OP Financial Group's Interim Report for 1 January-30 September 2016: Earnings and growth in the number of new customers at record levels

2. November 2016

OP Financial Group
Interim report for 1 January-30 September 2016
2 November 2016 at 9.00 am EET

OP Financial Group's Interim Report for 1 January-30 September 2016: Earnings and growth in the number of new customers at record levels

January-September earnings were the second best ever recorded by the Group and new home loans drawn down were 11% higher than a year ago    

• Earnings before tax were EUR 921 million (926) and profitability was at the targeted level based on the strategy.
• July-September earnings before tax, EUR 306 million (299), were the best third-quarter figure ever recorded by the Group. 
• Net interest income increased by 4% and net insurance income by 5% but net commissions and fees decreased by 2%. Expenses rose by 3% due mainly to higher development expenditure.
• Equity capital exceeded EUR 10 billion.
• The CET1 ratio was 19.7% (19.5) on 30 September 2016. Based on the results of the stress test conducted by the European Banking Authority, the Group's capital adequacy clearly exceeded regulatory requirements also in an operating environment of an extremely adverse scenario.
• Home and corporate loans as well as deposits increased by 5% in the year to September. Home loans drawn down rose by 11%. 
• Non-life Insurance recorded an operating combined ratio of 86.5% (86.3). Insurance premium revenue rose by 2%.
• Assets managed by Wealth Management increased by 12% over the previous year. 
• Full-year earnings for 2016 are expected to be of about the same size as the record earnings reported in 2015. 

120,000 new OP Financial Group banking customers and almost 230,000 new owner-customers   

• OP Financial Group got 120,000 new banking customers, or 22% more than a year ago. Growth was concentrated on the second and third quarter. The number of owner-customers increased by almost 230,000 to over 1.7 million.
• New OP bonuses totalled over EUR 154 million, up by almost 5% year on year.
• Contrary to the general trend in the sector, customer satisfaction with the Group and reputation have improved according to the surveys published during the reporting period (Pankki ja rahoitus 2016 survey by EPSI Rating and Luottamus & Maine survey by T-media).
• In June, OP Financial Group confirmed an updated strategy aimed at broad-based renewal. The implementation of the new strategy has started on a wide front. During the reporting period, the Group opened a new Pohjola Hospital in Tampere.  OP Financial Group supplemented its strategic targets with a new customer experience metric in the autumn.

  

OP Financial Group's key indicators

	Q1-3/2016	Q1-3/2015	Change, %	Q1-4/2015
Earnings before tax, EUR million	921	926	-0.6	1,101
Banking	467	531	-12.0	642
Non-life Insurance	200	218	-8.5	259
Wealth Management	191	168	13.9	213
New OP bonuses accrued to owner-customers	154	147	4.8	197
	30 Sept. 2016	30 Sept. 2015	Change, %	31 Dec. 2015
Common Equity Tier 1 (CET1) ratio, %	19.7	18.6	1.0*	19.5
Return on economic capital, % **	22.2	21.2	1.0*	21.5
Ratio of capital base to minimum amount of capital base (under the Act on the Supervision of Financial and Insurance Conglomerates), % ***	164	180	-16*	191
Ratio of impairment loss on receivables to loan and guarantee portfolio, %	0.06	0.08	0.0*	0.10
Joint banking and insurance customers (1,000)	1,720	1,637	5.1	1,656

Comparatives deriving from the income statement are based on figures reported for the corresponding period in 2015. Unless otherwise specified, balance-sheet and other cross-sectional figures on 31 December 2015 are used as comparatives.

* Change in ratio

** 12-month rolling, change in percentage

*** The FiCo ratio has been calculated under Solvency II transitional provisions and the comparatives have been adjusted

Comments by Reijo Karhinen, President and Group Executive Chairman

Along with our new strategy, the solid financial basis and attractiveness of OP Financial Group that is boldly reinventing itself are excellent and strengthening further. We have managed to make choices that our customers appreciate. Research results show that customer satisfaction with us has improved contrary to the general trend in the sector and the influx of new customers has been extraordinarily heavy. Our above the market average growth on a wide front and our earnings performance that has remained at record level are clearly some of our successes this year.

Our good earnings performance was supported by growth in volumes and the resulting clear increase in net interest income. At the same time, we could keep costs moderate although our investments in product and service development increased substantially. It is worth noting that our loan losses have remained low. Commission income has shown weak development since the beginning of the year.

As a result of digitisation, new market entrants and drastic change in customer behaviour, the financial sector is facing a major turning point. We at OP Financial Group must ensure that we will not slow down our reinvention process at the moment of success either. A strong player too must now reinvent itself and even radical changes will be necessary when adapting to the realities that the new daily business will involve.

Our new strategy confirmed in June is guiding our choices. Our strong financial position helps to implement it. Creating a new type of a diversified services company will necessitate learning plenty of new things and unlearning old ones at an accelerating pace. Improving agility on a wide front, creating new revenue generation in the disruptive market and securing price competitiveness will be our biggest challenges.

Customers are at the core of our strategy. Customer experience and its continuous improvement have become one of our most important strategic metrics. Customer expectations and change in customer behaviour will prompt us to create new, easy-to-understand service packages across industry boundaries. In the face of a changing operating environment and a fragmenting world around us, we will need combining forces that help people to control their daily lives. Pohjola Hospital's high customer satisfaction score is proof of how a superior customer experience can be created by combining services and products in an unconventional way.

Finland, which will soon celebrate its 100th anniversary as an independent nation, deserves and needs courageous forerunners. Future economic growth requires investments which will not emerge without reinvention. Society is tasked with creating the settings that support reinvention - the old tools have largely been used up. The Finnish economy has continued its slow recovery and consumer confidence has improved slightly. The economic policy has already taken steps in the right direction, but is the speed then fast enough?  The world is now changing at a pace that the philosophy based on the four-year government platform cannot recognise. What we now need in every aspect of society is more agility and innovation. In a digital operating environment, Finland will have every prospect of a becoming nation with a bigger success than what its size suggests.

January-September

OP Financial Group's earnings before tax were EUR 921 million (926), or the second best January-September figure ever recorded. A year ago, the Group recorded its all-time high January-September EBT.

Net interest income increased by 4.2% to EUR 799 million and net insurance income rose by 5.1% to EUR 418 million. Net commissions and fees decreased by 2.3% to EUR 637 million. Net commissions and fees were reduced by a reduction of EUR 4 million in brokerage fees due to the Invest in Finland initiative as part of the #Suominousuun (Putting Finland on a new growth path) initiative, and to an increase of EUR 7 million in commission expenses.

Net investment income decreased by 23.5% to EUR 282 million. Lower returns on equity instruments and impairment losses had an effect on a reduced net income from available-for-sale assets. Income from Life Insurance notes and bonds measured at fair value was increased by the individual life insurance portfolio transferred from Suomi Mutual to OP Financial Group at the end of 2015. Net income from securities trading was reduced by negative value changes in Credit Valuation Adjustment (CVA) in derivatives owing to market changes. Hedging interest rate risk associated with the insurance liability of Life Insurance added to income from derivatives.

Other operating income rose by EUR 71 million year on year to EUR 104 million. This rise resulted from the non-recurring gain of EUR 71 million recognised on the sale of Visa Europe Ltd.

Total expenses increased by 2.9% to EUR 1,136 million. The Group's major investments in service development increased other operating expenses by EUR 40 million. Development expenditure totalled EUR 96 million.

A non-recurring provision recognised a year ago for personnel costs totalled EUR 9 million, related to the reorganisation of the central cooperative consolidated. In addition, other operating expenses a year ago included the non-recurring expenses totalling EUR 18 million related to the intra-Group ownership reorganisation and the reconstruction of the Vallila premises. 

Impairment losses recognised under various income statement items that reduced earnings amounted to EUR 84 million (73), of which EUR 36 million (47) concerned loans and receivables. Net impairment loss on loans and receivables were very low, at 0.06% (0.08) of the loan and guarantee portfolio.

The Group's income tax before change in deferred tax amounted to EUR 183 million (215). The effective tax rate was 19.8% (23.2). A year ago, the tax rate was increased by capital gains tax on OP Financial Group's internal transactions.

Equity capital increased by 8.0%, exceeding EUR 10 billion. Group earnings added to equity capital. On 30 September 2016, EUR 2.6 billion (2.5) in Profit Shares were included in equity, terminated Profit Shares accounting for EUR 0.2 billion (0.3). The fair value reserve grew by EUR 169 million to EUR 411 million.

Outlook towards the year end

Supported by the domestic market, the Finnish economy has recovered slowly during the current year. Consumer spending and construction, in particular, have contributed to economic growth but export performance has remained sluggish. Unemployment has decreased and confidence improved. The world economy is expected to continue its slow growth and exports should not see any quick recovery. The Finnish economy is expected to continue its fairly slow growth, supported in the first place by domestic demand. Unrest in financial markets caused by the UK EU membership referendum eased off at the end of the reporting period but Brexit and many other political and economic risks are still casting a shadow over the outlook. In Finland, the faltering implementation of the economic policy measures already decided may threaten recovery.

Market interest rates that have in part turned negative places a burden on the net interest income of banks and erodes the investment income of insurance institutions. Then again, low interest rates support customers' loan repayment capacity, which has kept banking impairment loss low despite the prolonged period of slow economic growth. Digitisation in the financial sector, upgrading fragmented information system infrastructures and change in customer behaviour will require significant development investments in the sector in the next few years, which will increase expenses and weaken profitability in the short term. Changes in the operating environment will highlight the role of operational efficiency and profitability as well as a strong capital base.

OP Financial Group's full-year 2016 earnings before tax are expected to be of about the same size as the record earnings reported in 2015. Abnormally high uncertainty that is related to developments in the operating environment has further increased short-term earnings volatility, which will have an effect on the predictability of OP Financial Group's full-year earnings performance. The most significant uncertainties are related to changes in the interest rate and investment environment. 

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 of 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 Executive Chairman Reijo Karhinen in a press conference on 2 November 2016 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc will publish its own Financial Statements Bulletin.

Financial reporting in 2017

Schedule for Financial Statements Bulletin for 2016 and Interim Reports in 2017:

Financial Statements Bulletin 2016            2 February 2017
Interim Report Q1/2017                              27 April 2017
Interim Report H1/2017                              2 August 2017
Interim Report Q1-Q3/2017                        1 November 2017

Helsinki, 2 November 2016

OP Cooperative
Executive Board

Additional information:
Reijo Karhinen, President and Group Executive Chairman, tel. +358 (0)10 252 4500
Harri Luhtala, CFO, tel. +358 (0)10 252 2433
Carina Geber-Teir, Executive Vice President, Corporate Communications, tel. +358 (0)10 252 8394

DISTRIBUTION
Nasdaq Helsinki Ltd
London Stock Exchange
SIX Swiss Exchange
Major media
op.fi and pohjola.com

OP Financial Group is Finland's largest financial services group whose mission is to create sustainable prosperity, security and wellbeing for its owner-customers and in its operating region by means of its strong capital base and efficiency. OP Financial Group consists of about 180 member cooperative banks, its central cooperative OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000 and approximately 1.7 million owner-customers and 4.3 million customers. www.op.fi

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