Report for 1st quarter 2024

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

KBN’s core earnings¹ totalled NOK 308 million in the first quarter of 2024, compared to NOK 280 million in the first quarter of 2023. Increased net interest income resulting from higher interest rates and profitable growth was the main reason for the increase in core earnings.

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

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

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

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

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

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

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

Table 1: Result for the period and total comprehensive income

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

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

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

Chart 1: Quarterly lending growth in billion kroner

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

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

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

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

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

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

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

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

Table 2: Capital adequacy key figures

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

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

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

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

In 2022, KBN increased its long-term target for reducing its own emissions to a reduction of at least 55% by 2030 compared to the 2019 level. This emissions trajectory implies that KBN’s CO2 emissions in 2024 should be a maximum of 45% of the 2019 level, which corresponds to approximately 86.3 tonnes of CO2e for the year. KBN’s calculated CO2e emissions for the first quarter of 2024 were 31,0 tonnes of CO2e⁴, which is an increase from the first quarter of 2023.

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

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

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

Oslo, 26 April 2024

The Board of Directors and Chief Executive Officer of Kommunalbanken AS