Good results and strong growth in green lending
Kommunalbanken AS (hereinafter KBN) granted new loans totalling NOK 49 billion in 2021. These loans financed investment in projects such as schools, health and care facilities, and water and wastewater systems.
Illustration: Ola Roald Arkitektur
As KBN submits the annual report for 2021, Russia has invaded Ukraine. The US, the EU and the UK have introduced extensive sanctions against Russia, particularly against the country’s financial institutions. In addition to the human consequences of these acts of war, the actions affect the world economy. This has already been reflected in increased volatility in energy prices, currency fluctuations and stock market turmoil. The impact of the market turmoil on KBN's operations is considered to be limited, and is mainly related to the consequences of volatility in exchange rates. The market situation is not expected to have a significant impact on KBN's ability to offer loans to its customers.
Solid financial results
Profit for the year was NOK 1,208 million in 2021 as compared to NOK 1,159 million in 2020. KBN's revenue is primarily generated from its lending activities. Net interest income for 2021 was somewhat lower than in 2020-this was a result of the low level of interest rates as well as a reduction in lending margins. KBN's profit for the year of 2021 was positively affected by unrealised gains from changes in the value of financial instruments during the year. KBN's return on equity after tax for 2021 was 7.1%.
- KBN's robust financial results, the good growth in its lending for projects with a clear climate ambition, its efficient operations and its high level of customer satisfaction show that KBN is fulfilling its role in society successfully, says CEO Jannicke Trumpy Granquist.
KBN Annual Report
Strong growth in green lending
KBN's portfolio of green lending for investment in climate and environment friendly projects increased by 23%, equivalent to NOK 6.7 billion, in 2021. KBN disbursed a total of NOK 7.9 billion in green loans to 97 different projects in 2021. At the end of 2021, 126 municipalities, four county authorities and a total of 73 other customers had green loans from KBN. KBN's outstanding green lending totalled NOK 35.1 billion, of which NOK 32.9 billion was in line with KBN's Green Bond Framework 2016 or newer, and hence are financed with green bonds. The environmental impact of these loans is included in KBN's separate Impact Report. KBN‘s Criteria Document for green lending is updated annually in pace with developments in the market.
- The Norwegian local government sector’s projects often have an economic life of around 40-50 years and will accordingly be with us well into the low and zero-carbon age. We are pleased to see a growing number of municipalities investing in climate friendly projects, says Granquist.
KBN's lending increased in total by NOK 4.8 billion in 2021, equivalent to 1.5%. Growth was affected by large extraordinary repayments from toll-road financed road building projects and by a welcome reduction in the portfolio of loans granted on certificate loan terms which represent weak profitability. The overall growth in lending to municipalities and county authorities, which is included in the calculation of KBN’s market share was NOK 8 billion, equivalent to 3.0% in 2021. After adjusting for the reduction of lending on certificate loan terms, the total increase in lending to this customer group was NOK 14.6 billion, representing a growth rate that has been very stable over recent years. Demand for loans on fixed rate terms has increased over recent years, but in 2021 growth in fixed rate lending was much slower. The reasons for this may have been that many municipalities and county authorities already have a sufficiently high proportion of fixed rate borrowing, and that the fixed interest rates available increased over the course of 2021.
Good access to the capital markets
New long-term borrowings amounted to NOK 97 billion in 2021, as compared to NOK 108 billion in 2020. The reduction in new borrowings was primarily due to less debt maturing in 2021 than in 2020 and a stronger Norwegian krone exchange rate in 2021. KBN's funding program has not been adversely affected by the coronavirus pandemic, and KBN enjoyed good access to the capital markets throughout 2021. KBN increased the currency diversification of its funding portfolio over the course of 2021. The proportion of new borrowing that was denominated in US dollars decreased from 83% in 2020 to 61% in 2021.
The initiative to replace the most important international reference interest rate (LIBOR) is progressing. KBN is in the process of amending relevant contracts to use what is expected to be the new market standard in accordance with the standards under continuous development by ISDA. Work is also underway internally to map and analyse the risks that may result from the transition to and use of new reference rates. KBN became the first Norwegian financial institution to issue bonds using the new USD SOFR reference rate in April 2021. This issuance was well received by the market.
KBN is one of the most active Norwegian issuers of green bonds and is one of the leading participants in the development of green finance in the Nordic region. KBN's green bonds finance its loans to customers for their green projects. KBN's Green Bond Framework was updated in spring 2021, and further develops the earlier 2016 framework which it replaces. KBN issued three green bonds in 2021 with a total nominal value equivalent to NOK 9.8 billion and denominated in US, Australian and Canadian dollars respectively.
Well capitalized
KBN's total primary capital on 31 December 2021 was NOK 19,711 million. Of this amount, NOK 15,320 million is common equity Tier 1 capital. The common equity Tier 1 capital adequacy ratio at 31 December 2021 was 18.8%, the Tier 1 capital adequacy ratio was 21.7%, and the total capital adequacy ratio was 24.2%. The leverage ratio at 31 December 2021 was 3.9%.
On 31 December 2021 the capital requirements to which KBN was subject, including the pillar 2 capital requirement, required KBN to have a common equity Tier 1 capital adequacy ratio of 15.1%, a Tier 1 capital adequacy ratio of 16.6% and a total capital adequacy ratio of 18.6%. KBN is also subject to a requirement to have a leverage ratio in excess of 3.0%. KBN manages its operations to ensure it complies with the regulatory requirements in force at any time. There were no significant changes to regulatory requirements during the course of the most recent accounting year. The changes to legislation to implement the new EU rules to strengthen banks' resilience and better prepare for the future (the Banking Package) into Norwegian law were approved on 18 June 2021 and are expected to enter into force in Norway during the first half of 2022.