Aktia plc Interim report for 1 January - 31 March 2009
Aktia plc Interim Report 12.5.2009 at 10.00
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Aktia plc Interim Report for 1 January - 31 March 2009
The period in brief
- Results of the banking business were stable, but increase in insurance business volumes declined - Operating profit was EURÂ 10.3 (14.2) million. - Net interest income increased by 36.3% to EURÂ 32.5 (23.9) million. - The rating remains unchanged. - Listing on the Stock Exchange in September - The economic situation continues to be weak - Profitability of the banking business to remain stable in 2009 - Unchanged outlook (for complete outlook, see page 12)
The CEO's comments:
"The banking business started the year well but the economic situation makes the investment markets extremely difficult to assess. The long-term work for putting the strategy of One Aktia into practice has began with all employees and customers through AktiaDialog. While seeking to show that we now are more than just a bank, we are also working systematically to improve our cost efficiency. We at Aktia are looking forward to becoming a listed company in September," says CEO Jussi Laitinen.
Key figures at the end of each reporting period -------------------------------------------------------------------------------- | Â | 1-3 2009 | 1-3 2008 | 1-12 2008 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Earnings per share, EUR | 0.11 | 0.17 | 0.09 | -------------------------------------------------------------------------------- | Equity per share, EUR | 4.79 | 5.26 | 4.85 | -------------------------------------------------------------------------------- | Return on equity (ROE), % | 8.7 | 12.7 | 1.8 | -------------------------------------------------------------------------------- | Earnings per share excluding | | | | | negative goodwill recorded as | | | | | income and including | | | | -------------------------------------------------------------------------------- | fund at fair value, EUR | 0.02 | -0.14 | -0.22 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Capital adequacy ratio, % | 133.1 | 129.3 | 135.2 | | (conglomerate) | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Average number of shares, million | 67.0 | 60.2 | 60.2 | | | | | | -------------------------------------------------------------------------------- | Number of shares at end of period, | 67.0 | 60.2 | 60.2 | | million | | | | -------------------------------------------------------------------------------- | Personnel (FTEs), average number | 1,070 | 956 | 1,009 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Banking business | | | | -------------------------------------------------------------------------------- | Cost-to-income ratio | 0.70 | 0.70 | 0.65 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Borrowing from the public, EUR | 3,088 | 2,908 | 3,098 | | million | | | | -------------------------------------------------------------------------------- | Lending to the public, EUR million | 5,592 | 4,797 | 5,426 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Capital adequacy ratio, % | 14.2 | 14.2 | 13.7 | -------------------------------------------------------------------------------- | Tier 1 Capital ratio, % | 9.0 | 10.5 | 9.3 | -------------------------------------------------------------------------------- | Risk-weighted commitments, EUR | 3,335 | 3,052 | 3,313 | | million | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Asset Management | | | | -------------------------------------------------------------------------------- | Mutual fund volume, EUR million | 2,415 | 1,884 | 1,512 | -------------------------------------------------------------------------------- | Assets under management | 4,515 | 3,688 | 4,538 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Life Insurance | | | | -------------------------------------------------------------------------------- | Premium income before reinsurers' | 20.6 | 25.1 | 91.4 | | share, EUR million | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Expense ratio, % | 115.4 | 97.7 | 99.0 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Working capital, EUR million | 40.0 | 97.1 | 50.4 | -------------------------------------------------------------------------------- | Solvency ratio, % | 7.1 | 14.6 | 8.5 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Investments at fair value, EUR | 774.8 | 941.3 | 804.6 | | million | | | | -------------------------------------------------------------------------------- | Technical provisions for | 614.5 | 653.2 | 627.6 | | interest-linked policies, EUR | | | | | million | | | | -------------------------------------------------------------------------------- | Technical provisions for | 146.5 | 189.2 | 149.6 | | unit-linked policies, EUR million | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Non-Life Insurance | | | | -------------------------------------------------------------------------------- | Premium income before reinsurers' | 28.8 | | | | share, EUR million | | | | -------------------------------------------------------------------------------- | Premium income, EUR million | 13.9 | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Operating cost percentage, % | 28.9 | | | -------------------------------------------------------------------------------- | Loss ratio, % | 93.5 | | | -------------------------------------------------------------------------------- | Total cost percentage, % | 122.4 | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Technical provisions before | 114.7 | | | | reinsurers' share, EUR million | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Solvency capital, EUR million | 48.0 | | | -------------------------------------------------------------------------------- | Solvency ratio of technical | 43.7 | | | | provisions, % | | | | -------------------------------------------------------------------------------- | Solvency percentage (risk carrying | 80.8 | | | | capacity), % | | | | --------------------------------------------------------------------------------
Profit
The operating profit of the Group during the first quarter was EUR 10.3 (14.2) million. The operating profit for 2008 includes capital gains of EUR 0.9 million from real estate business.
The banking business reported a profit of EUR 12.2 (8.6) million as a result of
increased net interest income. Asset management suffered as a result of the
situation in the investment market and returned an operating loss of EUR -0.4
(1.0) million. The contribution of insurance business to the Group's operating
profit for the first quarter was EUR 2.0 (2.7) million for life insurance, while
that of non-life insurance was EUR -3.4 (-) million.
The operating profit from associated companies was EUR 0.0 million (-0.2).
Profit for the reporting period was EUR 7.2 (10.6) million.
Income
The Group's total income increased by 11.5% to EUR 50.0 (44.8) million.
Net interest income increased to EURÂ 32.5 (23.9) million. The derivatives used by Aktia to limit its interest rate risk contributed EURÂ 2.0 (-1.5) million to the improved net interest income during the period.
Net commission decreased by 10.2% to EUR 9.5 (10.6) million. Commission income from funds, asset management and securities brokerage was, in spite of the challenging market environment, at approximately the same level as the year before, thanks to the income from the acquired Aktia Invest, and totalled EURÂ 5.4 (5.6) million. Aktia Invest is an asset management unit that Aktia acquired from Kaupthing in December 2008. The card and payment services commissions amounted to EUR 2.8 (2.6) million. Income from real estate agency commissions decreased to EURÂ 1.7 (1.9) million. Commission expenses increased by EURÂ 1.4 million to EURÂ 3.2 (1.8) million. Of the total commissions, EUR 0.9 million is due to local banks for mortgages sold on behalf of Aktia Real Estate Mortgage Bank.
Net income from life insurance amounted to EUR 5.4 (6.0) million. Aktia Non-Life Insurance Company, consolidated since 1 January 2009, reports a net income of EUR 2.0 million. Net income from the insurance business includes insurance premium income, net income from investment activities, insurance claims paid and the change in provisions.
Other operating income totalled EURÂ 0.8 (1.8) million. Most of the decrease of EUR 1.0 million is attributable to the fact that the divestment of real estate holdings of the banking business accrued capital gains during the corresponding period in the previous year.
Expenditure
The Group's total expenditure rose by 25.4% to EUR 38.0 (30.3) million. Most of
the change was due to costs related to the new businesses, Aktia Non-Life
Insurance Company and Aktia Invest.
Staff costs increased by EUR 4.3 million to EUR 20.3 (16.0) million. Other
administration costs amounted to EURÂ 10.7 million (9.3). Most of the cost
increase of EUR 1.4 million is related to investments in IT and cost for
customer communications.
Total depreciation and write-downs on tangible and intangible assets amounted to EURÂ 1.8 (1.3) million. Other operating expenses increased by EURÂ 1.7 million to EURÂ 5.4 (3.7) million. The biggest change in other operating expenses was attributable to increased rental costs that rose to EUR 1.3 million. During 2008, most of Aktia's real estate holdings were sold off in line with the earlier divestment strategy because investments in real estate property are not part of Aktia's core business.
Balance sheet and off-balance sheet commitments
The Group's balance sheet total increased by 2.8% during the period and amounted to EUR 9,808 million (9,540 million at 31 December 2008) at the end of the period. The increase in the balance sheet total is primarily due to a growth in the mortgage stock and an increase in those assets that are available for sale and act as the bank's liquidity reserve. Borrowing both from the public and from savings banks and local cooperative banks decreased by 3.8% to EUR 4,823 million (5,015 million at 31December 2008), while borrowing using other financial instruments increased by 7.8% to EUR 3,375 million (3,130 million at 31December 2008).
The Group's total lending to the public amounted to EUR 5,592 million (5,426 million at 31 December 2008), representing an increase of EUR 167 million (+3.1%). The loans to private households accounted for EUR 4,499 million, or 80.4%, of the total loan stock. Of these loans to private households, 86.5% are secured by housing collateral (in accordance with Basel 2). Excluding the mortgages sold and capitalised by savings and local cooperative banks, the Group's lending increased by 1.9% from year-end.
The housing loan stock totalled EURÂ 4,282 million (4,036 million at 31 December 2008), of which mortgages made up EURÂ 2,123 million (1,968 million at 31 December 2008). In all, housing loans increased by 6.1%. Of the EURÂ 163 million total increase in mortgage loans, EURÂ 83 million came from loans sold by savings banks and local co-operative banks on behalf of Aktia Real Estate Mortgage Bank. Lending to corporate customers decreased, as planned, to EUR 796 million (804 million at 31 December 2008) during the first quarter.
Interest-bearing financial assets available for sale increased by 3.7% to EUR 2,912 million (2,808 million at 31 December 2008) million. These assets mainly consist of the banking business' liquidity reserve and can be used as security for transactions involving binding repurchase terms, known as repo agreements.
Deposits from the public and public sector entities decreased marginally (-0.3%) from year-end to EUR 3,088 million (3,098 million at 31 December 2008).
Outstanding Aktia certificates of deposit amounted to EURÂ 339 million at the end of the period, which represents an increase of EURÂ 76 million during the period. Aktia also issued new debentures and index-linked loans with a total value of EURÂ 18 million.
Life insurance provisions amounted to EURÂ 761 million (777 million at 31 December 2008).
Non-Life insurance provisions stood at EUR 115 million (99 million at 1 January 2009) at the end of the period (excluding acquisition eliminations of EUR 11 million).
Off-balance sheet commitments increased by EUR 59 million from the year-end and amounted to EUR 588 million (529 million at 31 December 2008) million. The increase was largely due to unused credit facilities (loan promises).
The Group's equity amounted to EUR 345 million (317 million at 31 December 2008) at the end of the period. The Group's fund at fair value amounted to EURÂ -43 million compared to EURÂ -36 million at 31 December 2008.
Capital adequacy and solvency
The banking group's capital adequacy amounted to 14.2% compared to 13.7% at year-end. The Tier 1 capital ratio was 9.0% (31.12.2008: 9.3). Capital adequacy calculated according to Basel 2 rules improved as Aktia Bank sold off Aktia Life Insurance from the Bank Group to the parent company Aktia plc and thus avoids the deductions related to holdings in insurance companies in the said capital adequacy calculation. The capital adequacy of the Bank Group remains at a good level, achieving the capital adequacy target and clearly exceeding the regulatory requirements.
The working capital of Life Insurance amounted to EUR 40 million and the solvency was 7.1% (8.5). The share risk in the investment portfolio has continued to decrease, and Aktia plc is prepared to increase the equity of Aktia Life Insurance by up to EURÂ 20 million if necessary.
The Non-Life Insurance company, consolidated in the Group at year-end, reports a solvency (risk carrying capacity) of 80.8%.
Capital adequacy for the financial and insurance conglomerate amounted to 133.1% (135.2 million at 31 December 2008). The statutory minimum stipulated in the Act on the Supervision of Financial and Insurance Conglomerates is 100%.
Rating
Aktia Bank plc's credit rating by the international credit rating agency Moody's Investors Service has been confirmed as the best classification, P-1, for short-term borrowing. The credit ratings for long-term borrowing and financial strength were the same, at A1 and C respectively, all with a stable outlook.
The subsidiary Aktia Real Estate Mortgage Bank Plc has issued long-term covered bonds with the highest credit rating of Aaa from Moody's Investors Service.
Valuation of financial assets
Value changes reported via the fund at fair value Impairments in interest-bearing securities where the issuer has not noted an inability to pay and value impairments in shares and participations which are not deemed to be long-term or significant are reported in the fund at fair value, which, taking cash flow hedging for the Group into consideration, amounted to EUR -43 million after deferred tax, compared to EURÂ -36 million at 31 December 2008.
Of the fund at fair value as per 31 March 2009, EURÂ 47 million was attributable to the negative valuation difference of interest-bearing securities, including fund units in interest-bearing funds, which are mainly due to continued poor liquidity and investors' demands for high returns as a result of the general uncertainty in the financial markets. The negative value changes in interest-bearing securities will not materialise provided that the issuer does not become unable to pay or the security is cashed in before its maturity.
Specification of the fund at fair value -------------------------------------------------------------------------------- | EURÂ million | 31.3.2009 | 31.12.2008 | Change | -------------------------------------------------------------------------------- | Â | Â | Â | Â | | -------------------------------------------------------------------------------- | Shares and participations | | | Â | -------------------------------------------------------------------------------- | Â | Banking business | -0.7 | -1.5 | 0.8 | -------------------------------------------------------------------------------- | Â | Life insurance business | -5.8 | -2.9 | -2.9 | -------------------------------------------------------------------------------- | Â | Non-life insurance | -0.2 | - | -0.2 | | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Direct interest-bearing securities | | | | -------------------------------------------------------------------------------- | Â | Banking business | -21.6 | -26.2 | 4.6 | -------------------------------------------------------------------------------- | Â | Life insurance business | -24.4 | -18.2 | -6.2 | -------------------------------------------------------------------------------- | Â | Non-life insurance | -1.0 | - | -1.0 | | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Cash flow hedging | 11,1 | 12.4 | -1.3 | -------------------------------------------------------------------------------- | Â | Â | Â | | | -------------------------------------------------------------------------------- | Fund at fair value, total | -42.6 | -36.4 | -6.2 | --------------------------------------------------------------------------------
Value changes reported via income statement Write-downs for the period amounted to EUR 9.7 million (39.2 million at 31 December 2008) as a result of significant or long-term impairment of shares and share funds as well as interest-bearing securities where the issuer has noted an inability to pay. Of the write-downs, EUR 4.9 million was attributable to shares and participations in the investment portfolio of the Life Insurance Company and EUR 4.7 million to interest-bearing securities, of which EUR 4.3 million was related to the investment portfolio of the Life Insurance Company.
Write-downs on financial assets -------------------------------------------------------------------------------- | Â | EUR million | 1-3 2009 | Â 1-12 2008 | -------------------------------------------------------------------------------- | Interest-bearing securities | | Â | -------------------------------------------------------------------------------- | Â | Banking business | 0.4 | 3.6 | -------------------------------------------------------------------------------- | Â | Life insurance business | 4.3 | 5.1 | -------------------------------------------------------------------------------- | Â | Non-life insurance business | - | - | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Shares and participations | | Â | -------------------------------------------------------------------------------- | Â | Banking business | - | 1.0 | -------------------------------------------------------------------------------- | Â | Life insurance business | 4.9 | 29.4 | -------------------------------------------------------------------------------- | Â | Non-life insurance business | Â - | -Â | -------------------------------------------------------------------------------- | Total | | 9.7 | 39.2 | --------------------------------------------------------------------------------
Write-downs of loan and guarantee claims
Write-downs based on individual examination of loan and guarantee claims totalled EURÂ -1.7 (-0.1) million. Reversals of losses from previous years came to EURÂ 0.1 (0.1) million so that the cost effect on the profit for the period was EURÂ -1.6 (-0.0) million. In addition to individual write-downs, group write-downs were made 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 stood at EURÂ 7.4, unchanged from the year-end, million and are based on anticipated losses in relation to the market situation.
Segment overview
Aktia plc's new division into business segments was from 1 January 2009 changed so that segments Retail Banking and Corporate Banking & Treasury are combined into a segment entitled Banking Business. The other segments are Asset Management, Life Insurance, Non-Life Insurance and Miscellaneous. The Miscellaneous segment includes the Group administration of Aktia plc, certain administrative functions for Aktia Bank plc and return on equity.
Comparative figures for 2008 relating to the new segmentation were published on 8 April 2009.
Banking business
The operating profit of banking business increased to EUR 12.2 million (8.6).
Operating income totalled EURÂ 39.2 million (31.8). The improvement is mainly attributable to net interest income that increased to EUR 30.8 million (22.3). Net commission income decreased to EURÂ 7.0 million (7.6), mainly as a result of reduced fund commissions. Operating expenses rose to EURÂ 25.3 million (23.1). The increase in costs includes an increased payment to the Deposit Guarantee Fund as well as increased rents as a result of selling off office premises during 2008.
The financial result was affected by one major case of corporate credit loss.
The customer base of Banking Business increased by 3,000 private customers during the first quarter. The number of Internet banking agreements is 109,361.
Aktia's lending to private households, including the mortgages sold by Aktia, increased by 1.7% to EURÂ 3,411 million (3,353 million at 31December 2008). Mortgage loans sold by Aktia on behalf of Aktia Real Estate Mortgage Bank amounted to EURÂ 1,149 million (1,069 million at 31 December 2008). Aktia's market share in housing loans increased to 4.2%. Aktia's total lending to private households made up 80.4% of the credit stock.
Total savings by households were EUR 2,930 million (2,097 million at 31 December 2008), of which household deposits were EUR 2,374 million (2Â 359 million at 31 December 2008) and savings by households in mutual funds were EUR 556 million (548). The flow of funds out from the funds has turned, and an increase of 1.4% in savings by households took place during the first quarter.
The decrease in short market rates of interest has had a positive effect on net interest income through lower re-financing costs, hedging derivative instruments and fixed-rate investments in the liquidity portfolio.
Increased risk premiums, the so-called spread, have allowed better returns from new investments in the liquidity portfolio, which has had a positive effect on net interest income. At the same time, the increased risk premiums have reduced the market value of the liquidity portfolio which burdens capital adequacy through the fund at fair value.
Aktia Real Estate Mortgage Bank plc showed continued growth. The total credit stock grew by 7.9% to EUR 2,234 million. Of the growth in credit stock, 49.5% was sold by Aktia's branch offices and 50.5% by savings banks and local co-operative banks. In February, Aktia Real Estate Mortgage Bank plc issued a covered bond worth EURÂ 125 million. The loan has a floating rate and a three-year maturity.
The net interest income of Corporate Banking developed favourably. Commission income fell somewhat due to fewer new loans being granted. The general economic situation has brought with it an increased risk of credit losses.
The operating profit of real estate agency business developed positively, mainly
as a result of cost adjustment measures, and amounted to EUR 0.2 million (-0.1).
Asset Management
Operating profit for Aktia's asset management business fell to EURÂ -0.4 million (1.0). The market situation continued to be very challenging throughout the period. However, Aktia did relatively well in the difficult market situation. The operating profit for the period includes non-recurring items, mainly materialised capital losses.
The Asset Management segment has continued to focus its operations more extensively in private banking and institutional investors. In December 2008, Aktia acquired Kaupthing's Finnish asset management business. This acquisition strengthened Aktia's service portfolio, representing expertise which has been very much appreciated by institutional investors in Finland. A more extensive investment of resources in private banking business has been initiated in Aktia's branch offices. During the period, Aktia issued an index-linked loan entitled Aktia Recovery Basket.
Operating income, i.e. income after reversals to the Group's other units and business partners, was EURÂ 2.9 (3.5) million. The business environment was very challenging for the whole of the period. Operating expenses increased by EUR 0.8 million to EUR 3.3 million, of which staff costs constituted EUR 1.9 million. The total increase of 0.8 million in costs is in its entirety attributable to increased investments in private banking and institutional investment businesses.
The volume of funds managed and brokered by Aktia (excluding Aktia Invest) amounted to EURÂ 2,415 million (1,512 million at 31 December 2008) million. Aktia's market share was 6.0% (3.7) at the end of the period. The total market is based on information from The Finnish Association of Mutual Funds.The assets managed by Aktia, including Asset Management and Aktia Invest (the asset management business acquired in December 2008) remained at the same level and totalled EURÂ 4,515 million (4,538 million at 31 December 2008). The customer assets of Private Banking totalled EURÂ 672 million (738 million at 31December 2008). The number of customers in Private Banking increased by approximately 2% over the course of the period.
Life Insurance
The contribution of the life insurance business to the Group's operating profit was EURÂ 2.0 million (2.7). The operating environment was challenging and had a negative impact on both premium income and the results of investment business. The segment's operating profit for both the previous year and the reported period include non-recurring items that make comparison difficult. Such items include write-downs of the investment portfolio, changes in the discount rate for the interest-based provisions and capital gains from real estate holding divestments last year.
Premium income was EURÂ 20.5 (25.5) million. The decrease in premium income is mainly due to the fact that the sales of large investment policies paid for in one payment have decreased. The sales organisation of the Life Insurance segment was transferred to Aktia Non-Life Insurance on 1 March 2009, and sales through that channel have started well.
Insurance benefits totalled EURÂ 25.0 (21.2) million. Increased payment of insurance benefits resulted primarily from surrender of savings policies and investment policies as well as increased pension and health insurance payments.
The operating expenses totalled EUR 3.7 million (3.2). The cost ratio worsened to 115.4% compared to 99.0% in 2008. The primary reason behind the poorer cost efficiency is the change in principles of allocating the Group's management costs in the segment. Coordination of sales distribution within the Group is expected to bring cost savings in the future.
The investment markets continued to be challenging during the first quarter of the year, albeit that a certain degree of recovery could be seen. The return on the company's investments based on fair value was -2.3% (-2.4). During the period, the share risk has continued to decrease through selling off holdings in the share portfolio.
Technical provisions totalled EURÂ 761 million (777 million at 31 December 2008), of which unit-linked insurance policies represented EURÂ 147 million (150 million at 31 December 2008). Interest-based provisions totalled EURÂ 614 million (627). The discount rate for certain elements of these provisions was increased, resulting in an average discount rate for all interest-bearing provisions of 3.4%. The increase reduced provisions by EURÂ 10.1 million.
The company's solvency amounted to 7.1% compared to 8.5% at year-end.
Non-Life Insurance
Aktia Non-Life Insurance was merged with Aktia plc on 1 January 2009. In 2008 and in previous years, the company has applied Finnish accounting principles (FAS). In conjunction with the merger, the company has for consolidation reasons started applying the reporting principles of IFRS. An opening balance according to IFRS was prepared for 1 January 2009. The company's opening balance according to IFRS includes equity amounting to EUR 31.9 million, technical provisions amounting to EUR 99.1 million, while the balance sheet total stood at EUR 155.3 million.
The contribution of the non-life insurance business to the Group's operating profit for the period was EURÂ -3.4 million. Premium income before reinsurers' share was EUR 28.8 million. Premium income for the period after reinsurers' share and change of premium liabilities amounted to EUR 13.9 million. Claim expenditure amounted to a total of EUR 11.7 million. Net income from investment business amounted to EUR -0.4 million, primarily as a result of a consciously low level of risk in the investment portfolio and selling off all the company's equity investments that resulted in net capital losses of EUR -1.2 million. Operating expenses amounted to EUR 5.3 million. The total cost ratio was 122%.
Of the total technical provisions of the company at EUR 114.7 million (99.1 at 1 January 2009), the actual provisions for compensation claims were EUR 80.9 million (79.4 at 1 January 2009). The fair value of the company's investment portfolio was EUR 137.3 million (130.7 at 1 January 2009), and the company's risk carrying capacity was 80.8%.
Miscellaneous
The operating profit of the Miscellaneous segment was EUR 2.2 million (2.8).
Aktia plc and Aktia Bank plc have on 20 March 2009 agreed that Aktia Bank plc will sell its shares in Aktia Life Insurance to the Group parent company Aktia plc. The right to title, possession and all other rights associated with the shares are transferred once it has been established that Financial Supervision has no objections regarding the transaction. The transaction will not affect the operative business of Aktia Life Insurance. The price corresponds to the reported net asset value of the Life Insurance Company which on 28 February 2009 stood at EUR 45.5 million. The effect of the transaction is eliminated at Group level.
The Group's risk management
Risk exposure
The banking business includes Retail Banking (including financing company operations), 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
There were no significant changes to the composition of the credit portfolio during the first quarter. The share of household loans increased slightly to 80.4% (80.0) of the total credit stock. The share of housing loans of the total credit stock also increased slightly and amounted to 76.6% (74.4). 86.5% of household loans are secured against adequate in line with Basel 2. Mortgage lending totalled EURÂ 2,123 million (1,968 million at 31 December 2008), of which EURÂ 1,085 million was brokered by savings banks and local cooperative banks.
Lending to corporate customers decreased, as planned, to 14.2% (14.4) of the total credit stock. Lending to the general public secured by collateral objects or unsecured within the framework of the financing companies Aktia Corporate Finance and Aktia Card & Finance totalled EURÂ 70.1 million (54.2 million at 31 December 2008), representing 1.2% of total lending.
Credit stock by sector -------------------------------------------------------------------------------- | EURÂ million | 31.3.2009 | 31.12.2008 | Change | Percentage | -------------------------------------------------------------------------------- | Corporate | 796 | 804 | -8 | 14.2% | -------------------------------------------------------------------------------- | Housing associations | 237 | 220 | 17 | 4.2% | -------------------------------------------------------------------------------- | Public sector | 10 | 12 | -2 | 0.2% | | entities | | | | | -------------------------------------------------------------------------------- | Non-profit | 50 | 47 | 3 | 0.9% | | organisations | | | | | -------------------------------------------------------------------------------- | Households | 4,499 | 4,343 | 156 | 80.4% | -------------------------------------------------------------------------------- | Total | 5,592 | 5,426 | 167 | 100.0% | --------------------------------------------------------------------------------
Loans with payments 1-30 days overdue decreased during the period from 3.5% to 3.4% of the credit stock, including off-balance sheet guarantee commitments. Loans with payments 31-90 days overdue increased from 0.90% to 1.01%, totalling approximately EURÂ 53 million. Non-performing loans more than 90 days overdue, including loans for collection, totalled approximately EURÂ 40 million, corresponding to 0.75% (0.49% at 31 December 2008) of the entire credit stock plus bank guarantees.
Undischarged debts by time overdue (EUR million) -------------------------------------------------------------------------------- | Days | 31.3.2009 | % of the | 31.12.2008 | % of the | | | | credit | | credit stock | | | | stock | | | -------------------------------------------------------------------------------- | 1-30 | 182.0 | 3.44 | 186.6 | 3.53 | -------------------------------------------------------------------------------- | 31-90 | 53.2 | 1.01 | 47.8 | 0.90 | -------------------------------------------------------------------------------- | 91- | 40.3 | 0.75 | 26.2 | 0.49 | --------------------------------------------------------------------------------
The Group's financing and liquidity risks and the actuarial risks in non-life insurance business
Within the banking business, financing and liquidity risks are defined as the availability of refinancing plus the differences in maturity between assets and liabilities. The financing and liquidity risks are dealt with at legal company level, and there is no financing connection between the Bank Group and the insurance companies. The objective in the Bank Group is to be able to cover one year's financing requirements using existing liquidity. Despite considerable uncertainty in the financial markets, the liquidity status was good and this aim was achieved.
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, while any unforeseen significant need for liquidity is taken care of through the liquid portfolio of bonds and shares.
The actuarial risk in non-life insurance business is related to the sufficiency
of premium volumes in relation to claims expenditure. Since claims expenditure
depends on the number of accidents and their scale, this may cause major
fluctuations in the liquidity and financial performance of non-life insurance
business. In order to reduce the actuarial volatility, Aktia Non-Life Insurance
has underwritten a re-insurance cover for both major individual damages and an
unexpected abundance of damages of moderate scale.
The re-insurance cover also reduces the company's liquidity risk as the
liquidity needs are catered for by cash flow and an adapted portfolio of bank
deposits, investment certificates and government bonds.
Counterparty risks
Counterparty risks within Group Treasury's liquidity management operations At the end of the year, the banking business' liquidity portfolio - which is managed by Group Treasury - stood at EURÂ 2,327 million (2,290 31.12.2008:) million. Counterparty risks arising in relation to liquidity management operations and entry into derivative contracts are managed through the requirement for high-level external ratings (minimum A3 rating from Moody's or equivalent) and the conservative allocation and active selection of investment assets as well as the rules regarding maximum exposure for each counterparty and asset category.
Of the financial assets available for sale, 51% (31.12.2008: 49) were investments in covered bonds, 36% (31.12.2008: 45) were investments in banks, 9% (31.12.2008: 3) were investments in state-guaranteed bonds and approximately 4% (31.12.2008: 3) were investments in public sector entities and companies. Of the financial assets, 1.1% did not meet the internal rating requirements, while seven securities with a market value of EURÂ 25 million were no longer eligible for refinancing with the central bank.
During the quarter, write-offs totalling EUR -0.4 materialised as a result of the issuer having noted an inability to pay.
Rating distribution for banking business -------------------------------------------------------------------------------- | | 31.3.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Aaa | 54.4% | 49.4% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 34.5% | 42.3% | -------------------------------------------------------------------------------- | A1-A3 | 6.9% | 4.9% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 0.9% | 0.9% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.2% | 0.0% | -------------------------------------------------------------------------------- | B1-B3 | 0.0% | 0.0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.0% | 0.0% | -------------------------------------------------------------------------------- | No rating | 3.1% | 2.5% | -------------------------------------------------------------------------------- | Total | 100.0% | 100.0% | --------------------------------------------------------------------------------
Counterparty risks in the life insurance business The direct interest investments in the life insurance company's investment business increased as a result of continued reallocation, primarily from share investments, totalling EURÂ 465 million (449) at the end of the quarter. Counterparty risks arising in connection with the life insurance company's investments are managed by the requirement for at least "Investment grade" external rating (rating class Baa3 from Moody's or equivalent) and by rules concerning maximum exposure for each counterparty and asset category.
At the end of the period, 45% (48% 31.12.2008:) of these direct interest rate investments were receivables from public sector entities, 21% (20% 31.12.2008:) were receivables from companies and 34% (32 % 31.12.2008:) were receivables from banks and covered bonds.
1.3% of the direct interest rate investments did not meet the internal rating requirements at the end of the period. During the quarter, write-offs totalling EUR -4.3 materialised as a result of the counterparty announcing its inability to pay.
Distribution of ratings for the life insurance business -------------------------------------------------------------------------------- | | 31.3.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Aaa | 50.4% | 53.7% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 19.2% | 17.3% | -------------------------------------------------------------------------------- | A1-A3 | 16.6% | 14.8% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 6.2% | 5.7% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.8% | 0.8% | -------------------------------------------------------------------------------- | B1-B3 | 0.3% | 0.2% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.2% | 0.0% | -------------------------------------------------------------------------------- | No rating | 6.3% | 7.6% | -------------------------------------------------------------------------------- | Total | 100.0% | 100.0% | --------------------------------------------------------------------------------
Counterparty risks in the non-life insurance business A conservative investment policy is observed in the non-life insurance business, and at the end of the period, 58% (80% 31.12.2008:) of these direct interest rate investments were receivables from public sector entities, 3% (4% 31.12.2008:) were receivables from companies and 39% (16% 31.12.2008:) were receivables from banks and covered bonds.
Rating distribution for non-life insurance business -------------------------------------------------------------------------------- | | 31.3.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Aaa | 48% | 65% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 32% | 23% | -------------------------------------------------------------------------------- | A1-A3 | 13% | 10% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 0% | 0% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0% | 0% | -------------------------------------------------------------------------------- | B1-B3 | 0% | 0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0% | 0% | -------------------------------------------------------------------------------- | No rating | 7% | 1% | -------------------------------------------------------------------------------- | Total | 100% | 100% | --------------------------------------------------------------------------------
The Group has a counterpart whose total exposure exceeds 10% of the financial conglomerate's equity calculated in compliance with the official directives.
Market risks
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 on an active market, and are valued in accordance with official quoted prices. Any significant or long-term negative differences between acquisition value and market value is reported under income statement, while interest-rate fluctuations are reported under the fund at fair value after the deduction of deferred tax.
Market value and structural interest rate risk within the banking business
Market value interest rate risk refers to changes in value as a result of
interest rate fluctuations in financial assets available for sale. The net
change in the fund at fair value , including the provision for cash flow
hedging, relating to market value interest rate risk posted during the period
totalled EURÂ -5.3 million after the deduction of deferred tax.
With an interest rate increase of one percentage point for financial assets
available for sale, the net change of the fund at fair value at 31 March 2009
would be -27.1 million (-27.2 million at 31 December 2008:) after the deduction
of deferred tax.
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. To reduce the volatility in the net interest income, structural
interest rate risk is primarily contained through the use of hedging derivative
instruments.
A parallel upward shift in the interest rate curve of one percentage point would reduce the net interest income of the banking business for the next 12 months by -5.4% (-5.4% at 31 December 2008:) while the target for structural interest rate risk management is a maximum of -6%. For the next 12-24 months, the net interest income of the banking business would reduce by -1.0% (-6.0% at 31 December 2008:), while the target for structural interest rate risk management is a maximum of -8%.
A parallel downward shift in the interest rate curve of one percentage point would increase the net interest income of the banking business for the next 12 months by +5.3% (+6.3% at 31 December 2008:), while the target for structural interest rate risk management is a maximum of -6%. For the next 12-24 months, the net interest income of the banking business would increase by +2.5% (+7.9% at 31 December 2008) while the target for structural interest rate risk management is a maximum of -8%.
Other market risks within the banking business and the parent company No equity trading or investments in, or ownership of, real estate property is carried out in the banking business, including the parent company. At the end of the year, real estate assets totalled EUR 3.6 (31.12.2008: 4.6) million. The investments in shares which are necessary or strategic to the business totalled EURÂ 20.6 (31.12.2008: 21.9) million. At the end of the period, the fund at fair value related to the above strategic share investments amounted to EUR -0.5 million after the deduction of deferred tax.
Investment risks in the life insurance business
The policyholder bears the investment risk of the investments that provide cover for unit-linked insurance policies. These investments are evaluated on an ongoing basis at fair value and any changes in value are posted to provisions for unit-linked insurance policies.
The investment portfolio covering the technical provisions is measured on an ongoing basis at fair value. During the reporting period, write-downs affecting profit attributable to shares and participations totalling EURÂ -4.9 million were posted, while the net change in the fund at fair value after acquisition eliminations posted during the period totalled EURÂ -9.1 million after the deduction of deferred tax.
The risks of the investment portfolio, such as credit risks, interest rate risks, exchange rate risks, share risks and real estate risks, are measured and contained using a VaR (Value at Risk) model, assuming a maximum loss for 12 months and applying a probability level of 97.5%.
Allocation of holdings in the life insurance company's investment portfolio -------------------------------------------------------------------------------- | Â | 31 March 2009 | 31 March | 31 December 2008 | | | (EUR million) | 2009 | | -------------------------------------------------------------------------------- | Shares | 21 | 3% | 6% | -------------------------------------------------------------------------------- | Bonds | 476 | 71% | 69% | -------------------------------------------------------------------------------- | Money market | 89 | 13% | 12% | -------------------------------------------------------------------------------- | Real estate | 40 | 6% | 6% | -------------------------------------------------------------------------------- | Other | 41 | 6% | 7% | --------------------------------------------------------------------------------
Investment risks in the non-life insurance business The investment portfolio covering the technical provisions is measured on an ongoing basis at fair value. In order to further reduce the level of risk in the investment portfolio, all listed share holdings were sold off during the reporting period.
The reported net change in the fund at fair value during the period totalled EURÂ 1.2 million after the deductions for deferred tax.
Allocation of holdings in the non-life insurance company's investment portfolio -------------------------------------------------------------------------------- | Â | 31 March 2009 | 31 March 2009 | 31 December. | | | (EUR million) | | 2008 | -------------------------------------------------------------------------------- | Shares | 0 | 0% | 15% | -------------------------------------------------------------------------------- | Bonds | 76 | 52% | 53% | -------------------------------------------------------------------------------- | Money market | 40 | 27% | 9% | -------------------------------------------------------------------------------- | Real estate | 29 | 20% | 21% | -------------------------------------------------------------------------------- | Other | 3 | 2% | 2% | --------------------------------------------------------------------------------
Operational risks
Operational risks refer to loss risks arising as a result of unclear or incomplete instructions, activities carried out contrary to instructions, unreliable information, deficient systems or actions taken by staff members. If an operational risk is realised, this can result in direct or indirect financial losses or tarnish the corporate image to the extent that the bank's credibility in the marketplace suffers. No significant incidents were registered during the reporting period.
Personnel
When converted into full-time employees, the number of staff employed by the Group increased by 187 from year-end to 1,240 at the end of the reporting period. The average number of full-time employees was 1,204 during the first quarter while on an annual basis, it was 1,070 (956). At the end of March, Aktia Non-L
