Financial sector’s capital position as at 30 September 2019: Finnish financial sector’s capital position remains good

Banking sector capital ratios bolstered by non-recurring items – capital position remains stronger than the European average

The Finnish banking sector’s capital ratios strengthened in July–September 2019 and returned close to levels at the end of 2018. The higher capital ratios compared with the previous quarter are mainly due to non-recurring items related to changes in business plans as well as corporate restructuring, which increased the banking sector’s Common Equity Tier 1 (CET1) capital and decreased the amount of risk-weighted assets. The Finnish banking sector’s CET1 capital ratio and total capital ratio are some 2 percentage points higher than the European average.

Pension institutions’ solvency position slightly stronger

Pension institutions’ pension assets relative to technical provisions, i.e. the solvency ratio, improved in the third quarter and remained solid. Pension institutions’ return on investment was 8.6%, i.e. higher than the return requirement, fuelled by return on equity and fixed-income investments. The share of the largest investment class, i.e. equities, in the total investment allocation continued to rise and reached 46% in the third quarter.

The risk-based solvency ratio decreased slightly in the third quarter, as the solvency limit increased at a higher rate than solvency capital.

Life insurance companies’ solvency strengthened despite the low level of interest rates

The solvency position of the life insurance sector improved slightly on the previous quarter and was solid. Solvency was boosted particularly by growth in Tier 2 capital and favourable returns on fixed-income investments. Life insurance companies decreased the share of higher-risk assets in their investment portfolio, as a result of which the solvency capital requirement remained unchanged – despite the growth in investment assets. In the period January–September, the return on investments was 7.7%.

Non-life insurance companies’ solvency weakened by lower interest rates and higher equity risk

The non-life insurance sector’s solvency position weakened compared to the record levels in 2018. The solvency position continued to decline in July–September, compared to the end-June situation, but remained solid. In January-June, solvency was eroded by an increase in the solvency capital requirement for equity risk, which was due to, for example, the rise in the market prices of equities. In addition, the fall in interest rates increased the amount of technical provisions and weakened the solvency position. The impact of the decline in interest rates was most pronounced in the third quarter.

Return on equity and fixed-income investments was boosted by the rise in equity prices and decline in interest rates, as well as narrower risk margins. In January–September, the return on investment was 7.6%, but it was not sufficient to compensate for the impact on the solvency position of the increase in the solvency capital requirement and the growth in technical provisions.