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Municipality Finance Plc Financial Statements Bulletin 1 January–31 December 2022

Municipality Finance Plc
Financial Statements Bulletin
10 February 2023 at 1:00 pm (EET)

Municipality Finance Plc Financial Statements Bulletin 1 January–31 December 2022

In brief: MuniFin Group in 2022

  • The Group’s net operating profit excluding unrealised fair value changes amounted to EUR 170 million (EUR 213 million). As expected, it decreased from the comparison year’s exceptionally good result and was 20.0% lower than in the year before (8.0% growth in 2021). This drop was influenced by the change in credit terms applied in late 2021 for the benefit of the Group’s customers. The Group’s net interest income totalled EUR 241 million (EUR 280 million) in January–December. Costs in the financial year amounted to EUR 73 million (EUR 72 million). Costs excluding non-recurring items totalled EUR 69 million (EUR 61 million] and making the figure 12.2% greater than in the previous year. The costs increased the most in fees collected by authorities.
  • The net operating profit amounted to EUR 215 million (EUR 240 million). Unrealised fair value changes amounted to EUR 45 million (EUR 27 million) in the financial year.
  • The Group’s leverage ratio was 11.6% (12.8%) at the end of December. The reduction in the leverage ratio is mostly explained by the Group redeeming its only AT1 capital loan in April, which decreased Tier 1 capital by EUR 347 million.
  • At the end of December, the Group’s CET1 capital ratio was very strong at 97.6% (95.0%). CET1 capital ratio exceeded the total requirement of 13.8% by over seven times, with capital buffers accounted for. The repayment of the AT1 capital loan decreased Tier 1 and total capital ratio to 97.6% (118.4%), bringing them currently on a par with the CET1 capital ratio.
  • Russia’s invasion of Ukraine has not had a significant negative effect on the Group’s operations. Despite the market turbulence, the Group continued to acquire funding without interruption during the year. Because of the uncertainty arising from the war and the inflation outlook, the Group has nevertheless maintained larger than normal liquidity buffers as a precaution. The market interest rates that have risen due to the accelerating inflation have had a positive effect on the Group’s net interest income.
  • Long-term customer financing (long-term loans and leased assets) excluding fair value changes totalled EUR 30,660 million (EUR 29,063 million) at the end of December and saw an increase of 5.5% (5.6%). Long-term customer financing decreased by 0.2% (4.3%) due to the unrealised fair value changes. New long-term customer financing in January–December amounted to EUR 4,375 million (EUR 3,671 million). Short-term customer financing increased by 33.8% (previous year’s drop was 16.9%) and reached EUR 1,457 million (EUR 1,089 million).
  • Of all long-term customer financing, the amount of green finance aimed at environmentally sustainable investments totalled EUR 3,251 million (EUR 2,328 million) and the amount of social finance aimed at investments promoting equality and communality EUR 1,734 million (EUR 1,161 million) at the end of December. Green and social finance have been extremely well received by customers, and the total amount of this financing increased by 42.9% (46.9%) from the previous year.
  • In 2022, new long-term funding reached EUR 8,827 million (EUR 9,395 million). At the end of December, the total funding was EUR 40,210 million (EUR 40,712 million), of which long-term funding made up EUR 35,560 million (EUR 36,893 million). The amount of total funding decreased due to the growth in unrealised fair value changes which was caused by the increase on the market rates.
  • The Group’s total liquidity is very strong, and it was EUR 11,506 million (EUR 12,222 million) at the end of the financial year. The Liquidity Coverage Ratio (LCR) stood at 257% (335%) and the Net Stable Funding Ratio (NSFR) at 120% (124%) at the end of the year.
  • The Board of Directors proposes to the Annual General Meeting to be held in spring 2023 a dividend of EUR 1.73 per share for 2022, totalling EUR 67,580,370.54. The total dividend payment in 2022 was EUR 40,235,711.94.
  • Outlook for 2023: The Group expects its net operating profit excluding unrealised fair value changes to remain at the same level as in the previous year. 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 2023.

Comparison figures deriving from the income statement and figures describing the change during the financial year are based on figures reported for the corresponding period in 2021. Comparison figures deriving from the balance sheet and other cross-sectional items are based on the figures of 31 December 2021 unless otherwise stated.

Key figures

  Jan–Dec 2022 Jan–Dec 2021 Change, %
Net operating profit excluding unrealised fair value changes (EUR million)* 170 213 -20.0
Net operating profit (EUR million)* 215 240 -10.3
Net interest income (EUR million)* 241 280 -13.9
New long-term customer financing (EUR million)* 4,375 3,671 19.2
New long-term funding (EUR million)* 8,827 9,395 -6.0
  31 Dec 2022 31 Dec 2021 Change, %
Long-term customer financing (EUR million)* 29,144 29,214 -0.2
Balance sheet total (EUR million) 47,736 46,360 3.0
CET1 capital (EUR million) 1,482 1,408 5.2
Tier 1 capital (EUR million) 1,482 1,756 -15.6
Total own funds (EUR million) 1,482 1,756 -15.6
CET1 capital ratio, % 97.6 95.0 2.7
Tier 1 capital ratio, % 97.6 118.4 -17.6
Total capital ratio, % 97.6 118.4 -17.6
Leverage ratio, % 11.6 12.8 -9.5
Return on equity (ROE), %* 9.9 10.7 -7.9
Cost-to-income ratio* 0.2 0.2 10.1
Personnel 175 164 6.7

* Alternative performance measure.

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

Comment on the 2022 financial year by President and CEO Esa Kallio

Finland’s geopolitical and geoeconomical position upended in early 2022. Russia’s war of aggression against Ukraine exacerbated inflation and hampered the availability of raw materials. Russian gas cut-offs plunged Europe into an energy crisis and sent energy prices soaring. This made collateral requirements in the electricity markets spiral, causing energy companies to face a liquidity crunch.

In October, the European Commission approved an aid scheme that allows MuniFin to finance Finnish municipality-owned energy companies under the EU State Aid Temporary Crisis Framework. This subsidised loan and guarantee scheme was designed to help cover the liquidity needs arising from the increased collateral requirements in the electricity derivatives market. In December, the scheme was extended to provide municipal energy companies’ other financing needs arising from potential crisis situations. Offering financing for the energy sector is our contribution to safeguarding the energy sector’s performance and Finland’s security of supply.

In 2022, the demand for our financing was slightly lower than expected. In the municipal sector, customers had less demand for finance because their income was higher than expected due to various non-recurring items, such as the central government’s pandemic recovery measures and funds they acquired from the sale of their health and social services properties before the reform took effect. Tax cuts related to the reform will not be fully implemented until 2024, which also affected the demand for financing. In the housing sector, the materials shortage and the rising cost of raw materials slowed down construction projects. The volatile market situation also resulted in longer processing times for interest subsidy loan decisions.

Hospital districts and joint municipal authorities sought funding more actively than we had expected, wanting to dispel uncertainty around the financing of their long-term investments and secure necessary funding on time before the health and social services reform entered into force.

The Act on the Municipal Guarantee Board was amended in the spring of 2022, allowing MuniFin also to finance new investments by the wellbeing services counties. However, the Municipal Guarantee Board set a limit to the amount of finance MuniFin can grant to wellbeing services counties, as wellbeing services counties are not members of the Municipal Guarantee Board and are not liable for the guarantees for MuniFin’s funding. In 2023, we can finance the long-term investments of wellbeing services counties by EUR 400 million and grant them up to EUR 900 million in short-term financing. Our estimate is that wellbeing services counties will have considerably larger financing needs than the limit allocated to us. The limit set by the Municipal Guarantee Board only applies to new financing granted by MuniFin.

The economic and geopolitical upheaval of 2022 has not had immediate, significant effects on MuniFin’s profitability. As expected, our result was lower in 2022 than in 2021 mostly due to planned changes in pricing, but also due to some unexpected expenses. For example, our contribution to the Single Resolution Fund in 2022 shot up by almost 40% from the previous year even though our risk position remained unchanged. On the other hand, rising interest rates boosted our profitability towards the end of the year.

Our funding remained stable even under the exceptional circumstances of 2022, and we continued to enjoy strong investor demand. We kept our liquidity at a high level throughout the year to ensure the availability of financing for our customers in all conditions.

The past year was again marked by general economic uncertainty, even after the exceptional uncertainty of the COVID years. In these uncertain times, our role in ensuring our customers’ operations and acting as our customers’ trusted partner has grown even more important. I wish to thank our customers for their confidence and forward-facing collaboration and our staff for their wonderful work and commitment to our shared goal.

Information on Group results

Consolidated income statement 1–12/2022 1–12/2021 Change, % 7–12/2022 7–12/2021 Change, %
(EUR million)            
Net interest income 241 280 -13.9 119 142 -15.9
Other income 2 4 -48.8 1 1 -10.0
Income excluding unrealised fair value changes 243 285 -14.5 120 143 -15.8
Commission expenses -6 -5 9.1 -3 -3 4.8
Personnel expenses -19 -18 6.4 -10 -9 11.9
Other items in administrative expenses -19 -17 8.9 -9 -8 10.0
Depreciation and impairment on tangible and intangible assets -10 -16 -35.7 -3 -13 -78.5
Other operating expenses -20 -16 27.0 -1 -5 -82.9
Costs -73 -72 2.1 -25 -38 -33.4
Credit loss and impairments on financial assets 0 0 <-100 1 0 <-100
Net operating profit excluding unrealised fair value changes 170 213 -20.0 96 105 -8.7
Unrealised fair value changes 45 27 67.1 28 7 305.2
Net operating profit 215 240 -10.3 124 112 11.0
Income tax expense -43 -48 -10.5 -24 -23 6.1
Profit for the period 172 192 -10.2 101 90 12.2

The sum of individual results may differ from the displayed total due 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 2022. The Group’s net operating profit excluding unrealised fair value changes shrank by 20.0% and totalled EUR 170 million (EUR 213 million). Income excluding unrealised fair value changes was EUR 243 million (EUR 285 million) and shrank by 14.5%.

In 2021, MuniFin decided to change the credit terms of negative interest rates in its long-term customer loans, enabled by the change in the banking regulation. This change began to gradually lower customers’ loan expenses as of October 2021. Non-recurring expenses from an IT project terminated in 2022 have been recorded in the results of 2021 and 2022. The result for 2022 was weakened by the growth in fees collected by authorities. The COVID pandemic and Russia’s invasion of Ukraine only had a minor effect on the results both in the reporting period and in the comparison period. The increased market rate levels, as a result of accelerated inflation, has a positive overall impact on the Group’s net interest income.

Net interest income totalled EUR 241 million (EUR 280 million) in January–December 2022. Net interest income was positively affected by growing business volumes and the continued low cost of funding, as well as the positive effect that rising market interest rates have had on interest income through equity.

On 1 April, the Group redeemed its only AT1 capital loan (EUR 350 million), included in its Tier 1 capital. The Group’s net interest income does not recognise the interest expenses of EUR 4 million (EUR 16 million) of the AT1 capital instrument for the financial year 2022, as the capital loan is treated as an equity instrument in the consolidated accounts. The interest expenses of the capital loan are treated similarly to dividend distribution; that is, as a decrease in retained earnings under equity upon realisation of interest payment on an annual basis.

Other income fell from the previous year to EUR 2 million (EUR 4 million). Other income includes commission income, net income from foreign exchange transactions, net income on financial assets at fair value through other comprehensive income, and other operating income. In addition, the turnover of MuniFin’s subsidiary company, Financial Advisory Services Inspira, is included in other income. At 0.9% (1.6%), 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 73 million (EUR 72 million), rising by 2.1% from the year before. Costs were negatively affected by the discontinuation of a major IT project for a loan lifecycle management system, which the Group launched in late 2019. The project was terminated in spring 2022, and a total of EUR 5 million (EUR 10.5 million) of non-recurring expenses were recorded in depreciation and impairment on tangible and intangible assets. The termination did not have an effect on customer business. Expenses were also increased by higher fees collected by authorities; especially the higher contribution to the Single Resolution Fund, which grew by 36.3% to EUR 9 million (EUR 7 million).

Commission expenses totalled EUR 6 million (EUR 5 million) and consisted primarily of paid guarantee fees, custody fees and funding programme update fees.

Administrative expenses reached EUR 37 million (EUR 35 million) and grew by 7.6% (+5.2%). Of this, personnel expenses comprised EUR 19 million (EUR 18 million) and other administrative expenses EUR 19 million (EUR 17 million). Employee numbers grew during the financial year, and the average number of employees in the Group was 172 (162).

Other items in administrative expenses grew by 8.9% (+11.6%) during the financial year. The growth is mainly due to the increased costs of maintaining and developing information systems. The improved COVID situation has also slightly increased travelling expenses and other types of running costs.

During the financial year, depreciation and impairment of tangible and intangible assets reached EUR 10 million (EUR 16 million). The termination of the aforementioned IT project was reflected in the amount of depreciation and impairment, both in 2022 and 2021.

Other operating expenses increased by 27.0% (+6.6%) to EUR 20 million (EUR 16 million). Of these, fees collected by authorities comprised EUR 12 million (EUR 9 million), increasing by 26.6% (23.0%) from the comparison period. The growth in fees was mainly due to the higher contribution to the Single Resolution Fund as described above. These fees excluded, other operating expenses totalled EUR 8 million (EUR 6 million), growing by 27.6% (-10.3%).

The amount of expected credit losses (ECL), calculated according to IFRS 9, amounted to EUR 0.1 million (EUR -0.1 million). MuniFin Group continued in 2022 IT and model development for the calculation of expected credit losses, and finished it during the second half of the year. With the development, changes have been made to the assessment criteria for significant increase in credit risk (SICR), probability of default (PD) and loss given default (LGD). Hence, there was no need for the additional discretionary provision of EUR 0.9 million recognised at the end of 2021 and increased in June 2022, and the Group’s management decided to remove the provision at the end of 2022. In addition, macro scenarios were updated at the end of financial year to take into account forward-looking information.

The Group’s overall credit risk position has remained low. According to the management’s assessment, all receivables from customers will be fully recovered. The receivables are from Finnish municipalities, joint municipal authorities or wellbeing services counties, or accompanied by a securing municipal, joint municipal authority or wellbeing services counties guarantee or a state deficiency guarantee supplementing real estate collateral, and therefore no final credit losses will arise. During the Group’s history of more than 30 years, it has never recognised any final credit losses in its customer financing.

At the end 2022, the Group had a total of EUR 4 million (EUR 19 million) of guarantee receivables from public sector entities due to customer insolvency, which is less than 0.01% (0.06%) of total customer exposure. Non-performing exposures were EUR 7 million (EUR 128 million). The credit risk of the liquidity portfolio has remained at a low level, its average credit rating being AA+ (AA+).

The Group’s profit and unrealised fair value changes

The Group’s net operating profit was EUR 215 million (EUR 240 million). Unrealised fair value changes improved the Group’s net operating profit by EUR 45 million (EUR 27 million). In January–December, net income from hedge accounting amounted to EUR 36 million (EUR 5 million) and unrealised net income from securities transactions to EUR 8 million (EUR 22 million).

The Group’s effective tax rate during the financial year was 20.0% (20.1%). Taxes in the consolidated income statement amounted to EUR 43 million (EUR 48 million). After taxes, the Group’s profit for the financial year was EUR 172 million (EUR 192 million). The Group’s full-year return on equity (ROE) was 9.9% (10.7%). Excluding unrealised fair value changes, the ROE was 7.8% (9.6%).

The Group’s other comprehensive income includes unrealised fair value changes of EUR -21 million (EUR -3 million). During the financial year, the most significant item affecting the other comprehensive income was the cost-of-hedging, totalling EUR -15 million (EUR -3 million). The net change in fair value due to changes in own credit risk on financial liabilities designated at fair value through profit or loss amounted to EUR -0.2 million (EUR 0.4 million).

On the whole, unrealised fair value changes net of deferred tax affected the Group’s equity by EUR 19 million (EUR 19 million) and CET1 capital net of deferred tax in capital adequacy by EUR 16 million (EUR 19 million). The cumulative effect of unrealised fair value changes on the Group’s own funds in capital adequacy calculations was EUR 47 million (EUR 31 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, MuniFin Group uses derivatives to financially hedge against interest rate, exchange rate and other market and price risks. Cash flows under agreements are hedged, but due to the generally used valuation methods, changes in fair value differ between the financial instrument and the respective hedging derivative. Changes in the shape of the interest rate curve and credit risk spreads in different currencies affect the valuations, which cause the fair values of hedged assets and liabilities and hedging instruments to behave in different ways. In practice, the changes in valuations are not realised on a cash basis because the Group primarily holds financial instruments and their hedging derivatives almost always until the maturity date. Changes in credit risk spreads are not expected to be materialised as credit losses for the Group, because the Group’s liquidity reserve has been invested in instruments with low credit risk.

Parent Company’s result

MuniFin’s net interest income at year-end was EUR 237 million (EUR 264 million), and its net operating profit stood at EUR 211 million (EUR 223 million). The profit after appropriations and taxes was EUR 138 million (EUR 137 million). In April 2022, MuniFin redeemed its AT1 capital loan of face value at EUR 350 million included in Additional Tier 1 capital in capital adequacy calculation. The interest expenses of this loan for 2022 totalled EUR 4 million (EUR 16 million). In the Parent Company, the AT1 capital loan had been recorded under the balance sheet item Subordinated liabilities.

Subsidiary Inspira

In 2022, the turnover of MuniFin’s subsidiary company, Financial Advisory Services Inspira Ltd, was EUR 1.6 million (EUR 1.7 million), and its net operating profit amounted to EUR 0.0 million (EUR 0.1 million).

MuniFin Group’s results in July–December

The Group’s net operating profit excluding unrealised fair value changes was EUR 96 million (EUR 105 million) during the second half of the year 2022, which was 9% lower than year previous. The net interest income was EUR 119 million (EUR 142 million). The net interest income shrank thanks to the change in the credit terms applied in late 2021 for the benefit of MuniFin’s customers. Costs in July–December were EUR 25 million (EUR 38 million). Costs excluding the non-recurring item related to the terminated IT project grew by 10.7% and were EUR 30 million (EUR 27 million). Unrealised fair value changes increased the net operating profit by EUR 28 million (EUR 7 million). Net operating profit for July–December was EUR 124 million (EUR 112 million).

Compared to the first half of the year, net operating profit excluding unrealised fair value changes for July–December grew by 29%. Net interest income was slightly lower than in the first half of the year. Costs in July–December were 47% lower than in the first half of the year. The difference is partially explained by the fact that the stability fee to the Single Resolution Fund for the entire year is recorded already as an expense at the beginning of the year. Also, the allocation of the non-recurring item in costs in different halves of the year explains the difference. The profit-increasing effect of the unrealised fair value changes was EUR 12 million higher than in January–June 2022. Net operating profit for July-December was 38% higher than net operating profit in the first half of the year.

Outlook for 2023

The economic outlook has deteriorated markedly in all MuniFin’s main economic areas. In the United States, the main reason for the slowdown in growth is the rapidly tightening monetary policy, and in the euro area, the energy crisis and the surge in the cost of living. In China, the growth outlook is weighed down by the country’s COVID situation and property sector crisis. The euro area is expected to slide into a recession in early 2023, but the downturn in economy is projected to be relatively short-lived and shallow because businesses have adjusted to the energy crisis faster than expected, and many households still have some extra savings accumulated during the pandemic.

Inflation continues to pose the biggest challenge in global macroeconomy. The fastest rise in consumer prices is likely to calm down during the coming winter months, but it may take a few years for inflation to return to the central banks’ target level. Interest rate hikes will probably continue throughout the first half of 2023, other contractive monetary policy measures for much longer. Central bank key interest rates are predicted to rise to about 5% in the United States and over 3% in the euro area.

The Finnish economy is also sinking into a mild recession as real incomes are being eroded and businesses are more cautious in their investment decisions. The outlook has deteriorated especially in retail business and construction. General economic uncertainty and rising interest rates are a difficult combination for the housing market. Trends in building permits indeed suggest that the number of residential building projects will fall clearly in 2023.

It is to be expected that the cooling economic cycle will eventually also affect the labour market: employment growth will halt, and the unemployment rate will turn to a moderate rise. However, many sectors are currently facing such extensive labour shortages that strong growth in unemployment seems unlikely.

Finland’s public finances will continue to show a significant deficit in the coming years. Due to new cost pressures, especially the central government will run into much more debt than was previously estimated. Municipal finances, however, are looking exceptionally strong in 2023. Municipalities will not bear the full burden of the tax cuts introduced by the health and social services reform until in 2024, but they will experience the relief of their health and social services spending being eliminated immediately at the start of 2023. Thanks to the temporary tax benefit, the financial position of Finnish municipalities is expected to show a surplus of more than EUR 1 billion. The main uncertainties in municipal finances stem from the general economic development, the energy crisis and the yet unknown true cost of municipalities’ new responsibilities, such as the local government pilots on employment and the extension of compulsory education.

Considering the above-mentioned circumstances, the Group expects its net operating profit excluding unrealised fair value changes to be at the same level as in the previous year. 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 company is owned by Finnish municipalities, the public sector pension fund Keva and the Republic of Finland. MuniFin Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd. The Group’s balance sheet totals close to EUR 48 billion.

MuniFin builds a better and more sustainable future with its customers. MuniFin’s customers include municipalities, joint municipal authorities, wellbeing services counties, corporate entities under their control, and non-profit organisations nominated by the Housing Finance and Development Centre of Finland (ARA). 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.

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