In brief: MuniFin in 2019

• The Group’s net operating profit excluding unrealised fair value changes amounted to EUR 186 million (EUR 190 million), down 2.1% on the previous year. The Group’s net interest income improved slightly to EUR 240 million (EUR 236 million). Expenses grew as expected and amounted to EUR 60 million (EUR 49 million, +22.8%).
  
• Unrealised fair value changes weakened the net operating profit for the financial year by EUR 54 million, whereas they had no impact on the result in the previous year (EUR 0 million). Taking into account these valuations, Group’s net operating profit amounted to EUR 131 million (EUR 190 million).
  
  
• The Group’s capital adequacy continued to strengthen and its CET1 capital ratio was 83.1% (66.3%). Tier 1 and total capital ratio were 107.9% (88.0%) at the end of 2019.
  
  
• Leverage ratio amounted to 4.0% (4.1%) at the end of December.
  
  
• Long-term customer financing grew by 8.0% (6.1%) and the portfolio amounted to EUR 24,798 million (EUR 22,968 million) at the end of the year. New loans withdrawn during the year totalled EUR 3,175 million (EUR 2,953 million). In the entire customer finance portfolio, the amount of green financing aimed at environmental investments totalled EUR 1,263 million (EUR 1,081 million).
  
  
• New long-term funding in January–December amounted to EUR 7,385 million (EUR 7,436 million). The total amount of funding was EUR 33,929 million (EUR 30,856 million) at the end of the year. At year-end, the total amount of green bonds issued amounted to EUR 1,478 million (EUR 978 million).
  
  
• Liquid assets grew by the end of the year to EUR 9,882 million (EUR 8,722 million). At the end of December, the Liquidity Coverage Ratio (LCR) was 430.2% (176.7%).
  
  
• Return on equity (ROE) declined due to unrealised fair value changes to 6.8% (10.8%).
  
  
• The Board of Directors proposes to the Annual General Meeting to be held in spring 2020 that EUR 0.16 per share be paid in dividends, totalling EUR 6,250,207.68. Dividends of EUR 6,250,207.68 were paid in 2019.
  
  
• Outlook for 2020: MuniFin expects that net operating profit excluding unrealised fair value changes will be on a par with 2019. The adoption of IFRS 9 has led to a significant increase in the recognition of unrealised fair value changes in profit or loss, which increases the volatility of net operating profit. For more information on the outlook, see the section entitled “Outlook for 2020”.

Key figures (Group)

*Alternative Performance Measure

MuniFin Group defines the Alternative Performance Measures (APMs) to be financial measures that have not been defined in the IFRS standards or the capital requirements regulation (CRD/CRR). The APMs improve comparability between companies in the same sector and between reporting periods and provide valuable information to the readers of the financial reports. The APMs provide a more consistent basis for comparing the results of financial periods and for assessing MuniFin Group’s performance. They are also an important aspect of the way in which Group’s management defines operating targets and monitors performance.

Definitions, calculation formulas and reconciliations of Alternative Performance Measures are presented in the Note of the Report of the Board of Directors. The Alternative Performance Measures are presented in the Group’s financial reporting according to the guidelines by European Securities and Market Authority (ESMA). MuniFin Group’s Annual Report will be published on 4 March 2020.

Comment on the 2019 financial year by President and CEO Esa Kallio:

Uncertainty continued to prevail in the global economy in 2019, but the Finnish economy remained surprisingly robust. The development of local government finances was not as strong as that of the country’s economy. This was a challenging year for municipalities due to the shortfall in tax revenues caused by the tax card and tax register reform.

The health and social services reform collapsed in the beginning of the year. Uncertainty still continues relating to municipal and hospital districts’ investments in health and social services, even though the reform is on the agenda of the new Government. In spite of this uncertainty, investment needs are high, particularly in growing areas where there is pressure to develop infrastructure and the service network. Migration has gained momentum, which has also increased the need to step up state-subsidised housing production. Market-financed housing production decreased in 2019, but demand for housing in central cities has not declined, but in fact continues to increase.

MuniFin once again performed excellently in its funding. Our benchmark bonds were oversubscribed multiple times, including our fourth green bond. One of the reasons for this is that there is plenty of demand for safe investments around the world – but it also testifies to MuniFin’s good reputation in the international capital market.

In line with our mission, we continued to invest in the development of digital services. With digital solutions, we seek to enhance the efficiency of both our own and our customers’ operations and to give our customers and own experts access to a broader range of information. Information systems are also in need of development due to increasing regulation in our sector and the necessity to develop both the efficiency of our operations and knowledge-based management.

International investors are showing ever-greater interest in responsible investing and our Finnish customers have discovered the benefits of green finance. MuniFin was the first credit institution to launch green finance onto the Finnish market and the first Finnish green bond issuer. The company continues investments into sustainable finance by preparing a new social finance product that we are launching in 2020. Social finance is meant for investments in non-profit housing production promoting equality and sense of community, as well as investments in wellbeing and education.

MuniFin celebrated its 30th anniversary in 2019 – this was a financially stable year of renewal for the company. I would like to thank our customers and partners for these successes. I am particularly grateful for our staff for their commitment to the socially meaningful work that we do.

Information on Group results

Group’s net operating profit excluding unrealised fair value changes

The Group’s core business operations remained strong during 2019. MuniFin Group’s net operating profit excluding unrealised fair value changes saw a slight year-on-year decline, 2.1%, and amounted to EUR 186 million (EUR 190 million). Income grew by 3.3% year on year. The profit was reduced by growth in expenses, as expected.

Net interest income was up 1.7% on the previous year to EUR 240 million (EUR 236 million). Net interest income grew due to successful funding operations, growth in customer finance and a favourable interest rate environment. The Group’s net interest income does not recognise the EUR 16.2 million in interest expenses of the AT1 capital loan through profit or loss, as the capital loan is treated as an equity instrument in the consolidated accounts. The interest expenses of the capital loan are treated similarly to dividend distribution, that is, as a decrease in retained earnings under shareholders’ equity upon realisation of interest payment on an annual basis.

Other income tripled from the previous year to EUR 6 million (EUR 2 million). Other income includes commission income, realised net income from securities and foreign exchange transactions, net income from financial assets measured at fair value through other comprehensive income and other operating income. The most significant item under the Group’s other income was the turnover of the subsidiary Inspira.

The Group’s expenses grew by 22.8% compared with the previous year and amounted to EUR 60 million (EUR 49 million) at the end of 2019.

Commission expenses totalled EUR 4 million (EUR 4 million) and primarily comprise of paid guarantee fees, custody fees and funding programme update fees.

Administrative expenses grew by 18.5% to EUR 32 million (EUR 27 million), of which personnel expenses comprised EUR 18 million (EUR 15 million) and other administrative expenses EUR 15 million (EUR 12 million). Administrative expenses were increased by growth in the number of employees at the Group’s parent company. The average number of parent company employees during the financial year was 151, as compared to 135 in the previous year. The personnel count has risen because banking regulation has led to a continuous need to develop the company’s risk management, administration and processes as well as due to major development investments. The growth in other administrative expenses has been influenced by the company’s investments in ensuring the operational reliability of information systems and developing customer service and the service offering. During the report year, MuniFin signed outsourcing agreements for information system end-user and infrastructure services as well as to ensure the operational reliability of business systems and to improve the availability of services. A project to implement outsourcing procedures is under way and is expected to be completed in 2020.

Depreciation and impairment on tangible and intangible assets amounted to EUR 6 million at the end of 2019 (EUR 2 million). The increase in depreciation is largely due to strong investments in system development in recent years. MuniFin also updated its depreciation principles during the financial year. As a result, an additional cost item of EUR 2.5 million was recognised in depreciation and certain other cost items.

Other operating expenses increased by 14.7% year-on-year to EUR 18 million (EUR 15 million). Growth in other operating expenses was mainly due to costs related to systems and process development. Fees collected by the authorities decreased by EUR 0.3 million (-4.7%) compared to the previous year and amounted to EUR 7 million (EUR 7 million).

The amount of expected credit losses (ECL) calculated in accordance with IFRS 9 decreased during the financial year, and the change recognised in the profit was EUR 0 million (EUR 1 million).

Group’s result and unrealised fair value changes

Taking unrealised fair value changes into account, net operating profit in 2019 was EUR 131 million (EUR 190 million). Unrealised fair value changes weakened MuniFin’s net operating profit by EUR 54 million during the financial year; in the previous year, they had no impact (EUR 0 million). Unrealised fair value changes account for EUR 54 million of the EUR 59 million weakening in net operating profit. In 2019, net income from hedge accounting amounted to EUR -19 million (EUR 28 million) and unrealised net income from securities transactions to EUR -35 million (EUR -27 million). The Group’s profit for the financial year totalled EUR 105 million (EUR 152 million).

The Group’s comprehensive income includes unrealised fair value changes of EUR 28 million (EUR 72 million). During the financial year, the most significant item affecting the comprehensive income was a net change in Cost-of-Hedging totalling EUR 17 million (EUR 28 million). The fair value change due to changes in own credit risk associated with financial liabilities designated at fair value through profit or loss amounted to EUR 10 million (EUR 49 million).

On the whole, unrealised fair value changes net of deferred tax decreased the amount of consolidated equity by EUR 21 million (EUR +57 million) and CET1 capital net of deferred tax in capital adequacy by EUR 28 million (EUR +19 million).

The adoption of IFRS 9 at the beginning of 2018, and the related changes in preparation and valuation principles, have significantly increased volatility of unrealised fair value changes, as financial instruments are increasingly measured at fair value. Changes in fair value reflect the temporary impact of market conditions on the valuation levels of financial instruments on the reporting date. Unrealised fair value changes may vary significantly from one reporting period to another, causing increased volatility in profit, equity and own funds in capital adequacy calculations.

In accordance with its risk management principles, MuniFin uses derivatives to financially hedge against interest rate, foreign exchange risk and other market and price risks. Cash flows are hedged, but due to the generally used valuation methods, changes in fair value differ between the hedged financial instrument and the respective hedging derivative. Changes in the shape of the interest rate curve and credit risk spreads in different currencies affect the valuations, which
causes the fair values of hedged assets and liabilities and hedging instruments to behave in different ways. In practice, the changes in valuations are not realised on a cash basis because MuniFin primarily holds loan and funding agreements and their hedging derivatives until the maturity date. The unrealised fair value changes in the financial year were influenced, in particular, by changes in interest rate expectations in MuniFin’s main funding markets.

The Group’s effective tax rate during the financial year was 20.0% (20.0%). Taxes in the consolidated income statement amounted to EUR 26 million in 2019 (EUR 38 million). The Group’s full-year return on equity (ROE) was 6.8% (10.8%). Excluding unrealised fair value changes, ROE was 9.6% (10.7%).

Parent company’s result

MuniFin’s total net interest income at year-end was EUR 224 million (EUR 220 million) and net operating profit stood at EUR 115 million (EUR 174 million). The profit after appropriations and taxes was EUR 8 million (EUR 22 million). The interest expenses of EUR 16.2 million for 2019 on the AT1 capital loan, which forms part of Additional Tier 1 capital in capital adequacy calculation, have been deducted in full from the parent company’s net interest income (EUR 16.2 million). In the parent company, the AT1 capital loan has been recorded under the balance sheet item “Subordinated liabilities”. The balance sheet of the parent company at the end of the year was EUR 38,933 million (EUR 35,676 million).

Inspira

The turnover of MuniFin’s subsidiary Inspira was EUR 3.5 million for 2019 (EUR 2.5 million), and its net operating profit amounted to EUR 0.2 million (EUR 0.0 million).

Outlook for 2020

2020 began on a more positive note for the international economy than the previous year. On the basis of trend indicators, the global economy will most likely ride out its weakest phase during the winter and expectations of gradual recovery have strengthened. However, economic growth in 2020 will be slower than the long-term trend. In Europe, the situation is still affected by the hard-to-predict impacts of Brexit.

Problems in the global economy have a delayed impact on Finland – slowdown in growth still largely lies ahead. Economic momentum is losing steam, which is already evident in the stalled growth of goods exports and the decline in new orders in industry. The improvement in the employment rate has in practice also come to a standstill. Going forward, economic growth in Finland will be slowed particularly by the cooldown in new construction. That said, non-profit housing production financed by MuniFin will in all likelihood remain at the same level as in previous years. GDP growth is currently expected to decline to around one per cent, or even slightly less, in 2020. In spite of the slowdown in economic growth, municipalities remain under pressure to invest, especially in growth centres.

Preparations for the health and social services reform have been ongoing in Finland for a long time. The reform is also on the agenda of the current Government. However, it is challenging to assess its overall effects on MuniFin’s customers and operations, as no concrete proposals or decisions have as yet been made about the reform. The reform is not currently expected to have a fundamental impact on MuniFin’s operating volumes in 2020.

In 2020, MuniFin will continue to put major effort into developing its systems in order to further enhance its efficiency and operations, as well as on the digitisation of services. MuniFin expects that costs will rise year-on-year, particularly due to these outlays on information system development.

According to the bank capital adequacy regulations (CRR II) adopted in 2019 and applicable in June 2021 onwards, a public development credit institution may in the leverage ratio calculation deduct all credit receivables from the Sovereign and municipalities. Based on the self-assessment, MuniFin has determined that it fulfils the definition of a public development credit institution. Should the definition be fulfilled, the changes in CRR II would have a significant positive effect on MuniFin’s leverage ratio.

Considering the above factors, and assuming that the trend in market rates and credit risk premiums does not deviate significantly from forecasts, MuniFin expects that net operating profit excluding unrealised fair value changes will be on a par with 2019. The adoption of IFRS 9 has led to a significant increase in the recognition of unrealised fair value changes in profit or loss, which increases the volatility of net operating profit.

The estimates presented herein are based on current views on the development of the operating environment and operations.

Webcast for investors and other stakeholders

MuniFin’s results for the year 2019 will be presented to investors and other stakeholders in a webcast held on 14 February 2020 at 1 pm EET. The webcast is available at munifin.videosync.fi/financial-statements-2019. A video recording will be published at MuniFin’s website after the webcast.

Municipality Finance Plc

Further information:

Esa Kallio, President and CEO, tel. +358 50 337 7953
Harri Luhtala, Executive Vice President, Finance, CFO, tel. +358 50 592 9454

MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet totals nearly EUR 39 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.

MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled entities and non-profit housing organisations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.

MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer. The funding is exclusively guaranteed by the Municipal Guarantee Board.

Attachment

• MuniFin Financial Statements Bulletin_2019_SECURE

Municipality Finance Plc
Stock Exchange Release
28 January 2020 at 8 am (EET)

Municipality Finance Plc financial calendar in 2020

In this stock exchange release Municipality Finance Plc provides its financial calendar for 2020. The calendar includes the planned publication dates of Municipality Finance’s financial reports.

The financial statements of Municipality Finance for the year 2019 will be published on 13 February 2020. An investor webcast on financial statements is arranged in English on 14 February at 1 pm (EET). The webcast will be available at https://munifin.videosync.fi/financial-statements-2019.

The annual report 2019 will be published on 4 March 2020. On the same date Municipality Finance will also publish the Pillar III disclosure based on the Capital Requirements Regulation, the Corporate Governance Statement and the remuneration report.

The half year report for the period 1 January – 30 June 2020 will be published on 14 August 2020.

The financial reports are published in English and in Finnish.

The Annual General Meeting of Municipality Finance Plc is planned be held on 25 March 2020.

MUNICIPALITY FINANCE PLC

Harri Luhtala
Executive Vice President, Finance, CFO
Tel. +358 50 592 9454

MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet totals EUR 37 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.

MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled companies and non-profit housing corporations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.

MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer.  The funding is exclusively guaranteed by the Municipal Guarantee Board.

The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd.

Read more: www.munifin.fi

Municipality Finance Plc
Stock Exchange Release
26 November 2019 at 11.30 am (EET)

Municipality Finance’s capital adequacy remains well above the ECB minimum requirements

The European Central Bank (ECB) has updated the capital buffer requirement (P2R) imposed on Municipality Finance as part of the yearly Supervisory Review and Evaluation Process (SREP). The requirement was kept unchanged at 2.25 percent. The updated capital buffer requirement is effective on 1 January 2020.

The capital buffer requirement pertains to CET1 capital. When taking account of this capital buffer requirement, the minimum for MuniFin’s CET1 ratio is currently 10.25 percent.

Municipality Finance’s capital adequacy ratio exceeds by many times the requirement. At the end of June 2019 the group’s ratio of CET1 capital ratio was 69.1 percent.

MuniFin is supervised by the European Central Bank (ECB) and the continuous SREP process is part of the banking supervision activities carried by the ECB. The banking supervision aims to ensure that credit institutions have appropriate risk management methods in place, as well as sufficient capital and liquidity.

MUNICIPALITY FINANCE PLC

Harri Luhtala
Executive Vice President, CFO
Tel. +358 50 592 9454

Measured by the group’s balance sheet, MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet totals EUR 37 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland. MuniFin is an integral part of the Finnish public economy.

MuniFin’s mission is to help its customers thrive in changing circumstances. The company ensures competitive funding for its customers in all market conditions. Its customers are Finnish municipalities, municipal federations, municipally controlled companies and non-profit housing cor­porations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centers, schools and day care centers, and homes for the elderly.

MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets. The funding is exclusively guaranteed by the Municipal Guarantee Board.

The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd.

Read more: www.munifin.fi

Municipality Finance Plc
Half Year Report
15 August 2019 at 4:00 pm (EET)

Municipality Finance Plc Half Year Report January-June 2019: Business operations remained strong

This release is a summary of Municipality Finance’s Half Year Report published on 15 August 2019. The complete Half Year Report with tables is attached to this release and available at www.munifin.fi.

In brief: Municipality Finance Group in the first half of 2019

• The net operating profit excluding unrealised fair value changes decreased by 2.9% and amounted to EUR 90.0 million in the review period (EUR 92.7 million). Taking into account unrealised fair value changes, net operating profit amounted to EUR 33.7 million (EUR 124.4 million).
• The Group’s net interest income remained at the same level than in the previous year and amounted to EUR 117.2 million (EUR 118.0 million). The expenses grew, as anticipated, by 17.5% from the previous year and amounted to EUR 30.6 million (EUR 26.0 million). The unrealised fair value changes weakened the result by EUR 56.3 million, while a year earlier they improved the result by EUR 31.7 million.
• The Group’s capital adequacy was further strengthened and the CET1 capital ratio was 69.1% (66.3%). Tier 1 capital ratio and total capital ratio were 91.4% (88.0%) at the end of the review period.
• At the end of June, the Group’s leverage ratio amounted to 3.99% (4.06%).
• Long-term customer financing grew by 3.3% (1.7%) and the portfolio amounted to EUR 23,719 million at the end of the review period (EUR 22,968 million). This figure includes long-term loans and leasing. The total of new loans withdrawn in January–June amounted to EUR 1,386 million (EUR 1,239 million). In the entire customer finance portfolio, the amount of green financing aimed at environmentally friendly investments totalled EUR 1,194 million (EUR 1,081 million).
• In January–June, EUR 3,432 million was acquired in long-term funding (EUR 3,985 million). The total amount of acquired funding was EUR 31,822 million (EUR 30,856 million).
• Total liquidity remained close to the year-end level and stood at EUR 8 554 million at the end of June (EUR 8 722 million).
• Return on equity (ROE) decreased due to unrealised fair value changes and was 3.60% (10.76%).
• Outlook for the second half of 2019: MuniFin estimates its net operating profit excluding unrealised fair value changes to remain at the same level as in 2018 or decrease, even though MuniFin’s net operating profit excluding unrealised fair value changes was better than anticipated in the first half of 2019. The IFRS 9 standard adopted at the beginning of 2018 has significantly increased unrealised fair value changes recognised in profit and loss and in equity, which respectively increases the volatility of net operating profit. More information on outlook in section “Outlook for the second half of 2019”.

Comparatives deriving from the income statement are based on figures reported for the corresponding period in 2018. Balance sheet and other cross-sectional figures on 31 December 2018 are used as derivatives unless otherwise stated.

President and CEO of MuniFin, Esa Kallio:

“In MuniFin’s operations, the first six months of 2019 were in line with business expectations. In the past years, MuniFin has invested strongly in responding to the changing customer needs. This year we have hired for the first time in our company’s history a chief economist who has a central role in supporting our customers with insight into market developments and their effects on the economy and financial market. We have also been active in growing our service portfolio. Leasing has been a welcome financing option among customers and the customer base of green financing is growing continuously: both products are well-established in the market and have managed to deepen MuniFin’s customer relations. Demand for financing remained at a good level in both the municipal and social housing production segments.

Therefore, our core business remained strong but the result was weakened mainly due to the volatility brought about by the accounting standards adopted in the beginning of 2018 concerning the unrealised fair value changes of financial instruments.

The task of restructuring the organisation and production of Finland’s health and social services failed during the term of the previous government, but the reform proposedly based on a regional model is also on the new government’s agenda. This time, the discussions regarding the financing of the health and social services reform should not only concern the operational expenditure but also how the funding for the required investments in premises, infrastructure and equipment is arranged. The current funding model of MuniFin and the Municipal Guarantee Board has proven effective in the financing of the municipal and housing sectors and going forward, its use should also continue in relation to investments related to health and social services. The same model should also be used to finance major infrastructure projects the government is currently initiating.

New banking regulation requirements were published during this review period. One of the aims of the wide-ranging regulation renewal is to significantly ease the leverage ratio requirements for public development credit institutions such as MuniFin in the future. The final effects of the change will be clarified after possible discussions with the supervisory authority European Central Bank. “

Group’s key figures

MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet totals nearly EUR 37 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.

MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled companies and non-profit housing corporations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.

MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer.  The funding is exclusively guaranteed by the Municipal Guarantee Board.

The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services
Inspira Ltd.

Read more: www.munifin.fi

Attachment

• MuniFin Half year report 2019_ENG_secure

Municipality Finance Plc
Stock exchange release
28 June 2019 at 1.30 p.m. (EET)

Systemic risk buffer requirement on MuniFin remains on the current level (1.5%)

On 28 June 2019, the Finnish Financial Supervisory Authority (FIN-FSA) has decided to remain the systemic risk buffer requirement on MuniFin on its current level. The buffer set by the FIN-FSA is 1.5% and it will be covered by common equity tier 1 capital (CET1). The decision will take effect on 1 July 2020.

MuniFin clearly meets all capital requirements set to it.

MUNICIPALITY FINANCE PLC

Harri Luhtala
CFO
tel. +358 50 592 9454

MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet exceeds EUR 35 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.

MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled companies and non-profit housing corporations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.

MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer.  The funding is exclusively guaranteed by the Municipal Guarantee Board.

The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd.

Read more: www.munifin.fi

Municipality Finance Plc
Stock exchange release
28 March 2019 at 1:00 p.m. (EET)

Resolutions by the Annual General Meeting of Municipality Finance Plc held on 28 March 2019

The Annual General Meeting of Municipality Finance Plc held on 28 March 2019 adopted the company’s financial statements and discharged the members of the Board of Directors, the CEO, and the Deputy to the CEO from liability for the financial year 2018.

Use of profit shown on the balance sheet

The Annual General Meeting decided that dividend amounting to EUR 0.16 per share, totalling EUR 6,250,207.68, shall be paid out, and that the remainder of distributable funds of EUR 127,617,814.70 be retained in equity. Dividends will be paid on 9 April 2019 to each shareholder recorded in the company’s list of shareholders on 4 April 2019.

Amendment of the Articles of Association

The Annual General Meeting decided to amend MuniFin’s Articles of Association by increasing the maximum number of Board members to nine. Currently the Articles of Association allow for maximum of eight Board members. The Annual General Meeting also decided that some technical amendments shall be made to the Articles of Association.

Remuneration and composition of the Board of Directors

The Annual General Meeting decided the following remuneration for the members of the Board of Directors for the term 2019-2020: annual remuneration of a Board member EUR 20,000; annual remuneration of the Vice Chairperson of the Board EUR 23,000; annual remuneration of the Chairperson of the Board EUR 35,000; to the members, a fee of EUR 500 per Board and committee meeting attended; and to the chairpersons, EUR 800 per meeting attended. The remuneration for the term 2019-2020 corresponds to the remuneration for the term 2018-2019. The Annual General Meeting also decided that such fees are also paid per each meeting required by authorities.

The Annual General Meeting decided that nine members will be elected to the Board of Directors for the term 2019-2020 and that the following current members will be re-elected: Ms. Minna Helppi, Mr. Markku Koponen, Mr. Jari Koskinen, Mr. Kari Laukkanen, Ms. Vivi Marttila, Ms. Tuula Saxholm and Ms. Helena Walldén. The Annual General Meeting confirmed the election of Ms. Maaria Eriksson and Ms. Raija-Leena Hankonen as new members of the Board of Directors for the Term 2019-2020 – provided however that Raija-Leena Hankonen’s term will begin once the amendment of the Articles of Association concerning the number of the Board members has been registered in the trade register in accordance with the Finnish Limited Liability Companies Act

The CEO’s review

Esa Kallio, the President and CEO of Municipality Finance, noted in his speech that progress in respect of the regional government, health and social services reform has not been made in accordance with the previous plan and that proposals made for new legislation will no longer be addressed by the parliament. The government to be appointed after the parliamentary election in spring 2019 may reinitiate the process to prepare a reform. However, at this stage there are no proposals for legislation nor are there any concrete plans. For this reason MuniFin is not able to assess the effects such potential reform may have on its clients’ financing needs or its own operations. MuniFin’s objective is to continue to be able to finance investments regarding social and healthcare sector regardless of in what form the reform will potentially be implemented. Through MuniFin’s activities, the joint funding system for Finnish municipalities has proven functional even under challenging market conditions for which reason MuniFin deems that it would be sensible to make use of this system in financing the reformed social and healthcare sector, Mr. Kallio said.

Election and remuneration of the Auditor

KPMG Oy Ab was elected as the company’s auditor with Tiia Kataja, Authorized Public Accountant, as the principal auditor. The auditor’s fees will be paid against the invoices approved by the company.

Constitutive Meeting of the Board of Directors

At its constitutive meeting, the Board of Directors appointed Helena Walldén as the Chairperson and Tuula Saxholm as the Vice Chairperson of the Board. The following persons were appointed to the Remuneration Committee: Helena Walldén as the Chairperson, and Markku Koponen, Jari Koskinen and Tuula Saxholm as members. The following persons were appointed to the Audit Committee: Markku Koponen as the Chairperson, and Raija-Leena Hankonen, Kari Laukkanen and Vivi Marttila as members. The following persons were appointed to the Risk Committee: Kari Laukkanen as the Chairperson, and Maaria Eriksson, Raija-Leena Hankonen and Minna Helppi as members.

Additional information on the company’s operations in 2018 is available in the company’s Annual Report, which can be downloaded in PDF format from the company website at www.munifin.fi.

MUNICIPALITY FINANCE PLC

Esa Kallio
President and CEO
tel. +358 50 337 7953

MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet exceeds EUR 35 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.
MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled companies and non-profit housing corporations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.
MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer. The funding is exclusively guaranteed by the Municipal Guarantee Board.
The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd.
Read more: www.munifin.fi

Municipality Finance Plc
Stock exchange release
7 March 2019 at 2 pm (EET)

Municipality Finance’s Annual Report for 2018 published

Municipality Finance’s Annual Report, Corporate Governance Statement, and Remuneration Report for the year 2018 have been published in English and in Finnish on the company’s website at www.munifin.fi.

Municipality Finance has also published Pillar 3 Disclosure document in accordance with Regulation (EU) No 575/2013 and Directive 2013/36/EU. The document is available in English on the company’s website.

MUNICIPALITY FINANCE PLC

Esa Kallio
President and CEO
tel. +358 50 337 7953

MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet exceeds EUR 35 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.

MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled companies and non-profit housing corporations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.

MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer.  The funding is exclusively guaranteed by the Municipal Guarantee Board.

The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd.

Read more: www.munifin.fi

Municipality Finance Plc
Financial Statements Bulletin
13 February 2019, at 2:00 p.m.

Municipality Finance Plc Financial Statements Bulletin

1 January – 31 December 2018

2018 in Brief

• The Group’s net operating profit without unrealised fair value changes grew by 1.2% and amounted to EUR 189.6 million at the end of the financial year (2017: EUR 187.4 million). Taking fair value changes into account, net operating profit was EUR 190.0 million (2017: EUR 198.4 million).
• The Group’s net interest income grew by 3.4% from the previous year and amounted to EUR 236.3 million (2017: EUR 228.5 million).
• The balance sheet total grew by 2.7% and was EUR 35,677 million (2017: EUR 34,738 million) at the end of the year.
• The Group’s capital adequacy continued to strengthen and CET1 capital ratio was 66.34% (2017: 53.01%). Tier 1 capital ratio and total capital ratio were 87.97% at the end of December (2017: 72.50%).
• At the end of December, the Group’s leverage ratio amounted to 4.06% (2017: 3.84%).
• New loans withdrawn in the January-December period totalled EUR 2,953 million (2017: EUR 2,439 million). The lending portfolio amounted to EUR 22,354 million (2017: EUR 21,219 million). Of this amount, EUR 1,143 million had been withdrawn at the end of December 2018 as green finance targeted for environment-friendly investments (2017: EUR 803 million).
• The leasing portfolio increased 42.2% and amounted to EUR 614 million at the end of December (2017: EUR 432 million).
• In January-December, EUR 7,436 million was acquired in long-term funding (2017: EUR 9,510 million). The total amount of acquired funding was EUR 30,856 million (2017: EUR 30,153 million).
• At the end of December, total liquidity was EUR 8,722 million (2017: EUR 9,325 million).
• Return on equity (ROE) decreased slightly to 10.76% (2017: 12.57%).
• The Board of Directors proposes to the Annual General Meeting in spring 2019 that EUR 0.16 per share will be paid in dividends, totalling EUR 6,250,207.68. In 2018, a dividend of EUR 6,250,207.68 was paid.

Key Figures (Group)

Comment on the Financial Year by President and CEO Esa Kallio:

2018 was a good year for MuniFin and its customers. Demand for financing grew slightly and our performance in funding was excellent. With our revamped customer strategy, we aim to provide even more suitable solutions.

Finland’s economy continued to grow in 2018, although the pace slowed down towards the end of the year. Investment needs among our customers remained high, and thus we saw continued good demand for our financing, both among municipalities and in state-subsidised housing production. Migration to growth centres maintained the need for affordable rental housing.

The international economy was filled with uncertainties in 2018. These include the growing tension between major world powers, the threat of a trade war, Brexit turmoil and Italy’s worrying debt situation, all of which will also have an impact on the capital markets in 2019. Despite the instability, we performed extremely well in our funding activities – we were successful in the timing of our benchmark bond issuances and they were in great demand among international investors.

Our strategy was revamped in 2017 and it extends to 2022. Our vision is to be the best possible financial expert for our customers in an ever-changing world. With this goal in mind, we polished our values and sharpened our customer strategy this year.

Our strategy is built on rock-solid foundations. In the future, we will continue to focus on financing the diverse needs of municipalities and state-subsidised housing production. With our new customer operations model, we seek to find solutions that are an even better fit for our customers’ changing needs.  We feel that our responsibility as a builder of an affluent society extends over the entire lifecycle of financing.

MuniFin’s operating model is based on partnership. I would like to take the opportunity to thank our customers for our excellent cooperation, constantly developed together along the lines of the customers’ expectations. MuniFin’s own experts have worked throughout the year with strong commitment and I owe this year’s good result for them.

Operating Environment in 2018

In 2018, trends in the Finnish and global economies remained generally favourable, but the rate of growth slowed down in many areas. Forecasting market trends was complicated by, among other things, the growing tensions between the major world powers, the consequent restrictions on international trade, and, in Europe, particularly by the risks posed by Italy’s debt situation and the difficulties involved in the Brexit negotiations. However, these, and the ongoing uncertainties affecting global politics, did not have a major impact on the markets. In 2018, the European Central Bank ended net purchases under its purchase programme, but in spite of this plenty of liquidity was available in the market for most of the year, meaning that the availability of financing remained at a good level. However, towards the end of the year market liquidity weakened substantially compared with the beginning of the year.

Housing construction remained brisk in Finnish growth centres. Municipalities also stepped up their investments, and demand for financing grew towards the end of the year due to lower-than-anticipated municipal tax revenue. Changes in service needs ushered in investment pressures in growth centres with respect to municipal infrastructure, traffic arrangements, and schools and daycare centres. Also the property maintenance backlog was shortened around the country.

The regional government, health and social services reform did not progress as expected during the year. This uncertainty involves MuniFin’s customer base, but it does not appear to have had a significant impact on the appetite for investments.

Credit ratings

The credit ratings of Moody’s and Standard & Poor’s and their outlooks for MuniFin did not change in 2018. The credit rating of MuniFin is the same as the state’s credit rating: Standard & Poor’s rating is AA+ and Moody’s rating is Aa1. The ratings’ outlooks are stable.

Income Statement and Statement of Financial Position

Municipality Finance Group

Figures have been rounded, so the total of individual figures may differ from the total figure presented.

* The company has applied the IFRS 9 option to not restate prior periods, and thus the unrealised fair value changes for 2017 are not fully comparable due to reclassification.

The Group’s business operations remained strong during 2018. The Group’s net operating profit without unrealised fair value changes amounted to EUR 189.6 million (2017: EUR 187.4 million). This was affected particularly by the year-on-year improvement in net interest income, but also by higher costs. Taking unrealised fair value changes into account, net operating profit was EUR 190.0 million (2017: EUR 198.4 million).

Net interest income grew by 3.4% to EUR 236.3 million (2017: EUR 228.5 million) at the end of the financial year. Growth of net interest income was due to successful funding operations, volume growth and a favourable interest rate environment for MuniFin’s business operations. The Group’s net interest income does not recognise the interest expenses of the AT1 capital loan through profit or loss, as the capital loan is treated as an equity instrument in the consolidated accounts. The interest expenses of the capital loan are treated similarly to dividend distribution, that is, as a decrease in retained earnings under shareholders’ equity upon realisation of payment on an annual basis.

Following the adoption of IFRS 9 at the beginning of 2018, MuniFin reclassified financial assets and liabilities. Due to reclassification, the unrealised fair value changes of financial instruments have increased the volatility of financial results. At year-end, the impact of the unrealised fair value changes on profit totalled EUR 0.4 million (2017: EUR 11 million), of which net income from hedge accounting amounted to EUR 27.6 million (2017: EUR 2.7 million). Unrealised net income from securities transactions totalled EUR -27.3 million (2017: EUR 8.3 million). The company has applied the IFRS 9 option to not restate prior periods, and thus the unrealised fair value changes for the previous year are not fully comparable due to reclassification.

The Group’s expenses grew by 14.5% and amounted to EUR 49.1 million at the end of December (2017: EUR 42.9 million).

Commission expenses totalled EUR 4.2 million (2017: EUR 4.1 million) and primarily comprise paid guarantee fees, custody fees and funding programme update fees.

Administrative expenses were EUR 27.2 million (2017: EUR 22.3 million), of which personnel expenses comprised EUR 15.2 million (2017: EUR 13.6 million) and other administrative expenses EUR 12.0 million (2017: EUR 8.8 million). Administrative expenses were increased particularly by growth in the number of employees at the parent company. Due to increase in banking regulation, the company needs to develop its governance, risk management and processes. In addition, the company made substantial investments in developing customer service as well as service offerings and systems.  

Depreciation and impairment on tangible and intangible assets amounted to EUR 2.3 million at the end of the financial year (2017: EUR 2.0 million).

Other operating expenses grew to EUR 15.4 million (2017: EUR 14.5 million). Growth in other operating expenses was mainly due to financial supervision costs paid to the ECB and to the Finnish Financial Supervisory Authority, and the contributions paid to EU-level crisis resolution fund.

Impairments of financial assets have been calculated as from the beginning of 2018 in accordance with the requirements of IFRS 9. The amount of expected credit losses (ECL) calculated in accordance with IFRS 9 decreased during the financial year compared with the amount booked at the time of IFRS 9 transition on 1 January 2018 and the change recognised in profit or loss was EUR 0.6 million at the end of the year.

The Group’s comprehensive income includes unrealised fair value changes related to financial instruments due to the IFRS 9 transition that are not treated as fair value changes through profit or loss. During the financial year, the largest items affecting the comprehensive income were a fair value change of EUR 49.0 million due to changes in own credit risk on financial liabilities designated at fair value through profit or loss as well as a net change in cost-of-hedging totalling EUR 27.7 million. The changes in the fair value of items included in the comprehensive income reflect the temporary effects of market conditions on the valuation level of financial instruments at the reporting date. Deferred valuation changes may vary significantly over the reporting periods, causing more volatility in fair value equity reserves.

The consolidated balance sheet saw growth of 2.7% from the end of 2017 and at the end of December 2018 amounted to EUR 35,677 million (2017: EUR 34,738 million). The increase in balance sheet assets is primarily due to growth in the lending and leasing portfolio. The growth of liabilities is due to increased funding and is shown in liabilities to credit institutions, liabilities to the public and public sector entities, and debt securities issued. Equity at the end of the year totalled EUR 1,486 million (2017: EUR 1,339 million), including the AT1 capital loan of EUR 347.4 million. Equity increased due to profit for the period. However, the transition to IFRS 9 as from 1 January 2018 decreased equity by EUR 43 million. In addition, in the consolidated accounts interest expenses amounting to EUR 12.6 million net of deferred tax on the AT1 capital loan were deducted from the equity upon the realisation of the interest payment in April, and the dividends of EUR 6.3 million paid to MuniFin shareholders were likewise deducted.

The Parent Company

At the end of 2018, MuniFin’s net interest income was EUR 220.1 million (2017: EUR 212.3 million), and the company’s net operating profit amounted to EUR 173.8 million (2017: EUR 181.9 million). The interest expenses of EUR 16.2 million for 2018 on the AT1 capital loan, which forms part of the Additional Tier 1 capital in capital adequacy calculation, have been deducted in full from the parent company’s net interest income (2017: EUR 16.2 million). In the parent company, the AT1 capital loan has been recorded under the balance sheet item Subordinated liabilities. The balance sheet of the parent company at the end of the year amounted to EUR 35,676 million (2017: EUR 34,738 million).

Inspira

The turnover of MuniFin’s subsidiary Inspira was EUR 2.5 million for 2018 (2017: EUR 2.7 million), while its net operating profit amounted to EUR 0.0 million (2017: EUR 0.2 million).

Business

Customer finance and other services for customers

MuniFin is the only credit institution in Finland which specialises in financing the local government sector and state-subsidised housing production, and is by far the largest financier for its customer base. MuniFin’s customers consist of municipalities, municipal federations and municipality-controlled entities, as well as organisations and housing sites defined as not for profit by the Housing Finance and Development Centre of Finland (ARA). The company offers its customers versatile financing services, as well as comprehensive support for investment planning and financial management.

Demand for MuniFin’s financing saw year-on-year growth. Changes in service needs in growth centres call for new investments in municipal infrastructure, traffic arrangements and the development of the service network, and shortening of the maintenance backlog. Demand for financing grew towards the end of the year, partly due to lower-than-anticipated municipal tax revenue. Migration to growth centres maintained the need for the construction of affordable rental housing.

The total of new loans withdrawn, EUR 2,953 million, was more than the year before (2017: EUR 2,439 million).

MuniFin’s total customer financing year-on-year growth was 6.1% and amounted to EUR 22,968 million at year-end (2017: EUR 21,651 million). The long-term loan portfolio increased 5.3% and amounted to EUR 22,354 million at the end of the year (2017: EUR 21,219 million). Financial leasing portfolio increased 42.2% and amounted to EUR 614 million at year-end (2017: EUR 432 million). The largest share of portfolio growth is generated by property leasing agreements. Property leasing is typically used to finance school buildings, for instance.

Green finance, launched in 2016 to finance environmental investments, continued to attract interest, and the company has successfully increased awareness of the product among its customers. By the end of 2018, EUR 1,143 million in green financing had been withdrawn (2017: EUR 803 million). Whether or not a project fits in with the green finance framework is determined by an evaluation team comprising external experts.

The company’s year-end balance sheet included EUR 726 million in municipal papers and municipal commercial papers issued by municipalities and municipal companies (2017: EUR 749 million).

In 2018, MuniFin’s Apollo e-service for financial portfolio management was expanded to include features such as investment management. With pilot customers, it was deployed for use in wide-ranging economic modelling and forecasting. Customers are rapidly adopting the Apollo service. Its users include all of Finland’s largest cities.

Demand for the services provided by MuniFin’s subsidiary Inspira was brisk in 2018. Its assignments focused on the regional government, health and social services reform that is currently under preparation, participating in the competitive tendering processes of schools and daycare centre buildings, and M&A projects.

Funding and liquidity management

MuniFin’s funding strategy is to diversify its funding sources, which aims to ensure the continuity of its funding under all market conditions. MuniFin actively diversifies its funding across different currencies and maturities as well as geographical areas and investor groups. Active long-term cooperation with investors has increased name recognition of MuniFin in different markets.

Liquidity remained generally strong in the international capital markets during 2018, and MuniFin’s funding operations were very successful. Extensive diversification has also made funding efficient, which makes the funding terms for MuniFin’s customers competitive. MuniFin’s name is widely known in the international capital markets, where investors regard it as one of the most flexible, reliable and fast-reacting issuers.

MuniFin’s public benchmark issuances were in extremely high demand. In 2018, MuniFin organised four benchmark bonds: two in USD (both 1 billion), one in GBP (400 million) and one in EUR (750 million). The 15-year term of the EUR 500 million benchmark bond issued in January 2018 is the longest benchmark bond in the company’s history so far and the size of the bond was increased by EUR 250 million in October. These benchmark bonds are listed on the London Stock Exchange.

Long-term funding acquired during the year totalled EUR 7,436 million (2017: EUR 9,510 million). MuniFin’s short-term debt instruments under the Euro Commercial Paper (ECP) programme amounted to EUR 3,062 million at the end of the year (2017: EUR 3,833 million).

Total funding at the end of 2018 was EUR 30,856 million (2017: EUR 30,153 million). Of this amount, 24% was denominated in euros (2017: 23%) and 76% in foreign currencies (2017: 77%). In total, the company issued bonds denominated in 11 different currencies in 2018 (2017: 14 currencies).

MuniFin currently acquires all of its funding from the international capital market. In total, 260 long-term funding arrangements were made in 2018 (2017: 318).

The majority of funding is carried out as standardised issues under debt programmes, of which MuniFin uses the following:

MuniFin’s funding is guaranteed by the Municipal Guarantee Board, which has the same credit ratings from Moody’s and Standard & Poor’s as MuniFin and the Finnish government. The Municipal Guarantee Board is a public-law institution, whose members are all Finnish mainland municipalities. The members are responsible for the liabilities of Guarantee Board in proportion to their population. The Municipal Guarantee Board has granted guarantees for MuniFin’s debt programmes, as well as for funding arrangements outside the programmes. As a result, debt instruments issued by MuniFin are classified as zero-risk when calculating the capital adequacy of credit institutions and as Level 1 liquid assets in liquidity calculation in the EU.

The company’s liquidity remained excellent during 2018. MuniFin’s investment operations mostly comprise the management of acquired funding. The funds are invested in liquid and highly rated financial instruments, so as to ensure business continuity under all market conditions.

According to the company’s liquidity policy, its liquidity must be sufficient to cover the needs of continued undisturbed operations (including new net lending) for at least the following 12 months.

At the end of 2018, total liquidity was EUR 8,722 million (2017: EUR 9,325 million). Investments in debt securities totalled EUR 5,146 million (2017: EUR 5,755 million) and their average credit rating was AA (2017: AA). The average maturity of the portfolio stood at 2.1 years at year-end (2017: 2.5 years). In addition to this, the company had EUR 3,576 million in other investments (2017: EUR 3,570 million), of which EUR 3,554 million was in central bank deposits (2017: EUR 3,554 million) and EUR 22 million in money market deposits in credit institutions (2017: EUR 16 million). The company invests cash collateral received on the basis of derivative collateral agreements primarily in short-term money market investments.

As of 2015, MuniFin has also monitored the ESG performance (Environmental, Social and Governance) of its liquidity investments. At the end of 2018, MuniFin’s liquidity investments had an ESG average of 50.9 on a scale of 1-100 (2017: 49.1). The benchmark index is 50.8 (2017: 49.2).

Capital Adequacy

The Group’s capital adequacy has remained strong and clearly above the statutory requirements and the minimum capital adequacy requirements set by the authorities.

At the end of 2018, the Municipality Finance Group’s ratio of total own funds to total risk was 87.97% (2017: 72.50%), and its CET1 capital ratio was 66.34% (2017: 53.01%). The total capital ratio saw year-on-year growth of 15.47 percentage points, largely due to growth in own funds and the decline in total risk exposure. The parent company’s total capital ratio was 89.37% (2017: 73.15%), and its CET1 capital ratio was 67.33% (2017: 53.46%).

Common Equity Tier 1 capital (CET1) at the end of the year totalled EUR 1,065 million (2017: EUR 946 million), and Tier 1 capital (T1) amounted to EUR 1,413 million (2017: EUR 1,293 million). There was no Tier 2 capital, and the company’s own funds totalled EUR 1,413 million (2017: EUR 1,293 million).

CET1 capital includes the profit for the financial year, as the result for the financial year has been subject to a financial review by the auditors and can, therefore, be included in CET1 capital based on the permission granted by the ECB in accordance with the Capital Requirements Regulation.

The parent company’s CET1 capital totalled EUR 1,064 million at the end of the year (2017: EUR 945 million), and Tier 1 capital (T1) amounted to EUR 1,413 million (2017: EUR 1,293 million). There was no Tier 2 capital, and the company’s own funds totalled EUR 1,413 million (2017: EUR 1,293 million).

The Group’s risk-weighted assets decreased by 10% since the end of 2017 and amounted to EUR 1,606 million at year-end (2017: EUR 1,784 million). The overall credit and counterparty risk decreased from the year-end 2017 figure of EUR 1,108 million to EUR 977 million at the end of the financial year. This was particularly affected by the decrease in the size of liquidity portfolio. The credit valuation adjustment risk (CVA VaR) declined to EUR 247 million (2017: EUR 341 million). This was mainly due to the lower amount of derivatives exposure and shortening average maturity of the derivatives. The currency position was less than 2% of own funds and therefore, based on Article 351 of the Capital Requirements Regulation (CRR), the own funds requirement for market risk has not been calculated. The exposure for operational risk grew by EUR 48 million to EUR 383 million (2017: EUR 335 million) due to an increase in the profit indicator.

The leverage ratio of MuniFin at the end of the year was 4.06% (2017: 3.84%), calculated using currently valid calculation principles. According to the draft legislation, the minimum leverage ratio is 3%. A proposal concerning the leverage ratio is currently under consideration at the EU level and the leverage ratio with its calculation principles is expected to come into effect no earlier than in 2021.

At the end of the year, the liquidity coverage ratio (LCR) was 177% (2017: 173%). As from the beginning of 2018, LCR must be at least 100%. MuniFin is also preparing for the Net Stable Funding Ratio (NSFR), which is being made ready at EU level and will, according to the current estimate, not take effect until sometime in 2021.

Risk Management

There were no material changes in the company’s risk appetite in 2018. Risks remained within the set limits during the financial year and, according to the company’s assessment, risk management met the requirements set for it. The IFRS 9 standard adopted at the beginning of 2018 has increased volatility of the financial results through unrealised fair value changes of financial instruments. In the adoption, MuniFin reclassified financial assets and liabilities, and the profit and loss volatility of financial liabilities in particular has grown. The company continuously monitors and analyses the volatility arising from valuations and prepares for any impacts it may have on profit and capital adequacy.

Outlook for 2019

Developments in the global economy and capital markets seem fairly stable, but the financial markets are filled with uncertainties. The international financial markets are characterised particularly by the slowdown in the global economy, the financial system-level risks related to Italy’s debt situation and the hard-to-predict impacts of the UK’s potential exit from the EU. The company is prepared for Brexit, and it is not expected to result in material changes in the company’s operations.

From the perspective of Finnish local government finances, the outlook for 2019 is still stable. The regional government, health and social services reform is still under preparation; evaluating its overall effects on MuniFin’s customer base and the company’s own operations is challenging. The reform is not currently expected to have a fundamental impact on MuniFin’s operating volumes in 2019.

In 2019, MuniFin will continue to put major effort into developing the service offering and systems in order to further enhance its efficiency and operations, as well as on the digitisation of services. MuniFin expects that expenses will be higher than in 2018 due to personnel increases, the development of IT systems and higher fees collected by authorities. Considering the above-mentioned outlook in the operational environment and assuming that there are no major changes in the development of interest rates and credit risk premiums when compared to market expectations, MuniFin expects its net operating profit without unrealised fair value changes to remain in the same level than in 2018 or decrease.  The developments in financial markets and the IFRS 9 standard adopted at the beginning of 2018 might increase the volatility of financial results through the unrealised fair value changes of financial instruments.

The estimates presented herein are based on current views on the development of the operating environment and operations.

Proposal from the Board of Directors Concerning Profit for the Financial Year 2018

Municipality Finance Plc has distributable funds of EUR 133,868,022.38, of which the profit for the financial year totalled EUR 21,831,739.09.

The Board of Directors proposes to the Annual General Meeting that

• EUR 0.16 per share be paid in dividends, totalling EUR 6,250,207.68, and that
• the distributable funds of EUR 127,617,814.70 be retained in equity.

The result for the financial year is good, and the Board of Directors considers the payment of a moderate dividend to be a strongly grounded decision. In recent years, the company has been preparing for the anticipated banking regulation’s capital requirements, in particular leverage ratio’s entry into force. Own funds have been strengthened with retained earnings and the issue of an AT1 loan. At the end of 2018, the company’s leverage ratio was 4.06%. The effective date for the leverage ratio requirement has not yet been finalised, but the company currently fulfils the anticipated leverage ratio requirement of 3%. The Board of Directors estimates that the moderate distribution of dividends will not place the fulfilment of the capital requirements or the company’s liquidity in jeopardy. MuniFin clearly fulfils all the prudential requirements set for it. 

Dividends will be paid to shareholders who are recorded in the company’s list of shareholders on 4 April 2019. The Board of Directors proposes that the dividends be paid on 9 April 2019.

No events have taken place since the end of the financial year that would have a material effect on the company’s financial position. The company’s liquidity is solid and, in the Board’s opinion, the proposed distribution of profits does not put the company’s liquidity in jeopardy.

Municipality Finance Plc

Further information:
Esa Kallio, President and CEO, tel. +358 50 337 7953
Marjo Tomminen, CFO, tel. +358 50 386 1764

MuniFin (Municipality Finance Plc) is one of Finland’s largest credit institutions: the company’s balance sheet exceeds EUR 35 billion. The company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland.

MuniFin’s mission is to build a better future in line with the principles of responsibility and in cooperation with its customers. MuniFin’s customers are Finnish municipalities, municipal federations, municipally controlled companies and non-profit housing corporations. Lending is used for environmentally and socially responsible investment targets such as public transportation, sustainable buildings, hospitals and healthcare centres, schools and day care centres, and homes for people with special needs.

MuniFin’s customers are domestic but the company operates in a completely global business environment. It is the most active Finnish bond issuer in international capital markets and the first Finnish green bond issuer.  The funding is exclusively guaranteed by the Municipal Guarantee Board.

The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd.

Read more: www.munifin.fi

Municipality Finance Plc
Jaakonkatu 3 A, P.O. Box 744
00101 Helsinki, Finland
Tel. +358 9 6803 5666
www.munifin.fi
firstname.lastname@munifin.fi