Strong year in financial sector despite uncertain operating environment – economic developments and geopolitical situation the most significant risks also in 2024
Despite the gloomier operating environment, the financial sector’s capital position remained strong in 2023. Despite the increase in credit risks in corporate and household loans, the Finnish banking sector's non-performing loans and loan losses were still among the lowest in Europe. In the insurance sector, too, solvency remained good, albeit weakening slightly. In the employee pension sector, the increase in the share of equity investments to nearly half of the investment allocation weakened stress resilience, which nevertheless remained reasonable. Economic developments and the geopolitical situation are still subject to significant risks and vulnerabilities, protection against which will be provided by the strong capital and liquidity position of the supervised entities as well as high-quality risk management and preparedness.The operating environment of the Finnish financial sector weakened towards the end of 2023 as the Finnish economy slid into a recession. As a result of the weak business cycle, bankruptcies, unemployment and furloughs have increased, and consumer confidence and the outlook for businesses have remained weak. In addition, housing prices continued to decline and the sales volumes of commercial real estate decreased further. Unemployment is forecast to increase this year, and the situation in the construction and real estate sectors is projected to remain difficult. Despite the weakness of economic activity, share prices rose towards the end of 2023 as financial markets expected a cut in central bank policy rates and interest rates declined in the bond market. According to economic forecasts, Finland's GDP will contract in 2024, but will return to a growth path thereafter.
“The largest threats to the financial sector's operating environment are related to economic developments and the geopolitical environment. The FIN-FSA will therefore focus this year on the risk resilience of supervised entities in a changing operating environment, for example on the operational and financial risks of supervised entities and on the soundness of governance. As we have witnessed in recent years, a strong capital and liquidity position, high-quality risk management and preparedness protect us against global turbulence,” says Tero Kurenmaa, Director General of the Financial Supervisory Authority (FIN-FSA).
Banking sector's capital position strengthened and operating result increased significantly – credit risks continued to increase in the real estate and construction sector
The banking sector's capital position improved due to a solid performance and remained stronger than the European average. The sector's Common Equity Tier 1 (CET1) capital ratio at the end of December was 18.3% (12/2022: 17.2%) and the total capital ratio was 22.1% (12/2022: 20.6%). The banking sector's operating result improved significantly compared to the same period a year earlier, boosted by strong growth in net interest income; growth in net interest income declined, however, in the fourth quarter of 2023. The growth in net interest income was slowed by higher financing costs and subdued demand for credit.
The banking sector’s non-performing assets relative to the credit stock increased towards the end of 2023 both in corporate and household loans. Movements of loans between the stages of impairment are also signalling an increase in credit risks in corporate and household loans. The share of stage 2 loans continued to grow, particularly in the real estate and construction sectors. The Finnish banking sector’s non-performing loans and loan losses nevertheless remained moderate and among the lowest in Europe.
Finnish banks’ liquidity position is stable and the banking sector's liquidity improved in the fourth quarter of 2023. However, the Finnish banking sector's above-average dependency on market funding exposes banks to possible market disruptions. The significantly higher level of interest rates than in previous years has increased the costs of domestic banks’ market and deposit funding.
Employee pension institutions’ solvency virtually unchanged
The employee pension sector's solvency ratio remained virtually unchanged at 126.7% (12/2022: 127.0%) as return on investment (5.9%) was nearly as high the required return on technical provisions (6.0%). Solvency capital increased by EUR 1 billion to EUR 33.7 billion. The value of investment assets increased as a result of the positive return on equities and fixed-income investments. The return on real estate investments was strongly negative.
The share of equity investments in the investment allocation grew, to 49.7% (12/2022: 47.3%). The growth in the share of illiquid investments (e.g. private equity, real estate and hedge fund investments) came to a halt and their share in the investment allocation decreased. The risk-based solvency position weakened, due to higher risk-taking. Employee pension institutions’ stress resilience against equity shocks has weakened in recent years but is still reasonable.
The employee pension sector's payroll continued to grow, albeit more slowly than pension contributions. This trend is expected to continue in the coming years. The difference between the insurance premiums based on payroll and pension contributions and administration expenses will, even so, probably be covered in the next few years mainly with cash flows from investment assets.
Life insurance sector solvency weakened at the end of the year
The life insurance sector’s solvency ratio decreased from a year earlier and was 235.0% (12/2022: 256.9%). The amount of own funds decreased considerably in the fourth quarter due to an increase in technical provisions as a result of the sharp decline in interest rates. Despite the strong return on investments, the solvency capital requirement remained virtually unchanged compared to a year earlier, reflecting a decrease in the share of higher-risks investments.
Life insurance companies’ return on investment was 6.2%, i.e. at a good level in 2023 (1–12/2022: -10.0%). The most of the return was generated in the fourth quarter. The return on both fixed-income investments and equity investments was clearly positive, but the return on real estate investments was negative, at - 4.9%.
Premiums written increased slightly from a year earlier. Premiums written were boosted particularly by an increase in capital redemption contracts of corporate clients. The amount of claims paid, in turn, decreased slightly as a result of a decrease in the amount of claims paid on endowment insurance policies.
Non-life insurance companies’ solvency position weakened but remained good
At the end of 2023, non-life insurance companies’ solvency ratio was 270.1% (Dec 2022: 301.6%). The weakening of solvency was attributable to the increase in the solvency capital requirement as a result of the rise in the market prices of equities. In the fourth quarter of 2023, the amount of own funds decreased and solvency weakened, also due to the rise in the market value of long-term liabilities, reflecting the lower level of interest rates, and the expected profit distribution deducted from the amount of own funds.
Return on investment was 5.7% (1– 12/2022: -7.1%). Return on equity and fixed-income investments grew towards the end of the year and was positive, but real estate investments generated a loss. The profitability of insurance business was weakened by a growth in operating expenses and claims expenditure. The amount of claims paid increased the most in health insurance.
For further information, please contact:
Samu Kurri, Head of Department, Digitalisation and Analysis. Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030, Mon–Fri 9:00–16:00.
Appendices
FIN-FSA website page ‘Financial position and risks of supervised entities’ (in Finnish)
Presentation at the FIN-FSA press conference on 13 March 2024 (PDF, in Finnish)
Recording of the press conference (in Finnish)