“In the deteriorating operating environment, it is important that the financial sector is stable and risk management is sound.The Finnish financial sector's current situation is good, which is a strength as the economic situation weakens”, says Tero Kurenmaa, Director General of the Financial Supervisory Authority.  

The tightening of financing conditions, high inflation, uncertainty in the market and the weakening economy must be taken into consideration also in the long term. These factors are impacting the FIN-FSA's ongoing strategy work for 2023-2025, in addition to other trends, such as the increase in cyber threats, digitalisation and sustainability-related regulation.  

Due to risks in the operating environment as well as geopolitical risks, the financial sector has enhanced its preparedness for an increase in cyber risks. The cyber environment has remained stable and the payment systems have operated smoothly, however, with the exception of denial-of-service attacks with minor impacts or disruptions in payment systems. There are, however, incidents of phishing, and banks and their customers are urged to be vigilant.  

Finnish banking sector's capital ratios weakened slightly, but remained strong and higher than the European average

Uncertainty in the operating environment also weakened the banking sector's performance. Income from investment, in particular, has declined which has increased the importance of net interest income for profit performance. Non-performing loans and credit losses have remained moderate. Russia's war of aggression in Ukraine has heightened uncertainty in the operating environment, which will increase the risk of growth in credit losses and non-performing loans in the longer term.

The Finnish banking sector's capital ratios weakened slightly in the first half of 2022, but remained stronger than the European average. The decline in capital ratios was mainly due to changes in the internal ratings-based models as well as profit distribution which includes share buybacks. The decline in capital ratios was curbed, however, by the continued profitability of the banking business. The banking sector's Common Equity Tier 1 (CET1) capital ratio at the end of June was 17.3% (12/2021: 17.8%) and the total capital ratio was 20.7% (12/2021: 21.4%).

Employee pension sector’s solvency remained strong, despite a weakening

The employee pension sector’s solvency remained strong, despite solvency decreasing, as the return on investment was negative and clearly lower than the return requirement. The solvency ratio at the end of June was 130.3% (12/2021: 136.3%). The solvency position (the ratio of solvency capital and the minimum solvency requirement) weakened to 1.7 (12/2021: 1.9). Employee pension institutions’ average stress resilience is still strong, despite the weakening of solvency.

Employee pension institutions’ return on investment in the first half of the year was -5.2%, as liquid investments (listed shares, bonds and money market investments) were clearly negative. The return on illiquid investments (loans, real estate, private equity and hedge fund investments) was clearly positive in the first half of the year, but the valuation of these investments is subject to higher uncertainty and the values are updated with a lag.

In the employee pension sector, a growth in private equity investments has increased the share of illiquid investments, which accounted for 44% of total investments at the end of June.  

Life insurance sector solvency improved considerably

Life insurance companies’ solvency ratio rose at an exceptional rate and was 254.2% (12/2021: 192.9%). The strengthening of solvency was due to a decrease in the solvency capital requirement attributable to the decline in securities prices, and a decrease in the market value of technical provisions caused by a significant rise in interest rates, which bolstered own funds.  

The life insurance sector's return on investment was -8.2%, which weakened profitability. Premiums written grew in the first quarter of the year, but decreased in the second quarter of 2022 to a level lower than a year earlier.

Non-life insurance sector’s solvency strengthened, but own funds remained unchanged  

The solvency ratio of non-life insurance reached a record high level of 270.8% (12/2021: 242.0%). The value of non-life insurance companies’ investments decreased, due to the decline in the market prices of equities and the steep rise in interest rates. The decline in equity prices, however, was also reflected as a decrease in equity risk, which reduced the solvency capital requirement and thus bolstered the solvency ratio.

As a result of the steep rise in interest rates, the market value of insurance liabilities declined to its lowest level since the introduction of the Solvency II regulations. Large fluctuations in investment market prices increased the solvency-strengthening effect of factors included in the Solvency II regulations that smooth the impact of changes in market prices.    

Return on investment was negative (-6.3%). Real-estate investments were the only investment class that generated a profit. Insurance business profitability, excluding the impact of changes in the calculation basis, weakened compared with the higher-than-average level recorded in the corresponding period in 2021.