Aktia plc Interim report 1.1-30.6.2010
AKTIA PLC'S INTERIM REPORT JANUARY - JUNE 2010
FIRST HALF YEAR: OPERATING PROFIT EUR 41.0 (17.3) MILLION
Group operating profit for January-June 2010 improved 137.0% to EUR 41.0 (17.3) million and the profit for the period to EUR 30.0 (13.0) million. Earnings per share was up 107.0% to EUR 0.43 (0.21). Net interest income rose 7.7% to EUR 77.5 (71.9) million. Net commission income advanced 40.7% to EUR 28.9 (20.6) million. Net income from life insurance improved marginally to EUR 7.1 (7.0) million. Net income from non-life insurance improved 39.1% to EUR 10.3 (7.4) million. Write-downs on credit were clearly lower than last year and stood at EUR 8.4 (17.8) million. Aktia Bank plc's credit rating remained unchanged A1/C/P-1 (Moody's Investors Service) Aktia expects operating profit for 2010 to exceed the level in 2009 and write-downs on credit to remain clearly lower than last year (updated).
APRIL-JUNE: OPERATING PROFIT EUR 23.5 (9.1) MILLION
Group operating profit for April-June 2010 improved 158.0% to EUR 23.5 (9.1)
million and the profit for the period to EUR 17.5 (7.4) million. Earnings per
share was up 108.7% to EUR 0.25 (0.12).
Net interest income remained at a good level of EUR 38.6 (39.4) million.
Net commission income improved by 40.8% to EUR 15.5 (11.0) million.
Net income from life insurance improved by 58.5% to EUR 2.6 (1.7) million.
Net income from non-life insurance rose 8.9% to EUR 5.9 (5.5) million.
Write-downs on credit were clearly lower than last year and stood at EUR 3.8
(16.2) million.
CEO JUSSI LAITINEN:
"The first half of this year has been good for us. Operating profit is strong
thanks to high net interest income, increased net commissions and insurance
income as well as a moderate increase of costs and lower credit losses. Our
market position is strengthened by a larger number of Customer Dialogues carried
out at the branch offices and improved profile in media. Despite the financial
unrest, our financial assets have increased in value from the beginning of the
year. I am confident that Aktia's result will develop favourably during the
second half of the year. "
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| (EUR million) | 4-6/ | 4-6/ | Δ% | 1-6/ | 1-6/ | Δ% | 1-3/ | 1-12/ |
| | 2010 | 2009 | | 2010 | 2009 | | 2010 | 2009 |
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| Net interest | 38.6 | 39.4 | -2. | 77.5 | 71.9 | 7.7 | 38.9 | 152.2 |
| income | | | 1% | | | % | | |
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| Total operating | 66.2 | 62.4 | 6.2 | 127. | 110.2 | 15.5 | 61.0 | 233.1 |
| income | | | % | 2 | | % | | |
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| Operating profit | 27.4 | 25.3 | 8.1 | 49.4 | 35.1 | 40.8 | 22.1 | 78.7 |
| before write-downs | | | % | | | % | | |
| on credit | | | | | | | | |
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| Write-downs on | -3.8 | -16. | -76 | -8.4 | -17.8 | -52. | -4.6 | -31.7 |
| credit and other | | 2 | .3% | | | 7 % | | |
| commitments | | | | | | | | |
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| Operating profit | 23.5 | 9.1 | 158 | 41.0 | 17.3 | 137. | 17.5 | 47.0 |
| | | | .0% | | | 0 % | | |
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| Cost-to-income | 0.54 | 0.52 | 4.5 | 0.55 | 0.60 | -8.4 | 0.57 | 0.57 |
| ratio | | | % | | | % | | |
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| Earnings per share | 0.25 | 0.12 | 108 | 0.43 | 0.21 | 107. | 0.18 | 0.52 |
| (EPS), EUR | | | .7% | | | 0 % | | |
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| Equity per share | 6.89 | 5.51 | 25. | 6.89 | 5.51 | 25.0 | 6.86 | 6.52 |
| (NAV)1, EUR | | | 0% | | | % | | |
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| Return on equity | 14.2 | 8.0 | 78. | 12.4 | 7.3 | 70.3 | 10.5 | 8.7 |
| (ROE),% | | | 0% | | | % | | |
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| Capital adequacy | 16.5 | 14.5 | 13. | 16.5 | 14.5 | 13.8 | 16.2 | 15.9 |
| ratio1,% | | | 8% | | | % | | |
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| Tier 1 capital | 10.1 | 9.1 | 11. | 10.1 | 9.1 | 11.0 | 9.6 | 9.5 |
| ratio1,% | | | 0% | | | % | | |
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| Write-downs on | 0.05 | 0.27 | -81 | 0.13 | 0.31 | -57. | 0.08 | 0.51 |
| credit/total | | | .5% | | | 5 % | | |
| credit stock, % | | | | | | | | |
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1) At the end of the period
"Interim report January - June 2010" is a translation of the original report in
Swedish ("Delårsrapport 1.1-30.6.2010"). In case of discrepacies, the Swedish
version shall prevail.
profit
APRIL-JUNE 2010
The Group's operating profit in the second quarter was strong and amounted to
EUR 23.5 (9.1) million supported by a sustained high net interest income, a
clearly stronger net commission income and notably lower write-downs on credit.
income
During April - June the Group's total income increased 6.2% to EUR 66.2 (62.4)
million. Net interest income amounted to EUR 38.6 (39.4) million. Net income
from life insurance was EUR 2.6 (1.7) million and that from non-life insurance
EUR 5.9 (5.5) million. Net commission income increased 40.8% to EUR 15.5 (11.0)
million, the improvement mainly stemming from wealth management products.
costs
During April - June the costs stood at EUR 40.0 (37.4) million, showing a rise
by 6.8 %. The change originates mainly from higher IT costs and higher
reservations for the personnel fund and result related bonus payments.
The group common costs during April - June 2010 amounted to EUR 6.8 (9.3)
million.
segment overview
The segments' contribution to the Group's operating profit -------------------------------------------------------------------------------- | (mn euro) | 4-6/ 2010 | 4-6/ 2009 | ? | -------------------------------------------------------------------------------- | Banking Business | 20.6 | 9.1 | 126.4 % | -------------------------------------------------------------------------------- | Asset Management | 1.1 | 0.4 | 148.2 % | -------------------------------------------------------------------------------- | Life Insurance | 1.4 | -1.9 | - | -------------------------------------------------------------------------------- | Non-Life Insurance | 0.6 | 0.6 | 3.1 % | -------------------------------------------------------------------------------- | Miscellaneous | -1.2 | 0.6 | - | -------------------------------------------------------------------------------- | Eliminations | 1.1 | 0.3 | 239.9 % | -------------------------------------------------------------------------------- | Total | 23.5 | 9.1 | 158.0 % | --------------------------------------------------------------------------------
The operating profit for the banking business, after the Group's common costs, more than doubled to EUR 20.6 (9.1) million. Net interest income remained at a high level of EUR 37.4 (38.1) million. Loans totalling EUR 3.7 (16.1) million were written down. Credit write-downs were significantly lower than during the corresponding period last year and also lower than during the first quarter this year. Asset management improved profitability and its operating profit after the Group's common costs improved to EUR 1.1 (0.4) million. The market share of mutual funds was 6.7 (7.0)%. The life insurance business improved and contributed EUR 1.4 ( -1.9) million and non-life insurance EUR 0.6 (0.6) million to the Group's operating profit. Press and Analysts' Conference 12 August 2010 at 11 - 12 a.m. Aktia's CEO Jussi Laitinen and Deputy Managing Director, CFO Stefan Björkman will present the report and answer questions. The presentation will be available at www.aktia.fi. The conference will be held at Aktia's Head Office, Mannerheimintie 14 A, 7th floor.
ACTIVITY IN JANUARY-JUNE 2010
BUSINESS ENVIRONMENT
The short interest rates remained at a low level throughout the period, though rising somewhat during the second quarter. In this environment, Aktia's active management of interest rate risk contributed in this environment greatly to the group net interest income and result development. The general revival of the Finnish economy as well as the low level of interest rates resulted in clearly lower write-downs on credit compared to 2009. During the second quarter of 2010, Finnish real estate prices were generally up by 10.0% and in the Helsinki region even by 13.6%. Consumer price index increased by 0.9% and unemployment stood at 8.8%. (Statistics Finland). The decreasing trend in long interest rates continued which generated higher values on the fixed rate instruments that are part of Aktia's investment portfolios. The Southern European economies caused worries and led to generally higher demands on yields. This had a negative impact on the value of financial assets and caused somewhat higher costs of refinancing. The new initiatives for regulating banking and insurance businesses are still under work, but will likely result in higher capital requirements, sharpened competition for deposits, higher demands on long-term financing and eventually, higher margins on credits. -------------------------------------------------------------------------------- | Key figures | 2010E | 2009 | 2008 | -------------------------------------------------------------------------------- | GDP growth | | | | -------------------------------------------------------------------------------- | World | 3.8* | -1.3 | 3.0 | -------------------------------------------------------------------------------- | EU | 1.2* | -4.0 | 0.9 | -------------------------------------------------------------------------------- | Finland | 1.2* | -7.8 | 0.9 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Consumer price index | | | | -------------------------------------------------------------------------------- | EU | 1.3* | 0.3 | 3.3 | -------------------------------------------------------------------------------- | Finland | 1.1* | 0.1 | 4.0 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Other key ratios | | | | -------------------------------------------------------------------------------- | Development of real value of housing | 7.0* | -0.3 | -2.5 | | in Finland | | | | -------------------------------------------------------------------------------- | OMX Helsinki 25 | - | 28.3 | -49.5 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Interest rates | | | | -------------------------------------------------------------------------------- | ECB | 1.25* | 1.00 | 4.25 | -------------------------------------------------------------------------------- | 10-y interest Ger (=benchmark) | 3.70 | 3.40 | 3.80 | -------------------------------------------------------------------------------- | Euribor 12 months | 2.25* | 1.30 | 3.10 | -------------------------------------------------------------------------------- | Euribor 3 months | 1.25* | 0.70 | 4.50 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Unemployment in Finland | 9.7* | 8.2 | 6.4 | -------------------------------------------------------------------------------- | * At the end of the year (Aktia's chief economist's prognosis) | --------------------------------------------------------------------------------
RATING
The international rating agency Moody's Investor Service kept its credit opinion
of Aktia Bank plc's credit rating unchanged in an update on 6 January 2010.
Aktia Bank plc's credit quality remained at the best classification, P-1, for
short-term borrowing. The credit rating for long-term borrowing is A1 and that
for financial strength is C. All ratings have a stable outlook. See
http://www.aktia.fi/aktia_bank/rating.
The covered bonds issued by the subsidiary Aktia Real Estate Mortgage Bank plc
have a Moody's credit rating of Aa1.
PROFIT FOR THE PERIOD
The Group's operating profit improved by 137.0% to EUR 41.0 (17.3) million. The
profit for January - June 2010 increased by 130.8% to EUR 30.0 (13.0) million.
Income
The Group's total income increased by 15.5% between January and June to EUR 127.2 (110.2) million. Net interest income rose to EUR 77.5 (71.9) million. The positive impact of managing interest rate risks has made a significant contribution to the net interest income's rigidity despite the low interest environment. Both derivatives and fixed rate instruments are utilised by Aktia Bank to manage interest rate risks. The derivatives used by Aktia Bank to limit its interest rate risk improved net interest income by EUR 28.7 (9.1) million. Net commission income increased by 40.7% to EUR 28.9 (20.6) million. Commission income from mutual funds, asset management and brokering increased to EUR 18.5 (11.9) million. Card and payment services commissions improved somewhat to EUR 6.8 (5.7) million. Net income from life insurance amounted to EUR 7.1 (7.0) million. A lower number of claims and last year's cost reductions measures improved Aktia Non-Life Insurance's net income to EUR 10.3 (7.4) million. Net income from the insurance businesses includes insurance premiums written, net income from investment activities, insurance claims paid and the change in technical provisions. Other operating income was EUR 5.0 (1.8) million. This includes a sales gain of divestment of Aktia Bank plc's minority holding in Esperi Care Oy. The banking group's associated company Unicus Oy handled the transaction and divested also its holding in Esperi Care. The transaction added in total EUR 1.7 million to the period's operating profit.
Expenses
The Group's operating expenses in January-June rose by 4.5% to EUR 78.8 (75.4) million. Higher reservations for personnel fund and other result related bonus payments increased staff costs by 8.5% to EUR 42.5 (39.2) million. Other administration expenses increased by 4.9% to EUR 23.4 (22.3) million of which the most part consisted of costs for IT development. Total depreciation and write-downs on tangible and intangible assets were unchanged at EUR 3.5 (3.5) million. Other operating expenses fell somewhat to EUR 9.3 (10.6) million. The cost reduction measures taken during 2009 have been effective and the results will be fully visible during the latter part of this year.
Balance sheet and off-balance sheet commitments
The Group's balance sheet total increased by 2.9% from year-end and amounted to EUR 10,867 (31.12.2009; 10,556) million. The increase in the balance sheet total is largely due to growth in both deposit and mortgage stocks.
Borrowing
Aktia's liquidity was partly supported by a larger deposit stock from the public
and partly by the Mortgage Bank's issue.
Total deposits from the public, associations and credit institutions rose by
2.4% to EUR 4,868 (4,754) million, of which borrowing from the public and public
sector entities rose by 10.6% from the beginning of the year, totalling EUR
3,351 (3,029) million. A more active marketing boosted Aktia's market share in
deposits to 3.56 (3.35)%.
In March 2010, Aktia Real Estate Mortgage Bank plc issued a covered bond of EUR
500 million with a fixed interest rate and five-year maturity. Outstanding Aktia
Bank certificates of deposit amounted to EUR 394 million at the end of the
period and bonds issued by the Group totalled EUR 2,576 million, which
represents a decrease of EUR 146 million during 2010. The decrease is mainly
attributable to repurchase of Aktia Real Estate Mortgage Bank's bonds expiring
in August 2010. During the first half of the year, Aktia Bank issued new
subordinated debts and index-linked loans with a total value of EUR 43 million.
Aktia Bank has issued other long-term funding, (Schuldscheindarlehen) worth EUR
25 million as a part of preparations for new regulations concerning banks and
insurance companies (Basel III).
Lending
The Group's total lending to the public amounted to EUR 6,346 (6,061) million at the end of the period, representing an increase of EUR 286 million. Excluding the mortgages brokered by savings and local cooperative banks that the local banks are committed to capitalise, the Group's lending increased by EUR 150 million (3.1%) from the beginning of the year. Loans to private households (including mortgages brokered by local savings and cooperative banks) accounted for EUR 5,191 (4,924) million or 81.8% of the total loan stock. The housing loan stock totalled EUR 4,858 (4,598) million. In all, housing loans increased by 5.6% from the beginning of the year. Aktia's market share in housing loans was unchanged at 4.27%. Corporate lending accounted for 12.3% of Aktia's loan stock. Total corporate lending remained unchanged from year-end and amounted to EUR 781 (782) million at the end of the period. During the period, loans granted to housing associations increased by 7.6% to EUR 311 (289) million and stood for 4.9% of Aktia's total loan stock. Interest-bearing financial assets available for sale were EUR 3,281 (3,277) million. Of interest-bearing financial assets, EUR 651 million relates to the insurance companies' investment portfolios and EUR 2,630 million mainly to the banking business' liquidity portfolio. These securities can be used as collateral in central bank or in transactions with binding repurchase terms, so called repurchase agreements.
Technical provisions
Life insurance technical provisions amounted to EUR 826 (805) million, of which EUR 236 (210) million were unit-linked. At the end of June, total technical provisions of non-life insurance stood at EUR 132 (119) million.
Equity and commitments
Aktia Group's equity amounted to EUR 501 (466) million at the end of the period. The Group's fund at fair value amounted to EUR 55 (43) million and showed an improvement of EUR 12 million since the beginning of the year. Off-balance sheet commitments increased by EUR 43 million from the year-end and amounted to EUR 618 (575) million. This increase was largely due to unused credit facilities (loan promises and limits).
Segment overview
Aktia plc has five business segments; Banking Business, Asset Management, Life Insurance, Non-Life Insurance and Miscellaneous. The segments' contribution to the Group's operating profit -------------------------------------------------------------------------------- | (EUR million) | 1-6/2010 | 1-6/2009 | Change | -------------------------------------------------------------------------------- | Banking Business | 38.0 | 19.1 | 98.7 % | -------------------------------------------------------------------------------- | Asset Management | 2.0 | 0.1 | - | -------------------------------------------------------------------------------- | Life Insurance | 4.3 | 0.2 | - | -------------------------------------------------------------------------------- | Non-Life Insurance | 0.1 | -2.8 | - | -------------------------------------------------------------------------------- | Miscellaneous | -3.1 | 2.8 | - | -------------------------------------------------------------------------------- | Eliminations | -0.3 | -2.0 | 86.9 % | -------------------------------------------------------------------------------- | Total | 41.0 | 17.3 | 137.0 % | --------------------------------------------------------------------------------
Banking business
The banking business' contribution to the Group's operating profit amounted to EUR 38.0 (19.1) million. Operating income totalled EUR 95.1 (86.8) million. Net interest income increased by 9.5% to EUR 75.4 (68.9) million and net commission income increased by 44.4% and totalling EUR 21.7 (15.0) million. The improvement derives mainly from a higher level of net commission income from mutual funds and insurance. Operating expenses amounted to EUR 49.1 (50.1) million, of which staff costs accounted for EUR 20.0 (18.1) million. Aktia Bank ended the customers' bonus programme, launched in 2006, at the end of June 2010. Instead, customers are compensated with concentration benefits. The accumulated bonus points were actively utilised by customers during the last months, and more than EUR 120,000 was donated to charities. The banking business' customer base increased by 6,479 private customers (+2.4%) during the first half year of 2010. Sales activities are supported by the Aktia Dialogue concept whereby customers' needs are mapped out and Aktia's whole service portfolio is presented. During January - June, more than 21,000 Dialogues were carried out, which is expected to increase sales in 2010. The number of Internet agreements was up 4.4% from the beginning of the year and amounted to 121,205. Total savings by households increased by 9.2% from the beginning of the year to EUR 3,382 (3,113) million. Of these, household deposits were EUR 2,590 (2,372) million and household savings in mutual funds stood at EUR 792 (741) million. Aktia's lending to private households, including the mortgages brokered by Aktia, increased by 5.2% from the year-end to EUR 3,850 (3,658) million. Mortgage loans brokered by Aktia amounted to EUR 1,493 (1,237) million. In addition, the savings and local cooperative banks brokered mortgages amounting to EUR 1,426 (1,171) million. Aktia's market share in housing loans was unchanged at 4.27% year-on-year at the end of June. Corporate banking's net interest income was EUR 4.7 (4.1) million which is 15.3% higher year-on-year. Net commission income from corporate banking was up 16.3% to EUR 1.4 (1.2) million year -on - year. The income of the real estate agency business were somewhat higher than last year's level, standing at EUR 3.9 (3.7) million.
Asset Management
The Asset management's contribution to the Group's operating profit amounted to EUR 2.0 (0.1) million. Managed assets continued to develop favourably during January-June 2010. Aktia provides a wide and competitive range of services in the capital market for both private individuals and institutions. The Asset Management segment carries on to focus on private banking operations and institutional investors this year. Operating income, i.e. income after reversals to the Group's other units and business partners, was EUR 10.1 (6.4) million. Operating expenses increased by 26.9% to EUR 8.1 (6.4) million, of which staff costs made up EUR 4.4 (3.6) million. This is due to greater investment of resources in the private banking business. The volume of funds managed and brokered by Aktia was EUR 3,771 (3,786) million. Aktia's market share of mutual funds was 6.7 (31.12.2009: 7.0)% at the end of the period - this includes the share of brokered funds. The total market is based on information from the Finnish Association of Mutual Funds. The assets managed by Aktia Asset Management and Aktia Invest increased, thanks to an upswing in the markets, and totalled EUR 6,301 (5,996) million. Assets managed by Aktia Invest amounted to EUR 2,119 (2,140) million. The customer assets of Private Banking totalled EUR 1,021 (926) million.
Life Insurance
The life insurance's contribution to the Group's operating profit amounted to EUR 4.3 (0.2) million. The operating profit at Group level of the comparative year was weakened by eliminations for financial assets sold or written down that existed at the time of acquisition of the life insurance business in 2007. Premiums written during January-June increased 40.1% and were EUR 50.3 (35.9) million. The growth derives mainly from unit-linked savings and investment-linked insurance. The allocation service for mutual funds launched in 2009, Aktia Profil, showed increasing volumes during the first half of the year. Of the premium volume for savings and investment-linked insurance and pension insurance, unit-linked insurance accounted for 78%. Claims paid amounted to EUR 42.1 (43.8) million. Surrenders have decreased following the declining effects of the financial crisis. The trend of increased pensions paid has continued. Operating costs, including common costs, totalled EUR 6.5 (6.9) million. Cost-efficiency improved in the life insurance business as a result of rationalisation measures taken in previous years. The expense ratio stood at 96.7% compared to 106.3% for the year before. The return on the company's investments based on market value was 4.1 (0.9)%. The derivatives used by the life insurance company to limit its interest rate and currency risk improved operating profit by EUR 2.2 million. Technical provisions totalled EUR 826 (805) million, of which provisions for unit-linked insurance policies represented EUR 236 (210) million and interest-linked provisions EUR 590 (595) million. The company's solvency ratio improved to 16.6% compared to 14.4% at year-end.
Non-Life Insurance
The contribution of the non-life insurance business to the Group's operating profit was EUR 0.1 (-2.8) million. Premiums written for Aktia Non-Life Insurance rose by approximately 1% on the corresponding period last year. This increase is attributable to private customers. Premiums written before the reinsurers' share were EUR 44.3 (44.0) million. Premiums earned for the period after the reinsurers' share and change in provisions for unearned premiums amounted to EUR 30.6 (29.3) million. Claims incurred fell to EUR 22.9 (23.5) million. Operating costs were at the same level as last year and amounted to EUR 9.8 (9.7) million. The combined ratio in January-June 2010 was 107.2% compared to 114.3% the previous year. The lower combined ratio is largely explained by lower frequency of loss and lower staff costs. The return on the company's investments based on market value was 4.6 (-1.6)%. Of the non-life insurance business' total technical provisions of EUR 123 (110) million, provisions for outstanding claims stood at EUR 91 (89) million. The market value of the company's investment portfolio was EUR 144 (135) million and the company's risk carrying capacity was 76.6% compared to 72.4% at the end of 2009. The integration of Aktia Non-Life Insurance's distribution channels into Aktia's branch office network has continued to increase customer activity particularly in the private customer sector.
Miscellaneous
In January-June 2010 the operating profit of the Miscellaneous segment was EUR -3.1 (2.8) million.
Common costs
In accordance with the "One Aktia" strategy the Group support functions have been unified and integrated. The integration process is continuing throughout 2010 and the largest expenses consist of marketing and IT costs. Common costs were in total EUR 15.6 (18.0) million and were distributed as banking business EUR 12.0 (15.5) million, asset management EUR 1.8 (1.0) million, life insurance EUR 0.8 (0.7) million and non-life insurance EUR 1.0 (0.8) million.
Capital adequacy and solvency
The Bank Group's capital adequacy amounted to 16.5% compared to 15.9% at the end
of 2009. The Tier 1 capital ratio was 10.1 (9.5)%. The operating result and the
liquidity portfolio's lower use of capital strengthened the capital adequacy.
The Bank Group includes Aktia Bank and Aktia Real Estate Mortgage Bank.
Aktia Bank plc's capital adequacy stood at 20.9% compared to 19.9% at the end of
2009. The Tier 1 ratio was 12.6 (11.7)%.
The life insurance company's solvency margin amounted to EUR 100.7 (86.3)
million, where the minimum requirement is EUR 34.2 (34.0) million. The solvency
ratio amounted to 16.6 (14.4)%.
The non-life insurance company's solvency margin amounted to EUR 21.5 (18.4)
million, where the minimum requirement is EUR 13.1 (13.1) million. The solvency
capital was EUR 47.1 (43.6) million and a risk carrying capacity of 76.6 (72.4)%
was reported.
Capital adequacy for the conglomerate amounted to 164.5 (157.4)%. The statutory
minimum stipulated in the Act on the Supervision of Financial and Insurance
Conglomerates is 100%.
Write-downs of loan, guarantee and premium claims
Write-downs based on individual examination amounted to EUR -8.6 (30.6.2009; -17.8) million during January-June 2010. Recoveries and reversals of previous write-downs came to EUR 0.5 (0.3) million so that the cost effect on the profit for the period was EUR -8.0 (-17.5) million. Of write-downs, EUR -8.1 (-16.9) million was accounted for by corporate loans, which corresponds to 1.0 (2.1)% of the total corporate lending. Most of the write-downs during the period are related to commitments whose credit rating had already decreased in 2009 and where restructuring efforts now are confirmed as without result. Write-downs of household loans amounted to EUR -0.5 (-0.9) million of which EUR -0.2 (-0.5) million was accounted for by unsecured consumer loans. The review period's write-downs of household loans were marginal of total lending to households. Total write-downs amounted to 0.1 (0.3)% of total lending. In addition to individual write-downs, group write-downs were made for households and small companies, where there were objective reasons to believe there was uncertainty in relation to the repayment of claims in underlying credit portfolios. Group write-downs for households and small companies remained unchanged and amounted to EUR -7.4 (-7.4) million at the end of the period. During the period, the non-life insurance company made write-downs for outstanding premiums (credit losses) totalling EUR -0.4 (-0.3) million.
Valuation of financial assets
Value changes reported via income statement
For shares and participations, a value impairment is reported in the income
statement where the value change has been announced as significant or long-term
and, in the case of interest-bearing securities, where the issuer has announced
an inability to pay. For interest-bearing securities, previous write-downs are
reversed in the income statement and for shares and participations in the fund
at fair value.
Write-downs on financial assets during January - June 2010 had no impact on the
operating result, whereas these totalled EUR 20.7 million during the same period
in 2009.
Write-downs on financial assets
--------------------------------------------------------------------------------
| EUR million | 1-6/ 2010 | 1-6/ 2009 |
--------------------------------------------------------------------------------
| Interest-bearing securities | | |
--------------------------------------------------------------------------------
| Banking Business | - | -0.4 |
--------------------------------------------------------------------------------
| Life Insurance Business | 0.6 | -13.4 |
--------------------------------------------------------------------------------
| Non-Life Insurance Business | - | - |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Shares and participations | | |
--------------------------------------------------------------------------------
| Banking Business | - | - |
--------------------------------------------------------------------------------
| Life Insurance Business | -0.6 | -6.9 |
--------------------------------------------------------------------------------
| Non-Life Insurance Business | - | - |
--------------------------------------------------------------------------------
| Total | 0.0 | -20.7 |
--------------------------------------------------------------------------------
Value changes reported via the fund at fair value
A value impairment that is not reported in the income statement or an increase
in the value of financial assets that has not been realised is reported via the
fund at fair value. Taking cash flow hedging for the Group into consideration,
the fund at fair value amounted to EUR 54.9 million after deferred tax compared
to EUR 43.3 million as at 31 December 2009.
Cash flow hedging which comprises the market value for interest rate derivative
contracts which have been acquired for the purposes of hedging the banking
business' net interest income amounted to EUR 33.5 (21.4) million.
Specification of the fund at fair value
--------------------------------------------------------------------------------
| EUR million | 30.6.2010 | 31.12.2009 | Change EUR |
| | | | million |
--------------------------------------------------------------------------------
| Shares and participations | | | |
--------------------------------------------------------------------------------
| Banking Business | 1.0 | 3.7 | -2.7 |
--------------------------------------------------------------------------------
| Life Insurance Business | 0.6 | 0.2 | 0.3 |
--------------------------------------------------------------------------------
| Non-Life Insurance | 0.2 | -0.2 | 0.3 |
| business | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Direct interest-bearing | | | |
| securities | | | |
--------------------------------------------------------------------------------
| Banking Business | 2.7 | 13.3 | -10.6 |
--------------------------------------------------------------------------------
| Life Insurance Business | 15.2 | 5.6 | 9.6 |
--------------------------------------------------------------------------------
| Non-Life Insurance | 1.8 | -0.8 | 2.6 |
| business | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Cash flow hedging | 33.5 | 21.4 | 12.1 |
--------------------------------------------------------------------------------
| Fund at fair value, total | 54.9 | 43.3 | 11.6 |
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The Group's risk
management
Risk exposure
The banking business includes Retail Banking and the financing companies, Corporate Banking, Treasury and Asset Management. Life insurance business is carried out by Aktia Life Insurance, and non-life insurance business by Aktia Non-Life Insurance.
Lending-related risks within banking
Credit stock maintained its good quality. Credit stock increased in January-June 2010 by 4.7% or EUR 286 million, totalling EUR 6,346 (6,061) million. As planned, this increase mainly occurred within household financing and households' share of the total credit stock amounted to EUR 5,191 (4,924) million or 81.8% at the end of June, or 86.7% when combined with housing associations. Of the loans to households, 86.3 (86.2)% are secured against adequate real estate collateral in accordance with Basel 2.
Credit stock by sector -------------------------------------------------------------------------------- | EUR million | 30.6.2010 | 31.12.2009 | Change | Share, % | -------------------------------------------------------------------------------- | Corporate | 781 | 782 | -1 | 12.3 | -------------------------------------------------------------------------------- | Housing | 311 | 289 | 22 | 4.9 | | associations | | | | | -------------------------------------------------------------------------------- | Public sector | 7 | 10 | -3 | 0.1 | | entities | | | | | -------------------------------------------------------------------------------- | Non-profit | 56 | 55 | 0 | 0.9 | | organisations | | | | | -------------------------------------------------------------------------------- | Households | 5,191 | 4,924 | 267 | 81.8 | -------------------------------------------------------------------------------- | Total | 6,346 | 6,061 | 286 | 100.0 | --------------------------------------------------------------------------------
Housing credit stock totalled EUR 4,858 (4,598) million, of which mortgages granted by Aktia Real Estate Mortgage Bank plc made up EUR 2,752 (2,498) million. In all, housing loans increased by 5.6% against year-end 2009, and the growth derived mainly through Aktia Real Estate Mortgage Bank's lending where the average balance in relation to collateral market value decreased to 56.7 (57.0)% compared to the corresponding period 2009. New lending to companies remained moderate and corporate loans totalled EUR 781 (782) million. The proportion of the total credit stock accounted for by corporate loans fell as planned to 12.3 (12.9)%. Lending to the public secured by collateral objects or unsecured within the framework of the financing companies Aktia Corporate Finance and Aktia Card & Finance totalled EUR 97.9 (84.8) million, representing 1.5% of total lending. The increase derived mainly through Aktia Corporate Finance. Loans with payments 1-30 days overdue rose during from year-end to 3.05 (2.97)% of credit stock, including off-balance sheet guarantee commitments. Loans with payments 31-89 days overdue increased to 0.89 (0.76)%, totalling EUR 57 million. Non-performing loans more than 90 days overdue, including claims on bankrupt companies and loans for collection, totalled EUR 42 million, corresponding to 0.66 (0.56)% of the entire credit stock plus bank guarantees.
Undischarged debts by time overdue (EUR million) -------------------------------------------------------------------------------- | Days | 30.6.2010 | % of the | 31.12.2009 | % of the | | | | credit | | credit | | | | stock | | stock | -------------------------------------------------------------------------------- | 1-30 | 195 | 3.05 | 181 | 2.97 | -------------------------------------------------------------------------------- | of which | 131 | 2.04 | 114 | 1.86 | | households | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | 31-89 | 57 | 0.89 | 46 | 0.76 | -------------------------------------------------------------------------------- | of which | 41 | 0.63 | 37 | 0.61 | | households | | | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | 90- | 42 | 0.66 | 34 | 0.56 | -------------------------------------------------------------------------------- | of which | 22 | 0.34 | 18 | 0.30 | | households | | | | | --------------------------------------------------------------------------------
The Group's financing and liquidity risks
The financing and liquidity risks are dealt with at corporate legal level, and
there are no financing commitments from the Bank Group (Aktia Bank plc and its
subsidiaries) to the insurance companies.
In the banking business, financing and liquidity risks are defined as the
availability of refinancing plus the differences in maturity between assets and
liabilities. The objective is to be able to cover one year's refinancing
requirements using existing liquidity. Following the Aktia Real Estate Mortgage
Bank's issue in March 2010, the Bank Group's liquidity buffer was good and
targets were clearly exceeded.
Within the life insurance business, liquidity risks are defined as the
availability of financing for paying out claims, savings sums and surrenders,
and pensions. The need for liquidity is satisfied mainly through the inward flow
of cash and a portfolio of investment certificates which has been adapted in
line with varying needs. Any unforeseen significant need for liquidity is taken
care of through the liquidity portfolio (primarily bonds).
Within the non-life insurance business, liquidity risks are defined as the
availability of financing for paying out claims and depend on the number of
claims and their scale. Liquidity risks are managed through the inward flow of
cash plus an adapted portfolio of bank deposits, investment certificates and
government bonds.
Counterparty risks
Counterparty risks within Group treasury
The banking business' liquidity portfolio, which comprises interest-bearing securities and stood at EUR 2,691 (2,615) million as at 30 June 2010. Individual investment decisions are made in accordance with an investment plan in place and are based on careful assessment of the counterparty. Counter-party risks are limited by the requirement for a high external rating (a minimum rating of A3 by Moody's Investor Service or equivalent), and limits are set for maximum exposure per counterparty and asset category. Of the financial assets available for sale, 61 (51)% were investments in covered bonds, 23 (36)% were investments in banks, 11 (9)% were investments in state-guaranteed financial senior bonds and approximately 5 (4)% were investments in public sector entities and companies. Counterparty risks in derivatives trading are managed through demands on collateral (CSA = Credit Support Annex) limiting the open positions. Rating distribution for banking business -------------------------------------------------------------------------------- | | 30.6.2010 | 31.12.2009 | -------------------------------------------------------------------------------- | EUR million | 2,691 | 2,615 | -------------------------------------------------------------------------------- | Aaa | 58.4% | 55.1% | -------------------------------------------------------------------------------- | Aa1-Aa3 | 30.2% | 29.6% | -------------------------------------------------------------------------------- | A1-A3 | 7.3% | 11.6% | -------------------------------------------------------------------------------- | Baa1-Baa3 | 0.6% | 0.6% | -------------------------------------------------------------------------------- | Ba1-Ba3 | 0.5% | 0.2% | -------------------------------------------------------------------------------- | B1-B3 | 0.0% | 0.0% | -------------------------------------------------------------------------------- | Caa1 or lower | 0.0% | 0.0% | -------------------------------------------------------------------------------- | No rating | 3.0%* | 2.9%* | -------------------------------------------------------------------------------- | Total | 100.0% | 100.0% | --------------------------------------------------------------------------------
*) Of which 1.8% Finnish municipalities as at 30.6.2010 and 1.9% at 31.12.2009.
Of these financial assets, 1.1 (0.8)% did not meet the internal rating requirements. As a result of a reduced credit rating, five security assets with a total market value of EUR 20 million were no longer eligible for refinancing with the central bank. Other securities that are not eligible for refinancing and are unrated totalled EUR 80 million. During the period, no write-downs were realised as a result of the issuer announcing its inability to pay whereas the write-downs during the same period last year amounted to EUR -0.4 million.
Counterparty risks in the life insurance business
Fixed income assets amounted to EUR 575 (570) million at the end of the period
which corresponds to 91 (88)% of investments. 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 Investors Service or equivalent) and by rules concerning the
maximal exposure for each counterparty and asset category.
At the end of June 2010, 40 (47)% of direct interest rate investments were
receivables from public sector entities, 23 (23)% were corporate bonds and 37
(30)% were receivables from banks and covered bonds.
3.0 (1.7)% of direct interest rate investments did not meet the internal rating
requirements at the end of the period.
The net change in value amongst interest-rate instruments earlier written down
and booked was EUR 0.6 million. During the period, no write-downs were realised
as a result of the issuer's credit rating being lowered.
Rating distribution for life insurance business
--------------------------------------------------------------------------------
| | 30.6.2010 | 31.12.2009 |
--------------------------------------------------------------------------------
| EUR million | 575 | 570 |
--------------------------------------------------------------------------------
| Aaa | 56.6% | 52.5% |
--------------------------------------------------------------------------------
| Aa1-Aa3 | 13.3% | 12.2% |
--------------------------------------------------------------------------------
| A1-A3 | 15.3% | 18.3% |
--------------------------------------------------------------------------------
| Baa1-Baa3 | 8.2% | 11.4% |
--------------------------------------------------------------------------------
| Ba1-Ba3 | 2.6% | 1.4% |
--------------------------------------------------------------------------------
| B1-B3 | 0.2% | 0.0% |
--------------------------------------------------------------------------------
| Caa1 or lower | 0.2% | 0.3% |
--------------------------------------------------------------------------------
| No rating | 3.6% | 3.9% |
--------------------------------------------------------------------------------
| Total | 100.0% | 100.0% |
--------------------------------------------------------------------------------
Counterparty risks in the non-life
insurance business
The direct interest rate investments totalled EUR 115 (104) million at the end
of June 2010 corresponding to 76 (75)% of investments. Counterparty risks
arising in connection with the non-life insurance company's investments are
managed by the requirement for at least an "investment grade" external rating
(rating class Baa3 from Moody's Investors Service or equivalent) and by rules
concerning the maximal exposure for each counterparty and asset category.
At the end of June, 61 (64)% of the direct interest rate investments were
receivables from public sector entities, 12 (10)% were corporate bonds and 28
(36)% were receivables from banks and covered bonds. During the period no
write-downs were realised.
Rating distribution for non-life insurance
business
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| | 30.6.2010 | 31.12.2009 |
--------------------------------------------------------------------------------
| EUR million | 115 | 104 |
--------------------------------------------------------------------------------
| Aaa | 56.9% | 58.4% |
--------------------------------------------------------------------------------
| Aa1-Aa3 | 19.9% | 16.7% |
--------------------------------------------------------------------------------
| A1-A3 | 11.8% | 12.5% |
--------------------------------------------------------------------------------
| Baa1-Baa3 | 2.8% | 11.4% |
--------------------------------------------------------------------------------
| Ba1-Ba3 | 7.4% | 0.5% |
--------------------------------------------------------------------------------
| B1-B3 | 0.0% | 0.0% |
--------------------------------------------------------------------------------
| Caa1 or lower | 0.0% | 0.0% |
--------------------------------------------------------------------------------
| No rating | 1.3% | 0.4% |
--------------------------------------------------------------------------------
| Total | 100.0% | 100.0% |
--------------------------------------------------------------------------------
Market valuation of
financial assets
Aktia pursues no trading activities. Both the financial assets within the
banking business and the investment assets within the life and non-life
insurance businesses are invested in securities with access to market prices in
an active market, and are valued in accordance with official quoted prices. Any
significant or long-term impairment of market value compared to the acquisition
price is shown in the income statement, while interest-rate fluctuations are
reported under the fund at fair value after the deduction of deferred tax.
Structural interest rate risk in the banking business
Structural interest rate risk arises as a result of an imbalance between
interest rate ties and the re-pricing of assets and liabilities, and affects net
interest income. Hedging derivative instruments and investments within the
liquidity portfolio are exploited to reduce the volatility in net interest
income.
According to the strategy for interest rate risk management, a parallel upward
or downward shift in the interest rate curve of one percentage point shall not
influence estimated net interest income of the banking business for the next 12
months by more than 7%, and 8% for the following year. At the end of the period,
the set targets were met. The growth in the deposit stock diminishes net
interest income's sensitivity to an upward shift in the interest rate curve.
Market value interest rate risk in the banking business
Market value interest rate risk refers to changes in value of financial
