OP Mortgage Bank Interim Report for January-March 2016

27 april 2016

OP MORTGAGE BANK
Stock exchange release, 27 April 2016 at 10.00 EEST
Interim Report 

OP Mortgage Bank Interim Report for January-March 2016

OP Mortgage Bank (OP MB) is part of OP Financial Group and its role is to raise, together with OP Corporate Bank plc (formerly Pohjola Bank plc), funding for the Group from money and capital markets. OP MB is responsible for the Group's funding for the part of covered bond issuance.

Financial standing

The intermediate loans and loan portfolio of OP MB decreased to EUR 10,319 million (10,354)* during the reporting period. The company increased its loan portfolio by buying mortgage-backed loans from OP Financial Group's member banks worth a total of EUR 413 million. OP MB did not issue any new bonds during the reporting period.

The company's financial standing remained stable throughout the reporting period. Operating profit for January- March amounted to EUR 5.4 (5.6) million.

OP MB has used interest rate swaps to hedge against its interest rate risk. Interest rate swaps have been used to swap housing loan interest and interest on issued bonds into the same basis rate. OP MB has entered into all derivative contracts for hedging purposes, with OP Corporate Bank plc being their counterparty.

*The comparatives for 2015 are given in brackets. For income statement and other aggregated figures, January-March 2015 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2015) serve as comparatives.  

Collateralisation of bonds issued to the public

On 31 March 2016, loans as collateral in security of the covered bonds issued under the Euro Medium Term Covered Note programme worth EUR 15 billion established on 12 November 2010 under the Laki kiinnityspankkitoiminnasta (688/2010) (Covered Bond Act) totalled EUR 10,006 million.

Capital adequacy

OP MB has presented its capital base and capital adequacy in accordance with the EU capital requirement regulation and directive (EU 575/2013). OP MB uses the Internal Ratings Based Approach (IRBA) to measure its capital adequacy requirement for credit risk. OP MB uses the Standardised Approach to measure its capital adequacy for operational risk.

The Common Equity Tier 1 (CET1) ratio stood at 135.0% (140.2) on 31 March. The CET1 capital requirement is 4.5% and the requirement for the capital conservation buffer is 2.5%, or a total of 7%.

OP MB's highest minimum capital requirement is determined by the Basel I floor. OP MB's capital base exceeded the Basel I floor by EUR 16.4 million in March. Information on the Basel I floor and capital surplus can be found in note "Capital base and capital adequacy".

Joint and several liability of amalgamation

Under the Act on the Amalgamation of Deposit Banks, the amalgamation of the cooperative banks comprises the organisation's central cooperative (OP Cooperative), the central cooperative's member credit institutions and the companies belonging to their consolidation groups as well as credit and financial institutions and service companies in which the above together hold more than half of the total votes. This amalgamation is supervised on a consolidated basis. On 31 March 2016, OP Cooperative's members comprised 177 member cooperative banks as well as OP Corporate Bank plc, Helsinki Area Cooperative Bank (formerly Helsinki OP Bank Ltd), OP Mortgage Bank, OP Card Company Plc and OP Process Services Ltd. As a support measure referred to in the Act on the Amalgamation of Deposit Banks, the central cooperative is liable to pay any of its member credit institutions an amount that is necessary to prevent the credit institution from being placed in liquidation. The central cooperative is also liable for the debts of a member credit institution which cannot be paid using the member credit institution's assets. Companies belonging to the amalgamation are legally liable for each other's debts. The amalgamation's central cooperative, OP Cooperative, is obliged, if necessary, to assist member banks as a support action with a sum that prevents them from going into liquidation. The central cooperative is liable for the debts of a member bank which cannot be paid using the member bank's capital.

Each member bank is liable to pay a proportion of the amount which the central cooperative has paid to either another member bank as part of support action or to a creditor of such member bank in payment of an amount overdue which the creditor has not received from the member bank. Furthermore, in the case of the central cooperative's default, a member bank has unlimited refinancing liability for the central cooperative's debts as referred to in the Co-operatives Act.

Each member bank's liability for the amount the central cooperative has paid to the creditor on behalf of a member bank is divided between the member banks in proportion to their last adopted balance sheets. OP Financial Group's insurance companies do not fall within the scope of joint and several liability.

According to Section 25 of the Covered Bond Act, the holder of a covered bond has the right to receive a payment for the entire term of the bond from the assets entered as collateral before other receivables without this being prevented by OP MB's liquidation or bankruptcy.

Personnel

On 31 March, OP MB had five employees. The Bank purchases all the most important support services from OP Cooperative and its Group members, reducing the its need for its own personnel.

Administration

The Board composition is as follows:

Chairman       Harri Luhtala                         Chief Financial Officer, OP Cooperative
Members        Elina Ronkanen-Minogue      Head of Asset and Liability Management and Group Treasury, OP Cooperative
                       Hanno Hirvinen                     Group Treasurer, OP Corporate Bank plc    
                     
OP MB's Managing Director is Lauri Iloniemi and Hanno Hirvinen is his deputy.

Risk exposure

The most typical types of risks related to OP MB are credit risk, structural funding risk, liquidity risk and interest rate risk. The key credit risk indicators in use show that OP MB's credit risk exposure is stable and the limit for liquidity risk set by the Board of Directors has not been exceeded. The liquidity buffer for OP Financial Group, managed by OP Corporate Bank plc, is exploitable by OP MB. OP MB has used interest rate swaps to hedge against its interest rate risk. Interest rate swaps have been used to swap housing loan interest and interest on issued bonds into the same basis rate. The interest rate risk may be considered to be low.

Outlook

The existing issuance programme makes it possible to issue new covered bonds in 2016. It is expected that the Bank's capital adequacy will remain strong, risk exposure favourable and the overall quality of the loan portfolio good.

Accounting policies

The Interim Report for 1 January-31 March 2016 has been prepared in accordance with IAS 34 (Interim Financial Reporting).

This Interim Report is based on unaudited figures. Given that all figures have been rounded off, the sum total of individual figures may deviate from the presented sums.

OP MB's related parties include the parent company OP Cooperative and its subsidiaries, the OP Financial Group pension insurance companies OP Bank Group Pension Fund and OP Bank Group Pension Foundation, and the company's administrative personnel. Standard loan terms and conditions are applied to loans granted to the related parties. Loans are tied to generally used reference interest rates. The financial year saw no major changes in related-party transactions.

Formulas for key ratios

Return on equity (ROE), % = Annualised profit for the period / Equity capital (average equity capital at the beginning and end of the period) × 100

Cost/income ratio, % = (Personnel costs + Other administrative expenses + Other operating expenses) / (Net interest income + Net commissions and fees + Net trading income + Total net investment income + Other operating income) × 100

Income statement, TEUR	Q1/2016	Q1/2015	2015
Interest income	24,300	27,202	106,362
Interest expenses	5,434	10,476	33,007
Net interest income	18,866	16,726	73,355
Impairment loss on receivables	-67	-51	210
Net commissons and fees	-12,156	-9,907	-43,361
Net trading income	0	0	0
Net investment income	2	1	22
Other operating income	1	1	1
Personnel costs	89	114	382
Other administrative expenses	742	612	2,612
Other operating expenses	423	401	1,924
Earnings before tax	5,392	5,644	25,308
Income tax expense	1,078	1,128	5,020
Profit for the period	4,313	4,515	20,288

Statement of comprehensive income, TEUR	Q1/2016	Q1/2015	2015
Profit for the period	4,313	4,516	20,288
Items that will not be reclassified to profit or loss
Gains/(losses) arising from remeasurement of defined benefit plans			231
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans			-46
Total comprehensive income	4,313	4,516	20,473

Key ratios	Q1/2016	Q1/2015	2015
Return on equity (ROE), %	4.7	5.1	5.6
Cost/income ratio, %	19	17	16

Cash flow from operating activities, TEUR	Q1/2016	Q1/2015
Profit for the financial year	4,313	4,516
Adjustments to profit for the financial year	2,305	589
Increase (-) or decrease (+) in operating assets	16,088	-329,218
Receivables from the public and public-sector entities	33,771	-307,574
Other assets	-17,683	-21,644
Increase (+) or decrease (-) in operating liabilities	804,248	309,162
Liabilities to credit institutions and central banks	790,000	290,000
Other liabilities	14,248	19,162
Income tax paid	-921	-590
Dividends received	2	1
A. Net cash from operating activities	826,955	-14,951
Cash flow from investing activities
Purchase of PPE and intangible assets		-178
B. Net cash used in investing activities		-178
Cash flow from financing activities
Increases in debt securities issued to the public		2,103
Dividends paid and interest on cooperative capital	-16,282	-4,996
C. Net cash used in financing activities	-16,282	-2,893
D. Effect of foreign exchange rate changes on cash and cash equivalents	0	0
Net change in cash and cash equivalents (A+B+C+D)	810,673	-18,022
Cash and cash equivalents at year-start	245,120	109,046
Cash and cash equivalents at year-end	1,056,002	91,181
Change in cash and cash equivalents	810,882	-17,865
Interest received	6,564	5,893
Interest paid	-8,966	-8,406
Adjustments to profit for the financial year
Non-cash items
Unrealised net gains on foreign exchange operations	0	0
Impairment losses on receivables	68	51
Other	2,237	538
Total adjustments	2,305	589
Cash and cash equivalents
Receivables from credit institutions payable on demand	1,056,002	91,181
Total cash and cash equivalents	1,056,002	91,181

Balance sheet, TEUR	31 Mar 2016	31 Mar 2015	31 Dec 2015
Receivables from credit institutions	1,799,372	101,181	988,490
Derivative contracts	273,010	285,540	192,206
Receivables from customers	9,576,120	9,635,434	9,610,252
Investments assets	40	40	40
Intangible assets	2,366	2,630	2,575
Other assets	96,506	111,691	78,823
Tax assets		392
Total assets	11,747,413	10,136,908	10,872,386
Liabilities to credit institutions	2,165,000	1,795,000	1,375,000
Derivative contracts	6,202	7,156	12,971
Debt securities issued to the public	9,092,027	7,836,945	9,002,669
Provisions and other liabilities	122,733	141,278	108,485
Tax liabilities	1,483	551	1,325
Total liabilities	11,387,445	9,780,929	10,500,450
Shareholders' equity
Share capital	60,000	60,000	60,000
Reserve for invested unrestricted equity	245,000	245,000	245,000
Retained earnings	54,968	50,979	66,937
Total equity	359,968	355,979	371,937
Total liabilities and shareholders' equity	11,747,413	10,136,908	10,872,386

Off-balance-sheet commitments, TEUR	31 Mar 2016	31 Mar 2015	31 Dec 2015
Irrevocable commitments given on behalf of customers	205	3,305	858

Statement of changes in equity, TEUR	Share capital	Other reserves	Retained earnings	Total  equity
Shareholders' equity 1 Jan 2015	60,000	245,000	51,459	356,459
Reserve for invested unrestricted  equity
Profit for the period			4,516	4,516
Total comprehensive income
Other changes			-4,996	-4,996
Shareholders' equity 31 Mar 2015	60,000	245,000	50,979	355,979
Shareholders' equity 1 Jan 2016	60,000	245,000	66,937	371,937
Reserve for invested unrestricted equity
Profit for the period			4,313	4,313
Total comprehensive income
Other changes			-16,282	-16,282
Shareholders' equity 31 Mar 2016	60,000	245,000	54,968	359,968

OP MB has presented its capital base and capital adequacy in accordance with the EU capital requirement regulation and directive (EU 575/2013).
Capital base and capital adequacy, TEUR	31 Mar 2016	31 Dec 2015
Shareholders' equity	359,968	371,937
Common Equity Tier 1 (CET1) before deductions	359,968	371,937
Intangible assets	-2,366	-2,575
Excess funding of pension liability, indirect holdings and deferred tax assets for losses	-74	-74
Share of unaudited profits	-4,313	-20,288
Impairment loss - shortfall of expected losses	-2,279	-2,046
Common Equity Tier 1 (CET1)	350,935	346,954
Tier 1 capital (T1)	350,935	346,954
Total capital base	350,935	346,954
Risk-weighted assets
Credit and counterparty risk	225,990	219,560
Operational risk	33,898	27,846
Total	259,888	247,407
Key ratios, %
CET1 capital ratio	135.0	140.2
Tier 1 capital ratio	135.0	140.2
Capital adequacy ratio	135.0	140.2
Basel I floor
Capital base	350,935	346,954
Basel I capital requirements floor	334,573	324,461
Capital buffer for Basel I floor	16,362	22,493

Classification of financial assets  liabilities 31 March 2016, TEUR	Loans and  other receivables	Recognised at fair value through profit or loss	Available for sale	Total
Financial assets
Receivables from credit institutions	1,799,372			1,799,372
Derivative contracts		273,010		273,010
Receivables from customers	9,576,120			9,576,120
Shares and participations			40	40
Other receivables	96,506			96,506
Other assets	2,366			2,366
Total	11,474,363	273,010	40	11,747,413
Financial liabilities		Recognised at fair value through profit or loss	Other liabilities	Total
Liabilities to credit institutions			2,165,000	2,165,000
Derivative contracts		6,202		6,202
Debt securities issued to the public			9,092,027	9,092,027
Other liabilities			124,216	124,216
Total		6,202	11,381,243	11,387,445
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 31 March 2016			309,499	309,499

Classification of financial assets  liabilities 31 Dec 2015, TEUR	Loans and  other receivables	Recognised at fair value through profit or loss	Available for sale	Total
Financial assets
Receivables from credit institutions	988,490			988,490
Derivative contracts		192,206		192,206
Receivables from customers	9,610,252			9,610,252
Shares and participations			40	40
Other receivables	78,823			78,823
Other assets	2,575			2,575
Total	10,680,140	192,206	40	10,872,386
Financial liabilities		Recognised at fair value through profit or loss	Other liabilities	Total
Liabilities to credit institutions			1,375,000	1,375,000
Derivative contracts		12,971		12,971
Debt securities issued to the public			9,002,669	9,002,669
Other liabilities			109,810	109,810
Total		12,971	10,487,479	10,500,450
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 31 Dec 2015			219,641	219,641

Debt securities issued to the public are carried at amortised cost. The fair value of these debt instruments has been measured using information available in markets and employing commonly used valuation techniques. The difference between the fair value and carrying amount is presented as valuation difference in the Classification of financial assets and liabilities table.

Derivative contracts 31 Mar 2016, TEUR	Nominal values/residual term to maturity
	Less than 1 year	1-5 years	More than 5 years	Total
Interest rate derivatives
Hedging	2,406,976	10,816,977	5,084,754	18,308,707
Total	2,406,976	10,816,977	5,084,754	18,308,707

	Fair values		Credit equivalent
	Assets	Liabilities
Interest rate derivatives
Hedging	273,010	6,202	491,247
Total	273,010	6,202	491,247

Derivative contracts 31 Dec 2015, TEUR	Nominal values/residual term to maturity
	Less than 1 year	1-5 years	More than 5 years	Total
Interest rate derivatives
Hedging	2,387,456	8,816,977	7,118,958	18,323,391
Total	2,387,456	8,816,977	7,118,958	18,323,391

	Fair values		Credit equivalent
	Assets	Liabilities
Interest rate derivatives
Hedging	192,206	12,971	411,985
Total	192,206	12,971	411,985

Financial instruments classification, grouped by valuation technique, TEUR	Fair value measurement at year end
31 Mar 2016
	Balance sheet value	Level 1	Level 2
Recurring fair value measurements of assets
Derivate contracts	273,010		273,010
Total	273,010		273,010
Recurring fair value measurements of liabilities
Derivate contracts	6,202		6,202
Total	6,202		6,202
Financial liabilities not measured at fair value
Debt securities issued to the public	9,092,027	9,023,791	377,736
Total	9,092,027	9,023,791	377,736

OP MB does not hold any transfers between the levels of fair value valuation.

31 Dec 2015	Fair value measurement at year end
	Balance sheet value	Level 1	Level 2
Recurring fair value measurements of assets
Derivate contracts	192,206		192,206
Total	192,206		192,206
Recurring fair value measurements of liabilities
Derivate contracts	12,971		12,971
Total	12,971		12,971
Financial liabilities not recognised at fair value
Debt securities issued to the public	9,002,669	8,872,880	349,430
Total	9,002,669	8,872,880	349,430

Helsinki, 27 April 2016
OP Mortgage Bank
Board of Directors
For more information, please contact Managing Director Lauri Iloniemi, tel. +358 (0)10 252 3541
DISTRIBUTION
LSE London Stock Exchange
OAM, Officially Appointed Mechanism
Major media
op.fi

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