OP Financial Group
Half-year Financial Report for 1 January–30 June 2021
Stock Exchange Release 28 July 2021 09.00am EEST
OP Financial Group’s Half-year Financial Report for 1 January–30 June 2021: Earnings before tax EUR 561 million – strong increase in total income, a decrease in impairment loss on receivables
- Earnings before tax improved by 96% to EUR 561 million (287).
- Income from customer business increased by a total of 6% to EUR 1,479 million (1,396). Net insurance income increased by 11% to EUR 326 million (295) and net commissions and fees by 12% to EUR 512 million (455). Net interest income decreased by 1% to EUR 641 million (646).
- Investment income rose by EUR 104 million, to EUR 164 million (61) year on year.
- Total income increased by 20% to EUR 1,777 million (1,481).
- Total expenses remained at the previous year’s level at EUR 991 million (993).
- Impairment loss on receivables was EUR 35 million (166), or 0.07% (0.34) 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 by 1% to EUR 95 billion (94) and deposits by 6% to EUR 74 billion (69) year on year.
- The CET1 ratio was 18.3% (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 110 million to EUR 138 million (28). Net interest income increased by 3% and net commissions and fees by 7%. Impairment loss on receivables decreased by 52% to EUR 47 million (99). The loan portfolio grew by 2% and deposits by 7% in the year to June.
- Corporate Banking earnings before tax improved by EUR 173 million to EUR 276 million (103). Net interest income increased by 1%, net commissions and fees by 51% and net investment income by 60%. Reversal of impairment losses on receivables improved earnings by EUR 12 million (–68). The loan portfolio decreased by 1% in the year to June.
- Insurance earnings before tax improved by EUR 91 million to EUR 220 million (130). Net insurance income grew by 11% to EUR 335 million (302). Investment income rose by EUR 60 million to EUR 94 million (34). The operating combined ratio improved to 86.2% (89.3) in non-life insurance.
- Other Operations earnings before tax were EUR –51 million (43). 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 138 million (154) in business development and improving customer experience.
- New OP bonuses accrued to owner-customers totalled EUR 103 million (129). 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.
- In its profit distribution, OP Financial Group complies with the recommendation of the European Central Bank (ECB) that will remain in force until 30 September 2021 and that applies to the payment of interest on Profit Shares for 2020. The ECB announced on 23 July 2021 that its recommendation limiting banks’ profit distribution will expire at the end of September 2021. OP Financial Group is preparing to pay interest on Profit Shares for 2020 after 30 September 2021 and will provide more information on the schedule of interest payment later in the autumn.
- Pohjola Insurance Ltd, part of OP Financial Group, will sell Pohjola Hospital Ltd to Pihlajalinna Terveys Oy for EUR 31.8 million. As part of the transaction, Pohjola Insurance and Pihlajalinna will sign a long-term cooperation agreement on the provision of health services for customers of Pohjola Insurance. The transaction is subject to approval by the Finnish Competition and Consumer Authority.
- OP Financial Group announced in a stock exchange release on 14 June 2021 that it has improved its earnings outlook for 2021. Earnings before tax for 2021 are expected to be at about the same level as or higher than in 2020. For more detailed information on the outlook, see “Outlook for 2021”.
OP Financial Group’s key indicators
| H1/2021 | H1/2020 | Change, % | Q1–4/2020 | |
| Earnings before tax, € million | 561 | 287 | 95.7 | 785 |
| Retail Banking | 138 | 28 | 389.5 | 115 |
| Corporate Banking | 276 | 103 | 167.2 | 349 |
| Insurance | 220 | 130 | 69.8 | 348 |
| Other Operations | -51 | 43 | -220.3 | 3 |
| New OP bonuses accrued to owner-customers, € million | -103 | -129 | - | -255 |
| Return on equity (ROE), % | 6.9 | 3.6 | 3.3* | 5.0 |
| Return on equity, excluding OP bonuses, % | 8.1 | 5.2 | 2.9* | 6.6 |
| Return on assets (ROA), % | 0.55 | 0.29 | 0.26* | 0.42 |
| Return on assets, excluding OP bonuses, % | 0.65 | 0.42 | 0.22* | 0.55 |
| 30 Jun 2021 | 30 Jun 2020 | Change, % | 31 Dec 2020 | |
| CET1 ratio, % | 18.3 | 17.7 | 0.7* | 18.9 |
| Loan portfolio, € billion | 94.7 | 93.7 | 1.1 | 93.6 |
| Deposits, € billion | 73.6 | 69.2 | 6.4 | 70.9 |
| Ratio of non-performing exposures to exposures, %** | 2.4 | 2.2 | 0.2* | 2.5 |
| Ratio of impairment loss on receivables to loan and guarantee portfolio, % | 0.07 | 0.34 | -0.27* | 0.23 |
| Owner-customers (1,000) | 2,039 | 2,013 | 1.3 | 2,025 |
Comparatives deriving from the income statement are based on figures reported for the corresponding periods a year ago. Unless otherwise specified, balance-sheet and other cross-sectional figures on 31 December 2020 are used as comparatives.
*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 Non-performing and forborne exposures in the Risk exposure section of this Half-year Financial Report.
Comments by President and Group Chief Executive Officer Timo Ritakallio
OP Financial Group’s January–June earnings before tax was excellent at EUR 561 million, representing a growth of 96% from a year earlier. All three business segments improved their earnings markedly year on year.
Our excellent performance demonstrates that our strategic focus on banking and insurance business is working well, and that we have succeeded in broadening our income base in line with our strategy while keeping our costs under control.
Total income increased on a wide front, totalling EUR 1,777 million, up by 20% year on year. Income from customer business increased by 6% to EUR 1,479 million due to higher net commissions and fees and net insurance income. Investment income increased markedly too.
OP Financial Group’s expenses for January–June remained at the previous year’s level. Impairment loss on receivables decreased by EUR 131 million year on year as our customers’ repayment capacity remained good.
OP Financial Group’s capital adequacy continued to be strong. At the end of June, the CET1 ratio was 18.3%, ranking among the best ratios reported by large European banks.
OP Financial Group’s loan portfolio increased by 1% and the deposit portfolio by 6% in the year to June. In particular, demand for corporate loans for new investments has remained low. Meanwhile, demand for home loans continued to be lively: the sale of new home loans by OP Financial Group was at record levels in April–June.
Our customers were particularly active in the capital market. In January–June, OP’s mutual funds attracted more than 100,000 new unitholders. Demand for other investment services was also high.
The use of cash has declined markedly in recent years, and the Covid-19 pandemic has further accelerated the shift to other means of payment among our customers. At the end of June, we announced our plan to further strengthen our mobile payment services through a joint mobile payment platform provided by OP Financial Group’s Pivo, the Danish MobilePay and the Norwegian Vipps. Our goal is to provide consumers, merchants and other distributors with an unrivalled mobile payment experience. The plan is subject to the approval of the competition authorities.
Merger projects between OP cooperative banks are underway around Finland. Following the mergers decided upon so far, there will be 121 OP cooperative banks at the end of 2021, compared to 137 a year earlier. In the Helsinki Metropolitan Area, Helsinki Area Cooperative Bank, Itä-Uudenmaan Osuuspankki and Uudenmaan Osuuspankki have begun discussions on a possible merger to form a single bank that will be even more competitive with even better services. The main goal is to improve the customer experience in Finland’s key growth area.
In July, we announced two major arrangements within OP Financial Group’s central cooperative consolidated to support our strategic focus on banking and insurance business. Pohjola Insurance will focus on non-life insurance – its core business – and divest its hospital business by selling the entire share capital of Pohjola Hospital Ltd to Pihlajalinna Terveys Oy, part of the Pihlajalinna Group. The transaction is subject to the approval of the Finnish competition authorities.
Pohjola Insurance Ltd, currently a subsidiary of OP Corporate Bank plc, will be transferred to the direct ownership of OP Cooperative. The aim of the planned arrangement is to simplify the structure and governance of OP Financial Group’s central cooperative consolidated and to clarify its management structure. Over the past three years, we have implemented our strategy to considerably simplify the structure of the central cooperative consolidated and have achieved major cost savings through these actions.
The economic recovery rate picked up in the second quarter. However, the economic situation is characterised by several contradictions. In some sectors, recovery has been offset by bottlenecks, and part of the service sector is still suffering badly from the restrictions caused by the Covid-19 pandemic. While the employment rebound is lagging in some sectors despite the improved Covid-19 situation, other sectors are suffering from labour shortage.
The global economic outlook is basically positive, but simultaneously characterised by uncertainty created by the exceptional situation. The new variants of the coronavirus may unexpectedly weaken economic recovery, and the rise in inflation may be more sustained than expected.
The Finnish economy is expected to continue its recovery. The Finnish economy suffered less from the Covid-19 pandemic than many other countries, and we are among the first developed countries to return to the pre-crisis growth path.
However, the anticipated growth trend of Finland will be more subdued than in its key competitor countries. There is still an urgent need for structural measures improving competitiveness so that Finnish companies will be able to fully seize the growth opportunities that will open up in international markets after the crisis. During the Covid-19 crisis, Finland has demonstrated itself to be a stable country, which may appeal to international investors. This is an opportunity that we can’t afford to miss.
January–June
OP Financial Group’s earnings before tax amounted to EUR 561 million (287), up by EUR 274 million from the previous year. As regards income from customer business, net insurance income and net commissions and fees showed strong growth. Earnings were also increased by higher investment income and lower impairment loss on receivables.
Net interest income decreased by 0.7% to EUR 641 million. Net interest income reported by the Retail Banking segment increased by 3.1% and that by the Corporate Banking segment by 0.5%. Meanwhile, net interest income reported by the Other Operations segment decreased by EUR 14 million. OP Financial Group’s loan portfolio grew by 1.1% to EUR 94.7 billion and deposits by 6.4% to EUR 73.6 billion, year on year. New loans drawn down by customers during the reporting period totalled EUR 11.7 billion (11.7).
Net insurance income increased by 10.5% to EUR 326 million. The Insurance segment’s non-life insurance premium revenue increased by 1.6% to EUR 752 million. Claims incurred decreased by 4.0% to EUR 441 million. Operating combined ratio reported by non-life insurance improved to 86.2% (89.3).
Net commissions and fees totalled EUR 512 million (455). Net commissions and fees for payment transfer services increased by EUR 10 million and those for deposits by EUR 11 million. Fund and management fees grew by EUR 20 million.
Net investment income increased by EUR 283 million to EUR 255 million. Net income from financial assets at fair value through other comprehensive income totalled EUR 37 million (32), of which capital gains accounted for EUR 9 million (16).
Net income from financial assets recognised at fair value through profit or loss totalled EUR 83 million (118). Net income from financial assets held for trading decreased by a total of EUR 271 million due to changes in the fair value of derivatives. Value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes improved earnings by EUR 15 million (–21). Income from equity instruments recognised at fair value in the income statement increased by a total of EUR 296 million year on year. When the Covid-19 crisis broke out a year ago, the fair value of equities decreased significantly. Life insurance items, which include, for example, changes in technical items, increased net investment income by EUR 282 million to EUR 125 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 91 million, while a year ago it increased investment income by EUR 89 million. Total investment income rose by EUR 104 million year on year, to EUR 164 million. Capital gains on all financial instruments recognised through fair value reserve totalled EUR 79 million (32). The combined return on investments at fair value of OP Financial Group’s insurance companies was 0.5% (1.6).
Other operating income decreased year on year to EUR 43 million (112). The sale of Checkout Finland Ltd to Paytrail Oyj on 30 April 2021 increased other operating income. A year ago, the sale of the Vallila property increased other operating income, for which OP Financial Group recognised a capital gain of EUR 98 million 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 of EUR 991 million (993) were at the previous year’s level. Personnel costs increased by 10.9% to EUR 460 million due to higher provisions for performance-based bonuses and a higher headcount. Depreciation/amortisation and impairment loss on PPE and intangible assets were at the previous year’s level at EUR 128 million (129).
Other operating expenses decreased by 10.4% to EUR 403 million. ICT costs decreased by EUR 34 million to EUR 172 million. A one-off investment in the IT environment increased ICT costs a year ago. Development costs were EUR 90 million (100). Charges of financial authorities increased by 26.5% to EUR 53 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 38 million (180), of which EUR 35 million (166) concerned loans and receivables. 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 65 million in January–June 2020. In addition, the adoption of the new definition of default in January-March 2020 increased impairment loss on receivables by EUR 44 million in January–June 2020. Final net loan losses recognised totalled EUR 51 million (26). Loss allowance was EUR 689 million (708) at the end of the reporting period. Non-performing exposures (gross) accounted for 2.4% (2.5) of the exposures. Impairment loss on loans and receivables accounted for 0.07% (0.34) of the loan and guarantee portfolio.
OP Financial Group’s income tax amounted to EUR 109 million (62). The effective tax rate was 19.4% (21.8). A year ago, the rate was increased by the changes in deferred taxes arising from the sale and leaseback of the Vallila property.
Non-life insurance will focus on its core business and sell its hospital business. In the second quarter, Pohjola Hospital was classified as a non-current asset held for sale. Hospital business assets and liabilities recognised in the balance sheet totalled EUR 7 million.
OP Financial Group’s equity amounted to EUR 13.5 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 accrued during the reporting period is estimated to total EUR 47 million (47). 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 466 million (158). A year ago, comprehensive income was decreased by changes in the fair value reserve.
Outlook for 2021
The number of Covid-19 cases decreased in many countries in the spring of 2021. The world economic recovery gathered momentum and spread more clearly to the service sector too. Inflation accelerated clearly in many countries. This was partly due to a poor benchmark level but also to the bottlenecks arising from the economic recovery and a rise in commodity prices.
Inflation anxiety eased in the financial market in the course of the second quarter and required bond yields went down. Mood in the stock market remained robust. Central banks continued to pursue an accommodative monetary policy, and it is not expected to tighten this year.
The Finnish economic recovery rate picked up in the second quarter. The financial situation of both companies and households was favourable. Bankruptcies remained at prior years’ level and unemployment decreased. Mood in the housing market was robust. The Finnish economy is expected to continue its recovery during the rest of the year.
The Covid-19 pandemic still poses the greatest direct risk to the economy although the impact of the new waves of coronavirus infections on the economy has step by step diminished with the increasing vaccinations rates. Furthermore, a stronger-than-expected rise in inflation in the longer term would worsen the economic outlook. It would weaken consumer purchasing power and suggest problems in recovery and in the success of the economic policy.
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.
OP Financial Group’s earnings before tax for 2021 are expected to be at about the same level as or higher than in 2020. The Covid-19 pandemic will continue to cause uncertainty in the amount of impairment loss on receivables and investment income.
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 28 July 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 half-year financial reports.
Financial reporting in 2021
| Interim Report Q1-3/2021 | 27 October 2021 |
| OP Amalgamation Capital Adequacy Report 30 June 2021 | Week 32 |
| OP Amalgamation Capital Adequacy Report 30 September 2021 | Week 44 |
Helsinki, 28 July 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
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op.fi
OP Financial Group is Finland’s largest financial services group that has 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