Aktia plc - Interim report for 1 January - 30 September 2009
Aktia plc
Interim Report
9.11.2009 at 10.00
Not for release or distribution in the United States, Australia, Canada or Japan
Aktia Plc Interim report for 1 January - 30 September 2009
Strong third quarter
Operating profit was EUR 44.4 million (EUR 37.3 million), representing a clear improvement to EUR 22.4 million (EUR 7.4 million) in July - September.
Net interest income continued to be strong at EUR 112.4 million (EUR 74.3 million), primarily thanks to a successful strategy for managing interest rate risk. Net interest income for July - September amounted to EUR 40.5 million (EUR 25.2 million).
Earnings per share were EUR 0.50 (EUR 0.47), in July - September EUR 0.24 (EUR 0.10). Equity per share (net asset value) was EUR 6.51 (EUR 4.28) as at 30 September 2009.
Loan write-downs for January - September totalled EUR 26.3 million (EUR 0.3 million). This can be attributed to the weak economic situation. The credit losses relate to corporate loans and are not expected to continue increasing at the same pace. Corporate loans amount to only 13% of Aktia's total loan stock.
Aktia Bank plc's credit rating with Moody's Investors Service, the international credit rating agency, remained unchanged.
Aktia series A and R shares were listed on the Nasdaq OMX Helsinki exchange on 29 September 2009. The market value of the Aktia Group was approximately EUR 616 million at the end of the period.
Operating profit for the third quarter was exceptionally good, but the outlook for the rest of the year is in line with the performance of the two first quarters.
The CEO's comments Operating profit for the first nine months of the year was strong, despite considerably higher write-downs of loans. Net interest income has continued to develop well, primarily thanks to successful management of interest rate risk. We will continue to focus on cost efficiency. Customers have liked our "Aktia Dialogue" concept. "Aktia Dialogue" is a tool used to find comprehensive solutions for our customers and help them improve and safeguard their personal finances. I was pleased to note that Aktia was once again well placed in a survey of satisfied customers.
Aktia has started developing products in anticipation of the upcoming change in
the law change concerning long-term saving ("PS law") and will be able to offer
new alternatives for pension savings in the first quarter of 2010.
Jussi Laitinen
Key figures for the Group -------------------------------------------------------------------------------- | (EUR million) | 3Q | 3Q | Change | 1-9 | 1-9 | Change | | | 2009 | 2008 | | 2009 | 2008 | | -------------------------------------------------------------------------------- | Net interest income | 40.5 | 25.2 | 60.8% | 112.4 | 74.3 | 51.3% | -------------------------------------------------------------------------------- | Total operating | 66.8 | 33.9 | 97.2% | 181.7 | 126.3 | 43.9% | | income | | | | | | | -------------------------------------------------------------------------------- | Operating profit | 30.8 | 7.7 | 300.9% | 70.7 | 37.6 | 88.1% | | before write-downs on | | | | | | | | credits | | | | | | | -------------------------------------------------------------------------------- | Write-downs on | -8.5 | -0.3 | - | -26.3 | -0.3 | - | | credits | | | | | | | -------------------------------------------------------------------------------- | Operating profit | 22.4 | 7.4 | 201.4% | 44.4 | 37.3 | 19.0% | -------------------------------------------------------------------------------- | Cost-to-income ratio | 0.48 | 0.59 | -18.6% | 0.54 | 0.66 | -18.2% | -------------------------------------------------------------------------------- | Write-downs on | - | - | - | 0.44 | 0.01 | - | | credits/total credit | | | | | | | | stock, % | | | | | | | -------------------------------------------------------------------------------- | Earnings per share | 0.24 | 0.10 | 140.0% | 0.50 | 0.47 | 6.4% | | (EPS), EUR | | | | | | | -------------------------------------------------------------------------------- | Return on equity | 15.0 | 8.3 | - | 11.1 | 12.5 | - | | (ROE),% | | | | | | | -------------------------------------------------------------------------------- | Capital adequacy | - | - | - | 15.7 | 12.0 | - | | ratio,% | | | | | | | -------------------------------------------------------------------------------- | Tier 1 capital | - | - | - | 9.3 | 9.9 | - | | ratio,% | | | | | | | --------------------------------------------------------------------------------
Summary of the third quarter 2009
-------------------------------------------------------------------------------- | (EUR million) | 3Q | 3Q | Chang | 1-9 | 1-9 | Change | 1-12 | | | 2009 | 2008 | e | 2009 | 2008 | | 2008 | -------------------------------------------------------------------------------- | Net interest income | 40.5 | 25.2 | 60.8% | 112.4 | 74.3 | 51.3% | 101.0 | -------------------------------------------------------------------------------- | Dividends | 0.0 | 0.0 | - | 0.6 | 1.3 | -55.3% | 1.4 | -------------------------------------------------------------------------------- | Net commission | 11.3 | 9.4 | 20.2% | 31.8 | 31.7 | 0.3% | 41.0 | | income | | | | | | | | -------------------------------------------------------------------------------- | Net income for life | 3.8 | -2.0 | - | 10.8 | 9.2 | 17.9% | -33.8 | | insurance | | | | | | | | -------------------------------------------------------------------------------- | Net income for | 6.3 | - | - | 13.7 | - | - | - | | non-life insurance | | | | | | | | -------------------------------------------------------------------------------- | Net income from | 3.7 | -3.0 | - | 9.0 | -0.2 | - | -3.4 | | financial | | | | | | | | | transactions | | | | | | | | -------------------------------------------------------------------------------- | Net income from | 0.1 | 1.3 | -93.5 | 0.3 | 2.9 | -89.0% | 6.0 | | investment | | | % | | | | | | properties | | | | | | | | -------------------------------------------------------------------------------- | Other operating | 1.2 | 3.0 | -59.8 | 3.0 | 7.0 | -56.2% | 15.0 | | income | | | % | | | | | -------------------------------------------------------------------------------- | Total operating | 66.8 | 33.9 | 97.2% | 181.7 | 126.3 | 43.9% | 127.2 | | income | | | | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Staff costs | -18. | -12. | 44.0% | -57.5 | -45.4 | 26.6% | -60.6 | | | 3 | 7 | | | | | | -------------------------------------------------------------------------------- | Other | -9.5 | -8.8 | 8.2% | -31.8 | -28.3 | 12.6% | -38.4 | | administrative | | | | | | | | | expenses | | | | | | | | -------------------------------------------------------------------------------- | Negative goodwill | - | - | - | 0.1 | - | - | - | | recorded as income | | | | | | | | -------------------------------------------------------------------------------- | Depreciation of | -1.8 | -1.6 | 12.7% | -5.3 | -4.4 | 19.4% | -5.7 | | tangible and | | | | | | | | | intangible assets | | | | | | | | -------------------------------------------------------------------------------- | Other operating | -6.5 | -3.6 | 77.9% | -17.1 | -11.8 | 44.6% | -16.2 | | expenses | | | | | | | | -------------------------------------------------------------------------------- | Total operating | -36. | -26. | 34.9% | -111.5 | -89.9 | 24.0% | -120.9 | | expenses | 1 | 7 | | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Impairment and | - | 0.3 | - | -0.2 | 1.0 | - | 0.7 | | reversing items of | | | | | | | | | tangible and | | | | | | | | | intangible assets | | | | | | | | -------------------------------------------------------------------------------- | Write-downs on | -8.5 | -0.3 | - | -26.3 | -0.3 | - | -0.7 | | credits | | | | | | | | -------------------------------------------------------------------------------- | Share of profit | 0.1 | 0.3 | -60.7 | 0.7 | 0.2 | 204.5% | 0.2 | | from associated | | | % | | | | | | companies | | | | | | | | -------------------------------------------------------------------------------- | Operating profit | 22.4 | 7.4 | 201.4 | 44.4 | 37.3 | 19.0% | 6.6 | | | | | % | | | | | --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- | Aktia Group Key | 3Q | 3Q | Chang | 1-9 | 1-9 | Change | 1-12 | | figures, EUR | 2009 | 2008 | e | 2009 | 2008 | | 2008 | | million | | | | | | | | -------------------------------------------------------------------------------- | Earnings per share | 0.24 | 0.10 | 140.0 | 0.50 | 0.47 | 6.4% | 0.09 | | (EPS), EUR | | | % | | | | | -------------------------------------------------------------------------------- | Equity per share | - | - | - | 6.51 | 4.28 | 52.1% | 4.85 | | (NAV), EUR | | | | | | | | -------------------------------------------------------------------------------- | Return on equity | 15.0 | 8.3 | - | 11.10 | 12.50 | - | 1.80 | | (ROE),% | | | | | | | | -------------------------------------------------------------------------------- | Earnings per share | 1.00 | -0.2 | - | 1.70 | -0.79 | - | -0.22 | | excluding negative | | 4 | | | | | | | goodwill recorded | | | | | | | | | as income and | | | | | | | | | including the fund | | | | | | | | | at fair value, EUR | | | | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Banking Business' | | | | | | | | | (incl. Private | | | | | | | | | Banking) key | | | | | | | | | figures | | | | | | | | -------------------------------------------------------------------------------- | Cost-to-income | 0.48 | 0.59 | -18.6 | 0.54 | 0.66 | -18.2% | 0.65 | | ratio | | | % | | | | | -------------------------------------------------------------------------------- | Capital adequacy | - | - | - | 15.7 | 12.0 | - | 13.7 | | ratio,% | | | | | | | | -------------------------------------------------------------------------------- | Tier 1 capital | - | - | - | 9.3 | 9.9 | - | 9.3 | | ratio,% | | | | | | | | --------------------------------------------------------------------------------
Activity of the report period
Both A and R series shares of Aktia plc were listed on the Nasdaq OMX Helsinki exchange on 29 September 2009. This listing gives Aktia's shareholders an opportunity to trade in Aktia shares through the exchange and to constantly monitor the value of their shareholdings. Profit
The Group's operating profit for January - September 2009 was EUR 44.4 million (EUR 37.3 million). During July - September the operating profit amounted to EUR 22.4 million (EUR 7.4 million).
The operating profit of the banking business before write-downs was EUR 69.5 million (EUR 25.5 million). Despite considerably higher loan write-downs of EUR 25.9 million (EUR 0.3 million), an operating profit of EUR 43.6 million (EUR 25.2 million) was achieved thanks to strong net interest income.
Asset Management's operating profit weakened on last year to EUR 0.5 million (EUR 3.6 million) due to the difficult situation in the investment market during the first six months but improved somewhat during the third quarter.
Insurance operations contributed EUR 0.4 million (EUR -1.2 million) to the Group's operating profit during the period. Of this contribution, EUR 3.0 million (EUR -1.2 million) came from the life insurance company, while the non-life insurance company's contribution to the Group's profit was EUR -2.6 million (-). The results of the non-life insurance company was adversely affected by a write-down of EUR 0.4 million (-).
Operating profit for affiliates was EUR 0.7 million (EUR 0.2 million).
Profit for the reporting period was EUR 32.6 million (EUR 28.7 million). During the third quarter, July - September, the Group's profit amounted to EUR 16.1 million (EUR 5.8 million).
Income
The Group's total income increased by 43.9% between January and September to EUR 181.7 million (EUR 126.3 million). During July - September, total income almost doubled to EUR 66.8 million (EUR 33.9 million).
Net interest income rose between January and September by 51.3% to EUR 112.4 million (EUR 74.3 million). It should be noted that the positive impact of managing interest rate risk, which is temporary in nature, and the exceptionally steep decline of interest rates have made a significant contribution to the net interest income. The derivatives used by Aktia Bank to limit its interest rate risk improved net interest income to EUR 20.3 million (EUR -4.9 million). Aktia was also able to exploit the situation on the financial markets to generate additional earnings as a result of its good liquidity position. Net interest income from lending to and borrowing from customers was stable. During July - September net interest income improved to EUR 40.5 million (EUR 25.2 million).
Net commission income was EUR 31.8 million (EUR 31.7 million). Commission income from funds, asset management and brokering increased to EUR 19.3 million (EUR 16.0 million). Card and payment services commissions rose 4.5% to EUR 8.4 million (EUR 8.0 million). Income from the real estate agency business was stable at EUR 5.8 million (EUR 5.9 million) between January and September but strengthened during the latest quarter July - September.
Net income from life insurance totalled EUR 10.8 million (EUR 9.2 million). Aktia Non-Life Insurance, consolidated in the Aktia Group since 1 January 2009, reported a net income of EUR 13.7 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.
Expenditure
The Group's operating expenses rose between January and September by 24% to EUR 111.5 million (EUR 89.9 million). This change is primarily due to the new non-life insurance and Aktia Invest operations, consultancy fees connected with the listing on the Stock Exchange and increased rents. The increase of expenses without the new units was 4.6%
The higher rents are a consequence of Aktia during 2008 divesting the majority of its real estate holdings that were in its own use.
Staff costs increased during the first nine months of the year by EUR 12.1 million to EUR 57.5 million (EUR 45.4 million). This change is predominantly due to the incorporation of the Non-Life Insurance company and Aktia Invest.
Other administration costs increased by 12.6% to EUR 31.8 million (EUR 28.3 million). Total depreciation and write-downs on tangible and intangible assets was EUR 5.3 million (EUR 4.4 million).
Other operating costs amounted to EUR 17.1 million (EUR 11.8 million) for January - September.
Results for July - September 2009
The Group's operating profit for the third quarter was EUR 22.4 million (EUR 7.4 million). Net interest income improved by EUR 15.3 million to EUR 40.5 million (EUR 25.2 million) thanks to successful strategies aimed to manage interest rate risk. Profit for July - September was EUR 16.1 million (EUR 5.8 million).
During July - September, expenses amounted to EUR 36.1 million (EUR 26.7 million), an increase of 34.9%.
The operating profit from the banking business was adversely affected by write-downs of loans totalling EUR 8.4 million (EUR 0.3 million) and amounted to EUR 19.7 million (EUR 6.2 million). Asset management contributed EUR 0.5 million (EUR 1.5 million) to the Group's operating profit. The insurance business' contribution to the Group's operating profit was EUR 2.8 million (EUR -4.9 million) for life insurance and EUR 0.3 million (-) for non-life insurance.
The Group's segment results during July - September -------------------------------------------------------------------------------- | Operating profit (EUR million) | 3Q 2009 | 3Q 2008 | -------------------------------------------------------------------------------- | Banking business | 19.7 | 6.2 | -------------------------------------------------------------------------------- | Asset Management | 0.5 | 1.5 | -------------------------------------------------------------------------------- | Life Insurance | 2.8 | -4.9 | -------------------------------------------------------------------------------- | Non-Life Insurance | 0.3 | - | -------------------------------------------------------------------------------- | Miscellaneous | -0.1 | 4.6 | -------------------------------------------------------------------------------- | Eliminations | -0.7 | 0.0 | -------------------------------------------------------------------------------- | Total | 22.4 | 7.4 | --------------------------------------------------------------------------------
Balance sheet and off-balance sheet commitments
The Group's balance sheet total increased by 12.4% during the period and amounted to EUR 10,724 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 and the financial assets within the banking business. Total borrowing in the form of deposits from the public, associations and credit institutions fell by 4.5% to EUR 4,789 million (EUR 5,015 million) while financing from other financial instruments increased by 31.2% to EUR 4,106 million (EUR 3,130 million). This growth is largely due to an increase in debt securities issued and debts to credit institutions, i.e. transactions connected to liquidity management.
The Group's total lending to the public amounted to EUR 5,946 million (EUR 5,426 million) at the end of the period, representing an increase of EUR 521 million (9.6%). Loans to private households accounted for EUR 4,819 million, or 81.0% of the total loan stock. Of these loans to households, 88.5% were secured against adequate 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 291 million (6.6%) from the year-end.
The housing loan stock totalled EUR 4,481 million (EUR 4,036 million), of which mortgages granted by Aktia Real Estate Mortgage Bank plc made up EUR 2,403 million (EUR 1,968 million). In all, housing loans increased by 11.0%. New corporate lending continued to be moderate. The corporate loan stock was reduced by 1.8% from the start of the year, totalling EUR 789 million (EUR 804 million). Loans granted to housing associations increased by 23.6% during the period to EUR 272 million (EUR 220 million).
Interest-bearing financial assets available for sale increased by 17.2% to EUR 3,292 million (EUR 2,808 million). These assets mainly consist of the banking business' liquidity reserve.
Deposits from the public and public sector entities decreased marginally (-0.5%)
from the year-end to EUR 3,082 million (EUR 3,098 million at 31 December 2008).
Aktia Real Estate Mortgage Bank plc issued 2 covered bonds during the period. In February, a bond of EUR 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 327 million at the end of the period and issued bonds EUR 2,294 million, which represents an increase of EUR 437 million during the period January - September. Aktia Bank also issued new subordinated debts and index-linked loans via retail channels with a total value of EUR 64 million.
Life insurance provisions amounted to EUR 787 million (EUR 777 million at 31 December 2008).
Non-life insurance provisions stood at EUR 111 million (EUR 99 million at 1 January 2009) at the end of the period.
Off-balance sheet commitments increased by EUR 90 million from the year-end and amounted to EUR 619 million (EUR 529 million). This increase was largely due to growth in unused credit facilities (loan promises and limits) and high liquidity commitments with the local banks.
The Aktia Group's equity amounted to EUR 463 million (EUR 317 million) at the end of the period. The Group's fund at fair value amounted to EUR 44 million (EUR -36 million), showing an improvement of EUR 51 million during the third quarter and of EUR 80 million from the start of the year.
Capital adequacy and solvency
The Bank Group's capital adequacy amounted to 15.7% compared to 13.7% at year-end. The Tier 1 capital ratio was 9.3% (9.3% at 31 December 2008). The period's results and higher valuations of financial assets strengthened capital adequacy. The divestment of Aktia Life Insurance out of the Bank Group to the parent company Aktia plc also had a positive impact on capital adequacy. The Bank Group's capital adequacy remained at a good level, exceeding both the capital adequacy targets set internally and the requirements of the authorities.
The life insurance company's working capital amounted to EUR 85.0 million (EUR 50.4 million) and solvency 14.2% (8.5%).
The non-life insurance company's solvency capital was EUR 50.2 million. It reported risk carrying capacity of 83.6%.
Capital adequacy for the conglomerate amounted to 156.9% (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 remained on 23 September 2009 at the best classification, P-1,
for short-term borrowing. The credit rating for long-term borrowing is A1 and
that for financial strength C. All ratings have a stable outlook.
The covered bonds issued by subsidiary Aktia Real Estate Mortgage Bank plc have
a Moody's credit rating of Aa1.
Valuation of financial assets
Value changes reported via the fund at fair value Value changes in interest-bearing securities where the issuer has not announced an inability to pay and value changes 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 43.7 million after deferred tax, compared to EUR -36.4 million at 31 December 2008. The cash flow hedging which comprises the basic 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 20.8 million (EUR 12.4 million).
Specification of the fund at fair value -------------------------------------------------------------------------------- | EUR million | 30.9.2009 | 31.12.2008 | Change | -------------------------------------------------------------------------------- | Shares and participations | | | -------------------------------------------------------------------------------- | Banking | 3.8 | -1.5 | 5.3 | | business | | | | -------------------------------------------------------------------------------- | Life insurance | 0.9 | -2.9 | 3.8 | | business | | | | -------------------------------------------------------------------------------- | Non-Life | -0.2 | - | -0.2 | | insurance | | | | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Direct interest-bearing securities | -------------------------------------------------------------------------------- | Banking | 14.9 | -26.3 | 41.2 | | business | | | | -------------------------------------------------------------------------------- | Life insurance | 3.4 | -18.2 | 21.6 | | business | | | | -------------------------------------------------------------------------------- | Non-Life | 0.0 | - | 0.0 | | insurance | | | | | business | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Cash flow | 20.8 | 12.4 | 8.4 | | hedging | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Fund at fair | 43.7 | -36.4 | 80.1 | | value, total | | | | --------------------------------------------------------------------------------
Value changes reported via income statement The value of financial assets is written down where, in the case of shares, the value change has been announced as significant or long-term and, in the case of interest-bearing securities, where the issuer has announced an inability to pay. Previous write-downs are reversed for interest-bearing securities in the income statement and for shares in the fund at fair value.
Write-downs for the period totalled EUR 22.3 million (EUR 39.2 million at 31
December 2008) while write-downs for the third quarter amounted to EUR 1.7
million (EUR 8.5 million).
Of the period's write-downs, EUR 8.9 million was attributable to shares and
participations in the investment portfolio of the life insurance company. EUR
13.4 million of the write-downs was attributable to interest-bearing securities,
of which EUR 0.4 million was related to the bank's liquidity portfolio. The
share risk in the life insurance company's investment portfolio has continued to
be reduced and direct shareholdings amounted to EUR 3 million at the end of the
third quarter. No write-downs have been implemented within the non-life
insurance company's investment portfolio during the period.
Write-downs on financial assets -------------------------------------------------------------------------------- | EUR million | 1-9 2009 | 1-12 2008 | -------------------------------------------------------------------------------- | Interest bearing | | | | securities | | | -------------------------------------------------------------------------------- | Banking business | 0.4 | 3.6 | -------------------------------------------------------------------------------- | Life insurance business | 13.1 | 5.1 | -------------------------------------------------------------------------------- | Non-Life insurance | - | - | | business | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Shares and | | | | participations | | | -------------------------------------------------------------------------------- | Banking business | - | 1.0 | -------------------------------------------------------------------------------- | Life insurance business | 8.9 | 29.4 | -------------------------------------------------------------------------------- | Non-Life insurance | - | - | | business | | | -------------------------------------------------------------------------------- | Total | 22.3 | 39.2 | --------------------------------------------------------------------------------
Write-downs of loan and guarantee claims
Write-downs based on individual examination of loan and guarantee claims totalled EUR -26.3 million. Reversals of write-downs from previous years came to EUR 0.3 million so that the cost effect on the profit for the period was EUR -25.9 million.
The weak economic situation continues to be reflected in the write-downs of corporate loans which, between January and September, amounted to EUR -23.5 million and to EUR -8.2 million during the last quarter, July - September. The period's write-downs of corporate loans corresponded to just under 3% of total corporate lending.
Write-downs of household loans amounted to EUR -2.1 million, EUR -0.5 million of which was accounted for by unsecured consumer loans. The period's write-downs of household loans was equivalent to 0.04% of total lending to households.
In addition to individual write-downs, group write-downs were made for households and small companies, where there were objective reasons to believe there was uncertainty in relation to the repayment of claims in underlying credit portfolios. Group write-downs for households and small companies remained unchanged and amounted to EUR -7.4 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 banking business' operating profit improved during the first nine months of the year to EUR 43.6 million (EUR 25.2 million). The operating profit for July - September was EUR 19.7 million (EUR 6.2 million).
Operating income totalled EUR 147.0 million (EUR 96.8 million). The improvement is mainly attributable to net interest income which increased to EUR 108.1 million (EUR 69.7 million).
The drop of short term interest rates has had a positive effect on net interest income through lower re-finan-cing costs and hedging derivative instruments. Fixed-rate investments made at higher interest rates than the present as well as risk premiums remaining at a high level have allowed better returns from investments in the liquidity portfolio, which has had a positive effect on net interest income. During July - September net interest income amounted to EUR 39.2 million (EUR 23.5 million). Net commission income was EUR 23.7 million (EUR 22.8 million) for the reporting period. During July - September net commission income improved to EUR 8.7 million (EUR 6.9 million).
Operating expenses rose to EUR 77.6 million (EUR 71.3 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 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 banking business' customer base increased by 5,844 private customers (+2.2%) during the first nine months. The number of Internet banking agreements rose by 6.6% from the start of the year, amounting to 114,239.
The economic situation has brought with it increased write-downs of loans, particularly among a limited number of corporate customers. Write-downs of loans during the first nine months totalled EUR 25.9 million, of which EUR 8.2 million was reported during the third quarter.
Aktia's lending to private households, including the mortgages brokered by Aktia, increased by 10.9% to EUR 4,819 million (EUR 4,343 million). Mortgage loans brokered by Aktia amounted to EUR 1,301 million (EUR 1,069 million). Aktia's market share in housing loans to households amounted to 4.2%. Aktia's total lending to private households made up 81.0% of the loan stock. The proportion of the total credit stock accounted for by corporate loans fell as planned from the year-end to 13.3% at the end of the period.
Total savings by households increased by 4.6% from the start of the year and amounted to EUR 3,041 million (EUR 2,907 million). Household deposits were EUR 2,358 million (EUR 2,359 million) and savings by households in mutual funds stood at EUR 683 million (EUR 548 million). The outward flow from the funds has ended.
Aktia Real Estate Mortgage Bank plc showed continued growth. The total credit stock grew by 22.3% to EUR 2,534 million. Of the loan stock, 51.3% or EUR 1,301 million was brokered by Aktia's branch offices and 48.7% by savings and local co-operative banks. In February, Aktia Real Estate Mortgage Bank plc issued a covered bond amounting to EUR 125 million with a floating interest rate and three-year maturity. The second 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 1.2 million (EUR -0.3 million), mainly as a result of cost adjustment and slightly more activity on the market during both the second and third quarter.
Asset Management
Operating profit for Aktia's asset management business fell to EUR 0.5 million (EUR 3.6 million) during the first nine months. The market was slightly more positive during the third quarter than during the beginning of the year and Aktia fared relatively well in the market. The operating profit for the period included non-recurring items, mainly capital losses of approximately EUR 0.5 million. During July - September the operating profit amounted to EUR 0.5 million (EUR 1.5 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 operating under the name 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 10.6 million (EUR 10.5 million). Operating expenses increased by EUR 3.2 million to EUR 10.1 million, of which staff costs constituted EUR 5.6 million (EUR 3.5 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 3,488 million (EUR 2,490 million at 31 December 2008). Aktia's market share was 6.75% (6.0%) at the end of the period - this includes the share of managed funds. The total market is based on information from the Finnish Association of Mutual Funds. Assets managed by Aktia, including Aktia Asset Management and Aktia Invest, increased and amounted to EUR 5,680 million (EUR 4,538). The customer assets of Private Banking totalled EUR 755 million (EUR 738 million). The number of customers in Private Banking increased by approximately 2% during the first nine months.
Life Insurance
The contribution of the life insurance business to the Group's operating profit was EUR 3.0 million (EUR -1.2 million). The contribution to the Group's operating profit for July - September was EUR 2.8 million (EUR -4.9 million).
The segment's operating result 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 in 2008. These non-recurring items amounted to EUR 2.1 million (EUR 4.9 million) during January - September.
Premium income was EUR 53.5 million (EUR 64.9 million). The decrease in premium income is mainly due to the fact that the sales of large single premium policies have decreased. Premium volumes from unit-linked pension insurance schemes and risk insurance policies increased. Of the premium volume for savings and investment insurance and pension insurance, unit-linked insurance accounted for around 61% (66%).
Insurance claims and benefits totalled EUR 61.4 million (EUR 56.2 million).
Increased payment of insurance claims and benefits resulted primarily from time
investment-linked policies maturing as well as from increased pension and health
insurance payments.
The operating expenses totalled EUR 9.9 million (EUR 9.8 million). Within the
life insurance business, steps to streamline operations have continued, as has
work to improve cost efficiency. Despite the additional expenses brought about
by the modified principles for allocating the Group's administration expenses,
expenses for the year are at the same level as the year before. The cost ratio
was 101.5% compared with 99.1% 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 ongoing streamlining measures taking
place within Aktia Non-Life Insurance have also brought about certain
non-recurring expenses for the life insurance business for the latest quarter of
2009. The coordination of sales distribution is expected to bring cost savings
from 2010 onwards.
The return on the company's investments based on market value was 4.6% (-6.5%). To enable stable returns on investment in the long term, the risks in the portfolio have been further reduced. Net income from investment business has been adversely affected by write-downs entered against income of EUR 21.9 million.
Provisions totalled EUR 787 million (EUR 777 million at 31 December 2008), of which provisions for unit-linked insurance policies represented 24.2%. Unit-linked provisions amounted to EUR 191 million (EUR 150 million) and interest-linked provisions amounted to EUR 597 million (EUR 628 million). During the first and second quarter of the current financial year, the discount rate for certain elements of these provisions was increased and the average discount rate for all interest-bearing provisions is 3.6%. This increase reduced provisions by EUR 19.8 million and has a positive impact on the profit for the year.
The company's solvency improved to 14.2% 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 32 million, technical provisions amounting to EUR 99 million, while the balance sheet total stood at EUR 155 million.
The contribution of the non-life insurance business to the Group's operating profit for the first nine months was EUR -2.6 million. During July - September the contribution to the Group's operating profit was EUR 0.3 million.
Insurance premium income for Aktia Non-Life Insurance increased by approximately 4% 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 54.3 million. Premium income for the period after the reinsurers' share and change of premium liabilities amounted to EUR 45.5 million. Claim expenditure amounted to a total of EUR 35.5 million. Operating expenses totalling EUR 15.6 million included EUR 1.1 million of the Group's administration costs. Write-downs on loans for the period totalled EUR 0.4 million. The total cost ratio was reduced to 112.3% (compared to 122.4% at the start of the year).
Net income from investment business amounted to EUR 2.4 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. The return on the company's investments based on market value was 1.5%.
Of the company's total provisions of EUR 111 million (EUR 99 million at 1 January 2009), the provisions for pay-out claims stood at EUR 86 million (EUR 79 million at 1 January 2009). The market value of the company's investment portfolio was EUR 140 million (EUR 131 million at 1 January 2009) and the company's risk carrying capacity was 84%.
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
Operating profit for the Miscellaneous segment was EUR 2.6 million (EUR 11.3 million) during the first nine months. The profit for the corresponding period in 2008 includes non-recurring items amounting to EUR 5.6 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 2.6 million.
The operating profit for July - September was EUR -0.1 million (EUR 4.6 million). The profit for the quarter was adversely affected by non-recurring expenses of EUR 1.6 million associated with Aktia's listing of shares on the Stock Exchange in September.
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 period. Mortgages increased 11.0% to EUR 4,481 million, accounting for 75.4% (74.4% at 31 December 2008) of the total credit stock. Aktia Real Estate Mortgage Bank's lending totalled EUR 2,403 million (EUR 1,968 million), of which EUR 1,170 million was brokered by savings and local co-operative banks. Overall, the proportion of household loans in the total credit stock increased to 81.0% (80.0%). Of loans to households, 88.5% (86.4%) are secured against adequate housing collateral in accordance with Basel 2.
The proportion of the total credit stock accounted for by corporate loans fell as planned from 14.4% at the year-end to 13.3% 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 83.3 million (EUR 63.8 million), representing 1.4% of total lending.
Credit stock by sector
-------------------------------------------------------------------------------- | EUR million | 30.9.2009 | 31.12.2008 | Change | Per-centage | -------------------------------------------------------------------------------- | Corporate | 789 | 804 | -15 | 13.3 | -------------------------------------------------------------------------------- | Housing | 272 | 220 | 52 | 4.6 | | association | | | | | | s | | | | | -------------------------------------------------------------------------------- | Public | 11 | 12 | -1 | 0.2 | | sector | | | | | | entities | | | | | -------------------------------------------------------------------------------- | Non-profit | 56 | 47 | 9 | 0.9 | | organisation | | | | | | s | | | | | -------------------------------------------------------------------------------- | Households | 4,819 | 4,343 | 476 | 81.0 | -------------------------------------------------------------------------------- | Total | 5,946 | 5,426 | 521 | 100.0 | --------------------------------------------------------------------------------
Loans with payments 1-30 days overdue decreased during the period from 3.40% to 2.90% of the credit stock, including off-balance sheet guarantee commitments. Loans with payments 31-90 days overdue increased from 0.87% to 1.09%, totalling EUR 65.6 million. Non-performing loans more than 90 days overdue, including claims on bankrupt companies and loans for collection, totalled EUR 41.7 million, corresponding to 0.69% (0.48%) of the entire credit stock plus bank guarantees.
Undischarged debts by time overdue (EUR million) -------------------------------------------------------------------------------- | Days | 30.9.2009 | % of the | 31.12.2008 | % of the | | | | credit stock | | credit stock | -------------------------------------------------------------------------------- | 1-30 | 174 | 2.90 | 187 | 3.40 | -------------------------------------------------------------------------------- | of which | 118 | 1.97 | 110 | 2.01 | | households | | | | | -------------------------------------------------------------------------------- | 31-90 | 66 | 1.09 | 48 | 0.87 | -------------------------------------------------------------------------------- | of which | 42 | 0.69 | 34 | 0.63 | | households | | | | | -------------------------------------------------------------------------------- | 91- | 42 | 0.69 | 26 | 0.48 | -------------------------------------------------------------------------------- | of which | 26 | 0.43 | 16 | 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 Bank Group and the insurance companies. The objective in the Bank Group is to be able to cover one year's refinancing requirements using existing liquidity. Despite uncertainty in the financial markets, the liquidity status remained good and in line with this objective.
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 cashflow 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 liquidity portfolio of primarily bonds.
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 2,660 million at 30 September 2009 (EUR 2,290).
Counterparty risks arising in relation to liquidity management and entry into derivative contracts are managed through conservative allocation and the requirement for high-level external ratings (minimum A3 rating from Moody's or equivalent). In addition, maximum exposure limits have been established for each counterparty and asset type. Individual investment decisions are made in accordance with an investment plan in place and are based on careful assessment of the counterparty.
Of the financial assets available for sale, 52% (49%) were investments in covered bonds, 35% (45%) were investments in banks, 10% (3%) were investments in state-guaranteed bonds and approximately 3% (3%) were investments in public sector entities and companies. Of these financial assets, 1.0% (0.9%) did not meet the internal rating requirements. As a result of a reduced credit rating, one security asset with a market value of EUR 4 million was no longer eligible for refinancing with the central bank. Other securities that are not eligible for refinancing due to the absence of a rating, totalled EUR 31 million.
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 -------------------------------------------------------------------------------- | | 30.9.2009 | 31.12.2008 | -------------------------------------------------------------------------------- | Aaa | 54.1% | 49.4% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 31.1% | 42.3% | -------------------------------------------------------------------------------- | A1-A3 | 12.4% | 4.9% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 0.8% | 0.9% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.2% | 0.0% | -------------------------------------------------------------------------------- | B1-B3 | 0.0% | 0.0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.0% | 0.0% | -------------------------------------------------------------------------------- | No rating | 1.4% | 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 for the purpose of neutralising interest rate risk in technical provisions and totalled EUR 531 million (EUR 449 milli
