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Finland’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

The Finnish economy grew by 1.7% in 2018. As a result of this growth, the volume of gross domestic product exceeded the previous peak, reached prior to the financial crisis in 2008. In the class of demand items, investments grew by 3% and exports by 1%. The biggest demand item, private consumption expenditure, grew by 2%.

Household consumption increased as the level of employment rose to 72.5% and wages and salaries grew by 1.7%. Households’ savings ratio was -0.3%s.

In the strengthened economy, the general government deficit continued to decrease. The general government’s financial position recorded a deficit of 0.6% relative to GDP. The deficit was reduced particularly by growth in tax revenue.

The housing market cooled slightly. The number of new housing permits is on the decrease, which reflects the cooling down of the construction market. However, the previous years’ large number of housing starts will keep the number of completed houses on a high level for a while still.

The Finnish banking market is dominated by four major banks, which together, hold 81% of the market shares. Nordea Bank, OP Financial Group and Municipality Finance are deemed domestically significant institutions (O-SII) and are directly supervised by the ECB. Smaller domestic retail groups, like Savings Banks group, POP Bank group and other small domestic banks, are under the supervision of the Finnish Supervisory Authority.

The biggest group by market share (35.5%) is OP Financial Group. The group is made up of 156 independent member cooperative banks and the OP Cooperative, which they own. Second largest is Nordea Bank with a 25.8% market share. In October 2018, Nordea moved its headquarters to Finland, as a result of which the Finnish banking sector grew to over three times the size of GDP. Danske Bank and Municipality Finance are nearly equal in terms of their market shares, 9.5% and 9.7%, respectively. Danske Bank turned its Finnish subsidiary into a branch at the end of 2017.

Foreign ownership dropped dramatically after Nordea’s move to Finland. Danske Bank, Handelsbanken and their Scandinavian peers operate in Finland as branches. All the other credit institutions are privately owned except for Municipality Finance, which is specialised in financing the Finnish public sector.

New housing loans taken out were 2.2% higher than the previous year. At the end of 2018, the total housing loan portfolio stood at €97.8 billion (42.2% of GDP) after growing by 1.7% during the year.

Households’ debt-to-income ratio rose and was 127% at the end of the year. Discussions about household indebtedness continue and new macroprudential tools are being considered. The growth rate of debt is moderate, but the overall level of debt is what worries the authorities.

Although deposits from households are the largest single source of funding for domestic banks, the sector’s funding can be said to be heavily dependent on market funding as well. Market-based funding accounted for 57% of the total funding after Nordea’s headquarters change. However, the dispersion is high between credit institutions: some fund their operations almost entirely with deposits, while others, especially mortgage credit institutions, only issue covered bonds. Almost 40% of Finnish mortgage loans are funded by covered bonds. The ratio of loans to deposits increased and was 163% at the turn of the year, because all the performance ratios have been affected by the transfer.

Lending to corporates (housing corporations included) increased by 5.4%, with growth broadly based across economic activity sectors. At the end of December, the stock of loans to non-financial corporations stood at €85.3 billion (36.8% of GDP), of which loans to housing corporations accounted for EUR 32.0 bn. The corporate loan stock grew by €2.7 billion during the year, which is the most it has been since 2011.

As noted above, the balance sheet of the Finnish banking sector grew to €780 billion (336% of GDP). However, comparisons to previous years should be made carefully as, all the performance ratios have been affected by the transfer.

The capital adequacy of the Finnish banking sector remained strong. At the end of the year, its overall capital adequacy ratio was 20.9%. The Common Equity Tier 1 ratio (CET1) stood at 17.2%. The leverage ratio was 5.8%, which is slightly higher than the European average.

The comparable operating profit of the banking sector was slightly weaker than in 2017, but net interest income improved thanks to loan volume growth and low-cost funding. Other income items were weaker than in 2017. A sharp drop in net investment income reflected stock market volatility in the fourth quarter of 2018.

Banking sector expenses rose slightly in 2018, mainly related to IT development costs, which have been high due to the heavy investments banks have made in digitalisation and service development in recent years. In the long run, the higher level of automation will increase efficiency and decrease costs.

The efficiency of the banking sector in terms of cost to income ratio was 54%. However, dispersion between the banks is very high depending on both the bank size and business model.

Non-performing loans remained at a low level, at 1.7% of total loans.

The sector’s short-term liquidity position strengthened with the liquidity coverage ratio (LCR) at 175%.

The financial sector remains a significant taxpayer. The sector’s corporate tax contribution was €865 million, or 15% of the total annual corporate tax revenue in Finland.

Contributor: Mariia Somerla mariia.somerla@financefinland.fi

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