Report of the Board of Directors

Report of the Board of Directors

The year 2017 was a year of good financial news, and Finnish enterprises were able to join the upturn in the international economy. The year marked a positive turn in economy, which could be seen at Finnvera as record-breaking but expected demand for export credit guarantees and export credits. The raising of the export financing ceilings that came into force at the beginning of the year proved to be a well-founded decision during the year. Finnvera offered nearly 80 per cent more export credit guarantees and special guarantees to large corporates than in the previous year. The amount of export credits increased significantly, too.

Finnvera’s export financing focuses especially on three sectors: telecommunications, shipping, and forest industry. Measured in euros, the highest demand in 2017 was witnessed in shipping, shipbuilding and telecommunications, where Finnvera was involved in the largest financing project in its history. Finnvera plays a significant role in financing the entire value chain of enterprises that operate in the key sectors of the Finnish export industry. Such projects are not only major financing and export projects but also have a significant impact on employment both for the exporting company and the subcontracting network.

Finnvera’s risk management attracted more interest due to the raised financing authorisations. The assessment report commissioned by the Ministry of Economic Affairs and Employment and published in March states that, owing to the structure of Finnish industry, exports are strongly concentrated in a few sectors, which underlines the importance of Finnvera’s risk management system. According to the report, Finnvera’s export financing system and risk management are at a high level in international comparison.

As part of its risk management strategy, Finnvera revised its portfolio reinsurance for export credit guarantees. The renegotiated, more extensive portfolio reinsurance is tailored to take the special characteristics of export financing into account. In the future, the company will invest heavily in reinsurance and other risk transfer methods.

Shifting the focus of financing to growing and internationalising enterprises, enterprises seeking change, and transfers of ownership

The outlook for SMEs improved in 2017, for the third year in a row. The profitability and capital adequacy of companies have also improved as a result of economic growth, and an increasing number of enterprises strive to manage on cash flow financing in the future. The financing granted by Finnvera to SMEs and midcap enterprises decreased by approximately 7 per cent from the previous year. The lower volumes are partly explained by the fact that financing offered by the European Fund for Strategic Investments (EFSI) has proved to be easily found by Finnish enterprises. The utilisation of EFSI financing is a good example of the diversification of SME financing options. As part of the European Investment Plan, Finnvera has, since early 2017, provided guidance on European financing.

Finnvera’s goal is to shift the focus of financing to growing and internationalising enterprises, enterprises seeking change, transfers of ownership, and start-ups. A total of 80 per cent of Finnvera’s financing is already allocated to these focus areas. The share of growing and internationalising enterprises out of all financing granted grew to 40 per cent. The programme to promote transfers of ownership continued actively: the financing for transfers of ownership was nearly at the same level as in the previous year, and this financing contributed to the realisation of approximately 1,000 transfers of ownership.

Finnvera issued major bonds

During 2017, Finnvera issued EUR, USD and SEK bonds amounting to approximately EUR 2 billion. In May, Finnvera issued a EUR 750 million bond, due in 2032, which is Finnvera’s longest bond so far. In September, Finnvera issued a USD 1 billion bond, due in 2020, which is Finnvera’s largest USD bond to date.

The bonds were issued under the Euro Medium Term Note (EMTN) programme guaranteed by the State of Finland. Finnvera uses the funds acquired for financing export credits and for SME financing. In the next few years, annual funding is estimated to amount to approximately EUR 2 billion. The amount mainly depends on the demand for export credits and, as a result, it may deviate significantly from the estimate provided above.

Clients willing to recommend Finnvera

It is important for Finnvera to understand the needs of clients. The extensive client and stakeholder satisfaction survey, conducted every other year among SMEs, large corporates, banks, financial institutions and other stakeholders, was carried out in 2017. There were 1,950 respondents. The Net Promoter Score (NPS) indices that describe the recommendation willingness of different target groups were excellent, even over 80. This indicates that stakeholders are very willing to recommend Finnvera and its services.

The best ratings for the usefulness and the quality of Finnvera’s services came from small local enterprises and financier clients in large corporates. Large corporates’ stakeholders were more convinced than others that Finnvera’s export financing activities have promoted Finnish companies’ exports and exerted a positive influence not only on employment in Finland but also on the Finnish subcontractors of the companies. Providers of financing who are located in Finland assessed that without Finnvera, export trade transactions would have been more limited in scope or would have failed entirely. In addition to the client and stakeholder survey, customer satisfaction was monitored by continuously measuring the customer experience. The result target is set at the excellent score of 55, which was exceeded in 2017.

After having moved under the same roof in the Ruoholahti district of Helsinki in the previous year, the actors of the Team Finland network (Finnvera, Finpro, Tekes and Tesi) continued to cooperate in services offered to growing and internationalising enterprises and to seek synergy benefits. In 2017, the Team Finland service model was used to present 320 service proposals. The news announced during the year included the creation of a new Business Finland organisation. The project to create a joint management system for customer data continued. These actions secure good operating conditions for promoting Finnish exports.

Financial trend

The Finnvera Group in July–December 2017

The Finnvera Group’s profit in July–December was EUR 50 million, or 13 per cent lower than in January–June (EUR 57 million).

The main reason for the weaker financial performance was the decrease of the net value of fee and commission income and expenses in export credit guarantee and special guarantee operations. The net value was EUR 61 million, down by 8 per cent when compared to the first half of the year. One of the factors decreasing the net value was the fee and commission income from the parent company Finnvera plc’s export credit guarantee and special guarantee operations, which in July–December was EUR 1 million, or 3 per cent lower than in January–June. In addition, reinsurance fee and commission expenses in export credit guarantee and special guarantee operations were clearly higher. In July–December, reinsurance expenses increased by EUR 5 million, or nearly 70 per cent, when compared to the first half of the year.

The Finnvera Group’s net interest income in July–December came to EUR 23 million. The net interest income was 2 per cent lower than for the first half of the year, which resulted from a decrease in the net interest income of the parent company Finnvera plc’s SME and midcap financing due to higher interest expenses. The Group’s interest expenses in July–December were EUR 2 million or 6 per cent higher than in January–June.

In July–December, losses for items recognised at fair value through profit or loss were EUR -2 million, whereas during the first half of the year, these items showed a profit of EUR 3 million. These losses were mainly due to changes in the fair values of derivatives and debts, totalling EUR -5 million.

The Group’s personnel and other administrative expenses amounted to EUR 21 million. This was 4 per cent less than in the first half of the year.

Impairment losses on receivables and guarantee losses recorded for July–December were EUR 22 million, which was 9 per cent more than in January–June. The State’s credit and guarantee loss compensation covers SME and midcap financing losses partially. In July–December, the loss compensation amounted to EUR 12 million, which was 6 per cent more than during the first half of the year. The entries for impairment losses and provisions for losses are estimates. Their amounts may change even substantially as the volume and accuracy of information increase.

The Finnvera Group in January–December 2017

The Finnvera Group’s profit for 2017 was EUR 107 million (EUR 70 million). This was 52 per cent more than in the previous year. The main reason for the better financial performance was the fact that the parent company’s export credit guarantee losses and provisions for losses were lower than in the comparison year. In 2017, the export credit guarantee losses and provisions for losses totalled EUR 2 million, whereas the losses and provisions realised in the previous year amounted to EUR 67 million. 

The financial performance was also improved by profits from items recognised at fair value through profit or loss. During the period under review, profits from items recognised at fair value amounted to EUR 1 million, whereas in the comparison period, they showed a loss of EUR 20 million.

The net interest income for the period under review was EUR 46 million (EUR 50 million), down by 8 per cent from the comparison period. The net interest income was reduced by the EUR 1 million decrease in interest income and the EUR 3 million increase in interest expenses.

The net value of fee and commission income and expenses came to EUR 127 million (EUR 144 million) during the period under review. The net value was 12 per cent lower than in the comparison period. This resulted especially from the decrease of the net value of fee and commission income and expenses in export credit guarantee and special guarantee operations as well as the increase of the fee and commission expenses in reinsurance operations.

During the year, the quality of the SME and midcap financing credit portfolio improved when compared to previous years, which could be seen as lower credit losses. Risks pertaining to individual clients and the amounts of non-performing credits and arrears have remained at a reasonable level. The exposure risk level remained unchanged during the year when calculated using the so-called indicator of expected losses, which stood at 3 per cent of total exposure at year’s end.

At year’s end, the majority of the current guarantees and binding offers in the Large Corporates business was in the best country category. Most of the guarantees granted during the year were also entered into this category. The main sectors were shipping and shipbuilding industry, telecommunications, and forest industry. These sectors accounted for a total of 84 per cent of total exposure. Altogether, 56 per cent of the exposure was in category B1, which is close to investment grade, or in better risk categories.

Financial performance of Finnvera plc and the Group companies

The profit of the parent company, Finnvera plc, for 2017 stood at EUR 98 million (EUR 65 million), of which the Large Corporates business accounted for EUR 68 million (EUR 33 million) and the SMEs and Midcap business for EUR 30 million (EUR 32 million). The performance of the Large Corporates business improved clearly from the previous year, while the performance of the SMEs and midcap business was at a good level for a third year in a row.

The Group companies and subsidiaries had an impact of EUR 8 million on the profit for the period under review (EUR 6 million). Venture capital investments accounted for EUR 5 million (EUR -1 million) of this impact. Interest equalisation and the financing of export credits by Finnish Export Credit Ltd accounted for EUR 3 million (EUR 5 million).

Separate result for export credit guarantee and special guarantee operations

The separate result for export credit guarantee and special guarantee operations, as defined in the Act on the State’s Export Credit Guarantees, came to EUR 68 million (EUR 19 million) in 2017.

Analysis of financial performance in January–December 2017

Interest income and expenses and interest subsidies

The Finnvera Group’s net interest income in January–December came to EUR 46 million (EUR 50 million). The net interest income was 8 per cent lower than in the previous year. Outstanding loans in SME financing provided by the parent company, Finnvera plc, decreased by 7 per cent during the second half of the year, but this did not have an immediate impact on the net interest income of the period under review. The Group’s net interest income decreased during the period under review, especially due to higher interest expenses. Finnvera has acquired funds for future drawing of export credits, which has increased interest expenses. During the period under review, interest expenses grew by EUR 3 million, or 4 per cent.

The interest subsidies paid by the State and by the European Regional Development Fund (ERDF) and passed on directly to clients totalled EUR 1 million (2 million). Interest-subsidised financing has not been granted since 2013, and the accrual of interest subsidy will end in the coming years.

Net fee and commission income 

The net value of the Group’s fee and commission income and expenses came to EUR 127 million (EUR 144 million), down by 12 per cent from the comparison period.

The gross sum of the fee and commission income totalled EUR 152 million (EUR 166 million). Of this, the parent company’s fee and commission income from export credit guarantees and special guarantees accounted for 70 per cent (73), or EUR 106 million (EUR 120 million), while SME financing accounted for 29 per cent (27), or EUR 45 million (EUR 44 million).

Fee and commission expenses totalled EUR 24 million (EUR 22 million). Fee and commission expenses consisted mainly of the costs of reinsurance taken out by the parent company, Finnvera plc. The company has increased the volume of reinsurance taken out to cover the exposure for export credit guarantees; this also contributed to the rise in fee and commission expenses in 2017. During the period under review, the fee and commission expenses in reinsurance operations were 4 per cent higher than in the comparison period.

Gains and losses from financial instruments carried at fair value through profit and loss

The Group’s profits from items recognised at fair value through profit or loss totalled EUR 1 million (EUR -20 million), of which the change in the fair value of debts and interest rate and currency swaps accounted for EUR -6 million (EUR -11 million). The change in the fair value of venture capital investments was EUR 6 million (EUR -10 million), while exchange rate differences accounted for EUR +/- 0 million (EUR 2 million).

Other income

In January–December, the Group’s net income from investments totalled EUR 0.2 million (EUR 0.3 million). Other operating income amounted to EUR 1 million (EUR 12 million). Other operating income includes, for instance, the management fee paid by the State Guarantee Fund for managing the liability for export credit guarantees and special guarantees arisen prior to 1999. In the comparison period, other operating income also included the cancellation of subordinated loans received from the State on the basis of the sale of the subsidiary Seed Fund Vera Ltd, the grant received from the State for losses incurred in ERDF venture capital investments, and the Group’s capital gain from the sale of Seed Fund Vera Ltd.

Operating expenses and depreciation

The Group’s operating expenses were EUR 46 million (EUR 48 million). Of these operating expenses, personnel and other administrative expenses accounted for EUR 43 million (EUR 44 million) and other operating expenses for EUR 3 million (EUR 4 million). Personnel expenses accounted for 63 per cent (62) of operating expenses.

Operating expenses decreased by EUR 2 million, or 5 per cent, from the comparison period. Operating expenses were decreased by lower personnel expenses, rents and costs associated with real property. The number of Finnvera employees has decreased due to, for instance, the sale of the subsidiary Seed Fund Vera Ltd in December 2016. In addition, Finnvera’s offices have moved into new premises, which has generated significant savings in the company’s rents and costs associated with real property.

In 2017, the Group’s depreciation amounted to EUR 2 million (EUR 2 million).

Impairment loss on financial assets

The Group’s impairment losses on loans, as well as guarantee losses and provisions, were EUR 41 million (EUR 94 million). After the compensation for credit losses by the State and the European Regional Development Fund (ERDF), the Group’s liability for impairment losses and other losses during the financial period amounted to EUR 19 million (EUR 66 million).

Impairment losses and losses on loans and guarantees, and the change in impairment losses and provisions for losses, totalled EUR 39 million (EUR 27 million). The compensation for losses paid by the State and the European Regional Development Fund totalled EUR 23 million (EUR 28 million). Compensation for losses was 59 per cent of the losses realised (58).

Losses on export credit guarantee and special guarantee operations, including the change in the provisions for losses, were EUR 2 million during the period under review (EUR 67 million).

The parent company Finnvera plc has a recovery receivable related to the Brazilian company Oi S.A.’s export credit guarantees for which compensation was paid in 2016. On 31 December 2017, the carrying amount of recovery receivables of Finnvera’s export credit guarantee and special guarantee operations was EUR 115 million, the majority of which was receivables from Oi S.A. The effect of the claims paid to the results of the years 2016–2017 was EUR -58 million.

A provision is recognised on exposure for export credit guarantees and special guarantees when there is objective evidence that the obligation to pay an indemnity is likely to arise and it is estimated that the discounted present value of the cash flow indemnified exceeds the discounted present value of the recovery receivables. The value of the recovery receivables on the balance sheet is estimated correspondingly, taking the risk level of the receivable into account in the measurement, through both the recovery rate and the discount interest rate. Significant individual exposures are always estimated separately. The entries for impairment losses and provisions for losses are estimates. Their amounts may change even substantially as the volume and accuracy of information increase.

Finnvera Group H2/2017 H1/2017 Change H2/2016 2017 2016 Change Change
Impairment loss on financial assets MEUR MEUR % MEUR MEUR MEUR MEUR %
Loans and domestic guarantees -22 -17 25% -12 -39 -27 13 47%
Credit loss compensation from the State 12 11 6% 13 23 28 -5 -19%
Export credit guarantees and special guarantees 0 -2 -105% -2 -2 -67 -65 -97%
Net impairment loss on financial assets -10 -9 13% 0 -19 -66 -47 -72%
                 

Doubtful receivables

Calculated according to the method harmonised at the EU level, the amount of doubtful receivables and zero-interest receivables in SME and midcap financing stood at EUR 158 million at the end of the year (EUR 156 million). When the impairment losses recognised are considered, doubtful receivables accounted for 6.9 per cent of total exposure. This was 0.4 percentage points higher than the amount of doubtful receivables at the end of 2016 (6.5 per cent). The ratio of doubtful receivables to total exposure was 2.8 per cent (2.3) when the compensation for credit losses received from the State for SME and midcap financing is taken into account.

The amount of doubtful receivables in export financing stood at EUR 132 million at the end of the year (EUR 150 million). At the end of the period under review, doubtful receivables accounted for 0.6 per cent of total exposure (0.8 per cent).

Long-term economic self-sustainability

In its operations, Finnvera is expected to attain economic self-sustainability. This means that the income received from the company’s operations must, in the long run, cover the company’s operating expenses. The period for reviewing self-sustainability is 10 years for SME and midcap financing and 20 years for export financing.

Self-sustainability in Finnvera’s SME and midcap financing has been attained over a 10-year period when the cumulative result is calculated up to the end of year 2017. Correspondingly, export financing has been economically self-sustainable during Finnvera’s 19 years of operation. Economic self-sustainability is also realised over a 20-year period if the payment-based result of Finnvera’s predecessor, the Finnish Guarantee Board, for its last years of operation is taken into account when reviewing the self-sustainability of export financing.

The company’s risk-based pricing and the extent and risk level of Finnvera’s total exposure will have a significant impact on the company’s financial performance and long-term economic self-sustainability in the coming years. In examining the financial performance, it is important to note that, at the end of year 2017, Finnvera’s total exposure for export credit guarantees and special guarantees amounted to EUR 22.6 billion and the exposure for the credits and guarantees of SMEs and midcap enterprises, as well as guarantee receivables, stood at EUR 2.1 billion. Seen against these exposures, the net profit building a loss buffer on the balance sheet is now about 0.4 per cent at the annual level, the unrestricted equity is about 4 per cent, and the equity is about 5 per cent.

Balance sheet 31 December 2017

At the end of the year, the consolidated balance sheet total was EUR 10,337 million (EUR 9,498 million), while the balance sheet total of the parent company, Finnvera plc, came to EUR 8,584 million (EUR 7,178 million). The consolidated balance sheet total increased by 9 per cent, or EUR 839 million, during 2017. At the end of the year, the balance sheet total of Finnish Export Credit Ltd was EUR 4,900 million (EUR 4,918 million).

At the end of the year, the Group’s outstanding credits came to EUR 5,693 million (EUR 5,827 million), or EUR 135 million less than at the start of the year. The outstanding credits of the parent company, Finnvera plc, came to EUR 3,997 million (EUR 3,568 million), of which the receivables from the subsidiary Finnish Export Credit Ltd totalled EUR 3,042 million (EUR 2,500 million). Approximately 60 per cent of Finnish Export Credit Ltd’s loans are in US dollars, so changes in exchange rates affect the EUR value of the loans.

The parent company’s outstanding guarantees in SME and midcap financing increased slightly during 2017 and totalled EUR 1,098 million at the end of the year (EUR 1,061 million).

The exposure defined in the Act on the State’s Export Credit Guarantees (current total exposure and half of offers given at the closing date’s exchange rate) totalled EUR 18,691 million at the end of the year (EUR 14,442 million). The total exposure arising from export credit guarantees and special guarantees (current commitments and offers given, including export guarantees) totalled EUR 22,562 million (EUR 18,426 million), of which drawn guarantees amounted to EUR 9,136 million (EUR 9,659 million). The maximum indemnity amount of reinsurance arrangements valid at the end of the year was approximately EUR 0.9 billion, or 10 per cent of drawn guarantees.

In accordance with the Government’s policy outlines, Finnvera will give up its venture capital investments. The shares in the subsidiary ERDF-Seed Fund Ltd and Innovestor Kasvurahasto I Ky’s capital input owned by the parent company (19.71 per cent) have been transferred to assignable assets available for sale in the parent company’s financial statements. Similarly, the assets and liabilities of ERDF-Seed Fund Ltd are presented under assignable assets available for sale in the consolidated financial statements. Finnvera has a subordinated loan from the State, related to Innovestor Kasvurahasto I Ky, that has also been transferred to assignable liabilities available for sale. The Group’s assignable assets available for sale totalled EUR 51 million at the end of the year (EUR 47 million).

The Group’s long-term liabilities as per 31 December totalled EUR 8,464 million (EUR 7,514 million). Of this sum, EUR 6,483 million (EUR 4,892 million) consisted of bonds. The liabilities include subordinated loans of EUR 20 million received by Finnvera from the State for investment in the share capitals of Innovestor Kasvurahasto I Ky and Veraventure Ltd (EUR 20 million). The subordinated loan of EUR 50 million granted by the State in 2009 for strengthening capital adequacy was repaid in 2017.

At the end of the year, the Group’s non-restricted reserves contained a total of EUR 1,069 million (EUR 955 million), of which the reserve for domestic operations accounted for EUR 214 million (EUR 155 million), the reserve for export credit guarantee and special guarantee operations EUR 688 million (EUR 668 million), the reserve for venture capital investments EUR 15 million (EUR 17 million) and retained earnings for EUR 145 million (EUR 117 million).

At the end of 2017, the accumulated loss buffer amount in export credit guarantee and special guarantee operations was EUR 1,361 million, when the State Guarantee Fund’s assets, EUR 673 million, are taken into account in addition to the reserve for export credit guarantee and special guarantee operations on Finnvera’s balance sheet. The loss buffers amounted to EUR 1,575 million, or 6 per cent of exposures, with the reserve for domestic operations included.

The item Other reserves, presented under unrestricted equity on the balance sheet, is used to monitor the assets allocated by the ERDF to venture capital investments.

 

Finnvera Group 31 Dec 2017 31 Dec 2016 Change Change
Balance sheet MEUR MEUR MEUR %
Share capital 197 197 0 0%
Share premium and fair value reserve 56 55 1 2%
Non-restricted reserves, in total 1,062 955 107 11%
Reserve for domestic operations 214 155 59 38%
Reserve for export credit guarantees and special guarantees 688 668 19 3%
Other 15 15 0 0%
Retained earnings 145 117 28 24%
Equity attributable to the parent company’s shareholders 1,314 1,206 108 9%
Share of equity held by non-controlling interests 0 1 -1 -100%
Balance sheet total 10,337 9,498 839 9%
         

Funding

In 2017, the Group’s long-term acquisition of funds totalled EUR 2,060 million (EUR 1,363 million). EUR 647 million in long-term loans was paid back (EUR 588 million).

Capital adequacy

The Act on Finnvera (443/1998) stipulates that domestic operations must be kept separate from export credit guarantee and special guarantee operations. In consequence, losses from domestic operations are covered from the reserve for domestic operations, while losses from export credit guarantees and special guarantees are covered from the reserve for export credit guarantee and special guarantee operations. According to the Act on the State Guarantee Fund (444/1998), the State is responsible for export credit guarantees and special guarantees. Should the reserve for export credit guarantee and special guarantee operations lack sufficient assets to cover the losses incurred in the respective operations, the losses are covered from assets in the State Guarantee Fund, which are supplemented, whenever necessary, by an appropriation from the State Budget.

The above separation prescribed by law, and the State’s responsibility for export credit guarantees, explain why Finnvera calculates its capital adequacy, i.e. the ratio between its exposure and assets, only for domestic operations.

According to the goal set by the State of Finland, the owner of Finnvera, the Group’s capital adequacy ratio for domestic operations should be at least 12.0 per cent. Capital adequacy is calculated in accordance with the principles of the Basel III standard method. At the end of the year, the Group’s capital adequacy ratio for domestic operations, Tier 1, stood at 25.3 per cent (22.4) while that of the parent company, Finnvera plc, was 24.3 per cent (21.8). The Finnvera Group’s leverage ratio was 21.1 per cent at the end of December (18.5).

Capital adequacy 31 Dec 2017 31 Dec 2016 Change
Finnvera Group Domestic operations % % % points
Tier 1 25.3 22.4 2.9
       
Capital adequacy 31 Dec 2017 31 Dec 2016 Change
Finnvera plc Domestic operations % % % points
Tier 1 24.3 21.8 2.5
       

 

The risk-weighted receivables in the Finnvera Group’s domestic operations totalled EUR 2,030 million at the end of December (EUR 2,152 million). Of these, loans and guarantees pertaining to business proper amounted to EUR 1,729 million (EUR 1,801 million), or 85 per cent (84) of risk-weighted receivables. Most of the remaining receivables were investments and derivatives. About 50 per cent of loans and guarantees consisted of a large number of individual exposures of under EUR 1 million. Calculated according to the standard method, their risk weight was 75 per cent. The risk weight of other loans and guarantees was 100 per cent.

Finnvera Group Domestic operations 31 Dec 2017 31 Dec 2016 Change Change
Capital for calculating capital adequacy MEUR MEUR MEUR %
Equity excluding profit for the year 1,171 1,106 65 6%
Intangible assets -9 -7 -1 21%
Reserve for export credit guarantees and special guarantees -688 -668 -19 3%
Profit for the period 107 70 36 52%
Profit for the period attributable to export credit guarantees -68 -19 -49 253%
Total 513 481 32 7%
         
Finnvera Group Domestic operations 31 Dec 2017 31 Dec 2016 Change Change
Risk-weighted items MEUR MEUR MEUR %
Receivables from credit institutions 10 11 -1 -5%
Receivables from clients 1,729 1,801 -72 -4%
Investments and derivatives 113 166 -53 -32%
Receivables, prepayments, interest and other receivables, other assets 33 21 12 54%
Binding promises for loans 58 71 -13 -18%
Operational risk 86 82 4 4%
Total 2,030 2,152 -123 -6%
         

No specific requirement has been set for the capital adequacy of Finnvera’s export financing because ultimately it is the State that is responsible for any major export credit guarantee losses if the equities accumulated from operations and the assets of the State Guarantee Fund were not sufficient for covering these losses. Consequently, calculating capital adequacy in a manner similar to that applied to banking is not a suitable option for Finnvera, considering its special industrial policy purpose as a promoter of exports. If taking into account only the assets in the reserve for export credit guarantee and special guarantee operations and the State Guarantee Fund, the estimated capital adequacy of export financing in accordance with the IRBA (internal ratings-based approach) would be less than 8 per cent.

Risk position

At the end of 2017, total exposure for SME and midcap financing came to EUR 2.5 billion, or EUR 0.1 billion less than the year before. Among SMEs and midcap enterprises, demand focused on financing for working capital. Total exposure was decreased by the larger-than-normal paybacks related to some relatively major exposures.

During the year, the quality of the credit portfolio in SME financing has improved on the previous years. This is seen as lower credit losses when compared to the period of financial and euro crises. Risks pertaining to individual clients and the amounts of non-performing credits and arrears remained at a reasonable level. As some major exposures decreased, the diversification of the credit portfolio improved further, which reduced the overall risk. In its financing, Finnvera focuses on starting and growing enterprises, as well as enterprises in situations of change. The operational risks faced by these enterprises are often greater than the risks of established companies. Moreover, the importance of collateral in the management of credit risks has diminished owing to the revised collateral practices. For these reasons, the exposure risk level remained unchanged during the year when calculated using the so-called indicator of expected losses, which stood at 3 per cent of total exposure at year’s end. The distribution of exposure by risk category also remained virtually unchanged, even though the credit ratings of some individual enterprises could be upgraded.

Credit and guarantee losses and impairment losses totalled EUR 39 million (27). 

Exposure in the Large Corporates business was EUR 22.2 billion at the end of 2017. Total exposure increased by EUR 4.1 billion during the year. At year’s end, the majority of the current guarantees (EUR 18.8 billion) and binding offers (EUR 3.4 billion) was in the best country category. Most of the guarantees granted during the year were also entered into this category.

The volume of enterprises’ commercial exposure, associated with export guarantees and special guarantees, rose by about EUR 4.3 billion during 2017, to EUR 21.0 billion at year’s end. The main sectors were shipping and shipbuilding industry, telecommunications, and forest industry. These sectors accounted for a total of 84 per cent of total exposure. Altogether, 56 per cent of the exposure was in category B1, which is close to investment grade, or in better risk categories.

There were no significant export credit guarantee losses in 2017, which was a notable change from 2016. Among the subsidiaries, the exposure arisen for Finnish Export Credit Ltd from the financing of export credits totalled EUR 12.9 billion at year’s end; this was EUR 4.3 billion more than at the end of 2016. The exposure includes export credits financed both under the temporary system and the permanent system launched in 2012, as well as binding credit commitments. The credit risks associated with the exposure are fully covered by means of export credit guarantees granted by the parent company Finnvera plc. These export credit guarantees are included in the above-mentioned exposure for export financing.

Attainment of industrial policy and ownership policy goals

Finnvera’s operations are steered by the legislation on the company and by the industrial and ownership policy goals determined by the owner. As the body responsible for the ownership and industrial policy steering of Finnvera, the Ministry of Economic Affairs and Employment sets industrial and ownership policy goals for the company for a period of four years. Whenever necessary, the ministry revises these goals annually. Out of the eight goals set for the year 2017, six goals were reached and two goals were partially reached.

Corporate Governance

Personnel

At the end of the financial period, the Group had 375 employees (381). Parent company Finnvera plc had 371 employees (376), of whom 350 (353) held a permanent post and 21 (23) a fixed-term post. The average number of employees in 2017 was 383 (398). The salaries and fees paid to the personnel totalled EUR 29 million for the Group (EUR 30 million) and EUR 28 million for the parent company (EUR 29 million).

Supervisory Board, Board of Directors and auditor

On 7 April 2017, Finnvera’s Annual General Meeting elected new members to the company’s Board of Directors and Supervisory Board. Pentti Hakkarainen, Member of the ECB’s Banking Supervisory Board, was elected Chairman of the Board of Directors. Pekka Timonen, Director General, continues as First Vice Chairman. Terhi Järvikare, Director General, was elected Second Vice Chairman. She is a new member of the Board of Directors. In addition, Ritva Laukkanen, M.Sc. (Econ.), was elected as a new member to the Board of Directors. The members continuing on the Board of Directors are Kirsi Komi, LL.M., Pirkko Rantanen-Kervinen, B.Sc. (Econ.), and Antti Zitting, M.Sc. (Tech.).

Antti Rantakangas, Member of Parliament, continues as Chairman of Finnvera’s Supervisory Board, and Krista Kiuru, Member of Parliament, as Vice Chairman. The new members of the Supervisory Board are Pia Björkbacka, Adviser, International Affairs; and Olli Rantanen, Head of Legal Services, Domestic Financing. The members continuing on the Supervisory Board are: Eeva-Johanna Eloranta, Member of Parliament; Lasse Hautala, Member of Parliament; Laura Huhtasaari, Member of Parliament; Timo Kalli, Member of Parliament; Kari Kulmala, Member of Parliament; Leila Kurki, Senior Adviser; Kari Luoto, Managing Director; Veli-Matti Mattila, Chief Economist; Ville Niinistö, Member of Parliament; Carita Orlando, Managing Director; Eero Suutari, Member of Parliament; Christel Tjeder, Second Vice Chairman; Tommi Toivola, Senior Adviser; and Sofia Vikman, Member of Parliament.

KPMG Oy Ab was re-elected Finnvera’s regular auditor with Juha-Pekka Mylén, Authorised Public Accountant, as the principal auditor.

Events after the period under review

On 15 February 2018, the Government made a decision to change the commitment to compensate Finnvera plc partially for credit and guarantee losses. The changed commitment will enter into force on 1 March 2018, and it will be applied to all outstanding credits and guarantees of the company and to new credits and guarantees granted by the company as of 1 January 2018. The loss compensation level will be lowered and harmonised to 50% in SME and midcap financing. Finnvera estimates that the financing for the company’s domestic operations will be annually self-sustainable also after the loss compensation level has been lowered. According to the current estimate, the lower compensation level does not pose a risk to keeping the capital adequacy of Finnvera’s domestic operations at the minimum of 15% (Tier 1).

Outlook for financing

The outlook for the Finnish economy for 2018 is good. According to the Bank of Finland’s forecast, GDP will grow by 2.5 per cent this year. Demand for financing is expected to remain high in the entire SME and midcap sector, and the availability of financing is estimated to stay at a good level this year, too. Finnvera’s goal is still to shift the focus of SME and midcap financing to growing and internationalising enterprises, enterprises seeking change, transfers of ownership, and start-ups. The campaign to accelerate transfers of ownership continues, and demand for financing for transfers of ownership and company acquisitions will probably remain high, as in previous years.

Another goal is to increase the number of SMEs involved in exports and target advisory services at such SMEs, in order to enable them to prepare for risks associated with export trade transactions. We expect that this will increase demand for financing this year.

Financing solutions offered to buyers play a pivotal role in the export trade of capital goods sold by large corporates. Demand for export credit guarantees and export credits is expected to remain strong in 2018. As in previous years, the overall demand is affected by the realisation of individual major projects. Demand is expected to be strong especially in cruise shipping, forestry and telecommunications sectors. Regionally, the strongest demand is anticipated to occur in the United States and Latin America. Finnish enterprises’ interest in the Russian market took an upward turn in 2017, and further demand is expected for 2018.

It is estimated that the implementation of the strategy throughout the Group will proceed as planned in 2018, and the Group’s operations are expected to be self-sustainable in the current financial period as well. The trends in impairment losses on receivables and in guarantee losses involve some uncertainty. In consequence, the results realised may differ from the forecasts even significantly.