Bank of Åland Debt Investor Presentation September 2014
Table of Contents 1. Bank of Åland in Brief 3 2. Bank of Åland Strategy and Market Position 3. Earnings and Capital 4. Asset Quality and Cover Pool FIN 5 14 25 5. Liquidity and Funding 36 6. Contact Details 43 7. Appendix 45 2 2
1. Bank of Åland in Brief
Bank of Åland in brief Bank of Åland Plc A Finnish bank targeting high net worth and affluent individuals Top ranked in customer loyalty Tradition of stability and very low credit losses BBB rating from S&P Covered bonds program EUR 2 bn combined covered bond/senior Medium Term Note program updated in 2014 Two cover pools: Cover Pool FIN and Cover Pool SWE Issuance under Finnish Covered Bond Legislation Legal LTV cap at 70% and minimum 2% over-collateralization AA rating from S&P on both pools 4 4
2. Bank of Åland Strategy and Market Position
Three Markets Two Strategies The Åland Islands Finland Sweden 7 offices + 3 rep offices, market share 55-60 % Full product range offered A bank for everyone 5 offices in affluent parts of Finland, market share 0,7-4,5 % Full product range offered but bread and butter services only as complement to Private Banking and Premium Banking services offering Targeted segment: High Net Worth / Affluent Individuals and their companies 3 offices in Sweden's largest cities, market share 0,1-0,3 % Full product range offered but bread and butter services only as complement to Private Banking and Premium Banking services offering Targeted segment: High Net Worth / Affluent Individuals and their companies 6 6
Bank of Åland a relationship bank with focus on Private Banking and Premium Banking customers Established in 1919 on Åland Islands Listed since 1942 on NASDAQ OMX Helsinki Total assets of EUR 4,041 M, as of June 30, 2014 Assets under management of EUR 4,810 M, as of June 30, 2014 Approximately 640 employees Operations in the Åland Islands, Finnish mainland and Sweden More than 85,000 customers and top-ranked in customer loyalty A long-standing tradition of stability and very low credit losses At the forefront for introducing new products in Finland 7 7
Bank of Åland History of Strategic Decisions From a local bank supporting development of Åland a poor fishing and agrarian community 2004 2009 1994 1919 1942 Listing Expansion to Finnish mainland Turn Bank of Åland s IT department into Crosskey Ab Ltd Expansion to Sweden To a Nordic banking group Foundation with wide product range and personal service targeting high net worth individuals 8 8
Bank of Åland vision A bank for savings and wealth management with know-how on financing Private Banking since 1982 Premium Banking since 2004 Service Finance 9 Lifestyle Safety 9
Bank of Åland group legal structure Ålandsbanken Abp Ålandsbanken Asset Management Ab 70 % Ålandsbanken Fondbolag Ab 100 % Oy Compass Card Ab 66 % Crosskey Banking Solutions Ab Ltd 100 % 10
Ownership structure Owners Share of capital Share of votes Anders Wiklöf with companies 20.0% 24.1% Alandia-Bolagen 9.2% 13.6% Ålands Ömsesidiga försäkringsbolag 7.3% 11.8% The Family Kamprad Foundation 5.5% 0.6% Other owners 42,0 % 50,1 % Svenska Litteratursällskapet 1.5% 3.0% Föreningen Konstsamfundet 0.5% 1.1% Approximately 9,500 shareholders in total, mostly from the Åland Island. 11
Standard & Poor's rating of Bank of Åland Finnish banks A- 1. Bank of Åland Business Position -2 Niche bank with geographical concentration to Finland and Sweden Unprofitable Swedish franchise 2. Bank of Åland Capital & Earnings +1 Strong equity/assets ratio Strong capital adequacy position 3. Bank of Åland Risk Position -1 Geographical concentration to Finland and Sweden Small customer base with concentration risks 4. Bank of Åland Liquidity & Funding 0 Above average, since mainly funded by customer deposits Covered bond rating Bank rating Bank of Åland credit rating BBB 5. Bank of Åland Cover pool +6 Very low credit losses and stable loan base Maximum uplift from S&P Bank of Åland covered bonds rating AA Rating on Bank of Åland Ltd was confirmed in September 2013 by S&P 12
Scorecard improvements in all areas Capital S&P rating uplift for strong capital position Core tier 1 capital ratio 11,3 percent as of June 30, 2014 IRB method for credit risk capital requirement only yet implemented in approximately 57 percent of the total credit portfolio Liquidity and Funding Core funding ratio of 100 percent as of June 30, 2014 Liquidity reserve at 17 percent of total assets as of June 30, 2014 LCR at 83 percent as of June 30, 2014 NSFR at 102 percent as of June 30, 2014 AA rating on covered bonds Risk Management Long history of having the lowest loan loss level of all Finnish banks. Loan loss level was 0.06 percent January-June 2014. No trading or complex financial instruments No exposure to GIIPS countries, Russia or Ukraine Strict limits on exposure to financial institutions. Bulk of the exposure is to highly rated Nordic entities Profitability Positive earnings trend with Swedish business area reaching break even 12 months rolling operating profit, excluding nonrecurring items, of EUR 16.6 M Q2 2014 ROE 8.8 % for Q2 2014 13
3. Earnings & Capital
Long-term financial targets Return on equity after taxes (ROE) shall exceed 10 per cent. As a bank for investors, with financing knowhow, the Bank of Åland has a business model that shall generate most earnings from operations with limited capital requirements. The Bank of Åland s earnings will benefit from higher interest rates. After establishing a presence in the Swedish market and implementing several years of restructuring in the Group, we are now seeing a positive trend of earnings. The profitability target shall be achieved by 2016. The Bank s capital adequacy, primarily defined as the core tier 1 capital ratio under the Basel regulations, shall clearly exceed all regulatory requirements. There is still uncertainty about how the Bank of Åland s core tier I capital ratio will be affected by the transition from the standardised approach to the IRB approach for corporate portfolio in Finland and the entire lending portfolio in Sweden as well as by the final shape of Basel 3. At present, the Executive Team interprets the ambition to clearly exceed regulatory requirements as meaning that the core Tier I capital ratio, not taking into account transitional rules, should exceed 11 per cent. Looking ahead, the pay-out ratio shall be at the same level as the Nordic banking industry standard. The goal of the pay-out ratio is conditional on achieving the capital adequacy target. Over the next few years, the Bank of Åland will prioritise growth, among other things through increased lending. The Nordic industry standard is currently equivalent to a pay-out ratio of around 50 per cent. 15
Financial Performance Head winds from low interest rates and the economic down turn Basel 3 rules and the Finnish bank tax Consumer protection laws in Finland locking in historic low lending margins above reference rates the investment phase in Sweden after acquisition in March 2009 have been mastered through major restructuring, including downsizing of approximately 100 FTE, closing institutional equities activities in Sweden and Finland, transferring the Swedish business to a branch, closing two mutual funds companies, closing small branches in the Åland Islands and Helsinki area, re-pricing of loan portfolio, volume growth. 16 16
Q2 2014 in summary Net operating profit EUR 5.5 M, EUR 3.2 M or 139 percent better than previous year. Return on equity 8.8 percent (3.1 Q2/2013) Tier 1 capital ratio 11.3 percent (10.8 Q2/2013) LCR 83 percent (61 Q4/2013) Continued positive net interest income trend. Continued improved asset quality. Opening of Ålandsbanken Cover Pool SWE 17
18 H1 2014 in summary
19 Income statement
EUR M Ålandsbanken 4 quarters rolling operating result excl. non-recurring items 20
Operating profit H1/14 vs. H1/13, M EUR Finland + 3.7 Sweden + 1.7 Åland + 0.8 Crosskey + 0.9 Group functions & elim. - 2.9 Non-recurring items - 0.4 GROUP + 3.8 21
Interest margins vs. other Finnish banks Lending rates Deposit rates 22
Commitment to strong capital ratio Bank of Åland is committed to a strong capital ratio. Currently credit risk is measured by IRB method for the Finnish household portfolio. Permission to use IRB for the Finnish corporate portfolio and the Swedish portfolio is expected during 2014. The core tier 1 capital ratio for a small bank like Bank of Åland is not comparable to larger banks with IRB methods. Standard & Poor s rating method considers Bank of Åland well capitalized, giving a rating uplift of one notch at the current CT1 ratio level. The ambition is to be well capitalized, which currently translates to a CT1 ratio of at least around 11 percent. 23
S&P view: quality of the capital S&P regards Bank of Ålands capital position as strong Capital position is better than that of the large scandinavian peers 24
4. Asset Quality and Cover Pool FIN
Lending strategy Bank of Åland is a relationship bank with primary focus on customers with investment needs in the Private Banking and Premium Banking segments. Serving the core customers' credit needs are part of our commitment. Bank of Åland is not granting credits as a stand alone product to mass market clients or corporate clients. Every business area (Ålands Islands, Finland and Sweden) should have a balanced growth in lending versus deposits. At least half of the lending in every business area should be residential mortgages or have residential property as collateral. Many small loans are preferred to few large loans. 26
Balanced growth in the credit portfolio Total lending to the public EUR 3 159 M 30 June 2014, an increase of 5 per cent from a year ago Selective lending to high quality borrowers Asset quality prioritised over lending volume growth and higher returns Lending must always be made in consideration of safeguarding Bank of Åland s strong brand and market reputation Loan loss level 0.06 percent H1 2014 (0,07) Share of non-performing loans 0.38 percent (0.50) Lending to the public, EUR M Corporate lending, EUR M 27
28 Improved asset quality
Geographical distribution of mortgage lending Clear concentration to the wealthiest parts of Finland and Sweden As of 30.6.2014 approximately 75 % of the loan portfolio in Finland 25 % of the loan portfolio in Sweden According to the business plan growth in the coming years will be mainly in Sweden Stockholm 70% Vaasa 3 % Tampere 13 % Gothenburg 10% Malmö 17% Åland Islands 18 % Turku 13 % Helsinki 49 % 29
Cover Pool FIN characteristics, August 31 2014 Covered Pool FIN Total nominal amount, EUR M 913 Weighted average LTV, % 55,1 Current OC, nominal, % 38 Number of unique loans 12 933 Number of borrowers 12 386 Averag loan size, EUR T 71 Interest type, floating, % 90 Interest type, fixed, % 10 Average margin, % 1,03 Weighted average seasoning, years 3,9 Amortizing frequency, % monthly 72, quarterly 3, yearly 4, IO 22 Impaired loans none 30
LTV and loan size Cover Pool FIN, August 31 2014 LTV distribution Loans by size 31
Origination and credit quality Cover Pool FIN, August 31 2014 Origination Credit quality 32
% of Pool Balance % of Pool Balance Payment characteristics Cover Pool FIN, August 31 2014 Interest Rate Basis Repayment type 33
EUR T Cash flow profile in the Cover Pool FIN, August 31 2014 Contractual capital and amortization payments of loans in the cover pool FIN 34
Cover Pool FIN by purpose of use, August 31 2014 15 % 7 % Purchase Refurbishment Other 78 % Residential property for own use- construction 105 236 Residential property for own use- purchase 159 682 Shares in housing companies- for own use 323 535 Secondary residence 33 800 Purchase 707 697 Buy to let- property 21 780 Buy to let- shares in housing companies 63 664 Residential property- refurbishment 68 024 Refurbishment 68 024 Studies- loan to finance studies 349 Consumption 30 767 Securities 20 151 Other 137 393 Business operations 86 126 Totalt EUR T 913 114 913 114 35
5. Liquidity and Funding
Group funding profile June 30 2014 Demand deposits, time deposits and certificates of deposits from core private customers and their companies are the main funding sources Strong capitalization Covered bonds are the main long term funding instrument 37 37
Funding strategy Covered bond programme was created in early 2012 in order to diversify funding sources and to form a reliable and cost effective funding channel Since the launch of the programme both EUR- and SEK- denominated covered bonds have been issued totaling EUR 772 M with maximum tenor of 10Y During 2012-2013 Bank of Åland has built a credit curve 2-10 yrs in covered bonds In 2013-2014 Bank of Åland has also issued in SEK senior unsecured to maintain a balanced funding mix Themes 2014-2016 Demand conditions and the market situation favour issuance in covered bonds Senior unsecured market is open with an appealing pricing Balancing between funding maturity and cost 38
39 Long term debt securities outstanding June 30 2014
Funding tools EMTN-program (EUR 2 bln), English jurisdiction Covered Bond, Senior debt and Subordinated debt Tailored to institutional clients MTN-program (EUR 1 bln), Finnish and Swedish jurisdictions under update Senior Unsecured Unsubordinated (domestic) Plain vanilla Subordinated debt Also suitable for retail clients CD-program in Sweden (SEK 10 bln), Swedish jurisdiction Other CD s in Finland GMRA Equity lending 40 40
Liquidity management Well-diversified maturity profile Limited exposure to short term funding Maturing covered bonds are double-covered with a dedicated liquidity portfolio of EUR 120 M For the Covered Pool SWE the liquidity gap of the next 180 days is covered with substitute assets if needed Maturing long funding 41 41
Liquidity position Increased liquidity buffer Strong quality in liquidity reserves The most liquid and tradable assets LCR target reached (83 % June 30 2014) Composition of the liquidity reserve, EUR M Asset class 30.6.2014 31.12.2013 Cash and central banks 116,6 90,1 Deposits 232,7 63,5 Governments and supernationals 60,4 84,8 Covered bonds 114,1 134,6 Banks 141,8 181,8 Others 12,8 14,5 Total 678,4 569,3 Conservative approach to risk within liquidity reserves Assets with short duration Narrow limits for counterparty risk (credit risk) Only a few jurisdictions allowed High credit quality Rating distribution in the liquidity reserve Cash pools Coordinated cash pools between Finland and Sweden 42
6. Contact Details
Contact Details Peter Wiklöf, CEO peter.wiklof@alandsbanken.fi +358 40 512 7505 Jan-Gunnar Eurell, CFO jan-gunnar.eurell@alandsbanken.se +46 70 589 1209 Heli Huhtala, Head of Group Treasury heli.huhtala@alandsbanken.fi +358 50 385 5190 44 44
7. Appendix
Key figures Tier 1 capital ratio = core tier 1 capital ratio, since Bank of Åland has no hybrid capital. 46
47 Income statement
48 Business Area Åland H1 2014
EUR M Business Area Åland 4 quarters rolling operating result excl. non-recurring items 49
Business Area Finland H1 2014 +7 % -1 % 50
EUR M Business Area Finland 4 quarters rolling operating result excl. non-recurring items 51
Business Area Sweden H1 2014 +9 % +10 % (15 %) +12 % (17 %) +6 % (11 %) Change in local currency in parentheses 52
EUR M Business Area Sweden 4 quarters rolling operating result excl. non-recurring items 53
Business Area Sweden Steady growth in Stockholm, Gothenburg and Malmö in Private Banking and Premium Banking for several years. High customer satisfaction Four consecutive quarters with positive operating result excluding non-recurring items. Product offering widened Autogiro, E-invoice, BankID, credit cards, life and pensions, mortgage insurance, mobile banking. Bank of Åland s Finnish mutual funds available to Swedish customers Substantial efficiency gains taken from restructuring some potential still left in Asset Management and capital markets back office and IT systems. 54
EUR M Crosskey H1 2014 4 quarters rolling operating result excl. non-recurring items 55
8. Economies and Housing Markets
Strong public finances and credit 5 years CDS spread Finland enjoys high credit ratings from all three major credit rating institutes: AAA (S&P and Fitch) and Aaa (Moody's) 10 year government bond yield Government debt burden lightened by low interest rates mirroring the excellent credit quality Finnish banking sector is one of the steadiest in Europe with tight regulation and clean balance sheets 57
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Economic outlook Budget balance, % of GDP 8 6 4 2 0-2 -4 Finland Sweden Germany Public finances are in good shape, despite the challenging environment. Public deficit is expected to stay at -2,5 % 2014-6 90 80 70 60 50 40 30 Gross debt, % of GDP Finland Sweden Germany The Finnish GDP indicator point to flat growth in 2014. Outlook for Sweden is somewhat brighter 20 10 0 Economic forecast Despite of the weak economic growth unemployment rates have not gotten dramatically higher 2012 2013 2014 2015 2016 GDP growth, % -1,0-1,4 0,0 1,4 1,5 Unemployment rate, % 7,7 8,2 8,6 8,3 7,8 Imports -0,7-1,8 1,0 4,1 5,0 Exports -0,2 0,3 2,1 4,8 5,0 Private consumption 0,3-0,8-0,7 0,8 1,0 Recovery in the world economy is expected to balance the weak Finnish domestic demand Source: Eurostat, Statistics Finland, Bank of Finland 58
2000.12 2001.06 2001.12 2002.06 2002.12 2003.06 2003.12 2004.06 2004.12 2005.06 2005.12 2006.06 2006.12 2007.06 2007.12 2008.06 2008.12 2009.06 2009.12 2010.06 2010.12 2011.06 2011.12 2012.06 2012.12 2013.06 2013.12 Steady housing market Existing House Prices House prices have been very steady during the past ten years Differentiation in the price development is seen between the urban growth areas and rural areas in Finland 190 170 150 130 110 90 70 House prices and net disposable income Net disposable income House prices In Finland housing is still very affordable: house prices and net disposable income grow hand in hand Leading indicators for construction activity indicate a modest decline in housing supply in the near term. 50 Source: Eurostat, Statistics Finland 59
Thank you!
Disclaimer The presentation was prepared by Bank of Åland Ltd for use in investor relations. This presentation is not intended for retail customers. This presentation has been prepared on the basis of publicly available information which Bank of Åland considers to be reliable. This presentation may contain forward-looking statements, which are subject to risks, uncertainties, and assumptions. This presentation is being presented solely for your information and is subject to change without notice. No representation or warranty, expressed or implied, is made and no reliance should be placed on the accuracy, actuality, fairness, or completeness of the information presented. This presentation does not constitute an offer or invitation to purchase or subscribe for any shares or debt instruments of the Company, and no part of this presentation shall form the basis of or be relied upon in connection with any contract or commitment. The contents of this presentation may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose. 61