OP Financial Group's business segments are Banking, Non-life Insurance and Wealth Management. Non-segment operations are presented under “Other Operations”. OP Financial Group's segment reporting is based on accounting policies applied in its financial statements.
Weak economic growth and waning demand have also slowed down the growth of the loan portfolio. The number of new loans taken out has decreased by 1.0% during the year. However, in the second half of the year, demand for credit showed signs of improvement.
OP Financial Group's deposits increased by 3.0%. Because of an exceptionally long period of low interest rates and lower term deposit margins, investment deposits decreased by 8.2% during the year. The focus of growth in deposits is still on payment transaction accounts, which increased by 12%, or EUR 3.2 billion during the year. During the financial year, cooperative banks' combined amount of supplementary shares and Profit shares increased by EUR 1.2 billion.
The loan portfolio grew by 3.8%. Year on year, the volume of new home loans drawn down decreased by 5.7% and that of corporate loans by 11%. Demand for consumer credit was high, with the volume of consumer credit increasing by 27%. The average margin of new home and corporate loans was somewhat lower than a year ago.
OP Financial Group's market share of home loans and corporate financing and deposits has remained stable. OP Financial Group's share of the home loan market increased during the financial year by 0.3 percentage points and was 38.0% (37.7).
The housing market is still sluggish during 2014, with the volume of homes sold and bought through the Group’s real estate agents decreasing by 9% over the previous year.
Earnings before tax by Banking increased significantly year on year to EUR 587 million (404). This improvement can be attributed to an increase in net interest income and a decrease in personnel costs. Impairment losses increased by EUR 7 million to EUR 88 million, being still at a low 0.12% (0.12) level in relation to the loan and guarantee portfolio.
Net interest income increased by EUR 178 million, being 19% higher than a year ago due to a growth in credit portfolio and a higher level of margins. The favourable development of net interest income from capital market products and the decrease in deposit funding costs also promoted the growth of net interest income.
Other income decreased by EUR 14 million from its level a year ago.
Net commissions and fees were EUR 12 million higher than a year ago because of higher commissions from payment transactions.
Net trading and investment income decreased by a total of EUR 22 million year on year. Net trading income was reduced by a change in the credit and counterparty risk model used for the valuation of derivatives. Other operating income decreased by EUR 6 million.
Expenses decreased by 0.8% to EUR 1,082 million (1,090). Owing to the efficiency-enhancement measures, personnel costs decreased by 5.6% to EUR 456 million (483). ICT costs increased by EUR 12 million year on year.
OP bonuses related to Banking were EUR 170 million (182). Since the beginning of the financial year, part of the bonuses are related to the Non-life Insurance and Wealth Management segments. At Group level, bonuses increased by 3.6%.
Major risks within Banking include credit risk, market risks and liquidity risk.
Banking's credit risk exposure remained stable, at a moderate risk level. The loan and guarantee portfolio increased in the financial year by EUR 2.6 billion to EUR 73.6 billion. The amount of receivables over 90 days overdue was EUR 279 million (295), that is, less than a year ago in proportion to the loan and guarantee portfolio. At the end of the year, there was a total of EUR 1.8 billion of over 90 days past due receivables, other doubtful receivables, and receivables that have been subject to forebearance measures in accordance with the guidelines by the European Banking Authority (EBA) that will enter into force in 2015. This amount was at the same level as last year. Forebearance measures consist of concessions to contractual payment terms towards customers to make it easier for them to manage through temporary payment difficulties. Cooperative banks make every effort to find solutions to overcome customers' temporary financial difficulties.
Corporate customers' (including housing corporations) exposures represent 36% (36) of the loan and guarantee portfolio. Of corporate exposure, investment-grade exposure represented 49% (46) and the exposure of the lowest two rating categories amounted to EUR 501 million (634), accounting for 1.5% (1.9) of the total corporate exposure.
Of the six main categories for private customer exposure, 81% (77) of the exposures belonged to the top two categories, and 4% (4) in the two poorest.
The Banking capital base covering major customer exposure amounted to EUR 7.3 billion (6.3). No single customer's exposure exceeded 10% of the capital base.
Banking's interest rate risk measured as a one-percentage point decrease on 12-month net interest income was EUR 54 million (99) at the end of December.
The Group's Common Equity Tier 1 (CET1) was 15.1% (17.1) at the end of the financial year, including the financial year's earnings. The reference figures for capital adequacy presented here have been estimated in accordance with the regulations that entered into force on 1 January 2014. The purchase of Pohjola Bank plc shares reduced the CET1 ratio by about six percentage points, while on the other hand it was increased by the issue of Profit shares by about 3.7 percentage points. The Group's CET1 target is 18% by the end of 2016.
OP Financial Group's credit institution has a strong capital base compared to the statutory requirements and those set by the authorities. The statutory minimum for the capital adequacy ratio is 8% and for the Common Equity Tier 1 it is 4.5%.
The new Capital Requirements Directive and Regulation (CRD IV/CRR) was published in the EU Official Journal on 27 June 2013. These new rules and regulations will be phased in from 1 January 2014 and will implement the Basel III standards within the EU during 2014–2019. Changes to national legislation related to the new regulations came into force in August.
The Common Equity Tier 1 (CET1) capital was EUR 6,384 million (6,896) on 31 December, with CET1 being reduced by the purchase of Pohjola Bank plc shares. CET1 capital was increased by the issue of Profit shares, Banking's earnings for the financial year and dividends from the Group's insurance institutions. The insurance companies paid dividends worth EUR 280 million during the financial year. Profit shares accounted for EUR 1,561 million of CET1 capital at the end of December. A total of EUR 339 million (384) were deducted from CET1 capital as a shortfall of expected losses and impairment losses.
Risk-weighted assets totalled EUR 42,252 million (40,405) at the end of the financial year, being 4.6% higher than a year ago. The average risk weight of the total exposure portfolio decreased as a result of a slight decrease of average riskweight of retail exposures. The updated categorisation models for corporate exposure are expected to be adopted in early 2015 following approval by the Financial Supervisory Authority. These updates are expected to have a positive effect on capital adequacy ratios.
Equity investments include EUR 6,446 million in risk-weighted assets of the Group's internal insurance holdings.
On 27 November 2013, OP Financial Group received permission from the Financial Supervisory Authority to treat insurance holdings within the conglomerate as risk-weighted assets. The permission was valid from 1 January 2014 to 31 December 2014, because the ECB took up single supervisory responsibility. The method applied to insurance holdings leads to a risk-weight of approximately 280%. A request for an extension is being processed by the ECB.
The requirements for capital buffers implemented through national legislation will add to capital requirements. As of the beginning of 2015, the fixed capital add-on is 2.5% of all risk-weighted assets. No capital add-on concerning other significant credit institutions to a financing system that will enter into force at the beginning of 2016 has yet been confirmed for OP Financial Group. The Financial Supervisory Authority has the right to enforce a capital add-on that will reduce the cyclic nature of capital requirements. The upcoming liquidity regulation will add to liquidity management costs. Profitability will play a key role when preparing for regulatory changes.
The new regulations include a ratio on the degree of indebtedness, the leverage ratio. The leverage ratio of OP Financial Group’s Banking is estimated at about 6.4% according to the current interpretations, with the minimum level in the draft legislation being 3%.
Growth in insurance premium revenue remained strong among private customers and in the Baltic States. In terms of corporate customers, the general economic situation was reflected in insurance premium revenue, which remained at the previous year's level. Insurance sales grew slightly year on year.
OP Financial Group’s market share of non-life insurance premiums written in 2013 was 30.3%. Measured by this market share, OP Financial Group is Finland’s largest non-life insurer. The market share is expected to have increased further during the financial year.
The year-end number of loyal customer households totalled 655,000 (616,000), of which as many as 75% (73) also use OP Financial Group cooperative banks as their main bank.
OP Financial Group has decided to expand its hospital business: the first hospital was Omasairaala Oy in Helsinki, and now there are plans to have another four private hospitals in Finland. It will also expand to new fields of specialised medicine and occupational health. The nationwide hospital network is built under the Pohjola brand. Omasairaala will change its name to Pohjola Health Ltd in the autumn of 2015.
Earnings before tax improved to EUR 223 million (166) as a result of solid investment activities and an improved operating balance on technical account.
The discount rate for pension liabilities was reduced in the financial year from 2.8% to 2.5%, which increased claims incurred by EUR 62 million (38).
Insurance premium revenue increased by 5% (11). Operating expenses were 3% higher than a year ago. The operating combined ratio improved year on year, achieving a historically low level of 84.7% (86.6). The combined ratio was 91.0% (91.6). The balance on technical account, excluding the effect of a decrease in the discount rate, improved as a result of favourable development of loss numbers and the solid growth of private customers and of premium income in the Baltic countries.
Claims incurred increased by 2%, excluding the effect of the reduction in the discount rate for pension liabilities, i.e. more slowly than insurance premium revenue. Claims development was favourable apart from major losses. Claims incurred arising from new large claims regarding operations and assets were higher than a year ago. The reported number of large claims under property and business liability insurance (in excess of EUR 0.3 million) amounted to 82 (77) in the financial year, with their claims incurred retained for own account totalling EUR 79 million (72). The change in provisions for unpaid claims under statutory pension increased year on year, being EUR 62 million (59) in January–December. Changes to claims incurred in previous years, without considering the change in discount rate, increased the balance on technical account by EUR 27 million (10). The operating risk ratio excluding indirect loss adjustment expenses was 60.2% (61.7).
The operating expense ratio improved thanks to higher earnings to 18.4% (18.7). The operating cost ratio (including indirect loss adjustment expenses) was 24.4% (25.4).
Investment income at fair value was better than the previous year because of a significant decline in interest rates. Return on investments at fair value totalled EUR 220 million (115), or 6.7% (3.5). Net investment income recognised in the income statement amounted to EUR 171 million (131). Impairment charges on receivables amounted to EUR 2 million (10).
Major risks within Non-life Insurance include underwriting risks associated with claims developments, market risks associated with investments covering insurance liabilities, and the discount rate applied to insurance liabilities.
No significant changes took place in Non-life Insurance's underwriting risks. The low market rates increased the risk level of its liability's discount rate. On the whole, no major changes took place to investment risk levels. The equity risk associated with the investment portfolio was reduced slightly. The risk level of bonds and illiquid investments was raised moderately.
At the end of the financial year, the investment portfolio totalled EUR 3,522 million (3,219). The fixed-income portfolio by credit rating remained healthy, with investments within the “investment-grade” category accounted for 94% (91), and 71% (74) of the investments were rated at least A–. The average residual term to maturity of the fixed-income portfolio was 4.5 years (4.4) and the duration 4.3 years (3.7).
On 31 December, Non-life Insurance solvency capital amounted to EUR 988 million (913) and the ratio of solvency capital to insurance premium revenue (solvency ratio) was 75% (73). Equalisation provisions were EUR 215 million (248).
The Solvency II Directive regulating the solvency requirements of insurance companies will come into force at the beginning of 2016. On 31 December, the Non-life Insurance capital base under Solvency II totalled EUR 804 million (894) and capital requirement EUR 685 million (713). The solvency ratio conforming to Solvency II was 117% (125). These figures do not include the effects of transitional provisions. The transitional provisions increase the capital buffer.
The gross amount of assets managed by the Group was EUR 61.3 billion (52.0). This amount includes EUR 14.0 billion in assets of the companies belonging to OP Financial Group.
Net asset inflows to OP Financial Group's mutual funds and unit-linked insurance totalled EUR 2,490 million (2,530). Assets invested in mutual funds increased in the financial year by 20.9% to EUR 17.5 billion (14.4). Unit-linked insurance savings increased by 20.8% to EUR 7.6 billion (6.3).
The number of saver and investor customers was 755,000 at the end of the financial year, that is, 19,000 more than a year ago. OP Financial Group's customer market share of mutual fund shareholders registered in Finland increased to 22.8% (19.9).
Earnings before tax increased to EUR 161 million year on year (113). Earnings after a change in the fair value reserve amounted to EUR 211 million (96).
Net commissions and fees increased by 19%, owing to growth of wealth under management compared to last year, to EUR 175 million (147).
Life Insurance's return on investments at fair value was 6.0% (3.5). Investment income included in Life Insurance’s net interest and risk result but excluding the performance of derivatives that hedge the interest rate risk of insurance liabilities totalled EUR 169 million (147).
Preparations for the persistence of low interest rate levels were made through supplementary technical interest rate provisions worth EUR 38 million (12) to insurance liabilities through profit and loss.
Expenses were EUR 3 million lower than a year ago. Personnel costs decreased by EUR 1 million and other costs by EUR 2 million. Expenses were increased during the financial year by a EUR 2 million non-recurring system amortisation. Wealth Management's operating cost/income ratio improved to 40.8% (49.4).
The key risks associated with Wealth Management are the market risks of investment assets, the interest rate used for the discounting of insurance liabilities and the faster-than- expected life expectancy increase.
Life Insurance's investment assets, excluding assets covering unit-linked insurance, amounted to EUR 4.2 billion (3.9), and were divided as follows:
Investments within the “investment-grade” category accounted for 94% (90) of the fixed-income portfolio. The portfolio's modified duration was 3.1 (2.4) on 31 December.
No major changes took place in Life Insurance's underwriting risks or its investment risk level. On the whole, Life Insurance's risk exposure has remained stable.
OP Financial Group is prepared for any change in the interest rate used for the discounting of insurance liabilities by hedging a considerable part of the exposure using interest rate derivatives. Supplementary interest rate provisions related to insurance liabilities totalled EUR 475 million (128) at the end of the financial year.
Life Insurance's solvency margin was EUR 666 million (664). The solvency ratio, or the ratio of solvency capital to weighted insurance liabilities, was 12.5% (14.0).
The Solvency II Directive regulating the solvency requirements of insurance companies will come into force at the beginning of 2016. Life Insurance's preliminary Solvency II capital at the end of December amounted to EUR 804 million (789) and the preliminary economic capital was EUR 806 million (793). The solvency ratio conforming to Solvency II was 100% (99). These figures do not include the effects of transitional provisions. The transitional provisions increase the capital buffer.
Other Operations’ earnings before tax amounted to EUR -43 million (13). The result was eroded by lower net interest income and higher expenses.
Preparation for tighter liquidity regulations reduced the net interest income from the liquidity buffer, as a result of which the net interest income of Other Operations decreased to EUR -34 million (11). Other Income consists to a large extent of intra-Group service charges, which are presented as business segment expenses. Net commissions and fees outside the Group were EUR 6 million higher than a year ago because of higher commissions from payment transactions.
Expenses from Other Operations grew by 9%, being EUR 44 million higher than a year ago. Of the Other Operations expenses, personnel costs accounted for EUR 158 million (178) and ICT costs for EUR 174 million (136). The outsourcing of ICT services in late 2013 reduced personnel costs but increased ICT costs. During the financial year, expenses incurred from Other Operations were increased by EUR 20 million of non-recurring fees related to the public voluntary bid for Pohjola Bank shares. Approximately a third of this amount represents internal expenses.
Major risks exposed by Other Operations include credit and market risks associated with the liquidity buffer, and liquidity risks. The market risk is highest in notes and bonds included in the liquidity buffer.
The market risks of liquidity buffer investments increased in the financial year as a result of an increase in the liquidity buffer and allocation changes.
OP Financial Group secures its liquidity with a liquidity buffer which consists mainly of deposits with central banks and receivables eligible as collateral for central bank refinancing. The liquidity buffer and other sources of additional funding based on the contingency funding plan are sufficient to cover funding for at least 24 months in the event wholesale funding becomes unavailable and total deposits decrease at a moderate rate.
The liquidity buffer comprises notes and bonds issued by governments, municipalities, financial institutions and companies all showing good credit ratings, securitised assets and loans eligible as collateral. The notes and bonds included in the liquidity buffer are based on market-to-market valuations.
OP Mortgage Bank, which is part of OP Financial Group, issued three covered bonds each worth EUR 1 billion. The maturity of the bond issued in March is 7 years, that of the bond issued in June 5 years and that in November 10 years.
Pohjola Bank plc issued long-term bonds worth EUR 3.5 billion in the financial year. In March, Pohjola issued two senior bonds in the international capital market, each worth EUR 750 million with a maturity of three and seven years. In June, it issued a EUR 750 million senior bond with a maturity of five years, and two Samurai bonds worth a total of 60 billion yen (EUR 432 million).