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OP Mortgage Bank plc: OP Mortgage Bank Interim Report for 1 January-30 September 2016


Stock exchange release 2 November 2016
Interim Report

OP Mortgage Bank Interim Report for 1 January-30 September 2016

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 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 increased to EUR 10,477
million (10,354)* during the reporting period. The company increased its
on-balance sheet loan portfolio by buying mortgage-backed loans from OP
Financial Group's member banks worth a total of EUR 413 million. In May, OP
MB issued a fixed-rate covered bond with a maturity of seven years in
international capital markets. Out of the bond with a nominal value of EUR
1,250 million, OP MB intermediated EUR 1,119 million in intermediate loans to
OP Financial Group member cooperative banks. A total of 84 member cooperative
banks have intermediate loans from OP MB, worth a total of EUR 1,863 million

The company's financial standing remained stable throughout the reporting
period. Operating profit for January- September amounted to EUR 16.0 (18.6)

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,
intermediate 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-September 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

Collateralisation of bonds issued to the public

On 30 September 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 10,048 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 137.6% (140.2) on 30 September
2016. The CET1 capital requirement is 4.5% and the requirement for the
capital conservation buffer is 2.5%, or a total of 7%. The minimum total
capital requirement is 8% and 10.5% with increased capital conservation

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 43.7 million in
September. Information on the Basel I floor and capital surplus can be found
in note "Capital base and capital adequacy".

The Finnish Financial Supervisory Authority continues to take measures to set
a 10% minimum risk weight on housing loans in an effort, according to the
Authority, to prepare for an increased systemic risk. OP MB's loan portfolio
consists of low-risk home loans, on which the Authority's possible decision
will relatively have the strongest impact. Based on an assessment, OP MB's
capital adequacy will, however, remain solid even after the entry into force
of the floor and be clearly above the minimum requirements set by the
authorities; the minimum level of capital will continue to be determined
according to the Basel I floor even after the setting of the floor. The
Financial Supervisory Authority's decision will probably take effect in

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 30 September 2016, OP Cooperative's members comprised
178 member cooperative banks as well as OP Corporate Bank plc, OP Mortgage
Bank, OP Card Company Plc and OP Process Services Ltd. 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

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.


On 30 September 2016, OP MB had five employees. The Bank purchases all the
most important support services from OP Cooperative and its Group members,
reducing the need for its own personnel.


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, intermediate loan interest and interest on issued
bonds into the same basis rate. The interest rate risk may be considered to
be low.


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-30 September 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.

The Interim Report is available in Finnish and English. The Finnish version is
official that will be used if there is any discrepancy between the language

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.

The income statement layout grouping has been updated for the Interim Report
for 1 January-30 September 2016. Comparatives have been restated to
correspond to the new grouping. This has no effect on profit for the period.
Comparatives have not been presented in a separate table due to the minor
effect of the update on the income statement.

Changes caused by the new grouping are as follows:

Net interest income after impairment loss is not presented separately.
Impairment loss on receivables is presented in its own line after expenses.
"Net trading income" previously presented in its own line has been
incorporated into "Net investment income". Expenses have been divided into
personnel costs, amortisation/depreciation and other operating expenses.
Expenses were previously divided into personnel costs, other administrative
expenses and other operating expenses.

Formulas for Alternative Performance Measures

The Alternative Performance Measures Guidelines issued by the European
Securities and Markets Authority (ESMA) came into force on 3 July 2016. The
Alternative Performance Measures are presented to illustrate the financial
performance of business operations and to improve comparability between
reporting periods. They should not be considered to be replacements for the
performance measures defined in IFRS governing financial reporting.

The formulas for the used Alternative Performance Measures are presented below
and they correspond to the previously presented performance indicators in
terms of content.

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,...

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