OP Financial Group
Interim Report 1 January–30 September 2022
Stock Exchange Release 26 October 2022 at 9.00 EEST
OP Financial Group’s Interim Report for 1 January–30 September 2022: Earnings before tax EUR 940 million – a good result in an uncertain business environment
- Earnings before tax totalled EUR 940 million (858).
- Income from customer business increased by a total of 7% to EUR 2,431 million (2,274). Net interest income increased by 16% to EUR 1,122 million (971) and net insurance income by 2% to EUR 553 million (542). Net commissions and fees totalled EUR 756 million (761).
- Net investment income decreased to EUR –73 million (253). Including the overlay approach, investment income decreased by 41% to EUR 120 million (204).
- Total income decreased by 6% to EUR 2,410 million (2,573). Including the overlay approach, total income increased by 3% to EUR 2,602 million (2,524).
- Total expenses increased by 1% to EUR 1,436 million (1,420).
- Impairment loss on receivables in the income statement decreased by EUR 24 million to EUR 70 million (95). Ratio of impairment loss on receivables to loan and guarantee portfolio was 0.09% (0.13).
- OP Financial Group’s loan portfolio grew by 4% to EUR 99 billion (95) and deposits by 1% to EUR 75 billion (75) in the year to September.
- CET1 ratio was 17.7% (18.2), which exceeds the minimum regulatory requirement by 5.9 percentage points. OP Financial Group adopted a risk-weighted assets (RWA) floor, based on the Standardised Approach, in the second quarter. This decreased the CET1 ratio by one percentage point.
- Retail Banking earnings before tax increased to EUR 335 million (224). Net interest income increased by 11% to EUR 792 million (715) and net commissions and fees by 4% to EUR 583 million (560). Impairment loss on receivables decreased by EUR 16 million to EUR 54 million (70). The loan portfolio grew by 0.4% and deposits by 3% in the year to September.
- Corporate Banking earnings before tax decreased to EUR 220 million (356). Net interest income increased by 9% to EUR 334 million (305), net commissions and fees decreased by 14% to EUR 124 million (144) and net investment income decreased by EUR 112 million to EUR 18 million (130). Impairment loss on receivables decreased by EUR 9 million to EUR 16 million (25).
- Insurance earnings before tax decreased to EUR 319 million (380). Net insurance income grew by 2% to EUR 564 million (552). Investment income decreased by EUR 104 million to EUR 31 million (135). Non-life Insurance recorded an operating combined ratio of 89.6% (81.8).
- Group Functions earnings before tax were EUR –16 million (–70).
- New OP bonuses accrued to owner-customers totalled EUR 161 million (157).
- On 30 September 2022, OP Financial Group filed an application with the European Central Bank (ECB) on the use of the Standardised Approach in capital adequacy calculation, instead of the internal models (IRBA) and the currently applied risk-weighted assets floor based on the Standardised Approach. Transfer to the Standardised Approach is estimated to have no essential effect on OP Financial Group’s capital adequacy or risk exposure.
- On 19 September 2022, OP Financial Group improved its earnings outlook for 2022. Earnings before tax for 2022 are expected to be at about the same level as or higher than in 2021 (previously lower). For more detailed information on the outlook, see “Outlook towards the year end”.
- OP Financial Group will increase the OP bonuses earned by owner-customers for 2023 by 30% – estimated additional bonuses totalling more than EUR 60 million paid to owner-customers.
OP Financial Group’s key indicators
| Q1-3/2022 | Q1-3/2021 | Change, % | Q1–4/2021 | |
| Earnings before tax, € million | 940 | 858 | 9.6 | 1,127 |
| Retail Banking | 335 | 224 | 49.6 | 304 |
| Corporate Banking | 220 | 356 | -38.3 | 474 |
| Insurance | 319 | 380 | -16.0 | 504 |
| Group Functions | -16 | -70 | - | -109 |
| New OP bonuses accrued to owner-customers, € million | 161 | 157 | 2.9 | -210 |
| Return on equity (ROE), % | 7.2 | 6.9 | 0.3* | 6.6 |
| Return on equity, excluding OP bonuses, % | 8.4 | 8.1 | 0.3* | 7.8 |
| Return on assets (ROA), % | 0.59 | 0.56 | 0.03* | 0.54 |
| Return on assets, excluding OP bonuses, % | 0.69 | 0.66 | 0.03* | 0.64 |
| 30 Sep 2022 | 30 Sep 2021 | Change, % | 31 Dec 2021 | |
| CET1 ratio, % | 17.7 | 19.0 | -1.3* | 18.2 |
| Loan portfolio, € billion | 98.9 | 95.2 | 3.8 | 96.9 |
| Deposits, € billion | 75.4 | 74.6 | 1.1 | 75.6 |
| Ratio of non-performing exposures to exposures, % | 2.4 | 2.4 | 0.0* | 2.4 |
| Ratio of impairment loss on receivables to loan and guarantee portfolio, % | 0.09 | 0.13 | -0.04* | 0.16 |
| Owner-customers (1,000) | 2,062 | 2,045 | 0.8 | 2,049 |
Comparatives for the income statement are based on the corresponding figures a year ago. Unless otherwise specified, figures from 31 December 2021 are used as comparatives for balance-sheet and other cross-sectional items.
*Change in ratio
Comments by President and Group Chief Executive Officer Timo Ritakallio
The first nine months of 2022 were marked by exceptional levels of uncertainty. The operating environment was dominated by Russia’s aggressive war in Ukraine, the resulting energy crisis in Europe, rapidly growing inflation and clearly higher market rates. Despite the uncertain operating environment, OP Financial Group’s earnings before tax for January–September were excellent at EUR 940 million. In the year to September, income from customer business increased by seven per cent, in line with our strategic targets. Income growth was particularly boosted by strong growth in net interest income in Retail Banking. In the Insurance business, the claims trend normalised and claims expenditure rebounded to its pre-pandemic level. In the challenging capital market, investment income was clearly lower than a year ago. In the year to September, total income increased by three per cent and total expenses by one per cent.
The loan portfolio showed an annual growth rate of four per cent and deposits an annual growth rate of one per cent. Despite the weaker economic situation, the loan repayment capacity of personal and corporate customers remained good during the reporting period, and impairment loss on receivables remained low.
OP Financial Group’s CET1 ratio was very strong, reaching 17.7% (18.2) at the end of September. This exceeds the minimum regulatory requirement by 5.9 percentage points.
This year, households’ real income has decreased due to widespread inflation and higher market rates. The higher cost of housing and higher market rates are affecting the daily lives of a growing number of people with home loans. The most common reference rate for home loans, the 12-month Euribor, has risen exceptionally fast in the last few months – from one per cent in early July to more than 2.5% by the end of September. A third of OP Financial Group’s home loan customers have set an interest rate cap to protect themselves against rising interest rates. Interest rate caps are currently reducing the interest expenses of more than 60,000 home loan customers; around 100,000 home loan customers are expected to be benefiting from interest rate protection by the end of the year.
In the housing market, the weaker economic environment is reducing the number of homes bought and sold, and therefore demand for home loans. The upward trend in home prices has slowed. Next year, home prices are expected to fall slightly due to higher interest rates and housing costs, and waning economic growth.
Over the coming months, the weaker economic situation may reduce the ability of both personal and corporate customers to make loan repayments according to the original plan. In such cases, we encourage our customers to discuss their situation with their OP cooperative bank as early as possible.
Finnish households have remained active in systematic investing despite the uncertain economic outlook. In January–September, our customers made more than 85,000 systematic investment plans for mutual funds and opened 55,000 new book-entry accounts and equity savings accounts. Sustainability and corporate responsibility are playing a growing role in investment: of the 47,000 new investors who began investing in mutual funds this year, 79% chose funds categorised as responsible.
The economic outlook continues to be exceptionally uncertain, and the Finnish economy is expected to slow down markedly. Economic growth is slowing not only due to rapidly rising inflation but also because of the brisk upswing in market rates, the current energy crisis and weakening economic growth in Finland’s main export markets. Corporate and household finances in Finland are relatively good, making it easier to adjust to the weaker times lying ahead. However, the rise in interest rates means that growing public debt and the structural sustainability gap in the public finances must be taken even more seriously.
In September, we raised OP Financial Group’s earnings outlook for 2022. We expect our earnings before tax to be at about the same level or higher than in 2021.
OP Financial Group is owned by its customers. In line with our mission, we want to allocate part of our profitability improvement to support the daily lives of our almost 2.1 million owner-customers in these financially challenging times. We will increase the OP bonuses earned by our owner-customers for 2023 by 30%. This means an additional bonus totalling more than 60 million euros for owner-customers, who can ease the pressure on their household finances by using bonuses to cover charges debited for banking and insurance services.
We will also allocate part of our strong profitability to further improving our customer service and to carrying out various concrete corporate responsibility actions across Finland. In such times, it is particularly important to safeguard opportunities for exercise and hobbies for children and youths, and to support the less fortunate in other respects.
Once again, our strong financial position and high capital adequacy are providing us with excellent conditions to make it through hard times together with our customers.
I want to express my warmest thanks to our customers for their trust and to our employees and governing body members for their outstanding and successful work this year!
January–September
OP Financial Group’s earnings before tax amounted to EUR 940 million (858), up by EUR 82 million from the previous year. As regards income from customer business, net interest income and net insurance income increased. Earnings were reduced by lower investment income.
Net interest income increased by 15.5% to EUR 1,122 million. A rise in interest rates increased net interest income significantly. Net interest income reported by the Retail Banking segment increased by EUR 77 million, that by the Corporate Banking segment by EUR 29 million and that by the Group Functions segment by EUR 44 million. OP Financial Group’s loan portfolio grew by 3.8% to EUR 98.9 billion and deposits by 1.1% to EUR 75.4 billion, year on year. New loans drawn down by customers during the reporting period totalled EUR 19.2 billion (18.2).
Net insurance income increased by 2.1% to EUR 553 million. The Insurance segment’s non-life insurance premium revenue increased by 5.0% to EUR 1,208 million and claims incurred by 20.4% to EUR 765 million, excluding the increase in the discount rate. Large claims increased claims incurred by EUR 137 million (74). The increase in the discount rate for insurance liability improved net insurance income by EUR 96 million. Operating combined ratio reported by non-life insurance was 89.6% (81.8).
Net commissions and fees totalled EUR 756 million (761). Net commissions and fees for lending increased by EUR 5 million and those for payment transfer services by EUR 4 million. Meanwhile, net commissions and fees for mutual funds and securities brokerage decreased by EUR 6 million. Net commissions and fees for health and wellbeing services fell by EUR 6 million year on year following the sale of Pohjola Hospital that was completed on 1 February 2022.
The investment environment was challenging due to higher interest rates and lower stock prices. Net investment income decreased by EUR 325 million to EUR –73 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 increased investment income by EUR 192 million (–48). Total investment income decreased by EUR 85 million year on year, to EUR 120 million.
Net income from financial assets at fair value through other comprehensive income totalled EUR 32 million (52), of which net capital losses accounted for EUR –4 million (10). Net capital gains on all financial instruments recognised through fair value reserve totalled EUR 44 million (133).
Net income from financial assets, recognised at fair value in net investment income through profit or loss, totalled EUR –752 million (98). Net income from financial assets held for trading decreased by a total of EUR 329 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 4 million (15). Fair value of equity instruments recognised at fair value in the income statement decreased by a total of EUR 342 million and that from notes and bonds by a total of EUR 216 million, year on year. An item corresponding to the increase in the discount rate of the insurance liability for non-life insurance, EUR 96 million, was shown as negative value change in net investment income. Life insurance items, which include, for example, changes in technical items, increased net investment income by EUR 504 million to EUR 602 million. Net income from investment property increased by EUR 34 million due to positive changes in fair value following the sale of hospital buildings.
The combined return on investments at fair value of OP Financial Group’s insurance companies was –13.9% (0.5). The negative figure was affected by a rise in interest rates and the fall in stock prices.
Other operating income increased to EUR 52 million (47). The sale of Pohjola Hospital increased other operating income by EUR 32 million. A year ago, the sale of Checkout Finland Ltd increased other operating income.
Total expenses increased by 1.1% year on year, to EUR 1,436 million. Personnel costs decreased by 1.3% to EUR 647 million. Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 17.2% to EUR 159 million. Other operating expenses increased by 10.0% to EUR 630 million. ICT costs totalled EUR 277 million (251). Development costs were EUR 152 million (128). Charges of financial authorities increased by 29.9%, or EUR 16 million, to EUR 69 million as a result of a higher stability contribution paid to the Single Resolution Fund financed by the euro-area banks.
Impairment loss on loans and receivables and on investments recognised under various income statement items that reduced earnings amounted to EUR 93 million (98), of which EUR 70 million (95) concerned loans and receivables. The indirect effects of the war in Ukraine increased impairment loss on receivables in the first quarter. Final credit losses recognised totalled EUR 82 million (98). Loss allowance was EUR 743 million (751) at the end of the reporting period. Non-performing exposures accounted for 2.4% (2.4) of the exposures. Impairment loss on loans and receivables accounted for 0.09% (0.13) of the loan and guarantee portfolio.
OP Financial Group’s income tax amounted to EUR 177 million (164). The effective tax rate for the reporting period was 18.8% (19.2). The tax-exempt capital gain on the sale of Pohjola Hospital reduced the effective tax rate.
OP Financial Group’s equity amounted to EUR 14.1 billion (14.2). Equity included EUR 3.3 billion (3.2) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.3).
Comprehensive income after tax totalled EUR –73 million (672). Changes in the fair values of equities, derivatives and notes and bonds decreased the fair value reserve. Changes in the fair value reserve decreased comprehensive income by a total of EUR 966 million (–65). Gains from the remeasurement of defined benefit plans improved comprehensive income by EUR 130 million (31) as a result of the increase in the discount rate used in the calculation.
Outlook towards the year end
The economic outlook dimmed during the third quarter. Nevertheless, the financial situation among households and companies still remained good.
Market interest rates have risen exceptionally fast in recent months, as central banks have raised their key interest rates. Central banks are expected to continue to tighten their monetary policy in the months to come. Uncertainty in the financial market has increased considerably, credit spreads have widened and stock prices fallen. Uncertainty related to the economic outlook remains exceptionally high. Economic growth is anticipated to slow down, as demand in the home market and export demand go down.
OP Financial Group’s earnings before tax for 2022 are expected to be at about the same level or higher than in 2021, due to an increase in market rates.
Earnings performance continues to be affected by major uncertainty. Rising inflation and the war in Ukraine, including its indirect effects, weaken the predictability associated with the economy and OP Financial Group’s profit performance.
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 in a press conference on 26 October 2022 at 11am at Gebhardinaukio 1, Vallila, Helsinki.
Media enquiries: OP Corporate Communications, tel. +358 10 252 8719, viestinta@op.fi
OP Corporate Bank plc and OP Mortgage Bank will publish their own interim reports.
Time of publication of 2022 reports:
| OP Amalgamation capital adequacy tables 30 September 2022 | Week 44, 2022 |
| OP Financial Group's Report by the Board of Directors and Financial Statements for 2022 | Week 10, 2023 |
| OP Financial Group's Corporate Governance Statement 2022 | Week 10, 2023 |
| OP Financial Group's Annual Review 2022 (incl. CSR reporting) | Week 10, 2023 |
| OP Financial Group’s Capital Adequacy and Risk Management Report 2022 | Week 10, 2023 |
| OP Amalgamation capital adequacy tables 2022 | Week 10, 2023 |
| Remuneration Report for Governing Bodies at OP Financial Group 2022 | Week 10, 2023 |
| Remuneration Policy for Governing Bodies at OP Financial Group | Week 10, 2023 |
Schedule for Financial Statements Bulletin 2022 and Interim Reports and Half-year Financial Report in 2023:
| Financial Statements Bulletin 2022 | 8 February 2023 |
| Interim Report Q1/2023 | 3 May 2023 |
| Half-year Financial Report H1/2023 | 25 July 2023 |
| Interim Report Q1−3/2023 | 25 October 2023 |
| OP Amalgamation capital adequacy tables 31 March 2023 | Week 19 |
| OP Amalgamation capital adequacy tables 30 June 2023 | Week 32 |
| OP Amalgamation capital adequacy tables 30 September 2023 | Week 44 |
Helsinki, 26 October 2022
OP Cooperative
Board of Directors
Additional information:
Timo Ritakallio, President and Group Chief Executive Officer, tel. +358 (0)10 252 4500
Mikko Timonen, Chief Financial Officer, tel. +358 (0)10 252 1325
Anni Hiekkanen, Chief Communications Officer, tel. +358 (0)10 252 1989
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op.fi
OP Financial Group is Finland’s largest financial services group, with more than two million owner-customers and approximately 13,000 employees. We provide a comprehensive range of banking and insurance services for personal 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. Together with our owner-customers, we have been building Finnish society and a sustainable future for 120 years now. www.op.fi
