Operations and earnings by business segment

OP Financial Group's business segments are Banking, Non-life Insurance, and Wealth Management. Non-segment operations are presented under “Other Operations”. OP Financial Group's segment reporting is based on accounting policies applied in its financial statements.

Summary of earnings by business segment


€ million Income Expenses Other items *) Earnings before tax 2015 Earnings before tax 2014 Change, %
Banking 1,927 1,037 -248 642 571 12.5
Non-life Insurance 561 302 0 259 223 16.0
Wealth Management 321 108 0 213 167 27.6
Other Operations 538 551 0 -13 -34 -61.2
Eliminations -454 -478 -24 0 -13
Total 2,894 1,520 -272 1,101 915 20.4

*) Other items contain returns to owner-customers and OP bonus customers, and impairment loss on receivables

 

Banking

  • Earnings before tax amounted to EUR 642 million (571). Income increased by 1.6% and expenses decreased by 2.5%.
  • The cost/income ratio improved by 2 percentage points to 54%.
  • The loan portfolio grew by 6.4% in the year to December.
  • Impairment losses of EUR 77 million (86) accounted for 0.10% (0.12) of the loan and guarantee portfolio.

Banking, key figures and ratios

 

€ million 2015 2014 Change, %
Income


Net interest income 1,108 1,092 1.4
Net commissions and fees 663 655 1.3
Net trading and investment income 120 115 4.7
Other operating income 36 34 4.4
Total income 1,927 1,896 1.6
Expenses


Personnel costs 472 446 5.9
Other administrative expenses 370 345 7.1
Other operating expenses 194 272 -28.6
Total expenses 1,037 1,063 -2.5
Impairment loss on receivables 77 86 -10.2
Returns to owner-customers and accrued customer bonuses 171 176 -2.9
Earnings before tax 642 571 12.5




Cost/income ratio, % 53.8 56.1 -2.3
       
€ million      
Home loans drawn down 6,577 5,977 10.0
Corporate loans drawn down 6,631 6,468 2.5
No. of brokered property transactions 12,149 12,341 -1.6
       
€ billion 31 Dec 2015 31 Dec 2014 Change, %
Loan portfolio      
  Home loans 35.3 34.0 3.9
  Corporate loans 18.5 16.9 9.3
  Other loans 21.5 19.8 8.3
Total 75.2 70.7 6.4
Guarantee portfolio 2.6 2.9 9.5
       
Deposits      
  Current and payment transfer 34.7 29.8 16.6
  Investment deposits 17.2 19.0 -9.4
Total deposits 51.9 48.8 6.5
       
Market share,% ** 31 Dec 2015 31 Dec 2014 Change, %
  Loans 34.9 34.4 0,6*

Deposits 37.1 37.6 -0,5*
         

* Change in ratio

** Excluding financial and insurance institutions' loans and deposits

 

Despite weak economic growth, demand for loans continued to increase. The loan portfolio grew by 6.4% in the year to December as a result of the greater volumes of corporation and housing corporation loans and of home loans drawn down by households. The volume of new home loans drawn down increased year on year by 10%.

The deposit portfolio increased by 6.5% in the year to December. The volume of investment deposits declined between January and December, due to low interest rates and lower term deposit margins. However, the volume of deposits in payment transaction accounts grew in the year to December by 17% due mainly to growth in corporate and institutional deposits.

The Group's market share of home loans increased in the year to December by 0.6 percentage points, being 38.6% at the end of December. The market share of corporate loans increased during the same period by 1.8 percentage points to 37.5% (35.6). The Group's market share of the total euro-denominated deposits increased by 2.0 percentage points to 35.9%. Adjusted by financial and insurance institutions, this market share was 37.1% (37.6).

The combined amount of Profit Shares, ordinary and supplementary cooperative contributions of the member cooperative banks increased by EUR 0.9 billion in January‒December, amounting to EUR 2.8 billion on 31 December.

The volume of homes sold and bought through the OP Kiinteistökeskus real estate agents decreased by 1.6% over the previous year.

The home loan repayment grace period offered by OP Financial Group as part of its #Suominousuun campaign (Putting Finland on a new growth path) was used for almost 100,000 loans during the February‒June period. The deferred repayment of these loans totals around EUR 450 million.


In April, OP announced a new single financing process model for companies that need both bank loan and risk financing but are not ready to abandon their current ownership. This financing package is targeted at companies with net sales of EUR 10–50 million.

Earnings

Earnings before tax increased to EUR 642 million (571). Income increased by 1.6% and expenses decreased by 2.5%, as a result of which the cost/income ratio improved by 2.3 percentage points. Impairment losses of EUR 77 million (86) accounted for 0.10% of the loan and guarantee portfolio (0.12).

Net interest income rose to EUR 1,108 million (1,092) as a result of an increase in the loan portfolio and a higher average loan portfolio margin and lower deposit funding costs. As a result of a decrease in the Markets division's net interest income, Banking net interest income increased by only 1.4%.

Net commissions and fees increased by EUR 8 million to EUR 663 million (655). Commissions and fees related to Wealth Management increased by EUR 14 million and those to Non-life Insurance by EUR 3 million.

Net trading and investment income increased by a total of EUR 5 million year on year.

Expenses decreased by 2.5% to EUR 1,037 million (1,063). Statutory contributions to the Deposit Guarantee Fund and the bank levy, totalling EUR 70 million, increased other operating expenses a year ago.

Personnel costs increased by EUR 26 million to EUR 472 million (446) due mainly to higher social expenses.

Non-Life Insurance

  • Earnings before tax amounted to EUR 259 million (223). Earnings before tax at fair value were EUR 171 million (272).
  • Insurance premium revenue increased by 7% (5).
  • The balance on technical account improved. The operating combined ratio was 87.3% (89.4) and operating expense ratio 17.7% (18.4). The combined ratio was 88.8% (91.0).
  • Return on investments at fair value was 2.3% (6.7).

Non-life Insurance, key figures and ratios


€ million 2015 2014 Change, %
Insurance premium revenue 1,396 1,310 6.5
Claims incurred -972 -930 4.5
Operating expenses -247 -242 2.1
Amortisation adjustment of intangible assets -21 -21 -0.1
Balance on technical account 156 117 32.5
Net investment income 164 171 -4.2
Other income and expenses -61 -66 -7.2
Earnings before tax 259 223 16.0
Gross change in fair value reserve -87 49  
Earnings before tax at fair value 171 272 -36.9
       
Combined ratio, % 88.8 91.0  
Operating combined ratio, % * 87.3 89.4  
Operating loss ratio, % * 69.6 71.0  
Operating expense ratio, % 17.7 18.4  
Operating risk ratio, % 64.2 65.0  
Operating cost ratio, % 23.1 24.4  
Return on investments at fair value, % 2.3 6.7  
Solvency ratio, % 70.4 75.4  
Solvency ratio (Solvency II), %** 139.3 117.3  
Large claims incurred retained for own account -60 -79  
Changes in claims for provisions of previous years (run-off result) 32 27
         

* The ratio for the corresponding period a year ago has beeb changed to correspond to the treatment of change of the discount rate applied since the beginning of 2015.

** The figure in shown without the effect of transitional provisions.

 

Growth in insurance premium revenue remained strong among Private Customers. Insurance premium revenue from Corporate Customers increased despite the recession. Profitability improved among Private and Corporate Customers. Insurance sales increased slightly year on year. Claims expenditure developed favourably due to the mild winter and lower large claims.

OP Financial Group’s market share of non-life insurance premiums written in 2014 was 31.5% (30.3). Measured by this market share, OP Financial Group is clearly Finland’s largest non-life insurer.

The number of premier customer households increased in the year to December by 22,000 to 677,000 (655,000), of which up to 76% (75) also use OP Financial Group member cooperative banks as their main bank.

Developing claims services further has been one of the Non-life Insurance priorities. In particular, Non-life Insurance has developed its electronic services in both online and mobile services. The financial year saw the launch of a new loss report service on OP-mobile. Over up to 50% of loss reports are filed online and over up to 75% of loss reports on personal injuries under voluntary insurance are filed online.

Using electronic services in managing non-life policies and claims has increased considerably. During the last 12 months, the number of customers receiving their insurance-related mail electronically has risen to 554,000 (365,000).


Earnings

Earnings before tax increased to EUR 259 million (223). The balance on technical account was good. Net investment income recognised in the income statement decreased by EUR 7 million. Earnings before tax at fair value amounted to EUR 171 million (272).

At the beginning of the financial year, OP Financial Group changed the valuation model for non-life insurance liability in such a way that it takes account of a change in the discount rate as one continuously updated variable of an accounting estimate. On 31 December, the average discount rate was 2.22%. The reduced discount rate increased claims incurred by EUR 62 million (62). According to the new valuation model, a change in the discount rate also affects the calculation of operating ratios. The operating ratios for the corresponding period a year ago have been changed accordingly. The changed discount rate weakened the operating combined ratio by 4.5 percentage points (4.7).

The operating combined ratio was 87.3% (89.4). These operating ratios exclude amortisation on intangible assets arising from the corporate acquisition.

 

Non-life Insurance, Insurance premium


€ million 2015 2014 Change, %
Private Customers 730 687 6.3
Corporate Customers 609 568 7.3
Baltics 56 55 1.6
Total 1,396 1,310 6.5

Claims incurred, excluding the reduction in the discount rate, increased by 5% on a year earlier. Developments in large claims remained favourable. Claims incurred arising from new large claims were lower than a year ago. The reported number of new large claims under property and business liability insurance (in excess of EUR 0.3 million) amounted to 70 (82) in January‒December, with their claims incurred retained for own account totalling EUR 60 million (79). The change in provisions for unpaid claims under statutory pension increased year on year, being EUR 16 million (12) between January and December.


Changes in claims for previous years, excluding the effect of changes on the discount rate, improved the balance on technical account by EUR 32 million (27). The operating loss ratio was 69.6% (71.0). The operating risk ratio excluding indirect loss adjustment expenses was 64.2% (65.0).

Operating expenses grew by 2%, being EUR 5 million higher than a year ago, due to higher sales commissions and portfolio management fees. The operating expense ratio was 17.7% (18.4). The operating cost ratio (including indirect loss adjustment expenses) was 23.1% (24.4).


 

Operating balance on technical accout and combined ratio (CR)


1-12/2015
1-12/2014
€ million Balance, € million CR, % Balance, € million CR, %
Private Customers 140 80.9 126 81.6
Corporate Customers 32 94.7 7 98.8
Baltics 5 90.9 6 90.0
Total 177 87.3 139 89.4

Private Customer profitability improved as a result of continued growth in premium revenue. Claims developments among Corporate Customers were more favourable than a year ago. The reduced discount rate is reflected in Corporate Customer profitability in particular. In Baltics, profitability weakened slightly because of large claims.


Investment

Return on investments at fair value totalled EUR 74 million (236), or 2.3% (6.7). The full-year return on investments was positive due to higher stock market prices. Net investment income recognised in the income statement amounted to EUR 164 million (171).

Non-life Insurance, Investment portfolio by asset class


% 31 Dec 2015 31 Dec 2014
Bonds and bond funds 77 73
Alternative investments 1 1
Equities 7 7
Private equity 3 3
Real property 10 11
Money markets 3 5
Total 100 100

On 31 December, the Non-life Insurance investment portfolio totalled EUR 3,687 million (3,552). The fixed-income portfolio by credit rating remained healthy, considering that investments within the highest rating category accounted for 93% (94), and 63% (71) of the investments were rated at least A–. The average residual term to maturity of the fixed-income portfolio was 5.7 years (4.5) and the duration 5.2 years (4.3).

The running yield for direct bond investments averaged 1.76% (1.94) at the end of December.


Wealth Management

  • Earnings before tax amounted to EUR 213 million (167). Earnings before tax at fair value were EUR 159 million (218).
  • Net investment income from Life Insurance increased year on year.
  • Return on investments at fair value was 2.4% (6.0).
  • The gross amount of assets under management increased by 12% in the year to December, totalling EUR 68 billion on 31 December.

Wealth Management, key figures and ratios


€ million 2015 2014 Change, %
Net commissions and fees


  Funds and asset management 188 175 7.9
  Life insurance 171 166 2.7
  Expenses 163 133 22.5
  of which accrued customer bonuses 23 18 26.6
Total net commissions and fees 196 208 -5.6
Life Insurance's net risk results 21 20 7.0
Net Investment Income from Life Insurance 98 51 94.0
Other income 5 1  
Personnel costs 32 32 -1.0
Other expenses 76 80 -4.4
Earnings before tax 213 167 27.6
Gross change in fair value reserve -54 51  
Earnings before tax at fair value 159 218 -26.8
       
€ billion 31 Dec 2015 31 Dec 2014 Change, %
Assets under management (gross)


  Mutual funds 21.7 17.5 24.3
  Institutional Customers 23.5 23.5 -0.2
  Private Banking 14.6 12.8 14.3
  Unit-linked insurance savings 8.7 7.6 15.2
Total assets under management (gross) 68.5 61.3 11.7




€ million


Net inflows


  Investor and saver customers 666 716 -7.0
  Private Banking clients 469 1,363 -65.6
  Institutional clients -187 454 -141.2
Total net inflows 948 2,534 -62.6
 


Market share, % 31 Dec 2015 31 Dec 2014 Change, %
Mutual funds 22.2 20.5 1,7*
         

* Change in ratio

 

The gross amount of assets under management increased by 11.7% during the financial year, as a result of good value performance in stock markets and the positive total net inflows. Assets under management totalled EUR 68.5 billion (61.3), this amount including EUR 11 billion in assets of the companies belonging to OP Financial Group.

Year on year, net inflows declined in all customer segments, amounting to EUR 948 million (2,534). This decline was due to uncertainty associated with the general economic outlook.

The number of investor and saver customers grew by 26,000 in the financial year, totalling 754,000 on 31 December. In particular, the number of clients of Saver's funds made good progress, with the number of unitholders increasing by 51,000 from the end of 2014.

With the consent from the Finnish Financial Supervisory Authority, the individual life insurance portfolio worth around EUR 1.3 billion was transferred to OP Financial Group on 31 December. A separate balance sheet was created out of the transferred savings policy portfolio that differs from other life insurance operations in terms of the profit distribution policy.

The risk-adjusted return of OP Mutual Funds remained good in the financial year. The Morningstar rating for OP Mutual Funds was 3.2 (3.3).

During the financial year, the Group continued to further develop electronic sales and transactions for Wealth Management. Electronic channels accounted for 40% (28) of mutual fund subscriptions.

As part of the #Suominousuun (Putting Finland on a new growth path) campaign, trading in Finnish equities on the NASDAQ OMX Helsinki is free of charge for around four months for the customers of OP eServices online and mobile. OP also provides, free of charge, equity research containing analyses of companies to all those interested. These benefits will be effective for a fixed period of 7 December 2015‒31 March 2016. Moreover, OP permanently quit charging subscription fees for OP mutual funds investing in Finland in all of its channels.

Earnings

Earnings before tax increased to EUR 213 million (167). Earnings before tax at fair value were EUR 159 million (218).

Net commissions and fees decreased by 5.6% year on year, amounting to EUR 196 million (208). Net commissions and fees accounted for 0.29% (0.35) of the gross amount of the assets under management.

Life Insurance's return on investments at fair value was 2.4% (6.0). Life Insurance's net investment income, excluding the performance of derivatives that hedge the interest rate risk of insurance liabilities and the technical rate of interest, totalled EUR 185 million (169).

Expenses were EUR 4 million lower than a year ago. Wealth Management's operating cost/income ratio decreased to 45.6% (40.8). Expenses accounted for 0.16% (0.18) of the gross amount of the assets under management.

Interest-rate risk associated with insurance liability has been hedged through supplementary interest rate provisions and interest rate derivatives. Accrued supplementary interest rate provisions related to insurance liabilities totalled EUR 404 million (475) on 31 December. Short-term supplementary interest rate provisions made for 12 months accounted for EUR 52 million (54) of these provisions.

Life Insurance's investment assets, excluding assets covering unit-linked insurance and the separated balance sheet transferred from Suomi Mutual, amounted to EUR 4,078 million (4,148). Investments within the highest rating category accounted for 96% (94) of the fixed-income portfolio. On 31 December, the portfolio’s modified duration was 4.7 (3.1).

Investment portfolio by asset class


€ milion 31 Dec 2015 31 Dec 2014
Bonds and bond funds 76 68
Alternative investments 6 6
Equities and equity funds 5 7
Real property 7 6
Money markets 6 12
Total 100 100

 


Other Operations

Other Operations, key figures and ratios


€ million 2015 2014 Change, %
Net interest income -52 -33 -56.7
Net trading income 0 -9
Net investment income 89 59 50.9
Other income 501 473 5.7
Expenses 551 524 5.1
Earnings/loss before tax -13 -34 61.2




€ billion 31 Dec 2015 31 Dec 2014 Change, %
Receivables from credit institutions 11 10 3.8
Investment assets 16 13 29.8




Liabilities to credit institutions 4 5 -9.9
Debt securities issued to the public 18 17 5.3

Earnings

Earnings before tax reported by Other Operations amounted to EUR -13 million (-34). The earnings were eroded by lower net interest income and higher expenses. Net investment income and other income increased year on year.

Net interest income was EUR -52 million (-33). Net interest income was reduced by persistently low interest rates, narrower credit spreads of bonds included in the liquidity buffer and the Group's preparation for tighter liquidity regulation. On 31 December, the average margin of OP Financial Group's senior wholesale funding was 39 basis points (41).

Net investment increased by EUR 30 million to EUR 89 million as a result of higher capital gains on securities. Dividend income included in net investment income fell by EUR 16 million to EUR 21 million.

Other income increased to EUR 501 million, being EUR 28 million larger than a year ago. Other income consists to a large extent of intra-Group service charges, which are presented as business segment expenses.

Expenses rose by EUR 27 million to EUR 551 million. Personnel costs increased by EUR 16 million to EUR 176 million. Other operating expenses included the non-recurring expenses of EUR 18 million related to the intra-Group ownership reorganisation and the reconstruction of the Vallila premises. A year ago, non-recurring EUR 20 million fees related to the tender offer for Pohjola Bank plc shares was recognised in 'Other operating expenses'.