OP Financial Group
Interim Report 1 January-30 September 2023
Stock Exchange Release 25 October 2023 at 9.00 EEST
OP Financial Group's Interim Report 1 January-30 September 2023: Operating profit EUR 1,570 million - We will continue to provide more benefits to owner-customers
- Operating profit was EUR 1,570 million (766).
- Income from customer business, or net interest income, insurance service result and net commissions and fees, increased by 48% to EUR 2,822 million (1,908). Net interest income grew by 85% to EUR 2,079 million (1,122). Insurance service result decreased by EUR 19 million to EUR 58 million (77). Net commissions and fees were EUR 685 million (709).
- Impairment loss on receivables in the income statement was EUR 170 million (70), accounting for 0.22% (0.09) of the loan and guarantee portfolio.
- Investment income increased by 112% to EUR 294 million (138).
- Total expenses increased by 10% to EUR 1,564 million (1,420). The cost/income ratio improved to 45% (59).
- In the year to September, OP Financial Group's loan portfolio decreased by 2% to EUR 98.9 billion (100.6). Deposits decreased by 5% to EUR 72.6 billion (76.3).
- CET1 ratio was 19.1% (17.4), which exceeds the minimum regulatory requirement by 6.8 percentage points. During the first quarter, OP Financial Group adopted the Standardised Approach to credit risk.
- Retail Banking operating profit rose to EUR 919 million (335). Net interest income grew by 104% to EUR 1,619 million (792). Impairment loss on receivables increased by EUR 53 million to EUR 107 million (54). Net commissions and fees decreased by 10% to EUR 524 million (583). The cost/income ratio improved to 46% (64). The loan portfolio decreased by 2% and deposits by 4% in the year to September.
- Corporate Banking operating profit rose to EUR 321 million (220). Net interest income grew by 32% to EUR 441 million (334). Impairment loss on receivables increased by EUR 47 million to EUR 63 million (16). Net commissions and fees grew by 31% to EUR 163 million (124). The cost/income ratio improved to 39% (49). The loan portfolio was at the previous year's level, and deposits decreased by 18% in the year to September.
- Insurance operating profit was EUR 298 million (147). Insurance service result decreased by EUR 19 million to EUR 58 million (77). Investment income grew by EUR 197 million to EUR 241 million (44). Non-life Insurance recorded a combined ratio of 95% (91).
- Group Functions operating loss was EUR -2 million (-16).
- OP Financial Group will pay 40% extra on OP bonuses earned by owner-customers in 2024 - an estimated additional bonus of EUR 86 million to owner-customers. The Group increased the OP bonuses earned for 2023 by 30%, which means an estimated additional bonus of more than EUR 60 million for 2023. In addition, owner-customers will get daily banking services without monthly charges until the end of 2024. Between October 2023 and December 2024, the value of this benefit will amount to an estimated EUR 110 million. The total value of additional benefits to owner-customers will be EUR 82 million for 2023 and EUR 174 million for 2024.
- OP Financial Group has applied IFRS 17 Insurance Contracts as of 1 January 2023. As a result of the IFRS 17 transition, OP Financial Group's equity capital on 1 January 2022 decreased by EUR 52 million on the date of transition. At the same time, the Group ceased to apply the overlay approach. The figures in the income statement and balance sheet for 2022 have been adjusted retrospectively. Note 1 Accounting policies of this Interim Report provides more information on the adoption of IFRS 17 and the changes in the format of the income statement and balance sheet.
- Operating profit (earnings before tax) for 2023 is expected to be higher than in 2022. For more detailed information on the outlook, see "Outlook towards the year end".
OP Financial Group's key indicators
| Q1-3/2023 | Q1-3/2022 | Change, % | Q1-4/2022 | |
| Operating profit, € million | 1,570 | 766 | 105.0 | 1,120 |
| Retail Banking | 919 | 335 | 174.1 | 502 |
| Corporate Banking | 321 | 220 | 46.0 | 416 |
| Insurance | 298 | 147 | 102.7 | 293 |
| Group Functions | -2 | -16 | - | -91 |
| New OP bonuses accrued to owner-customers, € million | -204 | -161 | 26.8 | -215 |
| Total income | 3,492 | 2,403 | 45.3 | 3,394 |
| Total expenses | -1,564 | -1,420 | 10.1 | -1,961 |
| Cost/income ratio, % | 44.8 | 59.1 | -14.3* | 57.8 |
| Return on equity (ROE), % | 11.1 | 5.8 | 5.2* | 6.3 |
| Return on equity, excluding OP bonuses, % | 12.5 | 7.0 | 5.5* | 7.5 |
| Return on assets (ROA), % | 1.02 | 0.48 | 0.54* | 0.51 |
| Return on assets, excluding OP bonuses, % | 1.14 | 0.58 | 0.57* | 0.61 |
| 30 Sep 2023 | 30 Sep 2022 | Change, % | 31 Dec 2022 | |
| CET1 ratio, % | 19.1 | 17.7 | 1.4* | 17.4 |
| Loan portfolio, € billion** | 98.9 | 100.6 | -1.6 | 100.2 |
| Deposits, € billion** | 72.6 | 76.3 | -4.9 | 78.0 |
| Ratio of non-performing exposures to exposures, % ** | 2.73 | 2.36 | 0.37* | 2.34 |
| Ratio of impairment loss on receivables to loan and guarantee portfolio, % | 0.22 | 0.09 | 0.13* | 0.11 |
| Owner-customers (1,000) | 2,083 | 2,062 | 1.0 | 2,066 |
OP Financial Group has applied IFRS 17 Insurance Contracts as of 1 January 2023. The figures in the income statement and balance sheet for 2022 have been adjusted retrospectively. The preceding years' figures (2019, 2020 and 2021) have not been adjusted. Note 1 Accounting policies of this Interim Report provides more information on the adoption of IFRS 17 and the changes in the format of the income statement and balance sheet.
Comparatives for the income statement are based on the corresponding figures a year ago. Unless otherwise specified, figures from 31 December 2022 are used as comparatives for balance-sheet and other cross-sectional items.
*Change in ratio
**The loan portfolio and deposits exclude changes in the fair value of loans and deposits in hedge accounting as of 1 January 2023. Comparatives have been adjusted to correspond to the current definition.
Comments by the President and Group Chief Executive Officer:
The business environment remained uncertain and the economic outlook deteriorated
The Finnish economy was characterised by exceptional uncertainty and instability in the third quarter of 2023. Sluggish growth persisted, inflation remained much higher than in previous years, and market rates continued to rise as the European Central Bank hiked its main refinancing rate.
On the housing market, the volume of home sales and demand for home loans were clearly lower than a year ago. In addition, home prices continued their downward trend.
The downturn has affected construction and the related sectors in particular. Risks also grew considerably in the real estate sector in general in January-September.
OP Financial Group's strong performance continued in July-September - we will further reward our owner-customers
Despite the challenges in the business environment, OP Financial Group's operating profit continued to develop extremely well in the third quarter. The operating profit for January-September was EUR 1,570 million, which was clearly higher than a year ago.
Due to our good earnings performance, we want to provide our owner-customers with even better additional benefits in 2024. As we have previously announced, we will make daily life easier for our 2.1 million or so owner-customers by paying 30 per cent extra on OP bonuses accumulated in 2023. The estimated value of this additional benefit will be more than 60 million euros for our owner-customers in general. We have also announced that owner-customers will not be subject to monthly charges for daily services between October 2023 and March 2024. In these financially challenging times, this will bring them an additional benefit of around 22 million euros for October-December.
Alongside these previously announced benefits, we have now decided to pay 40 per cent extra on OP bonuses accumulated in 2024, creating an additional benefit of around 86 million euros for our owner-customers next year. For our owner-customers, we will also waive monthly charges for daily services altogether in 2024. Owner-customers will financially benefit from this by around 88 million euros next year. OP Financial Group, which is owned by its customers, aims to continue sharing its financial success by providing owner-customers with various financial and other benefits.
Strong capital adequacy and excellent liquidity are vital in a deteriorating business environment
OP Financial Group's CET1 ratio improved again, to 19.1 per cent, which exceeds the minimum regulatory requirement by 6.8 percentage points. OP Financial Group is one of the most financially solid large banks in Europe.
Our liquidity also remained excellent. Strong capital adequacy, excellent liquidity and broad trust among customers and other stakeholders are equally vital for a bank and insurance company. OP Financial Group is in excellent shape in all these respects, regardless of its turbulent business environment.
Despite the substantial rise in funding costs, income from customer business continued to show solid growth due to the strong increase in net interest income in particular. Similarly, investment income developed well in January-September, whereas net commissions and fees were slightly down, year on year. The insurance service result improved markedly in the third quarter. Overall, our income grew by 45 per cent in January-September. Despite high inflation, OP Financial Group's cost trend remained well under control, with a growth rate of 10 per cent from a year earlier. Its cost/income ratio was at a good level, at 45 per cent.
All three business segments performed well during the reporting period. Growth was particularly strong in Retail Banking, whose operating profit grew by 174 per cent, following favourable developments in net interest income. Similarly, Corporate Banking and Insurance clearly outperformed their results for the same period in 2022.
Deposit and loan volumes turned downwards - customers' repayment capacity remained good
The deposit portfolio decreased by five per cent over the year. This was mainly due to a clear reduction in deposits made by corporate and institutional customers. Household deposits fell by only one per cent, and OP Financial Group's market share of household deposits grew in January-September.
OP Financial Group's loan portfolio decreased by just under two per cent. Demand for new home loans was clearly down from a year ago. The decrease in the loan portfolio was driven by a considerable reduction in year-on-year demand and a steep rise in premature home loan repayments due to interest rate rises.
OP's home loan customers have been repaying their loans diligently and on schedule, despite rate rises. The number of applications for loan modifications was actually lower than in recent years. There was a slight rise in the number of corporate customers with non-performing loans, particularly in construction and more widely in the real estate sector. Since the summer, payment difficulties in general have nudged upwards among households, companies and entrepreneurs.
In August, we published credit portfolio emissions reduction targets for three of our customer sectors: energy production, agriculture and housing. These sectors account for more than 90 per cent of the emissions of OP Financial Group's credit portfolio. We have set sectoral emissions reduction targets to encourage our customers to move towards carbon neutrality, and to enable us to promote the green transition.
Demand for insurance continued to grow - claims expenditure also rose
Our customers' desire to prepare for possible risks could also be seen in growing demand for insurance products. In the year to September, non-life insurance revenue rose by just under four per cent, to almost 1.3 billion euros. Demand for personal insurance increased most.
Claims expenditure grew by three per cent. The number of insurance claims was up 12 per cent on the same period last year. Customers were compensated in line with their claims for around 94 per cent of loss reports filed.
Our customers took out 28 per cent more new term life insurance policies year-on-year.
We want to help people in Finland to prosper financially
We aim to coach our customers to help them make better financial choices. We provide various ways of managing personal finances more easily, while enabling and supporting long-term saving and investing. Asset and wealth management is one of our growth focus areas: we aim to make a clear growth leap in this respect in the coming years. In September, we announced our strengthening of OP Financial Group's asset and wealth management organisation by recruiting a seasoned professional to lead it - Hanna Porkka. Hanna will also become a member of OP Cooperative's Executive Management Team.
Preparation for the future has featured strongly in customer behaviour this year. Demand for savings and investment products continued to grow briskly. Due to higher interest rates, there was a clear rise in the number of Growth Return Accounts year-on-year: 66,000 new accounts were opened in January-September. During the same period, customers made 92,000 new agreements for systematic investment in mutual funds. At the end of the period, OP Financial Group's mutual funds had almost 1.3 million unitholders, and 57,000 new equity savings accounts and book-entry accounts had been opened.
New records set in use of digital services
Our personal and corporate customers increasingly use digital channels for their banking and insurance matters. OP-mobile alone had 57 million logins in August and 1.6 million users each month this year.
In August, we announced an agreement to further deepen our strategic partnership with Microsoft. This will enable us to accelerate our cloud migration and make extensive use of the cloud services Microsoft is building in Finland. Through the partnership and cloud migration, we can provide our customers with even better services and adapt quickly to our digitalising world.
In January-September, we continued with ICT investments, primarily to make our customer business smoother and ensure data security and security of supply in all circumstances. Use of AI will be increasingly highlighted in our ICT development and feature more frequently in our provision of high-quality services for customers.
Together through time
OP Financial Group has a strong basis for supporting its customers, despite the faltering economy. For example, if customers have loan repayment problems, we encourage them to contact their OP cooperative bank at the earliest possible stage, so that we can find the best solution together. As with past downturns, we will get through the current one together.
My warm thanks to our customers for trusting in us, and to our personnel and governing bodies for their excellent work.
Timo Ritakallio, President and Group CEO
January-September
OP Financial Group's operating profit (earnings before tax) was EUR 1,570 million (766), up by EUR 804 million year on year. Income from customer business, or net interest income, net commissions and fees and insurance service result, increased by a total of 47.9% to EUR 2,822 million (1,908). The cost/income ratio improved to 44.8% (59.1).
Net interest income grew by 85.3% to EUR 2,079 million. The rise in market rates has increased net interest income since spring 2022. Net interest income reported by the Retail Banking segment increased by EUR 827 million and that by the Corporate Banking segment by EUR 107 million. In the year to September, OP Financial Group's loan portfolio decreased by 1.6% to EUR 98.9 billion and deposits by 4.9% to EUR 72.6 billion. New loans drawn down by customers during the reporting period totalled EUR 16.0 billion (19.2).
Impairment loss on loans and receivables, which reduces earnings, totalled EUR 170 million (70). Expected credit losses concerning the real estate and construction sector increased. A year ago, the indirect effects of Russia's aggressive war in Ukraine increased impairment loss on receivables. Final credit losses recognised totalled EUR 42 million (82). Loss allowance was EUR 865 million (736) at the end of the reporting period. Non-performing exposures accounted for 2.7% (2.3) of total exposures. Impairment loss on loans and receivables accounted for 0.22% (0.09) of the loan and guarantee portfolio.
Net commissions and fees totalled EUR 685 million (709). Net commissions and fees for payment transfer services increased by EUR 7 million to EUR 233 million and those for lending by EUR 3 million to EUR 118 million. Meanwhile, net commissions and fees for mutual funds decreased by EUR 2 million to EUR 165 million, those for residential brokerage by EUR 9 million to EUR 47 million, and sales commissions on insurance contracts by EUR 9 million to EUR 27 million.
OP Financial Group has applied IFRS 17 Insurance Contracts as of 1 January 2023. The figures in the income statement and balance sheet for 2022 have been adjusted retrospectively. Insurance service result decreased by EUR 19 million to EUR 58 million. Reinsurance costs increased, and claims expenditure related to medical expenses insurance rose due to higher claims volumes. The number of large claims decreased year on year. Insurance service result includes EUR 348 million (305) in operating expenses. The Insurance segment's non-life insurance revenue increased by 3.7% to EUR 1,287 million. Claims incurred decreased by 12.2% to EUR 842 million and operating expenses increased by 13.5% to EUR 352 million. Combined ratio reported by non-life insurance weakened to 94.8% (90.8).
Investment income, or net investment income, net insurance finance expenses and income from financial assets held for trading, increased by a total of 112.3% to EUR 294 million. Investment income grew as a result of the increase in the value of shares.
OP Financial Group adopted IFRS 17 Insurance Contracts and stopped applying the overlay approach. The Insurance segment's investment result at fair value is fully recognised in the income statement. The impact of economic assumptions, such as the changes in interest rates, on the value of insurance contract liabilities is recognised in net finance income in the income statement. Net investment income together with net finance income describe investment profitability in the insurance business. The combined return on investments at fair value of OP Financial Group's insurance companies was 2.7% (-13.9). A year ago, the negative figure was affected by a rise in interest rates and the fall in stock prices.
Net income from financial assets recognised at fair value through profit or loss, or notes and bonds, shares and derivatives, totalled EUR 591 million (-3,087). Net income from investment contract liabilities totalled EUR -241 million (998). Net insurance finance expenses totalled EUR -102 million (2,219). Net income from investment property decreased by EUR 22 million to EUR 26 million.
In banking, net income from financial assets held for trading increased by a total of EUR 86 million to EUR 24 million due to the increase in interest income from notes and bonds and derivatives.
Other operating income decreased to EUR 24 million (52). A year ago, the sale of Pohjola Hospital increased other operating income by EUR 32 million.
Total expenses increased by 10.1% to EUR 1,564 million. Personnel costs rose by 13.9% to EUR 702 million. The increase was affected by higher headcount and growth in the provision for performance-based bonuses as well as pay rises. Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 13.8% to EUR 137 million. Other operating expenses increased by 12.4% to EUR 725 million. ICT costs totalled EUR 318 million (277). Development costs were EUR 194 million (152). Charges of financial authorities fell by EUR 7 million to EUR 63 million.
Income tax amounted to EUR 312 million (142). The effective tax rate for the reporting period was 19.9% (18.5). A year ago, the tax-exempt capital gain of EUR 32 million on the sale of Pohjola Hospital reduced the effective tax rate.
Comprehensive income after tax totalled EUR 1,279 million (342). Changes in the fair value reserve decreased comprehensive income by a total of EUR 4 million (-412).
OP Financial Group's equity amounted to EUR 15.7 billion (14.7). Equity included EUR 3.3 billion (3.4) in Profit Shares, terminated Profit Shares accounting for EUR 0.3 billion (0.4).
OP Financial Group's funding position and liquidity is strong. At the end of the reporting period, the Group's LCR was 217% (217) and NSFR was 126% (128). In the reporting period, OP Financial Group repaid in full the EUR 12.0 billion in TLTRO III loans.
Outlook towards the year end
The economy is expected to enter a mild recession and inflation to fall back slowly. An exceptional degree of uncertainty is still associated with the business environment. Rising interest rates are weakening the real estate market and construction sector in particular. Combined with the geopolitical situation, developments in global capital markets may abruptly affect the business environment.
OP Financial Group's operating profit (earnings before tax) for 2023 is expected to be higher than in 2022, due to an increase in market rates.
The most significant uncertainties affecting OP Financial Group's earnings performance are associated with developments in the business environment, changes in the interest rate and investment environment and developments in impairment loss on receivables. 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 25 October 2023 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 2023 reports:
| OP Amalgamation Pillar III Tables 30 September 2023 | Week 44 |
| OP Financial Group's Report by the Board of Directors and Financial Statements for 2023 | Week 11 |
| OP Financial Group's Corporate Governance Statement 2023 | Week 11 |
| OP Financial Group's Annual Review 2023 (incl. CSR Reporting) | Week 11 |
| OP Financial Group's Capital Adequacy and Risk Management Report 2023 | Week 11 |
| OP Amalgamation Pillar III Tables 31 December 2023 | Week 11 |
| Remuneration Report for Governing Bodies at OP Financial Group 2023 | Week 11 |
| Remuneration Policy for Governing Bodies at OP Financial Group | Week 11 |
Schedule for Financial Statements Bulletin 2023 and Interim Reports and Half-year Financial Report in 2024:
| Financial Statements Bulletin 2023 | 7 February 2023 |
| Interim Report Q1/2024 | 8 May 2024 |
| Half-year Financial Report H1/2024 | 24 July 2024 |
| Interim Report Q1-3/2024 | 31 October 2024 |
| OP Amalgamation Pillar III Tables 31 March 2024 | Week 19 |
| OP Amalgamation Pillar III Tables 30 June 2024 | Week 32 |
| OP Amalgamation Pillar III Tables 30 September 2024 | Week 45 |
Helsinki, 25 October 2023
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
