OP Financial Group's Financial Statements Bulletin for 1 January-31 December 2015: Record year - customer ownership bears fruit

OP Financial Group
Stock Exchange Release 4 February 2016 at 9.00 am EET
Financial Statements Bulletin

OP Financial Group's Financial Statements Bulletin for 1 January-31 December 2015:
Record year - customer ownership bears fruit

• The Group's earnings before tax increased by 20% to EUR 1,101 million (915). This figure is OP Financial Group's all-time high.        
• Total income increased by 5% and expenses decreased by 2% year on year.
• The CET1 ratio improved by 4 percentage points to 19.5% (15.1), supported by strong earnings, which, for its part, enabled strong growth in lending:
  • The home loan portfolio grew by 3.9% in the year to December
  • The corporate loan portfolio increased by 9.3%
  • The total loan portfolio increased by 6.4% and the number of loans drawn down by 8.7%
• New customer bonuses totalled EUR 197 million, up 4.5% year on year.
• Contributions made by owner-customers to cooperative capital increased to EUR 2.8 billion (1.9). OP Financial Group anticipates paying interest of 3.25% on Profit Shares for 2015. Interest payable totals about EUR 66 million.
• Each of the three business segments improved its performance markedly:
  • Banking earnings before tax increased by 12% to EUR 642 million (571). The cost/income ratio improved by 2 percentage points to 54%. The deposit portfolio grew by 6.5%. Impairment loss on receivables remained low at 0.10% of the loan and guarantee portfolio. 
  • Non-life Insurance earnings before tax increased by 16% to EUR 259 million (223). The operating combined ratio of 87.3% was the best ever recorded. Insurance premium revenue rose by 7%.
  • Wealth Management earnings before tax increased by 28% to EUR 213 million (167). Assets under management grew by 12% to EUR 68 billion.
• Full-year earnings for 2016 are expected to be about the same as in 2015.  For more detailed information on the outlook, see "Outlook for 2016".

       
OP Financial Group's key indicators

Comparatives deriving from the income statement are based on figures reported for the corresponding period in 2014. Unless otherwise specified, balance-sheet and other cross-sectional figures on 31 December 2014 are used as comparatives.
* Change in ratio.

Comments by Reijo Karhinen, President and Group Executive Chairman

Our long-standing success and determined transformation measures continued in 2015 as well. Our earnings and capital base increased to new record levels. A 6% growth in our loan portfolio and an almost 10% increase in our corporate loan portfolio, in particular, convey a message of our ability to provide our customers with opportunities for success today and tomorrow. Emphasis on growth - our strategic basis - at the same time maintains the required competition in the Finnish financial market.

We made strong progress in our business role. I am as happy with our efforts in our social role. As a company owned by customers, our duty is to promote the success of our owner-customers and operating region. By means of growth faster than that of our competitors and several #Suominousuun (Putting Finland on a new growth path) initiatives, we created positive mood both among our large clientele and in the Finnish economy as a whole. This is the course we will continue to stay. Community spirit as a value is a rising trend and, in my view, the cooperative system is more attractive than ever before.

The financial services sector is faced by one of the largest transformations of all time. Digitisation, cross-border competition and quickening changes in customer behaviour are challenging industry players in a new way. At OP Financial Group, we have made determined efforts to sharpen our vision. Cooperative ideology will continue to be our strategic basis. Maximising benefits for our owner-customers guide our choices and business. Our strong capital base combined with superior customer experience will guarantee our unique success story. 

In 2008, we promised to help our customers to go through the financial crisis. Now we promise to make our customers go through the digital transformation - on their own terms. The greater power of customers resulting from digitisation is a big asset and source of inspiration for us. When this is combined with a real customer ownership, a series of opportunities will open to us. In the future of the connecting world, only those financial services providers will succeed that can serve their customers and interact with them irrespective of time, place or service channel.

Enhancing digital expertise is an important competitive weapon to OP Financial Group. Investments in digitisation are traditionally seen as investments in technology. But for us at OP, they first of all mean investments in customer experience and service design. We have continued to make bold investments in future service capabilities and in our Oulu mobile development unit already established in 2011. We have now already taken the next steps. In addition to digital experts, we have hired dozens of service designers to arise to the challenge of digital business and to enable more customer-driven development work. We represent Finnish pioneership in service design in the financial sector.

We are making efforts to reinvent ourselves but we are concerned about stagnation in the Finnish economy and, on a broader basis, in Finnish society. Disagreement is now the last thing we need. In the digitising world, Finland must respond to the pressures for change at a pace that is completely different from before, or otherwise the Finnish foundations renowned as strong will wobble. What we need most now is an atmosphere of renewal and trust as well as agile decision-making and decision implementation.

Financial performance in the report period

Earnings before tax increased by 20.4% to EUR 1,101 million (915), being almost 10% higher than the previous record figure for 2007. This improvement was due especially to a 9% increase in other income. Net income posted by Life Insurance and Non-life Insurance increased as a result of improved insurance profitability. Net commissions and fees were at the level reported a year ago. Estate agent fees and lending fees were lower than a year ago whereas fees related to mutual funds and payment transaction fees increased. Net trading income rose due to income from derivatives trading.  Capital gains on securities added to net investment income.  

Net interest income decreased by 1.7% to EUR 1,026 million. Net interest income from retail and corporate banking increased but that from Markets and the liquidity buffer decreased. Net interest income from the liquidity buffer was reduced by narrower credit spreads of bonds and the Group's preparation for tighter liquidity regulation. The reduced net interest income from Markets was compensated by an increase in its other income.

Total expenses decreased by 2.3%, being EUR 35 million lower than a year ago. Higher personnel costs were explained by a EUR 40-million increase in pension costs and a non-recurring EUR 9 million in expenses related to the reorganisation of the central cooperative consolidated. Higher pension costs were explained, among other things, by amended pension laws adopted at the end of the year. Wages and salaries were at the previous year's level. In addition to business expansion, the non-recurring expenses of EUR 18 million related to intra-Group ownership reorganisation and the reconstruction of the Vallila premises increased other expenses.  ICT costs increased by 5.7%, being EUR 11 million higher than in the previous year. A year ago, statutory contributions to the Deposit Guarantee Fund and the bank levy, totalling EUR 72 million, and non-recurring expenses of EUR 12 million, related to the purchase of Pohjola Bank plc shares, increased other expenses.

Impairment losses recognised under various income statement items that reduced earnings amounted to EUR 114 million (113), of which EUR 78 million (88) concerned loans and receivables. Net impairment loss on loans and receivables were low, at 0.10% (0.12) of the loan and guarantee portfolio.

Earnings before tax at fair value amounted to EUR 883 million (1,067). OP Financial Group's fair value reserve before tax totalled EUR 302 million (531) on 31 December.

Equity capital amounted to EUR 9.3 billion (7.2) on 31 December. This increase was due to both Group earnings and the issues of Profit Shares. On December 31, EUR 2.5 billion (1.6) in Profit Shares were included in equity, terminated Profit Shares accounting for EUR 0.3 billion. In March 2015, the central cooperative's Executive Board decided to raise the target level of Profit Shares by EUR 0.4 billion to EUR 2.3 billion. This target amount has virtually been met.

Outlook for 2016

The world economy is expected to grow at a rate below the average. Economic growth in the euro area is anticipated to remain moderate. Finnish economic growth has been modest for a long time now. Weak export demand, eroding price competitiveness and slow reform of economic structures are threatening to make the Finnish economic growth rate clearly lag behind the euro area for several years.  Implementing the structural reforms may tighten the political situation, which may, for its part, threaten the recovery of the domestic market. The current exceptional world economic situation with low interest rates and quantitative easing measures by central banks will also cause major uncertainty to the future economic development.    

The weak Finnish economy will keep long-term growth expectations low in the financial sector. Low interest rates will erode banks' net interest income and weaken insurance institutions' investment income. Then again, low interest rates support customers' loan repayment capacity that has remained stable despite the prolonged period of slow growth. Capital adequacy and profitability in the financial sector have come to play an ever-increasing role because of the unstable operating environment and the tighter regulatory framework.   

OP Financial Group expects its earnings before tax for 2016 to be at about the same level as in 2015. The most significant uncertainties associated with the earnings estimate are related to unfavourable changes in the interest rate and investment environment. Some uncertainty is also associated with developments in impairment loss on receivables.     

All forward-looking statements in the Financial Statements Bulletin 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 Executive Chairman Reijo Karhinen in a press conference on 4 February 2016 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

Pohjola Bank plc will publish its own Interim Report.

Financial reporting in 2016

Schedule for Interim Reports in 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
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op.fi and pohjola.fi

OP Financial Group is Finland's leading financial services group providing a unique range of banking, wealth management and insurance services. OP's mission is to promote the sustainable prosperity, security and wellbeing of its customer-owners, customers and operating regions. Its objective is to offer the best and most versatile package of loyal customer benefits on the market. OP Financial Group consists of about 180 member cooperative banks, its central institution OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000. OP Financial Group has 4.3 million customers.

As laid down in the applicable law, OP Cooperative and its member credit institutions are ultimately jointly and severally liable for each other's debts and commitments. The joint liability in the OP Financial Group is prescribed by the Act on the Amalgamation of Deposit Banks. Pohjola Bank plc and OP Mortgage Bank are responsible for OP's funding operations on money and capital markets. www.op.fi