Municipality Finance Plc (MuniFin) maintained its position as the most important financier for Finnish municipalities and government-subsidised housing production in the first half of the year. With a market share of approximately 80 per cent, the company remained the most significant financier for its customers and practically bore sole responsibility for financing government-subsidised housing production.
MuniFin continued to strengthen its balance sheet during the period to ensure the availability of competitive funding to its customers in the future. The company’s aim is to satisfy the potentially higher leverage ratio requirements brought about by stricter regulation of the financial industry primarily by ensuring that it continues to achieve a strong result.
Municipality Finance Group’s net operating profit increased by 27% reaching EUR 80.7 million (1 January – 30 June 2012: EUR 63.7 million) and net interest income was EUR 78.6 million (1 January – 30 June 2012: EUR 67.9 million). The Group’s risk-bearing capacity continued to strengthen, with capital adequacy at 35.73% at the end of June (31 December 2012: 33.87%) and the capital adequacy ratio for Tier 1 capital at 31.09% (31 December 2012: 26.22%).
Competition in the supply of financing to the local government sector has continued to decrease substantially
There was a significant change in the supply of financing to the local government sector during the period under review, as the banking sector substantially reduced the supply of long-term loans to municipal customers. Municipality Finance’s lending to municipalities, however, continued as normal.
In the first half of 2013, investments by municipalities and municipal federations and the resulting financing requirements of the municipal sector remained at the previous year’s level. The rate of increase in lending for housing construction, on the other hand, was higher than anticipated at the end of last year. This increase in the demand for housing financing is largely due to customers looking to refinance their old state-subsidised housing loans with new market-based loans. As interest rates remained low, customers continued to actively use short-term financing.
Total lending volume at the end of the period stood at EUR 16.8 billion, which is 7.0 per cent higher than at the end of 2012 (31 December 2012: EUR 15.7 billion). The amount of new loans withdrawn during the period increased by 17 per cent to EUR 1.9 billion (1 January – 30 June 2012: EUR 1.6 billion).
Higher funding acquisition due to normal refinancing
During the period, the company acquired EUR 7.1 billion in funds from international investors (1 January – 30 June 2012: EUR 4.9 billion), with total funding now amounting to EUR 22.9 billion (31 December 2012: EUR 22.0 billion). The majority of the growth is due to normal refinancing of maturing loans and does not as such reflect an increase in local government sector funding requirements.
In April the company issued its largest ever bond transaction, which also marked the company’s inaugural issue in the United States capital market under the rule 144A . The transaction was met with very high demand and the final issue size was USD 1.75 billion. The largest group of investors were central banks and other official institutions. The geographical distribution of the investors was well balanced across the world. In total, the company carried out 160 funding arrangements during the period.
President and CEO Pekka Averio:
“In comparison to recent years, the first half of 2013 was relatively stable in the international financial markets. The measures initiated by the European Central Bank in late 2012 to stabilise the situation noticeably calmed the markets, particularly with respect to the European crisis countries. At the same time, there are signs emerging in Central Europe that suggest that the general economic situation is beginning to improve. However, there are still substantial differences between countries.
In Finland, the weakening of the general economic situation has resulted in increased uncertainty about the future. A decline in industrial orders and a slowing down of exports are serious signs that the economic trends in Finland continue to deteriorate and decisions aimed at promoting new growth are urgently needed.”
“The funding requirements of Municipality Finance’s customers remained largely unchanged from the previous year. Municipality Finance continues to be the most significant financier for its customers, with a market share of approximately 80 per cent. Total lending volume at the end of the period stood at EUR 16.8 billion, which is 7% higher than at the end of 2012 (31 December 2012: EUR 15.7 billion).
Our customers are facing a challenging situation. Extensive ongoing reforms in the local government sector are yet to be completed, which has an impact on the long-term development of municipalities and their investment decisions in particular. It is therefore very important that these reform projects are completed quickly. Local government investments are highly significant to the functioning of society as a whole, particularly in the healthcare and energy sectors, which are the two industries most affected by the ongoing reforms.
“During the review period EU’s development of financial market regulation in response to the financial crisis also progressed. The European Parliament decided on reforms to the regulation of banks’ capital requirements (known as the CRR and CRD IV package) based on the Basel III agreement, but postponed its decision on the implementation of a leverage ratio requirement, which is the most significant component of these new regulations to Municipality Finance.
The positive aspect of the European Parliament’s decision is that the risk profile of a credit institution’s operations is likely to have an effect on the leverage ratio requirement applied to it. The unfortunate aspect, however, is that we will now have to wait until 2017 for final confirmation of the minimum leverage ratio required of Municipality Finance. As a result, we must prepare for the strictest possible requirements and accumulate the required funds through our operations in the coming years.”
Municipality Finance Plc
Further information:
Pekka Averio, President and CEO, tel. +358 500 406 856
Esa Kallio, Executive Vice President, Deputy to CEO, tel. +358 50 337 7953
Marjo Tomminen, Senior Vice President, CFO, tel. +358 50 386 1764