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Municipality Finance Plc Interim Report

Municipality Finance’s financial result developed as planned

Municipality Finance Plc
INTERIM REPORT 1 January – 30 June 2014
Stock Exchange Release 8 August 2014 at 2:00 p.m.

Municipality Finance’s financial result developed as planned

Municipality Finance’s operations continued positively during the first half of the year. Net interest income grew by 0.5% compared to the previous year, reaching EUR 79.0 million (1 January – 30 June 2013: EUR 78.6 million).

Operating profit excluding valuation and non-recurring items has continued its strong development. Operating profit decreased as a result of unrealized IFRS fair value changes of financial items and the lower repurchase volume of own bonds. The Group’s net operating profit amounted to EUR 63.4 million (1 January – 30 June 2013: EUR 80.7 million).

The Group’s capital adequacy remained strong, with the ratio of own funds to risk-weighted assets being 29.04% at the end of June (31 December 2013: 39.88%) and the ratio of Tier 1 capital to risk-weighted assets being 25.70% (31 December 2013: 35.42%). The figures for 2014 have been calculated in accordance with the EU Capital Requirements Regulation that entered into force on 1 January 2014.

Demand for loans decreased

Customers’ demand for loans has been lower during the first half of the year compared to the previous year. The total volume of tender requests received by Municipality Finance in January-June was EUR 2,146 million (1 January – 30 June 2013: EUR 2,868 million). The total amount of new loans withdrawn in the first half of 2014 was lower than in the same period last year at EUR 1,245 million (1 January – 30 June 2013: EUR 1,858 million). At the end of June, Municipality Finance’s long-term loan portfolio stood at EUR 18,365 million (31 December 2013: EUR 17,801 million). This corresponds to a 3% increase in the loan portfolio from year end. Municipality Finance’s share of the financing of its customer base remains high.

With interest rates remaining low, customers continued to be active in using short-term financing. At the end of June 2014, the total value of municipal commercial paper and municipal company commercial paper programmes concluded with Municipality Finance was EUR 3,640 million (31 December 2013: EUR 3,265 million). At the end of the reporting period, the company had EUR 1,117 million in municipal commercial papers and municipal company commercial papers on its balance sheet (31 December 2013: EUR 704 million). During the first six months of the year, customers acquired EUR 4,771 million in financing under short-term programmes (1 January – 30 June 2013: EUR 4,561 million).

The leasing operations grew during the first part of the year, the leasing portfolio standing at EUR 106 million at the end of June 2014 (31 December 2013: EUR 81 million).

The turnover of Municipality Finance’s subsidiary Inspira Ltd was EUR 1.1 million (1 January – 30 June 2013: EUR 0.8 million). The net operating profit for the first half of the year was EUR 0.2 million (1 January – 30 June 2013: EUR 0.0 million).

Funding acquisition returns to a normal level after a record year

A total of 130 funding transactions were made in January-June (1 January – 30 June 2013: 160). During the first half of the year, the emphasis of funding acquisition was on the benchmark markets, which accounted for 48% of the funding acquired during the period.

In January-June, EUR 4,178 million was acquired in long-term funding (1 January – 30 June 2013: EUR 7,133 million). The company issued bonds denominated in 12 different currencies in the first half of 2014. A total of EUR 3,288 million was issued in short-term debt instruments under the Euro Commercial Paper programme in January-June (1 January – 30 June 2013: EUR 4,649 million), and total funding under the programme amounted to EUR 849 million at the end of June (31 December 2013: EUR 1,592 million). Total funding at the end of June 2014 amounted to EUR 25,477 million (31 December 2013: EUR 23,108 million). Of this total amount, 16% was denominated in euros (31 December 2013: 15%) and 84% was denominated in foreign currencies (31 December 2013: 85%).

President and CEO Pekka Averio:

“The first half of 2014 saw stability on the international financial markets and an absence of major disruptions. In Europe, the second quarter of the year was the strongest in three years, and signs of positive development could be seen in eurozone crisis economies. As a result, the credit ratings of Greece and Spain, amongst others, increased and Portugal exited financial assistance programme of the EU, ECB and IMF earlier than expected. The interest rates of the peripheral eurozone countries government bonds also decreased markedly.

In Finland, economic growth has been weaker than in the other Nordic and Central European countries, and forecasts indicate that 2014 will be the third consecutive year of negative GDP growth. Should this weak economic development continue for a prolonged period of time will it increasingly affect the future economic situation of the municipal sector.

The financial development and operations of Municipality Finance continued as planned during the first half of the year. The company continues to be the largest lender for its customer base, and its total lending volume increased to EUR 18.4 billion (31 December 2013: EUR 17.8 billion). The demand for alternative financing solutions is a growing trend among our customer base. As a result, we reached a milestone in financial leasing services during the period, with the leasing portfolio exceeding EUR 100 million. The loan demand of the company’s customer base has not been as high as during the corresponding period the previous year. The supply of financing to the municipal sector normalised, with banks and other financial institutions actively seeking to join the municipal lending market.

The year has been good in terms of our funding, and we carried out 130 debt issues during the first six months, raising a total of EUR 4.2 billion. Funding was raised in a front-loaded manner again by taking advantage of the positive conditions across the markets as efficiently as possible. We estimate our full-year funding requirement to be approximately EUR 7 billion.

Our largest debt issuance during the first half of the year was the benchmark bond of USD 1 billion in May, which was subscribed in its entirety in within an hour and in the end oversubscribed almost 2.5 times. The favourable demand for the bond was a clear sign of international investors’ continued trust in the Finnish municipal sector’s ability to fulfil its obligations and that the markets believe the Finnish government is able to make the required decisions to turn the direction of the country’s economic situation.

Municipality Finance celebrates its 25th anniversary in 2014. In celebration of this milestone, we will continue to focus on our mission of ensuring competitive funding for the Finnish municipal sector and state-subsidized housing production under all market conditions. I would like to wish all of Municipality Finance’s customers, shareholders and various stakeholders a relaxing and peaceful rest of the summer.”

Further information:

Pekka Averio, President and CEO, tel. +358 500 406 856

Esa Kallio, Executive Vice President, Deputy to CEO, tel. +358 50 337 7953

Marjo Tomminen, Senior Vice President, CFO, tel. +358 50 386 1764

MuniFin (Municipality Finance Plc) is a credit institution for the public sector in Finland, which is owned by municipalities, Keva and the Republic of Finland. The company is an integral part of the Finnish public financies. Its mission is to ensure competitive funding for its customers in all market conditions. The Municipality Finance Group also includes the subsidiary company, Financial Advisory Services Inspira Ltd.

The company’s customers are Finland’s municipalities, municipal federations, municipally controlled companies and non-profit making housing cor­porations. They use the funds to maintain and improve the high Finnish social welfare for example by building schools, hospitals, day care centers, dwelling and other infrastructural projects.

MuniFin has the best possible credit rating and its funding is guaranteed by the Municipal Guarantee Board. Funding for the company is primarily obtained through the international capital markets. The Group’s balance sheet is over EUR 28 billion.

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