Financial sector's capital position as at 30 September 2018: Capital position of the Finnish financial sector has remained strong – banking sector capital adequacy will weaken as a result of Nordea’s re-domiciliation
According to third quarter 2018 data, the capital position of the Finnish financial sector remained good. The employee pension, life insurance and non-life insurance sectors’ solvency strengthened from the previous quarter, while the banking sector’s capital position remained unchanged. In the fourth quarter of 2018, the Finnish banking sector’s capital ratio is expected to weaken considerably, however, reflecting the transfer of Nordea’s domicile to Finland. But even then, the Finnish banking sector’s capital position is expected to be clearly stronger than the EU average.
Banking sector capital adequacy still among the strongest in the EU
The Finnish banking sector’s capital position remained stable and among the strongest in the EU in the third quarter of 2018. The banking sector’s Common Equity Tier 1 (CET1) capital ratio and total capital ratio remained virtually unchanged from the previous quarter, but were still some 0.6 percentage points lower than at the end of 2017. The decrease in the capital ratios in 2018 is explained particularly by the growth in corporate lending and the risk weight floor of 15% for residential mortgage loans that entered into force on 1 January 2018.
The Finnish banking sector’s capital ratios are expected to weaken considerably, however, in the fourth quarter of 2018, reflecting Nordea’s re-domiciliation. The expected future decrease in capital ratios reflects the risk weight floors imposed on Nordea by the European Central Bank. Changes in the capital ratios reflect the differences in the methods for the application of the risk weight floors by the ECB and Swedish banks; in Sweden, the risk weight floors have been implemented by increasing the Pillar 2 additional capital requirement, and under ECB supervision, the risk weight floors have a direct impact on the amount of risk-weighted assets used in capital adequacy calculations (Pillar 1) and thus on the capital ratio.
Despite the expected weakening of capital ratios, the Finnish banking sector’s capital position is expected to remain clearly stronger than the EU average also in the fourth quarter of 2018.
Employee pension sector solvency position stronger
The good solvency position of employee pension institutions strengthened slightly from the previous quarter as return on investments* was higher than the return requirement. The solvency position nevertheless remained lower than at the end of 2017. At the same time, the solvency limit declined slightly as the solvency capital requirement, calculated based on the institutions’ credit risk classes, decreased significantly from the previous quarter. The solvency position thus strengthened compared to the previous quarter, as a result of improved solvency and the lower solvency limit.
Employee pension institutions’ return on investments* was 2.9%, most of which was generated by equity investments. Equities have been the investment class with the highest return, i.e. 5.7%, for employee pension institutions in 2018, and the weakest return (-0.3%) has been generated by fixed-income investments. The allocation of investments between the main investment classes did not change significantly. Equities are still the largest investment class, with a 43% weight in the portfolio, followed by fixed-income investments, with a weight of 35%.
Life insurance sector solvency position improved despite a challenging market environment
The solvency of life insurance companies improved slightly from the previous quarter and year-on-year, despite the challenging market environment. The negative sentiment in the investment markets has affected the net sales volumes of asset management, but the third quarter saw a pick-up in the stock markets, and the total return on investment* rose to 1.5%.
The decrease in life insurance companies’ own funds was accompanied by a lower solvency capital requirement, resulting in slightly lower total exposure. Life insurance companies’ total Solvency II own funds consisted almost entirely of the highest-quality Tier 1 capital. The capital is liquid and can be used to cover all insurance claims. Non-life insurance sector solvency strengthened by growth in own funds and lower risk levels.
The non-life insurance sector’s solvency strengthened from the previous quarter and compared to the situation at the end of 2017. It should be noted, however, that solvency positions are usually at their strongest at the end of September, when income has already been accrued and the amount of own funds is not yet affected by the proposed dividend for the period.
The non-life insurance sector’s solvency position in the third quarter was strengthened by growth in own funds and lower risk levels via hedging of interest rate risk and reinsurance. Own funds were bolstered by return on investment* and income from insurance business, which were significantly lower, however, than in January–September 2017. The return on investment was 2.1% in January–September 2018. The majority of the return was generated by equity investments.
Jyri Helenius, Deputy Director General. Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030, weekdays 9.00–16.00.
- Capital position of banking sector and financial and insurance conglomerates as at 30 September 2018 (Excel)
- Solvency position of life and non-life insurance companies as at 30 September 2018 (Excel)
- Solvency position of earnings-related pension companies, industry-wide pension funds and earnings-related pension sector as at 30 September 2018 (Excel)
* The return does not yet reflect the decline in equity prices after the end of the review period.