Municipality Finance Plc Financial Statements Bulletin 1 January–31 December 2021

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Municipality Finance Plc
Financial Statements Bulletin                                       
4 February 2022 at 1:00 pm (EET)

Municipality Finance Plc Financial Statements Bulletin 1 January–31 December 2021

In brief: MuniFin Group in 2021

  • The Group’s net operating profit excluding unrealised fair value changes amounted EUR 213 million (EUR 197 million) and it increased by 8.0% (6.2%). The Group’s net interest income totalled EUR 280 million (EUR 254 million) and grew by 10.3% (5.8%). Costs in the financial year amounted to EUR 72 million (EUR 58 million). Costs excluding the non-recurring item grew as expected and were EUR 2.6 million higher, making the figure 4.4% greater than in the previous year.
  • The net operating profit amounted to EUR 240 million (EUR 194 million). Unrealised fair value changes amounted to EUR 27 million (EUR -3 million) in the financial year.
  • Changes to the regulation of banks’ capital adequacy (CRR II and CRD V) were applied at the end of June 2021. The Group’s leverage ratio was 12.8% (3.9%) at the end of December. MuniFin fulfils the CRR II definition of a public development credit institution and may therefore deduct all credit receivables from the central government and municipalities in the calculation of its leverage ratio. This change explains the growth of leverage ratio.
  • At the end of December 2021, the Group’s CET1 capital ratio remained very strong, 95.0% (104.3%). Tier 1 and total capital ratio were 118.4% (132.7%). The new CRR II regulation lowered the capital ratio mainly due to the changes in the calculation of the counterparty credit risk and CVA VaR. CET1 capital ratio nevertheless exceeded the total requirement of 13.4% by over seven times, with capital buffers accounted for.
  • The COVID-19 pandemic that broke out in March 2020 has now lasted almost two years, although its intensity has varied. As a whole, the pandemic has only had a minor effect on the Group’s financial standing. In this financial year, the demand for financing in the municipal sector remained lower than expected due to surprisingly good economic development and the Government’s temporary COVID-19 recovery measures in 2020.
  • Long-term customer financing, including both long-term loans and leased assets totalled EUR 29,214 million (EUR 28,022 million) and grew by 4.3% (13.0%) at the end of December. The total of new lending in January–December amounted to EUR 3,275 million (EUR 4,764 million). Short-term customer financing decreased by 16.9% (previous year’s growth was 62.9%) and reached EUR 1,089 million (EUR 1,310 million).
  • Of all long-term customer financing, the amount of green finance aimed at environmentally sustainable investments totalled EUR 2,328 million (EUR 1,786 million) and the amount of social finance aimed at investments promoting equality and communality totalled EUR 1,164 million (EUR 589 million) at the end of December. Green and social finance have been well received by customers, and the amount of this finance increased by 47.0% (88.0%) from the previous year.
  • In 2021, new long-term funding reached EUR 9,395 million (EUR 10,966 million). At the end of December, the total amount of acquired funding was EUR 40,712 million (EUR 38,139 million), of which long-term funding made up for EUR 36,893 million (EUR 34,243 million).
  • The Group’s liquidity has remained at a very good level. At the end of December, total liquidity amounted to EUR 12,222 million (EUR 10,089 million). The Liquidity Coverage Ratio (LCR) stood at 334.9% (264.4%) at the end of the year and the Net Stable Funding Ratio (NSFR) at 123.6% (116.4%).
  • The Board of Directors proposes to the Annual General Meeting to be held in spring 2022 a dividend of EUR 1.03 per share for 2021, totalling EUR 40,235,711.94. The total dividend payment for 2020 was EUR 20,313,174.96.
  • Outlook for 2022: The Group expects its net operating profit excluding unrealised fair value changes to be significantly lower than in the previous year, as per the Group’s long-term profitability targets and more beneficial customer pricing enabled by these targets. The Group expects its capital adequacy ratio and leverage ratio to remain very strong. The valuation principles set in IFRS 9 may cause significant but temporary 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.

Key figures (Group)

  31 Dec 2021 31 Dec 2020
Net operating profit excluding unrealised fair value changes (EUR million)* 213 197
Net operating profit (EUR million)* 240 194
Net interest income (EUR million)* 280 254
New lending (EUR million)* 3,275 4,764
Long-term customer financing (EUR million)* 29,214 28,022
New long-term funding (EUR million)* 9,395 10,966
Balance sheet total (EUR million) 46,360 44,042
CET1 capital (EUR million) 1,408 1,277
Tier 1 capital (EUR million) 1,756 1,624
Total own funds (EUR million) 1,756 1,624
CET1 capital ratio, %** 95.0 104.3
Tier 1 capital ratio, %** 118.4 132.7
Total capital ratio, %** 118.4 132.7
Leverage ratio, %** 12.8 3.9
Return on equity (ROE), %* 10.7 9.4
Cost-to-income ratio* 0.2 0.2
Personnel 164 165
     

*Alternative performance measure.

**Figures for the financial year 2021 are calculated in accordance with CRR II. Comparison periods have not been restated to reflect the updated capital requirements regulation.

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

Finland’s economic and employment situation exceeded expectations in 2021 and reached a surprisingly good level. The central government’s COVID-19 support package ensured that municipalities have not had to shoulder the negative economic effects of the pandemic.

Municipal sector’s demand for financing was lower than expected in 2021. The demand for state-subsidised housing finance grew moderately, as expected. MuniFin’s market position is strong, and we continue to be by far the largest single credit institution offering long-term loans for our customer base.

Despite the temporarily improved financial situation, the fiscal sustainability gap and structural problems in the public economy continue to exist. In 2022, we therefore expect the demand for financing in the municipal sector to return to the pre-pandemic level.

The European Union’s changes to the capital adequacy regulation were applied at the end of June. Under the new regulation, MuniFin gained the status of a public development credit institution, which significantly eases MuniFin’s ability to comply with the leverage ratio capital requirement. This has allowed us to increasingly transfer the benefit from negative interest rates to our customers, making our loan financing even more affordable than before. This change in our credit terms took force in October, and its benefits will begin to have a wider impact in the interest expenses of our loan customers in 2022.

Once again, our funding succeeded excellently, and the availability of funding in the international capital market remained good. Thanks to our effective funding, we were again able to ensure affordable financing for our customers.

The legislative package for Finland’s long-prepared health and social services reform was largely completed in June, allowing municipalities to launch practical preparations. In the future, MuniFin’s customers will include the new wellbeing services counties.

Our customers play a key role in mitigating climate change and promoting the green transition. We support our customers in this transition by offering them green finance and sharing our expertise. In 2021, the demand for our green finance continued to grow, and the social finance that we launched in 2020 established its position among our customers.

MuniFin’s year started with a renewed organisation and was characterised by renewal and the rooting of new operating models.

I wish to thank our customers for their close collaboration and our staff for their excellent work during this year of external and internal upheaval.

Information on Group results

Consolidated income statement 01–12/2021 01–12/2020 Change, %
(EUR million)      
Net interest income 280 254 10.3
Other income 4 2 85.4
Income excluding unrealised fair value changes 285 257 11.0
Commission expenses -5 -5 -0.2
Personnel expenses -18 -18 -0.3
Other items in administrative expenses -17 -15 11.6
Depreciation and impairment on tangible and intangible assets -16 -6 >100
Other operating expenses -16 -15 6.6
Costs -72 -58 22.4
Credit loss and impairments on financial assets 0 -1 -87.8
Net operating profit excluding unrealised fair value changes 213 197 8.0
Unrealised fair value changes 27 -3 <-100
Net operating profit 240 194 23.5
Profit for the financial year 192 155 23.4
       

The sum of individual results may differ from the displayed total due rounding. Changes of more than 100% are shown as >100% or <-100%.

Group’s net operating profit excluding unrealised fair value changes

MuniFin Group’s core business operations remained strong during 2021. The Group’s net operating profit excluding unrealised fair value changes grew by 8.0% (6.2%) and totalled EUR 213 million (EUR 197 million). Income excluding unrealised fair value changes was EUR 285 million (EUR 257 million) and grew by 11.0% (4.3%). The Group’s costs were EUR 72 million (EUR 58 million) rising by 22.4% from the previous year. The non-recurring item related to impairment on on-going IT system implementation, EUR 10.5 million, increased costs. Costs excluding the non-recurring item grew as predicted and were 4.4% higher than in previous year (-3.0%). The COVID-19 pandemic did not have a significant negative impact on the Group’s core business and profitability in 2021 or in comparison year.

Net interest income totalled EUR 280 million (EUR 254 million), and increased by 10.3% (5.8%) from the previous year. Net interest income was positively affected by growing volumes and low market interest rates. In October 2021, the Group changed the conditions of its long-term customer loans with variable interest rates so that its customers will benefit from negative reference rates better than before. This change only had a minor effect on the Group’s profits. The Group’s net interest income does not recognise the interest expenses of EUR 16 million of the AT1 capital instrument, 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 equity upon realisation of interest payment on an annual basis.

Other income grew from the previous year to EUR 4 million (EUR 2 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. In addition, the turnover of MuniFin’s subsidiary company Financial Advisory Services Inspira is included in the other income.

During 2020, the COVID-19 pandemic slowed cost growth, making the year’s costs unusually low. Costs started rising again in 2021, although the growth was slower than before the pandemic.

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

Administrative expenses reached EUR 35 million (EUR 33 million) and grew by 5.2% (2.3%). Of this, personnel expenses comprised EUR 18 million (EUR 18 million) and other administrative expenses EUR 17 million (EUR 15 million). Personnel expenses were almost at the same level than in previous year and were 0.3% (0.8%) less than in 2020. There were no significant changes in employee numbers and the average number of employees in the Group was 162 (167). Salary and pension costs decreased slightly during the financial year.

Other items in administrative expenses grew by 11.6% (4.0%) during the financial year. The cost of maintaining and developing information systems has increased IT expenses, but on the other hand, the COVID-19 pandemic has reduced certain types of expenditure, such as travelling expenses both in 2021 and 2020. In 2019, MuniFin Group signed outsourcing agreements for IT end-user and infrastructure services as well as the operation of the business IT systems to improve operational reliability and the availability of services. This implementation project was completed in late 2021.

During the financial year, depreciation and impairment of tangible and intangible assets reached EUR 16 million (EUR 6 million). The item includes impairment of EUR 10.5 million on the Group’s significant on-going IT system implementation.

Other operating expenses increased by 6.6% (-17.1%) to EUR 16 million (EUR 15 million). Fees collected by authorities increased by 23.0% (13.6%) to EUR 9 million (EUR 7 million), mainly due to an increase in the contribution to the Single Resolution Fund, which grew by 30.5% to EUR 6.7 million (EUR 5.2 million). These fees excluded, other expenses were EUR 6 million (EUR 7 million), decreasing by 10.3% (-35.1%), mostly due to smaller purchases of external services compared to 2020. Other expenses include a provision of EUR 0.4 million related to a possible tax increase following a tax interpretation issue from previous years.

The amount of expected credit losses (ECL), calculated according to IFRS 9, decreased during the financial year and was EUR -0.1 million (EUR -0.9 million). MuniFin Group has updated the scenarios and weights used to calculate ECL.

In 2020, MuniFin Group recorded an additional discretionary provision (management overlay) of EUR 0.3 million to take into account the financial effects of the COVID-19 pandemic. This was due to the fact that the deteriorating financial situation of certain customer segments had not yet reflected in MuniFin Group’s internal risk ratings for these segments, and therefore the Group’s management decided to record an additional discretionary provision based on a group-specific assessment. The financial situation of these customer segments later improved, and the management decided to remove the additional discretionary provision in late 2021. At the end of 2021, the Group’s management decided to record an additional discretionary provision of EUR 0.4 million to take into account ECL model changes that will take place in 2022. During 2022, the Group will further develop loss given default (LGD) calculation of mortgage loans as well as lifetime ECL calculations.

The Group’s overall credit risk position has remained low. According to the management’s assessment, all receivables will be recovered in full and no final credit loss will therefore arise, because the receivables are from Finnish municipalities, or they are accompanied by a securing municipal guarantee or a state deficiency guarantee supplementing mortgage collateral. During the Group’s history of more than 30 years, it has never recognised any final credit losses in its customer financing.

At the end 2021, the Group had a total of EUR 19 (EUR 24 million) of guarantee receivables from public sector entities due to customer insolvency, which are still under 0.01% of total customer exposure. The credit risk of the liquidity portfolio has remained at a good level, its average credit rating being AA+ (AA+).

Group’s profit and unrealised fair value changes

The Group’s net operating profit was EUR 240 million (EUR 194 million). Unrealised fair value changes improved the Group’s net operating profit by EUR 27 million, while in the previous year it had a negative impact of EUR 3 million. In 2021, net income from hedge accounting amounted to EUR 5 million (EUR 4 million) and unrealised net income from securities transactions to EUR 22 million (EUR -7 million).

The Group’s effective tax rate during the financial year was 20.1% (20.0%). Taxes in the consolidated income statement amounted to EUR 48 million (EUR 39 million). After taxes, the Group’s profit for the financial year was EUR 192 million (EUR 155 million). The Group’s full-year return on equity (ROE) was 10.7% (9.4%). Excluding unrealised fair value changes, the ROE was 9.6% (9.6%).

The Group’s other comprehensive income includes unrealised fair value changes of EUR -3 million (EUR -32 million). During the financial year, the most significant item affecting the other comprehensive income was cost-of-hedging, EUR -3 million (EUR -16 million). The fair value change due to changes in own credit risk of financial liabilities designated at fair value through profit or loss totalled EUR 0.4 million (EUR -17 million).

On the whole, unrealised fair value changes net of deferred tax affected the Group’s equity by EUR 19 million (EUR -28 million) and CET1 capital net of deferred tax in capital adequacy by EUR 19 million (EUR -15 million). The cumulative effect of unrealised fair value changes on the Group’s own funds in capital adequacy calculations was EUR 31 million (EUR 12 million).

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 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 264 million (EUR 238 million), and its net operating profit stood at EUR 223 million (EUR 178 million). The profit after appropriations and taxes was EUR 137 million (EUR 22 million). The interest expenses of EUR 16 million for 2021 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 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 company, Financial Advisory Services Inspira Ltd, was EUR 1.7 million for 2021 (EUR 2.8 million), and its net operating profit amounted to EUR 0.1 million (EUR 0.1 million).

Outlook for 2022

According to the MuniFin Group’s current view, global economic growth is slowing down, but the main trend in the economic outlook remains still relatively positive. Employment continues to have room for growth, household savings lend support to consumption potential and private investments are expected to remain at a good level. The first half of the year will suffer from the uncertainty caused by the coronavirus Omicron variant. The high price of energy and the ongoing component shortage will continue to cause cost pressures and take their toll on economic activity. Economic forecasts continue to be highly uncertain.

The main trends in monetary policy are the same in the United States and Europe, but their central banks will move at a considerably different pace. The risk of the economy overheating in the United States is real, and the central bank Fed is likely to have to raise its key interest rates several times, already in 2022. In the euro area, the increased inflation is still mainly explained by reasons that are expected to be temporary. The ECB’s new symmetrical inflation target of 2% leaves the central bank more leeway to ignore temporary cost-push inflation. The ECB is likely to scale down its non-standard measures in 2022, but presumably very gradually. It now seems that a prudent normalisation of the interest rate policy could begin in late 2023, when the euro area should reach its pre-pandemic growth path. The outlook in monetary policy continues to be highly prone to changes in the pandemic situation.

In Finland, labour shortage and the increasing price of necessities will slow down economic growth in 2022. GDP growth will nevertheless remain somewhat stronger than Finland’s long-term growth potential. Unemployment is expected to fall below 7%.

The central government’s COVID-19 support package will no longer boost municipal finances in 2022, returning the focus on structural imbalances. More specific assessments of how the health and social services reform will impact individual municipalities will not be available until spring 2022. The reform’s practical challenges and the uncertainty of its financial impact make it difficult to predict municipal finances over the next few years.

In 2022, the health and social services reform will be reflected in the Group’s operations as practical preparation to act as a financing counterparty to the new wellbeing services counties. It is difficult to estimate the wider economic impact of the reform at this stage, when there is no practical information available on how wellbeing services counties will function. Wellbeing services counties’ future level of investments will effect on MuniFin’s financing volumes, but on the other hand the operating expenditures of the counties will be covered from the government’s budget. In MuniFin’s financing operations, health and social services lending plays such a role that changes in it will not have a material impact on MuniFin’s financial development in the near future.

After confirmation of its status as a public development credit institution, MuniFin decided in June 2021 to change the conditions of its long-term customer loans with variable interest rates in a way that will allow customers to benefit from negative reference rates better than before, which will clearly make the Group’s 2022 net interest income lower than in the previous year. The Group’s customer operations and funding are expected to continue to run and develop steadily. Operating expenses are expected to grow from 2021, as investments in IT systems and operational reliability as well as the marked rise in supervisory fees all increase expenses.

Considering the above-mentioned circumstances, the Group expects its net operating profit excluding unrealised fair value changes to be significantly lower than in the previous year, as per the Group’s long-term profitability targets and more beneficial customer pricing enabled by these targets. The Group expects its capital adequacy ratio and leverage ratio to remain very strong. The valuation principles set in the IFRS regulatory framework may cause significant but temporary 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.

These estimates are based on a current assessment of the development of MuniFin Group’s operations and the operating environment.

Webinar for investors and other stakeholders

MuniFin Group’s results for the year 2021 will be presented to investors and other stakeholders in a results webinar held on 9 February 2022 at 2:00 pm EET. Register for the webinar here. Register here if you are not able to attend but wish to receive a recording.

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 is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland. MuniFin Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd. The Group’s balance sheet is over EUR 46 billion.

MuniFin builds a better and more sustainable future 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, 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. The company is an 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.

Read more: www.munifin.fi

Attachment

  • 2021_Financial Statements Bulletin_MuniFin_SECURE

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Municipality Finance Plc Financial Statements Bulletin 1 January–31 December 2021

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