Foto: LETA

“OP Financial Group”: It is unlikely that Finland or the Baltic states will face even greater geopolitical risks.


Finland and the Baltic states border Russia, and after the start of the war in Ukraine, many investors were concerned about the impact of the geopolitical situation on this region. In an interview with the LETA agency, Timo Ritakallio, president and CEO of “OP Financial Group”, the largest financial group in Finland, emphasises that he does not think that Finland or the Baltic states will face even greater geopolitical risks than they have already.

He also emphasises that Finland itself has both a long border with Russia and a sufficient number of Russian-speaking residents; therefore, Finnish investors will not be the ones to be scared away from the Baltic states due to the current situation. “OP Financial Group” itself does not intend to change its operating model and will continue to work with large corporate clients in Latvia. The CEO of “OP Corporate Bank” Katja Keitaanniemi, and the manager of the Latvian branch of “OP Corporate Bank” Elmārs Prikšāns, also took part in the interview.

The half-year activity report of "OP Financial Group" states that the war started by Russia in Ukraine has no direct impact on the bank. However, both Finland and the Baltic States border Russia; can we therefore expect a long-term impact on the economy of this region?

T. Ritakallio (T.R.): If we recall a time more than 30 years ago, the USSR was a very serious trading partner of Finland. Before the collapse of the USSR, Finnish exports to it accounted for 44%. In the 1990s, exports to Russia decreased dramatically, before the global financial crisis it was 14%, afterwards it fell again, and before the war in Ukraine the volume of Finnish exports to Russia was only 4%. The same has happened, for example, with tourism. In the 2000s, many Russian tourists came to Finland and many Russians went shopping in Helsinki. However, this flow also significantly decreased both after the global financial crisis and after 2014, as the rouble fell against the euro. This only clearly illustrates that Russia's role in the Finnish economy has decreased significantly over the past decades. Therefore, I also do not expect that we can anticipate any further impact in the future.

I don't see Finland or the Baltic States facing even greater geopolitical risks than they already have. It should also be emphasised that the Baltic States have been members of NATO for several years and Finland is joining NATO now. In addition, Finland has invested heavily in its defence in recent decades and has prepared for these types of situations. Also, when talking to large international companies, they do not see an increase in geopolitical risks. For example, international real estate investors continue to operate as before. Of course, they take into account the fact that the European economy, including Finland and the Baltic States, will enter a recession phase during the next year. At the same time, we currently think that the recession will be short and mild.

Therefore, I emphasise once again that I do not see an increase in geopolitical risks in the Baltic States and in this region due to the war in Ukraine.

Do you see economic sectors that are seriously affected by this geopolitical situation? For example, in Latvia it must be transport and logistics?

T.R.: Yes, it is definitely transport. Likewise, everything related to energy security and where energy prices are of great importance. These are energy-intensive industries. However, the situation is not so clear-cut. For example, in Finland pulp and paper production is a very energy-intensive industry. At the same time, a major company in an industry such as UPM also has its own sources of energy production and is seen to be benefiting from high energy prices, and this company has recently announced record-breaking results.

Of course, higher energy prices mean financial challenges for households and a number of businesses. At the same time, in Finland – and in several other European countries, the same can be seen – household savings increased significantly during the pandemic and currently the level of deposits in banks is at a record high level. Also on the business side – both for large companies and small and medium-sized companies – generally very good performance indicators can be seen.

Katja Keitaanniemi (K.K.): We are the largest lender in the corporate sector in Finland and I can assure you that currently the situation is stable. If we compare this to the situation ten or twenty years ago, companies have good balance sheets, they have strong liquidity.

We cooperate with international investors and banks as well, for example by issuing syndicated loans, and I can assure you that we do not see a different attitude or behaviour from these global players after the start of the war in Ukraine.

T.R.: I would also like to mention an example. We are not only the largest Finnish bank, but the OP group also includes the largest Finnish risk insurer Pohjola, which also owned five relatively new hospital buildings. We sold them to a big US real estate company right after the war had started. To our surprise, they did not ask any additional questions about risks, which only means that they did not see any obstacles to investing in Finland due to the geopolitical situation.

Can you say the same about the Baltic States? At the beginning of the war, I had to talk to representatives of several international companies, who quite frankly said that investors still see risks in this region and could feel safer investing in Southern or Western Europe.

T.R.: Here, we must admit that the Finns are different from other investors who have invested in the Baltic States, because we ourselves have a very long border with Russia and it has been like this for more than 100 years. We have about 80,000 Russians living permanently in Finland. Therefore, it is easier for us to understand what is happening. However, if you live very far away and only get a very general idea from the news, it is much more difficult to understand the issues at hand. It is exactly the same as with events that take place very far from our region – without knowing the situation, you can draw very wrong conclusions.

You already mentioned that a recession is coming, all accompanied by high inflation and tighter central bank policy. What will all this mean for the banking business?

T.R.: The situation of zero or negative interest rates has been tough, and it was especially tough for the universal banks. Now interest rates are, let's say, more normal – the annual Euribor rate is around 2.5% – and this is good news for banks. At the same time, this level of interest rates does not cause problems for bank customers – be they household or corporate customers – and we do not see any complications with loan repayment. On its turn, if the level of interest rates increases significantly, it can become challenging, especially for customers with a lot of credit.

Is there a risk that, as interest rates continue to rise, corporate bankruptcies may follow, and individuals will stop taking loans?

T.R.: Of course, the rise in interest rates and recession in the economy will mean that the demand for loans and investment services will decrease. At the same time, it is not expected to be a dramatically large volume. Also, I have to say that we are following very closely what is happening and we do not see an increase in the number of bankruptcies in Finland.

Elmārs Prikšāns (E.P.): If we look at the Latvian market, it is generally quite conservative and the banking sector has attracted more deposits than issued loans. This means that both individuals and companies have been relatively conservative in making new commitments. It also means that corporate balance sheets are stronger and we don't see an immediate negative impact following. This especially applies to the large companies with which our bank works in the Latvian market.

T.R.: It should indeed be added here that OP Group works in all market segments in Finland, but in the Baltic States we are focused on large companies and the largest companies in the group of small and medium-sized companies. This is our niche, in which we have been working in the Latvian market for ten years already.

K.K.: I will add that many companies have reported very good performance this year. If the coming recession will be short and mild, as is currently predicted, then it does not raise a big concern. At the same time, geopolitical risks are much more serious than, for example, five years ago, so we will see how the situation develops. However, in general, the economic situation should not be considered very threatening at the moment.

Do you see differences in the Baltic States? For example, inflation is currently high across Europe, but in the Baltic States it is much higher than in a number of other countries.

T.R.: Of course, there are differences that are visible in the Baltic States. Inflation is also high in Finland – 8%, but it is lower than the European average and much lower than in the Baltic States. There are several reasons – energy prices, food prices and wage-related inflation. At the same time, our forecasts show that inflation is very close to its highest point and it will decrease already in the first half of next year. Also, it is clear that inflation will not return to the former level and inflation of around 4% can be predicted in the Eurozone.

E.P.: The differences between the Baltic States are related to the fact that here inflation is more associated with energy and food prices, and these are currently the main drivers of inflation. On the other hand, it should be emphasised that full employment is currently observed in the Baltic States and the labour market is quite heated. It is easier for citizens to cope with rising prices in such conditions than in countries where unemployment prevails.

The European Central Bank (ECB) has made yet another decision to increase the base interest rates. What will this mean for banks?

T.R.: At present, the overnight deposit rate has been increased to 1.5%. Our forecast is that rate increases will continue and this rate will be increased to 2.5%. If we look at the Euribor rate, the 12-month Euribor could fluctuate around 3% next year. Therefore, the Euribor rate could be close to the ECB base rates. This shows that the market has already taken into account the fact that the ECB's policy will become tighter, and the rise in rates is already visible.

What does this mean for the banking sector? It should be remembered here that banks have to make deposits with the central bank to ensure liquidity and previously interest rates were negative. In the summer they were already at zero level and now they are starting to grow. This is good news if we look at the profitability of banks. At the same time, central bank policy is tightening and there are not as many liquidity platforms available to banks as there once were.

Do you think the measures implemented by the ECB will help achieve the declared goals of reducing inflation?

T.R.: It is very important that the ECB puts a lot of emphasis on reducing inflation. Of course, next year inflation will be higher than the long-term goal of 2%, but it is important that all these measures are implemented. In addition, I want to emphasise that it is very important that the central banks are independent in their decisions, because there are discussions among politicians in Finland too, which show that the politicians would very much like to dictate what the central banks should do. This is not a good idea!

This is probably common to politicians in all countries.

T.R.: Of course, central bank policy creates a risk that the period of economic recession will be deeper and/or longer. But more importantly, this policy is aimed at reducing inflation.

How could bank deposit rates change over the next year?

E.P.: Corporate deposit rates will certainly follow what happens to base rates. This is of course a very interesting time because only a few months ago base rates were negative. At the same time, the rates will, of course, depend on how big the demand for deposits will be. It is currently very difficult to predict future rates, but they will definitely be positive and banks have already started paying for deposits and will continue to pay in the future as it has been in the past.

T.R.: It is also very important that what is happening in the financial markets clearly shows that the resources in these markets are now much more expensive than some time ago. This also makes deposits much more interesting in the eyes of banks and may contribute to the increase in deposit interest rates.

What about loans, because now, many were already used to low loan rates, which are also now increasing? Couldn't this cause many to think longer about whether they need a loan?

T.R.: Yes, this may have a negative impact on credit demand and companies may be less active in making investments. At the same time, I will remind you that current credit interest rates are still very moderate if we compare them to their historical levels.

K.K.: In addition, it must be remembered that the investment projects of many companies are long-term, and if the reference period is even several decades, then today's situation is not the most important when assessing the need for investment. At the same time, for example, in the segment of small and medium-sized companies, it is really evident that there is currently a lot of consideration as to whether this is the right moment to make investments.

Why does OP Financial Group not want to expand its business in Latvia?

T.R.: Overall, we are very satisfied with the development here and we want to focus on the large enterprise sector in the future as well. We have no intention to expand our activity, for example, in the field of private individuals. In Latvia, there is strong competition in the field of universal banks with three or four big players, so from our point of view it is not an easy sector to enter. As for large companies, it is a very important area of our activity in Finland and some of our clients also work in Latvia, and we have attracted local clients as well. Therefore, it is a niche of our activity where we are competitive not only in Latvia, but in all the Baltic States. OP has very high credit ratings, thus we are able to attract financing in the financial markets on more favourable terms than many other banks and we are able to be very good partners for large companies.

Therefore, we will continue as before, while increasing our market share year after year.

Do you see prospects in cooperation with the small and medium business sector in Latvia as well as in the other Baltic States?

E.P.: We have really focused more on large companies so far, but in the future it cannot be excluded that we will focus on other segments as well. At the same time, we also provide leasing services in Latvia, and they are widely used by small and medium-sized companies, among which special mention should be made of farmers.

T.R.: In order to better understand our structure, I must mention that OP Financial Group is co-owned by 2.1 million Finns and we provide a very wide range of financial services. On the other hand, the group's bank "OP Corporate Bank", headed by Katja and whose branches operate in the Baltic States, specialises in serving large and medium-sized clients, and in cooperation with institutional investors as well.

How would you describe the current situation in the Baltic States?

T.R.: If we look at business, the structure is different. For example, in the economy of Lithuania, transport and logistics play a bigger role, in Latvia there are other industries on which there is a greater focus. The culture of start-ups and the IT industry has developed strongly in Estonia. At the same time, the main indicators of economic development – for example, GDP growth – are quite similar. The same applies to economic forecasts for the coming years.

K.K.: I would like to add that currently we would expect more investments in the green energy sector in Latvia, as Lithuania and Estonia are slightly ahead in this respect.

E.P.: Of course, the Baltic markets each have their strengths, but Timo is right in that if you look from above, the development of the Baltic States is relatively the same. The uniqueness of the Baltic States is that you always have fellow members with whom you can compare yourself and compete with. It keeps you fit all the time. We ourselves often do not appreciate this factor, but it really promotes growth.

How high is the current demand for financing energy projects?

E.P.: Demand is currently growing. One reason is rising energy prices, which quite simply require companies to spend more on purchasing energy resources, but this is considered a short-term demand. On the other hand, the second reason is long-term and we see an ever-growing interest in energy production from local resources, giving preference to green energy.

As far as renewable energy resources are concerned, it is true – the Latvian market has developed relatively slowly in this area over the last few years. But now it can be seen that the development is happening much faster and there are many investment projects.

K.K.: If we look at green projects as a whole, their funding is currently growing significantly. It is a train that is moving forward very fast right now. In addition, one thing is the client's demand for such financing, the other is that the regulators have also taken a very serious look at this area and there will be more and more different requirements. This has also become a very important issue for investors. Eight out of ten investors want their portfolios to include investments in sustainability and green course projects.

How is the evaluation of green energy projects currently going on in banks, because relatively often they are implemented by new companies and it is often difficult to evaluate how successful they will be in the long term?

T.R.: There are different segments in this area as well. For example, such investments are also made by large and well-known energy companies, and their credit risk is not higher than in the implementation of other projects. But yes, start-ups also operate in this area, and their evaluation is quite a difficult issue for banks, because the risk to finance very young companies is always higher. At the same time, I will remind you that our focus is on large companies, so we mostly finance energy companies that want to become greener in their production, as well as companies that want to improve the sustainability of their operations. Mostly we are currently talking about wind and solar energy projects.

K.K.: In any case, the existing cash flow of the company is a very important criterion for the bank. If there is none, then the evaluation is very difficult.

E.P.: We have financed the last major wind farm project in Tārgale, so I can assure you that we are serious about green energy projects.

Several years ago, the so-called overhaul of the Latvian financial system took place. In your opinion, how has the Latvian financial market changed since then? Are the problems that have historically existed in the sector now a thing of the past?

T.R.: What is visible is that the volume of deposits from non-EU countries has decreased dramatically. The requirements of regulatory enactments and market regulators in this area are good news.

However, I must say that we currently work in four countries – Finland, Estonia, Latvia and Lithuania – and we would like to see more cooperation between market surveillance authorities. In general, the basic operating conditions in these countries are similar, however, from our point of view as a bank, it would be much easier to work if the market supervisors cooperated more with each other and harmonised the requirements for market participants.

E.P.: We also know that negotiations between market supervisors are taking place and we strongly support them.