Finnvera Group’s Half-Year Report 1 January–30 June 2020

The coronavirus pandemic significantly increased demand for Finnvera’s SME financing, export financing decreased from last year – Finnvera’s result showed a loss of EUR 423 million due to credit loss provisions

CEO Pauli Heikkilä:

“The extent of the coronavirus pandemic and its impacts on economy have affected many enterprises in our country, too. In Finland, the first and most concrete effects of the pandemic could be seen in the service sector and tourism and, in international business, in cruise shipping, a sector that is closely linked with Finland’s export trade. Thanks to the extremely positive development in the cruise shipping sector, more than half of the increase in the technology industry order book in the past few years consisted of cruise shipping orders. Even if the sector has always identified a pandemic as one of its risks, the coronavirus crisis has affected the sector in a completely exceptional manner as cruise operations all over the world were suspended with official decisions. The public credit ratings of many shipping companies have declined. Due to these facts and the generally declining outlook in the world economy, it has been necessary for us to make significant provisions for potential future credit losses. Consequently, the Finnvera Group’s result for January–June showed a loss of EUR 423 million.

During the first half of the year, we granted approximately EUR 1.7 billion in export credit guarantees, export guarantees and special guarantees. This was a little over one fifth less than in the corresponding period last year. The coronavirus pandemic has not affected all sectors equally and earlier, planned investment decisions have also been implemented during the first half of the year. The annual volume of export financing is always influenced by the timing of individual major export transactions. Our estimate is that as industrial orders decrease, Finland’s export trade may be facing a long-term slowing down in the autumn, which will also be seen in demand for export financing.

Starting from mid-March, SMEs’ financing needs increased rapidly along with the outbreak of the coronavirus pandemic. Finnvera focused its financing activities on guarantees, which enable the bank to grant a working capital loan to the enterprise. With this, we sought to ensure that enterprises get financing as quickly as possible. We adjusted our products and services quickly according to the situation, reduced our prices and recruited temporary agency workers to process the high influx of applications. Demand for financing exceeded our preliminary estimate: in January–June, we granted more than EUR 0.9 billion in domestic loans and guarantees, which is more than during the entire year 2019. At first, financing was applied for by small SMEs but then demand shifted to larger enterprises. Thanks to the authorisation-related legislative amendment, decided by the Finnish parliament, Finnvera has an excellent capability of responding to demand also in the future. It is estimated that the raising of our domestic loan and guarantee financing authorisation to EUR 12 billion will cover demand for financing until 2025.

The total impact of the pandemic remains to be seen. For a provider of financing, it is still essential to assess impacts in the long term.

Profits from previous years have strengthened Finnvera’s financial reserves against potential losses. Inline with the goal of self-sustainability set for Finnvera, the income received from the company’s operations must, in the long run, cover the company’s operating expenses and losses.Although the result for 2020 is predicted to show a loss, it is estimated that Finnvera’s cumulative self-sustainability will still be achieved. However, in the future, self-sustainability may be significantly influenced by how the coronavirus crisis develops during the autumn and how long-term its effects are.”

Finnvera Group, business operations and the financial performance

H1/2020 (H1/2019)

• Domestic loans and guarantees granted: EUR 926 million (EUR 430 million), change 115%
• Export credit guarantees and special guarantees granted: EUR 1,747 million (EUR 2,259 million), change -23%
• Export credits granted: EUR 402 million (EUR 132 million), change 205%
  • The credit risk for Finnish Export Credit Ltd’s export credits is covered by the parent company Finnvera plc’s export credit guarantee
  • The fluctuation in the amount of export credit guarantees and export credits is influenced by the timing of individual major export transactions

30 June 2020 (31 December 2019)

• Exposure, drawn domestic loans and guarantees: EUR 2,373 million (EUR 1,928 million), change 23%
• Exposure, export credit guarantees and special guarantees, incl. SME and midcap export credit guarantees and export guarantees: EUR 24,633 million (EUR 25,489 million), change -3%
  • Of this, Large Corporates’ cruise shipping exposure EUR 12,792 million (EUR 13,786 million)
  • Drawn exposure: EUR 11,431 million (EUR 11,443 million), change 0%, of which Large Corporates’ cruise shipping exposure EUR 3,487 million (EUR 3,669 million)
  • Undrawn exposure EUR 9,162 million (EUR 9,486 million) and binding offers EUR 4,041 million (EUR 4,560 million), total change -6%, of which Large Corporates’ cruise shipping exposure in total EUR 9,304 million (EUR 10,117 million)
• Exposure, export credits drawn: EUR 7,290 million (EUR 7,229 million), change 0%

Finnvera Group, H1/2020 and 30 June 2020
Result H1/2020 -423 MEUR H1/2019: 72 MEUR change -685%	Balance sheet total 30 June 2020 EUR 13.0 bn 31 Dec 2019: EUR 12.7 bn change 2%
Average number of employees H1/2020 360 H1/2019: 363 change -1%	Non-restricted equity and the State Guarantee Fund 30 June 2020 EUR 1.5 bn 31 Dec 2019: EUR 1.9 bn change -22%
Expense-income ratio H1/2020 29.1% H1/2019: 25.4% change 3.7 pp	Expected credit losses 30 June 2020 719 MEUR 31 Dec 2019: 242 MEUR change 197%
Net promoter score index H1/2020 50 H1/2019: 64 change -22%	Equity ratio 30 June 2020 8.1% 31 Dec 2019: 11.6% change -3.5 pp

Due to the impact of the coronavirus pandemic the Group’s result for January–June showed a loss of EUR 423 million, whereas the result for the corresponding period last year showed a profit of EUR 72 million. The loss was caused by the significant credit loss provisions in export credit guarantee and special guarantee operations, made as a result of the pandemic. Expected credit losses increased by EUR 477 million (a decrease of EUR 5 million). Realised credit losses totalled EUR 17 million (EUR 14 million), showing a year-on-year increase of 19 per cent.

At the end of June, the reserves accumulated from the Group’s operations, intended for covering credit losses, amounted to EUR 1.5 billion after loss provisions. The Group’s non-restricted equity and the State Guarantee Fund’s assets are included in the reserves. The State Guarantee Fund covers losses from export credit guarantee and special guarantee operations if the assets of the corresponding reserve on Finnvera’s balance sheet are not sufficient to cover an unprofitable result.

In January–June, the Group’s net interest income grew by 22 per cent year on year and net fee and commission income was on a par with last year. Changes in the value of items recognised at fair value through profit or loss were EUR -2 million in January–June, whereas in the corresponding period last year, these items were EUR 17 million. Operating expenses and depreciation increased by 2 per cent year on year. The underlying reasons for this increase included the temporary agency workers recruited to process SME and midcap financing applications, the number of which grew due to the coronavirus pandemic, as well as the increase in depreciation due to IT investments made.

Finnvera Group Financial performance	H1/2020 MEUR	H1/2019 MEUR	Change  MEUR	Change %	2019 MEUR
Net interest income	24	19	4	22%	41
Net fee and commission income	68	68	0	0%	141
Gains and losses from financial instruments carried at fair value though P&L and foreign exchange gains and losses	-2	17	-19	-113%	10
Administrative expenses	-22	-23	0	-2%	-42
Other operating expenses and depreciations	-4	-3	-1	28%	-7
Realised and expected credit losses	-494	-9	-485	-	-60
Credit loss compensation from the State	12	7	5	68%	17
Operating profit/loss	-418	77	-495	-644%	100
Profit/loss for the period	-423	72	-496	-685%	94

Outlook for financing

According to the Bank of Finland’s forecast, Finland’s GDP will decline by approximately 7 per cent this year. The Ministry of Finance estimates that the GDP will decrease by 6 per cent this year and increase by 2.5 per cent next year. According to the IMF’s forecast, the GDP will decrease globally by 4.9 per cent and in developed countries by 8.0 per cent.

Finnvera is prepared to secure the availability of lending to viable enterprises in all stages of the crisis. During the remainder of the year, we will continue the bank financing guarantee programme and supplement the financial market also with Finnvera’s own senior and junior loans. We are also prepared for an increase in the number of enterprises in difficulties. We estimate that financing arrangements will become more difficult especially for those enterprises that would need arrangements for the second time during the crisis. Finnvera takes a flexible approach towards all arrangement and re-arrangement needs and hopes that the entire financing system follows suit.

Our estimate is that during the autumn, the effects of the crisis will spread more intensively to export companies and their subcontracting chains in Finland. We expect that also in July–December, demand for domestic financing, when measured in euros, will remain on a par with the first half of the year. The reconstruction of economy proceeds at a different pace in different sectors. We are prepared to secure diverse forms of financing for new growth, too. This refers to the strengthening of enterprises’ eligibility for financing with Finnvera’s junior loans, for instance.

Demand for export credit guarantees and export credits is influenced by order book development in export companies and the development of the availability of financing to the companies’ clients during the second half of the year. Planned investments have been postponed and it is estimated that the number of new orders will decline significantly, which would affect even large companies. On the other hand, the weaker availability of financing typically increases demand for financing guaranteed by export credit agencies. As in previous years, the overall demand is affected by the realisation of individual major projects.

The pandemic has had a negative impact on the tourism sector, including cruise shipping and shipyards. The outlook for the sector is strongly affected by two factors: when shipping companies will have the chance to re-launch their operations and what kind of experiences the new beginning of cruises will bring along. In other major export industry sectors, we expect more buyers to be interested in financing their export transactions with export credit as the terms and conditions of commercial sources of financing become poorer. Demand is not expected to concentrate to certain geographical areas.

Until the end of 2020, Finnvera has the opportunity to offer credit insurance also to so-called commercial risk countries, such as the EU Member States. Credit insurance helps exporters continue trade relations during times of uncertainty, which is important for the continuity of exports and for the Finnish economy.

We are also preparing ourselves for responding to the working capital financing needs of major Finnish enterprises. The need to change our guidelines will be assessed as the situation evolves.

In normal circumstances, our strategic goal is to allocate the majority of our financing to enterprises seeking growth and internationalisation as well as to investments, transfers of ownership and exports. During the coronavirus pandemic, we have expanded the allocation of financing to help all viable enterprises to overcome the crisis.

On 1 July 2020, Finnvera gave a profit warning, reducing its outlook for 2020. The coronavirus pandemic still causes exceptional uncertainty in the outlook. On the basis of current financial forecasts, we estimate that, owing to credit loss provisions, Finnvera Group’s result for 2020 will show a loss due to the calculated impact of macroeconomic indicators and the decline of risk ratings of individual risk subjects.

Further information:
Pauli Heikkilä, CEO, tel. +358 29 460 2400
Ulla Hagman, CFO, tel. +358 29 460 2458

Half-Year Report 1 January-30 June 2020 (PDF)

Distribution:
NASDAQ Helsinki Ltd, London Stock Exchange, the principal media, www.finnvera.fi
The financial statements are available in English at www.finnvera.fi/eng/finacial_reports