OP Mortgage Bank: Financial Statements Bulletin fo

OP Mortgage Bank Stock exchange release 5 February 2019 at 10.00 am EET Financial Statements Bulletin

OP Mortgage Bank: Financial Statements Bulletin for 1 January- 31 December 2018

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

OP MB's intermediary loans and loan portfolio increased to EUR 13,771 million (13,580)*. OP MB issued a one billion-euro fixed-rate covered bond with a maturity of 7.25 years in international capital markets in June. The bond was intermediated in its entirety to OP cooperative banks in the form of intermediate loans.

The November one billion-euro intermediary loan was implemented by expanding the intermediary loan model to include an existing bond maturing in 2024. On 31 December 2018, 122 OP cooperative banks had a total of EUR 6,776 million (4,776) in intermediate loans from OP MB.

The company's financial standing remained stable throughout the financial year. Operating profit amounted to EUR 16.2 million (19.3).

*The comparatives for 2017 are given in brackets. For income statement and other aggregated figures, January-December 2017 figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous financial year (31 December 2017) serve as comparatives.

Collateralisation of bonds issued to the public

The programme amount of the Euro Medium Term Covered Note programme established on 12 November 2010 under the Laki kiinnityspankkitoiminnasta (688/2010) Act (Covered Bond Act) was increased from EUR 15 billion to EUR 20 billion in December and loans in security of the covered bonds issued under the programme totalled EUR 13,700 million on 31 December 2018.

Capital adequacy

The Common Equity Tier 1 (CET1) ratio stood at 136.4% (109.5) on 31 December 2018. The 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.

The Financial Supervisory Authority has set a 15% minimum risk weight on housing loans from the beginning of 2018 for at least two years. According to the Authority, this floor is aimed at preparing for a systemic risk related to household indebtedness. The minimum risk weight floor does not apply to OP MB but applies only to OP Financial Group level.

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 December 2018, OP Cooperative's member credit institutions comprised 156 OP cooperative banks as well as OP Corporate Bank plc, OP MB, OP Card Company Plc and OP Customer Services Ltd (formerly 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 liability.

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.

Personnel

On 31 December 2018, OP MB had five 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.

The Representative Assembly of OP Bank Group Pension Fund, which manages statutory earnings-related pension for OP Financial Group, decided on 31 July 2018 to transfer the management of its pension liability and earnings-related pension insurance portfolio worth around EUR 1,068 million to Ilmarinen Mutual Pension Insurance Company. The transferred solvency capital totalled EUR 263 million. This decision was preceded by competitive bidding in which the Board of Trustees of OP Bank Group Pension Fund invited bids from the largest pension insurance companies. The insurance portfolio concerned accounted for some 90.8% of OP Bank Group Pension Fund's total pension liability. The transfer was executed on 31 December 2018. The transfer reduced OP Mortgage Bank's pension costs and improved its earnings before tax by EUR 150,000.

Management

The Board composition is as follows:

                                           OP MB's Managing Director is Lauri Iloniemi, and his deputy was Hanno Hirvinen until 2 July 2018 and is Sanna Eriksson as of 3 July 2018.

The Chair of the Board of Directors was Harri Luhtala until 30 October 2018. Vesa Aho was appointed to member of the Board of Directors to replace Harri Luhtala as of 1 November 2018. He was also appointed the Board's Chair.

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, 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, 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.

Future outlook

It is expected that OP MB's capital adequacy will remain strong, risk exposure favourable and the overall quality of the loan portfolio good. This will make it possible to issue new covered bonds in 2019.

Schedule for Interim Reports in 2019

Helsinki, 5 February 2019

OP Mortgage Bank Board of Directors

For more information, please contact: Lauri Iloniemi, Managing Director, tel. +358 10 252 3541

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Attachment

• OP Mortgage Bank Financial Statements Bulletin 2018.pdf