Report of the Board of Directors

  • The Group’s net interest income grew by 10.9% year on year, totalling EUR 228.5 million (2016: EUR 206.1 million).
  • The Group’s net operating profit amounted to EUR 198.4 million (2016: EUR 174.2 million). Growth over the previous year was 13.9%.
  • The balance sheet total was EUR 34,738 million (2016: EUR 34,052 million). Growth compared to the end of 2016 was 2.0%.
  • The Group’s capital adequacy continued to strengthen, with the year-end ratio of total own funds to risk-weighted assets being 75.51% (2016: 66.89%) and the ratio of Common Equity Tier 1 (CET1) to risk-weighted assets 55.22% (2016: 46.21%).
  • The leverage ratio at the end of 2017 was 3.84% (2016: 3.54%).
  • The total of new loans withdrawn amounted to EUR 2,439 million (2016: EUR 2,924 million). The lending portfolio increased to EUR 21,219 million (2016: EUR 20,910 million). This represented growth of 1.5% from the end of 2016.
  • The leasing portfolio stood at EUR 432 million at the end of the year (2016: EUR 286 million), showing growth of 51.0% year on year.
  • Long-term funding in 2017 totalled EUR 9,557 million (2016: EUR 6,702 million). A total of EUR 9,989 million was issued in short-term debt instruments under the Euro Commercial Paper (ECP) programme (2016: EUR 7,045 million). The total amount of funding grew to EUR 30,153 million (2016: EUR 28,662 million). This represents growth of 5.2% from the end of 2016.
  • At the end of 2017, total liquidity was EUR 9,325 million (2016: EUR 7,505 million). Growth compared to the end of previous year was 24.2%.
  • The turnover of Municipality Finance’s subsidiary Inspira was EUR 2.7 million (2016: EUR 2.2 million). Inspira’s net operating profit at the end of 2017 totalled EUR 0.2 million (2016: EUR 0.1 million).
Key figures (Consolidated):31 DEC 201731 DEC 2016
Net interest income (EUR million)228.5206.1
Net operating profit (EUR million)198.4174.2
New loans issued (EUR million)2,4392,924
New funding (EUR million)9,5576,702
Balance sheet total (EUR million)34,73834,052
Common Equity Tier 1 (CET1) (EUR million)946777
Tier 1 capital (EUR million)1,2931,124
Total own funds (EUR million)1,2931,124
Ratio of Common Equity Tier 1 (CET1) to risk-weighted assets, %55.2246.21
Ratio of Tier 1 capital (T1) to risk-weighted assets, %75.5166.89
Ratio of total own funds to risk-weighted assets, %75.5166.89
Leverage ratio, %3.843.54
Return on equity (ROE), %12.5712.51
Cost-to-income ratio0.180.17
Personnel134106
The calculation formulas for the key figures can be found on page 47. All figures presented in the Report of the Board of Directors are those of the Municipality Finance Group, unless otherwise stated. Alternative Performance Measures are reported after Calculation of key figures.

Group Structure

The Municipality Finance Group (hereinafter “the Group”) consists of Municipality Finance Plc (hereinafter “MuniFin” or “the company”) and Financial Advisory Services Inspira Ltd (hereinafter “Inspira”).

Municipality Finance is a financial institution owned by Finnish municipalities, Keva, and the Finnish state, providing a wide range of financing services for the local government sector and central government-subsidised housing production. The core principle of the company’s strategy is to build a better society in cooperation with its customers. MuniFin is the only financier in Finland specialising in the provision of financing for the local government sector and central government-subsidised housing production. The company aims to be the best possible financial expert for its customers, with the best insights into customer needs and ever-changing operating conditions.

Inspira is a company specialising in the ­provision of financial advisory services for the public ­sector. It offers financial advisory services for use in ­investment activities and the reorganisation of public sector operations

Operating Environment in 2017

2017 was a year of favourable trends in the Finnish and global economies. Despite the uncertainty and tension in world politics, the markets remained calm due to broad-based economic growth. Market interest rates remained at a record-low level. The extensive asset purchase programmes of the European Central Bank (ECB) strongly increased the liquidity of the markets.

In Finland, the health, social services and regional government reform, which has long been in the preparation phase and did not progress according to plan during 2017, has now been postponed by a year and is due to come into force in early 2020. Unanswered questions regarding the implementation of the reform will have a major impact on MuniFin’s customer base, which is why they may be postponing to some extent their investments in the social and healthcare service sector.

The credit ratings of Moody’s and Standard & Poor’s and their outlooks for MuniFin did not change in 2017. The credit rating of MuniFin is the same as Finland’s credit rating: Standard & Poor’s rating is AA+ and Moody’s rating is Aa1. The ratings’ outlooks are stable.

Rating agencyLong-term fundingOutlookShort-term funding
Moody’s Investors ServiceAa1StableP-1
Standard & Poor’sAA+StableA-1+

Income Statement and Statement of Financial Position

Municipality Finance Group

The Group’s business operations remained strong ­during 2017. The Group’s net operating profit for the financial year amounted to EUR 198.4 million (2016: EUR 174.2 million). The profit includes EUR 11.0 million of unrealised changes in the fair value of financial items (2016: EUR 2.7 million). Of this amount, EUR 8.3 million (2016: EUR 0.1 million) was unrealised net income from securities and foreign exchange transactions. The unrealised net income from securities and foreign exchange transactions includes EUR -0.7 million of CVA and DVA adjustments (2016: EUR -1.9 million). The net income from hedge accounting amounted to EUR 2.7 million (2016: EUR 2.6 million). These value changes are related to fluctuations in interest rates, the credit risk arising from counterparties in derivative transactions (CVA), and the fluctuations of market prices of own derivative liabilities (DVA).

The Group’s operating profit excluding unrealised fair value changes amounted to EUR 187.4 million (2016: EUR 171.5 million), with a year on year improvement of 9.3%.

Net interest income continued developing well, with growth of 10.9%. Total net interest income at the end of the financial year was EUR 228.5 million (2016: EUR 206.1 million). Growth of net interest income was positively influenced by successful funding operations and a favourable interest rate environment for MuniFin’s business operations. Net interest income includes EUR 2.4 million in commissions from the repurchase of own bonds (2016: EUR 1.2 million). In the consolidated accounts, the AT1 capital loan included in Tier 1 funds is treated as an equity instrument. The related interest expenses are not recognised through profit or loss in the consolidated accounts, but they are treated similar to dividend distribution, i.e. as a decrease in retained earnings under shareholders’ equity upon realisation of payment on an annual basis.

The Group’s commission expenses totalled EUR 4.1 million at the end of the year (2016: EUR 4.0 million). Operating expenses increased by 24.8% to EUR 38.8 million during 2017 (2016: EUR 31.1 million). This was mainly due to financial supervision expenses paid to the ECB and to the Financial Supervisory Authority, the contributions paid to EU-level crisis resolution funds, as well as ongoing information system projects. Administrative expenses came to EUR 22.3 million (2016: EUR 18.8 million), of which personnel expenses comprised EUR 13.6 million (2016: EUR 11.9 million). The administrative expenses increased in line with the rise in the number of staff. Depreciation of tangible and intangible assets amounted to EUR 2.0 million (2016: EUR 1.8 million). Other operating expenses were EUR 14.5 million (2016: EUR 10.5 million).

The Group’s balance sheet total stood at EUR 34,738 million at the end of 2017, compared to EUR 34,052 million at the end of the previous year. During the financial year, EUR 12.6 million of interest on the AT1 equity instrument was deducted from the Group’s equity, while taking account of the tax effect.

At the end of financial year 2017 MuniFin treated its subsidiary Inspira on the basis of 100% ownership of the company, as defined in the terms and conditions of the shareholder agreement. The redemption procedure for Inspira’s shares owned by minority shareholders was completed in early 2018. The redemption obligation was taken into account at the time of closing the accounts, and the transaction had no fundamental effect on the financial position of MuniFin or on Inspira’s business operations.

The Parent Company

At the end of 2017, MuniFin’s net interest income was EUR 212.3 million (2016: EUR 189.9 million), while its net operating profit amounted to EUR 181.9 million (2016: EUR 158.0 million). The interest expenses of EUR 16.2 million for 2017 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 (2016: EUR 16.3 million). In the Parent Company, the AT1 capital loan has been recorded under the balance sheet item Subordinated liabilities.

Inspira

The turnover of MuniFin’s subsidiary Inspira was EUR 2.7 million for 2017 (2016: EUR 2.2 million), while its net operating profit amounted to EUR 0.2 million (2016: EUR 0.1 million).

Business

Customer finance

MuniFin is the only credit institution in Finland which specialises in the provision of financing for the local government sector and central government-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 non-profit corporations and other non-profit organisations nominated 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. It is by far the largest single operator in its customer segment.

The financial situation of municipalities was stronger during 2017, reducing the need for loans among municipalities. However, overall demand for financing grew from the previous year, due to the strong growth of housing construction in particular. The total volume of loan quotation requests ­received by MuniFin during 2017 was EUR 4,451 ­million (2016: EUR 4,168 million). For the most part, demand increased due to the strong growth in central government-subsidised housing production.

The total of new loans withdrawn, EUR 2,439 million, was lower than the year before (2016: EUR 2,924 million). This was particularly due to the stronger financial situation of municipalities, which kept demand for financing at a moderate level. Another factor was the tighter competition among financial institutions operating in the local government sector. Demand for financing within the local government sector may also have been influenced by the uncertainty about the effects of the health, social services and regional government reform.

At the end of the year, the long-term lending portfolio stood at EUR 21,219 million (2016: EUR 20,910 million). The year on year change to the lending portfolio was 1.5%.

The green financing concept intended for investments earmarked for environmental projects, which was launched on the markets in 2016, is still raising a great deal of interest and, by the end of 2017, more than one billion euros worth of financing had been granted for environmental projects. As a product, ­MuniFin’s green financing is in many ways a pioneering concept in the Finnish financing markets. It is believed that it will increase investment in environmental projects in the local government sector, improve awareness of environmental matters, and promote the achievement of Finland’s climate targets. Whether or not a project fits in with the green financing framework is determined by an evaluation team comprising external experts.

MuniFin has been offering leasing financing to municipalities, municipal federations and municipally owned or controlled companies since 2010. Long-term work has been carried out to maximise clarity in the service model and its pricing. Demand for leasing solutions continued to grow in 2017. Customers are particularly interested in leasing-based solutions for real estate financing. The leasing portfolio grew by 51% during the year and stood at EUR 432 million at year-end (2016: EUR 286 million).

There was also continued demand for MuniFin’s short-term financing. At the end of 2017, the total value of municipal commercial paper and municipal company commercial paper programmes concluded with MuniFin was EUR 4,582 million (2016: EUR 4,368 million). The company’s year-end balance sheet included EUR 749 million in such papers issued by municipalities and municipal companies (2016: EUR 973 million).

The Apollo service developed for use by MuniFin’s customers in portfolio management was expanded in 2017 to cover new activities such as the management of guarantees. Additionally, use of the service for investment management is being piloted by a group of customers. More and more customers began using the Apollo service during 2017; its customer base covers all major cities in Finland.

Demand for MuniFin’s subsidiary Inspira’s services was high in 2017, and the company concluded a total of 117 commission agreements (2016: 123). Inspira’s turnover in 2017 was EUR 2.7 million (2016: EUR 2.2 million). Its net operating profit for the financial year was EUR 0.2 million (2016: EUR 0.1 million). Inspira’s commissions were particularly characterised by preparations for the effects of the health, social services and regional government reform and the preparation of public-private partnership (PPP) projects.

Funding and liquidity management

Liquidity remained high in the international capital markets during 2017, 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 partners.

MuniFin’s public issues in 2017 were very successful. In 2017, MuniFin issued three benchmark bonds in total: two US dollar-denominated benchmark bonds of 1 billion each, and one EUR 1 billion benchmark bond. The timing of the benchmark bonds was excellent and they were all oversubscribed. The second-ever green bond in the history of MuniFin, set at EUR 500 million and issued in September, was oversubscribed six times over within an hour. It was the most sought after loan in the history of MuniFin and, from the issuer’s perspective, it was priced very low. The issue enabled MuniFin to expand its investor base even further. Long-term funding in 2017 totalled EUR 9,557 million (2016: EUR 6,702 million). The company played an active role as an issuer in the money and capital markets during 2017. Stock and currency market trends increased the amount of early repayments of MuniFin’s own bonds. The amount of CSA collaterals relating to derivative transactions changed considerably during 2017, which led to a greater need for funding.

A total of EUR 9,989 million was issued in short-term debt instruments under the Euro Commercial Paper (ECP) programme during the year (2016: EUR 7,045 million), and total funding under the programme amounted to EUR 3,833 million at the end of the year (2016: EUR 1,139 million). 

Total funding at the end of 2017 was EUR 30,153 million (2016: EUR 28,662 million). Of this amount, 23% was denominated in euros (2016: 21%) and 77% in foreign currencies (2016: 79%). In total, the company issued bonds denominated in 14 different currencies in 2017 (2016: 13 currencies).

MuniFin currently acquires all of its funding from the international capital market, where the Group is a well-known, valued and active operator. In total, 318 long-term funding arrangements were made in 2017 (2016: 204).

MuniFin’s funding strategy is to diversify its funding sources, which aims to ensure the continuity of its funding under all market conditions. This has been proven to be a successful approach. MuniFin has various diversification strategies: by market, geographically, by issuing bonds targeted at different investor groups, and by varying maturities. Active, long-term collaboration with investors has increased MuniFin’s visibility in various markets, and investor relations are increasingly progressing towards the maintenance of key accounts.

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

Medium Term Note (MTN) programmeEUR 30,000 million
Euro Commercial Paper (ECP) programmeEUR 5,000 million
AUD debt programme (Kangaroo)AUD 2,000 million

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. The Municipal Guarantee Board has granted guarantees for the 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 in the EU.

The company’s liquidity remained excellent during 2017. MuniFin’s investment operations mostly comprise the management of funds obtained through ex ante 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 six months. The company invests cash collateral received on the basis of derivative collateral agreements in short-term ­money market investments. These investments are not taken into account when calculating the company’s liquidity adequacy.

At the end of 2017, total liquidity was EUR 9,325 million (2016: EUR 7,505 million). Investments in securities totalled EUR 5,755 million (2016: EUR 6,506 million), and their average credit rating was AA (2016: AA). The average maturity of the securities portfolio was 2.5 years (2016: 2.3 years) at the end of 2017.

In addition, the company had EUR 3,570 million in other investments (2016: EUR 999 million), of which EUR 3,554 million was in central bank deposits (2016: EUR 989 million) and EUR 16 million in money market deposits in credit institutions (2016: EUR 10 million).

As of 2015, MuniFin has also monitored the ESG performance (Environmental, Social and Governance) of its investments. At the end of 2017, MuniFin’s liquidity investments had an ESG average of 49.1 on a scale of 1–100 (2016: 49.9). The benchmark index is 49.2 (2016: 51.4).

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.

Minimum capital requirements and capital buffers

The minimum capital adequacy is 8% and that of CET1 capital adequacy 4.5%. The capital conservation buffer requirement under the Act on Credit Institutions is 2.5%, while the additional capital requirement for other systemically important credit institutions is 0.5%, and together they increase the minimum CET1 capital adequacy to 7.5% and the overall minimum capital adequacy to 11.0%. The Financial Supervisory Authority decides on the countercyclical capital buffer requirements on a quarterly basis. In December 2017, the Financial Supervisory Authority decided not to impose a countercyclical capital buffer requirement on MuniFin. The institution-specific countercyclical capital buffer, which is determined on the basis of the geographical distrubution of exposures, is for MuniFin 0.3%. After this, the minimum requirement for CET1 capital adequacy is 7.8% and for total own funds the minimum requirement is 11.3%.

Also in December, the Financial Supervisory Authority decided to raise the additional capital requirement for other systematically important institutions on MuniFin from 0.5% to 1%. The new requirement will become effective on 1 July 2018.

31 Dec 2017Capital requirementCapital
conservation
buffer 1)
Counter-
cyclical
capital buffer 2)
O-SII 3)Total
capital
buffers
TotalRealised
31 DEC 2017
Common Equity Tier 1 (CET1)4.5%2.5%0.3%0.5%3.3%7.8%55.2%
Tier 1 Capital (T1)6.0%2.5%0.3%0.5%3.3%9.3%75.5%
Total own funds8.0%2.5%0.3%0.5%3.3%11.3%75.5%
31 Dec 2017Capital
requirement
Capital
conservation
buffer 1)
Counter-
cyclical
capital buffer 2)
O-SII 3)Total
capital
buffers
Total
Common Equity Tier 1 (CET1)77,05142,8065,7778,56157,145134,196
Tier 1 Capital (T1)102,73542,8065,7778,56157,145159,880
Total own funds136,98042,8065,7778,56157,145194,125
31 Dec 2016Capital
requirement
Capital
conservation
buffer 1)
Counter-
cyclical
capital buffer 2)
O-SII 3)Total
capital
buffers
TotalRealised
31 DEC 2016
Common Equity Tier 1 (CET1)4.5%2.5%0.3%0.5%3.3%7.8%46.2%
Tier 1 Capital (T1)6.0%2.5%0.3%0.5%3.3%9.3%66.9%
Total own funds8.0%2.5%0.3%0.5%3.3%11.3%66.9%
31 Dec 2016Capital
requirement
Capital
conservation
buffer 1)
Counter-
cyclical
capital buffer 2)
O-SII 3)Total
capital
buffers
Total
Common Equity Tier 1 (CET1)75,62542,0144,3668,40354,783130,408
Tier 1 Capital (T1)100,83342,0144,3668,40354,783155,616
Total own funds134,44442,0144,3668,40354,783189,227
1) Act on Credit Institutions (610/2014), Chapter 10, Section 3, and the EU capital requirements Regulation (575/2013; CRR) and Directive (2013/36/EU; CRD IV). Valid from 1 January 2015.

2) Act on Credit Institutions (610/2014) Sect 10:4-5 § and Capital Requirements Regulation (575/2013) and Directive (2013/36/EU; CRD IV).
On 21th December 2017, the Board of Financial Supervisory Authority (FIN-FSA) decided not to set countercyclical ­capital buffer requirement for credit exposures allocated to Finland. The institution-specific countercyclical capital buffer requirement is determined on the basis of the geographical distribution of the exposures. For MuniFin it is 0,3% on 31 December 2017.

3) The additional capital requirement for other systemically important institutions: Act on Credit Institutions (610/2014), Chapter 10, Section 8, and the EU capital requirements Regulation (575/2013; CRR) and Directive (2013/36/EU; CRD IV). The additional capital requirement (O-SII) imposed on MuniFin is 0.5% as per the decision of the FIN-FSA made on 6 July 2015, valid from 7 January 2016.

As part of the Supervisory Review and Evaluation Process (SREP), the European Central Bank (ECB) has imposed an additional Pillar II capital requirement of 1.5% (P2R) on MuniFin, effective from 1 January 2017. The amount of the additional capital requirement is evaluated by the ECB at least annually. The minimum level of CET1 capital adequacy is 9.3% when taking account of the P2R additional capital requirement, and the minimum level of overall capital adequacy is 12.8%. In the same connection, the ECB proposed an indicative additional Pillar II capital requirement of 4.2% (P2G). Falling below this level does not have an effect on issues such as the distribution of profit. When this indicative additional capital requirement is taken into account, the minimum level for CET1 capital adequacy at the end of 2017 is 13.5%. MuniFin’s capital adequacy is many times higher than these capital requirements.

The ECB’s updated additional capital requirements on MuniFin, which take effect on 1 January 2018, are 1.75% (P2R) and 4.0% (P2G). Based on the above, as of 1 January 2018, with the additional capital requirement and the indicative additional capital requirement taken into account, the new minimum for the CET1 capital adequacy is 13.55%.

Key figures for capital adequacy

The Group’s own funds totalled EUR 1,293 million at the end of 2017 (2016: EUR 1,124 million). Common Equity Tier 1 capital (CET1) totalled EUR 946 million (2016: EUR 777 million). Tier 1 capital amounted to EUR 1,293 million (2016: EUR 1,124 million). The unrealised profits from assets measured at fair value (fair value reserve) have been included in CET1 capital (transitional provision for the period 1 January 2015–31 December 2017). Common Equity Tier 1 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. Adjustments due to filters applied to CET1 capital consist of MuniFin’s own debt valuation adjustment (DVA) and additional value adjustments (PVA, AVA). Additionally, the planned distribution of profits has been taken into account in CET1 capital. There was no Tier 2 Capital (T2) at the end of the period under review or during the comparison year.

The assets of MuniFin’s subsidiary Inspira were not taken into account in the Group’s own funds because, according to the interpretation of the Finnish Financial Supervisory Authority (27 January 2016), shares that the company, according to its Articles of Association, has the right to redeem as stipulated in Chapter 3, Section 7 of the Limited Liability Companies Act (624/2006), cannot be classified as CET1 instruments.

The Parent Company’s own funds totalled EUR 1,293 million at the end of 2017 (2016: EUR 1,123 million). Common Equity Tier 1 capital (CET1) totalled EUR 945 million (2016: EUR 776 million), and Tier 1 capital (T1) amounted to EUR 1 293 million (2016: EUR 1,123 million). There was no Tier 2 Capital (T2) at the end of the period under review or during the comparison year.

The ratio of the Group’s total own funds to risk-weighted assets was 75.51% (2016: 66.89%). At the end of the year, CET1 capital adequacy was 55.22% (2016: 46.21%). The Parent Company’s capital adequacy was 76.22% (2016: 67.11 %) and its CET1 capital adequacy was 55.71% (2016: 46.35%).

The capital adequacy management principles applied and key figures are described in the Consolidated Financial Statements, after the Report of the Board of Directors, in Note 3: “Capital adequacy management principles”, and in Notes 44–48: “­Capital Adequacy”. The Parent Company’s disclosures on capital adequacy are provided in Notes 47–50 to the Parent Company’s Financial Statements. In addition to the report of the Board of Directors and the financial statements, MuniFin publishes a separate Pillar III disclosure report on capital adequacy and risk management, which is available in English on the company’s website.

Consolidated own funds (EUR 1,000)31 DEC 201731 DEC 2016
Common Equity Tier 1 before adjustments976,260827,393
Adjustments to Common Equity Tier 1-30,741-50,760
COMMON EQUITY TIER 1 (CET1)945,519776,633
Additional Tier 1 capital before adjustments347,454347,454
Adjustments to Additional Tier 1 capital--
ADDITIONAL TIER 1 CAPITAL (AT1)347,454347,454
TIER 1 CAPITAL (T1)1,292,9731,124,086
Tier 2 capital before adjustments--
Adjustments to Tier 2 capital--
TIER 2 CAPITAL (T2)--
TOTAL OWN FUNDS1,292,9731,124,086
Parent company own funds (EUR 1,000)31 DEC 201731 DEC 2016
Common Equity Tier 1 before adjustments975,532826,865
Adjustments to Common Equity Tier 1-30,875-50,865
COMMON EQUITY TIER 1 (CET1)944,658776,000
Additional Tier 1 capital before adjustments347,916347,426
Adjustments to Additional Tier 1 capital--
ADDITIONAL TIER 1 CAPITAL (AT1)347,916347,426
TIER 1 CAPITAL (T1)1,292,5741,123,426
Tier 2 capital before adjustments--
Adjustments to Tier 2 capital--
TIER 2 CAPITAL (T2)--
TOTAL OWN FUNDS1,292,5741,123,426
Consolidated key figures for capital adequacy31 DEC 201731 DEC 2016
Ratio of Common Equity Tier 1 (CET1) to risk-weighted assets, %55.2246.21
Ratio of Tier 1 capital (T1) to risk-weighted assets, %75.5166.89
Ratio of total own funds to risk-weighted assets, %75.5166.89
Parent company key figures for capital adequacy31 Dec 201731 Dec 2016
Ratio of Common Equity Tier 1 (CET1) to risk-weighted assets, %55.7146.35
Ratio of Tier 1 capital (T1) to risk-weighted assets, %76.2267.11
Ratio of total own funds to risk-weighted assets, %76.2267.11

The leverage ratio and liquidity coverage ratio

A proposal concerning the leverage ratio is currently under consideration at EU level. The leverage ratio of MuniFin at the end of 2017 was 3.84% (2016: 3.54%), calculated using currently valid calculation principles.

The liquidity coverage ratio (LCR) was 173% (2016: 149%). This clearly exceeds the regulatory requirement of 80% at the time of closing the accounts. The requirement will gradually increase in such a manner that, as of 1 January 2018, in order to comply with the capital adequacy regulations, the LCR must be 100% or over.

MuniFin is also preparing for the Net Stable Funding Ratio (NSFR), which is being made ready at EU level and will not take effect until sometime in 2020.

Risk Management 

There were no material changes in the company’s risk exposure in 2017. The company’s Board of Directors assures that the risk management systems in place are adequate with respect to the Group’s profile and strategy. 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. In addition, the Board of Directors assures that, to the best of its knowledge, the information provided in the report of the Board of Directors and financial statements gives a true and fair account at the time of closing the accounts and of developments during the financial year as regards the risk exposures of credit institutions.

The risk management principles and the Group’s risk exposure are described in Note 2 to the Consolidated Financial Statements. In addition to the report of the Board of Directors and the financial statements, MuniFin publishes a separate Pillar III disclosure report which is available in English on the company’s website.

Governance 

In addition to corporate legislation, MuniFin complies with the governance requirements of the Finnish Act on Credit Institutions. The company’s governance policy is described in more detail on the company’s website. Upon the publication of the Annual Report, MuniFin publishes a Corporate Governance Statement on its website, pursuant to Chapter 7, Section 7 of the Finnish Securities Market Act: The Statement is separate from this Report of the Board of Directors and includes a description of the main features of the internal audit and risk management systems pertaining to the financial reporting process. The statement also includes the governance descriptions required by the Act on Credit Institutions and information on how the company complies with the Finnish Corporate Governance Code for listed companies, published by the Finnish Securities Market Association. Since MuniFin is exclusively an issuer of listed bonds, and since its shares are not subject to public trading, it is not appropriate to directly apply this Code with respect to MuniFin. However, the company has used the Corporate Governance Code as the basis for preparing its own internal Corporate Governance Policy.

Annual General Meeting

The Annual General Meeting of MuniFin was held on 23 March 2017. The AGM confirmed the financial statements for 2016 and discharged the members of the Board of Directors and the CEO from liability for the financial year 2016. In addition, the AGM adopted the proposal of the Board of Directors not to distribute a dividend and to retain the distributable funds of EUR 61,496,269.28 in equity.

Based on the proposal of the Shareholders’ Nomination Committee, the AGM appointed the Board of Directors for the 2017–2018 term of office (from the 2017 AGM to the end of the 2018 AGM). The AGM also adopted the proposal of the Shareholders’ Nomination Committee on the remuneration of Board members.

In addition, the AGM decided to amend MuniFin’s Articles of Association so that the age limitation applied to members to be elected to the Board was removed.

The meeting also elected KPMG Oy Ab as the auditor of the company, with Marcus Tötterman, APA, as the principal auditor. Marcus Tötterman was also the principal auditor in the previous financial year.

The Board of Directors

At the Annual General Meeting of 23 March 2017, the Shareholders’ Nomination Committee made a proposal to the meeting regarding the Board members to be elected for the term beginning at the end of the 2017 AGM and concluding at the end of the following AGM. The AGM elected the following members to the Board of Directors: Helena Walldén (Chair), Tapani Hellstén (Vice Chair), Fredrik Forssell, Teppo Koivisto, Vivi Marttila, Tuula Saxholm, Minna Helppi and Jari Koskinen.

In order to organise its work as efficiently as possible, the Board of MuniFin has established Audit, Risk and Remuneration Committees for the assistance and preparation of matters.

The members of the Audit Committee at the end of the financial year were Tuula Saxholm (Chair), Jari Koskinen and Vivi Marttila. The members of the Risk Committee at the end of the financial year were Fredrik Forssell (Chair), Minna Helppi and Teppo Koivisto. The members of the Remuneration Committee at the end of the financial year were Helena Walldén (Chair), Tapani Hellstén and Teppo Koivisto.

From the 2016 AGM to the 2017 AGM, the members of the Board of Directors were: Helena Walldén (Chair), Tapani Hellstén (Vice Chair), Fredrik Forssell, Teppo Koivisto, Sirpa Louhevirta, Vivi Marttila, Tuula Saxholm and Juha Yli-Rajala.

The operations of the Board of Directors and its committees are described in more detail on the company’s website.

Personnel

At the end of 2017, the MuniFin Group had 134 employees (2016: 106), of whom 119 were in the Parent Company (2016: 90). The significant increase in the number of employees is due to changes in the operating environment and customer needs, as well as the need created by banking regulations to develop the company’s governance and processes. New employees have been hired for almost all of the company’s functions, including customer service, business development, administrative services, IT, finance and risk management. The wages and salaries and other remuneration paid to personnel totalled EUR 11.0 million in the Group (2016: EUR 9.5 million).

Until 22 August 2017, the President and CEO of MuniFin was Pekka Averio. On 22 August 2017, Averio and the Board of Directors of MuniFin agreed that Averio would resign from his position as the President and CEO of the company and Deputy to the CEO Esa Kallio would be appointed Interim President and CEO of MuniFin. In addition to being Interim President and CEO, Esa Kallio is the head of the company’s Capital Markets function. After the resignation of Pekka Averio, MuniFin immediately initiated a call for applications for the position of President and CEO, which was ongoing when this report of the Board of Directors was drawn up. In addition to the President and CEO, the other members of the Executive Management Team are Toni Heikkilä (CRO, EVP, Risk Management), Jukka Helminen (EVP, Customer Finance), Marjo Tomminen (CFO, EVP, Finance) and Mari Tyster (EVP, Legal and Compliance).

Salaries and Remuneration

The remuneration paid to the management and employees of MuniFin consists of fixed remuneration (base salary and fringe benefits) and a variable element based on the conditions of the remuneration scheme. The principles for the remuneration scheme are confirmed by the Board of Directors, and they are reviewed on an annual basis. The Remuneration Committee advises the Board of Directors on remuneration-related matters. For more information on salaries and remuneration, please refer to Note 29: “Salaries and Remuneration”, and to the Remuneration Report for 2017, which is published as a separate document from the report of the Board of Directors and the financial statements, and is available on the company’s website.

Internal Audit

The internal audit function is outsourced to Deloitte & Touche Ltd, which reports directly to the Board of Directors and its Audit Committee. Internal audit is tasked with monitoring the reliability and accuracy of MuniFin’s financial and other management information. Other tasks include ensuring that the company has sufficient and appropriately organised processes, including the supporting manual and IT systems, for carrying out its operations, and that the risks associated with the operations are adequately managed.

Share Capital and Shareholders

At the end of the 2017 financial year, MuniFin had paid share capital registered in the Trade Register to the amount of EUR 43,008,044.20 million, and the number of shares was 39,063,798. The company has two series of shares (A and B), with equal voting and dividend rights. Each share confers one vote at the Annual General Meeting.

At the end of 2017, MuniFin had 278 shareholders
(31 Dec 2016: 278).

10 largest shareholders 31 Dec 2017No. Of sharesPer cent
1. Keva11,975,55030.66%
2. Republic of Finland6,250,00016.00%
3. City of Helsinki4,066,52510.41%
4. City of Espoo1,547,8843.96%
5. VAV Asunnot Oy (City of Vantaa)963,0482.47%
6. City of Tampere919,0272.35%
7. City of Oulu903,1252.31%
8. City of Turku615,6811.58%
9. City of Kuopio592,0281.52%
10. City of Lahti537,9261.38%
The amounts of shares presented in the above table do not include any shares owned by the Group companies of the listed shareholders.

Events After the Reporting Period

The company’s Board of Directors is not aware of any events having taken place after the end of the financial year that would have a material effect on the company’s financial situation.

Outlook for 2018

The positive trend in the global economy and capital markets is expected to continue and interest rates to remain low. The gradual reduction of the ECB’s asset purchase programmes may begin in late 2018, but its controlled implementation is unlikely to have any major effects on the markets. The effects of Brexit have so far been minor, but it may have significant effects on Europe’s economic development in 2018.

From the perspective of Finnish local government finances, the outlook for 2018 is still good. Many growth centres, in particular, have a solid financial position, and housing construction is also expected to remain solid.

In a good economic situation, MuniFin’s customers have varying financing needs. A good overall economic situation may keep demand for financing at a moderate level, but it may also encourage customers to make new investments.

The health, social services and regional government reform is still under preparation; evaluating its overall effects on MuniFin’s customer base or the company’s own operations is challenging. The Finnish Government’s proposal for the health, social services and regional government reform is still pending after being returned for further preparation in 2017. The proposal is expected to be submitted to Parliament for consideration in the spring of 2018. The reform is not currently evaluated to have a fundamental impact on MuniFin’s operating volumes in 2018. MuniFin is actively monitoring the plans for the reform.

MuniFin aims to offer its customers solutions that generate more added value, and utilise in-depth information on the customer’s own situation and development trends within the sector. For this reason, in 2018, the company will put major effort into improving customer service, the service offering and systems in order to further enhance its efficiency and operations, as well as to digitalize its services. The company will also continue its long-term and systematic efforts to ensure that all of its operations comply with the principles of corporate responsibility.

MuniFin anticipates that costs will be higher than in 2017 due to an increase in the amount of personnel, investments in information systems and increases in fees and contributions to the authorities. Considering the previously described changes in the operating environment and assuming that there will be no significant change in interest rates compared to market expectations, the profitability of MuniFin’s operations is expected to remain at a good level in 2018. The performance of the financial markets and the IFRS 9 standard introduced in the beginning of 2018 might increase PnL volatility through unrealized gains and losses of financial instruments.

The estimates presented in this financial statements are based on the current outlook of the operating environment and business.

Proposal from the Board of Directors Concerning Profit for the Financial Year 2017

Municipality Finance Plc has distributable funds of EUR 95,456,652.15, of which the profit for the financial year totalled EUR 33,960,382.87.

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 89,206,444.47 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 well-reasoned decision. In recent years, the company has been preparing for the anticipated tightening – within banking regulations – of the minimum leverage ratios of capital requirements in particular. Own funds have been strengthened with retained earnings and the issue of an AT1 loan. At the end of 2017, the company’s leverage ratio was 3.84%. 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 2018. The Board of Directors proposes that the dividends be paid on 9 April 2018.

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 jeopardise the ­company’s ability to pay.

The Group’s Development

The Group’s Development31 Dec 201731 Dec 201631 Dec 201531 Dec 201431 Dec 2013
Turnover (EUR million)204.1183.7204.1222.0196.8
Net interest income (EUR million)228.5206.1172.2160.0149.5
% of turnover112.0112.284.472.176.0
Net operating profit (EUR million)198.4174.2151.8144.2141.3
% of turnover97.294.874.464.971.8
Cost-to-income ratio0.180.170.160.150.15
Lending portfolio (EUR million)21,21920,91020,08819,20517,801
Total funding acquired (EUR million)30,15328,66228,41926,61623,108
Balance sheet total (EUR million)34,73834,05233,88930,00926,156
Return on equity (ROE), %12.5712.5114.8421.6630.58
Return on assets (ROA), %0.460.410.380.410.48
Equity ratio, %3.863.483.081.981.8
Common Equity Tier 1 (CET1) (EUR million)945.5776.6686.3556.4-
Tier 1 capital (EUR million)1,293.001,124.101,033.80557.2454.2
Total own funds (EUR million)1,293.001,124.101,068.80623.1511.5
Ratio of Common Equity Tier 1 (CET1)
to risk-weighted assets, %
55.2246.2141.4929.94-
Ratio of Tier 1 capital (Tier 1)
to risk-weighted assets, %
75.5166.8962.4929.9835.42
Ratio of total own funds
to risk-weighted assets, %
75.5166.8964.6133.5339.88
Leverage ratio, %3.843.543.151.81.7
Personnel134106959083
The consolidated key figures for capital adequacy for 2017, 2016, 2015 and 2014 have been calculated in accordance with the EU Capital Requirements Regulation effective from 1 January 2014.

Calculation of key figures

Turnover

Interest income + commission income + net income from securities and foreign exchange transactions
+ net income from available-for-sale financial assets + net income from hedge accounting + other operating income

Cost-to-income ratio

Commission expenses + administrative expenses + depreciation + other operating expenses /
Net interest income + commission income + net income from securities and foreign exchange transactions
+ net income from available-for-sale financial assets + net income from hedge accounting + other operating income

Return on equity (ROE), %

Net operating profit – taxes /
Equity and non-controlling interest (average of values at the beginning and end of the year)
* 100

Return on assets (ROA), %

Net operating profit – taxes /
Average balance sheet total (average of values at the beginning and end of the year)
* 100

Equity ratio, %

Equity and non-controlling interest /
Balance sheet total
* 100

Ratio of Common Equity Tier 1 (CET1) to risk-weighted assets, %

Common Equity Tier 1 (CET1) /
Risk-weighted assets
* 100

Ratio of Tier 1 capital to risk-weighted assets, %

Tier 1 capital /
Risk-weighted assets
* 100

Ratio of total own funds to risk-weighted assets, %

Total own funds /
Risk-weighted assets
* 100

Leverage ratio, %

Tier 1 capital /
Total exposure
* 100

Lending portfolio

Loans and advances to the public and public sector entities – Leasing receivables

Alternative Performance Measures

The Alternative Performance Measures required by the European Securities and Markets Authority (ESMA) are presented to illustrate the financial performance of business operations and to improve comparability between reporting periods.

Figures are in Million eur.20172016
Interest income (incl. Leasing)191.4180.5
Commission income3.22.7
Net income from securities and foreign exchange transactions6.2-1.8
Net income from available-for-sale financial assets0.5-0.5
Net income from hedge accounting2.72.6
Other operating income0.10.1
Turnover204.1183.7
Commission expenses4.14.0
Administrative expenses22.318.8
Depreciation2.01.8
Other operating expenses14.510.5
Costs42.935.1
Net interest income228.5206.1
Commission income3.22.7
Net income from securities and foreign exchange transactions6.2-1.8
Net income from available-for-sale financial assets0.5-0.5
Net income from hedge accounting2.72.6
Other operating income0.10.1
Income241.3209.4
Liabilities to credit institutions3,9025,362
Liabilities to the public and public sector entities647873
Debt securities issued26,30424,584
Total30,85330,819
- CSA-collateral (received)-700-2,158
Total funding acquired30,15328,662
Net operating profit198.4174.2
Taxes-39.7-34.9
Equity and non-controlling interest (average of values at the beginning and end of the year)1,261.901,113.90
Return on equity, % (ROE)12.57 %12.51 %
Net operating profit198.4174.2
Taxes-39.7-34.9
Average balance sheet total (average of values at the beginning and end of the year)34,395.2033,970.50
Return on assets, % (ROA)0.46 %0.41 %
Equity1,339.401,184.30
Non-controlling interest-0.1
Balance sheet total34,738.1034,052.20
Equity ratio, %3.86 %3.48 %
Common Equity Tier 1 (CET1)945.5776.6
Risk-weighted assets1,712.301,680.50
Ratio of Common Equity Tier 1 to risk-weighted assets, %55.22 %46.21 %
Tier 1 capital1,293.001,124.10
Risk-weighted assets1,712.301,680.50
Ratio of Tier 1 capital to risk-weighted assets, %75.51 %66.89 %
Total own funds1,293.001,124.10
Risk-weighted assets1,712.301,680.50
Ratio of total own funds to risk-weighted assets, %75.51 %66.89 %
Tier 1 capital1,293.001,124.10
Total exposure33,635.7031,738.00
Leverage ratio, %3.84 %3.54 %