Report for 3rd 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.

_{* Aggregate customer financing is the sum of KBN’s lending portfolio and KBN’s portfolio of municipal bonds in the liquidity portfolio, which are included as a part of KBN’s financing of customers.}

KBN’s net interest income totalled NOK 595 million in the third quarter of 2024, compared to NOK 556 million in the third quarter of 2023. Growth in profitable lending products over the last twelve months together with higher interest rates contributed to this increase in KBN’s income. KBN’s aggregate customer financing grew by NOK 8.0 billion in the third quarter of 2024, with green lending accounting for NOK 5.5 billion of this growth. Green lending represented 17.1% of KBN’s total lending at the end of the third quarter.

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. This result measure is included to give relevant information about the company's underlying operations. totalled NOK 345 million in the third quarter of 2024, compared to NOK 298 million in the third quarter of 2023. KBN’s net interest income totalled NOK 595 million in the third quarter of 2024, as compared to NOK 556 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 September meeting. Norway’s key policy rate has remained unchanged at 4.5% throughout 2024.

KBN’s result for the accounting period in the third quarter of 2024 was a profit of NOK 310 million, compared to a profit of NOK 197 million in the same period in 2023. In the third quarter of 2024, KBN recognised a net loss on financial instruments totalling NOK 54 million, as compared to a net loss of NOK 191 million in the third quarter of 2023. These net losses comprise the sum of the realised and unrealised gains and losses recognised by KBN. Realised gains from market transactions of NOK 47 million were included in the net loss on financial instruments reported for the third quarter of 2024, while there was a net realised loss from market transactions of NOK 5 million in the third quarter of 2023. Unrealised losses amounted to NOK 101 million in the third quarter of 2024, compared to unrealised losses of NOK 187 million in the same period in 2023. KBN’s fixed rate lending and associated hedging instruments contributed a net unrealised gain of NOK 64 million in the third 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 gain on fixed rate lending and associated hedging instruments of NOK 152 million in the third quarter of 2023. KBN started to apply hedge accounting to all its new fixed rate lending with effect from 1 January 2022. KBN’s introduction of hedge accounting to its 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 net unrealised gains and losses included in KBN’s earnings. At the end of the third quarter of 2024, 50% of KBN’s portfolio of fixed lending was carried at fair value.

KBN’s liquidity portfolio and associated hedging instruments contributed a net unrealised loss of NOK 39 million for the third quarter of 2024, while KBN's own bonds and associated hedging instruments contributed a net unrealised loss of NOK 126 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 expected credit losses is very 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 increased its provision for expected credit losses by NOK 4 million in the third quarter of 2024.

KBN’s total operating costs for the third quarter of 2024 were NOK 102 million, compared to NOK 87 million in the same period in 2023. The increase in operating costs was primarily due to inflation and the weakness of the Norwegian krone, a higher level of activity in developing and improving KBN's operations, and hiring in temporary employees pending new appointments.

KBN’s core earnings² 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. This result measure is included to give relevant information about the company's underlying operations. in the first nine months of 2024 totalled NOK 984 million as compared to NOK 938 million in the first nine months of 2023. KBN’s net interest income in the first nine months of 2024 was NOK 1,699 million, compared to NOK 1,572 million in the same period in 2023. The increase was primarily due to higher interest rates in combination with lending growth.

KBN’s result for the period in the first nine months of 2024 was a profit of NOK 1,194 million as compared to a profit of NOK 866 million in the same period in 2023. KBN recognised a net gain on financial instruments totalling NOK 219 million in the first nine months of 2024, compared to a net loss totalling NOK 125 million in the same period in 2023.

KBN’s total operating costs for the first nine months of 2024 were NOK 285 million, compared to NOK 238 million in the first nine months of 2023. The increase in operating costs was primarily due to inflation and the weakness of the Norwegian krone, a higher level of activity in developing and improving KBN's operations, and hiring in temporary employees pending new appointments. KBN’s cost-to-income ratio³ Operating expenses as a percentage of the sum of net interest income and total other operating income adjusted for net unrealised gains/losses on financial instruments (in accordance with note 2). for the first nine months of 2024 was 16.7%, compared to 15.1% in the same period in 2023.

KBN’s annualised return on equity in the first nine months of 2024 was 8.0%, compared to 6.3% in the same period in 2023. Based on its core earnings, KBN’s annualised return on equity in the first nine months of 2024 was 7.3%, compared to 7.6% in 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 nine months of 2024 was NOK 1,024 million, compared to NOK 758 million in the first nine months 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 nine months of 2024, there was an unrealised loss from changes to KBN’s own credit risk of NOK 227 million, as compared to an unrealised loss of NOK 143 million in the same period in 2023.

KBN’s lending portfolio totalled NOK 365 billion⁴ Principal amount at the end of the third quarter of 2024, while aggregate customer financing⁵ Aggregate customer financing is the sum of KBN’s lending portfolio and KBN’s portfolio of municipal bonds in the liquidity portfolio, which are included as a part of KBN’s financing of customers. totalled NOK 369 billion⁶ Principal amount at the end of the third quarter. KBN's aggregate customer financing increased by NOK 8.0 billion in the third quarter of 2024, as compared to an increase of NOK 5.6 billion in the third quarter of 2023. The main reason for the growth in the third quarter of 2024 was a high level of demand for new loans.

KBN continued to experience a good level of growth in its green lending, and its portfolio of green loans increased by NOK 5.5 billion in the third quarter of 2024, as compared to NOK 2.4 billion in the same period in 2023. KBN's green lending in the third quarter of 2024 included green loans for an upper secondary school in Trondheim, a water and wastewater project in Oslo, and Bergen Light Rail. At the end of the third quarter of 2024, KBN’s green lending represented 17.1% of its overall lending portfolio.

The annual rate of debt growth in the local government sector as at the end of September 2024 was calculated to be 9.5%. After adjusting for borrowing from the Norwegian State Housing Bank, the rate of debt growth was 9.3%. The debt growth is expected to fall towards the end of the year. After adjusting for borrowing from the Norwegian State Housing Bank, KBN’s market share based on its aggregate customer financing as at the end of the third quarter of 2024 was 51.1%.

Inflation has slowed in 2024 and is approaching 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 3.0% at the most recent assessment in September, while core inflation was 3.1%. 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. The US dollar and Euro remained relatively stable against the majority of currencies in the third quarter of 2024, including the Norwegian krone.

The credit spreads on local government and covered bonds fell through the third 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 third quarter of 2024 and completed all its funding transactions as planned. In the first nine months of 2024, KBN’s new borrowings totalled approximately NOK 83 billion through 28 bond issues in eight currencies, as compared to NOK 63 billion in the corresponding period 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 six months of 2024

KBN’s liquidity portfolio totalled NOK 128 billion⁷ Principal amount at the end of the third quarter of 2024, as compared to NOK 129 billion at the end of the third 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 largely held in zero-risk-weighted assets that are particularly liquid. Investments denominated in foreign currencies represented 47% of the portfolio at 30 September 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 has a long-term goal of reducing its own emissions by at least 55% by 2030 compared to the 2019 level. This emissions trajectory implies that KBN’s CO₂e emissions in 2024 should be a maximum of 55% of the 2019 level, which corresponds to approximately 106 tonnes of CO₂e for the year. KBN’s calculated that its own CO₂e emissions⁸ 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, as well as its indirect emissions in Scope 3 from waste and business travel. in the first nine months of 2024 were 69.9 tonnes of CO₂e, which is a moderate decrease from 71.9 tonnes of CO₂e in the same period in 2023.

At its monetary policy committee meeting in September 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 keeps declining towards the target of 2% per year within a reasonable time horizon, as it remains somewhat over the target. The outlook for the global economy has strengthened somewhat during the third quarter, but there is still considerable uncertainty. The future path of the policy rate thereafter will depend on economic developments.

KBN has good access to liquidity and will continue to provide its customers with attractive financing for local government sector projects across Norway.

Oslo, 7 November 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 30 September 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.

(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.

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, net debt amounting to NOK 7.5 billion has been transferred from Level 1 to Level 2.

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 30 September 2024, 30 September 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.