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Report of the Board of Directors

The year 2016 was marked by a few high-profile political events. Britain’s referendum on leaving the European Union and the result of the U.S. presidential election contributed to a feeling of uncertainty on the market. Despite these events, there were positive signals in the world economy. What’s more, messages received from Finnish companies indicated an upturn in demand towards the end of the year. Finland must still develop its cost competitiveness and the structure of the export industry to achieve proper growth of the economy.

Finnish export companies have been successful in some sectors, such as shipping, telecommunications, forestry and energy. As before, they were able to win some large contracts during the past year. This has had an impact on the constantly rising demand for Finnvera’s export financing services. The more stringent bank regulation following the financial crisis has also increased the need for export financing services. Finnvera is needed increasingly often to carry through the projects for Finnish companies to be able to complete their export deliveries.

Not only have individual large export deals given much-needed impetus to Finland’s otherwise sluggish exports; they have also raised Finnvera’s total exposure. According to forecasts, demand for Finnvera’s export financing services will continue to grow in the near future. In consequence, the Finnish Parliament decided to raise Finnvera’s authorisations to grant export financing, first from EUR 17 billion to EUR 19 billion in April and further to EUR 27 billion in December. Thanks to these higher authorisations, Finnvera will continue to have the opportunity to offer export financing arrangements that promote the success of Finnish export enterprises.

Finnvera's role strengthened in SME financing

As in export financing, Finnvera’s role is highlighted in domestic enterprise financing because of stricter bank regulation. Finnvera is needed as a provider of financing for increasingly many SMEs. In 2016, Finnvera received new mandates, one of which was the Growth Loan, a mezzanine financing product. Several special products associated with the promotion of small export transactions were introduced on the market. In addition, Finnvera was accepted as an intermediary organisation for the European Fund for Strategic Investments (EFSI), operating under the European Investment Bank. Finnvera will start EFSI financing if commercial actors are not ready to serve as intermediary organisations for the financing.

The ageing of Finnish entrepreneurs has increased the need to promote transfers of business to the next generation and other ownership changes. Together with enterprise organisations, Finnvera is campaigning across the country to raise awareness associated with ownership changes. Financing of ownership changes did in fact reach a new record in 2016. As matters stand, the positive trend will continue for several years.

Bonds issued by Finnvera

In April 2016, Finnvera plc issued a ten-year, fixed-rate bond of EUR one billion. In December 2016, Finnvera launched a 12-year, fixed-rate private placement bond of SEK 1.5 billion.

Both bonds were issued under Finnvera’s EMTN (Euro Medium Term Note) Programme. The loans issued under the EMTN Programme are guaranteed by the State of Finland. Finnvera uses the assets acquired under the programme to finance export credits as well as SMEs and midcap companies.

Finnvera sold most of its holding in Seed Fund Vera Ltd

In December 2016, Finnvera plc sold 80 per cent of its holding in Seed Fund Vera Ltd. The majority holding in Seed Fund Vera was sold to Innovestor Kasvurahasto I Ky, a Finnish limited partnership. To ensure continuity, Finnvera remained an owner of Seed Fund Vera Ltd, with a holding of about 20 per cent. Underlying the sale is the decision made by the Ministry of Economic Affairs and Employment in 2012 to transfer early-stage venture capital investments away from Finnvera.

Since Finnvera is giving up its venture capital investment activities, both the Large Corporates Unit and the SMEs and Midcap Companies Unit will first and foremost rely on debt-based financing instruments.

Customer experience measured more actively

In October 2016, Finnvera adopted regular and continuous measurement of customer experience. When more measurements are done in real-time, more accurate information is obtained about customers’ service expectations. The business units use the measurement results to develop their services so that they can meet the expectations of various customer groups even better.

Finnvera is a member of the Team Finland network, which has the objective of promoting the internationalisation of SMEs. In the past year, the network continued to develop its services. The most concrete form of cooperation was the adoption of the domestic service model, which was used in 2016 to present 370 service proposals to potential growth companies. Through the service model, the various Team Finland actors see to it that the customer gets all the necessary services available through the network. Also launched in 2016 was a project to create a joint CRM (Customer Relationship Management) system management system. The aim is to adopt the system in 2017.

Team Finland cooperation also got a boost when Finnvera, Finpro and Tekes relocated to joint premises in Team Finland House, situated in the Ruoholahti district of Helsinki, in August. Following the move, the organisations began to seek closer operational synergies. In addition to the head office in Helsinki, other Finnvera branch offices have also moved to modern premises. This brings the company annual savings of around EUR 2 million.

Financial trend

The Finnvera Group in July–December 2016

The Finnvera Group’s profit in July–December 2016 was EUR 77 million. This was EUR 84 million better than the loss of EUR 7 million entered for January–June 2016.

The main reasons for the improvement in financial performance from the first to the second half of the year were the smaller losses from export credit guarantee operations and the smaller provisions for losses recorded by the parent company, Finnvera plc. In July–December, export credit guarantee losses and provisions for losses totalled only EUR 2 million, whereas the losses entered and the provisions made in January–June amounted to EUR 66 million.

During the first half of 2016, a provision of EUR 55 million for guarantee losses was made for Oi S.A. of Brazil when it transpired that the receivables from the company involve an obvious risk. At the time of closing the books, Finnvera estimated that the loss caused by Oi S.A. to Finnvera corresponds to the guarantee loss provision made during the first half of the year. The entries for impairment losses and provisions for losses made in the financial statements are estimates. Their amounts may change even substantially as the volume and accuracy of information increase.

Apart from the decrease in guarantee losses and provisions, the improvement in financial performance during the second half of 2016 depended especially on the net value of fee and commission income. At EUR 77 million, the net value was EUR 11 million, or 16 per cent, more than during the first half of the year. The increase in the net value of fee and commission income was mainly explained by higher fee and commission income from export credit guarantees and special guarantees.

The Finnvera Group’s net interest income in July–December came to EUR 24 million. The net interest income was EUR 3 million and 11 per cent lower than the figure of EUR 27 million for January–June. This reduced the improvement of the result for the second half of 2016 when compared against the first half. Outstanding loans in SME financing decreased in July–December by EUR 47 million. This and the continuously falling interest rates were factors underlying the declining net interest income.

The losses from items carried at fair value in July–December totalled EUR 10 million. The figure is roughly the same as that for the previous six months. In recent years, the principal reasons for the increase in losses from items carried at fair value have been changes in the fair value of debts and interest rate and currency swaps and changes in the fair value of venture capital investments.

The Group’s personnel and other administrative expenses in July–December amounted to EUR 22 million. This was 4 per cent less than in the first half of 2016.

In December, Finnvera sold 80 per cent of its holding in Seed Fund Vera Ltd. The sale caused a loss of EUR 7 million to the parent company. In addition, the 19.99 per cent shares of Seed Fund Vera Ltd were valued to the actual selling price and an impaired loss was entered in the financial statements for EUR 2 million. For the Group, the sale of Seed Fund Vera Ltd brought in a profit of EUR 1 million. For the parent company, the capital loss from the sale of Seed Fund Vera Ltd is recognised under other operating expenses. Correspondingly, the profit for the Group was recognised under other operating income. In the parent company and the Group, ‘Other operating income’ also includes the cancellation of subordinated loans received from the State for venture capital investments, in total EUR 9 million. Other operating income for the Group totalled EUR 12 million in 2016, while other operating expenses came to EUR 4 million. Underlying the sale of Seed Fund Vera Ltd was the policy outline made by the government, according to which Finnvera will give up venture capital investments.

The Finnvera Group in January–December 2016

The profit of the Finnvera Group for 2016 was EUR 70 million (111 million). This was EUR 41 million, or 37 per cent, less than in the previous year. As was noted above, the reasons for the weaker performance were the parent company’s export credit guarantee losses as well as provisions for losses that were realised during the first half of the year and were markedly greater than those entered the year before. In 2016, the parent company’s export credit guarantee losses and provisions for losses totalled EUR 67 million. The losses and provisions realised in the previous year amounted to EUR 10 million.

Apart from the increase in export credit guarantee losses and provisions for losses, another reason for the weaker result in 2016 was the decrease in net interest income, which fell by EUR 6 million, or 10 per cent. In 2016, the Finnvera Group’s net interest income came to EUR 50 million (56 million).

The net value of fee and commission income and expenses came to EUR 144 million, or 2 per cent more than the year before (141 million). The main factor underlying the increase in the net value of fee and commission income and expenses in 2016 was the fact that the fee and commission income paid in advance on export credit guarantees indemnified in July–December was recognised in the income statement for the period under review.

The gross amount of the fee and commission income totalled EUR 166 million (158 million), while fee and commission expenses came to EUR 22 million (17 million). Fee and commission expenses consisted mainly of the costs of reinsurance taken out by the parent company, Finnvera plc. In recent years, the company has increased the volume of reinsurance; this also contributed to the rise in fee and commission expenses in 2016. The fee and commission expenses on reinsurance exceeded the figure for the previous year under review by 36 per cent.

Losses from items carried at fair value totalled EUR 20 million (21 million). The losses were EUR 1 million, or 6 per cent, less than the year before, the reason for this being, above all, a decrease in changes in the fair value of debts, interest rate and currency swaps and in venture capital investments.

Within the past few years, Finnvera’s exposures and their risk levels have risen significantly. In SME and midcap financing, the quality of the credit portfolio improved in 2016 when compared against the previous years. This is seen as clearly reduced credit losses. However, the overall risk level is still markedly higher than it was before the financial crisis and the subsequent recession. One major credit risk was realised during 2016, when the Brazilian telecommunications company Oi S.A. sought debt restructuring. Altogether 31 per cent of exposures in export financing were in category B1, which is close to investment grade, or better categories. New risks were taken mostly in category B2.

Financial performance of Finnvera plc, the subsidiaries and the associated companies

The profit of the parent company, Finnvera plc, for 2016 stood at EUR 65 million (95 million), of which large corporates business accounted for EUR 33 million (82 million) and SME and midcap business for EUR 32 million (38 million). The performance of the large corporates business declined clearly from the previous year, while the performance of SME and midcap business was at a good level for a second year in a row.

The Group companies and associated companies had an impact of EUR 6 million on the profit for the year (16 million). Venture capital investments accounted for EUR -1 million (-24 million) of this impact. Interest equalisation and the financing of export credits by Finnish Export Credit Ltd accounted for EUR 5 million (15 million).

Other factors affecting the Group’s financial performance in 2016 included the eliminations of EUR 2 million for the sale of Seed Fund Vera Ltd, and correspondingly the elimination of the impairment loss of EUR 25 million made in 2015 on the shares owned by the parent company in Seed Fund Vera Ltd.

Separate result for export credit guarantee and special guarantee activities

The separate result for export credit guarantee and special guarantee activities, as defined in the Act on the State’s Export Credit Guarantees, came to EUR 19 million (79 million) in 2016.

Analysis of financial performance in January–December 2016

Interest income and expenses and interest subsidies

The Finnvera Group’s net interest income in January–December came to EUR 50 million (56 million). The net interest income was EUR 6 million, or 10 per cent lower than during the corresponding period in 2015. Outstanding loans in SME financing provided by the parent company, Finnvera plc, decreased by EUR 77 million in January–December. This and the lower interest rates were the most important factors behind the declining interest income and the fall in the net interest income.

The interest subsidies paid by the State and by the European Regional Development Fund (ERDF) and passed on directly to clients totalled EUR 2 million (3 million). Interest subsidies were about 50 per cent less than during the corresponding period in 2015. Interest-subsidised financing has not been granted since 1 January 2014. In consequence, the volume of Finnvera’s interest subsidy will decrease and will account for a limited share of the net interest income, for instance, in 2017.

Fee and commission income and expenses

The net value of the Group’s fee and commission income and expenses came to EUR 144 million (141 million). This was two per cent more than in the year before. The main factor underlying the increase in the net value of fee and commission income and expenses in 2016 was the fact that the fee and commission income paid in advance on export credit guarantees indemnified in July–December was recognised in the income statement for the period under review.

The gross sum of the fee and commission income totalled EUR 166 million (158 million). Of this, the parent company’s fee and commission income from export credit guarantees and special guarantees accounted for 73 per cent (74), or EUR 120 million (108 million), while SME financing accounted for 27 per cent (26), or EUR 44 million (41 million). Finnish Export Credit Ltd’s fee and commission income from interest equalisation and export credit financing amounted to EUR 1 million (1 million).

Fee and commission expenses totalled EUR 22 million (17 million). The fee and commission expenses consisted mainly of the costs of reinsurance taken out by the parent company, Finnvera plc. In recent years, the company has increased the volume of reinsurance; this also contributed to the rise in fee and commission expenses in 2016. The fee and commission expenses on reinsurance exceeded the figure for the previous year under review by 36 per cent. 

Losses from items carried at fair value

The Group’s losses from items carried at fair value totalled EUR 20 million (21 million), of which the change in the fair value of debts and interest rate and currency swaps accounted for EUR -11 million (2 million). The change in the fair value of venture capital investments was EUR -10 million (-23 million), while exchange rate differences accounted for EUR 2 million (0.3 million).

In 2016, the parent company, Finnvera plc, adopted hedge accounting. Its purpose is to hedge against the impact of fair value changes caused by changes in market interest rates. The subsidiaries have no corresponding need for hedge accounting. Hedge accounting pertains to the fixed-rate bonds issued by the parent company and to the interest rate swaps that are used to hedge them. Hedge accounting is applied from the date when debt instruments encompassed by hedge accounting are issued to the date of their maturity.  In 2016, hedge accounting was applied to the 10-year bond of EUR 1 billion issued by Finnvera in April.

Other income

In January–December, the Group’s net income from investments totalled EUR 0.3 million (0.1 million). Other operating income amounted to EUR 12 million (2 million). Other operating income included, for instance, the cancellation of a subordinated loan from the State, the grant received from the State for losses incurred in ERDF venture capital investments, the Group's capital gain from the sale of the Seed Fund Vera Ltd and the management fee paid by the State Guarantee Fund for managing the liability for export credit guarantees and special guarantees arisen prior to 1999.

Operating expenses and depreciation

The Group’s administrative expenses, including personnel expenses and other administrative expenses, were EUR 44 million (44 million). Personnel expenses accounted for 68 per cent (69) of administrative expenses.

Other operating expenses in the Group totalled EUR 4 million (6 million) and depreciation EUR 2 million (1 million). Other operating expenses include rents and costs associated with real property and the EUR 7 million capital loss on the sale of the non-ERDF operations of Seed Fund Vera Ltd.

Impairment losses on receivables, guarantee losses

The Group’s impairment losses on loans, as well as guarantee losses and provisions, were EUR 94 million in January–December (97 million). After the compensation for credit losses by the State and the European Regional Development Fund (ERDF), the Group’s liability for impairment losses and other losses during the period under review amounted to EUR 66 million (15 million).

Impairment losses and losses on loans and guarantees, and the change in impairment losses and provisions for losses, totalled EUR 27 million (87 million). The compensation for losses paid by the State and the European Regional Development Fund totalled EUR 28 million (83 million). Compensation for losses was 58 per cent of the losses realised (64). Some large individual losses that were realised during the reference period had an impact on the total compensation for credit losses during the corresponding period the year before.

Losses on export credit guarantees and special guarantees, including the change in the provisions for losses, were EUR 67 million during the period under review (10 million). During the first half of 2016, a provision of EUR 55 million for guarantee losses was recognised for Oi S.A. of Brazil when it transpired that the receivables from the company involve an obvious risk. During the second half of the year, the provision for the losses of Oi S.A. was kept unchanged. The reasons are the proposal for the restructuring programme of Oi S.A. and the report drawn up by Finnvera on the exposure risk. Loss estimate may still change considerably as additional and more detailed information is obtained.

 
Finnvera Group H2/2016 H1/2016 Change H2/2015 2016 2015 Change Change
Impairment loss on financial assets MEUR MEUR % MEUR MEUR MEUR MEUR %
Loans and domestic guarantees -12 -15 -22 -15 -27 -87 -60 -69
Credit loss compensation from the State 13 15 -16 23 28 83 -54 -66
Export credit guarantees and special guarantees -2 -66 -98 -8 -67 -10 57 -
Net impairment loss on financial assets -0.2 -65 -100 -0.2 -66 -15 51 348

Doubtful receivables

Calculated according to the method harmonised at EU level, the amount of doubtful receivables and zero-interest items in SME financing stood at EUR 156 million at the end of December (201 million). When the impairment losses recognised are considered, doubtful receivables accounted for 6.5 per cent of total exposure. This was 1.8 percentage points lower than the amount of doubtful receivables at the end of 2015 (8.3 per cent). The ratio of doubtful receivables to total exposure was 2.3 per cent (3.3) when the compensation for credit losses received from the State for SME and midcap financing is taken into account.

Long-term economic self-sustainability

In its operations, Finnvera is expected to attain economic self-sustainability. This means that the income received from the company’s operations must, in the long run, cover the company’s operating expenses. The period for reviewing self-sustainability is 10 years for SME and midcap financing and 20 years for export financing.

Self-sustainability in Finnvera’s SME and midcap financing has been attained over a 10-year period when the cumulative result is calculated up to the end of December 2016. Correspondingly, export financing has been economically self-sustainable during Finnvera’s 18 years of operation. Economic self-sustainability is also realised over a 20-year period if the payment-based result of Finnvera’s predecessor, the Finnish Guarantee Board, for its last years of operation is taken into account when reviewing the self-sustainability of export financing.

The extent and risk level of Finnvera’s total exposure will have a significant impact on the company’s financial performance and long-term economic self-sustainability in the coming years. In examining the financial performance, it is important to note that, at the end of December 2016, Finnvera’s total exposure for export credit guarantees and special guarantees amounted to EUR 18.4 billion. The exposure for the credits and guarantees of SMEs and midcap companies, as well as guarantee receivables, stood at EUR 2.3 billion. Seen against these exposures, the net profit building a loss buffer on the balance sheet is now about 0.3 per cent at the annual level, and the equity is about 6 per cent.

Balance sheet 31 December 2016

At the end of December, the consolidated balance sheet total was EUR 9,498 million (8,418 million), while the balance sheet total of the parent company, Finnvera plc, came to EUR 7,178 million (5,784 million). The consolidated balance sheet total increased by 13 per cent, or EUR 1,080 million, during 2016. Most of the increase stemmed from the financing of export credits carried out by the subsidiary Finnish Export Credit Ltd. At the end of December, the balance sheet total of Finnish Export Credit Ltd was EUR 4,916 million (4,347 million).

At the end of December, the Group’s outstanding credits came to EUR 5,827 million (5,347 million), or EUR 480 million more than at the start of the year. The outstanding credits of the parent company, Finnvera plc, came to EUR 3,568 million (2,772 million), of which the receivables from the subsidiaries totalled EUR 2,500 million (1,641 million).

The parent company’s outstanding domestic guarantees increased slightly during 2016 and totalled EUR 1,061 million at the end of December (1,003 million).

The exposure defined in the Act on the State’s Export Credit Guarantees, totalled EUR 14,442 million at the end of December (14,236 million). The total exposure arising from export credit guarantees and special guarantees (current commitments and offers given, including export guarantees) totalled EUR 18,426 million (17,436 million).

In accordance with the government’s policy outlines, Finnvera will give up its venture capital investments. Finnvera’s shares in ERDF-Seed Fund Ltd and the remaining shares in Seed Fund Vera Ltd (19.99 per cent) have been transferred to long-term assets available for sale in the parent company’s financial statements. Similarly, the assets and liabilities of ERDF-Seed Fund Ltd are presented under long-term assets available for sale in the consolidated financial statements. With respect to Seed Fund Vera, Finnvera has a subordinated loan from the State, which has also been transferred to the item Liabilities associated with long-term assets available for sale. The Group’s long-term assets available for sale totalled EUR 47 million (102 million) at the end of December.

The parent company’s long-term liabilities as per 31 December totalled EUR 5,175 million (4,046 million). Of this sum, EUR 4,892 million (3,958 million) consisted of bonds. The liabilities include subordinated loans of EUR 20 million received by Finnvera from the State for investment in the share capitals of Seed Fund Vera Ltd and Veraventure Ltd (38 million), and a subordinated loan of EUR 50 million granted by the State for strengthening capital adequacy (50 million).

At the end of December, the Group’s non-restricted reserves contained a total of EUR 955 million (871 million), of which the reserve for domestic operations accounted for EUR 155 million (136 million), the reserve for export credit guarantees and special guarantees EUR 668 million (536 million), the reserve for venture capital investments EUR 15 million (17 million) and retained profits for EUR 117 million (183 million).

The item Other reserves, presented under unrestricted equity on the balance sheet, is used to monitor the assets allocated by the ERDF to venture capital investments.

 
Finnvera Group 31 Dec 2016 31 Dec 2015 Change Change
Balance sheet MEUR MEUR MEUR %
Share capital 197 197 0 0
Share premium and fair value reserve 55 49 6 12
Non-restricted reserves, in total 955 871 84 10
Reserve for domestic operations 155 136 19 14
Reserve for export credit guarantees and special guarantees 668 536 132 25
Other 15 17 -1 -8
Retained earnings 117 183 -66 -36
Equity attributable to the parent company's shareholders 1,206 1,117 90 8
Share of equity held by non-controlling interests 1 4 -3 -79
Balance sheet total 9,498 8,418 1,080 13

Funding

In 2016, the Group’s long-term acquisition of funds totalled EUR 1,349 million (1,827 million). EUR 629 million in long-term loans was paid back (603 million).

Capital adequacy

The Act on Finnvera (443/1998) stipulates that domestic operations must be kept separate from export credit guarantee and special guarantee operations. In consequence, losses from domestic operations are covered from the reserve for domestic operations, while losses from export credit guarantees and special guarantees are covered from the reserve for export credit guarantee and special guarantee operations. According to the Act on the State Guarantee Fund (444/1998), the State is responsible for export credit guarantees and special guarantees. Should the reserve for export credit guarantee and special guarantee operations lack sufficient assets to cover the losses incurred in the respective operations, the losses are covered from assets in the State Guarantee Fund, which are supplemented, whenever necessary, by an appropriation from the State Budget.

The above separation prescribed by law, and the State’s responsibility for export credit guarantees, explain why Finnvera calculates its capital adequacy, i.e. the ratio between its exposure and assets, only for domestic operations.

According to the goal set by the State of Finland, the owner of Finnvera, the Group’s capital adequacy ratio for domestic operations should be at least 12.0 per cent. Capital adequacy is calculated in accordance with the principles of the Basel III standard method. At the end of December, the Group’s capital adequacy ratio for domestic operations, Tier 2, stood at 24.3 per cent (19.6) while the capital adequacy for domestic operations, Tier 2, of the parent company, Finnvera plc, was 22.0 per cent (18.1). The Finnvera Group’s leverage ratio was 20.0 per cent (19.4) at the end of December.

 
Capital adequacy 31 Dec 2016 31 Dec 2015 Change
Finnvera Group, domestic operations % % % points
Tier 1 24.2 19.2 5.0
Tier 2 24.3 19,6 4.7
       
Capital adequacy 31 Dec 2016 31 Dec 2015 Change
Finnvera plc, domestic operations % % % points
Tier 1 21.8 17,7 4.1
Tier 2 22.0 18,1 3.9

The Finnvera Group’s risk-weighted receivables totalled EUR 2,152 million at the end of December (2,322 million). Of these, loans and guarantees pertaining to business proper amounted to EUR 1,801 million (1,808 million), or 84 per cent (78) of risk-weighted receivables. Most of the remaining receivables were associated with funding and the investment of cash assets. About 50 per cent of loans and guarantees consisted of a large number of individual exposures of under EUR 1 million. Calculated according to the standard method, their risk weight was 75 per cent. The risk weight of other loans and guarantees was 100 per cent.

 
Finnvera Group, domestic operations 31 Dec 2016 31 Dec 2015
Capital for calculating capital adequacy MEUR MEUR
Equity excluding profit for the year 1,144 954
Intangible assets -7 -4
Reserve for export credit guarantees and special guarantees -668 -536
Profit for the period 70 111
Profit for the period attributable to export credit guarantees -19 -79
Subordinated loan 3 10
Total 522 455
     
  31 Dec 2016 31 Dec 2015
Risk-weighted items MEUR MEUR
Receivables from credit institutions 177 118
Receivables from clients 1,801 1,808
Investments and derivatives 0 216
Receivables, prepayments, interest and other receivables, other assets 21 17
Binding promises for loans 71 80
Operational risk 82 83
Total 2,152 2,322

When calculated in accordance with the principles of the Basel III standard method, the capital adequacy of export financing would be at the lower limit of the target of under 10 per cent set by Finnvera’s owner for domestic operations, if the calculation also included the assets of the State Guarantee Fund, as well as the export financing equities presented on Finnvera’s balance sheet.

Risk position

At the end of 2016, total exposure for SME and midcap financing came to EUR 2.6 billion, or EUR 0.1 billion less than the year before. Among SMEs and midcap enterprises, demand focused on financing for working capital. Seen against previous years, however, an upswing was also visible in the demand for investment financing.

During the year, the quality of the credit portfolio in SME financing has improved on the previous years. This is seen as clearly reduced credit losses. It was still possible to reduce the risks pertaining to individual clients. This had a positive effect, for instance, on the amount of non-performing credits and arrears. In its financing, Finnvera focuses on starting and growing enterprises, as well as enterprises in situations of change. The operational risks faced by these enterprises are often greater than the risks of established companies. Moreover, the importance of collateral in the management of credit risks has diminished owing to the revised collateral practices. For these reasons, the exposure risk level remained unchanged during the year when calculated using the so-called indicator of expected losses, which stood at 3 per cent of total exposure at year’s end. The distribution of exposure by risk category also remained virtually unchanged, even though the credit ratings of some individual enterprises could be upgraded. Exposure for clients in the weak category B3 shrank by roughly EUR 50 million.

Credit and guarantee losses and impairment losses totalled EUR 38 million, or EUR 47 million less than the year before. Some extraordinary entries made in the previous year complicate the comparability of figures. No major new impairment losses were entered in 2016 and, for example, the exposure for companies that filed for corporate restructuring was clearly lower than in previous years.

At the end of 2016, the exposure for export financing, monitored by risk management, totalled EUR 18.1 billion. The ‘old liability’ under the State Guarantee Fund’s direct responsibility accounted for no more than EUR 1 million of this sum. Total exposure increased by EUR 1.0 billion during the year. At year’s end, a significant share of the current guarantees and binding offers was in the country risk categories 0 and 4. Most of the guarantees granted during the year were also entered into these categories.

The volume of enterprises’ commercial exposure, associated with export guarantees and special guarantees, rose by about EUR 1.2 billion during 2016, to EUR 16.9 billion at year’s end. The sectors with the highest exposure were telecommunications, shipping companies, shipyards, and the forest industry. These sectors accounted for a total of 88 per cent of corporate exposure. Altogether 31 per cent of the exposure was in category B1, which is close to investment grade, or in better categories. New risks were mostly taken in category B2.

Guarantee losses totalled EUR 67 million in 2016.

Among the subsidiaries, the exposure arisen for Finnish Export Credit Ltd from the financing of export credits totalled EUR 8.6 billion at year’s end; this was EUR 0.5 billion less than at the start of the year. The exposure includes export credits financed both under the temporary system and the permanent system launched in 2012, as well as binding credit commitments. The credit risks associated with the exposure are fully covered by means of export credit guarantees granted by Finnvera plc. These export credit guarantees are included in the above-mentioned exposure for export financing.

Attainment of industrial policy and ownership policy goals

Finnvera’s operations are steered by the legislation on the company and by the industrial and ownership policy goals determined by the owner. Being responsible for the ownership and industrial policy steering of Finnvera, the Ministry of Economic Affairs and Employment sets industrial and ownership policy goals for the company for a period of four years. Whenever necessary, the Ministry revises these goals annually. Out of the ten goals set for the year 2016, seven goals were reached and three goals were partially reached.

Corporate governance

Personnel

At the end of the financial period, the Group had 381 employees (396). Finnvera plc had 376 employees (381), of whom 353 (354) held a permanent post and 23 (27) a fixed-term post. The salaries and fees paid to the personnel totalled EUR 24 million for the Group (24 million) and EUR 23 million for the parent company (23 million).

Supervisory Board, Board of Directors and auditor

On 23 March 2016, Finnvera’s Annual General Meeting elected new members to the company’s Supervisory Board. No changes were made in the composition of the Board of Directors.

The new members on the Supervisory Board are the Members of Parliament Laura Huhtasaari, Timo Kalli, Krista Kiuru, Kari Kulmala, Ville Niinistö and Eero Suutari, Managing Director Kari Luoto, Managing Director Carita Orlando, and Christel Tjeder, Second Vice Chairman of the Finnish Business School Graduates.

Antti Rantakangas, Member of Parliament, was elected Chairman of the Supervisory Board and Krista Kiuru, Member of Parliament, was elected Vice Chairman. The members continuing on the Supervisory Board are: Eeva-Johanna Eloranta, Member of Parliament; Mika Harjunen, Information Security Manager; Lasse Hautala, Member of Parliament; Olli Koski, Chief Economist; Leila Kurki, Senior Adviser; Veli-Matti Mattila, Chief Economist; Tommi Toivola, Senior Adviser; and Sofia Vikman, Member of Parliament.

Markku Pohjola, B.Sc. (Econ.) continues as Chairman of Finnvera’s Board of Directors. Pekka Timonen, Director General, continues as the First Vice Chairman and Marianna Uotinen, Specialist Counsel, as the Second Vice Chairman. The members continuing on the Board of Directors are Kirsi Komi, LL.M., Pirkko Rantanen-Kervinen, B.Sc. (Econ.), Harri Sailas, B.Sc. (Econ.), and Antti Zitting, Chairman of the Board.

KPMG Oy Ab was re-elected Finnvera’s regular auditor with Juha-Pekka Mylén, Authorised Public Accountant, as the principal auditor.

Events after the period under review

No major events have taken place after the period under review.

Outlook for financing

The economic expectations of SMEs and midcap enterprises have taken a slightly upward turn, which is believed to reflect positively on financing granted by Finnvera to SMEs and midcap enterprises in 2017. This will probably be seen particularly clearly in financing for growth companies, but the rising trend in financing intended for investments by growing and internationalising enterprises may also continue following the turn that occurred in 2016. It is assumed that financing granted by Finnvera for transfers of ownership will continue at the same solid level in 2017. It is generally believed that the bond activities of SMEs and midcap enterprises will gain slightly more momentum and will also be reflected in Finnvera’s financing.

Financing solutions offered to buyers play a pivotal role in exports of capital goods sold by large corporations. Demand for export credit guarantees and export credits is expected to rise from the previous year, but the total amounts depend on the timing of individual large export transactions. Ships, telecommunications and the forest industry are still anticipated to account for the bulk of demand associated with large corporations’ exports. Among the new, opening markets, the greatest demand is likely to focus on Iran and Argentina. Exposures for Russian trade declined in 2016 as buyers postponed investments, but new demand is expected in 2017. Other countries where the demand for Finnvera’s guarantees is expected to rise are India and Mexico. In these countries, reforms associated with the modernisation of infrastructure will provide export opportunities for Finnish companies. In Finland, the progress of large investment projects promoting exports have an impact on the demand for guarantees.

The year 2017 is expected to be a year of growing demand. It is thought that implementation of the strategy throughout the Group will proceed as planned and that operations will be self-sustainable in the current financial period as well. The trends in impairment losses on receivables and in guarantee losses involve some uncertainty. In consequence, the results realised may differ from the forecasts even markedly.

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