A record-breaking year for Municipality Finance
• Net interest income grew to EUR 78.7 million (2009: EUR 50.6 million). This represents a 56% increase on the previous year.
• The Group’s net operating profit for the period was EUR
58.3 million (2009: EUR 33.7 million), up nearly 73%
from the previous year.
• The balance sheet of Municipality Finance Group grew by
38%, reaching EUR 20,047 million (2009: EUR 14,557 million).
• The Group’s risk-bearing capacity remained strong, with capital adequacy at 19.28% at year’s end (2009: 20.17%) and capital for primary own funds at 13.92% (2009:
14.12%).
• The total funding acquisition for the year 2010 amounted to EUR 6,504 million (2009: EUR 5,789 million). The total amount of funding grew to EUR 17,162 million (2009: EUR 13,218 million).
• Municipality Finance’s loan portfolio increased to EUR
11,698 million (2009: EUR 9,741 million). New loans is- sued amounted to EUR 2,842 million (2009: EUR 2,940 million).
• The company launched financial leasing operations in summer 2010. In the initial stages, leasing operations are focused on funding investments in fixed assets.
• The Group’s investments totalled EUR 4,839 million at the end of the year (2009: EUR 3,270 million). The mar- ket values of investments continued to improve during the year and the fair value reserve amounted to EUR -6.7 million at year’s end (2009: EUR -12.7 million).
• The turnover of Municipality Finance’s subsidiary, Inspira, increased 51% and reached EUR 2.2 million (2009: EUR
1.5 million). Inspira’s net operating profit for the financial period was EUR 0.4 million, up 43% from the previous year (2009: EUR 0.3 million).
| Municipality Finance Plc | Financial statements bulletin 1 January – 31 December 2010 |
Key figures (group)
| 31 Dec 2010 | 31 Dec 2009 | |
| Net interest income (EUR m) | 78.7 | 50.6 |
| Net operating profit (EUR m) | 58.3 | 33.7 |
| New loans issued (EUR m) | 2,842 | 2,940 |
| New funding acquisition (EUR m) | 6,504 | 5,789 |
| Balance sheet total (EUR m) | 20,047 | 14,557 |
| Own funds (EUR m) | 245.9 | 207.7 |
| Capital adequacy ratio, % | 19.28 | 20.17 |
| Capital adequacy ratio for primary own funds, % | 13.92 | 14.12 |
| Return on equity (ROE), % | 28.42 | 27.84 |
| Cost-to-income ratio | 0.23 | 0.31 |
Municipality Finance Plc is a credit institution owned by Finnish municipalities, Keva and the Finnish state and is the parent company of the Municipality Finance Group.
CEO Pekka Averio’s comments on the 2010 financial year:
“The company remained the largest lender for its custom- er sector in 2010. The company’s funding acquisition was highly successful, the loan portfolio grew significantly and the operating result shows a marked improvement from the previous year.
The competitive situation in the market for funding mu- nicipal sector and state-subsidised housing production con- tinues to be affected by the inactivity of commercial banks in the segment, and any change in this regard is unlikely in the coming years. Therefore, the company holds a key position in ensuring financing for its customers, even in economically uncertain times.
Municipality Finance constantly develops its services in response to its customers’ needs. A good example of this is the launch of financial leasing products in 2010 as a new option for financing investments in capital assets. Our services are needed now more than ever and by developing in response to our customers’ needs we will continue to be successful in the future.”
Credit ratings
Municipality Finance credit ratings
The company has the best possible ratings for long term funding:
Moody’s Investors Service Aaa (stable) Standard & Poor’s AAA (stable)
The best possible credit ratings have also been confirmed for the company’s short term funding:
Moody’s Investors Service P1 (stable) Standard & Poor’s A-1+ (stable)
The Municipal Guarantee Board’s credit ratings
The Municipal Guarantee Board, which guarantees the com- pany’s funding, also has the best possible credit ratings for long term funding:
Moody’s Investors Service Aaa (stable) Standard & Poor’s AAA (stable)
Operating environment in 2010
The euro zone national debt crisis caused instability through- out the Western economy in 2010. In spite of this uncertainty, economic growth was strong in the major euro zone countries in 2010, especially in Germany, while USA and Japan saw their growth slow down. Central banks have maintained very loose monetary policy by keeping interest rates at record low levels. Central banks in the United States and Europe have also engaged in stimulus policies by making massive support purchases of long term bonds. This caused long term interest rates to fall sharply in 2010.
The amendments to the regulations on liquidity and capi- tal adequacy requirements proposed by the Basel Commit- tee on Banking Supervision and the European Commission have been a hot topic on the financial markets in 2010. If implemented as planned, the new regulations would severely tighten the operating conditions of credit institutions. Mu- nicipality Finance was active in predicting the impacts of the amended regulations and taking steps to prepare for them.
The impact of the financial crisis on municipal economies in Finland was less severe than anticipated. Municipal tax revenues in 2010 exceeded forecasts. This was further helped by municipalities still receiving a temporarily elevated share of corporate taxes, 32% instead of 22%, in 2009-2011. As a result of the elevated municipal tax rates and the expansion of the income tax base, municipal tax revenues were clearly above expectations. Increased limits on real estate taxes also resulted in higher real estate tax revenue. Another factor in municipal economies developing better than expected was slower growth in operating expenses, which was enabled by costs increasing less than in previous years. Municipalities’ funding requirements increased slightly from the previous year despite municipal economies exceeded anticipated growth rates. While the short term developments have been positive, the public sector economy still faces long term economic and structural challenges.
Non-subsidised housing production recovered faster than anticipated. State-subsidised housing production decreased from the record-high levels of 2009 but remained above the long term average. Refinancing of housing loans went also down from the previous year.
Group operating result and balance sheet
The Group reached a good operating result. The growth of the business continued and net operating profit for the financial year before appropriations and taxes stood at EUR
58.3 million (2009: EUR 33.7 million). The Group’s net interest income grew by 56%, reaching EUR 78.7 million (2009: EUR 50.6 million).
Municipality Finance’s net operating profit was EUR
58.0 million (2009: EUR 33.0 million). The primary factors contributing to the growth in operating profit were increased volume, successful funding acquisition, good balance sheet management and repurchases of the company’s own bonds. Income from repurchased bonds totalled EUR 8.9 million in 2010 (2009: EUR 5.8 million). Municipality Finance’s subsidiary, Inspira, continued to grow and recorded an oper- ating profit of EUR 0.4 million for the period (2009: EUR
0.3 million).
The Group’s operating expenses increased by 16%, reach- ing EUR 14.9 million (2009: EUR 12.8 million). The in- crease in expenses was primarily caused by growth in volume and personnel.
Administrative expenses totalled EUR 10.2 million (2009: EUR 9.0 million), of which personnel expenses represented EUR 6.9 million (2009: EUR 6.0 million). Total depreciation of tangible and intangible assets amounted to EUR 0.6 million (2009: EUR 0.4 million). Other operating expenses for the period were EUR 4.1 million (2009: EUR 3.3 million).
The Group’s balance sheet total continued to grow rapidly during the year, reaching EUR 20,047 million at the end of the period, compared to EUR 14,557 million the year be- fore. This represents an increase of 38%. The balance sheet increase is primarily the result of business growth and valua- tion changes of derivatives and liabilities as other currencies strengthened against the euro.
Capital adequacy
The Group’s capital adequacy ratio stood at 19.28% at year’s end, compared to 20.17% in 2009. The capital adequacy for primary own funds was 13.92% (2009: 14.12%). The Group’s own funds totalled EUR 245.9 million at the end of the year (2009: EUR 207.7 million), with the minimum requirement for own funds being EUR 102.0 million (2009: EUR 82.4 million). The capital adequacy ratio for credit risk tied up the largest amount of the Group’s own funds at EUR 94.2 million (2009: EUR 77.6 million).
Business operations
Funding
The year 2010 was characterised by continued restlessness on the markets. With the Nordic countries maintaining strong credit ratings and untarnished reputations through the finan- cial crisis, investor interest in bonds issued by Municipality Finance continues to grow. Despite the challenges faced by the Finnish economy, Finland and the country’s public sector maintain a good reputation on the financial markets.
Municipality Finance’s funding acquisition, measured in euros, reached a record high in 2010. The company con- cluded a total of 229 arrangements (2009: 216) in the inter- national funding markets. Nearly three out of four funding arrangements were structured.
A very significant proportion of Municipality Finance’s funding is acquired on the international capital markets. Asia, in particular, remained a key area for the company’s funding acquisition, with Japan and Taiwan maintaining their positions as the key markets. The largest European market for funding acquisition was Switzerland, with Germany the largest in the euro zone. There was also interest in the company’s bonds in the Nordic countries. Active cooperation with investors has boosted the company’s position and recognisability in various markets and the strategy of diversifying funding sources has proved to be a successful move on the unstable markets. The company has managed to keep funding costs at a competitive level despite the challenges it has faced in this aspect.
New long term funding amounted to EUR 6,504 mil- lion in 2010 (2009: EUR 5,789 million), of which municipal bonds represented EUR 35 million (2009: EUR 86 million). A total of EUR 1,566 million was issued in short-term debt instruments in the period (2009: EUR 2,218 million). Total funding at the end of the year amounted to EUR 17,162 mil- lion (2009: EUR 13,218 million). Of this total amount, 15% was denominated in euros (2009: 26%) and 85% in foreign currencies (2009: 74%).
Lending
Demand for loans in the municipal sector remained high in
2010. The total number of requests for tenders received by Municipality Finance decreased by 19% from the previous year. The total value of requests received in 2010 was EUR
3,735 million (2009: EUR 4,630 million), of which the com- pany won EUR 2,675 million (2009: EUR 3,578 million), or 80% of all its competitive bidding. Tenders worth EUR
1,422 million were won in the municipalities and municipal federations segment (2009: EUR 1,353 million), EUR 326 million in the municipal enterprises category (2009: EUR 626 million) and EUR 927 million in bids to housing corporations (2009: EUR 1,599 million).
The company’s long term loan portfolio at the end of
2010 amounted to EUR 11,698 million (2009: EUR 9,741 million). This represents a 20% increase on the previous year. New loans granted amounted to EUR 2,842 million, close to the total for the previous year (2009: EUR 2,940 million).
In the first half of 2010, Municipality Finance began of- fering financial leasing services to municipalities, municipal federations and municipally owned corporations. In the initial stages, leasing operations are focused on investments in fixed assets. The aim of the company’s leasing operations is to in- crease transparency and the range of alternatives available in the leasing market. The recruitment and system investments required for the launch of leasing operations were carried out in 2010.
In 2010 low interest rates and lower customer margins attracted customers towards short term financing. At the end of the year, the total value of municipal paper and municipal commercial paper programmes concluded with Municipality Finance was EUR 2,623 million (2009: EUR 2,426 mil- lion). The company’s year-end balance sheet included EUR
581 million (2009: EUR 516 million) in commercial papers issued by municipalities and enterprises controlled by mu- nicipalities, and during the year customers raised a total of EUR 6,420 million through these programmes (2009: EUR
5,013 million).
Investment
Municipality Finance’s investment operations comprise the investment of acquired funding in liquid deposits and financial
sector securities with a good credit rating in order to ensure that the company can remain operational under all market conditions. The company maintains a liquidity portfolio that enables it to continue its operations uninterrupted for a mini- mum of six months under all market conditions. At the end of 2010 the total value of investments stood at EUR 4,839 million (2009: EUR 3,270 million) and the average credit rating of all investments was AA+ (2009: AA+). The dura- tion of all investments at year’s end was 2.38 years (2009:
2.22 years).
Financial Advisory Services Inspira Ltd
Financial Advisory Services Inspira Ltd (Inspira) offers finan- cial services to the public sector for the implementation of in- vestment projects as well as corporate and asset restructuring. Inspira’s turnover for the period increased by 51%, reaching EUR 2.2 million (2009: EUR 1.5 million). Net operating profit for the period was EUR 0.4 million, compared to EUR
0.3 million in the previous year.
Risk management
There were no material changes in the company’s risk stand- ing in 2010. Risks remained within the set limits and, based on the company’s assessment, risk management has met the requirements set for it.
Prospects for year 2011
Demand for lending is expected to remain strong in 2011, close to the levels seen in 2010. Investment activity in the local government sector is also anticipated to remain high. Municipal federations of hospital districts, in particular, are set to make major investments in real estate and equipment. The primary financing needs in the municipal corporations segment are likely to be seen in energy companies and water management projects. As non-subsidised housing production is increasing, lending for state-subsidised housing production is expected to continue to decrease. The company does not foresee major changes in the competitive situation compared to the past year.
Municipality Finance’s financial leasing operations are expected to grow in 2011, which will be the second year the company offers leasing services. Leasing demand in the municipal and municipal corporation sectors is expected to remain close to the levels seen in 2010. Hospital districts and energy companies, in particular, are set to launch major projects that may be funded by leasing products in addition to traditional balance sheet loans. The incorporation and re- structuring arrangements of municipally owned enterprises also hold significant potential for financial leasing.
Thanks to the company’s excellent credit rating and strong position in funding acquisition as well as the positive eco- nomic conditions in the Finnish public sector, Municipality
Finance foresees no problems with the availability of funding. Funding acquisition in 2011 is expected to remain close to the levels seen in 2010.
The upcoming changes in regulations concerning capital adequacy are likely to affect the company’s operations in many ways. Municipality Finance actively monitors the progress of the regulatory work while promoting measures to ensure the company’s operating conditions after the implementation of the new Capital Requirements Directive.
Municipality Finance will begin implementing an action plan based on the company’s IT strategy in 2011. In order to achieve the stated objectives, investments in IT development will be primarily focused on improving systems and services. The development project will begin with the drafting of an architecture design to support system development.
Inspira’s operations are expected to grow in 2011. The company expects that pressures to improve the efficiency of public sector operations will continue to grow, which will be particularly reflected in the reorganisation of activities in the local government sector. The operating environment in
2011 is expected to be conducive to growth in the demand for the services offered by Inspira.
The Group’s profitability is also expected to remain at the current strong level in 2011.
The Board’s proposal for the distribution of profits for the 2010 financial year
Municipality Finance Plc’s distributable funds total EUR
9,806,992.91, of which the profit for the financial year is EUR 9,773,899.41. The Board of Directors will propose to the annual general meeting that the distributable funds be used by declaring a dividend of EUR 0.25 per share for the year 2010, totalling EUR 9,765,949.50, with EUR 41,043.41 retained in equity.
The full financial statements for 2010 will be published on the company website (www.munifin.fi) on 2 March, 2011.
Municipality Finance Plc
Further information:
Pekka Averio, CEO
Tel. +358 (0)9 6803 6211, +358 (0)500 406 856
Esa Kallio, Executive Vice President, Deputy to CEO Tel. +358 (0)9 6803 6231, +358 (0)50 337 7953
Marjo Tomminen, Senior Vice President
Tel. +358 (0)9 6803 5665, +358 (0)50 386 1764