OP MORTGAGE BANK: Interim Report 1 January - 30 September 2013

OP MORTGAGE BANK

Stock exchange release 30 October 2013
Interim Report 1 January -30 September 2013

Financial Standing

The loan portfolio of OP Mortgage Bank (OPMB) decreased from EUR 8,678 million on 31 December 2012 to EUR 8,202 million on 30 September 2013. The company's loan portfolio was increased in February and March by buying mortgage-backed loans from OP-Pohjola Group's member banks with a total of EUR 463 million. Low interest rates resulted in shorter loans, which were in turn reflected as a decrease in OP Mortgage Bank's loan portfolio. No new bonds were issued in the report period.

The company's financial standing remained stable throughout the review period. Earnings before tax for the third quarter came to EUR 2.6 million (3.6) and those for Q1-3 to EUR 9.8 million (10.6). A total of EUR 500 million funding for overcollateral concerning bonds issued to the public was converted in May into long-term funding and EUR 125 million in September to reduce the funding risk. Extending the term to maturity reduces profitability to a small extent in the future.  

OPMB has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate swaps, i.e. base rate cash flows from the housing loans to be hedged are swapped to Euribor cash flows. OPMB has also swapped the fixed interest rates of the bonds it has issued to short-term market rates. All derivative contracts have been concluded for hedging purposes. Pohjola Bank plc is the counterparty to all derivative contracts.

Collateralisation of bonds issued to the public

Mortgages collateralising covered bonds issued before 1 August 2010, under the Finnish Act on Mortgage Credit Banks (1240/1999), are included in Cover Asset Pool A. The balance of Pool A was EUR 3,200 million at the end of September.

Mortgages collateralising covered bonds issued after 1 August 2010, under the Finnish Covered Bonds Act (688/2010), are included in Cover Asset Pool B. The balance of Pool B was EUR 4,590 million at the end of September.

Capital adequacy

OPMB's capital adequacy ratio stood at 9.9% on 30 September. Capital ratio excluding transition rules stood at 46.3%.

Joint Responsibility and Joint Security

Under the Act on Cooperative Banks and Other Cooperative Credit Institutions, the amalgamation of the cooperative banks comprises the organisation's central institution (OP-Pohjola Group Central Cooperative), the Central Cooperative's member credit institutions and the companies belonging to their consolidation groups. This amalgamation is monitored on a consolidated basis. The Central Cooperative and its member banks are ultimately responsible for each other's liabilities and commitments. The Central Cooperative's members at the end of the report period comprised OP-Pohjola Group's 188 member banks as well as Pohjola Bank plc, Helsinki OP Bank Plc, OP Mortgage Bank, OP-Kotipankki Oyj and OP Process Services Ltd. OP-Pohjola Group's insurance companies do not fall within the scope of joint responsibility.

The central institution is obligated to provide its member credit institutions with instructions on their internal supervision and risk management, their operations in securing liquidity and capital adequacy, and compliance with uniform accounting principles in preparing the amalgamation's consolidated financial statements.

The central institution and its member credit institutions are jointly responsible for the liabilities of the central institution or a member credit institution placed in liquidation or bankruptcy that cannot be paid from its assets. The liability is divided between the central institution and the member credit institutions in the ratios following the balance sheet total.

In spite of the joint responsibility and the joint security, pursuant to Section 25 of the Finnish Covered Bonds Act, the holder of a bond with mortgage collateral shall, notwithstanding the liquidation or bankruptcy of a mortgage credit bank, have the right to receive payment, before other claims, for the entire loan period of the bond, in accordance with the contract terms, from the funds entered as collateral for the bond.

Personnel

On 30 September, OPMB had six employees. It purchases all key support services from the Central Cooperative and its Group companies, which reduces the need for more staff.

Administration

The Board composition is as follows:

OPMB's Managing Director is Lauri Iloniemi.

Risk Exposure

The most significant types of risk related to OPMB are credit risk, structural funding risk, liquidity risk and interest-rate risk. The key indicators in use shows that OPMB'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-Pohjola Group, managed by Pohjola Bank Plc, is exploitable by OPMB. OPMB has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate swaps, i.e. base rate cash flows from housing loans to be hedged are swapped to short-term Euribor cash flows. The interest rate risk may be considered to be low.

Outlook

The existing issuance programme will make it possible to issue new covered bonds in 2013. It is expected that the Company's capital adequacy will remain strong, risk exposure will be favourable and the overall quality of the credit portfolio will remain strong.

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

Accounting Policies

The Interim Report for 1 January-30 September 2013 has been prepared in accordance with IAS 34 (Interim Financial Reporting), as approved by the EU. In the preparation of this Interim Report, OPMB substantially applied the same accounting policies as in the financial statements 2012, except a change in the recognition of actuarial gains and losses on the defined benefit pension plan.

Since 1 January 2013, OPMB has applied the amendments to IAS 19 Employee Benefits. The revised standard removes the option for entities to apply the so-called corridor method in the recognition of actual gains and losses and changes the calculation of net interest income on the net defined benefit liability.Under the revised standard, the expected return on plan assets used in the calculation of net interest income is calculated based on the discount rate of the plan liability.

OPMB voluntarily abandoned the corridor method as of the beginning of 2012. The change in the calculation of the net interest income did not have any substantial effects on the personnel costs year on year or the financial year 2012.

The cash flow statement presents the cash flows for the period on a cash basis, divided into cash flows from operating activities, investing activities and financing activities. Cash flows from operating activities include the cash flows generated from day-to-day operations. Cash flow from investing activities includes payments related to PPE and intangible assets, investments held to maturity and shares that are not considered as belonging to cash flow from operating activities. Cash flow from financing activities includes cash flows originating in the financing of operations either on equity or liability terms from the money or capital market. Cash and cash equivalents include liquid assets and receivables from credit institutions payable on demand.  The statement has been prepared using the indirect method.

Capital adequacy
OPMB uses the Internal Ratings Based Approach (IRBA) to measure its capital adequacy requirement for credit risk and and uses the Standardised Approach to measure its capital adequacy for operational risk. The increase in shareholders' equity arising from the measurement of pension liabilities and the assets covering them, under IFRS, is not included in the capital base. Furthermore, intangible assets were deducted from the capital base.

Related-party transactions
OPMB's related parties include OP-Pohjola Group Central Cooperative and its subsidiaries, the OP Bank Group pension insurance organisation OP Bank Group Pension Fund and OP Bank Group Pension Foundation, and the company's administrative personnel. Standard loan terms and conditions apply to loans granted to the related parties. Loans are tied to generally used reference rates. Related-party transactions did not undergo any substantial changes during the reporting period.

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. The carrying amounts of other balance-sheet items substantially correspond to their fair values.

All derivative contracts have been entered into for hedging purposes, regardless of their classification in accounting.

Calculation of key ratios

Return on equity, % = 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

Shortfall of difference between impairment losses and expected losses totals EUR 7 million.