Pohjola Group 31 March 2008
Group business structure Strategy Interim report 31 March 2008 Pohjola Group Banking and Investment Services Non-life Insurance Acquisition synergies Prospects for 2008 Dividend policy 2
3 Group business structure
4 Pohjola Group in brief Pohjola Group offers banking, investment and non-life insurance services as one of the leading players in the Finnish market. For corporate customers: comprehensive financial, investment and payment transaction solutions and non-life insurance services in Finland and abroad. For private customers: non-life insurance and asset management services.
The Group's business structure Q1/2008 5 Pohjola Group Banking and Investment Services Non-life Insurance Corporate Banking Markets Group Treasury Asset Management Private Customers Corporate Customers Baltic States
6 Strategy
Strategy in a Nutshell Fully Integrated Financial Services Company 7 Vision The most preferred financial services partner Mission Goals Measures Tools and critical success factors Business concept Creating economic value for our customers and shareholders High profitability High cost-efficiency Market leadership Exploiting the shared International New value-added customer potential and service services service network capabilities Brand Proactive risk management Effective capital management People and competencies Integrated business model
Financial targets 8 1-3/2008 1-3/2007 2007 Target 2010 Banking and Investment Services Operative return on equity, % -3.8 17.6 12.1 > 19 Operative cost/income ratio, % 104.4 39.1 46.3 < 40 Non-life Insurance Operative return on equity, % -15.5 35.0 25.2 > 20 Operative combined ratio, % 98.2 100.8 93.8 92 Operating expense ratio, % 21.7 22.9 21.2 < 20 Solvency ratio, % 67.0 77.0 72.0 70 Group Return on equity at fair values, % -8.0 13.7 9.3 15.0 Tier 1 ratio, % (old approach) 8.0 7.5 Tier 1 ratio, % (new approach) 8.2 9.0 > 8.5
Objective: leading market position in Finland 9 Now Target Corporate Banking 2nd 1st Non-life Insurance 1st 1st Asset Management 2nd 1st Source: Data disclosed by companies, Financial Supervision Authority, Federation of Finnish Insurance Companies
10 Systematic implementation of strategy continues In Banking and Investment Services, the focus is on strengthening further the market position of Corporate Banking and Asset Management. Customers' positive opinions are a strength. Problem-solving orientation guides the operations. In Non-life Insurance, the market position as the insurer of private households can be improved in particular. The target is to increase the number of loyal customer households. by offering the market's best bonuses for customers who pool their banking and insurance matters with the OP-Pohjola Group, and by benefiting from the wide customer base and branch office network of the OP-Pohjola Group. Requirements for reaching the Group's profitability target: Fulfilment of synergy benefits and improvement of operational efficiency Organic growth in business operations Increased efficiency in the use of capital.
11 Interim report 31 March 2008
12 Pohjola Group Growth remained strong Customer business improved profitability Lower liquidity reserve market value undermined earnings markedly Capital adequacy at a good level
Sustained Strong Growth Lower Earnings than in Q1/2008 13 The Group continued its strong growth during the first quarter The loan portfolio increased by 11% and by 26% in the year to March. Insurance premium revenue was 8% higher than a year ago. It is estimated that the Group's market position strengthened during the first quarter. Earnings were markedly lower than a year ago Improved year-on-year earnings from customer business were eroded by marketvalue changes recognised for liquidity reserves. Banking and Investment Services showed a slight loss before tax. Non-life Insurance posted a higher balance on technical account than a year ago although it reported lower earnings before tax than a year earlier, due to year-on-year lower investment income from Non-life Insurance.
12 mrd. billion Banking and Investment Services Strong growth: Loan portfolio up by 11% in the first quarter 11% 14 10 19% 8 17% 6 12% 7% 19% 13% 4 2 0 12/2002 12/2003 12/2004 12/2005 12/2006 12/2007 3/2008 Growth rates are based on growth over the previous period.
million 300 Non-life Insurance Strong growth: Insurance premium revenue up by 8% 15 250 8% 200 150 100 9% 6% 50 0 10% Private Customers Corporate Customers Baltic Total 1-3/2007 1-3/2008
Banking and Investment Services 16 million Earnings adjusted for fair value changes up by 12% *) 50 44.6 44.6 52.3 52.3 49.1 53.1 49.9 30 23.0 21.3 10-0.5 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008-10 Earnings before tax Earnings adjusted for fair value changes *) *) Earnings adjusted for value changes in liquidity reserves
Non-life Insurance Customer business profitability improved 17 120 100 103.6 105.1 98.2 100.8 98.2 80 60 40 20 0 2004 2005 2006 2007 2008 Operating combined ratio Q1
Income statement 18 million 1-3/2008 1-3/2007 2007 Net interest income after impairment losses 37 26 114 Net income from non-life insurance 91 94 433 Net commissions and fees 28 28 115 Other operating income -23 31 66 Total income 133 179 728 Total expenses 115 114 440 Earnings before tax 17 65 288 Earnings per share, 0.07 0.25 1.04
million 50 Earnings before tax by business line 45 January-March 19 40 30 20 31 22 10 0-10 -1-11 - 4-20 Banking and Investment Services Non-life Insurance 1-3/2007 1-3/2008 Other operations
Balance sheet - Loans and investments 20 billion 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 16.5 billion 16% 6% 19% 53% 2% 5% 22.3 billion 12% 9% 17% 30% 12% 1% 10% 24.2 billion 14% 9% 20% 32% 11% 1% 12% 25.9 billion 9% 11% 18% 36% 11% 3% 12% 29.0 billion 11% 6% 18% 36% 11% 5% 14% 31 Dec 2004 31 Dec 2005 31 Dec 2006 31 Dec 2007 31 March 2008 Receivables from Member Cooperative Banks Receivables from other financial institutions Financial assets for trading Receivables from customers Non-life insurance assets Life insurance assets Investment assets Other items
Balance sheet Funding 21 billion 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 16.5 billion 19% 7% 25% 37% 3% 5% 4% 22.3 billion 7% 9% 9% 9% 41% 2% 9% 6% 25.9 billion 24.2 billion 5% 5% 5% 5% 11% 8% 9% 55% 3% 8% 7% 31 Dec 2004 31 Dec 2005 31 Dec 2006 31 Dec 2007 31 March 2008 8% 50% 3% 7% 10% 29.0 billion 6% 9% 11% 9% 43% 4% 5% 12% Liabilities to Member Cooperative Banks Liabilities to other financial institutions Liabilities to customers Non-life insurance liabilities Life insurance liabilities Debt securities issued to the public Subordinated liabilities Capital loans Shareholders' equity and minority interests Other items
22 Own funds and capital adequacy million % 2 000 30 1 800 27 1 600 24 1 400 1 200 1 000 800 600 400 356 11.0 7.6 550 721 12.8 12.9 9.6 8.2 258 10.9 9.0 378 10.8 8.2 21 18 15 12 9 6 Tier 2 Tier 1 Tier 1 ratio, % Capital adequacy ratio, % 200 0 751 1002 948 1185 1181 12/04* 12/05* 12/06* 12/07 03/08 3 0 * Measurement approach under Basel I, which is not comparable with the current approach under Basel II
Long-term credit ratings *) 23 Moody's Investors Standard Fitch Service & Poor s Ratings Pohjola Bank Aa1 AA- AA- Danske Bank Aa1 AA- AA- Handelsbanken Aa1 AA- AA- Nordea Aa1 AA- AA- DnB NOR Aa1 AA- - Swedbank Aa1 A+ A+ SEB Aa2 A+ A+ Pohjola Insurance **) A2 A+ - If **) A2 A - Finnish Sovereign Aaa AAA AAA *) Long-term funding **) Insurer financial strength
24 Banking and Investment Services Customer business improved profitability, but the lower liquidity reserve market value eroded earnings
Banking and Investment services Q1/2008 in brief 25 The loan portfolio grew by 11% and by 26% in the year to March. The average level of corporate loan portfolio's margins stood at 0 83% (0.81). Loss before tax EUR 1 (earnings of EUR 45 million). EUR 59 million negative mark-to-market valuation of liquidity reserves, EUR 49 million recognised in the income statement.
Banking and investment services Performance 26 million 1-3/08 1-3/07 2 007 Net interest income 39 29 131 Impairment losses on receivables -2 0 1 Net interest income after impairment losses 40 29 130 Net commissions and fees 28 26 115 Net trading income -44 7-34 Net investment income 1 5 24 Other operating income 12 7 35 Total income 37 74 269 Operating expenses 38 30 125 Earnings before tax at fair values -1 45 141
Banking and Investment Services Credit margins in the derivatives market *) 27 180 160 140 120 100 700 600 500 400 80 60 40 20 300 200 100 0 0 12/06 03/07 06/07 09/07 12/07 03/08 itraxx 5 yrs, Companies and financial institutions investment grade (left axis) itraxx Financials Senior 5 yrs, Financial institutions investment grade (left axis) itraxx Crossover 5 yrs, Companies below investment grade (right axis) *) Developments in margins in the spot and derivatives markets may differ from each other
million Banking and investment services Earnings before tax by division January-March 28 50 45 40 30 26 20 17 10 7 8 5 5 3 4 3 0 0-10 -20-30 -40-34 Corporate Banking Markets Central Banking Treasury Asset Management Banking and Investment Services 1-3/2007 1-3/2008
billion 12 Banking and investment services Growth in the first quarter: loan portfolio 29 10 19% 11% 8 6 12% 7% 19% 13% 17% 4 2 0 12/2002 12/2003 12/2004 12/2005 12/2006 12/2007 3/2008 The percentages describe the change of loan portfolio from the end of the previous period.
20 % Banking and Investment Services Market share in corporate loans developed favourably 30 16 12 18.3% 29 March 2008 8 4 6.7% 31 March 1999 0 12/99 12/00 12/01 12/02 *) **) 12/03 12/04 12/05 12/06 12/07 *) Until December 2002 deposit banks' corporate loan portfolio. **) Since January 2003 according to the new statistics of the Bank of Finland.
% 1,0 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0 Banking and Investment Services Average margin of corporate loan portfolio Average margin of corporate loan portfolio 31 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07
20 18 16 14 12 10 8 6 4 2 0 Banking and investment services Corporate exposure by industry 32 Construction Forest industry Real estate Investment Services Transport and traffic Energy Other industry Food industry Real estate management Telecommunications and electronics Chemical Industry Communications and publishing Other industries Wholesale and retail trade Metal industry % 31 Dec.2003 ( 6.6 billion) 31 Dec.2004 ( 7.9 billion) 31 Dec.2005 ( 8.6 billion) 31 Dec.2006 ( 10.6 billion) 31 Dec 2007 ( 12.3 billion) 31 March 2008 ( 14.3 billion)
% 60 50 40 30 Banking and investment services Corporate exposure by credit rating *) 1-2 (AAA-A-) 3-4 (BBB+ - BBB-) 5-6 (BB+ - BB) 7-8 (BB- - B+) 9-10 (B - C) 11-12 (D) 33 20 10 0 1-2 3-4 5-6 7-8 9-10 11-12 Non-rated 31 Dec.2003 31 Dec.2004 31 Dec.2005 31 Dec.2006 31 Dec.2007 31 March.2008
billion 14 Banking and investment services Loan and guarantee portfolio % 12 34 12 10 10 8 8 5 6 4 3 2 0.2 0.1 0.2 0.3 0.2 0.1 0.3 1 0 0.0-0.2-0.1 0.0 0.0 0.0 0.0 12/02 12/03 12/04 12/05 12/06 12/07 3/2008-1 Loan and guarantee portfolio *) Impairment losses on receivables / Loan and guarantee portfolio, % Doubtful receivables / Loan and guarantee portfolio, % *) Loan portfolio, including leasing assets, repos, guarantees and guarantee commitments.
Banking and investment services Impairment losses on receivables and credit losses 35 15 10 5 0-5 -10-15 2000 2001 2002 2003 2004 2005 2006 2007 New impairment losses Credit loss recoveries and reversal of impairment losses Net credit and impairment losses 1-3/2008
Banking and investment services Average balances of receivables and liabilities between Pohjola Bank million 5 500 and OP-Pohjola Group retail banks 36 4 500 3 500 2 500 1 500 500-500 -1 500-2 500-3 500 3/04 6/04 9/04 12/04 3/05 6/05 9/05 12/05 3/06 6/06 9/06 12/06 03/07 06/07 09/07 12/07 03/08 Other deposits Reserve deposits Capital investments and perpetual bonds Cash reserve deposits Other loans Net position
Mrd. billion 35 30 Banking and investment services Growth- assets under management 152 % 14% 0% -6% 37 25 20 15 10 11 % 37 % 30 % 5 0
Banking and investment services Assets under management 31 March 2008 38 39% 58% 3% Institutional clients Pohjola Private OP-Mutual funds
Banking and investment services Assets under management by asset class 31 March 2008 39 5.0% 4.4% 7.8% 12.2% Money market Bonds Shares Other investments
40 Non-life Insurance Strong growth and balance on technical account investment income lower than a year ago
Non-life Insurance Q1/2008 in brief 41 Insurance premium revenue EUR 220 million (204), up by 8%. Operating combined ratio 98.2% (100.8). Return on investment at fair value at 0.6% (2.4). Earnings before tax EUR 22 (31).
Non-life Insurance Performance 42 M 1-3/08 1-3/07 2007 Insurance premium revenue 220 204 850 Claims incurred 168 159 582 Operating expenses 48 47 182 Operating balance on technical account 4-2 86 Amortisation/adjustment on intangible asset*) 7 6 26 Balance on technical account -3-8 60 Investment income and expenses 38 48 160 Other income and expenses 0 3 8 Operating profit 35 42 228 Unwinding of discount 10 10 39 Finance costs 2 2 9 Earnings before tax 22 31 181 *) Due to amortisation on intangible assets arising from company acquisition
million 300 Non-life insurance Growth - insurance premium revenue January-March 43 250 8% 200 150 6% 100 9% 50 0 10% Private Customers Corporate Customers Baltic Total 1-3/2007 1-3/2008
Net annual growth 50 000 45 000 Strong growth in the number of Loyal Customer Households Total growth 450 000 (target by 2010) 400 000 44 40 000 35 000 30 000 25 000 20 000 15 000 10 000 5 000 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 2003 2004 2005 2006 2007 2008 0 Net annual growth Total growth
40 Non-life insurers' market shares in premiums written*) 45 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Pohjola If/Sampo Tapiola Fennia Lähivakuutus Others *) market shares of domestic direct premiums written
% 140 120 Private Customers Non-life insurance Operating combined ratio by division Corporate Customers Baltic Total 46 100 100.9 % 97.4 % 102.1 % 99.6 % 91.7 % 89.0 % 100.8 % 98.2 % 80 60 40 20 0 1-3/07 1-3/08 1-3/07 1-3/08 1-3/07 1-3/08 1-3/07 1-3/08 Operating expenses / Insurance premium revenue Claims handling expenses / Insurance premium revenue Claims incurred / Insurance premium revenue
Non-life insurance Development of combined ratio 47 120 100 103.6 105.1 91.2 92.3 98.2 100.8 95.4 93.8 98.2 80 60 40 20 0 2004 2005 2006 2007 2008 Q1 Whole year
million 3200 Non-life insurance Allocation of investment portfolio 48 2800 2400 2 562 million 8 % 2 490 million 3 % 2 511 million 2 % 2 563 million 5% Money market *) 2000 Bonds and bond funds *) 1600 70% 72% 69% 69% Shares Alternative investments 1200 Properties 800 400 16 % 17% 16% 14% 0 Fair values, 31 Dec. 2005 Fair values, 31 Dec. 2006 Fair values, 31 Dec 2007 Fair values, 31 March 2008 *) The figures include accrued interest income on interest-bearing instruments.
Non-life insurance Net investment income 49 million 80 60 40 20 0-20 -40-60 -80 1-3/06 4-6/06 7-9/06 10-12/06 1-3/07 4-6/07 7-9/07 10-12/07 1-3/08 Net investment income on income statement Change in fair value reserve Net investment income at fair values
50 Acquisition synergies
Inclusion in the OP-Pohjola Group brings benefits for Pohjola Bank 51 The OP-Pohjola Group is the market leader as a bank for Finnish retail customers and small and medium-sized companies - over four million customers Possibility to benefit from customer information The OP-Pohjola Group's customer promise: the market s best concentration benefits The OP-Pohjola Group has the market's most comprehensive service network which serves as a distribution channel for OKO Bank's non-life insurance services The majority of OKO Bank's support services are acquired from the central organisation of the OP-Pohjola Group. The strong financial standing of the OP-Pohjola Group improves OKO Bank's credit rating.
OP-Pohjola-Group today 52 Central Cooperative Group services Strategic ownership Shares 29.9 % Votes 56.9 % Ownership 100% Pohjola Group Member Cooperative Banks Retail banking Shares 13.6 % Votes 12.8 % Banking and Investment Services Non-life Insurance Legal structure: OP-Pohjola Group has joint and several liability for each other s commitments
The roles of Group entities 53 Central Cooperative Life insurance Mutual fund management Group services Profits in excess of administrative costs and capitalisation as sales fees of sold mutual funds and life insurance policies Compensation for support services Member Cooperative Banks Retail banking Asset management fees on centralised asset management Salesfeesof mutualfunds and life policies sold by OKO Bank Compensation for centralised support services Pohjola Group Corporate Banking Asset Management Non-life insurance Cross-utilisation of customer information, no fees Common corporate customers, returns to the party providing the service
Net annual growth 50 000 45 000 Strong growth in the number of Loyal Customer Households Total growth 450 000 (target by 2010) 400 000 54 40 000 35 000 30 000 25 000 20 000 15 000 10 000 5 000 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 2003 2004 2005 2006 2007 2008 0 Net annual growth Total growth
Non-life Insurance Income synergies supported by growth of loyal customer households million 20 55 15 10 5 0 2005 2006 2007 2008 2009 2010 Revenue synergies Target *) The estimate was calculated using the following formula: 10% *( new loyal customer households obtained through cooperation within the OP Bank Group * average premium/household)-+ 5,4 % profit for invested insurance premiums
Non-life insurance Cost synergies on the track 56 million 40 Target 30 20 10 0 2006 2007 2008 2009 Non-life Insurance Asset Management Group structure
57 Prospects for 2008
Prospects for the Rest of 2008 In 2008, economic growth is expected to slow down and the corporate loan market is anticipated to continue its growth at a slower rate than in 2007. Recent developments in the corporate loan market herald widening lending margins. Provided that the negative mark-to-market valuations of liquidity reserves will not increase considerably during the rest of the year, Banking and Investment Services' earnings before tax in 2008 are estimated to be better than or at the same level as in 2007. Risk exposure is projected to remain healthy. In addition to market growth, intense cooperation with OP-Pohjola Group member cooperative banks and the adoption of bonus benefits for joint banking and insurance customers, which are expected to strengthen the market share among private customers in particular, will contribute to insurance premium revenue within Non-life Insurance. In Non-life Insurance, the operating combined ratio is estimated to vary between 91% and 95% if the number of major losses is not unusually large. Non-life Insurance's expected long-term return on investment is 5.4%. Other Operations' results for 2007 included EUR 11 million in non-recurring expenses. Since the Group does not expect to incur these expenses in 2008, results are anticipated to be better than in 2007. 58
Pohjola Group Business Structure 6 May 2008 59 Pohjola Group Banking Asset Management Non-life Insurance Group Functions Corporate Banking Markets Baltic States Institutional Customers Private Customers Corporate Customers Private Customers Baltic States Finance Risk Management HR Services Corporate Communications
60 Dividend policy
Dividend policy 61 Dividends paid out more than targeted: Aim: distributing a minimum of 50% of earnings in dividends, provided that Tier 1 stands at least 8.5%. Dividend payout ratio during 2003 07 averaged 63%. 2,50 2,00 1,50 1,00 % 100 80 60 40 0,50 20 0,00 2002 2003 2004 2005 2006 2007 0 Dividend per share Dividend payout ratio
Market capitalisation (Pohjola Bank series A and K) 62 billion 3,5 3,0 2,5 2.39 2.58 2.66 2.43 2,0 1,5 1.02 1,0 0.87 0.67 0,5 0,0 12/02 12/03 12/04 12/05 12/06 12/07 03/08
Turnover and price 63 15,00 OKO OKO-Pohjola Turnover 15 000 000 12,00 12 000 000 9,00 9 000 000 6,00 6 000 000 3,00 3 000 000 0,00 0 3/02 3/03 3/04 3/05 3/06 3/07 3/08 Turnover Price
Distribution of share holdings 31 March 2008 64 11.1% 29.9% 17.3% 7.8% 13.6% 10.2% 10.0% OP Bank Group Central Cooperative Ilmarinen mutual pension insurance company Other domestic institutions Private households OP Bank Group member cooperative banks Suomi mutual life assurance company Nominee-registered shareholders Others
65 IR contact information CFO Ilkka Salonen Tel. + 358 10 252 3146 ilkka.salonen@pohjola.fi IR Controller Raila Rissanen Tel.+358 10 252 3224 raila.rissanen@pohjola.fi SVP,Corporate Planning and IR Pasi Laaksonen Tel. +358 10 252 2217 pasi.laaksonen@pohjola.fi IR Communications Officer Jaana Mäkelä Tel. +358 10 252 7269 jaana.j.makela@pohjola.fi
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