OP Mortgage Bank: Interim Report for January–March 2020

OP Mortgage Bank
Interim Report January–March 2020
Stock Exchange Release 28 April 2020 at 10.00am EEST

OP Mortgage Bank: Interim Report for January–March 2020

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

Financial standing

The intermediary loans and loan portfolio of OP MB totalled EUR 14,217 million (14,335) on 31 March 2020. In January, OP MB issued a 1 billion-euro fixed-rate covered bond with a maturity of 8.25 years in international capital markets. In February, a new extension of an intermediary loan model was performed on a bond issued in February 2019 that will mature in 2029. As part of this extension, seven OP cooperative banks applied for an intermediary loan from OP MB at a total amount of EUR 185 million. On 31 March 2020, 120 OP cooperative banks had a total of EUR 8,891 million (8,706) in intermediary loans from OP MB.

The company's financial standing remained stable throughout the reporting period. Earnings before tax amounted to EUR 1.8 million (4.2).

*The comparatives for 2019 are given in brackets. For income statement and other aggregated figures, January–March 2019 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2019) serve as comparatives.

Collateralisation of bonds issued to the public

On 31 March 2020, loans as collateral in security of the covered bonds issued under the Euro Medium Term Covered Note programme worth EUR 20 billion established on 12 November 2010 under the Act on Mortgage Credit Banks (Laki kiinnitysluottopankkitoiminnasta (688/2010)) totalled EUR 14,475 million.

Capital adequacy

OP MB’s Common Equity Tier 1 (CET1) ratio stood at 55.1% (69.8) on 31 March 2020. Capital adequacy decreased because the average risk weights rose in connection with the adoption of the new definition of default as a result of the risk parameter factors set by the ECB. The minimum CET1 capital requirement is 4.5% and the requirement for the capital conservation buffer is 2.5%, i.e. the total CET1 capital requirement is 7%. The minimum total capital requirement is 8% and 10.5% with increased capital conservation buffer. Earnings for the financial year were not included in CET1 capital.

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.

OP MB has presented its capital base and capital adequacy in accordance with the EU Capital Requirements Regulation (EU 575/2013).

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 2020, OP Cooperative's member credit institutions comprised 142 OP cooperative banks as well as OP Corporate Bank plc, OP MB and OP Card Company Plc.

The central cooperative is responsible for issuing instructions to its member credit institutions concerning their internal control and risk management, their procedures for securing liquidity and capital adequacy as well as for compliance with harmonised accounting policies in the preparation of the amalgamation’s consolidated financial statements.

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.

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 Act on Mortgage Credit Banks, 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 receivables without this being prevented by OP MB's liquidation or bankruptcy.

Personnel

On 31 March 2020, OP MB had seven employees. OP MB has been digitising its operations and purchases all the most important support services from OP Cooperative and its Group members, reducing the need for its own personnel.

Management

The Board composition is as follows:
                                           
Chair              Vesa Aho        Chief Financial Officer, OP Cooperative
Members       Kaisu Christie  Director, Mortgages and Housing-related Services, OP Cooperative
                      Lauri Iloniemi   Head of Treasury and Asset and Liability Management, OP Corporate Bank plc
                     
OP MB's Managing Director is Sanna Eriksson. The deputy Managing Director is Pekka Moisio, Head of Funding and Liquidity Management.

Risk exposure

When entering 2020, OP MB has a strong capital base, capital buffers and risk-bearing capacity. The coronavirus pandemic (COVID 19) that spread widely in early 2020 has had a global effect on societies, which has further affected economic development and operating conditions in the financial sector. This is the case in Finland too.

The pandemic may especially affect risks associated with lending, liquidity maintenance and business processes. The capital base of OP MB is sufficient to secure business continuity.

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, 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 home loan interest, intermediary loan interest and interest on issued bonds into the same basis rate. OP MB has concluded all derivative contracts for hedging purposes, with OP Corporate Bank plc being their counterparty. The interest rate risk of OP MB may be considered low and it has been within the set limit.

Events after the reporting period

In April, OP MB issued a 500 million-euro retained covered bond with a maturity of two years. In April, OP MB also issued a 300 million-euro retained covered bond with a maturity of eight years. These bond issues were performed as private placements within OP Financial Group.

On 21 April 2020, OP MB intermediated a total of EUR 1,284 million as intermediary loans. Of this amount, EUR 984 million is related to a bond issued in January, and EUR 300 million to a 300-million euro bond issued in April.

On 28 April 2020, the date of release of this Interim Report, 123 banks hold intermediary loans totalling EUR 10,175 million.

Outlook

Measures to restrain the coronavirus pandemic threw the global economy into a recession during the first quarter. In the financial market, the funding costs of banks increased markedly. However, it is expected that OP MB’s capital adequacy will remain extremely strong and the overall quality of the loan portfolio good. This will make it possible to issue new covered bonds in the future as well.

Schedule for Interim Reports in 2020

Half-year Financial Report H1/2020              21 July 2020
Interim Report Q1–3/2020                            22 October 2020

Helsinki, 28 April 2020 

OP Mortgage Bank
Board of Directors

For more information, please contact:
Sanna Eriksson, Managing Director, tel. +358 10 252 2517

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