OP Financial Group's Interim Report for 1 January–31 March 2024: OP Financial Group reports a strong Q1 – operating profit EUR 618 million

OP Financial Group
Interim Report 1 January–31 March 2024
Stock Exchange Release 8 May 2024 9.00 am EET

*OP Financial Group's Interim Report for 1 January–31 March 2024: OP Financial Group reports a strong Q1 – operating profit EUR 618 million*

· Operating profit was EUR 618 million (480).
· Income from customer business, or net interest income, insurance service result and net commissions and fees, increased by 13% to EUR 969 million (857). Net interest income grew by 24% to EUR 763 million (615). Insurance service result decreased by EUR 8 million to EUR –10 million (–2). Net commissions and fees decreased by 11% to EUR 217 million (244).
· Impairment loss on receivables in the income statement was EUR 39 million (23), accounting for 0.15% (0.09) of the loan and guarantee portfolio.
· Investment income increased by 19% to EUR 151 million (128).
· Total expenses decreased by 3% to EUR 537 million (553). The cost/income ratio improved to 43% (50).
· In the year to March, the loan portfolio decreased by 1% to EUR 98.4 billion (98.8). Deposits decreased by 1% to EUR 73.6 billion (74.1).
· CET1 ratio was 19.6% (19.2), which exceeds the minimum regulatory requirement by 7.3 percentage points.
· *Retail Banking segment's *operating profit rose to EUR 368 million (256). Net interest income grew by 34% to EUR 611 million (455). Impairment loss on receivables increased by EUR 15 million to EUR 27 million (12). Net commissions and fees decreased by 17% to EUR 161 million (194). The cost/income ratio improved to 43% (52). The loan portfolio decreased by 1% and deposits by 2% year on year.
· *Corporate Banking segment's* operating profit rose to EUR 140 million (100). Net interest income grew by 21% to EUR 166 million (138). Impairment loss on receivables increased by EUR 1 million to EUR 12 million (11). Net commissions and fees decreased by 3% to EUR 57 million (58). The cost/income ratio improved to 34% (47). The loan portfolio grew by 2% and deposits by 11% year on year.
· *Insurance segment's* operating profit rose to EUR 118 million (90). Insurance service result decreased by EUR 8 million to EUR –10 million (–2). Investment income increased by 37% to EUR 129 million (94). Combined ratio reported by non-life insurance weakened to 109% (101).
· *Group Functions* operating loss was EUR –5 million (4).
· OP Financial Group increased the OP bonuses earned by owner-customers in 2024 by 40% compared to the 2022 level. The estimated total amount of OP bonuses to be paid in 2024 will exceed EUR 300 million. In addition, owner-customers will get daily banking services without monthly charges until the end of 2024. The estimated total value of this benefit will be EUR 88 million for 2024.
· OP Financial Group's operating profit for 2024 is expected to be at a good level but lower than that for 2023. For more detailed information on the outlook, see "Outlook towards the year end".

*OP Financial Group’s key indicators*
Q1/2024 Q1/2023 Change, % Q1–4/2023
*Operating profit, € million* *618* *480* *28.7* *2,050*
Retail Banking 368 256 43.5 1,223
Corporate Banking 140 100 39.8 408
Insurance 118 90 31.4 414
Group Functions -5 4 - -26
New OP bonuses accrued to owner-customers,
€ million -75 -64 17.4 -275
Total income 1,259 1,111 13.3 4,775
Total expenses -537 -553 -2.9 -2,201
Cost/income ratio, % 42.6 49.8 -7.1* 46.1
Return on equity (ROE), % 12.1 10.5 1.6* 10.6
Return on equity, excluding OP bonuses, %
13.4 11.8 1.6* 12.0
Return on assets (ROA), % 1.25 0.94 0.31* 0.98
Return on assets, excluding OP bonuses, % 1.39 1.05 0.34* 1.11 31 Mar 2024 31 Mar 2023 Change, % 31 Dec 2023
CET1 ratio, % 19.6 18.3 1.3* 19.2
Loan portfolio, € billion 98.4 98.8 -0.5 98.9
Deposits, € billion 73.6 74.1 -0.8 74.5
Ratio of non-performing exposures to exposures, % 3.04 2.41 0.6* 2.94
Ratio of impairment loss on receivables to loan and guarantee portfolio, % 0.15 0.09 0.06* 0.26
Owner-customers (1,000) 2,095 2 071 1.1 2,094

Comparatives for the income statement are based on the corresponding figures in 2023. Unless otherwise specified, figures from 31 December 2023 are used as comparatives for balance-sheet and other cross-sectional items.
* Change in ratio*Comments by the President and Group Chief Executive Officer:*

*Finland's economic performance was weaker than forecast, inflation continued to slow and, despite a small decrease, interest rates remained higher than in previous years*

Finland's economic growth in January–March was slower than forecast. This was due to factors such as strikes and the poor performance of the construction sector. Despite this, the economy is slowly resuming an upward trend thanks to exports and consumer spending. After a poor start to the year, the Finnish economy could even recover brusquely, but this would still be just a rebound from a long-standing, sluggish growth trend.

Inflation in Finland slowed to a couple of per cent in early 2024. The slowdown in the inflation rate and the fall in interest rates will support the economic turnaround. In January–March, market rates remained considerably higher than previously familiar levels, due to the ECB's continuation of its tight monetary policy.

On the housing market, home sale volumes and demand for home loans were clearly lower than a year earlier. In addition, home prices continued their moderate downward trend.

Low economic growth affected construction and the related sectors in particular. Overall risks in the real estate sector remained a cause for concern. The number of new bankruptcies was again considerably higher than in previous years; new bankruptcy petitions were filed in sectors such as construction, accommodation and restaurant services in particular.

Geopolitical risks remained high as the situation in the Middle East deteriorated. No improvement is expected in this regard in the near future. The global economic outlook has nevertheless improved in recent months and indicators suggest that the economy will gradually pick up.

*OP Financial Group had a strong first quarter – this excellent performance enables considerable benefits for owner-customers*

Despite the challenging business environment, OP Financial Group's operating profit fared extremely well. Earnings before tax for January–March grew by 29 per cent year on year. Operating profit was 618 million euros in the first quarter. Our strong profit performance enables us to provide outstanding benefits for our almost 2.1 million owner-customers in 2024. This year again, we will use such benefits to help ease the strain on households in economically challenging times. OP Financial Group will pay 40% extra on OP bonuses earned in 2024 and will not charge owner-customers monthly fees for daily services throughout the year. Together, these benefits will add up to around 400 million euros in value for owner-customers. Being customer-owned, OP Financial Group will continue to share its financial success through a range of financial and other benefits for its owner-customers.

Strong capital adequacy and excellent liquidity provide security in an uncertain and often unpredictable business environment. OP Financial Group's CET1 ratio strengthened again, to 19.6 per cent, which exceeds the minimum regulatory requirement by 7.3 percentage points. OP Financial Group is one of the most financially solid large banks in Europe. Furthermore, our liquidity remained excellent. Strong capital adequacy, excellent liquidity and broad trust among customers and other stakeholders are vital both for banks and insurance companies. OP Financial Group is in great shape in all these respects.

OP Financial Group's income from customer business continued to grow, mainly spurred by the strong increase in net interest income. Both deposit funding and wholesale funding costs rose. On the other hand, net commissions and fees decreased by 11 per cent year on year, chiefly due to the benefit (provided for owner-customers) of zero monthly charges for daily banking services.

The insurance service result was a EUR 10 million loss, attributable to growth in claims expenditure in particular. In early 2024, claims expenditure was swelled by several large claims and claims due to frost damage, as well as active use of health insurance.

Income from investment activities was excellent, rising by 24 million euros from last year to 151 million euros in total. Total income grew by 13 per cent in January–March, compared to the same period in 2023.

On the other hand, OP Financial Group's costs decreased by three per cent year on year, the key reduction being the fall of 62 million euros in stability contributions. The EU's Single Resolution Board (SRB) will not collect stability contributions from banks for 2024. Without this effect, expenses would have grown by 9 per cent. This was chiefly the result of rising personnel costs and higher investments in ICT development. OP Financial Group's cost/income ratio markedly improved year on year, to the excellent level of 43 per cent.

All three business segments performed well. Growth was particularly strong in the Retail Banking segment, with operating profit rising by 44 per cent to 368 million euros, following favourable developments in net interest income. Corporate Banking's profit improved considerably, by 40 per cent, to 140 million euros. Earnings in the insurance segment were 118 million euros. This was 31 per cent higher year on year, largely because of the excellent result in investment income.

*Deposit and loan volumes turned slightly downwards – customers' repayment capacity remained very good*

The deposit portfolio decreased by 0.8 per cent over the year. This was mainly due to a clear reduction in deposits by corporate and institutional customers. Household deposits, on the other hand, grew by just over a per cent. OP Financial Group’s market share of household deposits rose again, to 42.6 per cent.

OP Financial Group's loan portfolio shrank by 0.5 per cent, with demand for new home loans and corporate loans at a low level. Despite higher interest rates, home loan customers have been repaying their loans diligently and on schedule. The number of loan modification applications was lower than the year before. OP Financial Group’s market share of home loans was 39 per cent. Following the deterioration in the construction and real estate sectors in 2023, the situation regarding customers in these sectors remained difficult in the first quarter of 2024. The weak economy led to another slight increase in expected credit loss provisions and non-performing exposures, but these were moderate in historical terms.

*Interest in saving and investing grew*

We aim to coach our customers to help them make better financial choices. We provide various ways of managing personal finances more easily, while enabling and supporting long-term saving and investing. Asset and wealth management is one of our growth focus areas and we aim to make a clear growth leap in this business activity. During the quarter, our customers retained a strong interest in securing their financial futures and accumulating wealth.

OP Financial Group's customers were interested in systematically investing in funds, with 51 per cent more new investment agreements being made than in the same period last year. The number of OP mutual fund unitholders rose to more than 1.31 million. There was also considerable growth in the number of active equity investors. Reaching almost 107 billion euros in value, investment assets managed by OP Financial Group grew by 8 per cent year on year.

*Clear rise in insurance claims expenditure*

Insurance claims expenditure grew by 22 per cent compared to the first quarter in 2023, owing to a few large claims, the exceptionally freezing weather at the start of the year, and active use of health insurance. Compensation was paid for 94 per cent of all claims. Hard frosts in January led to a record number of broken pipe and emergency road service claims. Compared to January–March last year, property damage claims rose by 91 per cent and emergency road service claims by as much as 129 per cent. The weak claims trend raised the non-life insurance risk ratio to almost 82 per cent. Insurance revenue rose by eight per cent in early 2024.

*Steady growth in use of digital services continues*

Use of digital services grew substantially again. Personal and corporate customers increasingly use digital channels for banking and insurance. OP-mobile was logged into more than 57 million times in March. OP-mobile already has more than 1.6 million active users.

*Major structural change is underway between OP cooperative banks*

Several plans for restructuring projects between OP cooperative banks around Finland were published during the first quarter. If the projects announced so far were implemented, the number of OP cooperative banks would reduce from 102 at the end of 2023 to 71 by the end of 2025. In addition, several merger projects (not yet published) between OP cooperative banks were at the planning stage.

Key drivers of merger projects include OP cooperative banks' aim to ensure that they can provide banking services of the widest possible range and highest quality in their operating region, and the increase in regulatory requirements in the banking sector.

*Together through time *

OP Financial Group is in good shape and we are ready to support our customers during the mild recession now underway. For example, I would encourage customers experiencing loan repayment problems to contact their OP cooperative bank at the earliest possible stage, so that we can seek the best solution together.

At the beginning of April, the Ministry of Finance invited comments on a draft proposal to reform the tax treatment of customer bonuses in the financial sector. If the bill is implemented, it will affect the tax treatment of OP bonuses used to pay insurance premiums. However, OP Financial Group will ensure that there is no reduction in the net value of normal benefits accrued by owner-customers, even if the legislative change occurs.

My warm thanks to all our customers for the trust they showed in OP Financial Group in early 2024. We aim to continue being worthy of the confidence you place in us. I would also like to thank our employees and governing bodies for their excellent work in the first quarter of 2024.

*Timo Ritakallio
*President and Group CEO

*January–March*

OP Financial Group's operating profit was EUR 618 million (480), up by EUR 138 million year on year. Income from customer business, or net interest income, net commissions and fees and insurance service result, increased by a total of 13.1% to EUR 969 million (857). The cost/income ratio improved to 42.6% (49.8).

Net interest income grew by 24.0% to EUR 763 million. A rise in market rates continued to increase net interest income. Net interest income reported by the Retail Banking segment increased by 34.3% to EUR 611 million and that by the Corporate Banking segment increased by 20.8% to EUR 166 million. OP Financial Group's loan portfolio decreased by 0.5% to EUR 98.4 billion and deposits by 0.8% to EUR 73.6 billion year on year. However, household deposits increased by 1.3% to EUR 47.0 billion. New loans drawn down by customers during the reporting period totalled EUR 4.5 billion (4.8).

Impairment loss on loans and receivables, which reduces earnings, totalled EUR 39 million (23). Final credit losses recognised totalled EUR 12 million (7). At the end of the reporting period, loss allowance was EUR 957 million (929), of which management overlay accounted for EUR 109 million (109). Non-performing exposures accounted for 3.0% (2.9) of total exposures. Impairment loss on loans and receivables accounted for 0.15% (0.09) of the loan and guarantee portfolio.

Net commissions and fees decreased by 11.3% to EUR 217 million. Owner-customers have got daily banking services without monthly charges since October 2023. This contributed to the decrease in payment transfer net commissions and fees. Net commissions and fees for payment transfer services decreased by EUR 21 million to EUR 55 million, and those for residential brokerage by EUR 2 million to EUR 13 million. Net sales commissions on insurance contracts decreased by EUR 12 million to EUR 14 million. Meanwhile, net commissions and fees for mutual funds increased by EUR 7 million to EUR 55 million.

Insurance service result decreased by EUR 8 million to EUR –10 million as a result of higher net claims incurred. In January–March, the number of large claims was higher than usual, which increased claims incurred. Insurance service result includes EUR 129 million (120) in operating expenses. Non-life insurance revenue increased by 9.1% to EUR 453 million, net claims incurred after reinsurer's share by 25.2% to EUR 345 million and operating expenses by 1.7% to EUR 118 million. Combined ratio reported by non-life insurance weakened to 108.9% (100.5).

Investment income, or net investment income, net insurance finance expenses and income from financial assets held for trading, increased by a total of 18.6% to EUR 151 million. Investment income grew as a result of the increase in the value of equity investments. Net investment income together with net finance income describe investment profitability in the insurance business. The combined return on investments at fair value of OP Financial Group's insurance companies was 2.0% (2.1).

Net income from financial assets recognised at fair value through profit or loss, or notes and bonds, shares and derivatives, totalled EUR 744 million (485). Net income from investment contract liabilities totalled EUR –359 million (–174). Net insurance finance expenses totalled EUR –250 million (–223).

In banking, net income from financial assets held for trading decreased by a total of EUR 25 million to EUR 8 million due to the decrease in interest income from notes and bonds.

Other operating income increased to EUR 9 million (6).

Total expenses decreased by 2.9% to EUR 537 million. Personnel costs rose by 15.4% to EUR 256 million. The increase was affected by headcount growth and pay increases. At OP Financial Group, the number of personnel increased by 1,000 year on year. Depreciation/amortisation and impairment loss on PPE and intangible assets decreased by 29.2% to EUR 33 million. Other operating expenses decreased by 12.8% to EUR 248 million. ICT costs totalled EUR 123 million (104). Development costs were EUR 83 million (64) and capitalised development expenditure EUR 14 million (23). Charges of financial authorities fell by EUR 62 million to EUR 1 million. The EU's Single Resolution Board (SRB) will not collect stability contributions from banks for 2024. In 2023, OP Financial Group paid a total of EUR 62 million in stability contributions.

The income statement item 'OP bonuses to owner-customers' grew by 17.2% to EUR 65 million (55) as a result of the additional bonuses paid for 2024.

Income tax amounted to EUR 125 million (95). The effective tax rate for the reporting period was 20.3% (19.7). Comprehensive income after tax totalled EUR 509 million (420).

OP Financial Group's equity amounted to EUR 16.5 billion (16.3). Equity included EUR 3.2 billion (3.3) in Profit Shares, terminated Profit Shares accounting for EUR 0.2 billion (0.4).

OP Financial Group's funding position and liquidity is strong. At the end of the reporting period, the Group's LCR was 199% (199) and NSFR was 130% (130).

*OP Cooperative's Annual Cooperative Meeting*

On 23 April 2024, OP Cooperative held its Annual Cooperative Meeting which elected members of the Supervisory Council and the auditor.

The Supervisory Council comprises 36 members. The Annual Cooperative Meeting re-elected the following members to the Supervisory Council who were due to resign: Managing Director Kaisa Markula, Managing Director Ulf Nylund, Managing Director Teuvo Perätalo, HR Director Titta Saksa and Professor of Regional Development Studies Markku Sotarauta.

New Supervisory Council members elected were Customer Relationship Director Essi Alaluukas, Senior Lecturer Kati Antola, Lawyer Sanna Ebeling, Managing Director Jouni Hautala, Managing Director Miia Hirvonen, Managing Director Ari Karhapää, Managing Director Juha Korhonen, Managing Director Leena Perämäki, Managing Director Eija Sipola, Managing Director Kirsi Soltin, Managing Director Agneta Ström-Hakala and entrepreneur Antti Turkka.

At its reorganising meeting on 23 April 2024, the Supervisory Council elected the Chairs of the Supervisory Council. Chair of the Board of Directors Annukka Nikola was elected as Chair and entrepreneur Taija Jurmu and Managing Director Ari Väänänen as Vice Chairs of the Supervisory Council.

The Annual Cooperative Meeting elected PricewaterhouseCoopers Oy, an audit firm, to act as auditor for the financial year 2024, with APA Lauri Kallaskari as the chief auditor.

The Annual Cooperative Meeting elected PricewaterhouseCoopers Oy, a sustainability audit firm, to assure OP Financial Group's sustainability reporting for the financial year 2024, with Tiina Puukkoniemi, ASA, acting as the chief authorised sustainability auditor.

*Outlook towards the year end*

The Finnish economy declined in the first quarter, but recovery in the export market, improvement in spending power and a fall in interest rates are anticipated to ameliorate the economy towards the year end. The escalation of geopolitical crises may abruptly affect capital markets and the economic environment.

OP Financial Group's operating profit for 2024 is expected to be at a good level but lower than that for 2023.

The most significant uncertainties affecting OP Financial Group's earnings performance are associated with developments in the business environment, changes in the interest rate and investment environment and developments in impairment loss on receivables. Forward-looking statements in this Interim Report 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 the President and Group Chief Executive Officer Timo Ritakallio in a press conference on 8 May 2024 at 11am at Gebhardinaukio 1, Vallila, Helsinki.

Media enquiries: OP Corporate Communications, tel. +358 10 252 8719, viestinta@op.fi

OP Corporate Bank plc and OP Mortgage Bank plc will publish their own interim reports.

*Financial reporting 2024:*

Half-year Financial Report H1/2024 24 July 2024
Interim Report Q1−3/2024 31 October 2024

OP Amalgamation Pillar III Disclosures 30 June 2024 Week 33
OP Amalgamation Pillar III Disclosures 30 September 2024 Week 45

Helsinki, 8 May 2024

*OP Cooperative
**Board of Directors*

*Additional information:*

Timo Ritakallio, President and Group Chief Executive Officer, tel. +358 (0)10 252 4500
Mikko Timonen, Chief Financial Officer, tel. +358 (0)10 252 1325
Lotta Ala-Kulju, Head of Corporate Communications, tel. +358 (0)10 252 8719

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OP Financial Group is Finland’s largest financial services group, with more than two million owner-customers and nearly 14,000 employees. We provide a comprehensive range of banking and insurance services for personal and corporate customers. OP Financial Group consists of OP cooperative banks, its central cooperative OP Cooperative, and the latter's subsidiaries and affiliates. Our mission is to promote the sustainable prosperity, security and wellbeing of our owner-customers and operating region. Together with our owner-customers, we have been building Finnish society and a sustainable future for 120 years now. www.op.fi