The operating profit, excluding exceptional items, increased from EUR 9 million in the first half-year of 2019 to EUR 26 million in the first half-year of 2020. The higher operating profit is due to increased interest margin (EUR 17 million), a higher fair value result (EUR 3 million) and higher fee income (EUR 1 million). Increased operating expenses (EUR 3 million) and a higher addition to the loan loss provision (EUR 1 million) are more than compensated.
The interest margin in 2020 increased by EUR 17 million compared to the same period in 2019. EUR 10 million of the higher net interest margin is due to the acquired mortgage and saving portfolio(s) in 2019. The compensation for early redemptions increased and contributed EUR 10 million to the improved result. The net impact of lower funding costs and lower gross margin on the mortgage portfolio resulted in a decrease of the interest margin by EUR 3 million.
The higher fee income is due to the increased mortgage portfolio serviced by Achmea Bank for Achmea Pensioen- en Levensverzekeringen N.V.. The fair value result (first half-year 2019 minus EUR 3 million, first half-year 2020 negligible) is an accounting result that is mainly compensated in other reporting periods, generally reflecting a pull to par as the underlying derivatives (used for hedging interest rate risk) approach maturity.
Compared to the same period in 2019, operating expenses increased by EUR 3 million, mainly due to additional costs related to the acquired portfolios of last year. Corrected for this, the underlying operating costs are decreasing in line with the strategy of the Bank. Achmea Group has the ambition to grow in the mortgage market. In line with this ambition, Achmea is concentrating its operational mortgage activities at one location in Amsterdam. The commercial activities will be concentrated in Apeldoorn. For Achmea Bank this means transferring its mortgage operations activities from Tilburg to Amsterdam and its commercial activities to Apeldoorn at 1 October 2020. The expected reorganisation costs of EUR 2 million are provisioned for and were already included in the operating expenses of 2019.
The net addition to the loan loss provision increased from EUR 2 million to EUR 3 million in the first six months of 2020, of which EUR 1 million relates to the Acier portfolio. The addition in 2020 is mainly related to a worsening of the macro-economic outlook as a result of the COVID-19 crisis and the potential impact of this on our mortgage portfolio and the impact of the clients using the Covid-19 payments holiday.
Since March 2020, Achmea Bank offers the possibility of a payment holiday to mortgage customers with payment difficulties directly related to the COVID-19 crisis. With this payment holiday customers temporarily do not have to pay interest and principal on their mortgage loan. By deferring the mortgage payments, it is more likely that customers will not get liquidity problems and can continue living in their homes. This is one of the solutions that Achmea Bank offers to its mortgage customers. The number of clients using the COVID-19 payment holiday is relatively low (0.5%), the impact on the loan loss provision amounts EUR 2 million.
The production of new mortgages remained stable at EUR 747 million (2019: EUR 788 million), of which EUR 570 million for Achmea Pensioen- en Levensverzekeringen N.V. (2019 EUR 461 million). Due to the decreased mortgage productions for its own balance sheet and the increased level of early redemptions in the first half of 2020, the regular mortgage portfolio (including the portfolios acquired in 2019) of Achmea Bank decreased from EUR 11.4 billion by the end of 2019 to EUR 10.8 billion by the end of June 2020.
The savings portfolio remained stable at EUR 7.1 billion (2019 EUR 7.2 billion). In 2020 Achmea Bank redeemed EUR 0.9 billion RMBS notes and issued a 5Y conditional pass-through covered bond of EUR 0.5 billion. The Bank has a diversified funding mix, comprising retail funding as well as unsecured and secured wholesale funding. The Bank retained its sound liquidity position with liquidity ratios well above internal and external limits. In addition the Bank maintains different maturity profiles in its funding instruments to prevent potential future refinancing concentration risk.
The Total Capital ratio and the Common Equity Tier 1 (CET1) increased to 21.0% (2019: 19.2). The increase is mainly due to the addition of the 2019 result and the decreased mortgage portfolio. In April 2020, Achmea Bank N.V. has decided to suspend dividend distributions to its shareholder until there is more clarity regarding the impact of the COVID-19 crisis. Thereby following the call from the European Central Bank (ECB) and the Dutch Central Bank (DNB). In the second half of 2020, Achmea Bank will determine whether a dividend can be paid out, based on recent developments of the COVID-19 crisis, recent statements of regulators and its financial position.
S&P confirmed the Issuer Credit Rating. The Outlook has been changed per 15 June 2020 from A-/ negative to A-/stable and Fitch confirmed the issuer Default Rating of A/Stable per 29 April 2020.
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