AKTIA PLC INTERIM REPORT JANUARY - SEPTEMBER 2010
4 NOVEMBER 2010 AT 8:00 AM
JANUARY - SEPTEMBER: operating profit EUR 64.4 (37.2) million Group operating profit for January-September 2010 improved 73% to EUR 64.4 (37.2) million and the profit for the period to EUR 47.9 (27.2) million. Earnings per share was up 66% to EUR 0.69 (0.42).
Net interest income was strong at EUR 114.4 (112.4) million. Net commission income advanced 32% to EUR 42.1 (31.8) million. Net income from life insurance was EUR 9.6 (10.8) million. Net income from non-life insurance improved 27% to EUR 17.4 (13.7) million. Write-downs on credit were clearly lower than last year and stood at EUR 9.8 (26.3) million. Aktia Bank plc's credit rating remained unchanged A1/C/P-1 (Moody's Investors Service).
Aktia expects operating profit for 2010 to exceed the level in 2009 and write-downs on credit to remain clearly lower than last year (unchanged).
JULY - SEPTEMBER: Operating profit EUR 23.4 (19.8) million Group operating profit for July-September 2010 improved 18% to EUR 23.4 (19.8) million and the profit for the period to EUR 17.9 (14.2) million. Earnings per share was up 24% to EUR 0.26 (0.21).
Net interest income remained at a good level of EUR 37.0 (40.5) million. Net commission income improved 17% to EUR 13.2 (11.3) million. Net income from life insurance decreased to EUR 2.5 (3.8) million. Net income from non-life insurance rose to EUR 7.1 (6.3) million. Write-downs on credit were clearly lower than last year and stood at EUR 1.4 (8.5) million.
CEO Jussi Laitinen: "Aktia's third quarter was a strong one. We received top marks in customer satisfactions surveys, independent experts gave our asset management high scores and the operating profit exceeded our expectations. We aim to get even better through improving Internet services, by training our personnel and by raising our media profile. " -------------------------------------------------------------------------------- | (EUR million) | 1-9/ | 1-9 | ? | 7-9/ | 7-9/ | ? | 4-6/ | 1-3/ | 2009 | | | 2010 | / | | 2010 | 2009 | | 2010 | 2010 | | | | | 200 | | | | | | | | | | | 9 | | | | | | | | -------------------------------------------------------------------------------- | Net interest | 114. | 112 | 2% | 37.0 | 40.5 | -9% | 38.6 | 38.9 | 152.2 | | income | 4 | .4 | | | | | | | | -------------------------------------------------------------------------------- | Total | 187. | 174 | 7% | 60.2 | 64.3 | -6% | 66.2 | 61.0 | 233.1 | | operating | 4 | .5 | | | | | | | | | income | | | | | | | | | | -------------------------------------------------------------------------------- | Operating | 74.2 | 63. | 17% | 24.7 | 28.3 | -13 | 27.4 | 22.1 | 78.7 | | profit before | | 4 | | | | % | | | | | write-downs on | | | | | | | | | | | credit | | | | | | | | | | -------------------------------------------------------------------------------- | Write-downs on | -9.8 | -26 | -63 | -1.4 | -8.5 | -84 | -3.8 | -4.6 | -31.7 | | credit and | | .3 | % | | | % | | | | | other | | | | | | | | | | | commitments | | | | | | | | | | -------------------------------------------------------------------------------- | Operating | 64.4 | 37. | 73% | 23.4 | 19.8 | 18% | 23.5 | 17.5 | 47.0 | | profit | | 2 | | | | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Cost-to-income | 0.56 | 0.5 | -2% | 0.58 | 0.51 | 14% | 0.54 | 0.57 | 0.57 | | ratio | | 7 | | | | | | | | -------------------------------------------------------------------------------- | Earnings per | 0.69 | 0.4 | 66% | 0.26 | 0.21 | 24% | 0.25 | 0.18 | 0.52 | | share (EPS), | | 2 | | | | | | | | | EUR | | | | | | | | | | -------------------------------------------------------------------------------- | Equity per | 7.30 | 6.5 | 12% | 7.30 | 6.51 | 12% | 6.89 | 6.86 | 6.52 | | share (NAV)1, | | 1 | | | | | | | | | EUR | | | | | | | | | | -------------------------------------------------------------------------------- | Return on | 12.8 | 9.3 | 38% | 13.9 | 13.2 | 5% | 14.2 | 10.5 | 8.7 | | equity (ROE),% | | | | | | | | | | -------------------------------------------------------------------------------- | Capital | 17.0 | 15. | 10% | 17.0 | 15.4 | 10% | 16.5 | 16.2 | 15.9 | | adequacy | | 4 | | | | | | | | | ratio1,% | | | | | | | | | | -------------------------------------------------------------------------------- | Tier 1 capital | 10.4 | 9.1 | 14% | 10.4 | 9.1 | 14% | 10.1 | 9.6 | 9.5 | | ratio1,% | | | | | | | | | | -------------------------------------------------------------------------------- | Write-downs on | 0.14 | 0.4 | -68 | 0.02 | 0.14 | -86 | 0.05 | 0.08 | 0.51 | | credit/total | | 4 | % | | | % | | | | | credit stock, | | | | | | | | | | | % | | | | | | | | | | --------------------------------------------------------------------------------
1) At the end of the period
"Interim report January - September 2010" is a translation of the original
report in Swedish ("Delårsrapport 1.1-30.9.2010"). In case of discrepancies, the
Swedish version prevails.
profit July - September 2010
The Group's operating profit in the third quarter was sound and amounted to EUR 23.4 (19.8) million supported by a sustained high net interest income, a clearly stronger net commission income and notably lower write-downs on credit. income During July - September the Group's total income decreased 6% to EUR 60.2 (64.3) million. Net interest income remained strong but decreased to EUR 37.0 (40.5) million. Net income from life insurance weakened to EUR 2.5 (3.8) million. Net income from non-life insurance improved to EUR 7.1 (6.3) million. Net commission income increased 17% to EUR 13.2 (11.3) million, the improvement mainly stemming from wealth management products. costs Following Aktia's strategy, investments into IT and media visibility were increased which lifted other administrative expenses to EUR 12.5 (9.5) million. Other operating expenses amounted to EUR 4.4 (6.5) million. Last year other operating expenses included various consultancy and advisory fees in conjunction with the listing of Aktia plc. The costs in total amounted to EUR 36.2 (36.1) million.
segment overview The segments' contribution to the Group's operating profit -------------------------------------------------------------------------------- | (mn euro) | 7 -9/ 2010 | 7-9/ 2009 | ? | -------------------------------------------------------------------------------- | Banking Business | 18.9 | 17.2 | 10% | -------------------------------------------------------------------------------- | Asset Management | 1.2 | 0.5 | 147% | -------------------------------------------------------------------------------- | Life Insurance | 0.9 | 2.8 | -67% | -------------------------------------------------------------------------------- | Non-Life Insurance | 1.8 | 0.3 | 578% | -------------------------------------------------------------------------------- | Miscellaneous | 0.0 | -0.1 | 75% | -------------------------------------------------------------------------------- | Eliminations | 0.6 | -0.7 | - | -------------------------------------------------------------------------------- | Total | 23.4 | 19.8 | 18% | --------------------------------------------------------------------------------
The operating profit for the banking business grew by 10% to EUR 18.9 (17.2) million. Net interest income remained at a high level of EUR 35.4 (39.2) million. Loans totalling EUR 1.1 (8.4) million were written down. Write-downs on loans were significantly lower than during the corresponding period last year. Asset management improved profitability and its operating profit strenghtened to EUR 1.2 (0.5) million. The market share of mutual funds was 6.8 (7.0)%. Write-downs of investments reduced the life insurance business contribution to the Group's operating profit to EUR 0.9 (2.8) million. The non-life insurance contribution to the Group's operating profit rose to EUR 1.8 (0.3) million.
Press and Analysts' Conference 4 november 2010 at 1 - 2 p.m. Aktia's CEO Jussi Laitinen and Deputy Managing Director, CFO Stefan Björkman will present the report and answer questions. The presentation will be available at www.aktia.fi. The conference will be held at Aktia's Head Offices, Mannerheimintie 14 A, 7th floor.
activity January - September 2010
business environment The short interest rates rose somewhat at the beginning of the third quarter but are still at a low level. In this environment, Aktia's active management of interest rate risk contributed greatly to the group net interest income and result development. The general revival of the Finnish economy as well as the low level of interest rates resulted in clearly lower write-downs on credit compared to 2009. The OMX Helsinki 25 index continued to improve strongly in the third quarter. According to Statistics Finland Finnish consumers' confidence in the economy was stronger in September than ever before. The consumer confidence indicator stood at 23.0 in September, having been 11.7 one year ago. Compared to last year, Finnish real estate prices were generally up by 7.8 (30.6.2010; 10.0) % and in the Helsinki region by 9.2 (30.6.2010; 13.6) %. Inflation acclerated to 1.4 (30.6.2010; 0.9) % and unemployment decreased to 7.0 (30.6.2010; 8.8) % (Statistics Finland). The long interest rates continued to decrease during the third quarter which generated higher values on the fixed rate instruments in Aktia's investment portfolios. The worries for Southern European economies declined after the bank stress tests, but the demands on yields remained at a high level. This had a negative impact on the value of financial assets and caused somewhat higher costs of refinancing. The schedules of the new initiatives for regulating banking businesses are now ready, but the contents of regulations are still under work. The results are likely to be higher capital requirements, sharpened competition for deposits, higher demands on long-term financing and eventually higher margins on credits.
-------------------------------------------------------------------------------- | Key figures | 2010E | 2009 | 2008 | -------------------------------------------------------------------------------- | GDP growth | | | | -------------------------------------------------------------------------------- | World | 3.8* | -1.3 | 3.0 | -------------------------------------------------------------------------------- | EU | 1.6* | -4.0 | 0.9 | -------------------------------------------------------------------------------- | Finland | 3.0* | -7.8 | 0.9 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Consumer price index | | | | -------------------------------------------------------------------------------- | EU | 1.5* | 0.3 | 3.3 | -------------------------------------------------------------------------------- | Finland | 1.1* | 0.1 | 4.0 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Other key ratios | | | | -------------------------------------------------------------------------------- | Development of real value | 9.0* | -0.3 | -2.5 | | of housing in Finland | | | | -------------------------------------------------------------------------------- | OMX Helsinki 25 | - | 28.3 | -49.5 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Interest rates | | | | -------------------------------------------------------------------------------- | ECB | 1.00* | 1.00 | 4.25 | -------------------------------------------------------------------------------- | 10-y interest Ger (=benchmark) | 2.25* | 3.40 | 3.80 | -------------------------------------------------------------------------------- | Euribor 12 months | 1.70* | 1.30 | 3.10 | -------------------------------------------------------------------------------- | Euribor 3 months | 1.00* | 0.70 | 4.50 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Unemployment in Finland | 8.5* | 8.2 | 6.4 | -------------------------------------------------------------------------------- | * At the end of the year (Aktia's chief economist's prognosis) | --------------------------------------------------------------------------------
Rating The international rating agency Moody's Investor Service kept its credit opinion of Aktia Bank plc's credit rating unchanged in an update on 6 January 2010. Aktia Bank plc's credit quality remained at the best classification, P-1, for short-term borrowing. The credit rating for long-term borrowing is A1 and that for financial strength is C. All ratings have a stable outlook. See http://www.aktia.fi/aktia_bank/rating. The covered bonds issued by the subsidiary Aktia Real Estate Mortgage Bank plc have a Moody's credit rating of Aa1.
Profit for the period The Group's operating profit improved by 73% to EUR 64.4 (37.2) million. The Group profit amounted to EUR 47.9 (27.2) million.
Income
The Group's total income increased by 7% between January and September to EUR 187.4 (174.5) million. Net interest income rose to EUR 114.4 (112.4) million. In the low interest rate environment the managing of interest rate risk made a significant positive contribution to the net interest income's persistance. Both derivatives and fixed rate instruments are utilised by Aktia Bank to manage interest rate risks. The derivatives and fixed rate instruments used by Aktia Bank to limit its interest rate risk improved net interest income by EUR 45.7 (30.1) million. Net commission income increased by 32% to EUR 42.1 (31.8) million. Commission income from mutual funds, asset management and brokering increased by 42% to EUR 27.4 (19.3) million. Card and payment services commissions rose to EUR 10.4 (8.4) million. Net income from life insurance amounted to EUR 9.6 (10.8) million. A lower number of claims and last year's cost reductions measures improved Aktia Non-Life Insurance's net income to EUR 17.4 (13.7) million. Net income from the insurance businesses includes insurance premiums written, net income from investment activities, insurance claims paid and the change in technical provisions. Other operating income was EUR 6.2 (3.0) million. This includes a sales gain of divestment of Aktia Bank plc's minority holding in Esperi Care Oy. The bank group's associated company Unicus Oy handled the transaction and divested also its holding in Esperi Care. The transaction added a total of EUR 1.7 million to the period's operating profit. Net income from financial transactions was EUR -4.0 (1.8) million which mainly consisted of sales losses from securities in PIGS countries.
Expenses
The Group's operating expenses in January - September rose by 3% to EUR 115.0 (111.5) million. Higher reservations for the personnel fund and other result related payments increased staff costs by 4% to EUR 59.9 (57.5) million. Other administration expenses increased by 13% to EUR 35.9 (31.8) million of which the most part consisted of costs for IT development and marketing. Total depreciation and write-downs on tangible and intangible assets were unchanged at EUR 5.4 (5.3) million. Other operating expenses fell 19% to EUR 13.8 (17.1) million. Last year other operating expenses included advisory fees and other expenses in relation to the listing of Aktia plc.
Balance sheet and off-balance sheet commitments
The Group's balance sheet total increased by 1% from year-end and amounted to EUR 10,671 (31.12.2009; 10,556) million. The increase in the balance sheet total is largely due to growth in both deposit and mortgage stocks.
Borrowing
Aktia's liquidity was partly supported by a larger deposit stock from the public and partly by Aktia Bank's and Aktia Real Estate Mortgage Bank's issues. Total deposits from the public and public sector entities rose by 11% from year-end to EUR 3,370 (3,029) million. A more active marketing boosted Aktia's market share in deposits to 3.61 (3.35)%. Deposits from public sector entities and credit institutions decreased, and lending from the central bank was reduced. In March 2010, Aktia Real Estate Mortgage Bank plc issued a covered bond of EUR 500 million with a fixed interest rate and five-year maturity. Outstanding Aktia Bank certificates of deposit amounted to EUR 407 million at the end of the period and bonds issued by the Group totalled EUR 2,469 million, which represents an increase of EUR 16 million during 2010. During the January-September, Aktia Bank issued new subordinated debts and index-linked loans with a total value of EUR 55 million. Aktia Bank issued other long-term funding, (Schuldscheindarlehen) worth EUR 80 million as a part of preparations for new regulations concerning banks and insurance companies (Basel III) during the period.
Lending
The Group's total lending to the public amounted to EUR 6,485 (6,061) million at the end of the period, representing an increase of EUR 424 million. Excluding the mortgages brokered by savings and local cooperative banks that the local banks are committed to capitalise, the Group's lending increased by EUR 198 million (4%) from the beginning of the year. Loans to private households (including mortgages brokered by local savings and cooperative banks) accounted for EUR 5,337 (4,924) million or 82.3% of the total loan stock. The housing loan stock increased from the beginning of the year by 9% and totalled EUR 4,987 (4,598) million. Aktia's market share in housing loans was unchanged at 4.27% year-on-year at the end of September. Corporate lending accounted for 12.3% of Aktia's loan stock. Total corporate lending amounted to EUR 797 (782) million at the end of the period. During the period, loans granted to housing associations decreased by 1% to EUR 287 (289) million and stood for 4.4% of Aktia's total loan stock. Interest-bearing financial assets available for sale were EUR 3,072 (3,277) million. Of interest-bearing financial assets, EUR 669 million relates to the insurance companies' investment portfolios and EUR 2,403 million mainly to the banking business'liquidity portfolio. These securities can be used as collateral in central bank or in transactions with binding repurchase terms, so called repurchase agreements.
Technical provisions
Life insurance technical provisions amounted to EUR 843 (805) million, of which EUR 254 (210) million were unit-linked. At the end of September, total technical provisions of non-life insurance stood at EUR 126 (119) million.
Equity and commitments
Aktia Group's equity amounted to EUR 529 (466) million at the end of the period. The Group's fund at fair value amounted to EUR 64 (43) million and showed an improvement of EUR 21 million since the beginning of the year. Off-balance sheet commitments increased by EUR 94 million from the year-end and amounted to EUR 670 (575) million. This increase was largely due to unused credit facilities (loan promises and limits).
Segment overview
Aktia plc has five business segments; Banking Business, Asset Management, Life Insurance, Non-Life Insurance and Miscellaneous. The segments' contribution to the Group's operating profit -------------------------------------------------------------------------------- | (EUR million) | 1-9/ 2010 | 1-9/ 2009 | Change | -------------------------------------------------------------------------------- | Banking Business | 56.9 | 36.3 | 57% | -------------------------------------------------------------------------------- | Asset Management | 3.2 | 0.5 | 508% | -------------------------------------------------------------------------------- | Life Insurance | 5.3 | 3.0 | 75% | -------------------------------------------------------------------------------- | Non-Life Insurance | 1.9 | -2.6 | - | -------------------------------------------------------------------------------- | Miscellaneous | -3.2 | 2.6 | - | -------------------------------------------------------------------------------- | Eliminations | 0.4 | -2.8 | - | -------------------------------------------------------------------------------- | Total | 64.4 | 37.2 | 73% | --------------------------------------------------------------------------------
Banking business The banking business' contribution to the Group's operating profit amounted to EUR 56.9 (36.3) million. Operating income totalled EUR 139.5 (135.6) million. Net interest income was EUR 110.8 (108.1) million and net commission income increased by 32% totalling EUR 31.2 (23.7) million. The improvement derives mainly from a higher level of net commission income from mutual funds and insurance. Operating expenses amounted to EUR 73.6 (73.4) million, of which staff costs accounted for EUR 28.1 (26.5) million. The banking business' customer base increased by 9,336 private customers (+4%) during January - September 2010. Sales activities are supported by the Aktia Dialogue concept whereby customers' needs are mapped out and Aktia's whole service portfolio is presented. During January - September, nearly 30,000 Dialogues were carried out, which is expected to increase sales in 2010. The number of Internet agreements was up 7% from the beginning of the year and amounted to 123,881. Total savings by households increased by 11% from the beginning of the year to EUR 3,464 (3,113) million. Of these, household deposits were EUR 2,638 (2,372) million and household savings in mutual funds stood at EUR 826 (741) million. Aktia's lending to private households, including the mortgages brokered by Aktia, increased by 6% from the year-end to EUR 3,864 (3,658) million. Mortgage loans brokered by Aktia amounted to EUR 1,558 (1,346) million. In addition, the savings and local cooperative banks brokered mortgages amounting to EUR 1,516 (1,290) million. Corporate banking's net interest income was EUR 7.0 (6.4) million which is 9% higher year-on-year. Net commission income from corporate banking was up 11% to EUR 2.0 (1.8) million year-on-year. The income of the real estate agency business was somewhat higher than last year's level, standing at EUR 5.8 (5.7) million. Asset Management The Asset management's contribution to the Group's operating profit amounted to EUR 3.2 (0.5) million. Managed assets continued to develop favourably during January - September 2010. Aktia provides a wide and competitive range of services in the capital market for both private individuals and institutions. The Asset Management segment carries on to focus on private banking operations and institutional investors this year. Operating income, i.e. income after reversals to the Group's other units and business partners, was EUR 15.1 (10.6) million. Operating expenses increased by 18% to EUR 11.9 (10.1) million, of which staff costs made up EUR 6.4 (5.6) million. This is due to greater investment of resources in the private banking business. The volume of funds managed and brokered by Aktia was EUR 4,028 (3,786) million. Aktia's market share of mutual funds was 6.8 (31.12.2009: 7.0)% at the end of the period - this includes the share of brokered funds. The total market is based on information from the Finnish Association of Mutual Funds. The assets managed by Aktia Asset Management and Aktia Invest increased, partly thanks to an upswing in the markets, and totalled EUR 6,658 (5,996) million. Assets managed by Aktia Invest amounted to EUR 2,274 (2,140) million. The customer assets of Private Banking totalled EUR 1,141 (926) million, increasing 23%. Life Insurance The life insurance's contribution to the Group's operating profit amounted to EUR 5.3 (3.0) million. Premiums written during January - September increased 32% and were EUR 70.7 (53.5) million. The growth derives mainly from unit-linked savings and investment-linked insurance. The allocation service for mutual funds, Aktia Profil, continued to show increasing volumes. Of the premium volume for savings and investment-linked insurance and pension insurance, unit-linked insurance accounted for 77.1 (65.7)%. Claims paid amounted to EUR 58.6 (61.4) million. Surrenders have decreased to a lower level than last year. The trend of increased pensions paid has continued as the share of pension insurances reaching payment stage has increased. Operating costs totalled EUR 9.6 (9.9) million. Cost-efficiency continued to be good. The expense ratio stood at 95.0% compared to 101.5% for the year before. The improved key figures derive from lower costs but also from an increase of total expense loadings due to higher premium volumes and higher market value of the insurance stock. The return on the company's investments based on market value was 6.6 (4.6)%. The derivatives used by the life insurance company to limit its interest rate and currency risk improved operating profit by EUR 4.2 (0.4) million. Technical provisions totalled EUR 843 (805) million, of which provisions for unit-linked insurance policies represented EUR 254 (210) million and interest-linked provisions EUR 588 (595) million. The company's solvency ratio improved to 18.6% compared to 14.4% at year-end. Non-Life Insurance The contribution of the non-life insurance business to the Group's operating profit was EUR 1.9 (-2.6) million. Premiums written for Aktia Non-Life Insurance rose by approximately 4% on the corresponding period last year. This increase is attributable to private customers. Premiums written before the reinsurers' share were EUR 56.3 (54.3) million. Premiums earned for the period after the reinsurers' share and change in provisions for unearned premiums amounted to EUR 46.2 (45.5) million. Claims incurred fell to EUR 33.4 (35.5) million. Operating costs decreased on last year and amounted to EUR 14.7 (15.6) million. The combined ratio in January - September 2010 was 104.8% compared to 112.3% the previous year. The lower combined ratio is largely explained by lower frequency of loss and lower staff costs. The return on the company's investments based on market value was 7.9 (1.5)%. Of the non-life insurance business' total technical provisions of EUR 118 (110) million, provisions for outstanding claims stood at EUR 91 (89) million. The market value of the company's investment portfolio was EUR 150 (135) million and the company's risk carrying capacity was 84.6% compared to 72.4% at the end of 2009. The integration of Aktia Non-Life Insurance's distribution channels into Aktia's branch office network has continued to increase customer activity particularly in the private customer sector. Miscellaneous In January - September 2010 the operating profit of the Miscellaneous segment was EUR -3.2 (2.6) million. common costs In accordance with the "One Aktia" strategy the Group support functions have been unified and integrated. The largest expenses consist of marketing and IT costs. The integration process is continuing throughout 2010 and Common costs were in total EUR 25.6 (25.7) million and were distributed as follows: banking business EUR 19.9 (21.8) million, asset management EUR 2.8 (1.7) million, life insurance EUR 1.3 (1.0) million and non-life insurance EUR 1.6 (1.2) million. Capital adequacy and solvency The Bank Group's capital adequacy amounted to 17.0% compared to 15.9% at the end of 2009. The Tier 1 capital ratio was 10.4 (9.5)%. The operating result and the liquidity portfolio's lower use of capital strengthened the capital adequacy. The Bank Group includes Aktia Bank and Aktia Real Estate Mortgage Bank. Aktia Bank plc's capital adequacy stood at 21.7% compared to 19.9% at the end of 2009. The Tier 1 ratio was 13.1 (11.7)%. The life insurance company's solvency margin amounted to EUR 114.2 (86.3) million, where the minimum requirement is EUR 34.3 (34.0) million. The solvency ratio amounted to 18.6 (14.4)%. The non-life insurance company's solvency margin amounted to EUR 24.4 (18.4) million, where the minimum requirement is EUR 13.1 (13.1) million. The solvency capital was EUR 51.3 (43.6) million and a risk carrying capacity of 84.6 (72.4)% was reported. Capital adequacy for the conglomerate amounted to 171.0 (157.4)%. The statutory minimum stipulated in the Act on the Supervision of Financial and Insurance Conglomerates is 100%. Write-downs of loan, guarantee and premium claims Write-downs on credit were clearly lower than last year and stood at EUR 9.8 (26.3) million. Write-downs on credit based on individual examination amounted to EUR -9.7 (30.9.2009; -26.3) million during January - September 2010. Recoveries and reversals of previous write-downs came to EUR 0.7 (0.3) million so that the cost effect on the profit for the period was EUR -9.1 (-25.9) million. Of write-downs, EUR -9.0 (-23.5) million was accounted for by corporate loans, which corresponds to 1.1 (3.0)% of the total corporate lending. Write-downs of corporate loans amounted to EUR -1.0 (-8.2) million during the third quarter. Write-downs of household loans amounted to EUR -0.7 (-2.1) million of which EUR -0.3 (-0.5) million was accounted for by unsecured consumer loans. The review period's write-downs of household loans were marginal of total lending to households. Total write-downs amounted to 0.1 (0.4)% of total lending. In addition to individual write-downs, group write-downs were made for households and small companies, where there were objective reasons to believe there was uncertainty in relation to the repayment of claims in underlying credit portfolios. Group write-downs for households and small companies remained unchanged and amounted to EUR -7.4 (-7.4) million at the end of the period. During the period, the non-life insurance company made write-downs for outstanding premiums (credit losses) totalling EUR -0.7 (-0,4) million. Valuation of financial assets Value changes reported via income statement For shares and participations, a value impairment is reported in the income statement where the value change has been announced as significant or long-term and, in the case of interest-bearing securities, where the issuer has announced an inability to pay. For interest-bearing securities, previous write-downs are reversed in the income statement and for shares and participations in the fund at fair value. Write-downs on financial assets during January - September 2010 was EUR -2.8 million, whereas these totalled EUR -22.3 million during the same period in 2009. Write-downs on financial assets -------------------------------------------------------------------------------- | EUR million | 1-9/ 2010 | 1-9/ 2009 | -------------------------------------------------------------------------------- | Interest-bearing securities | | | -------------------------------------------------------------------------------- | Banking Business | - | -0.4 | -------------------------------------------------------------------------------- | Life Insurance Business | 0.1 | -13.1 | -------------------------------------------------------------------------------- | Non-Life Insurance Business | - | - | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Shares and participations | | | -------------------------------------------------------------------------------- | Banking Business | - | - | -------------------------------------------------------------------------------- | Life Insurance Business | -2.9 | -8.9 | -------------------------------------------------------------------------------- | Non-Life Insurance Business | - | - | -------------------------------------------------------------------------------- | Total | -2.8 | -22.3 | --------------------------------------------------------------------------------
Value changes reported via the fund at fair value A value impairment that is not reported in the income statement or an increase in the value of financial assets that has not been realised is reported via the fund at fair value. Taking cash flow hedging for the Group into consideration, the fund at fair value amounted to EUR 64.4 million after deferred tax compared to EUR 43.3 million as at 31 December 2009. Cash flow hedging which comprises the market value for interest rate derivative contracts which have been acquired for the purposes of hedging the banking business' net interest income amounted to EUR 32.2 (21.4) million. Specification of the fund at fair value -------------------------------------------------------------------------------- | EUR million | 30.9.2010 | 31.12.2009 | Change EUR | | | | | million | -------------------------------------------------------------------------------- | Shares and participations | | | | -------------------------------------------------------------------------------- | Banking Business | -0.2 | 3.7 | -3.9 | -------------------------------------------------------------------------------- | Life Insurance Business | 2.6 | 0.2 | 2.4 | -------------------------------------------------------------------------------- | Non-Life Insurance | 0.4 | -0.2 | 0.6 | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Direct interest-bearing | | | | | securities | | | | -------------------------------------------------------------------------------- | Banking Business | 5.1 | 13.3 | -8.2 | -------------------------------------------------------------------------------- | Life Insurance Business | 20.7 | 5.6 | 15.1 | -------------------------------------------------------------------------------- | Non-Life Insurance | 3.5 | -0.8 | 4.4 | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Cash flow hedging | 32.2 | 21.4 | 10.8 | -------------------------------------------------------------------------------- | Fund at fair value, total | 64.4 | 43.3 | 21.1 | --------------------------------------------------------------------------------
The Group's risk management Risk exposure The banking business includes Retail Banking and the financing companies, Corporate Banking, Treasury and Asset Management. Life insurance business is carried out by Aktia Life Insurance, and non-life insurance business by Aktia Non-Life Insurance. Lending-related risks within banking Credit stock maintained its good quality. Credit stock increased in January - September 2010 by 7% or EUR 424 million, totalling EUR 6,485 (6,061) million. As planned, this increase mainly occurred within household financing through Aktia Real Estate Mortgage Bank plc and households' share of the total credit stock amounted to EUR 5,337 (4,924) million or 82.3% at the end of September, or 86.7% when combined with housing associations. Of the loans to households, 86.3 (86.2)% are secured against adequate real estate collateral in accordance with Basel 2. Credit stock by sector -------------------------------------------------------------------------------- | EUR million | 30.9.2010 | 31.12.2009 | Change | Share, % | -------------------------------------------------------------------------------- | Corporate | 797 | 782 | 15 | 12.3 | -------------------------------------------------------------------------------- | Housing | 288 | 289 | -1 | 4.4 | | association | | | | | | s | | | | | -------------------------------------------------------------------------------- | Public | 7 | 10 | -3 | 0.1 | | sector | | | | | | entities | | | | | -------------------------------------------------------------------------------- | Non-profit | 57 | 55 | 1 | 0.9 | | organisatio | | | | | | ns | | | | | -------------------------------------------------------------------------------- | Households | 5,337 | 4,924 | 413 | 82.3 | -------------------------------------------------------------------------------- | Total | 6,485 | 6,061 | 424 | 100.0 | --------------------------------------------------------------------------------
Housing credit stock totalled EUR 4,987 (4,598) million, of which mortgages granted by Aktia Real Estate Mortgage Bank plc made up EUR 2,895 (2,498) million. In all, housing loans increased by 9% against year-end 2009, and the growth derived mainly through Aktia Real Estate Mortgage Bank's lending where the average balance in relation to collateral market value decreased to 56.7 (56.8)% compared to the corresponding period 2009. The proportion of the total credit stock accounted for by corporate loans fell as planned to 12.3 (12.9)% and totalled EUR 797 (782) million. Lending to the public secured by collateral objects or unsecured within the framework of the financing companies Aktia Corporate Finance and Aktia Card & Finance totalled EUR 103.7 (84.8) million, representing 1.6% of total lending. The increase derived mainly through Aktia Corporate Finance. Loans with payments 1-30 days overdue decreased from year-end to 2.82 (2.97)% of credit stock, including off-balance sheet guarantee commitments. Loans with payments 31-89 days overdue increased somewhat to 0.77 (0.76)%, totalling EUR 51 million. Non-performing loans more than 90 days overdue, including claims on bankrupt companies and loans for collection, totalled EUR 44 million, corresponding to 0.67 (0.56)% of the entire credit stock plus bank guarantees. Undischarged debts by time overdue (EUR million) -------------------------------------------------------------------------------- | Days | 30.9.2010 | % of the | 31.12.2009 | % of the credit | | | | credit stock | | stock | -------------------------------------------------------------------------------- | 1-30 | 184 | 2.82 | 181 | 2.97 | -------------------------------------------------------------------------------- | of which | 126 | 1.93 | 114 | 1.86 | | household | | | | | | s | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | 31-89 | 51 | 0.77 | 46 | 0.76 | -------------------------------------------------------------------------------- | of which | 41 | 0.62 | 38 | 0.61 | | household | | | | | | s | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | 90- | 44 | 0.67 | 34 | 0.56 | -------------------------------------------------------------------------------- | of which | 20 | 0.31 | 18 | 0.30 | | household | | | | | | s | | | | | --------------------------------------------------------------------------------
The Group's financing and liquidity risks
The financing and liquidity risks are dealt with at corporate legal level, and there are no financing commitments from the Bank Group (Aktia Bank plc and its subsidiaries) to the insurance companies. In the banking business, financing and liquidity risks are defined as the availability of refinancing plus the differences in maturity between assets and liabilities. The objective is to be able to cover one year's refinancing requirements using existing liquidity. At the end of the period, the Bank Group's liquidity buffer was good and targets were clearly exceeded. Within the life insurance business, liquidity risks are defined as the availability of financing for paying out claims, savings sums and surrenders, and pensions. The need for liquidity is satisfied mainly through the inward flow of cash and a portfolio of investment certificates which has been adapted in line with varying needs. Any unforeseen significant need for liquidity is taken care of through the investment portfolio (primarily bonds). Within the non-life insurance business, liquidity risks are defined as the availability of financing for paying out claims and depend on the number of claims and their scale. Liquidity risks are managed through the inward flow of cash plus an portfolio of bank deposits, investment certificates and government bonds. Counterparty risks Counterparty risks within Group treasury The banking business' liquidity portfolio, which comprises interest-bearing securities stood at EUR 2,347 (2,615) million as at 30 September 2010. Individual investment decisions are made in accordance with an investment plan in place and are based on careful assessment of the counterparty. Counter-party risks are limited by the requirement for a high external rating (a minimum rating of A3 by Moody's Investor Service or equivalent), and limits are set for maximum exposure per counterparty and asset category. Of the financial assets available for sale, 63 (51)% were investments in covered bonds, 22 (36)% were investments in banks, 10 (9)% were investments in state-guaranteed financial senior bonds and approximately 5 (4)% were investments in public sector entities and companies. Counterparty risks in derivatives trading are managed through demands on collateral (CSA = Credit Support Annex) limiting the open positions. Rating distribution for banking business -------------------------------------------------------------------------------- | | 30.9.2010 | 31.12.2009 | -------------------------------------------------------------------------------- | EUR million | 2,347 | 2,615 | -------------------------------------------------------------------------------- | Aaa | 60.4 % | 55.1% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 26.8 % | 29.6% | -------------------------------------------------------------------------------- | A1-A3 | 9.2 % | 11.6% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 0.5 % | 0.6% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.6 % | 0.2% | -------------------------------------------------------------------------------- | B1-B3 | 0.0 % | 0.0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.0 % | 0.0% | -------------------------------------------------------------------------------- | No rating | 2.5 % | 2.9%* | -------------------------------------------------------------------------------- | Total | 100.0 % | 100.0% | --------------------------------------------------------------------------------
*) Of which 1.9% Finnish municipalities as at 30.9.2010 and 1.9% at 31.12.2009.
Of these financial assets, 1.1 (0.8)% did not meet the internal rating
requirements. As a result of a reduced credit rating, two security assets with a
total market value of EUR 7 million were no longer eligible for refinancing with
the central bank. Other securities that are not eligible for refinancing and are
unrated totalled EUR 58 million.
During the period, no write-downs were realised as a result of the issuer
announcing its inability to pay whereas the write-downs during the same period
last year amounted to EUR -0.4 million.
Counterparty risks in the life
insurance business
Fixed income assets amounted to EUR 586 (570) million at the end of the period
which corresponds to 82 (82)% of investments. Counterparty risks arising in
connection with the life insurance company's investments are managed by the
requirement for a high-class external rating of at least rating class A3 from
Moody's Investors Service for banks and states, and "investment grade" external
rating (at least Ba3) for companies, and by rules concerning the maximal
exposure for each counterparty and asset category.
At the end of September 2010, 38 (47)% of direct interest rate investments were
receivables from public sector entities, 24 (23)% were corporate bonds and 38
(30)% were receivables from banks and covered bonds.
The net change in value amongst interest-rate instruments earlier written down
and booked was EUR 0.1 million. During the period, no write-downs were realised
as a result of the issuer's credit rating being lowered. The write-down of EUR
2.9 million derived from indirect real estate holdings.
Rating distribution for the direct interest rate investments in life insurance
business
--------------------------------------------------------------------------------
| | 30.9.2010 | 31.12.2009 |
--------------------------------------------------------------------------------
| EUR million | 586 | 570 |
--------------------------------------------------------------------------------
| Aaa | 57.4 % | 52.5% |
--------------------------------------------------------------------------------
| Aa1-Aa3 | 12.9 % | 12.2% |
--------------------------------------------------------------------------------
| A1-A3 | 14.6 % | 18.3% |
--------------------------------------------------------------------------------
| Baa1-Baa3 | 7.2 % | 11.4% |
--------------------------------------------------------------------------------
| Ba1-Ba3 | 2.3 % | 1.4% |
--------------------------------------------------------------------------------
| B1-B3 | 0.0 % | 0.0% |
--------------------------------------------------------------------------------
| Caa1 or lower | 0.1 % | 0.3% |
--------------------------------------------------------------------------------
| No rating | 5.5 % | 3.9% |
--------------------------------------------------------------------------------
| Total | 100.0 % | 100.0% |
--------------------------------------------------------------------------------
3.8 (3.4)% of direct interest rate investments did not meet Aktia's internal rating requirements at the end of the period. Counterparty risks in the non-life insurance business The direct interest rate investments totalled EUR 120 (104) million at the end of September 2010 corresponding to 75 (73)% of investments. Counterparty risks arising in connection with the non-life insurance company's investments are managed by the requirement for a high-class external rating of at least rating class A3 from Moody's Investors Service for banks and states, and "investment grade" external rating (at least Ba3) for companies, and by rules concerning the maximal exposure for each counterparty and asset category. At the end of September, 60 (64)% of the direct interest rate investments were receivables from public sector entities, 12 (10)% were corporate bonds and 28 (36)% were receivables from banks and covered bonds. During the period no write-downs were realised. Rating distribution for direct interest rate investments in non-life insurance business -------------------------------------------------------------------------------- | | 30.9.2010 | 31.12.2009 | -------------------------------------------------------------------------------- | EUR million | 120 | 104 | -------------------------------------------------------------------------------- | Aaa | 57.8 % | 58.4% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 24.2 % | 16.7% | -------------------------------------------------------------------------------- | A1-A3 | 6.4 % | 12.5% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 1.7 % | 11.4% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 7.3 % | 0.5% | -------------------------------------------------------------------------------- | B1-B3 | 0.0 % | 0.0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.0 % | 0.0% | -------------------------------------------------------------------------------- | No rating | 2.6 % | 0.4% | -------------------------------------------------------------------------------- | Total | 100.0% | 100.0% | --------------------------------------------------------------------------------
4.4 (3.6)% of direct interest rate investments did not meet Aktia's internal rating requirements at the end of the period. Market valuation of financial assets Aktia pursues no trading activities. Both the financial assets within the banking business and the investment assets within the life and non-life insurance businesses are invested in securities with access to market prices in an active market, and are valued in accordance with official quoted prices. Any significant or long-term impairment of market value compared to the acquisition price is shown in the income statement, while interest-rate fluctuations are reported under the fund at fair value after the deduction of deferred tax. Structural interest rate risk in the banking business Structural interest rate risk arises as a result of an imbalance between interest rate ties and the re-pricing of assets and liabilities, and affects net interest income. Hedging derivative instruments and investments within the liquidity portfolio are utilised to reduce the volatility in net interest income. According to the strategy for interest rate risk management, a parallel upward or downward shift in the interest rate curve of one percentage point shall not influence estimated net interest income of the banki
