Pohjola Bank plc s Interim Report for 1 January 30 September 2011

Transcription

1 Pohjola Bank plc s Interim Report for 1 January 30 September Q3

2 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Pohjola Group Performance for January September Consolidated earnings before tax came to EUR 245 million (242). Earnings before tax at fair value were EUR 65 million (273) and return on equity at fair value stood at 2.8% (11.7). Banking earnings before tax rose to EUR 135 million (93). These included EUR 36 million (89) in impairment charges on receivables. The loan portfolio increased by 8% from its level on 31 December and the average margin decreased to 1.32% (1.36). Within Non-life Insurance, insurance premium revenue rose by 7% and the balance on technical account was good. Excluding amortisation on intangible assets arising from company acquisition, the operating combined ratio stood at 89.4% (88.6). Within Non-life Insurance, return on investments at fair value was 1.8% (5.2). Asset Management increased its earnings before tax by 11% to EUR 19 million (18) and assets under management amounted to EUR 31.5 billion (35). The Group Functions reported earnings of EUR 20 million (48) before tax. Outlook: The Group's operational profitability is expected to remain good during the rest of the year. However, fourth-quarter consolidated earnings will be eroded by a reduction of an estimated percentage points in the discount rate and higher technical provisions due to a change in the mortality model. The growth in the amount of technical provisions will become clear towards the end of this year. Consolidated earnings before these non-recurring items and tax are expected to be at somewhat the same level in as in (Previous estimate: Consolidated earnings before tax in are expected to be higher than in.) It is estimated that Non-life Insurance's operating combined ratio will vary between 89 and 93% (unchanged). For more detailed information on the outlook, see Outlook towards the year end below. July September Consolidated earnings before tax amounted to EUR 47 million (103). Loss before tax at fair value was EUR 101 million (earnings of 165). The euro area's debt crisis and the resulting weak developments in capital markets reduced earnings before tax posted by investment operations and the Markets division by a total of over EUR 60 million, year on year. Banking earnings before tax amounted to EUR 43 million (38). Impairment charges on receivables and their recoveries were EUR 1 million (28) in net terms. Within Non-life Insurance, the operating combined ratio stood at 85.2% (82.8) and the return on investments at fair value was 2.8% (2.6). Earnings before tax recorded by Asset Management improved by 6% to EUR 6 million and the cost/income ratio stood at 49% (51). The Group Functions reported a loss of EUR 4 million (earnings of 18) before tax. Q1 3/ Q1 3/ Change, Q3/ Q3/ Change, Earnings before tax, million % % Banking Non-life Insurance Asset Management Group Functions Change in fair value reserve Earnings/loss before tax at fair value Earnings per share, Earnings per share at fair value, Equity per share, Average personnel 3,135 2,996 3,247 3,007 3,005 Q1 3/ Q1 3/ Q3/ Q3/ Financial targets Target Return on equity at fair value, % Tier 1 ratio, % >9.5 Operating cost/income ratio by Banking, % <40 Operating combined ratio, % Operating expense ratio, % <20 Solvency ratio, % Operating cost/income ratio by Asset Management, % <50 AA rating affirmed by at least two credit rating agencies Dividend payout ratio a minimum of 50%, provided that Tier 1 > 9.5% 55 >50 Pohjola Bank plc s Interim Report for 1 January 30 September 2

3 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report President and CEO Mikael Silvennoinen: Our customer business performed well during the reporting period. We have continued to strengthen our market position in both Banking and Non-life Insurance, and our operational profitability has remained good. Our January September consolidated earnings before tax were on a par with those reported a year ago. July September earnings before tax were eroded by the euro area's debt crisis and the resulting weak financial performance of investment operations. Earnings before tax for the third quarter were less than half than those reported a year earlier and in the second quarter of the current year. Asset Management showed slightly improved earnings year on year although assets under management decreased from their -end level. The cost/income ratio was better than targeted. We have typically been able to strengthen our market position in difficult market conditions. A gradual slackening of competition, our customer-focused approach coupled with our investments in customer service resources this year provide us with solid foundations for strengthening our position in the current, exceptional market situation too. Our loan portfolio grew at a rate above the market average during the third quarter. The loan portfolio grew by 8% from its -end level and in September our market share of euro-denominated corporate loans increased to over 20% for the first time. Impairment charges were markedly lower than a year ago. The Markets division showed favourable development in client income but trading business was weak due to the exceptional market situation. The Baltics business developed favourably during the reporting period. Insurance premium revenue continued to grow vigorously. We received over 27,000 new loyal customer households during the reporting period, their number totalling over half a million. The balance on technical account was at the same good level as the year before. Investment income turned negative during the third quarter, due to the market effects arising from the euro area's debt crisis and to impairment charges transferred from the fair value reserve to the income statement. Pohjola Bank plc s Interim Report for 1 January 30 September 3

4 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Pohjola Group Interim Report for 1 January 30 September Contents Operating environment...5 Consolidated earnings... 6 Group risk exposure... 9 Capital adequacy Credit ratings Financial performance and risk exposure by business segment Banking Non-life Insurance Asset Management Group Functions Shares and shareholders Management Events after the balance sheet date Outlook towards the year end Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Segment information Notes to the financial statements Accounting policies Formulas for key figures and ratios Pohjola Bank plc s Interim Report for 1 January 30 September 4

5 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Operating environment We were overshadowed by great economic uncertainty in July September. Management of the European sovereign debt crisis and the global economic situation have become a widespread concern reflected in lower consumer and business confidence. Successful handling of the European sovereign debt crisis is vital to future economic development. Failure to handle the crisis may have dire consequences, while successful solutions can restore confidence in the euro system and thereby prevent a recession. So far industrialised economies have done better than feared. US industrial production and consumer spending took a turn for the better in the third quarter, with industrial production also growing in the euro area. Emerging economies slowed down only marginally. Global economic jitters have also had repercussions in Finland: households and companies expectations of economic growth have faded. On the other hand, statistics on industrial production and retail trade indicate that economic activity has remained relatively high throughout the summer and autumn. Gloomier global economic outlook and doubts concerning how the debt crisis in the euro area will be handled resulted in major movements in the money and capital markets during the third quarter. Market rates were low and key share prices fell globally by about 15% and in Finland by about 20%. This uncertainty has also increased risk premiums in the money markets. The European Central Bank has supported the markets by increasing liquidity in an attempt to boost the markets and reduce risk premiums. Interest rates will remain low or decrease slightly towards the year end. The euro area's debt crisis has had only minor effects on the increase in the Finnish banking sector's loan portfolio. Year on year, the loan portfolio increased by about 5% in July September. Despite lower consumer confidence, consumer loans continued to grow at a steady rate and the housing market was still lively. On the other hand, growth of the corporate loan portfolio slowed down somewhat, its annual growth remaining at about 3%. Mutual fund and insurance savings fell even more in the third quarter owing to poor capital market performance. Net asset inflows were clearly negative and the sales of new life insurance policies were low. On the positive side, deposits increased as the number of current accounts and payment transfer accounts went up. 50 % Business volumes Sector total Loans Deposits Life insurance savings Mutual fund savings Banking market total 6 % % % 10 Sources: Bank of Finland, Federation of Finnish Financial Services, The Finnish Association of Mutual Funds ECB: Main refinancing rate Euribor rates and ECB refi rate month euribor 3-month euribor Source: Bank of Finland Long-term interest rates Government bonds (10 years) 2009 Greece Ireland Italy Portugal Spain Finland Germany Source: Reuters EcoWin Fixed investments Annual change in volume In the non-life insurance sector, premiums written for Q1 3 rose by about 4% year on year. Claims expenditure still grew much faster than premiums written. Slower economic growth is nevertheless expected to offset higher claims expenditure relative to higher premiums written. On the other hand, uncertainties over the investment environment and the low interest rates are expected to increase challenges related to investment by insurance companies Source: Statistics Finland Pohjola Bank plc s Interim Report for 1 January 30 September 5

6 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Consolidated earnings Earnings analysis Change Change Rolling million Q1 3 Q1 3 % Q3 Q3 % 12-month Net interest income Corporate and Baltic Banking Markets Other operations Net commissions and fees Net trading income Net investment income Net income from Non-life Insurance Insurance operations Investment operations Other items Other operating income income Personnel costs IT expenses Depreciation and amortisation Other expenses expenses Earnings before impairments of receivables Impairments of receivables Share of associates profits Earnings before tax Change in fair value reserve Earnings/loss before tax at fair value January September earnings Consolidated earnings before tax were somewhat at the previous year's level, EUR 245 million (242). Year on year, total income dropped by 6% and total expenses rose by 1%. Impairment charges for receivables shrank by EUR 48 million to EUR 40 million (88). The European sovereign debt crisis and capital market uncertainty deteriorated earnings before tax at fair value by EUR 180 million from their year-start level. Earnings before tax at fair value were EUR 65 million against EUR 273 million recorded a year earlier. Net interest income was up by 8%. Corporate Banking increased its net interest income, thanks to growth in the loan portfolio. Corporate loan margins shrank slightly in the first quarter but since then they have remained steady. Funding costs continued to rise as expected. The Markets division increased its net interest income but net trading income came down. Net commissions and fees were at around the same level as the year before. Net commissions and fees from securities brokerage increased whereas those from securities issuance decreased. Net investment income was slightly lower than a year ago. The reported earnings included EUR 7 million (22) in realised capital gains recognised on the liquidity portfolio. Dividend income was markedly higher than a year earlier. Insurance premium revenue continued its strong growth and the balance on technical account was at the level recorded a year ago. Net investment income within Non-life Insurance included EUR 21 million (29) in impairment charges, the largest individual impairment loss, EUR 16 million, being recognised on Greek government bonds. Capital gains were markedly lower than a year ago. Pohjola Bank plc s Interim Report for 1 January 30 September 6

7 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Personnel costs rose by 9% year on year. Non-life Insurance sales, claims settlement and wellbeing-at-work business as well as Baltic Banking reinforced their personnel. The number of Group employees on 30 September was 294 higher than on 31 December. Amortisation on intangible assets related to company acquisitions was lower than the year before. Amortisation/depreciation a year ago also included a non-recurring item of EUR 7 million. July September earnings Consolidated earnings before tax was markedly lower than the year before, amounting to EUR 47 million (103). The euro area's debt crisis and the resulting weak developments in capital markets reduced earnings before tax posted by investment operations and the Markets division by a total of over EUR 60 million, year on year. income fell by 33% to EUR 170 million (255) and total expenses decreased by 5%. Impairment charges for receivables and their recoveries in net terms reduced earnings by EUR 4 million (27). With the euro-area debt crisis deepening during the third quarter, the Group reported a loss of EUR 101 million before tax at fair value as against earnings of EUR 165 million a year ago. Net interest income grew at a slower rate than in the previous quarters. While net interest income from Corporate Banking was at the previous year's level, net interest income posted by Markets continued to rise although market instability markedly deteriorated net trading income. Higher funding costs eroded net interest income from other operations. Net commissions and fees increased by 5% year on year. Insurance premium revenue rose by 7% and the balance on technical account was good. As a result of the European sovereign debt crisis and capital market uncertainties, Nonlife Insurance net investment income turned negative. Net investment income within Non-life Insurance included almost EUR 20 million in impairment charges, EUR 16 million of which being recognised on Greek government bonds. Personnel costs rose by 3%. Amortisation/depreciation a year ago included a non-recurring item of EUR 7 million. Pohjola Bank plc s Interim Report for 1 January 30 September 7

8 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Earnings analysis by quarter million Q1 Q2 Q3 Q4 Q1 Q2 Q3 Net interest income Corporate and Baltic Banking Markets Other operations Net commissions and fees Net trading income Net investment income Net income from Non-life Insurance Insurance operations Investment operations Other items Other operating income income Personnel costs IT expenses Depreciation and amortisation Other expenses expenses Earnings before impairments of receivables Impairments of receivables Share of associates profits Earnings before tax Change in fair value reserve Earnings/loss before tax at fair value Pohjola Bank plc s Interim Report for 1 January 30 September 8

9 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Group risk exposure The Group's risk exposure remained favourable as impairment charges decreased from their level a year earlier and investment-grade exposures remained high. It is currently exceptionally difficult to assess the future macroeconomic development. Doubtful receivables remained low relative to the loan and guarantee portfolio. Net loan losses and impairment losses recognised for January September reduced earnings by EUR 40 million (88), accounting for 0.27% (0.63) of the loan and guarantee portfolio. Final loan losses recognised for the period totalled EUR 46 million (41) and impairment charges EUR 60 million (98). Loan loss recoveries and allowances for impairments totalled EUR 67 million (51). The majority of the impairment losses were those recognised on an individual basis. The table below shows Pohjola Group's direct exposure to GIIPS sovereign bonds as of 30 September. Non-life Insurance's investments are measured at market value. Those of the Group Functions are stated at amortised cost. million Banking Non-life Group Insurance Functions Greece Italy Ireland Portugal Spain The third quarter saw no major change in doubtful receivables, totalling EUR 46 million (31), or accounting for 0.31% (0.22) of the loan and guarantee portfolio. Past due payments came to EUR 22 million (17), representing 0.15% (0.12) of the loan and guarantee portfolio. No major changes took place in Non-life Insurance's underwriting risks. The investment portfolio risk exposure underwent a slight reduction. The financial and liquidity position remained strong. Shortterm funding performed well in the third quarter. The exceptional market situation raised long-term funding costs. In the present liquidity position, there was no need for new long-term issues. Pohjola Bank plc maintains OP-Pohjola Group's liquidity reserve which mainly consists of notes and bonds eligible as collateral for central bank refinancing. This liquidity portfolio plus other items included in OP-Pohjola Group's balance sheet and eligible for central bank refinancing constitute the total liquidity buffer, which can be used to cover OP-Pohjola Group's wholesale funding maturities for at least 24 months. Determining the value of the available-for-sale financial assets at fair value through profit or loss and included in the liquidity portfolio is based on mark-to-market valuations. Major risks related to the Group's business are associated with developments in the overall economic environment and capital markets as well as upcoming regulatory changes in the financial sector. Pohjola Bank plc s Interim Report for 1 January 30 September 9

10 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Capital adequacy Capital structure and capital adequacy million 30 Sept. 31 Dec. Tier 1 capital 1,589 1,692 Tier 2 capital capital base 1,589 1,803 Risk-weighted assets Credit and counterparty risk 12,899 12,314 Market risk Operational risk ,416 13,520 Capital adequacy ratio, % Tier 1 ratio, % Core Tier 1, %*) *) Tier 1 capital, excl. hybrid capital and shortfall of Tier 2 capital covered by hybrid capital / minimum capital requirement x 8 Capital adequacy under the Act on the Supervision of Financial and Insurance Conglomerates million 30 Sept. 31 Dec. Conglomerate's capital base 1,903 2,154 Conglomerate's minimum capital base 1,347 1,259 Conglomerate s capital adequacy Conglomerate s capital adequacy ratio The capital adequacy ratio under the Act on Credit Institutions was 11.0%, exceeding the minimum statutory requirement of 8%. Pohjola Group's Tier 1 target ratio stands at a minimum of 9.5% over the economic cycle. On 18 October, the Financial Supervisory Authority granted OP-Pohjola Group permission to adopt the Internal Ratings-based Approach (IRBA) to credit risk in capital adequacy measurement as of 31 December, applying to exposure amounts involving OP-Pohjola Group's retail, corporate and credit institution customers. The previous permission to use IRBA applied to Pohjola Bank plc's corporate and institutional exposures. This adoption will increase OP-Pohjola Group's Tier 1 ratio by an estimated 2.6 percentage points and capital adequacy ratio under the abovementioned Act by an estimated 0.3 percentage points. For Pohjola, IRBA will improve the capital adequacy ratio under the Act on Credit Institutions by an estimated 0.2 percentage points (pro forma) The European Banking Authority (EBA) published its EUwide forward-looking stress test results in July. Just like last year, OP-Pohjola Group's capital adequacy clearly exceeded the stress test's threshold level. In the adverse scenario, the Group's capital adequacy remained on a solid basis and clearly above the test's minimum requirement. The Group's Core Tier 1 capital ratio would fall no lower than 11.5%, while the minimum level in the test is 5%. Pohjola s data are included in OP-Pohjola Group's results. As a result of the financial crisis, the regulatory framework for banks' capital requirements is becoming more rigorous in an effort to improve the quality of their capital base, to reduce the cyclic nature of capital requirements, to decrease banks' indebtedness and to set quantitative limits to liquidity risk. These changes are still under preparation, due to be effective between 2013 and 2019, and it is too early to predict precisely what their effects will be. From Pohjola Group's viewpoint, the most significant changes in the new regulations are related to allowances for insurance company holdings and liquidity risk requirements whose treatment will most likely to be finalised only in national legislation. Tier 1 capital was 6% lower than at the end of December, because EUR 159 million in the shortfall of Tier 2 capital were deducted from Tier 1 capital. Pohjola Bank plc redeemed the Lower Tier 2 debenture loan of EUR 150 million in March and the Lower Tier 2 subordinated notes of USD 325 million in September. Pohjola Bank plc issued Lower Tier 2 subordinated notes of CHF 100 million in July and of EUR 100 million in September. These four transactions decreased Pohjola Group's capital adequacy ratio by 1.5 percentage points, Tier 1 ratio by 1.1 percentage points and capital adequacy under the Act on the Supervision of Financial and Insurance Conglomerates by 0.16, in net terms. Risk-weighted assets increased by 7%, or EUR 896 million, from their -end level. Pohjola Group belongs to OP-Pohjola Group whose capital adequacy is supervised in accordance with the Act on the Supervision of Financial and Insurance Conglomerates. Pohjola Group's capital adequacy ratio under the Act, measured using the consolidation method, decreased to 1.41 (1.71). Pohjola Bank plc s Interim Report for 1 January 30 September 10

11 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Credit ratings Pohjola Bank plc's credit ratings remained unchanged during the reporting period. On 10 August, Moody's put Pohjola Bank plc's Aa2 rating for long-term debt and Pohjola Non-life Insurance Ltd's insurance financial strength (IFRS) A2 on review for a possible credit rating downgrade. On 13 October, as part of its extensive review of the global and European banking sector, Fitch Ratings put OP- Pohjola Group's and Pohjola Bank plc's credit ratings under review for a possible downgrade. Credit rating AA- for OP- Pohjola Group's and Pohjola's long-term debt and credit rating F1+ for short-term debt are under review. Fitch's reassessment applies to several large global and European banks with a relatively high credit rating. S&P's credit ratings have not undergone any changes, and the outlook is stable. Rating agency Short-term debt Outlook Long-term debt Outlook S&P A-1+ Stable AA- Stable Moody s P-1 Negative Aa2* Negative Fitch F1+* Stable AA-* Negative * Credit rating put on review for a possible downgrade Pohjola Bank plc s Interim Report for 1 January 30 September 11

12 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Financial performance and risk exposure by business segment Banking Earnings before tax for January September amounted to EUR 135 million (93). Impairment charges on receivables fell by EUR 53 million to EUR 36 million. The loan portfolio grew by 8% from its -end level and by slightly over 8% from its level a year ago. In the third quarter, Corporate Banking doubled its earnings before tax to EUR 42 million (20) but Markets posted an earnings reduction of EUR 19 million, year on year. Earnings before tax reported by Baltic Banking came to EUR 0 million ( 4). Operating cost/income ratio stood at 37% (34), which was better than the strategic target of 40%. Banking: financial results and key figures and ratios million Q1 3/ Q1 3/ Change, % Q3/ Q3/ Change, % Net interest income Corporate and Baltic Banking Markets Net commissions and fees Net trading income Other income income Expenses Personnel costs IT expenses Depreciation and amortisation Other expenses expenses Earnings before impairments of receivables Impairments of receivables Earnings before tax Earnings before tax at fair value Loan portfolio, billion Guarantee portfolio, billion 2.5 2, Margin on corporate loan portfolio, % Ratio of doubtful receivables to loan and guarantee portfolio, % Ratio of impairments of receivables to loan and guarantee portfolio, % Operating cost/income ratio, % Personnel January September earnings Earnings before tax improved to EUR 135 million (93), based on a EUR 53 million reduction in impairment charges which amounted to EUR 36 million in net terms. The loan portfolio grew by EUR 0.9 billion from its -end level, or by 8%, to EUR 12.3 billion. The market share of euro-denominated corporate loans increased to over 20% for the first time. The guarantee portfolio declined by EUR 0.1 billion from its -end level, standing at EUR 2.5 billion. Committed standby credit facilities decreased by almost EUR 0.1 billion to EUR 2.8 billion. On 30 September, the corporate loan margin averaged 1.32%, or 4 basis points lower than on 31 December. The average corporate loan margin shrank in the first quarter but has since then remained steady. Thanks to the growth in the portfolio, net interest income from Corporate Banking rose although funding costs increased by 2% year on year. Net commissions and fees were 7% higher than a year ago. commission income from loans and guarantees was one million euros higher than in the previous year. Net commissions and fees from securities brokerage increased by over EUR 2 million. Pohjola Bank plc s Interim Report for 1 January 30 September 12

13 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Earnings before tax, million Q1 3/ Q1 3/ Change % Corporate Banking Markets Baltic Banking Earnings improvement by Corporate Banking was due to lower impairment charges. Syndicated loan arrangements in particular, in which Corporate Banking has strengthened its position further, were behind higher net interest income and net commissions and fees. Net commissions and fees from syndicated loans were higher than a year ago. Earnings before tax reported by Markets decreased by EUR 8 million, year on year. Client income remained at the previous year's level but income from trading was down as a result of the challenging market situation. Baltic Banking showed favourable development in its financial performance, its earnings before tax improving by EUR 4 million and totalling around zero. The loan portfolio doubled to EUR 0.2 billion from its -end level. July September earnings Earnings before tax were EUR 43 million, or EUR 5 million higher than the year before. This improvement was mainly based on the reduction of impairment charges by EUR 27 million. The loan portfolio grew by 3% to EUR 12.3 billion, which compensated for the effect of higher financing costs on net interest income. Market instability eroded net trading income. Client income remained at the somewhat same level as a year ago. 12 was 1.4% (1.7) and that of non-rated exposure 1.0% (1.0). Corporate exposure (including housing corporations) accounted for 80% (76) of total exposure within Banking. Of corporate exposure, the share of investment-grade exposure stood at 61% (61) and the exposure of the lowest two rating categories amounted to EUR 289 million (360), accounting for 1.7% (2.2) of the total corporate exposure. Significant corporate customer exposure increased to EUR 4.3 billion (3.4) in the third quarter. The Group's capital base for the purpose of calculating major customer exposure came to EUR 1,673 million (1,925). The distribution of corporate exposure by industry remained highly diversified. The most significant industries included Letting and Operation of Dwellings representing 10.5% (11.5), Manufacture of Machinery and Equipment 9.5% (9.5) and Operation of Other Real Estates 9.2% (8.5). 51% of exposures within Letting and Operation of Dwellings and 20% of exposures within Operation of Other Real Estates were guaranteed by general government. January September net loan losses and impairment losses within Banking came to EUR 36 million (89), accounting for 0.24% (0.64) of the loan and guarantee portfolio. Final loan losses recognised totalled EUR 46 million (41) and impairment charges EUR 57 million (98). Loan loss recoveries and allowances for impairments totalled EUR 67 million (50). On 30 September, Baltic Banking exposures totalled EUR 0.3 billion (0.1), accounting for 2.1% (0.9) of the loan and guarantee portfolio. The Baltic Banking net loan losses and impairment losses for January September amounted to EUR 1 million (1). January September interest rate risk exposure averaged EUR 8.2 million (4.3), based on the 1-percentage-point change in the interest rate. Earnings before tax, million Q3/ Q3/ Change, % Corporate Banking Markets Baltic Banking Risk exposure by Banking Within Banking, key risks are associated with credit risk arising from customer business, and market risks. During January September, total exposure decreased by EUR 0.3 billion to EUR 21.5 billion. This decrease was to a large extent due to the adoption of the netting of derivative contracts during the second quarter, reducing exposures by EUR 2.5 billion. In particular, this change is reflected in investment-grade exposures. On a comparable basis, total exposures grew by EUR 2.2 billion from their -end level. The ratio of investment-grade exposure i.e. ratings 1 5 to total exposure, excluding households, remained at a healthy level, standing at 65% (67). The share of ratings 11 Pohjola Bank plc s Interim Report for 1 January 30 September 13

14 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Non-life Insurance Earnings before tax amounted to EUR 71 million (84). Investment income for the third quarter was EUR 43 million lower than a year ago as a result of the difficult market situation. Insurance premium revenue increased by 7% (2). The balance on technical account was good. The operating combined ratio stood at 89.4% (88.6). The number of loyal customer households totalled over 500,000. OP bonuses were used to pay over one million insurance premiums. Return on investments at fair value was 1.8% (5.2). Non-life Insurance: financial results and key figures and ratios million Q1 3/ Q1 3/ Change, % Q3/ Q3/ Change, % Insurance premium revenue Claims incurred Operating expenses Amortisation adjustment of intangible assets Balance on technical account Net investment income Other income and expenses Earnings before tax Earnings/loss before tax at fair value Combined ratio, % Operating combined ratio, % Operating expense ratio, % Return on investments at fair value, % Solvency ratio, % Personnel 2,297 2, ,090 January September earnings Insurance operations Insurance premium revenue continued to grow vigorously and the balance on technical account was good. insurance premium revenue was up by 7% (2). The operating balance on technical account totalled EUR 82 million (83) and the operating combined ratio stood at 89.4%% (88.6). These operating figures exclude changes in reserving bases and amortisation on intangible assets arising from the corporate acquisition. Insurance premium revenue, million Q1 3/ Q1 3/ Private Customers Corporate Customers Baltic States Change, % Insurance premium revenue rose by 8% among Private Customers. With its increasingly stronger market position, Pohjola became the market leading insurer of private customers' motor vehicles. The number of loyal customer households increased by 27,143 (29,937). On 30 September, the number of loyal customer households totalled 507,748, of which up to 65% also use OP-Pohjola Group member cooperative banks as their main bank. OP- Pohjola Group member banks' and Helsinki OP Bank's customers can use their OP bonuses earned through banking transactions to pay Pohjola non-life insurance premiums. Since December, OP bonus customers have earned bonuses from insurance premiums for Pohjola's home, family and motor vehicle policies. During January September, OP bonuses were used to pay 1,030,000 insurance premiums, with 148,800 paid in full using bonuses only. Insurance premiums paid using bonuses totalled EUR 47 million. The Finnish Tax Administration is revising its guidelines concerning corporate bonus practices late this year. As a result of such changes in tax treatment of bonuses, OP- Pohjola Group has changed its bonus system in such a way that customers will not have the option of encashing their unused bonuses from 31 October and of choosing for what their bonuses are used from 1 January Insurance premium revenue from Corporate Customers rebounded by 7%, the strongest growth coming from SMEs. In the Baltic region, insurance premium revenue remained at somewhat the same level as the year before. Claims incurred rose by 9%. Growth in the insurance portfolio and especially the higher number of material Pohjola Bank plc s Interim Report for 1 January 30 September 14

15 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report damage claims filed by private customers added to claims incurred. The number of losses reported increased by 8%. Claims incurred due to major losses were at around the same level as a year ago. The reported number of major or mediumsized losses (in excess of EUR 0.1 million and over EUR 0.5 million in pension liabilities) came to 174 (184) in January September, with their claims incurred retained for own account totalling EUR 76 million (76). The operating loss ratio stood at 68.8% (67.2) and the risk ratio (excl. loss adjustment expenses) at 62.8% (61.4). The operating expense ratio stood at 20.6% (21.3). Operating expenses rose by a moderate 3%. Pohjola has recruited more personnel for sales and claims services with a view to improving services for its growing customer base. During the reporting period, Pohjola Insurance Ltd also strengthened resources in its wellbeing-at-work business through some 40 wellbeing experts, the most of whom came from Excenta as a result of the company acquisition. The operating cost ratio (incl. indirect loss adjustment expenses) stood at 26.6% (27.2). Operating balance on technical account and combined ratio (CR) Private Customers Corporate Q1 3/ Q1 3/ Balance CR Balance CR % million % million Customers Baltic States Within Private Customers, profitability remained good despite higher claims incurred. Within Corporate Customers, the operating balance on technical account improved as a result of the favourable development in claims expenditure. In the Baltic States, exceptional weather conditions added to claims resulting in a weaker profitability. Investment operations Capital market uncertainty was reflected in investment income. Return on investments at fair value stood at 1.8% (5.2). Net investment income recognised in the income statement amounted to EUR 42 million (65). Impairment charges recognised from the fair value reserve in the income statement totalled EUR 21 million (29), EUR 16 million of which derived from Greek government bonds. Net investment income at fair value was EUR 50 million (145). Investment portfolio by asset class, % 30 Sept Dec. Bonds and bond funds Alternative investments Equities Private equity Real property Money market instruments On 30 September, the investment portfolio totalled EUR 2,853 million (2,924). The fixed-income portfolio by credit rating remained healthy, considering that investments under the "investment-grade" represented 90% (91) and 76% of the investments were rated at least A. The average residual term to maturity of the fixed-income portfolio was 5.0 years (5.3) and the duration 4.0 years (4.1). July September earnings Insurance operations Insurance premium revenue continued to grow vigorously. The balance on technical account remained good despite higher claims incurred. insurance premium revenue was up by 7% (4). The operating balance on technical account totalled EUR 39 million (43) and the operating combined ratio stood at 85.2% (82.8). Insurance premium revenue Q3/ Q3/ Change, % Private Customers Corporate Customers Baltic States Within both Private Customers and Corporate Customers, insurance premium revenue continued to grow at the rate reported in the first half. The number of loyal customer households increased by 8,051 (12,070). Insurance premium revenue posted by the Baltic States was lower than a year earlier. Claims incurred rose by 12%, with private customers showing the strongest growth. The reported number of major or medium-sized losses (in excess of EUR 0.1 million and over EUR 0.5 million in pension liabilities) came to 60 (55) in July September, with their claims incurred retained for own account totalling EUR 23 million (25). The operating loss ratio deteriorated, standing at 66.3% (62.8), and the risk ratio (excl. loss adjustment expenses) stood at 60.6% (57.5). The operating expense ratio was 18.9% (20.0). Operating expenses amounted to EUR 50 million (50). The operating cost ratio (incl. loss adjustment expenses) stood at 25.4% (24.5). Pohjola Bank plc s Interim Report for 1 January 30 September 15

16 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Operating balance on technical account and combined ratio (CR) Private Customers Corporate Q3/ Q3/ Balance CR Balance CR % million % million Customers Baltic States Within both Private Customers and Corporate Customers, profitability remained good despite higher claims incurred. The Corporate Customers division made good progress in profitability and premium revenue continued its strong growth. Claims expenditure continued to develop unfavourably in the Baltic States. Investment operations The European sovereign debt crisis and capital market uncertainty eroded investment income. Return on investments at fair value was 2.8% (2.6). Net investment income recognised in the income statement amounted to EUR 20 million (23). Impairment charges recognised on Greek government bonds in the income statement totalled EUR 16 million. In addition, capital losses deteriorated the financial result. Net investment income at fair value was EUR 82 million (75). Risk exposure by Non-life Insurance Major risks within Non-life Insurance include underwriting risks associated with claims developments and market risks associated with investment portfolios covering technical provisions. Non-life Insurance's solvency capital stood at EUR 823 million (832) on September 30. The ratio of solvency capital to insurance premium revenue (solvency ratio) stood at 81% (86). Equalisation provisions rose to EUR 441 million (424). Pohjola Insurance Ltd s credit ratings remained unchanged: A2 by Moody's (outlook: negative) and A+ by Standard & Poor's (outlook: stable). Investment risk exposure was slightly reduced. Pohjola Bank plc s Interim Report for 1 January 30 September 16

17 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Asset Management Earnings before tax increased by 11% to EUR 19.5 million (17.6). Assets under management totalled EUR 31.5 billion (35.0). Operating cost/income ratio stood at 49% (52). Asset Management: financial results and key figures and ratios million Q1 3/ Q1 3/ Change, % Q3/ Q3/ Change, % Net commissions and fees Other income income Personnel costs Other expenses expenses Share of associate's profit Earnings before tax Earnings before tax at fair value Assets under management, billion Operating cost/income ratio, % Personnel January September earnings Year on year, earnings before tax rose by 11% to EUR 19.5 million (17.6). The operating cost/income ratio stood at 49% (52). The reported earnings included EUR 0.9 million (0.3) in performance-based management fees. The Q1 3 earnings a year ago included income and expenses of Pohjola Capital Partners Ltd and Pohjola Private Equity Funds Ltd sold in December. Earnings posted by these sold companies increased earnings before tax by EUR 2.3 million in January September. For the continuing operations, both income and expenses increased. Earnings before tax include EUR 1.7 million deriving from net profit shown by Access Capital Partners Group SA, an associated company Assets under management, billion 30 Sept. 30 June 31 Dec. Institutional clients OP mutual funds Private acquired in December, in proportion to Pohjola's shareholding. Assets under management shrank by EUR 3.5 billion from their -end level. The bear market for equities led to the reduction in assets under management. July September earnings Earnings before tax amounted to EUR 6.0 million (5.6), showing a year-on-year improvement of 6%. The operating cost/income ratio improved to 49% (51). Q3/ earnings included EUR 0.7 million in earnings posted by companies sold in December. Earnings include EUR 0.5 million in earnings recorded by Access Capital Partners Group SA. Assets under management by asset class, % 30 Sept. 30 June 31 Dec. Money market investments Bonds Equities Other Pohjola Bank plc s Interim Report for 1 January 30 September 17

18 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report Group Functions Earnings before tax amounted to EUR 20 million (48), eroded by lower net interest income and capital gains on notes and bonds. Earnings before tax at fair value fell by EUR 58 million year on year. Liquidity and the availability of funding remained good. Group Functions: financial results and key figures and ratios million Q1 3/ Q1 3/ Change, % Q3/ Q3/ Change, % Net interest income Net trading income Net investment income Other income income Personnel costs Other expenses expenses Earnings/loss before impairments of receivables Impairments of receivables Earnings/loss before tax Earnings/loss before tax at fair value Liquidity portfolio, billion Receivables and liabilities from/to OP-Pohjola Group entities, net position, billion Central Banking earnings, million Personnel January September earnings Earnings before tax dropped by EUR 28 million to EUR 20 million, year on year. A decline in net interest income was due to higher funding costs. Net investment income included EUR 7 million in capital gains on notes and bonds (22) and EUR 10 million (3) in dividend income. Impairment charges recognised on shares and participations included in available-for-sale financial assets totalled EUR 1 million (4). Impairment charges recognised on bonds came to EUR 3 million ( 1), which was EUR 4 million higher than a year ago. The availability of funding remained good despite the exceptional market situation. During the reporting period, Pohjola increased its long-term funding by issuing in international capital markets one senior bond with a maturity of five years and worth EUR 500 million. In addition, OP Mortgage Bank issued two covered bonds each worth EUR 1 billion and with a maturity of five and seven years. In the third quarter in particular, banks' long-term funding costs rose as a result of the overall market situation, but Pohjola had no need for new long-term issues towards the end of the reporting period owing to its strong liquidity position. On 30 September, the average wholesale funding margin was 31 basis points (22). Average funding costs will rise when maturing long-term debt is renewed with higher margins. Earnings before tax at fair value were in the red, EUR 59 million, or EUR 58 million lower than the year before. July September earnings Earnings before tax were in the red, EUR 4 million, or EUR 22 million lower than the year before. This reduction resulted from higher funding costs, lower capital gains on notes and bonds and higher impairment charges on notes and bonds recognised from bonds. Earnings before tax at fair value were EUR 110 million lower than a year earlier. Uncertainty over the euro-area's economic development has widened credit spreads, which diminished the fair value reserve. Risk exposure by Group Functions Major risks within the Group Functions include those associated with the fair value change of assets included in the liquidity portfolio, and liquidity risks. The Group Functions exposure totalled EUR 20.1 billion (18.1), consisting of assets held in the liquidity portfolio to secure OP-Pohjola Group's liquidity and of receivables from OP-Pohjola Group member banks. The liquidity portfolio amounted to EUR 12.8 billion (9.5), comprising primarily Pohjola Bank plc s Interim Report for 1 January 30 September 18

19 Pohjola Bank plc Stock exchange release, 2 November, 8.00 am Interim Report investments in notes and bonds issued by governments, municipalities, financial institutions and companies all showing good credit ratings, and in securitised assets. Shares and shareholders The total number of Pohjola Series A shares, quoted on the NASDAQ OMX Helsinki, and unquoted Series K shares did not change during the first half. Number of shares Share series 30 Sept. No. of shares % of all shares % of votes Pohjola A (POH1S) 251,169, Pohjola K (POHKS) 68,381, ,551, On 30 September, one Series A share closed at EUR 7.94 (8.97). In January September, the share price reached a high of EUR (on 11 April) and a low of EUR 6.96 (on 12 September). Pohjola's market capitalisation amounted to EUR 2,536 million (2,866) on 30 September. In calculating the market capitalisation, Series K shares were valued at the price of Series A shares. Trading in Series A shares in euro terms amounted to EUR 1,216 million in January September as against EUR 1,028 million a year earlier, while in volume terms it came to 135 million shares (123). Number of shareholders 30 Sept. 31 Dec. Change Holders of Series A 34,082 34, shares Holders of Series K shares * 34,088 34, *The combined number of the holders of Series A and K shares differs from the total number of the holders of Series A and K shares, because some holders of Series K shares also hold Series A shares. Major shareholders 30 Sept. % of all % of Series % of votes shares A shares 1. OP-Pohjola Group Central Cooperative Ilmarinen Mutual Pension Insurance Company 3. Oulun Osuuspankki OP Bank Group Pension Fund OP Bank Group Pension Foundation State Pension Fund Turun Seudun Osuuspankki Varma Mutual Pension Insurance Company 9. Tampereen Seudun Osuuspankki 10. Suur-Savon Osuuspankki Nominee-registered shares, total Other Trading venues for Pohjola shares In January September, 80.6% of euro-denominated trading in Series A shares took place on NASDAQ OMX. During the current year, around a fifth of trading has transferred to multilateral trading facilities (MTF). Trading venue % of euro-denominated trading NASDAQ OMX Chi-X BATS 4.96 Turquoise 3.52 Burgundy 0.41 EuroNext Arca 0.08 Source: NASDAQ OMX Helsinki On 30 September, Pohjola had 34,088 shareholders, private individuals accounting for 95%. The number of nominee-registered shares totalled 51.8 million on 30 September, increasing by 1.3 million shares from their level on 31 December. On 30 September, these shares accounted for 20.6% (20.1) of Series A shares. Interest rate risk exposure averaged EUR 12.7 million (9.9) in January September, based on the 1-percentage-point change in the interest rate. Pohjola Bank plc s Interim Report for 1 January 30 September 19