Finnish savings, co-op banks consider the case for covered

Finland’s savings and cooperative banking groups are exploring covered bonds as a funding tool, although no decisions have been made, representatives of the banks told Nordic FIs & Covered.

The suggestion that these banking groups could become covered bond issuers was made around the time when their erstwhile partner, Aktia, announced a change in covered bond issuance procedure – from issuing via Aktia Real Estate Mortgage Bank (REMB) to issuance directly by the universal bank, Aktia Bank.

Finland’s cooperative banking group (POP Pankii), and Savings Banks Group (Säästöpankki) are shareholders in Aktia REMB, alongside Aktia Bank.

Aktia REMB is being wound down. It has not granted any new mortgages since October 2012 and is focussed on managing its loan stock and the refinancing of this.

Aktia Bank used to be the central credit institution for the savings banks and POP banks, but this relationship is being terminated as of the beginning of 2015. The savings bank group is building a central credit institution facility of its own. The new facility will be based on the former Itella Bank, acquired from the state-owned Itella Corporation in March and renamed the Central Bank of Savings Banks Finland Ltd.

The Finnish Savings Banks Association (Säästöpankkiliitto) is the central organisation for the country’s savings banks and its chief executive, Pasi Kämäri, told Nordic FIs & Covered that the group is considering covered bonds as a funding tool as part of normal business planning, also taking into account new regulation.

“We are thinking about long term financing options, asset-liability matching and the diversity of our asset structure,” he said. “Covered bonds are an interesting option but it is on the table as one optional funding tool and we have not decided for or against.”

He noted that the savings banks are pure retail banks focussed mainly on private customers and that 80% of their funding is based on deposits.

The savings bank group, which in 2013 will comprise 30 individual savings banks, had some Eu7.68bn real estate mortgage loans on its book in 2012, and Kämäri said that the high quality of these loans is something that the group could take advantage of.

“We also have to think about the competition in Finland, and about funding costs and having sufficient volume,” he said. “Covered bonds are one option in that sense, a quite interesting one.”

If the savings bank group were to issue covered bonds this would be done on a centralised basis, according to Kämäri, although he stressed that the group is not far enough along in its thinking for issuance infrastructure to be on the agenda.

Thirty-five independent cooperative banks form the POP Bank Group in Finland, which is organised around the POP Bank Alliance. Its chief executive, Heikki Suutala, said that the group does not have plans to issue covered bonds at the moment, although this is a possibility in the longer term. For now, the group is preoccupied with overarching questions about the structure of the group.

“The main question is what will be the structure of the POP Bank Group,” he said. “Will it stay the same or will we move to a tighter group with unlimited guarantees between group members and would it be a central entity that issues on behalf of the group? One structure opens one door, another perhaps three doors.”

With respect to the possibility of covered bond issuance from Finland’s POP Banks, Suutala said that the group is investigating different structures and ways to replace the funding that they would have obtained via the partnership with Aktia. “It might be that we can live without covered bonds, but it is possible for the coming years, but not this year or next,” he said.