In brief: MuniFin in 2019
- The Group’s net operating profit excluding unrealised fair value changes amounted to EUR 186 million (EUR 190 million), down 2.1% on the previous year. The Group’s net interest income improved slightly to EUR 240 million (EUR 236 million). Expenses grew as expected and amounted to EUR 60 million (EUR 49 million, +22.8%).
- Unrealised fair value changes weakened the net operating profit for the financial year by EUR 54 million, whereas they had no impact on the result in the previous year (EUR 0 million). Taking into account these valuations, Group’s net operating profit amounted to EUR 131 million (EUR 190 million).
- The Group’s capital adequacy continued to strengthen and its CET1 capital ratio was 83.1% (66.3%). Tier 1 and total capital ratio were 107.9% (88.0%) at the end of 2019.
- Leverage ratio amounted to 4.0% (4.1%) at the end of December.
- Long-term customer financing grew by 8.0% (6.1%) and the portfolio amounted to EUR 24,798 million (EUR 22,968 million) at the end of the year. New loans withdrawn during the year totalled EUR 3,175 million (EUR 2,953 million). In the entire customer finance portfolio, the amount of green financing aimed at environmental investments totalled EUR 1,263 million (EUR 1,081 million).
- New long-term funding in January–December amounted to EUR 7,385 million (EUR 7,436 million). The total amount of funding was EUR 33,929 million (EUR 30,856 million) at the end of the year. At year-end, the total amount of green bonds issued amounted to EUR 1,478 million (EUR 978 million).
- Liquid assets grew by the end of the year to EUR 9,882 million (EUR 8,722 million). At the end of December, the Liquidity Coverage Ratio (LCR) was 430.2% (176.7%).
- Return on equity (ROE) declined due to unrealised fair value changes to 6.8% (10.8%).
- The Board of Directors proposes to the Annual General Meeting to be held in spring 2020 that EUR 0.16 per share be paid in dividends, totalling EUR 6,250,207.68. Dividends of EUR 6,250,207.68 were paid in 2019.
- Outlook for 2020: MuniFin expects that net operating profit excluding unrealised fair value changes will be on a par with 2019. The adoption of IFRS 9 has led to a significant increase in the recognition of unrealised fair value changes in profit or loss, which increases the volatility of net operating profit. For more information on the outlook, see the section entitled “Outlook for 2020”.
Key figures (Group)
|31 Dec 2019||31 Dec 2018|
|Net operating profit excluding unrealised fair value changes (EUR million)*||186||190|
|Net operating profit (EUR million)*||131||190|
|Net interest income (EUR million)*||240||236|
|New loans withdrawn (EUR million)*||3,175||2,953|
|Long-term customer finance (EUR million)*||24,798||22,968|
|New long-term funding (EUR million)*||7,385||7,436|
|Balance sheet total (EUR million)||38,934||35,677|
|CET1 capital (EUR million)||1,162||1,065|
|Tier 1 capital (EUR million)||1,510||1,413|
|Total own funds (EUR million)||1,510||1,413|
|CET1 capital ratio, %||83.1||66.3|
|Tier 1 capital ratio, %||107.9||88.0|
|Total capital ratio, %||107.9||88.0|
|Leverage ratio, %||4.0||4.1|
|Return on equity (ROE), %*||6.8||10.8|
*Alternative Performance Measure
MuniFin Group defines the Alternative Performance Measures (APMs) to be financial measures that have not been defined in the IFRS standards or the capital requirements regulation (CRD/CRR). The APMs improve comparability between companies in the same sector and between reporting periods and provide valuable information to the readers of the financial reports. The APMs provide a more consistent basis for comparing the results of financial periods and for assessing MuniFin Group’s performance. They are also an important aspect of the way in which Group’s management defines operating targets and monitors performance.
Definitions, calculation formulas and reconciliations of Alternative Performance Measures are presented in the Note of the Report of the Board of Directors. The Alternative Performance Measures are presented in the Group’s financial reporting according to the guidelines by European Securities and Market Authority (ESMA). MuniFin Group’s Annual Report will be published on 4 March 2020.
Comment on the 2019 financial year by President and CEO Esa Kallio:
Uncertainty continued to prevail in the global economy in 2019, but the Finnish economy remained surprisingly robust. The development of local government finances was not as strong as that of the country’s economy. This was a challenging year for municipalities due to the shortfall in tax revenues caused by the tax card and tax register reform.
The health and social services reform collapsed in the beginning of the year. Uncertainty still continues relating to municipal and hospital districts’ investments in health and social services, even though the reform is on the agenda of the new Government. In spite of this uncertainty, investment needs are high, particularly in growing areas where there is pressure to develop infrastructure and the service network. Migration has gained momentum, which has also increased the need to step up state-subsidised housing production. Market-financed housing production decreased in 2019, but demand for housing in central cities has not declined, but in fact continues to increase.
MuniFin once again performed excellently in its funding. Our benchmark bonds were oversubscribed multiple times, including our fourth green bond. One of the reasons for this is that there is plenty of demand for safe investments around the world – but it also testifies to MuniFin’s good reputation in the international capital market.
In line with our mission, we continued to invest in the development of digital services. With digital solutions, we seek to enhance the efficiency of both our own and our customers’ operations and to give our customers and own experts access to a broader range of information. Information systems are also in need of development due to increasing regulation in our sector and the necessity to develop both the efficiency of our operations and knowledge-based management.
International investors are showing ever-greater interest in responsible investing and our Finnish customers have discovered the benefits of green finance. MuniFin was the first credit institution to launch green finance onto the Finnish market and the first Finnish green bond issuer. The company continues investments into sustainable finance by preparing a new social finance product that we are launching in 2020. Social finance is meant for investments in non-profit housing production promoting equality and sense of community, as well as investments in wellbeing and education.
MuniFin celebrated its 30th anniversary in 2019 – this was a financially stable year of renewal for the company. I would like to thank our customers and partners for these successes. I am particularly grateful for our staff for their commitment to the socially meaningful work that we do.
Information on Group results
|Consolidated income statement|
|Net interest income||240||236||1,7|
|Other administrative expenses||-15||-12||22,6|
|Depreciation and impairment on tangible and intangible assets||-6||-2||165,0|
|Other operating expenses||-18||-15||14,7|
|Credit loss and impairments on financial assets||0||1||-95,1|
|Net operating profit excluding unrealised fair value changes||186||190||-2,1|
|Unrealised fair value changes||-54||0||14320,8|
|Net operating profit||131||190||-30,9|
|Profit for the financial year||105||152||-30,9|
Group’s net operating profit excluding unrealised fair value changes
The Group’s core business operations remained strong during 2019. MuniFin Group’s net operating profit excluding unrealised fair value changes saw a slight year-on-year decline, 2.1%, and amounted to EUR 186 million (EUR 190 million). Income grew by 3.3% year on year. The profit was reduced by growth in expenses, as expected.
Net interest income was up 1.7% on the previous year to EUR 240 million (EUR 236 million). Net interest income grew due to successful funding operations, growth in customer finance and a favourable interest rate environment. The Group’s net interest income does not recognise the EUR 16.2 million in interest expenses of the AT1 capital loan through profit or loss, as the capital loan is treated as an equity instrument in the consolidated accounts. The interest expenses of the capital loan are treated similarly to dividend distribution, that is, as a decrease in retained earnings under shareholders’ equity upon realisation of interest payment on an annual basis.
Other income tripled from the previous year to EUR 6 million (EUR 2 million). Other income includes commission income, realised net income from securities and foreign exchange transactions, net income from financial assets measured at fair value through other comprehensive income and other operating income. The most significant item under the Group’s other income was the turnover of the subsidiary Inspira.
The Group’s expenses grew by 22.8% compared with the previous year and amounted to EUR 60 million (EUR 49 million) at the end of 2019.
Commission expenses totalled EUR 4 million (EUR 4 million) and primarily comprise of paid guarantee fees, custody fees and funding programme update fees.
Administrative expenses grew by 18.5% to EUR 32 million (EUR 27 million), of which personnel expenses comprised EUR 18 million (EUR 15 million) and other administrative expenses EUR 15 million (EUR 12 million). Administrative expenses were increased by growth in the number of employees at the Group’s parent company. The average number of parent company employees during the financial year was 151, as compared to 135 in the previous year. The personnel count has risen because banking regulation has led to a continuous need to develop the company’s risk management, administration and processes as well as due to major development investments. The growth in other administrative expenses has been influenced by the company’s investments in ensuring the operational reliability of information systems and developing customer service and the service offering. During the report year, MuniFin signed outsourcing agreements for information system end-user and infrastructure services as well as to ensure the operational reliability of business systems and to improve the availability of services. A project to implement outsourcing procedures is under way and is expected to be completed in 2020.
Depreciation and impairment on tangible and intangible assets amounted to EUR 6 million at the end of 2019 (EUR 2 million). The increase in depreciation is largely due to strong investments in system development in recent years. MuniFin also updated its depreciation principles during the financial year. As a result, an additional cost item of EUR 2.5 million was recognised in depreciation and certain other cost items.
Other operating expenses increased by 14.7% year-on-year to EUR 18 million (EUR 15 million). Growth in other operating expenses was mainly due to costs related to systems and process development. Fees collected by the authorities decreased by EUR 0.3 million (-4.7%) compared to the previous year and amounted to EUR 7 million (EUR 7 million).
The amount of expected credit losses (ECL) calculated in accordance with IFRS 9 decreased during the financial year, and the change recognised in the profit was EUR 0 million (EUR 1 million).
Group’s result and unrealised fair value changes
Taking unrealised fair value changes into account, net operating profit in 2019 was EUR 131 million (EUR 190 million). Unrealised fair value changes weakened MuniFin’s net operating profit by EUR 54 million during the financial year; in the previous year, they had no impact (EUR 0 million). Unrealised fair value changes account for EUR 54 million of the EUR 59 million weakening in net operating profit. In 2019, net income from hedge accounting amounted to EUR -19 million (EUR 28 million) and unrealised net income from securities transactions to EUR -35 million (EUR -27 million). The Group’s profit for the financial year totalled EUR 105 million (EUR 152 million).
The Group’s comprehensive income includes unrealised fair value changes of EUR 28 million (EUR 72 million). During the financial year, the most significant item affecting the comprehensive income was a net change in Cost-of-Hedging totalling EUR 17 million (EUR 28 million). The fair value change due to changes in own credit risk associated with financial liabilities designated at fair value through profit or loss amounted to EUR 10 million (EUR 49 million).
On the whole, unrealised fair value changes net of deferred tax decreased the amount of consolidated equity by EUR 21 million (EUR +57 million) and CET1 capital net of deferred tax in capital adequacy by EUR 28 million (EUR +19 million).
The adoption of IFRS 9 at the beginning of 2018, and the related changes in preparation and valuation principles, have significantly increased volatility of unrealised fair value changes, as financial instruments are increasingly measured at fair value. Changes in fair value reflect the temporary impact of market conditions on the valuation levels of financial instruments on the reporting date. Unrealised fair value changes may vary significantly from one reporting period to another, causing increased volatility in profit, equity and own funds in capital adequacy calculations.
In accordance with its risk management principles, MuniFin uses derivatives to financially hedge against interest rate, foreign exchange risk and other market and price risks. Cash flows are hedged, but due to the generally used valuation methods, changes in fair value differ between the hedged financial instrument and the respective hedging derivative. Changes in the shape of the interest rate curve and credit risk spreads in different currencies affect the valuations, which
causes the fair values of hedged assets and liabilities and hedging instruments to behave in different ways. In practice, the changes in valuations are not realised on a cash basis because MuniFin primarily holds loan and funding agreements and their hedging derivatives until the maturity date. The unrealised fair value changes in the financial year were influenced, in particular, by changes in interest rate expectations in MuniFin’s main funding markets.
The Group’s effective tax rate during the financial year was 20.0% (20.0%). Taxes in the consolidated income statement amounted to EUR 26 million in 2019 (EUR 38 million). The Group’s full-year return on equity (ROE) was 6.8% (10.8%). Excluding unrealised fair value changes, ROE was 9.6% (10.7%).
Parent company’s result
MuniFin’s total net interest income at year-end was EUR 224 million (EUR 220 million) and net operating profit stood at EUR 115 million (EUR 174 million). The profit after appropriations and taxes was EUR 8 million (EUR 22 million). The interest expenses of EUR 16.2 million for 2019 on the AT1 capital loan, which forms part of Additional Tier 1 capital in capital adequacy calculation, have been deducted in full from the parent company’s net interest income (EUR 16.2 million). In the parent company, the AT1 capital loan has been recorded under the balance sheet item “Subordinated liabilities”. The balance sheet of the parent company at the end of the year was EUR 38,933 million (EUR 35,676 million).
The turnover of MuniFin’s subsidiary Inspira was EUR 3.5 million for 2019 (EUR 2.5 million), and its net operating profit amounted to EUR 0.2 million (EUR 0.0 million).
Outlook for 2020
2020 began on a more positive note for the international economy than the previous year. On the basis of trend indicators, the global economy will most likely ride out its weakest phase during the winter and expectations of gradual recovery have strengthened. However, economic growth in 2020 will be slower than the long-term trend. In Europe, the situation is still affected by the hard-to-predict impacts of Brexit.
Problems in the global economy have a delayed impact on Finland – slowdown in growth still largely lies ahead. Economic momentum is losing steam, which is already evident in the stalled growth of goods exports and the decline in new orders in industry. The improvement in the employment rate has in practice also come to a standstill. Going forward, economic growth in Finland will be slowed particularly by the cooldown in new construction. That said, non-profit housing production financed by MuniFin will in all likelihood remain at the same level as in previous years. GDP growth is currently expected to decline to around one per cent, or even slightly less, in 2020. In spite of the slowdown in economic growth, municipalities remain under pressure to invest, especially in growth centres.
Preparations for the health and social services reform have been ongoing in Finland for a long time. The reform is also on the agenda of the current Government. However, it is challenging to assess its overall effects on MuniFin’s customers and operations, as no concrete proposals or decisions have as yet been made about the reform. The reform is not currently expected to have a fundamental impact on MuniFin’s operating volumes in 2020.
In 2020, MuniFin will continue to put major effort into developing its systems in order to further enhance its efficiency and operations, as well as on the digitisation of services. MuniFin expects that costs will rise year-on-year, particularly due to these outlays on information system development.
According to the bank capital adequacy regulations (CRR II) adopted in 2019 and applicable in June 2021 onwards, a public development credit institution may in the leverage ratio calculation deduct all credit receivables from the Sovereign and municipalities. Based on the self-assessment, MuniFin has determined that it fulfils the definition of a public development credit institution. Should the definition be fulfilled, the changes in CRR II would have a significant positive effect on MuniFin’s leverage ratio.
Considering the above factors, and assuming that the trend in market rates and credit risk premiums does not deviate significantly from forecasts, MuniFin expects that net operating profit excluding unrealised fair value changes will be on a par with 2019. The adoption of IFRS 9 has led to a significant increase in the recognition of unrealised fair value changes in profit or loss, which increases the volatility of net operating profit.
The estimates presented herein are based on current views on the development of the operating environment and operations.
Webcast for investors and other stakeholders
MuniFin’s results for the year 2019 will be presented to investors and other stakeholders in a webcast held on 14 February 2020 at 1 pm EET. The webcast is available at munifin.videosync.fi/financial-statements-2019. A video recording will be published at MuniFin’s website after the webcast.
Municipality Finance Plc
Esa Kallio, President and CEO, tel. +358 50 337 7953
Harri Luhtala, Executive Vice President, Finance, CFO, tel. +358 50 592 9454
MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet totals nearly EUR 39 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.
MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled entities and non-profit housing organisations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.
MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer. The funding is exclusively guaranteed by the Municipal Guarantee Board.