Report for 1st quarter 2024

KBN has a strong market position and seeks to use this to promote communities that are sustainable, both economically, socially and environmentally. We are committed to ensuring municipalities make future oriented choices when investing, and we offer a slightly lower interest rate on loans for projects that are ambitious from a climate perspective. We also use some of our resources to improve knowledge of climate change and risk, and interest rates, as well as economy and debt management for municipalities’ elected representatives and administrative teams.

KBN finances its lending to the local government sector by borrowing money directly in the capital markets. KBN is today one of the largest Norwegian borrowers in the international capital markets, with a yearly borrowing program of around NOK 100 billion. KBNs green bonds finance the transition to a low-carbon, climate resilient future in Norwegian local societies. KBN has more than ten years’ history as an issuer of green bonds.

KBN has a conservative risk profile and is one of the few AAA-rated financial institutions in the world. KBN has never suffered any losses on its lending. As a state-owned company with a public mandate, strong capital base, robust operations and low risk appetite, KBN holds the highest possible credit rating from both Standard and Poor’s and Moody’s.

KBN’s lending grew by NOK 3 billion in the first quarter of 2024, with green lending accounting for NOK 1.5 billion of this growth. Green lending represented 15.7% of KBN’s total lending at the end of the quarter. KBN’s net interest income increased from NOK 508 million in the first quarter of 2023 to NOK 553 million in the first quarter of 2024. Good growth in profitable lending products together with higher interest rates contributed to this increase in KBN’s income.

KBN’s core earnings¹ Profit after tax adjusted for net unrealised gain/(loss) on financial instruments (in accordance with note 2) adjusted for estimated tax at 25% tax rate, and adjusted for Portion allocated to owners of additional Tier 1 capital. totalled NOK 308 million in the first quarter of 2024, compared to NOK 280 million in the first quarter of 2023. Increased net interest income resulting from higher interest rates and profitable growth was the main reason for the increase in core earnings.

KBN’s net interest income totalled NOK 553 million in the first quarter of 2024, as compared to NOK 508 million in the corresponding period of 2023. There was relatively little change in money-market interest rates in the quarter. Norges Bank kept its key policy rate unchanged at its January and March meetings. Norway’s key policy rate currently stands at 4.5%.

KBN’s result for the accounting period in the first quarter of 2024 was a profit of NOK 390 million, compared to a profit of NOK 389 million in the same period in 2023. In the first quarter of 2024, KBN recognised a net gain on financial instruments totalling NOK 81 million, as compared to a net gain of NOK 114 million in the first quarter of 2023, with realised gains from market transactions representing NOK 25 million of the net gain in the first quarter of 2024 compared to NOK 1 million in the first quarter of 2023. Unrealised gains amounted to NOK 55 million in the first quarter of 2024, compared to NOK 114 million in the same period in 2023. KBN’s fixed-rate lending and associated hedging instruments contributed a net unrealised gain of NOK 68 million in the first quarter of 2024, primarily as a result of a moderate decrease in credit spreads for the local government sector. There was an equivalent net unrealised loss on fixed-rate lending and associated hedging instruments of NOK 116 million in the first quarter of 2023. KBN started to apply hedge accounting to all its new fixed rate lending with effect from 1 January 2022. The application of hedge accounting to KBN’s fixed-rate lending will over time reduce the size of the portfolio of fixed-rate loans carried at fair value, and this will reduce the unrealised gains and losses included in KBN’s earnings.

KBN’s liquidity portfolio and associated hedging instruments contributed a net unrealised gain of NOK 51 million for the first quarter of 2024, while KBN's own bonds and associated hedging instruments contributed a net unrealised loss of NOK 64 million to its result from ordinary activities. KBN’s unrealised gains and losses are expected to reverse, either as market conditions normalise or as the instruments approach maturity.

KBN’s provision for losses is limited due to the fact that Norwegian municipalities cannot be declared insolvent. KBN’s liquidity management portfolio is also of very high credit quality. KBN reduced its provision for losses by NOK 9 million in the first quarter of 2024.

KBN’s total operating costs for the first quarter of 2024 were NOK 96 million, compared to NOK 77 million in the same period in 2023. The increase in operating costs was mainly due to inflation and the weakness of the Norwegian krone, increased activity in developing and improving KBN's operations, and hiring in temporary employees pending new appointments.

KBN’s annualised return on equity in the first quarter of 2024 was 7.7%, compared to 8.9% in the first quarter of 2023. Based on its core earnings, KBN’s annualised return on equity in the quarter was 6.8%, unchanged from the same period in 2023. The return requirement set for KBN by its owner for the 2022-2024 period is 5.5%.

KBN’s total comprehensive income in the first quarter of 2024 was NOK 318 million, compared to NOK 343 million in the first quarter of 2023. KBN’s total comprehensive income includes gains and losses on KBN’s own bonds resulting from changes to KBN’s own credit risk. For the first quarter of 2024, there was a loss from changes to KBN’s own credit risk of NOK 97 million, as compared to a loss of NOK 61 million in the same period in 2023.

Table 1: Result for the period and total comprehensive income

KBN’s lending portfolio totalled NOK 357 billion² Principal amount at the end of the first quarter of 2024. The lending portfolio increased by NOK 3.0 billion in the first quarter of 2024, while it increased by NOK 1.6 billion in the same period in 2023. The relatively unattractive terms available to KBN’s customers in the capital markets continued to create better market conditions for KBN’s long-term instalment-based loans in the first quarter.

KBN continued to experience a good level of growth in its green lending, and its portfolio of green loans increased by NOK 1.5 billion in the first quarter of 2024, as compared to NOK 1.3 billion in the same period in 2023. KBN's green lending in the first quarter of 2024 included green loans to the municipalities of Trondheim and Fredrikstad as financing for environmentally friendly projects. At the end of the first quarter of 2024, KBN’s green lending represented 15.7% of its overall lending portfolio.

The annual rate of debt growth in the local government sector as at the end of February 2024 was calculated to be 8.0%. After adjusting for borrowing from the Norwegian State Housing Bank, the rate of debt growth was 7.8%. After adjusting for borrowing from the Norwegian State Housing Bank, KBN’s market share at the end of the first quarter of 2024 was 50.4%. The market conditions for new lending were good in the first quarter of 2024. However, a high rate of debt growth among KBN’s customers, particularly in January, resulted in KBN’s market share at the end of February being somewhat lower than at the end of 2023.

Inflation slowed over the first quarter of 2024, but remains materially above the targets of the central banks of many countries across the world, including in Norway. The market now expects that the rate of inflation will continue to fall, and that peak interest rates have now been reached. The rate of inflation in Norway was running at 3.9% at the most recent assessment in March, while core inflation was 4.5%. The goal of monetary policy is for the annual rate of growth in the consumer price index to be as close as possible to 2% annual growth. It is uncertain how long it will take before inflation falls to the target rate. The US dollar and Euro strengthened against the majority of currencies in the first quarter of 2024, including the Norwegian krone. The Norwegian krone continues to be at a historically low level.

Credit spreads on local government and covered bonds were somewhat lower in the first quarter of 2024. The outlook for future changes in the spreads on local government and covered bonds is uncertain, both in Norway and internationally.

KBN enjoyed good access to the international capital markets in the first quarter of 2024 and completed all its funding transactions as planned. The weakness of the Norwegian krone relative to the US dollar increased KBN’s liquidity as a result of liquidity inflows from cash collateral for currency hedging instruments over the first quarter of 2024, and KBN's funding activities were therefore somewhat less extensive. In the first quarter of 2024, KBN’s new borrowings totalled approximately NOK 38.2 billion through 15 bond issues in six currencies, as compared to NOK 24.5 billion in the first quarter of 2023.

KBN continues to enjoy low borrowing costs and good market access thanks to its AAA/Aaa rating.

Chart 2: New borrowings by currency in the first quarter of 2024

KBN’s liquidity portfolio totalled NOK 116 billion³ Principal amount at the end of the first quarter of 2024, as compared to NOK 110 billion at the end of the first quarter of 2023. KBN’s liquidity portfolio is managed with the aim of matching its financing requirements, including lending growth, for the subsequent twelve months, and it is managed on the basis of a low-risk investment strategy.

The liquidity portfolio is principally held in zero-risk-weighted assets that are particularly liquid. Investments denominated in foreign currencies represented 56% of the portfolio at 31 March 2024. Fluctuations in the value of the Norwegian krone relative to other currencies will therefore result in fluctuations in the size of the liquidity portfolio in NOK terms.

KBN’s capital adequacy at the end of the first quarter of 2024 was in excess of the requirements set by the authorities.

Table 2: Capital adequacy key figures

KBN’s total assets at the end of the first quarter of 2024 amounted to NOK 531 billion, up from NOK 505 billion at the end of the first quarter of 2023 and from NOK 522 billion at the end of 2023. The increase was primarily due to growth in KBN’s lending and an increase in the NOK value of balance sheet assets as a result of currency conversion.

KBN’s Pillar 2 capital requirement at the end of the first quarter consisted of 2.0% of the basis for calculation under Pillar 1. The Pillar 2 requirement is intended to address risks that the undertaking is exposed to and that are not, or are only partially, covered by the general capital requirements in Pillar 1. The requirement must be satisfied with at least 56.25% common equity Tier 1 capital and at least 75% Tier 1 capital.

KBN’s leverage ratio at the end of the first quarter of 2024 was 4.1%, as compared to the requirement of 3.0%

Capital adequacy figures are sensitive to large fluctuations in exchange rates, particularly the USD-NOK rate, because these impact the size of KBN’s balance sheet through the conversion into NOK. In addition, changes in the value of KBN’s outstanding currency hedging instruments lead to fluctuations in cash collateral that influence KBN’s capital adequacy key figures. KBN has internal buffers that are intended to ensure its capital adequacy does not fall below the regulatory requirements as a result of such exchange rate fluctuations.

In 2022, KBN increased its long-term target for reducing its own emissions to a reduction of at least 55% by 2030 compared to the 2019 level. This emissions trajectory implies that KBN’s CO2 emissions in 2024 should be a maximum of 45% of the 2019 level, which corresponds to approximately 86.3 tonnes of CO2e for the year. KBN’s calculated CO2e emissions for the first quarter of 2024 were 31,0 tonnes of CO2e⁴ KBN’s greenhouse gas accounting is based on the Greenhouse Gas Protocol Corporate Standard. For the purposes of this greenhouse gas accounting, KBN’s own emissions consist of calculations regarding its Scope 1 and Scope 2 emissions., which is an increase from the first quarter of 2023.

At its monetary policy committee meeting in March 2024, Norges Bank announced that Norway’s key policy rate will likely be held steady for some time. Norges Bank stated that the reason for this is the need to ensure inflation returns to its target of 2% per year within a reasonable time horizon. The future path of the policy rate thereafter will depend on economic developments.

Credit spreads for local government sector issuers in the capital markets continue to be at historically high levels. It is uncertain whether credit spreads will fall over 2024 or whether they will stabilise at a higher level. This, in combination with the increases in money market rates, has made it more expensive for our customers to finance their investment spending. It is expected that this may affect the overall demand for new financing in 2024.

KBN will continue to provide its customers with attractive financing for local government sector projects across Norway.

Oslo, 26 April 2024

The Board of Directors and Chief Executive Officer of Kommunalbanken AS

Kommunalbanken AS (KBN) prepares its financial statements in accordance IFRS® Accounting Standards as adopted by the EU. The condensed interim financial statements as of 31 March 2024 are prepared in accordance with IAS 34 Interim Financial Reporting and follow the same accounting policies and methods of computation as presented in the annual financial statements for 2023. The interim financial statement does not include all the information required in a full annual financial statement and should be read in conjunction with the annual financial statement for 2023.

The company has only one operating segment. There is thus no segment information beyond the note information provided on lending to customers and the business as a whole.

The preparation of financial statements in accordance with IFRS requires management to make estimates and judgments and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses. Estimates and judgments are based on historical experience and expectations about future developments.

The fair value of financial instruments not traded in an active market or lacking readily available quoted prices on the balance sheet date is determined using valuation models. When inputs into valuation models cannot be directly derived from observable market data, management makes assessments and uses assumptions related to credit risk and liquidity risk in financial instruments. Although judgmental assessments and assumptions are largely based on actual market conditions on the balance sheet date, they may introduce uncertainty into the recognised amounts.

From the second half of 2023, KBN has changed the presentation of interest from financial instruments in fair value hedging. This entails that interest that was previously presented as interest income or expense measured at fair value in the table above, is now presented as interest income or expense measured at amortised cost. The change only affects the presentation of interest on financial derivatives. Historical data has been adjusted accordingly.

(Amounts in NOK 1 000 000)

Changes in fair value of liabilities due to changes in own credit risk are not included in the line net gain/(loss) on financial instruments in the table above. Such fair value changes are recognised in other comprehensive income in the statement of comprehensive income. The change in fair value arising from debt securities issued presented in the above table, is due to changes in parameters other than own credit risk.

Changes in fair value are the result of changes in market parameters - mainly prices on bonds, interest rates, credit spreads, basis swap spreads and FX rates, and are reflected in carrying amounts in the statement of financial position and in the income statement. As KBN has limited currency and interest rate risk, the changes in relevant parameters will mostly be symmetric on the asset and liabilities sides of the statement of financial position and will therefore only to a small extent cause net effects in the income statement. Changes in credit spreads for investments in the liquidity portfolio, fixed interest-rate loans to customers measured at fair value and issued debt securities, as well as changes in basis swap spreads, may on the other hand lead to significant effect in income statement and in the statement of comprehensive income.

KBN hedges currency risk. The bank's guidelines require hedging of all currency risk associated with positions in foreign currency. However, short-term net positions may arise related to income statement and balance sheet items in USD and EUR. KBN's framework for currency risk in these currencies is set at 1.6% of regulatory capital. This means that net income effects from short-term exchange rate fluctuations are limited. Effects from the currency conversion of principal amounts from non-derivative interest-bearing instruments in foreign currency, including certificates and bonds and debt securities issued, as well as from interest and fees are presented net in the income statement. Corresponding changes in fair value from FX derivatives used as hedging instruments in the economic hedging of the mentioned currency exposure, are presented net along with exchange differences from the hedged item. In the tables above, only the effects of exchange rate changes on fair value changes and changes in hedging value are presented.

(Amounts in NOK 1 000 000)

Methods used for the determination of fair value is categorised within three levels, which reflect different degrees of valuation uncertainty:

Level 1 - Quoted prices in active markets for identical assets and liabilities
Level 2 - Valuation techniques with observable inputs
Level 3 - Valuation techniques where inputs are to a significant degree unobservable

See Note 9 in the Annual Report for further information about valuation techniques, inputs, value change analysis and sensitivities. Level 2 includes fixed rate loans to customers granted before 1 January 2022. Fixed rate loans to customers are granted on an individual basis and are not traded in an active market. Fair value is calculated using the discounted cash flows method where discount rates are derived from observable money market interest rate yield curves. Discount rates are adjusted for credit and liquidity risk linked to the relevant securities based on observable credit spreads for Norwegian municipalities at the balance sheet date. For fixed rate loans to customers with an installment structure, a discretionary liquidity premium is added to the valuation, but this does not constitute a significant part of the input data in the valuation.

Financial instruments measured at fair value in KBN's Statement of financial position are distributed in the following levels:

(Amounts in NOK 1 000 000)

KBN has reassessed the categorisation of fixed rate loans to customers at fair value in the fair value hierarchy. KBN considers that all the bank's fixed rate loans to customers at fair value should be included in level 2, since both money market interest rate yield curves and credit spreads are considered observable, and non-observable input data do not constitute a significant proportion of input data. Historical data have been adjusted accordingly. The change applies correspondingly to information on measurements at fair value for loans to customers measured at amortised cost in note 10 of the annual report.

Reconciliation of changes in Level 3

The transfers into and out of Level 3 are mainly due to changes in market conditions that affect the assessment of inputs to the valuation techniques during the reporting period. Year to date 2024 there have been no transfers from Level 2 to Level 1.

Effects from the currency conversion of principal amounts from non-derivative interest-bearing instruments in foreign currency and from interest and fees, are presented net in the income statement. Corresponding changes in fair value from currency derivatives used as hedging instruments in the economic hedging of the mentioned currency exposure, are presented net along with FX differences from the hedged item.

Net unrealised fair value changes for loans to customers, commercial paper issued, debt securities issued as well as subordinated loans are included in the income statement in net gain/(loss) on financial instruments, with the exception of unrealised fair value changes due to a change in own credit risk. Unrealised fair value changes due to a change in own credit risk are included in the statement of comprehensive income as other comprehensive income.

Sensitivity analysis, level 3

The table below shows the impact of a 10 bp increase in the discount rate for financial assets and liabilities in Level 3.

The below table shows expected credit loss as part of the carrying amount of loans to customers and commercial paper and bonds at the end of the period.

The below table shows a specification of the period’s change in expected credit loss that is recognised in the income statement.

All assets are allocated to stage 1 at initial recognition. On subsequent reporting dates, stage 1 allocation means that there has been no significant increase in credit risk since initial recognition for that particular asset. An allocation to stage 2 on a subsequent reporting date represents a significant increase in credit risk since initial recognition, while stage 3 implies that the asset is credit impaired. Stage 1 requires the calculation of a 12-month expected credit loss that is recognised in the income statement and statement of financial position. Assets allocated to stages 2 and 3 require the calculation of a lifetime expected credit loss, recognised in the income statement and statement of financial position. The assets are allocated back to lower stages if the credit risk is since reduced. Actual credit losses have never taken place during KBN’s history.

All exposures are assessed to be in stage 1, both as of 31 March 2024, 31 March 2023 and 31 December 2023.

(Amounts in NOK 1 000 000)

Amounts in the tables below represent actual credit exposure.

Primary capital has been calculated under Capital Requirements Regulation (CRR). Unrealised gain/(loss) on liabilities that is due to changes in own credit risk is related to debt securities issued.