OP Financial Group
Interim report 1 January–31 March 2021
Stock Exchange Release 28 April 2021 09.00am EEST
OP Financial Group’s Interim Report for 1 January–31 March 2021: Earnings before tax EUR 265 million – income increased and impairment loss on receivables decreased
- Earnings before tax improved to EUR 265 million (129).
- In customer business, net insurance income increased by 19% to EUR 157 million (131) and net commissions and fees by 10% to EUR 270 million (244). Net interest income decreased by 1% to EUR 316 million (319).
- Investment income rose by EUR 80 million year on year, to EUR 91 million (11).
- Total income increased by 35% to EUR 896 million (662).
- Total expenses decreased by 2% to EUR 507 million (518).
- Impairment loss on receivables was EUR 22 million (105), or 0.09% (0.44) of the loan and guarantee portfolio. A year ago, impairment loss on receivables was increased by the effects of the Covid-19 pandemic on loan portfolio quality and by the adoption of the new definition of default based on a regulatory change.
- OP Financial Group’s loan portfolio grew year on year by 1% to EUR 94 billion (93) and deposits by 10% to EUR 71 billion (65).
- The CET1 ratio was 18.1% (18.9). The lower ratio was affected by the ECB’s decision which increased the risk-weighted assets of corporate exposures.
- Retail Banking earnings before tax improved by EUR 59 million to EUR 66 million (8). Net interest income increased by 3% and net commissions and fees by 5%. Impairment loss on receivables decreased by 57% to EUR 24 million (57). The loan portfolio grew by 1% and deposits by 10% in the year to March.
- Corporate Banking earnings before tax improved by EUR 101 million to EUR 115 million (14). Net interest income decreased by 1% and net commissions and fees increased by 48%. Net investment income grew by EUR 39 million to EUR 49 million (9). Reversal of impairment losses on receivables improved earnings by EUR 2 million (–47). The loan portfolio decreased by 1% in the year to March.
- Insurance earnings before tax improved by EUR 58 million to EUR 117 million (59). Net insurance income grew by 19% to EUR 164 million (138). Investment income rose by EUR 35 million to EUR 56 million (21). The operating combined ratio improved to 86.0% (92.7) in non-life insurance.
- Other Operations earnings before tax were EUR –22 million (57). A year ago, the sale of the Vallila property improved earnings by EUR 96 million.
- During the reporting period, OP Financial Group invested a total of EUR 70 million (82) in business development and improving customer experience.
- New OP bonuses accrued to owner-customers totalled EUR 51 million (65). The accrual of OP bonuses was changed as of 1 November 2020.
- The number of owner-customers in OP cooperative banks totalled 2.0 million (2.0). OP Financial Group had a total of 1.3 million (1.3) joint banking and insurance customers.
- OP Financial Group complies with the recommendation of the European Central Bank in its profit distribution. Following the recommendation, the Group discussed the level of profit distribution with the ECB Joint Supervisory Team, and the interest on Profit Shares for 2019 was paid to holders of those shares on 8 February 2021. Interest on Profit Shares for 2020 will be paid at the earliest in October 2021.
- The Covid-19 pandemic will cause uncertainty in the amount of impairment loss on receivables and investment income. Earnings before tax for 2021 are expected to be lower than in 2020. For more detailed information on the outlook, see “Outlook for 2021”.
OP Financial Group’s key indicators
| Q1/2021 | Q1/2020 | Change, % | Q1–4/2020 | |
| Earnings before tax, € million | 265 | 129 | 105.6 | 785 |
| Retail Banking | 66 | 8 | 771.1 | 115 |
| Corporate Banking | 115 | 14 | 745.2 | 349 |
| Insurance | 117 | 59 | 98.0 | 348 |
| Other Operations | -22 | 57 | -138.2 | 3 |
| New OP bonuses accrued to owner-customers, € million | -51 | -65 | -20.9 | -255 |
| Return on equity (ROE), % | 6.5 | 3.1 | 3.4* | 5.0 |
| Return on equity, excluding OP bonuses, % | 7.6 | 4.7 | 3.0* | 6.6 |
| Return on assets (ROA), % | 0.52 | 0.26 | 0.26* | 0.42 |
| Return on assets, excluding OP bonuses, % | 0.61 | 0.39 | 0.22* | 0.55 |
| 31 Mar 2021 | 31 Mar 2020 | Change, % | 31 Dec 2020 | |
| CET1 ratio, % | 18.1 | 17.7 | 0.5* | 18.9 |
| Loan portfolio, € billion | 93.8 | 93.0 | 0.9 | 93.6 |
| Deposits, € billion | 71.3 | 64.8 | 10.0 | 70.9 |
| Ratio of non-performing receivables to exposures, %** | 2.4 | 2.0 | 0.4* | 2.5 |
| Ratio of impairment loss on receivables to loan and guarantee portfolio, % | 0.09 | 0.44 | -0.35* | 0.23 |
| Owner-customers (1,000) | 2,032 | 2,007 | 1.3 | 2,025 |
*Change in ratio
**The name and content of the ratio was changed in Q1/2021. Comparatives have been adjusted accordingly. More detailed information on the change can be found under table Forborne loans and non-performing receivables in the Risk exposure section.
Comments by President and Group Chief Executive Officer Timo Ritakallio
Our customer business made strong progress in January–March. Income from customer business increased by 7%, reaching a record level of EUR 743 million. The insurance business and asset management performed particularly well. Net insurance income and net commissions and fees were clearly higher than a year ago. Meanwhile, net interest income showed a slight decline.
OP Financial Group’s earnings before tax doubled to EUR 265 million, an increase of EUR 136 million. All business segments improved their performance markedly year on year. Investment income grew significantly, particularly due to the favourable development of the equity market. The earnings improvement was also supported by the strong growth in income from customer business and the decline in impairment loss on receivables.
Impairment loss on receivables decreased by EUR 83 million year on year. In 2020, impairment loss was increased by the adoption of the new definition of default and the effects of the Covid-19 pandemic on loan portfolio quality.
OP Financial Group’s expenses decreased year on year. Especially ICT costs were lower than a year ago.
OP Financial Group’s capital adequacy is at a solid level. The CET1 ratio was 18.1% at the end of March.
OP Financial Group’s loan portfolio increased by 1% and the deposit portfolio by 10% year on year. The growth in deposits was driven by the rise in consumer savings ratio.
Consumers’ confidence in their personal finances remains good. This is reflected, for example, in increased activity of the housing market. March was the best month in ten years for OP Financial Group’s home loan services.
Investing in mutual funds showed strong growth in 2020 and continued to grow in the reporting period. During the Covid-19 crisis, consumers have placed their funds in long-term saving, which supports the accumulation of wealth among people in Finland. In January–March, OP’s mutual funds attracted more than 60,000 new unitholders. In February, OP Financial Group passed the milestone of one million unitholders. As part of our revised owner-customer membership programme, we launched an investor benefits package in early 2021 to encourage our owner-customers to save and invest on a long-term basis.
According to a survey published in March by ETLA Economic Research, OP Financial Group ranked number one among companies generating the most added value in Finland. The value we added to the economy was approximately EUR 1.7 billion in 2019. The impact of OP Financial Group’s operations on the Finnish economy has increased by several hundreds of millions of euros over the last decade.
In January–March, the Covid-19 situation continued to be difficult but economic resilience remained fairly steady. The world economy has continued to recover and the Finnish economy has survived through the increase in infections and the related restrictions with relatively small damage. The most recent information indicates that the economy has continued to recover during the first quarter, too, and that the number of bankruptcies has remained moderate.
The pandemic affects different sectors in different ways. While a large part of the economy is doing well, the heaviest burden is on certain fields of the service sector. Although the situation continues to be critical for many businesses, increasing vaccination rates bring hope to sectors that have suffered the most.
According to OP’s survey of large corporations, business confidence in Finland’s long-term growth outlook is weak. This reflects not only the practical measures taken but also the atmosphere. Government should restore confidence in a pro-business economic policy. Without it, businesses will not be able to fully exploit the incoming economic rebound. Now it is extremely important to focus on the long-term sustainability of public finances.
January–March
OP Financial Group’s earnings before tax amounted to EUR 265 million (129), up by EUR 136 million from the previous year. As regards income from customer business, net insurance income and net commissions and fees increased. Earnings were also increased by higher investment income and lower expenses and impairment loss on receivables.
Net interest income decreased by 0.7% to EUR 316 million. Net interest income reported by the Retail Banking segment increased by 2.5% and that by the Corporate Banking segment decreased by 0.8%. OP Financial Group’s loan portfolio grew by 0.9% to EUR 93.8 billion and deposits by 10.0% to EUR 71.3 billion, year on year. New loans drawn down by customers during the reporting period totalled EUR 5.1 billion (6.2).
Net insurance income increased by 19.1% to EUR 157 million. The Insurance segment’s non-life insurance premium revenue increased by 0.9% to EUR 372 million. Claims incurred decreased by 9.8% to EUR 218 million. Operating combined ratio reported by non-life insurance improved to 86.0% (92.7).
Net commissions and fees totalled EUR 270 million (244). Net commissions and fees for payment transfer services increased by EUR 8 million and fund and management fees by EUR 7 million.
Net investment income grew by EUR 285 million to EUR 146 million. Net income from financial assets at fair value through other comprehensive income totalled EUR 31 million (26), of which capital gains accounted for EUR 9 million (10).
Net income from financial assets recognised at fair value through profit or loss totalled EUR –20 million (–131). Net income from financial assets held for trading decreased by a total of EUR 198 million due to changes in the fair value of derivatives. Meanwhile, income from equity instruments recognised at fair value in the income statement increased by EUR 287 million year on year. When the Covid-19 crisis broke out a year ago, the fair value of equities decreased significantly. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes improved earnings by EUR 12 million (–15). Life insurance items, which include, for example, changes in technical items, increased net investment income by EUR 178 million to EUR 134 million.
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 shareholders’ equity. The overlay approach decreased investment income by EUR 55 million, while a year ago it increased investment income by EUR 151 million. Total investment income rose by EUR 80 million year on year, to EUR 91 million. Capital gains on all financial instruments recognised through fair value reserve totalled EUR 57 million (23). The combined return on investments at fair value of OP Financial Group’s insurance companies was –0.6% (–2.3). The negative figure was affected by a rise in interest rates.
Other operating income decreased significantly year on year to EUR 7 million (107). A year ago, the sale of the Vallila property increased other operating income. 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.
Total expenses decreased by 2.2% to EUR 507 million. Personnel costs rose by 6.7% to EUR 222 million due to a higher headcount. Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 2.3% to EUR 64 million.
Other operating expenses fell by 9.7% to EUR 221 million. ICT costs decreased by EUR 16 million to EUR 91 million. A one-off investment in the IT environment increased ICT costs a year ago. Development costs were EUR 46 million (50). Charges of financial authorities increased by 33.3% to EUR 46 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 20 million (114), of which EUR 22 million (106) concerned loans and receivables. The adoption of the new definition of default a year ago increased impairment loss on receivables by EUR 44 million in Q1 2020. A year ago, customers actively applied for repayment holidays on their loans and changes to their repayment schedules due to the Covid-19 crisis. Combined with the changes in macroeconomic parameters applied in the calculation of expected credit losses, this increased impairment loss on receivables by EUR 29 million in Q1 2020. Final net loan losses recognised totalled EUR 35 million (18). Loss allowance was EUR 691 million (708) at the end of the reporting period. Non-performing receivables (gross) accounted for 2.4% (2.5) of the exposures. Impairment loss on loans and receivables accounted for 0.09% (0.44) of the loan and guarantee portfolio.
OP Financial Group’s income tax amounted to EUR 55 million (33). The effective tax rate was 20.9% (25.7). A year ago, the 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 13.2 billion (13.1). Equity included EUR 2.9 billion (3.0) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.3). The return target for Profit Shares for 2021 is 3.25%. Interest payable on Profit Shares is estimated to total EUR 23 million (24). A total of EUR 95 million in interest for 2020 will be paid at the earliest in October 2021 in line with the recommendations of the ECB. The amount of interest paid for 2019 on 8 February 2021 totalled EUR 97 million.
Comprehensive income totalled EUR 187 million (–150). A year ago, comprehensive income was decreased by changes in the fair value reserve.
Outlook for 2021
The Covid-19 pandemic continued to afflict the economy in the first quarter of 2021. However, the pandemic did not weaken economic growth as much as before. In particular, the global economic mood and industrial sentiment remained good. During the quarter, confidence in the economy began to improve in the fields of the service sector too, and positive expectations were also reflected in the financial market. Stock and commodity prices rose. Along with the favourable outlook, inflationary expectations became higher and long-term market rates rose. Nevertheless, central banks continued their easy monetary policy and emphasised that this accommodative policy would still continue for a long time.
Based on the available information, the resilience of the Finnish economy to the growth in Covid-19 infections and the resulting restrictions has been rather good. Confidence in the economy has improved and economic recovery is expected to strengthen as the vaccination process proceeds and the pandemic abates.
The Covid-19 pandemic will continue to cause uncertainty over the economic outlook. 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 Covid-19 pandemic will cause uncertainty in the amount of impairment loss on receivables and investment income. OP Financial Group’s earnings before tax for 2021 are expected to be lower than in 2020.
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 28 April 2021 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.
Financial reporting in 2021
| Half-year Financial Report H1/2021 | 28 July 2021 |
| Interim Report Q1-3/2021 | 27 October 2021 |
| OP Amalgamation Capital Adequacy Report Q1 | Week 18 |
| OP Amalgamation Capital Adequacy Report H1/2021 | Week 31 |
| OP Amalgamation Capital Adequacy Report Q1-3/2021 | Week 44 |
Helsinki, 28 April 2021
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
DISTRIBUTION
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op.fi
OP Financial Group is Finland’s largest financial services group, with two million owner-customers and more than 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