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.
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).
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.