OP Financial Group's Financial Statements Bulletin

OP Financial Group Stock Exchange Release 5 February 2019 at 09.00 am EET Financial Statements Bulletin 

OP Financial Group's Financial Statements Bulletin for 1 January - 31 December 2018: Customer business developed favourably and full-year earnings before tax were EUR 1,017 million

• Earnings before tax amounted to EUR 1,017 million (1,031).
• Income from customer business showed favourable development. Net interest income increased by 7% to EUR 1,175 million and net commissions and fees by 1% to EUR 887 million. Net insurance income increased by 19% to EUR 566 million - comparable change was -2%.
• Investment income fell by 46% to EUR 280 million and other operating income by 26% to EUR 61 million. Investment income was affected by a year-on-year decrease of EUR 227 million in capital gains.
• Expenses decreased by 5% to EUR 1,681 million. OP Financial Group transferred the management of the majority of the personnel's statutory earnings-related pension insurance and the related portfolio to Ilmarinen Mutual Pension Insurance Company at the end of 2018. The transfer reduced OP Financial Group's pension costs and improved earnings before tax by EUR 286 million while improving the Group's capital adequacy ratio by 0.4 percentage points.
• Impairment loss on receivables was EUR 46 million (48), or still low.
• The CET1 ratio was 20.5% (20.1).
• Banking earnings before tax increased by 28% to EUR 795 million. Net interest income increased by 4% and net commissions and fees decreased by 6%. The transfer of the pension liability improved the segment's earnings by EUR 172 million. The loan portfolio increased by 6% and deposits by 6%.
• Non-life Insurance earnings before tax decreased by 37% to EUR 133 million. Insurance premium revenue increased by 2% and expenses by 9%. Investment income fell by EUR 159 million. The reduction in the discount rate for insurance liability increased claims incurred by EUR 102 million a year ago.
• Wealth Management earnings before tax decreased by 14% to EUR 213 million. Net commissions and fees decreased by 11% and investment income by 11%. The transfer of the pension liability improved the segment earnings by EUR 35 million. Assets under management decreased by 8%.
• Other Operations earnings before tax were EUR -123 million (-45). The earnings were eroded by an increase in depreciation/amortisation and impairment losses as well as by a decrease in net investment income. The transfer of the pension liability improved the segment earnings by EUR 71 million. Non-recurring income of EUR 42 million was included in income a year ago.
• In 2018, OP invested EUR 384 million (454) in developing its operations and improving customer experience.
• OP bonuses given out rose by 4% to EUR 230 million.
• In January-December, the number of OP cooperative banks' owner-customers increased by 79,000 to over 1.9 million and that of OP Financial Group's joint banking and insurance customers by 21,000 to over 1.8 million.
• Earnings before tax for 2019 are expected to be lower than in 2018. For more detailed information on the outlook, see "Outlook for 2019".

OP Financial Group's key indicators

On 1 January 2018, OP Financial Group adopted IFRS 9 Financial Instruments. Comparatives deriving from the income statement are based on figures under IAS 39 reported for the corresponding period in 2017. Unless otherwise specified, balance sheet and other cross-sectional figures under IAS 39 on 31 December 2017 are used as comparatives. * Change in ratio ** The FiCo ratio has been calculated for insurance companies using transition provisions included in solvency regulation. *** 12-month rolling **** Non-performing receivables refer to receivables that are more than 90 days past due, other receivables classified as risky and forborne receivables related to such receivables due to the customer's financial difficulties.

Comments by President and Group Executive Chair Timo Ritakallio

Our customer business continued to show favourable development during the last quarter of 2018. Our loan and deposit portfolio increased at a brisk pace, and credit risks and impairment loss on receivables were still low. Our full-year earnings before tax amounted to EUR 1,017 million, thus remaining almost at the same level as in the previous year. Our capital adequacy improved further.

Growth in expenses was OP Financial Group's challenge in 2018. Higher claims incurred weakened Non-life Insurance earnings. Investment income, too, decreased markedly. In Wealth Management, general market developments decreased client assets under management.

The transfer of the management of statutory earnings-related pension insurance and the related portfolio to Ilmarinen Mutual Pension Insurance Company had a positive impact on OP Financial Group's earnings for 2018. The transfer will strengthen our capital base and provides us with the opportunity to focus on our core business. The investment environment for the transfer was exceptionally favourable, and the timing was highly successful due to the situation in capital markets.

As part of a more extensive change in our operating model, we completed the Information and Consultation of Employees process in the last quarter of the year, concerning 6,000 central cooperative employees. As a result, 700 roles ceased to exists and 1,000 new jobs were created. The negotiations with employee representatives were held in a very good spirit. During this transformation, we have supported our personnel in many ways to find a new job in OP Financial Group, and the number of employee redundancies has remained low.

One of our priorities is to utilise the opportunities provided by digitalisation in our business. At the end of the year, we extended our automatic home loan service to cover a larger number of our customers. The service enables customers to apply for a home loan digitally and get a loan decision almost on a real-time basis. In the service, we exploit opportunities provided by artificial intelligence.

The Finnish economy showed a favourable development last year. Employment improved and low interest rates supported consumer buying power. The global economy weakened considerably at the end of last year and uncertainty increased. Swings in the financial markets were significantly wilder than in the previous year. Home sales decreased and prices increased only slightly.

Economic growth is slowing down. In 2019, the Finnish economy is expected to grow by 1.6%. OP's economists forecast that in 2020 slowing global economic growth will hit Finland harder than the rest of the euro zone. Fixed investments are expected to fade, which means that economic growth will rely more on domestic consumption. The weakening economic situation will challenge both the business sector and policymakers to be elected in the spring to make decisions on a long-term basis.

January-December

OP Financial Group's earnings before tax amounted to EUR 1,017 million (1,031). The figure decreased by EUR 14 million over the previous year. Income from customer business, or net interest income, net insurance income and net commissions and fees, rose year on year. Transferring the management of the majority of statutory earnings-related pension insurance and the related portfolio to Ilmarinen Mutual Pension Insurance Company improved earnings before tax by EUR 286 million. Lower net investment income and other operating income reduced earnings.

Net interest income increased by 6.7% to EUR 1,175 million. Banking net interest income increased by EUR 50 million and that by the Other Operations segment by EUR 27 million. Net insurance income amounted to EUR 566 million (478). A year ago, the reduction in the discount rate for insurance liability reduced net insurance income by EUR 102 million. Comparable net insurance income changed by -2.3%. An increase in private and corporate customer insurance premium revenue supported an increase in net insurance income. Net commissions and fees were EUR 887 million, or EUR 8 million higher than the year before. Refunds based on unit-linked management fees increased by EUR 14 million, payment transfer net commissions and fees by EUR 17 million and net commissions and fees from health and wellbeing services by EUR 4 million. In the meantime, asset management commission income fell by EUR 29 million.

Net investment income decreased by EUR 268 million (51.3%) to EUR 254 million. The overlay approach is applied to certain equity instruments of insurance companies. Changes in the fair value of investments within the scope of the overlay approach are presented under the fair value reserve under equity. Total net investment income decreased by 46.3% to EUR 280 million. The combined return on investments at fair value of OP Financial Group's insurance institutions was 0.7% (3.1).

Net income recognised at fair value through other comprehensive income (net income from available-for-sale financial assets a year ago) decreased by EUR 252 million over the previous year. As a result of the adoption of IFRS 9 at the beginning of 2018, investments recognised at fair value through other comprehensive income and capital gains decreased. However, investments recognised at fair value in the income statement increased and their earnings effect was EUR 174 million (301). Net income from investment property decreased by EUR 40 million from its level a year ago. Capital gains recognised totalled EUR 36 million (263). A year ago, the capital gains were mainly used to supplement insurance liability. The net change in the short-term life insurance supplementary interest rate provision improved earnings by EUR 43 million. A year ago, the net change in these supplementary interest rate provisions reduced earnings by EUR 51 million. Net trading income resulting from positive value changes in Credit Valuation Adjustment (CVA) in derivatives credit and counterparty risk owing to market changes was EUR 14 million lower than a year ago.

Other operating income fell by EUR 22 million year on year to EUR 61 million. All share capital of the Baltic subsidiary Seesam Insurance AS was sold to Vienna Insurance Group (VIG). OP Financial Group recognised a total of EUR 16 million in non-recurring capital gain on the sale. Non-recurring VAT refunds for prior years, interest included, totalled EUR 22 million a year ago. In addition, non-recurring income of EUR 25 million from the sale of the portfolio of agreements and POS terminals of acquiring and POS services was recognised a year ago in other operating income and extra amortisation and other expenses recognised related to the sale totalled EUR 6 million.

Total expenses decreased by 4.9% to EUR 1,681 million. The transfer of statutory earnings-related pension liability at the end of 2018 reduced OP Financial Group's pension costs by EUR 286 million. Excluding the effect of this transfer, total expenses increased by 11.3% to EUR 1,967 million and personnel costs by 6.0% to EUR 803 million. Development costs were EUR 202 million (219). New businesses accounted for EUR 92 million (61) of total expenses. Planned depreciation/amortisation increased by 14.6% to EUR 219 million. This increase resulted from higher development expenditure recognised for prior years. Impairment write-downs increased by EUR 51 million year on year. Impairment loss recognised on property in own use totalled EUR 41 million and on information systems EUR 61 million. Charges of financial authorities increased by EUR 41 million year on year.

Impairment losses on loans and receivables and on investments recognised under various income statement items that reduced earnings amounted to EUR 70 million (89), of which EUR 46 million (48) concerned loans and receivables. Considering that impairment losses on receivables are calculated in 2018 based on IFRS 9, they are not comparable with those calculated under the previous IAS 39. The ratio of non-performing receivables in loans and receivables to the loan and guarantee portfolio was low, at 1.0% (1.2).

OP Financial Group's current tax amounted to EUR 125 million (189). The effective tax rate was 21.7% (20.7). The effective tax rate was increased by non-deductible items arising from the Group's internal holdings.

OP Financial Group's equity amounted to EUR 11.8 billion (11.1). Equity was increased by the reporting period's earnings. Equity included EUR 3.0 billion (2.9) in Profit Shares, terminated Profit Shares accounting for EUR 0.3 billion (0.3). The return target for Profit Shares for 2018 is 3.25%. Interest payable on Profit Shares accrued during the reporting period is estimated to total EUR 94 million. The amount of interest paid for 2017 totalled EUR 90 million in June 2018.

Outlook for 2019

The financial-sector operating environment is quite favourable on the whole although the world economy is showing signs of slower growth. While low market interest rates are expected to slow down growth in banks' net interest income and erode insurance institutions' income from fixed income investments, they should also improve customers' repayment capacity. Impairment losses have been very low for a long time now. The most significant strategic risks in the financial sector are currently associated with changing customer behaviour, operating environment digitisation, competition from outside of the traditional financial sector and more complex regulation. Industry disruption is threatening to slow down growth and erode income generation in the years to come. Changes mean that financial sector players will be faced with an obvious requirement to improve customer and employee experience, enhance the agility of their operations and related development as well as improve productivity.

OP Financial Group's Earnings before tax for 2019 are expected to be lower than in 2018. The most significant uncertainties in respect of the financial performance relate to changes in the interest rate and investment environment, market growth rate, changes in the competitive situation and impairment losses.

All forward-looking statements in this financial statements bulletin 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 Executive Chair Timo Ritakallio in a press conference on 5 February 2019 at 11 am at Gebhardinaukio 1, Vallila, Helsinki.

OP Corporate Bank plc and OP Mortgage Bank plc will publish their own Financial Statements Bulletins.

Financial reporting in 2019

Time of publication of 2018 reports:

Schedule for Interim Reports in 2019:

Interim Report Q1/2019         7 May 2019 Interim Report H1/2019         30 July 2019 Interim Report Q1-3/2019      29 October 2019

Helsinki, 5 February 2019 OP Cooperative Executive Board

Additional information: Timo Ritakallio, President and Group Executive Chair, tel. +358 (0)10 252 4500 Vesa Aho, Chief Financial Officer, tel. +358 (0)10 252 1427 Tuuli Kousa, Chief Communications Officer, tel. +358 (0)10 252 2957

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OP Financial Group is Finland's largest financial services group whose mission is to create sustainable prosperity, security and wellbeing for its owner-customers and in its operating region by means of its strong capital base and efficiency. OP Financial Group consists of 156 OP cooperative banks, its central cooperative OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000 and 1.9 million owner-customers.  www.op.fi

Attachments

• OP Financial Group Financial Statements Bulletin 2018.pdf
• OP Financial Group Q4 2018 background material.pdf