Municipality Finance Plc Financial Statements Bulletin 1 January–31 December 2020

Municipality Finance Plc
Financial Statements Bulletin                                       
15 February 2021 at 1 pm (EET)

Municipality Finance Plc Financial Statements Bulletin 1 January–31 December 2020

In brief: MuniFin Group in 2020

• The year 2020 was characterised by the COVID-19 pandemic. The pandemic significantly increased the demand for MuniFin Group’s customer financing, especially the growth of  municipal sector’s financing. Otherwise, the pandemic only had a minor effect on the Group’s operating profit and financial standing.
• The Group’s net operating profit excluding unrealised fair value changes was EUR 197 million (EUR 186 million) and it increased by 6.2% (-2.1%). The net interest income totalled EUR 254 million (EUR 240 million) and it grew by 5.8% (1.7%). The costs in the financial year amounted to EUR 58 million (EUR 60 million), making it 3.0% (+22.8%) smaller than in the previous year.
• The net operating profit amounted to EUR 194 million (EUR 131 million). Unrealised fair value changes amounted to EUR -3 million (EUR -54 million).
• At 104.3% (83.1%), the Group’s CET1 capital ratio remained very strong. Tier 1 and total capital ratio were 132.7% (107.9%) at the end of 2020.
• The Group’s leverage ratio was 3.9% (4.0%) at the end of December. Calculated using the CRR II calculation principles, to be enforced in June 2021, MuniFin Group’s leverage ratio was 13.4%, including deductions made based on MuniFin’s status as a public development credit institution, according to which the Group’s customer financing can be excluded from the leverage ratio.
• Long-term customer financing was at the end of December EUR 28,022 million (EUR 24,798 million) and it grew by 13.0% (8.0%). Long-term customer financing includes both long-term loans and leased assets. New lending in January–December amounted to EUR 4,764 million (EUR 3,175 million). Short-term customer financing reached EUR 1,310 million (EUR 804 million) and grew by 62.9% (10.9%) from the previous year. The growth was spurred by the increase in the demand of loans and a drop in the availability of financing from other credit institutions, both due to the COVID-19 pandemic.
• In the entire long-term customer financing, the amount of green financing aimed at environmental investments totalled EUR 1,786 million (EUR 1,263 million) and the social finance projects amounted to EUR 589 million (EUR - million) at the end of the year.
• In 2020, new long-term funding reached EUR 10,966 million (EUR 7,385 million), and total funding totalled EUR 38,139 million (EUR 33,929 million) at the end of December.
• The Group’s liquidity has remained at a good level. At the end of December, total liquidity amounted to EUR 10,089 million (EUR 9,882 million). The Liquidity Coverage Ratio was 264.4% (430.2%) at the end of the year.
• The Board of Directors proposes that it may based on the authorisation of the Annual General Meeting, decide paying dividend maximum amount of EUR 0.52 per share, totalling EUR 20,313,174.96. The authorisation is valid until the next Annual General Meeting. Based on the ECB’s recommendation, the Board of Directors intends to refrain from deciding on the distribution of dividends until 30 September 2021.
• Outlook for 2021: The Group expects its net operating profit excluding unrealised fair value changes to remain at the same level as in 2020. The valuation principles set in IFRS 9 standard may cause significant unrealised fair value changes, some of which increase the volatility of net operating profit and make it more difficult to estimate in the short-term. A more detailed outlook is presented in the Section Outlook for 2021.

Key figures (Group)

	31 Dec 2020	31 Dec 2019
Net operating profit excluding unrealised fair value changes (EUR million)*	197	186
Net operating profit (EUR million)*	194	131
Net interest income (EUR million)*	254	240
New lending (EUR million)*	4,764	3,175
Long-term customer finance (EUR million)*	28,022	24,798
New long-term funding (EUR million)*	10,966	7,385
Balance sheet total (EUR million)	44,042	38,934
CET1 capital (EUR million)	1,277	1,162
Tier 1 capital (EUR million)	1,624	1,510
Total own funds (EUR million)	1,624	1,510
CET1 capital ratio, %	104.3	83.1
Tier 1 capital ratio, %	132.7	107.9
Total capital ratio, %	132.7	107.9
Leverage ratio, %	3.9	4.0
Return on equity (ROE), %*	9.4	6.8
Cost-to-income ratio*	0.2	0.3
Personnel	165	167

*Alternative performance measure.

All figures presented in the Financial Statements Bulletin are those of MuniFin Group, unless otherwise stated.

Comment on the 2020 financial year by President and CEO Esa Kallio

The COVID-19 pandemic strained the economy in 2020, but the worst of the predicted crisis scenarios did not materialise. The first wave of the pandemic caught the households, corporates and markets by surprise, but swift recovery measures by governments and central banks brought the situation quickly under control.

Overall, Finland managed to prevent the spread of the virus relatively well; in the end, economic activity and tax revenues fell less than we initially feared. The most significant economic effects caused by the pandemic have accumulated at the municipal level, especially in large cities and tourism-heavy northern regions.

In 2020, MuniFin’s customers required substantially more financing. Uncertainty caused an unusual spike in demand from March to May, when especially our customers in municipality sector prepared for the expected increase in expenditure while reducing their income caused by the pandemic. At the same time, the supply of financing to our customers decreased as other credit institutions focused on financing private sector. Housing production was largely unaffected by the pandemic, and the demand for financing of the non-profit housing production remained unchanged.

The situation on the international capital markets changed rapidly in the spring of 2020 due to the uncertainty caused by the COVID-19, and funding operations in general were more challenging. However, thanks to MuniFin’s long-term cooperation with investors and reputation as a reliable and responsible partner, we were able to continue our own funding without interruption during the whole year. 

International investors have shown growing interest in responsible and safe investments. In 2020, we added social financing to our portfolio of responsible financing products. Social financing is targeted at projects that yield particularly effective and wide-ranging benefits for the society. 

We continued to further develop our digital services as planned and even speed up the process somewhat due to the increased demand caused by the pandemic. During this exceptional year, we also managed to find new ways to meet our customers. Good examples of these are i.e. expanding the digital services, digital services training that proved very popular and our chief economist’s webinars for different stakeholder groups.

The year 2020 highlighted MuniFin’s core mandate. We successfully met our customers’ greatly increased demand for financing despite the challenging market environment. For this I want to thank our staff, who have shown exceptional ability in adapting to the new situation. I would also like to thank our customers, who were open to adopting new practices and enabled our close collaboration to continue throughout this unusual year. 

Information on Group results

Consolidated income statement	01–12/2020	01–12/2019	Change, %
(EUR million)
Net interest income	254	240	5.8
Other income	2	6	-57.0
Income excluding unrealised fair value changes	257	246	4.3
Commission expenses	-5	-4	19.6
Personnel expenses	-18	-18	0.8
Other items in administrative expenses	-15	-15	4.0
Depreciation and impairment on tangible and intangible assets	-6	-6	-6.3
Other operating expenses	-15	-18	-17.1
Costs	-58	-60	-3.0
Credit loss and impairments on financial assets	-1	0	<-100.0
Net operating profit excluding unrealised fair value changes	197	186	6.2
Unrealised fair value changes	-3	-54	-94.3
Net operating profit	194	131	47.9
Profit for the financial year	155	105	48.0

Figures have been rounded, so the total of individual figures may differ from the total figure presented. The changes over 100% are described in the table as >100% or <-100%.

Group’s net operating profit excluding unrealised fair value changes

The Group’s core business operations remained strong during 2020. MuniFin Group’s net operating profit excluding unrealised fair value changes grew by 6.2% (-2.1%) and totalled EUR 197 million (EUR 186 million). Income excluding unrealised fair value changes was EUR 257 million (EUR 246 million) and grew by 4.3% (3.3%). The Group’s costs shrank to EUR 58 million (EUR 60 million), by 3.0% (+22.8%). During 2020, the COVID-19 pandemic slowed cost growth, but at the same time, it accelerated business growth, which had a positive impact on the net interest income. Overall, the pandemic did not have any significant negative impact on MuniFin Group’s core business’ results or profitability.

Net interest income totalled EUR 254 million (EUR 240 million), up 5.8% (1.7%) on the previous year. This was due to growth in customer finance, successful funding operations and a favourable interest rate environment. The Group’s net interest income does not include the EUR 16 million in interest expenses of the AT1 capital loan, 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 deduction in retained earnings under equity upon realisation of interest payment on an annual basis.

Other income shrank from the previous year to EUR 2 million (EUR 6 million). Other income includes commission income, realised net income from securities and foreign exchange transactions, net income on financial assets at fair value through other comprehensive income, and other operating income. Other income also includes the turnover of the Subsidiary Company Inspira.

Commission expenses totalled EUR 5 million (EUR 4 million) and primarily comprised paid guarantee fees, custody fees and funding programme update fees.

Administrative expenses were EUR 33 million (EUR 32 million) and they grew by 2.3% (18.5%) . Of which personnel expenses comprised EUR 18 million (EUR 18 million) and other administrative expenses EUR 15 million (EUR 15 million). Personnel expenses were 0.8% higher than previous year. Personnel expenses were affected by slower growth in employee numbers, redefined principles for the capitalisation of the acquisition costs of development projects, and the Government’s decision to temporarily reduce all Finnish companies’ pension contributions due to COVID-19 pandemic. Personnel expenses include a restructuring provision of EUR 0.6 million due to the Group’s reorganisation in 2020 and the related cooperation negotiations. The average number of employees in the Group during the financial year was 167, as compared to 162 in the previous year.

Other items in administrative expenses grew moderately, 4.0% during the financial year. The COVID-19 pandemic reduced certain types of expenditure, such as travelling expenses, but on the other hand, the Group has invested heavily in the development of IT systems, such as the loan lifecycle management system. In 2019, the MuniFin Group signed outsourcing agreements for IT end-user and infrastructure services as well as for the operation of the business IT systems to improve operational reliability and the availability of services. The practical implementation of the outsourcing agreements is currently underway and services are partially in production. The project is expected to be completed in 2021.

During the financial year, depreciation and impairment of tangible and intangible assets reached EUR 6 million (EUR 6 million). The Group has invested significantly recently in developing IT systems and business operations, which have increased the amount of depreciation in the recent years.

Other operating expenses decreased to EUR 15 million (EUR 18 million), by 17.1% (+14.7%). Fees collected by authorities were EUR 7 million (EUR 7 million) and increased by 13.6% (-4.7%), mainly due to an increase in the contribution to the Single Resolution Fund. These fees excluded, other expenses were EUR 7 million (EUR 11 million) and decreased by 35.1% (+23.7%). This decrease is mostly due to smaller purchases of external services compared to the previous year.

The amount of expected credit losses (ECL), calculated according to IFRS 9, increased during the financial year. Change recognised in the income statement was EUR 0.9 million (EUR 0.0 million). Due to the COVID-19 pandemic, MuniFin Group has updated the scenarios used for calculating expected credit losses to take into account the effect of the COVID-19 pandemic. Scenarios include probability weights. Due to uncertainty caused by the COVID-19 pandemic, MuniFin Group has given a larger weight to the adverse scenario. During the second half of 2020, MuniFin Group has specified the methods for estimating and modelling expected credit losses, as well as the assumptions used in the model. The change in the modelling methodology affected the modelling of the probability of default over the lifetime of the loan, therefore increasing the expected credit losses by approximately EUR 0.5 million.

In addition, MuniFin Group has recorded an additional discretionary provision (management overlay) of EUR 0.34 million to take into account the financial effects of the COVID-19 pandemic. The year 2020 was financially exceptionally weak for certain customer segments, such as the arts sector and sports facilities providers. However, the deteriorating financial situation is not yet reflected in the Group’s internal risk ratings, which have been mainly updated based on the 2019 financial statements. As the credit risk of certain customer segments is estimated to have increased since then, MuniFin Group’s management decided to record an additional discretionary provision based on a group-specific assessment. MuniFin Group’s overall credit risk position has remained low due to the fact, that the COVID-19 pandemic has not had an impact on the guarantees the Group has received. According to the management’s assessment, all receivables will be recovered in full and therefore no final credit loss will arise, because the receivables are from Finnish municipalities or they are accompanied by a securing municipal guarantee or a state deficiency guarantee. During the Group’s more than 30 years history, it has never recognised any final credit losses in its customer financing.

On 31 December 2020, the Group had a total of EUR 24 million (EUR 2 million) guarantee receivables from public sector entities due to customer insolvency. This increase is caused by a few individual customers. The credit risk of the liquidity portfolio has remained at a good level, its average credit rating being AA+.

Group’s profit and unrealised fair value changes

Net operating profit was EUR 194 million (EUR 131 million). Unrealised fair value changes weakened MuniFin Group’s net operating profit by EUR 3 million during the financial year; in the previous year, they had a negative impact of EUR 54 million. In 2020, net income from hedge accounting amounted to EUR 4 million (EUR -19 million) and unrealised net income from securities and foreign exchange transactions to EUR -7 million (EUR -35 million).

The Group’s effective tax rate during the financial year was 20.0% (20.0%). Taxes in the consolidated income statement amounted to EUR 39 million (EUR 26 million). After taxes, the Group’s profit for the financial year was EUR 155 million (EUR 105 million). The Group’s full-year return on equity (ROE) was 9.4% (6.8%). Excluding unrealised fair value changes, ROE was 9.6% (9.6%).

The Group’s other comprehensive income includes unrealised fair value changes of EUR -32 million (EUR 28 million). During the financial year, the most significant item affecting the other comprehensive income was the fair value change due to changes in own credit risk of financial liabilities designated at fair value through profit or loss of EUR -17 million (EUR 10 million). Net change in Cost-of-Hedging totalled EUR -16 million (EUR 17 million).

On the whole, unrealised fair value changes net of deferred tax affected the amount of consolidated equity by EUR -28 million (EUR -21 million) and CET1 capital net of deferred tax in capital adequacy by EUR -15 million (EUR -28 million). In capital adequacy calculations, the cumulative effect of unrealised fair value changes was EUR 12 million (EUR 27 million) on the MuniFin Group’s own funds.

Unrealised fair value changes reflect the temporary impact of market conditions on the valuation levels of financial instruments at the reporting time. The value changes may vary significantly from one reporting period to another, causing volatility in profit, equity and own funds in capital adequacy calculations. The effect on individual contracts will be removed at the latest by the end of the contract period.

In accordance with its risk management principles, MuniFin Group uses derivatives to financially hedge against interest rate, exchange rate and other market and price risks. Cash flows under agreements are hedged, but due to the generally used valuation methods, changes in fair value differ between the 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 cause 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 the Group primarily holds financial instruments and their hedging derivatives almost always until the maturity date. Changes in credit risk spreads are not expected to be materialised as credit losses for the Group, because the Group’s liquidity reserve has been invested in instruments with low credit risk. In the financial year, unrealised fair value changes were influenced in particular by changes in interest rate expectations and credit risk spreads in the Group’s main funding markets.

Parent Company’s result

MuniFin’s total net interest income at year-end was EUR 238 million (EUR 224 million), and net operating profit stood at EUR 178 million (EUR 115 million). The profit after appropriations and taxes was EUR 22 million (EUR 8 million). The interest expenses of EUR 16.2 million for 2020 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.

Subsidiary Inspira

The turnover of MuniFin's subsidiary, Financial Advisory Services Inspira Ltd., was EUR 2.8 million for 2020 (EUR 3.5 million), and its net operating profit amounted to EUR 0.1 million (EUR 0.2 million).

Outlook for 2021

The COVID-19 pandemic will continue to weigh down the economy in early 2021, when susceptible new virus variants require the maintenance of restrictions. Vaccination of high-risk groups and health care workers will gradually strengthen confidence in the economy. It is generally estimated that in Western countries, the vaccination coverage necessary for easing most restrictions will be reached by the autumn. However, the vaccination schedule and the availability of vaccines are still very much uncertain.

In the second half of 2021, economic growth in the euro area, and also in Finland, may temporarily be quite rapid, as accumulated household consumer demand begins to unravel. The COVID-19 pandemic has scarred the production structure, which slows down the recovery of economy. Governments have introduced stimulus packages to prevent mass unemployment and a wave of bankruptcies, but the economy’s normal recovery process has ground to a halt. It will take time until companies will fully regain their ability to make investments.

If demand recovers much faster than supply, the economy may face inflationary pressure for the first time in a long time. This may make it harder to correctly adjust stimulus policies and cause uncertainty in the markets. Long-term interest rates and asset pricing in general are sensitive to changes in inflation expectations.

As a whole, the economic outlook for 2021 is hopeful. Joe Biden’s US presidency is expected to restore a sense of stability and predictability in international relations, and trade policy tensions are also expected to ease, although the EU–UK Brexit deal leaves many unanswered questions in the trade relations between the EU and the UK. In 2021, the euro area economy is expected to grow by approximately 4%. Finland's GDP accumulates slower than the euro area on average, as the economic downturn has also been milder.

In 2020, the Government of Finland’s COVID-19 subsidies brought temporary relief to the municipal economy. The comprehensive COVID-19 subsidy for municipalities will decrease in 2021 and attention will gradually turn back to the structural imbalances in the municipal economy.

Finland’s long-running social welfare and health care reform took a step forward in 2020, when the Government introduced a new implementation proposal to the Parliament. Parliament’s committees will continue to prepare the reform in 2021. Assessing the wide-ranging impact of the reform remains challenging, but the reform is currently not expected to have any significant effects on MuniFin Group’s operations in 2021.

Changes to the regulation of banks’ capital adequacy (CRR II and CRD V) will be largely applied in June 2021. MuniFin fulfils the CRR II definition of a public development credit institution and may therefore deduct in the calculation of its leverage ratio all credit receivables from the central government and municipalities. This has a significant positive effect on the Group’s leverage ratio.

Thanks to strong growth in business operations already in 2020 and the projected growth to 2021, successful funding and a favourable interest rate environment, MuniFin Group’s net interest income is expected to develop positively in 2021. The expenses are expected to grow as the costs were at exceptionally low level in 2020, but clearly slower than before COVID-19 pandemic. Investments in IT systems and improvement of operational reliability will increase the expenses.

Considering the above-mentioned circumstances and assuming that there will be no major changes in the development of market interest rates and credit risk premiums when compared to market expectations, the Group expects its net operating profit excluding unrealised fair value changes to remain at the same level as in 2020. The valuation principles set in IFRS 9 standard may cause significant unrealised fair value changes, some of which increase the volatility of net operating profit and make it more difficult to estimate in the short-term.

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

Webcast for investors and other stakeholders

MuniFin Group’s results for the year 2020 will be presented to investors and other stakeholders in a webcast held on 16 February 2021 at 2 pm EET. The webcast is available at https://munifin.videosync.fi/financial-statements-bulletin-2020. A video recording will be published at MuniFin’s website after the webcast.

Municipality Finance Plc

Further information:

Esa Kallio, President and CEO, tel. [phone]

Harri Luhtala, Executive Vice President, Finance, CFO, tel. [phone]

MuniFin (Municipality Finance Plc) is one of Finland's largest credit institutions: the company's balance sheet totals EUR 44 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 and social 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

• 2020_Financial Statements Bulletin_MuniFin_SECURE