Annual Report 2024

Reporting entity

KBN is a Norwegian limited company providing loans to counties, municipalities, intermunicipal companies and other companies with municipal guarantee that carry out tasks at a municipal level. KBN ’s registered office is located in Filipstad Brygge 1, Oslo. KBN is wholly owned by the Norwegian state through the Ministry of Local Government and Districts.

Basis of preparation

The financial statements have been prepared in accordance with IFRS® Accounting Standards as adopted by the EU. The accounting is based on the historical cost principle, except for financial assets and liabilities measured at fair value.

Functional currency and presentation currency

The company's functional and presentation currency is Norwegian Kroner (NOK). Balance sheet items in foreign currency are translated into Norwegian Kroner using the exchange rate on the balance sheet date. Income statement items in foreign currency are translated into Norwegian Kroner using the exchange rate at the transaction date. Effects from the translation of the principal amount of non-derivative interest-bearing instruments in foreign currency and on accrued 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 translation differences from the hedged item.

Significant estimates and accounting judgements

The preparation of financial statements in accordance with IFRS requires management to make estimates, 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 key estimates and assessments in the financial statements include:

Measurement at Fair Value

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. Management exercises particular judgment in valuing instruments measured at fair value in Level 3 of the fair value hierarchy, as detailed in note 9.

Financial instruments

RECOGNITION AND DERECOGNITION

Recognition of financial assets and derivatives occurs when the entity becomes a party to the contractual provisions of the instrument, i.e., at the contract inception. Recognition of financial liabilities occurs at the settlement date. The recognised amount for financial assets and liabilities not classified at fair value through profit or loss also includes transaction costs directly attributable to the acquisition. When the requirements for hedge accounting with fair value hedging are met, KBN will recognise the cumulative fair value change of the financial liability (the hedged item) from the inception of the contract.

Financial assets and derivatives are derecognised when the contractual rights to cash flows expire or are transferred, and substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognised when the obligation specified in the contract is fulfilled, cancelled, or expires. In the case of repurchasing issued bonds, the financial liability is derecognised at the settlement date.

CLASSIFICATION AND MEASUREMENT

Classification of financial instruments takes place at initial recognition and determines the subsequent measurement of the carrying amount. Classification of financial instruments is determined by the characteristics of the financial instrument and by the business model for the management of financial assets. Detailed principles of classification and measurement are presented in note 8 together with tabular statements of the instruments.

FAIR VALUE OF FINANCIAL INSTRUMENTS

All assets and liabilities, which are not measured at amortised cost, are measured at fair value with changes in fair value recognised in the income statement or in statement of comprehensive income. Fair value is the market-based price that would have been obtained selling an asset or paying to transfer a liability in a well-arranged transaction between market participants at the time of measurement. Fair value is the achieved price under the current market conditions, regardless of whether the price is directly observable or estimated using a valuation method.

Financial instruments are categorised into the fair value hierarchy, where the level of classification (levels 1, 2 or 3) is based on the observability of the input that is significant to the fair value measurement. See note 9 for accounting principles on fair value measurement.

PRESENTATION OF FINANCIAL ASSETS AND LIABILITIES

General master netting agreements for financial derivatives do not meet the conditions for offsetting, and all financial derivatives are presented gross in the balance sheet. Cash received or provided as collateral for derivative exposure, which grant the right of offset in the event of bankruptcy also do not meet the conditions for offsetting under IAS 32 and is presented gross in the balance sheet as liabilities to or receivables from credit institutions. Combined repurchase and resale agreements where the terms of the GMRA agreement (Global Master Repurchase Agreement) trigger an offsetting obligation under IAS 32 are presented net in the balance sheet. See note 20 for details on financial assets and financial liabilities subject to offsetting.

All financial derivatives are measured at fair value through profit or loss and are classified as assets when the value is positive and as liabilities when the value is negative.

For issued liabilities that are designated as measured at Fair Value Option (FVO), the part of changes in fair value that is attributable to changes in KBN ’s own credit risk will be recognised in other comprehensive income in the statement of comprehensive income. The remaining part of the value changes is recognised in the income statement.

EXPECTED CREDIT LOSS

Provision for expected credit loss is recognised for all financial assets that are measured at amortised cost. Expected credit loss is based on the instrument’s/loan’s exposure at default, probability of default and loss at default, all estimated at the reporting date. Expected credit loss for instruments where credit risk has not increased significantly since initial recognition, is calculated based on the probability of default within the next 12 months. For instruments where credit risk has increased significantly since initial recognition, the expected credit loss is calculated based on a probability of default during the full lifetime of the asset. See note 14 Expected credit loss for accounting principles on measuring expected credit loss.

Hedge accounting

The bank uses interest rate and cross currency swaps to financially hedge interest rate and currency risk in assets and liabilities. KBN applies IFRS 9 for hedge accounting. When a hedge relationship fulfils the criteria for hedge accounting and is designated as such, it is accounted for as a fair value hedge. The hedged items are classified as measured at amortised cost. The accounting principles for hedge accounting are described in detail in note 11 together with the financial information.

Principles of revenue recognition and cost allocation

Interest income for assets and liabilities measured at amortised cost, is recognised in the income statement using the effective interest method. For items measured at fair value, including interest rate derivatives, interest is recognised as it accrues, either as income or expense. Changes in the value of derivatives resulting from accrued or incurred interest are presented as interest income/cost, as the derivatives are used in economic hedging. Interest income/costs from financial derivatives included in hedge accounting are presented together with corresponding interest income/costs from the hedged item.

Unrealised gains and losses on financial instruments at fair value and value changes attributable to the hedged risk on hedged items under hedge accounting, are recognised in the income statement as net gain/(loss) on financial instruments.

Fees and commission expenses are recognised as expenses in the period when the service is provided.

Fixed assets

Fixed assets are measured at acquisition cost with the deduction of accumulated depreciation and write-downs. Depreciation is calculated by using a linear method over the estimated useful life, where the disposal value of the assets is assumed to be zero.

Intangible assets

Intangible assets are measured at acquisition cost and consist of IT systems. Acquisition cost is depreciated over its useful life. If the annual impairment test indicates that assets are impaired, the value of the assets is written down, and the difference between the carrying amount and the recoverable amount is recognised in profit or loss.

Pensions

The bank ’s pension scheme is a defined contribution pension scheme. This means that the bank is paying a fixed percentage deposit as savings to each employee ’s pension account, depending on the size of the employee’s salary. Employees who were 55 or older at the time of transition to the defined contribution pension scheme on 1 January 2018, remain in the former defined benefit pension scheme. The defined contribution pension scheme is expensed on an ongoing basis.

Leases

Leases are being accounted for according to IFRS 16 Leases. Depreciation for leased assets (“right-to-use-assets”) are recognised in the income statement, at the same time as interest costs on the lease obligation. Repayment of the lease obligation ’s principal and interest portion, are classified as financing activities in the cash flow statement.

Taxes

Taxes are recognised in the income statement as they accrue. The income tax is based on profit before tax, other comprehensive income before tax, and on interest expense on additional Tier 1 capital that is recognised in the Statement of changes in equity. Temporary and permanent differences are adjusted for in the year's tax base when current taxes are calculated. Deferred tax liabilities and deferred tax assets are calculated on the basis of temporary differences between the accounting and tax values at year end. The nominal tax rate is used for calculation. Tax-increasing and tax-reducing differences within the same period are offset. Income tax consists of current taxes (tax on the taxable profit or loss for the year), changes in net deferred tax and adjustment to taxes payable for previous years.

The company is subject to financial tax. The tax rate is 25%.

Equity

The Company’s equity consists of share capital, additional Tier 1 capital that fulfils the requirements of equity, and other retained earnings. Dividends are classified as equity until approved by the Annual General Meeting. The additional Tier 1 capital is measured at cost and paid interest is subtracted from other equity.

Segment information

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, including information on the geographical distribution of lending, commercial paper and bonds and income from various categories of financial instruments.

Statement of cash flows

The cash flow statement is prepared using the direct method and presents cash flows by category. Cash flows from derivatives are classified as either interest received or interest paid, while cash flows from the exchange of principal on derivatives are reported on the line net (increase)/decrease in financial derivatives. Some derivatives involve periodic settlements of currency on the nominal amount, and these inflows or outflows are also recorded on the net (payment)/disbursement financial derivatives line. Cash flows from realised and unrealised foreign exchange gains/losses are reported on adjustment of exchange rate changes. Cash and cash equivalents include cash on hand, receivables, and payables with credit institutions with no notice period.

Implementation of new accounting standards as well as amended standards and interpretations

KBN has not implemented new standards in 2024. There has been no significant change in accounting principles throughout the year. There are no relevant standards and interpretation that have been approved, but not yet entered into force, that have an impact on KBN`s accounting principles in the coming financial year.

(Amounts in NOK 1 000 000)

(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 and amounted to NOK 305 million in loss throughout the year, and NOK 227 million in accumulated loss. 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 and from interest and fees on non-derivative interest-bearing instruments are presented net in the income statement. This applies to commercial paper and bonds, as well as debt securities issued and commercial paper 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.

For further information about remuneration to senior executives see the remuneration report for 2024 published at KBNs website.

(Amounts in NOK 1 000)

The company is obliged to have an occupational pension scheme in accordance with the Mandatory Occupational Pensions Act. The company has a pension scheme that meets the requirements of this Act.

KBN have a defined contribution pension scheme at Storebrand Livsforsikring AS. The contribution pension scheme has contribution rates of 7% for salaries 0-7.1 times the National Insurance basic amount (G) and 18% for salaries between 7.1 G and 12 G. The scheme includes the option for the Advanced Pension Plan (AFP) in the private sector associated with the common scheme. Associated insurance coverages are part of the scheme and include disability pension with child supplement without individual policy accumulation, child pension, and group life insurance/death benefits. The contribution scheme applies to all employees, except those who were 55 years or older as of 1 January 2018, and employees who were partially disabled or incapacitated with the right to sick pay at the time of the establishment of the contribution pension schemes. These individuals are covered by the previous scheme with KLP, which, with 30 years of accrual, grants the right to age-adjusted retirement pension at 66% of the pensionable salary at the time of retirement. The scheme also includes disability and survivor pensions as well as agreed-upon early retirement. The assets in the pension scheme are placed in a collective portfolio and cannot be specified in terms of asset classes. KBN had an operational pension scheme for salaries exceeding 12G that was closed in 2011.

Pension costs and pension liabilities for the defined benefit scheme include payroll tax and are assessed at the present value of future pension obligations accrued as of the balance sheet date. Pension obligations are calculated based on linear accrual, considering assumptions about discount rates, future salary adjustments, pensions, and benefits from the National Insurance, as well as assumptions about mortality and voluntary turnover. The period's pension cost consists of the sum of the period's accrual, interest cost on the calculated liability, and administrative costs. Changes in prior periods' pension accruals (plan amendments) are recognised in the period's results when the pension plan changes. The period's net pension cost is recognised under salary and administrative expenses. Changes in pension liabilities and assets in defined benefit schemes due to changes and variations in calculation assumptions (changes in financial and actuarial assumptions) are presented in the statement of comprehensive income as other comprehensive income. For the defined contribution scheme, payroll tax is presented as such in Note 4 Salary and administrative expenses and are therefore not included in the pension costs below.

KBN has used preferential bonds (OMF) in the Norwegian market as a basis for determining the discount rate for 2024 and 2023. Actuarial assumptions are based on commonly used assumptions regarding demographic factors.

(Amounts in NOK 1 000 000)

KBN has previously received a resolution on changes to its tax assessments for the years 2015 -2021. KBN also expects to receive a similar resolution for 2022 and 2023. The changes relate to the tax treatment and periodisation of the accrual of financial instruments. The Norwegian Tax Administrations resolutions implies a change to the timing of taxable income and expense, but no change in total taxable income and expense over the lifetime of the instruments. KBN has prepared its accounts in compliance with the treatment expected by the tax authorities. KBN is still in disagreement with the Norwegian Tax Administration on certain matters relating to the tax treatment of the accrual of financial instruments in the accounts. KBN has submitted an appeal against aspects of the resolutions.

Tax accruals/timing of income and expenses may deviate significantly from accounting accruals over the instruments’ lifetime. However, there will be no difference in total income/expense over the life of the instruments. This can lead to volatility in temporary differences and tax payments. This will not have a significant effect on the banks tax cost over time, except for changes in tax rate. Deferred tax assets arising from temporary differences affect capital adequacy adversely through deduction in common equity Tier 1 capital.

(Amounts in NOK 1 000 000)

KBN has one lease agreement that is covered by IFRS 16 Leases. The agreement applies to the lease of office space in Filipstad Brygge 1. The right-of-use-asset is presented in the statement of financial position as other assets, while the lease obligation is presented as other liabilities. See Note 16 for further information.

Accounting policies for classification and measurement

Classification of financial instruments are carried out at initial recognition and determines the subsequent measurement of the carrying amount. Classification of financial instruments is determined by the characteristics of the financial instrument and by the business model for the management of financial assets.

Financial assets measured at amortised cost

KBN’s business model for loans to customers and commercial paper and bonds is to “hold to collect contractual cash flows”. When the assets’ cash flows only consist of principal and interest payments, and instruments with mainly offsetting value changes are not present, the assets are measured at amortised cost. New loans to customers and commercial paper and bonds are subject to an assessment of whether the cash flows of the asset are only repayment, principal or interest payments. If this is not the case, the asset shall be classified as measured at fair value. KBN’s PT and NIBOR loans are measured at amortised cost. Commercial paper and bonds without related financial derivatives are also measured at amortised cost, as well as deposits from credit institutions (cash deposits, money market deposits and cash collateral pledged) and other money market deposits, not hedged with a derivative contract. Other money market deposits are deposits to non-financial institutions. Measurement of amortised cost is performed using the effective interest rate method.

Hedge accounting may apply to assets classified as measured at amortised cost. When fair value hedge accounting is applied, the value change that is attributable to the hedged risk is recognised as part of the carrying amount with the hedged item, and in the income statement as net gain/(loss) on financial instruments.

Financial assets designated at fair value through profit or loss (FVO)

If the risk in selected commercial paper and bonds, loans to customers with fixed interest rate and money-market deposits (both to financial and non-financial institutions) is hedged with a derivative contract, these financial assets is designated at fair value through profit or loss at initial recognition, in order to achieve similar treatment as related derivative contracts which are measured at fair value. This leads to a reduction in measurement inconsistency between commercial paper and bonds and loans to customers on one hand, and financial derivatives on the other hand.

Financial liabilities measured at amortised cost

Debt securities issued in the form of benchmark loans and certain loans from institutional investors in niche markets issued in public capital markets, are classified as financial liabilities measured at amortised cost and are measured at amortised cost using the effective interest rate method. The same applies to floating-rate bonds issued in U.S. dollars or Euros, due to credit institutions (received cash collateral or loans in the money market), as well as commercial papers issued. A portion of these financial liabilities is designated as hedged items and is subject to fair value hedge accounting rules. The hedged risk is limited to interest rate risk for liabilities in USD, EUR, and NOK. Changes in value attributable to the hedged risk in the bond are recognised under debt securities issued, and accounted for in the income statement under net gain/(loss) on financial instruments.

Financial liabilities designated at fair value through profit or loss (FVO)

Debt securities issued that are not measured to amortised cost, are designated as at fair value through profit or loss at initial recognition. This to achieve similar treatment as related derivative contracts, which are measured at fair value. This leads to a reduction in measurement inconsistency between debt securities issued on one hand and financial derivatives on the other hand. For debt securities issued that are measured at fair value, the part of changes in fair value of liabilities that is attributable to changes in KBN’s own credit risk is recognised in other comprehensive income in the statement of comprehensive income. The remaining part of the change in fair value is recognised in the income statement. Note 9 provides additional information about financial assets at fair value through profit or loss (FVO).

Financial derivatives

Financial derivatives are classified as at fair value through profit and loss, with the exception of contracts designated as hedging instruments in fair value hedges. All financial derivatives are measured at fair value through profit or loss and are presented as assets when the value is positive, and as liabilities when the value is negative.

The accumulated principal of the debt as of December 31, 2024, including commercial paper issued, debt securities issued and subordinated loan capital, amounts to NOK 514 billion against a book value of NOK 500 billion.

(Amounts in NOK 1 000 000)

(Amounts in NOK 1 000 000)

Accounting principles for measuring financial instruments at fair value

Financial instruments are categorised into the fair value hierarchy, where the level of categorisation (Levels 1, 2 or 3) is based on the following.

Level 1

For securities traded in an active market with frequent market observations, quoted prices on the reporting date are used in the measurement of fair value. The bank uses quoted prices provided by international vendors, and they are classified as level 1-inputs when they represent actual market transactions for the instrument.

Level 2

For financial instruments without available quoted prices in an active market, KBN will either use quoted prices of similar instruments in active markets, where possible, or valuation techniques where significant inputs are based on observable market data. level 2-inputs might include:

• observable interest rate yield curves, basis swap spreads, FX-rates, equity indices, commodity indices and volatilities
• quoted prices and credit spreads at the reporting date for similar instruments issued by the same issuer but with a different tenor, so that an adjustment for maturity is necessary
• quoted prices and credit spreads at the reporting date for similar instruments issued by the same issuer but denominated in a different currency, so that an adjustment for basis swap spread is necessary
• actual market transactions in identical instruments before or after the reporting date, so that an adjustment for events between the date of transaction and the reporting date is necessary
• more liquid instruments issued by the same issuer with identical maturity, but an adjustment for liquidity risk is necessary
• prices on potential new issues in similar instruments from the same issuer

Level 3

Level 3 is relevant for financial instruments that are not traded in an active market and fair value is determined using valuation techniques where significant input is based on unobservable data.

The same type of input might be used to determine the fair value of commercial paper and bonds classified as level 2 and level 3, however, the significance of adjustments of market data and to what extent the adjustment is done based on observable data, determines the categorisation. Other inputs used in determination of fair value might include:

• indicative prices and estimates for similar instruments provided by other market participants
• market indices, both bond and credit default swap indices, for similar instruments
• non-binding price quotes from different sources
• historical or implied volatilities

Fair value disclosures

For financial instruments categorised in the fair value hierarchy at multiple periods, a reconciliation of movements between the levels is done at the end of each reporting period. The valuation technique used to determine fair value of financial instruments categorised in level 2 or level 3, is determined based on the instruments’ features. Fair value of financial instruments without embedded option-elements is determined using the discounted cash flows method, where discount rates are derived from the relevant observable money market interest rates with the addition of a credit surcharge. When such factors cannot be reliably observed at a reporting date, management may make assumptions and use estimates when determining the fair value. Fair value of financial instruments with embedded option-elements is determined using both discounting and option pricing models with observable market data and estimates as inputs. The most significant unobservable input used in the valuation in level 3, comprises the credit premium for financial instruments that are not traded in an active market.

Information about fair value

Assets and liabilities measured at fair value are in the above tables categorised in the three levels as described in the accounting principles above.

All changes in fair value of financial instruments adjust the carrying amounts of assets and liabilities and are recognised in either the income statement as net unrealised gain/(loss) on financial instruments or in the statement of comprehensive income as change in fair value of liabilities due to changes in own credit risk under other comprehensive income.

KBN has established policies and guidelines for valuation that describe principles for fair value measurement of financial instruments. The main principles are that fair value should be measured at the value the asset may be sold for or the liability repurchased/transferred for, and that observable data shall be used to the extent possible in the valuation. Quality assurance should be undertaken against alternative sources. The guidelines also set out the frequency of valuation for different instrument types, and procedures for control of fair value.

Loans to customers

Level 2 includes fixed rate loans to customers granted before 1 January 2022. Fixed rate loans to customers are granted on individual level and are not traded in an active market. Hence, observable market prices are not available after initial recognition. Fair value of such loans is estimated based on discounting future cash flows using discount rates derived from observable money market rates and observable credit spreads for Norwegian municipalities at the reporting date. Fixed rate loans with an amortisation schedule are valued adding a discretionary spread to cover liquidity premium, but this does not constitute a significant part of the input data in the valuation.

Commercial paper and bonds

Level 1

Determination of fair value based on quoted prices in an active market with many buyers and sellers gives a fair value estimate with the lowest degree of valuation uncertainty (level 1). Level 1 inputs for commercial paper and bonds include quoted prices provided by international vendors, which represent actual transactions in an active market. Such third-party prices are also partially used within level 2, but where the price is not considered to reflect sufficient liquidity to allocate the position to level 1.

Level 2 and 3

The fair value of commercial paper and bonds where quoted prices are not sufficiently available on the reporting date, is determined using the discounted cash flow method where discount rates are derived from observable money market interest rate yield curves (parts of level 2 and level 3). Discount rates are adjusted for the issuers credit and liquidity risk to as large a degree as possible, based on observable market data. When applying credit/liquidity adjustments to discount rates, the assets are grouped based on the issuer’s credit rating, currency, time to maturity, underlying exposure and geographic location. All investments are allocated to their respective levels on each reporting date. Unobservable credit spreads are used to some extent when there is little or no market activity for the security in concern, or equivalent securities. When these are material for the valuation, the security is allocated to level 3, which reflects significant valuation uncertainty.

Debt securities issued.

The bond debt is divided into three main groups based on the type of borrowing product and the corresponding loan documentation used. The three groups are loans in public niche markets, private placement loans, and retail loans. The first two groups are public (listed) syndicated loans in various currencies, where the issuance size constitutes the primary difference between the two groups.

Level 1

For quoted loans in public niche markets, quoted prices exist in an active market and these are considered to belong to level 1 with limited valuation uncertainty.

Level 2

For other loans in public niche markets, there are partially listed prices, but the activity and liquidity are somewhat low, so they are considered to belong to level 2, with some valuation uncertainty. A discounted cash flow model is used in the valuation, where inputs include market interest rates, listed prices, and prices of comparable instruments adjusted for differences in maturity, size, and currency. Prices of new issuances are also used as an important indicator in the valuation, and the bank makes non-binding price inquiries to brokers.

Level 3

The second group comprised of private placement loans where the loan terms are specially adapted for a single investor. The final main group is retail loans, i.e. loans sold to non-professional investors. Bonds in these two groups are not listed and normally not traded in the secondary market and are, to a large extent, structured products with option elements that are linked to stock prices, equity indices, FX rates or commodity prices. Quoted prices are hence not available for the security, and unobservable inputs are used to a significant degree in the valuation. These loans are therefore allocated to level 3 in the fair value hierarchy, and thus are characterised by significant valuation uncertainty. The choice of valuation techniques and inputs depends on the structure and terms of each loan. For all bonds in these groups, fair value is determined by using the discounted cash flow method. Inputs are current interest rate yield curves and credit spreads that are estimated from price indications to brokers at the Company’s information channels. Credit spreads are for these groups regarded as an unobservable input, and hence an estimate. For structured bonds with option elements, option pricing models are used in addition to determine expected cashflows. These models use interest rates, FX-rates, stock prices, equity indices and implicit or historical volatilities as inputs.

Financial derivatives

All financial derivatives are unlisted OTC-contracts used in economic hedges of interest rate and currency risk, and other market risks for debt securities. Derivatives are used for all portfolios, including securing interest for fixed-rate loans. For basis swaps (USD-NOK, USD-EUR and EUR-NOK), FRAs and interest rate swaps and cross currency swaps without option elements, fair value is determined by using the discounted cash flow method. Discount rates are derived from observable basis swap spreads and swap interest rates. Hence, these contracts are allocated to Level 2, with considerable market activity for new contracts and relevant market parameters. Cross-currency swaps and interest rate swaps which are economic hedges of debt securities issued with option elements, are valued using discounted cash flow method and option pricing. These are classified as Level 3 due to significant use of unobservable inputs.

KBN analyses the fair value and the value changes at the end of the reporting period, including the basis for the development in fair values.

Reconciliation of changes in level 3

Transfers to and from level 3 primarily result from changes in the availability of observable inputs to valuation methods during the period, as well as refinancing or product shifts for loans to customers. In 2024, net debt of NOK 6.7 bn. were transferred from level 1 to level 2, and net assets of NOK 0.6 bn. were transferred from level 2 to level 1. Transfer between level 1 and level 2 is due to improved or reduced reliability of market data used in the valuation.

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.

Description of significant unobservable data used in valuation, within level 3

In cases where there is very little or no market activity for the relevant instrument, the valuation relies significantly on estimates as input in the model. The most significant estimate includes a spread to the relevant yield curve. For debt securities issued, the spread includes liquidity risk, own credit risk, and market risk in the relevant currency market. For commercial paper and bonds valued using a model, the spread includes liquidity risk, issuer credit risk, and market risk in the relevant currency market. Other unobservable inputs include volatilities within option pricing models, where relevant. Beyond this, the parameters used in valuing instruments with option elements are primarily observable. Bonds with option elements are hedged one-to-one with financial derivatives where the option element is offsetting, thus eliminating exposure from the option element.

The total credit spread and thus the yield curves are sensitive to changes in underlying components. Changes in credit spread, liquidity risk, or market risk in the relevant currency market will therefore affect the fair value of the instrument. See the sensitivity analysis in the following table for the impact of a 10 bp increase in the discount rate.

Sensitivity analysis level 3

For debt securities issued as well as subordinated loan capital, changes attributed to an increased credit spread will result in recognising the unrealised gain in other comprehensive income in the statement of comprehensive income. Changes attributable to increased money market interest rate will result in the unrealised gain being recognised in the income statement.

Level 3 unrealised gain/(loss) in the period

Amounts in the column unrealised fair value changes in the table above are included in net gain/(loss) on financial instruments in the income statement, and in other comprehensive income in the statement of comprehensive income.

(Amounts in NOK 1 000 000)

Information about the level within the fair value hierarchy, for financial instruments measured at amortised cost, where fair value is disclosed.

Information about fair value for assets and liabilities recognised at amortised cost

Loans to customers.

Loans to customers at level 2 includes P.t. loans, NIBOR-loans and fixed rate loans. These loans are not traded in an active market. Valuation is hence based on discounting future cash flows using discount rates derived from observable money market rates and observable credit spreads for Norwegian municipalities. Fixed rate loans with an amortisation schedule, the same principals as for fixed rate loans at fair value are applied. See note 9 for information on fair value measurements.

Commercial paper and bonds

Commercial paper and bonds without related financial derivatives are measured at amortised cost. Fair value valuation and grouping in levels 1, 2 and 3 follow similar principles as for commercial paper and bonds measured at fair value, see note 9 for information on fair value measurement.

Debt securities issued.

Debt securities issued in the form of benchmark loans and certain loans from institutional investors in niche markets issued in public capital markets, are classified as financial liabilities measured at amortised cost. The same applies to bond debt with a floating interest rate issued in USD or Euros. The valuation at fair value and the grouping in levels 1, 2 and 3 follow similar principles as for debt securities issued that is measured at fair value, see note 9 for information on fair value measurement.

(Amounts in NOK 1 000 000)

Accounting principles for hedge accounting

KBN uses fair value hedge accounting for selected economic hedges of interest rate risk according to IFRS 9 of debt securities issued, commercial paper and bonds and loans to customers. Fair value hedging is applied when the economic hedging meets the requirements for the use of fair value hedge accounting. The hedge relationship is documented at designation, including the goals and strategy for the risk management of the hedge relationship. The documentation includes identification of the hedge relationship, description of hedged risk (interest rate risk) and a prospective effectiveness test. Hedge effectiveness is measured on an on-going basis. Any ineffective part of the hedge is recognised in the income statement. Hedging instruments are measured at fair value through profit or loss, and carrying amounts are adjusted accordingly. The value change of the hedged items that is attributable to the hedged risk (interest rate risk), is recognised as part of the carrying amount of the item and in the income statement as net gain/(loss) on financial instruments.

Ineffectiveness occurs due to changes in market rates in the floating leg of the hedging instrument (swap), the use of different interest rate curves for discounting the hedging instrument and where the hedge is not 1:1.

Recognised value changes are a result of changes in underlying risk factors, hence the hedged risk (secured inefficiency).

Maturity profile of financial instruments in fair value hedge.

Accounting policies on measuring of expected credit loss

At each reporting date, an allocation to stages 1, 2 or 3 is performed for all loans to customers and commercial paper and bonds that are measured at amortised cost.

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.

The recognition of interest income for assets allocated to stages 1 and 2 is based on the assets principal amount, while the recognition of interest income for assets allocated to stage 3 is based on the assets amortised cost, meaning after deduction of the provision for the expected credit loss. Expected credit loss is calculated per loan/instrument, based on exposure at default, probability of default and loss given default, all estimated at the reporting date.

KBN uses three different scenarios in its model for the calculation of expected credit loss. Furthermore, the normalised values for probability of default are adjusted for market cycles in line with current market conditions at reporting times. The periods change in total expected credit loss is recognised in the Income statement as increased/(reduced) provision for expected credit loss. Within stage 1 a 12-month probability of default and lifetime losses based on default within the next 12 months are used, while stages 2 and 3 use lifetime probability of default and losses resulting from this.

Major changes in the issuers rating or a significant move under KBN’s internal credit rating assessment are used as indicators of significant increase in credit risk since initial recognition. These will lead to an allocation of the asset to stage 2. For loans to customers such deterioration has taken place if a payment stop is decided under the Municipality Act. An assessment as credit impaired or allocation to stage 3 for loans to customers are triggered by events that result in actual credit losses, or payment delays of at least 90 days over a certain threshold amount. For bonds and certificates, allocations to level 3 are triggered by events such as payment delays, bankruptcy petitions, or restructuring due to financial difficulties.

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

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

(Amounts in NOK 1 000 000)

Other assets

Intangible assets comprise of IT systems, website, customer online banking and data-warehouse. All are amortised over their expected lifetimes.

Other liabilities

* There have been no buybacks in 2024. **Amortisation is shown in its own line in the table above but is included in buyback in the table below.

Changes in value due to a change in own credit risk are recognised in other comprehensive income in the statement of comprehensive income, while changes in value due to changes in short term interest are recognised in the income statement as net gain/(loss) on financial instruments.

Reconciliation of changes in liabilities that are part of financing activities.

KBN uses financial derivatives to economically hedge exposures to interest rate and currency risk arising in the Company’s business activities, and to economically hedge exposure to option elements in issued bonds. In addition to its ordinary function as a hedging instrument, a subset of currency-related derivatives has a built-in financing element with ongoing predefined payments during the term and repayment at maturity. KBN enters derivative contracts with counterparties with an average credit rating of A+ and all derivative exposure is subject to risk limits approved by the Board. The bank's assets and liabilities denominated in foreign currency, are financially secured with interest rate and currency derivatives based on reference rates in NOK, USD, and EUR. Net assets or liabilities in reference rates in USD or EUR are converted to reference rates in NOK using a combination of basis swaps and currency forwards. Derivatives that are both interest rate and currency related are presented as currency related in the table below.

Interest rate risk arising from interest rate fixation on loans to customers is hedged using interest rate swaps.

See note 20 and note 24 for information on ISDA agreements, collateral transfers and clearing, that reduce counterparty risk. Counterparty risk is measured and monitored on an ongoing basis.

All financial derivatives are measured at fair value through profit and loss. Most contracts are categorised as mandatorily at fair value according to IFRS 9. The remaining contracts are designated as hedging instruments in fair value hedges. Standard netting agreements (ISDA) do not fulfil the requirements for offsetting in the statement of financial position, even though they imply the right to offset in case of default. Financial derivatives are hence presented on a gross basis in the statement of financial position, such that contracts with a positive fair value are presented as assets and contracts with a negative fair value are presented as liabilities.

KBN have financial instruments that have been affected by the IBOR reform. In accordance with the fallback provisions in ISDA, all derivatives with USD Libor 3M as reference rate changed reference rate to SOFR with an imposed fallback spread of 26.16 basis points as of July 1, 2023. The transition had no significant impact on the financial statement of 2023.

Offsetting and collateral

KBN has entered into ISDA agreements with all derivatives counterparties. This implies that all exposures vs the counterparty may be offset in the event of default. The ISDA agreements contain agreements regarding the exchange of collateral in the form of Credit Support Annex (CSA) related to financial derivatives exposures. Financial derivatives entered under the ISDA/CSA framework are presented gross in the balance sheet.

KBN also use repurchase agreements, reverse repurchase agreements, and combined repurchase and reverse repurchase agreements (collateral swaps) for liquidity management. A combined repurchase and reverse repurchase agreement aims to exchange the underlying collateral. When entering into such transactions, KBN assesses whether the terms of the GMRA agreement trigger an obligation to offset in the balance sheet.

KBN provides securities as collateral in derivative transactions and repurchase agreements. Such assets do not meet the criteria for derecognition and are presented in the balance sheet under commercial paper and bonds. See note 15 for more information on securities that are not derecognised.

Cash collateral received and cash collateral pledged is presented in the statement of financial position as deposits with credit institutions or due to credit institutions. Cash collateral received is included in KBN's cash management and is placed either in commercial paper and bonds or in short term money market instruments.

The Board of Directors proposes that for 2024, NOK 700 million be paid out as dividends to the owner, NOK 162 million be paid as interest to Additional Tier 1 capital holders, and NOK 612 million be transferred to other equity.

KBN issued additional Tier 1 capital in June 2023, June 2020 and June 2017. The bonds forms part of KBN’s Tier 1 capital, see Note 29. The bonds are perpetual with redemption rights by the issuer. Based on KBN having a one-sided right to not pay interest and notional amount to the investors, the bond does not qualify as a liability under IAS 32 and is therefore classified as equity in the Statement of Financial Position. The interest expenses are not presented as interest expense in the income statement, but rather as a reduction of other equity. The expenses are recognised when paid, see the Statement of changes in equity. In 2024 interest in the amount of NOK 122 million (after tax) has been paid (NOK 76 million in 2023). In addition, NOK 39 million (after tax) had accrued at year end 2024 (NOK 39 million in 2023).

Risk management

KBN’s state ownership, customer group and sector political role imply that KBN maintains a low to very low risk profile. The Board has determined KBN’s overall risk appetite, which is divided into the following categories: market risk, liquidity risk, credit risk, capital risk and operational risk with associated risk appetite. Risk appetite has also been established for key subcategories of operational risk, such as compliance risk, cyber risk, and the risk of being used for money laundering and contributing to terrorist financing. Risk appetite is operationalised through defined limits for types and extent of risk exposure.

Risk management and internal control are integrated into the banks strategy and business processes, and are adapted to the nature, scope and complexity of the risk exposure. The CEO is responsible for the implementation of risk management and internal control, and follows up and assesses changes in the banks risk exposure.

Robust internal control is carried out as an integrated part of the business processes of the bank. Risk management is established in a structure based on three lines of defence that ensures systematic identification, assessment, monitoring and reporting of the risk in all parts of KBN’s activities. The first line of defence carries out operational tasks and is responsible for managing and controlling that all the activities are carried out within the established limits, and in accordance with external and internal regulations. The second line of defence conducts independent risk- and compliance assessments, controls and validates models and develops and prepares KBN’s risk and compliance reporting. The second line of defence consists of the risk management and compliance functions. Internal audit (KPMG) constitutes KBN’s third line of defence and is the Board’s independent control body.

Risk types

The risk management and risk exposure in KBN are subject to strict internal guidelines to ensure the banks credit rating and access to the most attractive money markets. KBNs appetite for credit and liquidity risk are low and very low. Interest rate and currency risk is hedged on transaction level for all currencies except for NOK, USD and EUR. Interest rate risk for these currencies is hedged with interest rate swaps, such that the bank is only exposed to changes in three-month interest rates or shorter money market rates.

The following risk factors are identified as the most important for KBN:
Capital management
Credit risk and counterparty risk

• Loss on loans granted to customers
• Counterparty default – derivative transactions
• Issuer default – liquidity portfolio

Market risk

• Basis risk
• Interest rate risk
• Credit spread risk
• Currency risk

Liquidity risk

ESG risk (including climate risk) is not a separate risk area but is managed within the individual areas.

Capital management

KBN is subject to the Financial Undertakings Act and its capital requirements. In addition, KBN have a strategy and process of assessing necessary capital level, considering all substantial risks the bank is exposed to. The Board of Directors discusses the capital level and assesses all the risks annually to ensure the Company’s capital level based on the actual and expected future risk exposure.

In the process of capital assessment, KBN estimates the capital level necessary to cover the total risk exposure. This is done by estimating the capital requirement per risk area. The following risks are assessed separately: credit risk, market risk, liquidity risk and operational risk.

The Board pays special attention to the risk of changes in regulatory framework.

KBN’s Common equity Tier 1 capital adequacy ratio is 18,1 per cent as of 31 December 2024, and KBN is compliant with all regulatory minimum requirements and buffer requirements for all capital measures (common equity Tier 1 capital ratio, Tier 1 capital ratio, total capital ratio and leverage ratio).

Credit risk

KBN’s assets consist of loans to municipalities and similar, and a liquidity portfolio of commercial paper and bonds issued by or guaranteed by sovereigns, regional authorities, multilateral development banks, covered bonds and financial institutions with high credit rating.

Credit risk arising from loans to customers is limited to payment deferrals as the payment obligation cannot be waived. The Local Government Act states that municipalities and county authorities cannot be declared bankrupt. In the Local Government Act, provisions have also been made on the procedures to be followed if payment deferral must be implemented. KBN does, however, perform credit assessment of all lending customers, based on a model for economic analysis of municipalities and county authorities. The model considers the municipalities’ financial situation with both qualitative and quantitative key indicators for economic development and prospects of the customer.

KBN also grants loans to companies that perform tasks for municipalities and county authorities. The prerequisite for such loans is that the municipalities, or county authorities, provide guarantees that have been politically adopted and approved by the state through the chief county executive or the Ministry of Local Government and Regional Development.

Financial counterparties in the liquidity portfolio are subject to regular credit assessment and are allocated a credit limit. Credit limits are determined through an internal assessment of the counterparty’s rating, the banks risk capital, the type of financial instrument and its maturity.

For investments in commercial paper and bonds, as well as for financial derivatives, the minimum rating requirement is A2/A from Moody ’s and Standard and Poor ’s.

KBN enters into derivative transactions in order to control interest rate and currency risk. Counterparties in derivative transactions are financial institutions or central counterparties. In addition to strict rating requirements, the risk inherent in derivative transactions is mitigated through the use of ISDA agreements (offsetting). Such agreements have been made with all derivative counterparties.

KBN uses clearing services at a central counterparty (London Clearing House —LCH) for financial derivatives related to interest rate risk. As a central counterparty, LCH are subject to capital and risk management, and are considered to have lower counterparty risk than ordinary financial institutions.

KBN does not have a direct membership at LCH and uses clearing brokers that act on behalf of KBN towards LCH. KBN has chosen to segregate its derivative positions and funds (collateral) in relation to any possible default of the clearing broker. Thus, the banks’ exposure is directly against LCH. KBN achieves a high degree of protection through such a solution.

Credit risk related to the liquidity portfolio is low. The average rating of the portfolio is AA+ (based on the lowest of S&P and Moody ’s) as of 31 December 2024, and 41 per cent of the portfolio is invested in securities with a risk weight of zero per cent. Average time to maturity of the portfolio was 1.6 years as of 31 December 2024. The risk in the portfolio is managed at issuer level and is limited due to the portfolios short duration.

Market risk

Market risk consists mainly of interest rate, basis spread, credit spread and currency risk. KBN ’s risk appetite and risk policy allows a limited degree of exposure to changes in interest rates, basis spreads and credit spreads, while it allows a minimal degree of exposure of currency for operational reasons. Interest rate and currency risk are managed through matching of assets and liabilities at all times. Economic hedges with derivative instruments are used actively to reduce market risk.

Liquidity risk

Liquidity risk is managed by matching maturity profiles and interest rate reset periods for assets and liabilities. The policy requires that the liquidity portfolio must at any time cover a minimum of 10 months' obligations, without access to new borrowing. Liquidity risk in KBN is primarily a function of the need for collateral exchange with the bank's derivative counterparties. The size and liquidity characteristics of the liquidity portfolio are at all times adapted to KBN's liquidity risk through the bank's liquidity framework. The liquidity portfolio is invested in liquid securities of very high credit quality and with low ESG-risk.

KBN has credit exposures against the municipal sector in Norway, as well as against sovereigns, local authorities, multilateral development banks, financial institutions and issuers of covered bonds within the OECD. For the Norwegian municipal sector, the maximum maturity is determined by the Municipality Act and the credit framework is governed by regulations on large exposures. Credit exposures to financial institutions shall have a rating of A- or above.

KBN has no actual loan losses in 2024. Neither are there any evidence of actual default or payment problems with customers that would give reason to expect actual loan losses in 2024. KBN does not issue financial guarantees.

The table below includes exposures that are recognised as deposits with credit institutions, loans to customers and commercial paper and bonds. Exposures on the line regional authorities includes loans to companies guaranteed by municipalities and regional authorities.

Amounts in the table below represent actual credit exposure.

Credit exposure by country

Amounts in the table represent actual credit exposure.

Credit exposure by country

Interest rate sensitivity

The interest rate sensitivity information illustrates how the value of the bank's assets and liabilities, income statement and equity would be affected by a change in the respective market rate. KBN calculates interest rate sensitivity for the economic value of equity (EVE) and the net interest income (NII) on a 12-month horizon for changes in interest rates, basis spreads and credit spreads. EVE gives an estimate of the change in market value of all the bank's balance sheet items regardless of the measurement method in the financial statements, while NII gives an estimate of changes in net interest income for the period's result. Tables below show amounts before tax, for effects on equity, a tax of 25 per cent must be deducted.

EVE is a cash flow calculation that deducts the present value of all known and expected cash flows stemming from debt positions from the present value of all known and expected cash flows stemming from assets. EVE sensitivity indicates how a basis point change in the yield curve will affect the total capital. NII is a cash flow calculation that deducts interest costs of all known and expected cash flows on debt from the interest income of all known and expected cash flows on assets. NII sensitivity indicates how a basis point change in the yield curve will affect the net interest income in the Income Statement. EVE sensitivity and NII sensitivity are internationally recognised standards for estimating interest rate risk. The bank uses both models to manage its assets and liabilities. The interest rate sensitivities are calculated before tax according to the items agreed rate fixing, distributed per currency type at a 1%-point parallel shift in market interest rate.

Table 1: Interest rate sensitivity on the market value of balance sheet items (EVE)

The table below illustrates the sensitivity in market value for all balance sheet items, based on a parallel shift in the yield curve (market rate/swap rate) of 100 basis points (upward).

Table 2: Interest rate sensitivity for unrealised fair value changes in the income statement and the statement of comprehensive income (EVE)

The table below shows the effect on the income statement in the form of unrealised fair value changes at a parallel shift of 100bp, as in table 1. Not all balance sheet items included in EVE have an accounting measurement method that impacts profit and loss, this only applies to assets and liabilities measured at fair value and assets and liabilities included in hedge accounting. The effect in the income statement of balance sheet items measured at fair value is NOK 152 million, while the effect in the income statement of balance sheet items measured at hedge accounting is NOK -259 million. Net effect of these is NOK -107 million.

Table 3: Basis-spread sensitivity (EVE)

The table below shows sensitivity in market value for derivatives in form of a parallel shift of the basis curve by one basis point (up). The items included in the table have an effect on profit and loss.

Table 4: Credit-spread sensitivity (EVE)

The table below shows sensitivity in market value of balance sheet items (assets measured at fair value) by a parallel shift of the credit spread curve by one basis point (up). The items included in the table influence profit and loss.

Table 5: Interest rate sensitivity for net interest income (NII)

The table below shows the sensitivity of the bank's net interest income on a 12-month horizon based on a 100bp parallel shift of the yield curve (up).

Table 6: Sensitivity for change in basis spread for net interest income (NII)

The table below shows the sensitivity of the bank’s net interest income on a 12-month horizon based on a 1bp parallel shift of the basis curve (up).