as a risk limit.


Group-level reporting and limits also derive from the liquidity coverage ratio (LCR) – which will be phased in from October 2015 and gradually tightened – based on the new Capital Requirements Directive and Regulation (CRD IV/CRR). At the end of the year, OP Financial Group fulfilled the 60% limit set by the regulation.


Market risks

OP Financial Group limits its Trading market risk using the VaR limit (99% confidence level, 1-day time horizon) within its risk limit system. At the end of the year, the VaR of Trading was clearly within the limit set for it..


The market risk limit for insurance operations has been set on the basis of the ratio between the economic capital and the Group’s capital resources concerning the risk in question. At the end of the year, the market risk associated with insurance operations was clearly within limit set for it.


Insurance risks

Within the risk limit system, the Group limits underwriting risk using the ratio of Non-life and Life Insurance underwriting risk economic capital to capital resources. On 31 December 2014, underwriting risks were within the set limits.