Report for 4th 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 554 million in the fourth quarter of 2024, compared to NOK 534 million in the fourth quarter of 2023. Profitable growth over the last twelve months together with higher interest rate levels contributed to this increase in KBN’s income from previous year. KBN’s aggregate customer financing grew by NOK 6.7 billion in the fourth quarter of 2024, with green lending accounting for NOK 6.1 billion of this growth. Green lending represented 18.5% of KBN’s total lending at the end of the fourth 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 293 million in the fourth quarter of 2024, compared to NOK 273 million in the fourth quarter of 2023. KBN’s net interest income totalled NOK 554 million in the fourth quarter of 2024, as compared to NOK 534 million in the corresponding period of 2023. Money market interest rates were relatively stable in the quarter. Norges Bank kept its key policy rate unchanged at its December meeting. Norway’s key policy rate remained unchanged at 4.5% throughout 2024.

KBN’s result for the accounting period, in the fourth quarter of 2024, was a profit of NOK 280 million, compared to a profit of NOK 566 million in the same period in 2023. In the fourth quarter of 2024, KBN recognised a net loss on financial instruments totalling NOK 62 million, as compared to a net gain of NOK 338 million in the fourth quarter of 2023. KBN’s net gains/(losses) on financial instruments comprise the sum of the realised and unrealised gains and losses recognised by KBN. There was a net realised gain from market transactions of NOK 10 million for the fourth quarter of 2024, while there was a net realised gain from market transactions of NOK 1 million in the fourth quarter of 2023. Unrealised losses amounted to NOK 71 million in the fourth quarter of 2024, compared to unrealised gains of NOK 336 million in the same period in 2023. KBN’s fixed rate lending and associated hedging instruments contributed a net unrealised loss of NOK 44 million in the fourth quarter of 2024, primarily as a result of a moderate increase 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 193 million in the fourth 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 fourth quarter of 2024, 45% 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 42 million for the fourth quarter of 2024, while KBN's own bonds and associated hedging instruments contributed a net unrealised gain of NOK 15 million to its result from ordinary activities in the same period. 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 relatively 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 expected credit losses by NOK 4 million in the fourth quarter of 2024.

KBN’s total operating costs for the fourth quarter of 2024 were NOK 98 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. Digitalisation, further development of digital robustness and increased regulatory requirements are contributing factors to cost growth.

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. for 2024 as a whole totalled NOK 1,276 million, compared to NOK 1,211 million for 2023. KBN’s net interest income in 2024 as a whole was NOK 2,253 million, as compared to NOK 2,105 million in 2023. The increase was primarily due to the average level of interest rates being higher in 2024 than in 2023, as well as lending growth.

KBN’s result for the period for 2024 as a whole was a profit of NOK 1,474 million as compared to a profit of NOK 1,432 million in 2023. KBN recognised net gains on financial instruments totalling NOK 157 million in 2024, compared with NOK 212 million in 2023.

KBN’s total operating costs in 2024 as a whole were NOK 383 million, compared to NOK 325 million in 2023. The increase was 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. Digitalisation, further development of digital robustness and increased regulatory requirements are contributing factors to cost growth. 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 2024 was 17.1%, compared to 15.6% in 2023.

KBN’s annualised return on equity in 2024 was 7.4%, compared to 7.9% in 2023. Based on its core earnings, KBN’s annualised return on equity in 2024 was 7.2%, compared to 7.3% 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 2024 was NOK 1,254 million, compared to NOK 1,789 million in 2023. KBN’s total comprehensive income includes gains and losses on KBN’s own bonds resulting from changes to KBN’s own credit risk. In 2024, there was an unrealised loss from changes to KBN’s own credit risk of NOK 228 million, as compared to an unrealised gain of NOK 363 million in 2023.

KBN’s lending portfolio totalled NOK 370 billion⁴ Principal amount at the end of the fourth 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 375 billion⁶ Principal amount at the end of the fourth quarter. KBN's aggregate customer financing increased by NOK 6.7 billion in the fourth quarter of 2024, as compared to an increase of NOK 12.9 billion in the fourth quarter of 2023. The main reason for the increase in aggregate customer financing in the fourth quarter of 2024 was demand for new loans. The level of demand for new loans was somewhat weaker in the fourth quarter of 2024 compared with the same period in 2023, while there was also a higher level of competition.

KBN continued to experience a good level of growth in its green lending, and its portfolio of green loans increased by NOK 6.1 billion in the fourth quarter of 2024, as compared to NOK 6.2 billion in the same period in 2023. KBN's green lending in the fourth quarter of 2024 included green loans for a water and wastewater project in Oslo and for Bergen Light Rail. At the end of the fourth quarter of 2024, KBN’s green lending represented 18.5% of its overall lending portfolio.

The annual rate of debt growth in the local government sector as at the end of December 2024 was calculated to be 8.5%. After adjusting for borrowing from the Norwegian State Housing Bank, the rate of debt growth was 8.0%. 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 December 2024 was 50.2%.

Inflation 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 2.2% at the most recent assessment in January (rate as at December 2024), while core inflation was 2.7%. 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 strengthened against the majority of currencies in the fourth quarter of 2024, including the Norwegian krone.

The credit spreads on local government and covered bonds increased through the fourth 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 fourth quarter of 2024 and completed all its funding transactions as planned. In 2024 as a whole, KBN’s new borrowings totalled approximately NOK 92 billion through 38 bond issues in eight currencies, as compared to NOK 77 billion in 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 2024

KBN’s liquidity portfolio totalled NOK 140 billion⁷ Principal amount at the end of the fourth quarter of 2024, as compared to NOK 115 billion at the end of the fourth 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 54% of the portfolio at 31 December 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 has 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 2024 were 82.5 tonnes of CO₂e, which is a moderate decrease from 111.5 tonnes of CO₂e in 2023, well below and within the target for 2024.

Norges Bank reiterated at its January 2025 monetary policy committee meeting that it expects it will reduce Norway’s key policy rate to 4.25% in March and then to 3.75% by the end of the year. Norges Bank stated that a restrictive monetary policy is still needed to stabilise inflation around the target of 2%. The future path of the policy rate thereafter will depend on economic developments. The outlook for the Norwegian and global economy have improved, but there continues to be a high level of uncertainty, including in relation to the change in American politics in the USA.

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

The Board of Directors proposes a dividend for 2024 of NOK 700 million. This represents 47% of KBN’s profit for the period in 2024 and 55% of its core earnings.

Oslo, 13 February 2025

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 December 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 as well as from interest and fees are presented net in the income statement. This includes certificates and bonds and debt securities issued. 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. In 2024, net debt amounting to NOK 6.7 billion has been transferred from Level 1 to Level 2, and net assets amounting to NOK 0.6 billion has been transferred 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 December 2024 and 31 December 2023.

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.