Municipality Finance Plc Financial Statements Bulletin 1.1.–31.12.2023
Municipality Finance Plc
Financial Statements Bulletin
9 February 2024 at 1:00 pm (EET)
Municipality Finance Plc Financial Statements Bulletin 1.1.–31.12.2023
In brief: MuniFin Group in 2023
- The Group’s net operating profit excluding unrealised fair value changes in January–December increased by 3.2% and amounted to EUR 176 million (EUR 170 million). The net interest income grew by 7.5% propelled by rising short-term market rates and totalled EUR 259 million (EUR 241 million). The growth in result was slowed down by an increase in costs.
- Net operating profit amounted to EUR 139 million (EUR 215 million). Unrealised fair value changes amounted to EUR -37 million (EUR 45 million) 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.
- Costs in the financial year amounted to EUR 82 million (EUR 73 million). The growth in costs was primarily driven by the almost quadrupled guarantee commission of EUR 13 million (EUR 4 million) paid to the Municipal Guarantee Board, which resulted from a change in the calculation method. The guarantee commission is a compensation for the guarantees the Municipal Guarantee Board grants to MuniFin’s funding.
- The Group’s leverage ratio continued to strengthen, standing at 12.0% (11.6%) at the end of December.
- At the end of December, the Group’s CET1 capital ratio was very strong at 103,4% (97.6%). CET1 capital ratio was well over the total requirement of 13.9%, with capital buffers accounted for. Because MuniFin Group only has CET1 capital, Tier 1 and total capital ratios are the same with the CET1 capital ratio, 103.4% (97.6%).
- The Russian invasion of Ukraine has not had a significant effect on the Group’s operations. The war has accelerated inflation and pushed up market interest rates, which has had a positive effect on the Group’s net interest income, but also increased costs. Because of the geopolitical uncertainty caused by the war, the Group has maintained strong liquidity buffers. Otherwise, the war has had only a minor effect on the Group’s operations.
- Long-term customer financing (long-term loans and leased assets) excluding unrealised fair value changes totalled EUR 32,948 million (EUR 30,660 million) at the end of December and saw an increase of 7.5% (5.5%). New long-term customer financing in January–December was at the same level as in the previous year and amounted to EUR 4,370 million (EUR 4,375 million). Short-term customer financing totalled EUR 1,575 million (EUR 1,457 million).
- Of all long-term customer financing, the amount of green finance aimed at environmentally sustainable investments totalled EUR 4,795 million (EUR 3,251 million) and the amount of social finance aimed at investments promoting equality and communality totalled EUR 2,234 million (EUR 1,734 million) at the end of December. The total amount of this financing increased by 41.0% (42.9%) from the previous year. The ratio of green and social finance to long-term customer financing excluding unrealised fair value changes grew by 5.1 percentage points to 21.3%. In late 2023, the Group published its sustainability agenda, which extends to the year 2035. By the end of 2030, the Group’s goal is to increase the share of green and social financing to one third of all long-term customer financing, and by the end of 2035 reduce emissions from financed properties by 38% from the 2022 level.
- In 2023, new long-term funding reached EUR 10,087 million (EUR 8,827 million). At the end of December, the total funding was EUR 43,320 million (EUR 40,210 million), of which long-term funding made up EUR 39,332 million (EUR 35,560 million). In March and in June 2023, the Group decided to repay the debt related to the European Central Bank’s targeted longer-term refinancing operations (TLTRO III). The debt totalled EUR 2,000 million.
- The Group’s total liquidity remained very strong, standing at EUR 11,633 million (EUR 11,506 million) at the end of the financial year. The liquidity coverage ratio (LCR) stood at 409% (257%) and the net stable funding ratio (NSFR) at 124% (120%) at the end of the year.
- The Board of Directors proposes to the Annual General Meeting to be held in spring 2024 a dividend of EUR 1.69 per share, totalling EUR 66.0 million. The total dividend payment in 2023 was EUR 1.73 per share, totalling EUR 67.6 million.
- Outlook for 2024: The Group expects its net operating profit excluding unrealised fair value changes to be at the same level or higher than in 2023. The Group expects its capital adequacy ratio and leverage ratio to remain strong. The valuation principles set in the IFRS 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. A more detailed outlook is presented in the section Outlook for 2024.
Comparison figures deriving from the income statement and figures describing the change during the reporting period are based on figures reported for the corresponding period in 2022. Comparison figures deriving from the balance sheet and other cross-sectional items are based on the figures of 31 December 2022 unless otherwise stated.
Key figures
Jan–Dec 2023 | Jan–Dec 2022 | Change, % | |
Net operating profit excluding unrealised fair value changes (EUR million)* | 176 | 170 | 3.2 |
Net operating profit (EUR million)* | 139 | 215 | -35.5 |
Net interest income (EUR million)* | 259 | 241 | 7.5 |
New long-term customer financing (EUR million)* | 4,370 | 4,375 | -0.1 |
New long-term funding (EUR million)* | 10,087 | 8,827 | 14.3 |
Cost-to-income ratio, %* | 32.4 | 23.9 | 35.7 |
Return on equity (ROE), %* | 6.6 | 9.9 | -33.5 |
31 Dec 2023 | 31 Dec 2022 | Change, % | |
Long-term customer financing (EUR million)* | 32,022 | 29,144 | 9.9 |
Balance sheet total (EUR million) | 49,736 | 47,736 | 4.2 |
CET1 capital (EUR million) | 1,550 | 1,482 | 4.6 |
Tier 1 capital (EUR million) | 1,550 | 1,482 | 4.6 |
Total own funds (EUR million) | 1,550 | 1,482 | 4.6 |
CET1 capital ratio, % | 103.4 | 97.6 | 5.9 |
Tier 1 capital ratio, % | 103.4 | 97.6 | 5.9 |
Total capital ratio, % | 103.4 | 97.6 | 5.9 |
Leverage ratio, % | 12.0 | 11.6 | 3.8 |
Personnel | 185 | 175 | 5.7 |
* Alternative performance measure.
All figures presented in the Financial Statements Bulletin are those of MuniFin Group, unless otherwise stated.
Comment on the 2023 financial year by President and CEO Esa Kallio
The year 2023 was the fourth consecutive year marked by instability. The rising geopolitical tensions and market volatility did not significantly affect MuniFin’s performance, and we were able to successfully carry out our core mandate of ensuring the availability of affordable long-term financing for our customers.
In 2023, the inflation exacerbated by the Russian invasion of Ukraine in 2022 took a downward turn, and interest rate hikes tapered off. Geopolitical tensions increased across the world throughout the year, and expectations of central bank measures caused uncertainty in the capital markets.
In Finland, the first half of the year was characterised by the parliamentary elections held in April and the ensuing government formation talks that stretched into June. The new government programme is unlikely to affect municipal operations directly. In the housing sector, our customers have been concerned about the government programme’s entries concerning right-of-occupancy housing and state-subsidised housing production. In this uncertain operating environment, our role as our customers’ trusted partner has grown even more important.
The demand for financing from our customers in the municipality sector was quiet at the beginning of the year, but demand picked up towards the end of the year close to the previous year’s level. Temporary tax benefits boosted municipal finances, causing municipalities to have lower financing needs. In municipal finances, 2023 was still a relatively good year, but started to weaken at the end of the year.
In the affordable social housing sector, financing needs were higher than in the year before. Our housing sector customers have suffered from rising construction costs for several years now, which has decreased the start of new building contracts. Rising interest expenses have taken a further toll on them since 2022. Towards the end of the year, however, the demand for financing started to pick up as construction costs levelled off and right-of-occupancy project starts were rushed because of the new government programme’s entries.
The new wellbeing services counties started their operations on 1 January 2023, and we financed the wellbeing services counties within the limits set by the Municipal Guarantee Board (MGB). The EUR 400 million limit for long-term finance set by the MGB was reached before the end of the year, and we could no longer fulfil wellbeing services counties’ financing requests for 2023 after that.
Our funding operations were a success despite the fluctuation in the capital markets. Our issuances were well-timed, and all our transactions were successful. We continued to keep our liquidity at a strong level throughout the year to ensure the availability of financing for our customers in all conditions.
Our operations continued in the usual manner in 2023, and our profitability was slightly higher than in 2022.
In 2023, we revised our strategy to further underline our core mandate. Our revised strategy highlights sustainability and our role as an enabler of sustainable welfare in society. We also made efforts to better assess and measure the impact of our operations. In October, we published our sustainability agenda, which sets the framework and goals for our long-term sustainability work. The agenda focuses on our business operations, i.e. the products and services offered to our customers, and the long-term impact achieved through them.
Information on the Group results
Consolidated income statement | Jan–Dec 2023 | Jan–Dec 2022 | Change, % | Jul–Dec 2023 | Jul–Dec 2022 | Change, % |
(EUR million) | ||||||
Net interest income | 259 | 241 | 7.5 | 135 | 119 | 12.9 |
Other income | 0 | 2 | -93.7 | -1 | 1 | <-100 |
Income excluding unrealised fair value changes | 259 | 243 | 6.5 | 134 | 120 | 11.5 |
Commission expenses | -16 | -6 | >100 | -8 | -3 | >100 |
HR expenses | -20 | -19 | 9.1 | -10 | -10 | 6.6 |
Other items in administrative expenses | -20 | -19 | 8.8 | -11 | -9 | 13.9 |
Depreciation and impairment on tangible and intangible assets | -7 | -10 | -37.2 | -3 | -3 | 18.5 |
Other operating expenses | -19 | -20 | -2.5 | -7 | -1 | >100 |
Costs | -82 | -73 | 12.4 | -39 | -25 | 53.2 |
Credit loss and impairments on financial assets | -1 | 0 | <-100 | -1 | 1 | <-100 |
Net operating profit excluding unrealised fair value changes | 176 | 170 | 3.2 | 95 | 96 | -1.5 |
Unrealised fair value changes | -37 | 45 | <-100 | -33 | 28 | <-100 |
Net operating profit | 139 | 215 | -35.5 | 62 | 124 | -50.2 |
Income tax expense | -28 | -43 | -34.8 | -12 | -24 | -48.1 |
Profit for the period | 111 | 172 | -35.7 | 50 | 101 | -50.7 |
The sum of individual results may differ from the displayed total due to rounding. Changes of more than 100% are shown as >100% or <-100%.
The Group’s net operating profit excluding unrealised fair value changes
MuniFin Group’s core business operations remained strong in 2023. The Group’s net operating profit excluding unrealised fair value changes increased by 3.2% and amounted to EUR 176 million (EUR 170 million). The growth resulted from an increase in net interest income. Russia’s invasion of Ukraine had only a minor effect on the result both in the financial year and in the comparison period. The Group’s net interest income benefited overall from the rising market interest rates resulting from the accelerating inflation.
The Group’s income excluding unrealised fair value changes was EUR 259 million (EUR 243 million) and grew by 6.5%. Net interest income grew by 7.5%, totalling EUR 259 million (EUR 241 million). Net interest income was positively affected by growing business volumes, the continued low cost of funding and the positive effect that rising market interest rates have had on net interest income through equity.
Other income totalled EUR 0.1 million (EUR 2 million). Other income includes mainly the turnover of MuniFin’s subsidiary company, Financial Advisory Services Inspira Ltd (Inspira) and capital gains and losses on net income from foreign exchange differences. At 0.1% (0.9%), other income relative to income excluding unrealised fair value changes forms only a minor part of the Group’s income.
The Group’s costs were EUR 82 million (EUR 73 million), rising by 12.4% from the year before. The increase in costs was primarily driven by the Municipal Guarantee Board’s decision to change the guarantee commission of MuniFin’s funding from a fixed fee to a fee tied to the amount of guaranteed funding, which considerably increased the sum to EUR 13 million (EUR 4 million). In contrast, the lower contribution fee to the Single Resolution Fund, which fell by 20.0% to EUR 7 million (EUR 9 million), helped curb the growth of expenses. In the comparison year, costs included a non-recurring item of EUR 5 million resulting from the discontinuation of a major IT project.
Commission expenses totalled EUR 16 million (EUR 6 million), and the growth in commission expenses was mainly due to the aforementioned increase in guarantee commission.
HR and administrative expenses reached EUR 41 million (EUR 37 million) and grew by 9.0% (7.6%). HR expenses comprised EUR 20 million (EUR 19 million) and other administrative expenses EUR 20 million (EUR 19 million). Employee numbers grew during the year, and the average number of employees in the Group was 183 (172). Other items in administrative expenses grew by 8.8% (8.9%). The growth is mainly due to the increased costs of maintaining and developing information systems.
During the financial year, depreciation and impairment of tangible and intangible assets reached EUR 7 million (EUR 10 million). This included the EUR 5 million impairment of the termination of the aforementioned IT project in the comparison year.
Other operating expenses decreased by 2.5% (growth in the previous year was 27.0%) to EUR 19 million (EUR 20 million). The reduction in fees was mainly due to the lower contribution fee to the Single Resolution Fund. Excluding fees collected by authorities other operating expenses totalled EUR 9 million (EUR 8 million), growing by 9.9%.
The amount of expected credit losses (ECL) amounted to EUR 1.2 million (EUR 0.1 million positive). During the financial year, the Group updated the probability of defaults in accordance with the update cycle, the recovery rates used in loss given default calculations and loss given default for certain customer segments. In addition, macro scenarios were updated to take into account forward-looking information. The Group has assessed the impact of rapidly increased interest rate environment on its receivables from customer financing and on credit risk. Based on the Group’s assessment some customers may face challenges in the sufficiency of cash flows during the first half of 2024, so the Group’s management still justified to recognise an additional discretionary provision of EUR 0.6 million based on a group-specific assessment.
The Group’s overall credit risk position has remained low. At the end of December 2023, the Group had no guarantee receivables from public sector entities due to customer insolvency (EUR 4 million). The amount of forborne loans was EUR 491 million (EUR 80 million), while non-performing exposures amounted to EUR 140 million (EUR 7 million) at the end of the year. The non-performing exposures were less than 0.4% (0.02%) from customer exposures. All the Group’s customer financing receivables are from Finnish municipalities, joint municipal authorities, wellbeing services counties or joint county authorities, or accompanied by a securing municipal, joint municipal authority, wellbeing services county or joint county authority guarantee or a state deficiency guarantee supplementing real estate collateral, and therefore no final credit losses will arise. According to the management’s assessment, all receivables from customers will be fully recovered. During the Group’s history of almost 35 years, it has never recognised any final credit losses in its customer financing.
The credit risk of the liquidity portfolio has remained at a low level, and the average credit rating of the debt securities in the portfolio is AA+ (AA+).
The Group’s profit and unrealised fair value changes
The Group’s net operating profit was EUR 139 million (EUR 215 million). Unrealised fair value changes decreased the Group’s net operating profit by EUR 37 million (in 2022: increased by EUR 45 million). In January–December, unrealised fair value changes in hedge accounting amounted to EUR -27 million (EUR 36 million) and unrealised net income from financial assets and liabilities through profit or loss to EUR -10 million (EUR 8 million).
The Group’s effective tax rate in the financial year was 20.2% (20.0%). Taxes in the consolidated income statement amounted to EUR 28 million (EUR 43 million). After taxes, the Group’s profit for the financial year was EUR 111 million (EUR 172 million).
The Group’s full-year return on equity (ROE) was 6.6% (9.9%). Excluding unrealised fair value changes, the ROE was 8.4% (7.8%).
The Group’s other comprehensive income includes unrealised fair value changes of EUR 109 million (EUR -21 million). During the financial year, the most significant item affecting the other comprehensive income was net change in fair value due to changes in own credit risk of financial liabilities designated at fair value through profit or loss totalling EUR 75 million (EUR -0.2 million). The cost-of-hedging amounted to EUR 25 million (EUR -15 million). Net change in fair value of financial assets at fair value through other comprehensive income was EUR 8 million (EUR -6 million).
On the whole, unrealised fair value changes net of deferred tax affected the Group’s equity by EUR 56 million (EUR 19 million) and CET1 capital net of deferred tax in capital adequacy by EUR -3 million (EUR 16 million). The cumulative effect of unrealised fair value changes on the Group’s own funds in capital adequacy calculations was EUR 45 million (EUR 47 million).
Unrealised fair value changes reflect the temporary impact of market conditions on the valuation levels of financial instruments at the time of reporting. 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 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.
In accordance with its risk management principles, the Group uses derivatives to 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. The counterparty credit risk related to derivatives is comprehensively covered by collateral management. 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.
The Parent Company and subsidiary company Inspira’s results
In 2023, MuniFin’s net interest income amounted to EUR 259 million (EUR 237 million) and net operating profit to EUR 139 million (EUR 211 million). The comparison period included interest expenses of EUR 4 million for an AT1 capital instrument redeemed in April 2022.
The turnover of MuniFin’s subsidiary company, Inspira’s, was EUR 1.4 million (EUR 1.6 million), and its net operating profit amounted to EUR 0.0 million (EUR 0.0 million).
MuniFin Group’s results in July–December
In the second half of 2023, the Group’s net operating profit excluding unrealised fair value changes amounted to EUR 95 million (EUR 96 million), remaining at the same level as in the year before. Net interest income totalled EUR 135 million (EUR 119 million). Costs in July–December amounted to EUR 39 million (EUR 25 million). Unrealised fair value changes weakened the net operating profit by EUR 33 million (in the comparison period: improved by EUR 28 million). In July–December, the Group’s net operating profit amounted to EUR 62 million (EUR 124 million).
In the second half of the year, net operating profit excluding unrealised fair value changes increased by 16.3% from the first half. Net interest income grew by 8.5% compared to the first half of the year. Costs amounted to EUR 39 million in July–December and to EUR 43 million in January–June. The net operating profit totalled EUR 62 million in July–December, decreasing by 19.0% from January–June. In the second half of the year, unrealised fair value changes affected the net operating profit by EUR -33 million, while in the first half of the year, their effect was EUR -5 million.
Outlook for 2024
The global economy is starting 2024 in a weakening economic cycle. The demand-slowing effects of interest rate hikes are reaching their peak and making sources of growth scarce, while fiscal policies are contracting as governments need to curb their debt. The geopolitical environment continues to remain unpredictable. On the upside, the cooling economy is helping to cushion cost pressures, and inflation is falling towards the ECB’s target of 2% in the euro area. The ECB is expected to commence interest rate cuts in 2024.
In Finland, the combined effect of factors saddling growth will peak in the first half of 2024. As the months pass and inflation eases, consumer purchasing power increases and interest rates start to come down moderately, the domestic market will gradually kick off economic recovery. Towards the end of the year, the export market may also start to contribute to recovery. Because of the low starting level, Finland’s GDP growth may nevertheless remain slightly in the negative in 2024.
The economic downturn will inevitably reflect on employment. In many sectors, Finland is suffering from such high structural labour shortages that strong growth in unemployment seems unlikely, but the employment outlook is nevertheless looking risky. It remains difficult to estimate how severe the construction sector’s recession will become and what multiplier effects this will have in other sectors. The euro area’s inflation trajectory is also looking somewhat uncertain. If inflation proves more persistent than anticipated and expected interest rate cuts are postponed, the downturn may drag on and push unemployment up more than expected.
Although Finland’s government programme sports ambitious fiscal efforts, public finances are projected to continue to show a significant deficit and high levels of debt in the coming years. The higher-than-expected increase in health and social services expenditure and financing costs and the cyclical decrease in tax income are making public finances difficult to balance. After a few exceptionally strong years, the municipal sector will return into serious deficit as various positive non-recurring items cancel out, costs increase and central government transfers decrease. The main uncertainties in municipal finances stem from the general economic development, the upcoming changes to central government transfers and the potential additional costs arising from the transfer of employment and economic development services (TE services) to municipalities.
Considering the above-mentioned circumstances, the Group expects its net operating profit excluding unrealised fair value changes to be at the same level as or higher than in 2023. The Group expects its capital adequacy ratio and leverage ratio to remain strong. The valuation principles set in the IFRS 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.
These estimates are based on a current assessment of the development of MuniFin Group’s operations and the operating environment.
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 owners of the company include Finnish municipalities, the public sector pension fund Keva and the State of Finland. MuniFin Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd. The Group’s balance sheet totals close to EUR 50 billion.
MuniFin’s customers include municipalities, joint municipal authorities, wellbeing services counties, joint county authorities, corporate entities under the control of the above-mentioned organisations, and affordable social housing. 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. 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