Aktia plc Interim Report for 1 January - 30 June 2009
Aktia plc Interim report 20.8.2009 at 10.00
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Aktia plc Interim Report for 1 January - 30 June 2009
The period in brief
Aktia's result for the first six months was stable
Operating profit before write-downs was EUR 39.5 million (EUR 29.2 million), April - June EUR 27.5 million, (EUR 14.7 million)
Operating profit was EUR 22.0 million (EUR 29.9 million), April - June EUR 11.7 million (EUR 15.7 million)
Net interest income increased by 46.4% to EUR 71.9 million (EUR 49.1 million)
The Group's equity was strengthened by 25.1% to EUR 396.3 million (EUR 317 million at 31 December 2008)
Listing on the Stock Exchange in September is being prepared
The general economic situation continues to be weak with increased loan losses
The Group's income to remain stable in 2009
The CEO's comments "Work to integrate Aktia's banking and insurance businesses continues. With our "One Aktia" service concept our aim is to provide our customers with one point of contact where we can present Aktia's wide range of financial products and services. This objective imposes considerable demands on our product companies and especially our staff in the branch offices. The staff have taken on this challenge in an admirable way. We still have a lot to do to become the best at helping our customers improve and safeguard their finances.
The economic situation in Finland continues to be challenging. The financial crisis, which has translated into a general downturn in the real economy, has led to a sharp increase in credit loss provisions, primarily for corporate loans. Small and medium-sized enterprises are being hardest hit by the current economic climate. Given that only 15% of Aktia's lending is to corporate customers, and with strong net interest income and our continued efforts to monitor our costs, we will be able to achieve a satisfactory result this year. We are looking forward to the Stock Exchange listing that is scheduled for the autumn", says CEO Jussi Laitinen.
Key figures
-------------------------------------------------------------------------------- | | 1-6 2009 | 1-6 2008 | 1-12 2008 | -------------------------------------------------------------------------------- | Earnings per share, EUR | 0.26 | 0.37 | 0.09 | -------------------------------------------------------------------------------- | Equity per share, EUR | 5.51 | 4.55 | 4.85 | -------------------------------------------------------------------------------- | Return on equity (ROE), % | 9.2 | 14.6 | 1.8 | -------------------------------------------------------------------------------- | Earnings per share excluding negative | 0.70 | -0.54 | -0.22 | | goodwill recorded as income and including | | | | | the fund at fair value, EUR | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Capital adequacy ratio, % (conglomerate) | 144.2 | 115.1 | 135.2 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Average number of shares, million | 67.0 | 60.2 | 60.2 | -------------------------------------------------------------------------------- | Number of shares at end of period, million | 67.0 | 60.2 | 60.2 | -------------------------------------------------------------------------------- | Personnel (FTEs), average number of | 1,213 | 992 | 1,010 | | employees from the beginning of the | | | | | financial year | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Banking business (incl. Private Banking) | | | | -------------------------------------------------------------------------------- | Cost-to-income ratio | 0.57 | 0.69 | 0.65 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Borrowing from the public, EUR million | 3,080 | 3,069 | 3,098 | -------------------------------------------------------------------------------- | Lending to the public, EUR million | 5,820 | 5,082 | 5,426 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Capital adequacy ratio, % | 14.7 | 12.8 | 13.7 | -------------------------------------------------------------------------------- | Tier 1 capital ratio, % | 9.2 | 10.1 | 9.3 | -------------------------------------------------------------------------------- | Risk-weighted commitments, EUR million | 3,395 | 3,229 | 3,313 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Asset Management | | | | -------------------------------------------------------------------------------- | Mutual fund volume, EUR million | 2,927 | 1,858 | 2,490* | -------------------------------------------------------------------------------- | Managed and brokered assets, EUR million | 5,083 | 3,722 | 4,538 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Life Insurance | | | | -------------------------------------------------------------------------------- | Premium income before reinsurers' share, | 36.0 | 48.2 | 91.4 | | EUR million | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Expense ratio, % | 106.3 | 104.1 | 99.0 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Working capital, EUR million | 65.6 | 82.6 | 50.4 | -------------------------------------------------------------------------------- | Solvency ratio, % | 11.2 | 12.5 | 8.5 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Investments at fair value, EUR million | 813.1 | 921.8 | 804.6 | -------------------------------------------------------------------------------- | Technical provisions for interest-linked | 599.1 | 655.8 | 627.6 | | policies, EUR million | | | | -------------------------------------------------------------------------------- | Technical provisions for unit-linked | 168.6 | 191.7 | 149.6 | | policies, EUR million | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Non-Life Insurance | | | | -------------------------------------------------------------------------------- | Premium income before reinsurers' share, | 44.0 | - | - | | EUR million | | | | -------------------------------------------------------------------------------- | Premium income, EUR million | 29.3 | - | - | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Operating cost percentage, % | 26.1 | - | - | -------------------------------------------------------------------------------- | Loss ratio, % | 88.2 | - | - | -------------------------------------------------------------------------------- | Total cost percentage, % | 114.3 | - | - | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Technical provisions before reinsurers' | 116.8 | - | - | | share, EUR million | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Solvency capital, EUR million | 46.9 | - | - | -------------------------------------------------------------------------------- | Solvency ratio of technical provisions, % | 42.6 | - | - | -------------------------------------------------------------------------------- | Solvency percentage (risk carrying | 78.9 | - | - | | capacity), % | | | | -------------------------------------------------------------------------------- *) Including fund volume of Aktia Invest from December 2008. Activity of the report period
Profit
The Group's operating profit for the first six months was EUR 22.0 million (EUR 29.9 million). During April - June the Group's operating profit amounted to EUR 11.7 million (EUR 15.7 million).
The banking business reported an operating profit of EUR 41.4 million (EUR 19.1
million) before write-downs. Despite increased write-downs of credits EUR 17.8
million (0.0), the banking business achieved an operating profit of EUR 23.8
million (EUR 19.0 million) thanks to improved net interest income. Asset
management suffered as a result of the situation in the investment market and
returned an operating profit of EUR 0.1 million (EUR 2.1 million). The
contribution of the insurance business to the Group's operating profit for the
reporting period was EUR 0.2 million (EUR 3.7 million) for life insurance, while
that of non-life insurance was EUR -2.8 million.
The operating profit from associated companies was EUR 0.6 million (EUR -0.1
million).
Profit for the reporting period was EUR 16.5 million (EUR 22.8 million). During
April - June the Group's profit for the period amounted to EUR 9.3 million (EUR
12.2 million).
Income
The Group's total income increased by 24.4% in the first six months to EUR 114.9 million (EUR 92.4 million). During April - June the Group's total income was EUR 65.0 million (EUR 47.6 million).
Net interest income increased to EUR 71.9 million (EUR 49.1 million). The derivatives used by Aktia to limit its interest rate risk contributed EUR 9.1 million (EUR -2.7 million) to the improved net interest income during the first six months. Active interest-rate risk management including fixed-rate investments was the main factor of the remaining improvement in net interest income. Net interest income from borrowing from and lending to the public was stable. During April - June net interest income rose to EUR 39.4 million from its strong level of EUR 32.5 million in the first quarter.
Net commission decreased by 8.1% to EUR 20.6 million (EUR 22.4 million). Commission income from funds, asset management and brokering fell to EUR 10.5 million (EUR 11.2 million). Card and payment services commissions rose to EUR 5.7 million (EUR 5.4 million). Income from real estate agency commissions decreased to EUR 3.7 million (EUR 4.2 million). Commission expenses increased by EUR 3.7 million to EUR 7.0 million (EUR 3.3 million). Of the total commission expenses, EUR 1.7 million is due to local banks for mortgages brokered. All business areas contributed to increased net commission during April - June.
Net income from life insurance amounted to EUR 7.0 million (EUR 11.2 million). Aktia Non-Life Insurance, consolidated since 1 January 2009, reports a net income of EUR 7.4 million from non-life insurance. Net income from the insurance business includes insurance premium income, net income from investment activities, insurance claims paid and the change in provisions. Net income from non-life insurance in particular developed favourably during April - June.
Other operating income totalled EUR 1.8 million (EUR 3.9 million). This reduction is largely due to the fact that the sale of the banking business' real estate holdings during the corresponding period last year resulted in capital gains.
Expenditure
The operating costs of the Group increased by 19.4% to EUR 75.4 million (EUR
63.2 million). Most of the change was due to costs related to the new
businesses, Aktia Non-Life Insurance and Aktia Invest. During April - June the
Group's operating expenses amounted to EUR 37.4 million (EUR 32.9 million).
Staff costs increased by EUR 6.5 million to EUR 39.2 million (EUR 32.7 million).
Other administration costs amounted to EUR 22.3 million (EUR 19.5 million). Most
of the increase of EUR 2.8 million is related to investments in IT.
Total depreciation and write-downs on tangible and intangible assets increased
to EUR 3.5 million (EUR 2.8 million). Other operating expenses increased by EUR
2.4 million to EUR 10.6 million (EUR 8.2 million). The biggest change in other
operating expenses was attributable to increased rental costs that rose by EUR
2.4 million. This increase is due to Aktia having disposed of much of its real
estate holdings which it used during 2008 and the rents for the new businesses.
Profit April - June 2009
The Group's operating profit in the second quarter was EUR 11.7 million (EUR 15.7 million). Net interest income improved on the first quarter by EUR 6.9 million to EUR 39.4 million (EUR 25.3 million) during April - June thanks to active risk management. The Group's profit for the period was EUR 9.3 million (EUR 12.2 million).
The banking business' operating profit* was adversely affected during April - June by write-downs of credits totalling EUR 15.9 million (0.0). The insurance business' contribution to the Group's operating profit after eliminations was EUR -1.8 million (EUR 1.1 million) for life insurance and EUR 0.6 million (-) for non-life insurance.
The fund at fair value showed an improvement of EUR 35.5 million (EUR -36.2 million) for April - June.
The Group's segments reported the following operating profit for the second quarter -------------------------------------------------------------------------------- | Operating profit (EUR million) | Q2 2009 | Q2 2008 | -------------------------------------------------------------------------------- | Banking business | 11.7 | 10.4 | -------------------------------------------------------------------------------- | Asset Management | 0.4 | 1.1 | -------------------------------------------------------------------------------- | Life Insurance | 0.0 | 5.6 | -------------------------------------------------------------------------------- | Non-Life Insurance | 0.2 | | -------------------------------------------------------------------------------- | Miscellaneous | 0.6 | 3.9 | -------------------------------------------------------------------------------- | Eliminations | -1.1 | -5.4 | -------------------------------------------------------------------------------- | Total | 11.7 | 15.7 | --------------------------------------------------------------------------------
Balance sheet and off-balance sheet commitments
The Group's balance sheet total increased by 5.9% during the period and amounted to EUR 10,105 million (EUR 9,540 million at 31 December 2008). This increase in the balance sheet total is largely due to growth in the mortgage stock. Borrowing both from the public and from savings banks and local cooperative banks decreased by a total of 6.7% to EUR 4,678 million (EUR 5,015 million at 31 December 2008) while borrowing using other financial instruments increased by 19.9% to EUR 3,752 million (EUR 3,130 million at 31 December 2008).
The Group's total lending to the public amounted to EUR 5,820 (EUR 5,426 million at 31 December 2008) at the end of the period, representing an increase of EUR 394 million (+7.3 %). Loans to private households accounted for EUR 4,682 million, or 80.4% of the total loan stock. Of these loans to households, 86.4% were secured against real estate collateral (in accordance with Basel 2). 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 225 million (+5.1%) from the year-end.
The housing loan stock totalled EUR 4,354 million (EUR 4,036 million at 31 December 2008), of which mortgages granted by Aktia Real Estate Mortgage Bank plc made up EUR 2,288 million (EUR 1,968 million at 31 December 2008). In all, housing loans increased by 7.9%. Corporate lending continued to be moderate, totalling EUR 814 million (EUR 804 million at 31 December 2008) at the end of June.
Interest-bearing financial assets available for sale increased by 8.2% to EUR 3,039 million (EUR 2,808 million at 31 December 2008). These assets mainly consist of the banking business' liquidity reserve.
Deposits from the public and public sector entities decreased marginally (-0.6%)
from the year-end to EUR 3,080 million (EUR 3,098 million at 31 December 2008).
Aktia Real Estate Mortgage Bank plc issued two covered bonds during the first half of the year. In February, a bond of 125 million was issued with a floating interest rate and three-year maturity. In June, a bond of EUR 600 million was issued with a fixed interest rate and five-year maturity. Outstanding Aktia Bank certificates of deposit amounted to EUR 266 million at the end of the period and issued bonds EUR 2,302 million, which represents an increase of EUR 450 million during the first six months. Aktia Bank also issued new debentures and index-linked loans with a total value of EUR 45 million.
Life insurance provisions amounted to EUR 768 million (EUR 777 million at 31 December 2008).
Non-life insurance provisions stood at EUR 117 million (EUR 99 at 1 January 2009) at the end of the period.
Off-balance sheet commitments increased by EUR 88 million from the year-end and amounted to EUR 617 million (EUR 529 million at 31 December 2008). This increase was largely due to growth in unused credit facilities (loan promises) and high liquidity commitments with the local banks.
The Group's equity amounted to EUR 396 million (EUR 317 million at 31 December 2008) at the end of the period. The Group's fund at fair value amounted to EUR -7.1 million (EUR -36 million at 31 December 2008) and showed an improvement of EUR 35 million on the first quarter.
Capital adequacy and solvency
The Banking Group's capital adequacy amounted to 14.7% compared to 13.7% at year-end. The Tier 1 capital ratio was 9.2% (9.3% at 31 December 2008). The capital adequacy calculated in accordance with the Basel 2 rules improved as a result of Aktia Bank disposing of Aktia Life Insurance from the Banking Group in March to the parent company Aktia plc, thanks to the positive result during the first six months and higher valuations of financial assets which brought about an improvement in the fund at fair value. The capital adequacy of the Banking Group remains at a good level, achieving the capital adequacy target and clearly exceeding regulatory requirements.
The life insurance company's working capital amounted to EUR 65.6 million and solvency 11.2% (8.5% at 31 December 2008). The share risk in the investment portfolio has continued to decrease.
The non-life insurance company's working capital was EUR 17.7 million. It reported solvency of 78.9% (risk carrying capacity).
Capital adequacy for the conglomerate amounted to 144.2% (135.2% 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 (unchanged), for short-term borrowing. The credit ratings for long-term borrowing and financial strength were the same, at A1 and C respectively (both unchanged), all with a stable outlook.
The covered bonds issued by subsidiary Aktia Real Estate Mortgage Bank plc have a Moody's credit rating of Aa1 (previously Aaa) as of 25 May 2009.
Valuation of financial assets
Value changes reported via the fund at fair value Impairments in interest-bearing securities where the issuer has not announced 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 -7.1 million after deferred tax, compared to EUR -36.4 million at 31 December 2008. The 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 18.2 million (EUR 12.4 million at 31 December 2008).
Of the fund at fair value as at 30 June 2009, EUR 27.3 million was attributable to the negative valuation difference of interest-bearing securities including fund-units in interest-bearing funds which is mainly due to continued poor market 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 -------------------------------------------------------------------------------- | EUR million | 30.6.2009 | 31.12.2008 | Change | -------------------------------------------------------------------------------- | Shares and participations | | | -------------------------------------------------------------------------------- | Banking business | 2.3 | -1.5 | 3.8 | -------------------------------------------------------------------------------- | Life insurance | -0.2 | -2.9 | 2.7 | | business | | | | -------------------------------------------------------------------------------- | Non-life insurance | -0.1 | - | -0.1 | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Direct interest-bearing securities | -------------------------------------------------------------------------------- | Banking business | -16.3 | -26.2 | 9.9 | -------------------------------------------------------------------------------- | Life insurance | -9.2 | -18.2 | 9.0 | | business | | | | -------------------------------------------------------------------------------- | Non-life insurance | -1.8 | - | -1.8 | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Cash flow hedging | 18.2 | 12.4 | 5.8 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Fund at fair value, total | -7.1 | -36.4 | 29.3 | --------------------------------------------------------------------------------
Value changes reported via income statement Write-downs for the period amounted to EUR 20.7 million (EUR 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 announced an inability to pay. Of the total write-downs EUR 20.3 million are attributable to the life insurance company. Of the write-downs EUR 6.9 million was attributable to shares and participations in the investment portfolio of the life insurance company and EUR 13.8 million to interest-bearing securities after the accounting principles had been defined more precisely. Defining the principles more precisely primarily affected the assessment of securities with subordinate right of priority.
Write-downs on financial assets -------------------------------------------------------------------------------- | EUR million | 1-6 2009 | 1-12 2008 | -------------------------------------------------------------------------------- | Interest-bearing securities | | | -------------------------------------------------------------------------------- | | Banking business | 0.4 | 3.6 | -------------------------------------------------------------------------------- | | Life insurance business | 13.4 | 5.1 | -------------------------------------------------------------------------------- | | Non-life insurance business | - | - | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Shares and participations | | | -------------------------------------------------------------------------------- | | Banking business | - | 1.0 | -------------------------------------------------------------------------------- | | Life insurance business | 6.9 | 29.4 | -------------------------------------------------------------------------------- | | Non-life insurance business | - | - | -------------------------------------------------------------------------------- | Total | 20.7 | 39.2 | --------------------------------------------------------------------------------
Write-downs of loan and guarantee claims Write-downs based on individual examination of loan and guarantee claims totalled EUR -17.8 million. Reversals of losses from previous years came to EUR 0.2 million so that the cost effect on the profit for the period was EUR -17.5 million.
Of the total write-downs, corporate loans accounted for EUR -16.9 million, of which EUR -10 million can be attributed to one major customer entity whose operating conditions have worsened considerably as a result of liquidity problems and the declining market. The financier has shares in subsidiaries as well as floating charges as collateral. The customer constitutes Aktia's largest credit exposure which is not secured against real estate, shares in listed companies or guarantees from financial institutions.
Write-downs of household loans amounted to EUR 0.9 million, EUR 0.5 million of which was accounted for by unsecured consumer loans.
In addition to individual write-downs, group write-downs were made for households and small companies, taking the economic situation into consideration, 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 million at the end of the period.
Segment overview
Aktia plc's new division into business segments was changed from 1 January 2009 so that the 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 Group administration, certain administrative functions 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 the banking business during the first six months was EUR 23.8 million (EUR 19.0 million). The operating profit for April - June was EUR 11.7 million (EUR 10.4 million).
Operating income totalled EUR 93.7 million (EUR 67.8 million). The improvement is mainly attributable to net interest income which increased to EUR 68.9 million (EUR 46.2 million). 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 (credit spreads) have allowed better returns from new investments in the liquidity portfolio, which has had a positive effect on net interest income. During April - June net interest income continued to improve from the strong level reached in the first quarter. Net commission income fell to EUR 15.0 million (EUR 16.0 million). During April - June net commission income improved somewhat on the first quarter.
Operating expenses rose to EUR 52.3 million (EUR 48.7 million). 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 economic situation has brought about a sharp increase in loan losses, particularly among corporate customers.
The banking business' growth is primarily driven by retail customers. Sales activities are supported by the Aktia Dialogue concept whereby customers' needs are mapped out and Aktia's whole service portfolio is presented. The appearance of the branch offices has also been standardised. The customer base of the banking business increased by 4,400 private customers during the first six months. The number of Internet banking agreements rose by 4.2% from the start of the year, amounting to 112,429.
Aktia's lending to private households, including the mortgages brokered by Aktia, increased by 5.3 % to EUR 3,523 million (EUR 3,346 million at 31 December 2008). Mortgage loans brokered by Aktia amounted to EUR 1,237 million (EUR 1,069 million at 31 December 2008). Aktia's market share in housing loans amounted to 4.2%. Aktia's total lending to private households made up 80.4% of the loan stock. The proportion of the total credit stock accounted for by corporate loans fell as planned from 14.8% at the year-end to 14.0% at the end of the period.
Total savings by households amounted to EUR 2,972 million (EUR 2,907 million at 31 December 2008), of which household deposits were EUR 2,380 million (EUR 2,359 at 31 December 2008) and savings by households in mutual funds stood at EUR 592 million (EUR 548 million at 31 December 2008). The outward flow from the funds has stopped and household savings showed an increase of 2.2% during the first six months.
Aktia Real Estate Mortgage Bank plc showed continued growth. The total credit stock grew by 16.3% to EUR 2,409 million. Of the growth in the credit stock, 51.4% was brokered by Aktia's branch offices and 48.6% by savings banks and local co-operative banks. In February, Aktia Real Estate Mortgage Bank plc issued a covered bond worth EUR 125 million with a three-year maturity. Another bond was issued in June worth EUR 600 million with a fixed interest rate and five-year maturity.
The operating profit of the real estate agency business developed favourably and amounted to EUR 0.6 million (EUR -0.2 million), mainly as a result of cost adjustment measures and slightly more activity on the market during the second quarter.
Asset Management
Operating profit for Aktia's asset management business fell to EUR 0.1 million (EUR 2.1 million) during the first six months. The market situation became more positive during the second quarter. Aktia fared relatively well in the market. The operating profit for the period includes non-recurring items, mainly capital losses of approximately EUR 0.4 million. During April - June the operating profit amounted to EUR 0.4 million (EUR 1.1 million).
The Asset Management segment has continued to focus on private banking operations and institutional investors. In December 2008, Aktia acquired Kaupthing's Finnish asset management business, now Aktia Invest. This acquisition strengthened Aktia's service portfolio, representing expertise which has been very much appreciated by institutional investors in Finland in recent years. Increased investment of resources in the private banking business has been initiated in Aktia's branch offices.
Operating income, i.e. income after reversals to the Group's other units and business partners, was EUR 6.4 million (EUR 7.3 million). The business environment was challenging throughout the period as a whole. Operating expenses increased by EUR 1.2 million to EUR 6.4 million, of which staff costs constituted EUR 3.6 million. This increase in costs is due to greater investment of resources in the private banking business and institutional investment activities.
The volume of funds managed and brokered by Aktia was EUR 2,927 million (EUR 2,490 million at 31 December 2008). Aktia's market share was 6.4% (6.0%) 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. Assets managed by Aktia, including Asset Management and Aktia Invest, increased and amounted to EUR 5,083 million (EUR 4,538 at 31 December 2008). The customer assets of Private Banking totalled EUR 871 million (EUR 738 million). The number of customers in Private Banking increased by approximately 4% over the period.
Life Insurance
The contribution of the life insurance business to the Group's operating profit was EUR 0.2 million (EUR 3.7 million). The contribution to the Group's operating profit for April - June was EUR -1.8 million (EUR 1.1 million).
The segment's operating result for both the previous year and the reporting 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 in 2008.
Premium income was EUR 35.9 million (EUR 48.2 million). The decrease in premium income is mainly due to the fact that the sales of large single premium policies paid for in one payment have decreased. Premium volumes from unit-linked pension insurance schemes and risk insurance policies increased. Of the premium volume, unit-linked insurance accounted for approximately 37% (44%).
Insurance claims and benefits totalled EUR 43.8 million (EUR 37.7 million).
Increased payment of insurance benefits resulted primarily from the surrender of
savings policies and single premium policies as well as increased pension and
health insurance payments.
The operating expenses totalled EUR 6.6 million (EUR 6.7 million). Within the
life insurance business, steps to streamline operations have continued, as has
work to improve cost efficiency. The operating costs include EUR 0.8 million
(EUR 0.1 million) of the Group's administration costs. The increase is due to
the change in allocation principles within the Group. The cost ratio worsened to
106.3% compared with 104.1% for the corresponding period the year before. The
sales organisation of the life insurance segment was transferred to Aktia
Non-Life Insurance on 1 March 2009 and the coordination of sales distribution is
expected to bring continued cost benefits.
The return on the company's investments based on market value was 0.9% (-3.2%). In order to enable a secure and long-term investment portfolio, the risks in the portfolio have been reduced, primarily through the continued selling off of holdings in the share portfolio. Net income from investment business has been adversely affected by write-downs entered against income of EUR 20.3 million.
Technical provisions totalled EUR 768 million (EUR 777 million at 31 December 2008), of which unit-linked insurance policies represented EUR 169 million (EUR 150 million at 31 December 2008). Interest-based provisions totalled EUR 599 million (EUR 628 million). The discount rate for certain elements of these provisions was increased, resulting in an average discount rate for all interest-bearing provisions of 3.6%. This increase reduced provisions by EUR 19.8 million and had a positive impact on the profit for the period.
The company's solvency amounted to 11.2% compared to 8.5% at the 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 IFRS reporting principles. An opening balance according to IFRS was prepared as at 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 first six months was EUR -2.8 million. During April - June the contribution to the Group's operating profit was EUR 0.6 million. Comparative figures for the corresponding period in 2008 are not available.
Insurance premium income for Aktia Non-Life Insurance increased by approximately 5% on the corresponding period last year. This increase is well above the average growth in the market and is attributable to both private and corporate customers. Premium income before the reinsurers' share was EUR 44.0 million. Premium income for the period after the reinsurers' share and change of premium liabilities amounted to EUR 29.3 million. Claim expenditure amounted to a total of EUR 23.5 million. Operating costs totalled EUR 9.9 million and include loan losses totalling EUR 0.3 million. The operating costs include EUR 0.7 million of the Group's administration costs. The total cost ratio amounted to 114% (compared to 122% in the first quarter).
Net income from investment business amounted to EUR 0.9 million. The result from investment business was adversely affected by net capital losses totalling EUR -1.2 million which resulted from consciously reducing the level of risk in the investment portfolio and selling off all the company's stock market investments during the first quarter.
Of the company's total provisions of EUR 116.8 million (EUR 99.1 million at 1 January 2009), the actual provisions for pay-out claims stood at EUR 84.5 million (EUR 79.4 million at 1 January 2009). The market value of the company's investment portfolio was EUR 139.0 million (EUR 130.7 million at 1 January 2009) and the company's risk carrying capacity was 78.9%.
The integration of Aktia Non-Life Insurance's distribution channels into Aktia's branch office network has increased customer activity particularly in the private customer sector.
Miscellaneous
The operating profit of the Miscellaneous segment was EUR 2.8 million (EUR 6.6 million). The profit for the corresponding period in 2008 includes non-recurring items amounting to EUR 2.3 million. During 2008 much of Aktia's real estate holdings were disposed of which generated capital gains. Profit was also adversely affected by reduced rental incomes and increased rental costs to an overall effect of EUR -1.9 million.
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 structure of the credit portfolio during the first six months. Loans for housing purposes increased 7.9% to EUR 4,354 million, accounting for 74.8% (74.4% at 31 December 2008) of the total credit stock. Mortgage lending for housing purposes totalled EUR 2,288 million (EUR 1,968 million at 31 December 2008), of which EUR 1,113 million was brokered by savings and local co-operative banks. Overall, the proportion of household loans in the total credit stock increased to 80.4% (80.0% at 31 December 2008). Of the household loans, 86.5% are secured against adequate collateral in accordance with Basel 2.
The proportion of the total credit stock accounted for by corporate loans fell as planned from 14.8% at the year-end to 14.0% at the end of the period.
Lending to the general public secured against collateral objects or unsecured within the framework of the financing companies Aktia Corporate Finance and Aktia Card & Finance totalled EUR 78.8 million (EUR 63.8 million at 31 December 2008), representing 1.4% of total lending.
Credit stock by sector
-------------------------------------------------------------------------------- | EUR million | 30.6.2009 | 31.12.2008 | Change | Percentage | -------------------------------------------------------------------------------- | Corporate | 814 | 804 | 10 | 14.0 | -------------------------------------------------------------------------------- | Housing | 260 | 220 | 40 | 4.5 | | associations | | | | | -------------------------------------------------------------------------------- | Public sector | 12 | 12 | 0 | 0.2 | | entities | | | | | -------------------------------------------------------------------------------- | Non-profit | 52 | 47 | 5 | 0.9 | | organisations | | | | | -------------------------------------------------------------------------------- | Households | 4,682 | 4,343 | 338 | 80.4 | -------------------------------------------------------------------------------- | Total | 5,820 | 5,426 | 394 | 100.0 | --------------------------------------------------------------------------------
Loans with payments 1-30 days overdue increased during the period from 3.40% to 4.09% of the credit stock, including off-balance sheet guarantee commitments. Loans with payments 31-90 days overdue increased from 0.87% to 0.95 %, totalling approximately EUR 56 million. Non-performing loans more than 90 days overdue, including loans for collection, totalled approximately EUR 44 million, corresponding to 0.74% (0.48% at 31 December 2008) of the entire credit stock plus bank guarantees.
Undischarged debts by time overdue (EUR million) -------------------------------------------------------------------------------- | Days | 30.6.2009 | % of the | 31.12.2008 | % of the | | | | credit stock | | credit stock | -------------------------------------------------------------------------------- | 1-30 | 240.8 | 4.09 | 186.6 | 3.53 | -------------------------------------------------------------------------------- | of which | 131.6 | 2.23 | 110.3 | 2.01 | | households | | | | | -------------------------------------------------------------------------------- | 31-90 | 55.6 | 0.95 | 47.8 | 0.87 | -------------------------------------------------------------------------------- | of which | 47.1 | 0.8 | 34.5 | 0.63 | | households | | | | | -------------------------------------------------------------------------------- | 91- | 43.6 | 0.74 | 26.2 | 0.48 | -------------------------------------------------------------------------------- | of which | 22.1 | 0.37 | 16.1 | 0.29 | | households | | | | | --------------------------------------------------------------------------------
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 are no financing commitments between the Banking Group and the insurance companies. The objective in the Banking 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 remained 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 the 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 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 The banking business' liquidity portfolio - which is managed by Group Treasury - stood at EUR 2,425 million at 30 June 2009 (EUR 2,290 at 31 December 2008). 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, 52% (49% at 31 December 2008) were investments in covered bonds, 36% (45% at 31 December 2008) were investments in banks, 10% (3% at 31 December 2008) were investments in state-guaranteed bonds and approximately 2% (3% at 31 December 2008) were investments in public sector entities and companies. Of the financial assets, 1.3% did not meet the internal rating requirements, while eight securities with a total market value of EUR 32 million were no longer eligible for refinancing with the central bank.
During the period, write-offs totalling EUR 0.4 million were realised as a result of the issuer announcing its inability to pay.
Rating distribution for banking business -------------------------------------------------------------------------------- | | 30.6.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Aaa | 55.1% | 49.4% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 35.2% | 42.3% | -------------------------------------------------------------------------------- | A1-A3 | 8.3% | 4.9% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 0.5% | 0.9% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.2% | 0.0% | -------------------------------------------------------------------------------- | B1-B3 | 0.0% | 0.0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.0% | 0.0% | -------------------------------------------------------------------------------- | No rating | 0.7% | 2.5% | -------------------------------------------------------------------------------- | Total | 100.0% | 100.0% | --------------------------------------------------------------------------------
Counterparty risks in the life insurance business The direct interest rate investments in the life insurance company's investment business increased as a result of continued reallocation, primarily from share investments, and totalled EUR 465 million (EUR 449 million) at the end of the period. Counterparty risks arising in connection with the life insurance company's investments are managed by the requirement for at least an "Investment grade" external rating (rating class Baa3 from Moody's or equivalent) and by rules concerning the maximal exposure for each counterparty and asset category.
At the end of the period, 46% (48% at 31 December 2008) of these direct interest rate investments were receivables from public sector entities, 18% (20% at 31 December 2008) were receivables from companies and 36% (32% at 31 December 2008) were receivables from banks and covered bonds.
1.1% of the direct interest rate investments did not meet the internal rating requirements at the end of the period.
During the period, write-downs totalling EUR -13.4 million were realised as a result of the issuers announcing an inability to pay, EUR -9.1 million of which is attributable to the second quarter after the accounting principles have been defined more precisely.
Distribution of ratings for life insurance business -------------------------------------------------------------------------------- | | 30.6.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Aaa | 54.9% | 53.7% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 15.2% | 17.3% | -------------------------------------------------------------------------------- | A1-A3 | 17.8% | 14.8% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 6.5% | 5.7% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.5% | 0.8% | -------------------------------------------------------------------------------- | B1-B3 | 0.6% | 0.2% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.4% | 0.0% | -------------------------------------------------------------------------------- | No rating | 4.0% | 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, 60% (80% at 31 December 2008) of these direct interest rate investments were receivables from public sector entities, 8% (4% at 31 December 2008) were receivables from companies and 33% (16% at 31 December 2008) were receivables from banks and covered bonds.
During the second quarter no write-downs were realised as a result of issuers announcing an inability to pay.
Rating distribution for non-life insurance business -------------------------------------------------------------------------------- | | 30.6.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Aaa | 53.3% | 65% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 21.5% | 23% | -------------------------------------------------------------------------------- | A1-A3 | 18.4% | 10% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 1.5% | 0% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.5% | 0% | -------------------------------------------------------------------------------- | B1-B3 | 0.0% | 0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.0% | 0% | -------------------------------------------------------------------------------- | No rating | 4.8% | 1% | -------------------------------------------------------------------------------- | Total | 100.0% | 100% | --------------------------------------------------------------------------------
The Group has no counterparty whose total exposure exceeds 10% of the financial and insurance 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 accord
