Municipality Finance Plc Financial Statements Bulletin
1.1.–31.12.2023
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
- MuniFin_Financial_Statements_Bulletin_2023
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