Strong capital position protects the financial sector from risks – increased uncertainty in the economy and financial market

The operating environment of Finland's financial sector remained difficult in 2024, despite some small signs of a pick-up. Interest rates declined in 2024, and there are stronger signs of a turn in the Finnish economy. Sales of old dwellings are also showing signs of a recovery. The economic situation in Finland is still weak, however, which is reflected in an increase in unemployment and bankruptcies and a low level of consumer confidence. The economy is expected to remain sluggish also in the near-term, and risks of weaker-than-projected economic growth have increased.

Weaker-than-expected economic growth and higher-than-expected interest rates could increase banks’ loan losses further, hamper the situation of the real estate sector, the construction sector and real estate funds, push up the financing costs of financial sector entities and decrease earnings. The materialisation of geopolitical and trade policy risks would have implications on Finland's financial sector by, for example, increasing the possibility of weaker economic growth and raising the level of uncertainty, and amplifying the volatility of share and bond prices in the financial markets. The Finnish financial sector's direct exposures to countries and regions at the epicentre of geopolitical tensions and conflicts, such as Russia and the Middle East, are generally small. In contrast, the domestic pension and fund sectors’ investments in the US stock market, in particular, have grown strongly in recent years, which has increased the domestic financial sector's exposure to strong corrections in the US stock market. In addition, geopolitical risks may affect Finland's financial sector via indirect channels, such as more extensive disruptions in the financial markets. Cyber and hybrid threats are also still significant, and could, if they materialise, endanger the operational reliability of the financial sector's digital services.

“Finland's financial sector coped well in the turbulence experienced last year. Geopolitical risks and trade policy uncertainty are very real, however, and market unrest is considerable. Many political realities and principles have changed. In terms of the stability of Finland's financial system, this continues to underline the importance of appropriate capital and liquidity buffers, high-quality risk management and preparedness. Responding to uncertainties in the operating environment is also a supervisory priority for the Financial Supervisory Authority in 2025,” says Tero Kurenmaa, Director General of the Financial Supervisory Authority (FIN-FSA).

Banking sector's operating profit improved and capital position remained strong – moderate developments in credit risks

In 2024, the banking sector's capital ratios remained virtually unchanged and higher than the European average. The sector's Common Equity Tier 1 (CET1) capital ratio was 18.2% (12/2023: 18.3%) and the total capital ratio was 22,2% (12/2023: 22.1%). The banking sector's own funds increased due to a solid performance, which compensated for the adverse impact on capital ratios of the growth in risk-weighted assets and profit distribution. The banking sector's operating profit continued to grow, fuelled by the increase in net interest income, but the increase in net interest income slowed and started to decline slightly towards the end of the year as a result of a fall in interest rates. Net interest income was still the most significant income item of Finnish banks.

The banking sector's non-performing loans remained at a low level and were among the lowest in Europe. Non-performing loans continued to increase slightly year-on-year both in the corporate and household sector but, in the fourth quarter, the increase seems to have halted.  The development of credit risks differed considerably, however, between the banks and the various lender segments and industries. The quality of the credit stock continued to weaken in consumer credit as well as in the corporate sectors that have in recent years suffered from the increase in debt-servicing expenses and the weak business cycle.

The banking sector's liquidity situation and liquidity position remained strong. Deposits from the public increased and growth in funding costs came to an end. The refinancing of debt securities issued during the period of low interest rates may, however, further increase the costs of banks’ market funding. Diversified funding sources and the strong capital position of banks improve the availability and terms of market-based funding and provide protection against financial market disruptions.

Employee pension institutions’ solvency ratio remained at the level in the previous quarter

The employee pension sector's solvency ratio was 129.3% at the end of 2024, i.e. remained at the level in the previous quarter. The solvency ratio strengthened from the previous year (12/2023: 126.7%). Solvency capital increased in 2024 by EUR 5.4 billion. During the fourth quarter, the solvency limit rose at a slightly higher rate than solvency capital, but the solvency position remained at the level in the previous quarter (1.6).

The employee pension sector’s return on investment in 2024 was 9.1%. Return on equity investment was 13.7%, return on fixed-income investment 4.7%, and that of other investment 9.5%. The return on real estate investments was negative.

In the employee pension sector’s investment allocation, the weight of equities reached in the fourth quarter a record high level, nearly 53%.

The employee pension sector's risk-bearing capacity against a decline in share prices weakened slightly in the fourth quarter due to, in particular, higher risk-taking but remained at a reasonable level.

Life and non-life insurance sectors’ solvency remained good despite weakening

The life insurance sector's solvency ratio was 222.2%, i.e. it decreased compared with the previous year (12/2023: 234.6%). The non-life insurance sector’s solvency ratio was 254.6% (12/2023: 265.5%). In both sectors, the solvency capital requirement increased, which was attributable to, for example, the strong return on investment and changes in the adjustment of the equity capital charge that evens out the solvency impact of volatility in return on equity investment. The life insurance sector's own funds remained unchanged, and in the non-life insurance sector, the amount of own funds grew, despite the fact that the decline in the risk-free yield curve increased the amount of technical provisions and the expected dividend distributions decreased the amount of own funds.

The life insurance sector's return on investment was 4.9%, and the non-life insurance sector's 7.5% in 2024. The majority of the return on investment was generated by fixed-income and equity investments. The life insurance sector's return on real estate investment remained slightly negative, but in the non-life insurance sector the return was already positive.

Premiums written on life insurance increased on the previous year, and the increase was strong, particularly in investment insurance. The amount of claims paid remained virtually unchanged compared to the previous year. The slight growth in premiums written in non-life insurance was generated mainly from health insurance and motor liability insurance. Despite the notable rise in claims incurred, the combined ratio improved towards the end of the year and remained below 100%.

The pick-up in financial markets was reflected as positive developments in the fund sector and investment firms

In Finland's fund sector, the amount of capital reached a new record, and was EUR 205 billion at the end of 2024. The most significant factor underlying the growth was investment in the United States, the value of which increased considerably in 2024, fuelled by, in particular, the strong developments in the value of US listed shares. At the end of 2024, about a quarter of the investment assets of UCITS funds was in US instruments.

The situation of open-end real estate funds remains challenging in the current real estate market. A total of 10 open-end real estate funds have activated their liquidity management tools. The share of real estate funds’ debt capital has increased since the end of 2022, but has remained reasonable.

Domestic investment firms’ own funds and liquidity relative to the regulatory requirements are at a good level.

Positive developments in the investment market supported the profit performance of management companies and investment firms in 2024, even though their overall financial result remained below the level in 2023. This was due to, for example, non-recurring items and changes in business models in the case of individual entities. In 2024, many management companies and investment firms improved their profits, however, compared with the previous year.

For further information, please contact:

Samu Kurri, Head of Department, Digitalisation and Analysis. Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030, Mon–Fri 9:00–16:00.

Appendices

FIN-FSA website page ‘Financial position and risks of supervised entities’ (in Finnish)