Report for 1st quarter 2023

KBN’s net interest income in the first quarter of 2023 was NOK 508 million as compared to NOK 436 million in the same period in 2022. KBN’s lending portfolio increased by NOK 1.6 billion in the first quarter of 2023 primarily as a result of good growth in fixed rate lending. KBN’s green lending grew by NOK 1.3 billion in the quarter. KBN’s result for the period in the first quarter of 2023 was a profit of NOK 389 million as compared to a loss of NOK 352 million in the same period in 2022. In the first quarter of 2023 KBN recognised unrealised gains on financial instruments totalling NOK 114 million. Unrealised losses on financial instruments were the main reason for the loss in the first quarter of 2022.

The final part of the quarter was characterised by a high level of uncertainty in the banking market, which was triggered by the insolvency of two American banks and the subsequent forced acquisition of a Swiss bank. The common denominator of these events was lack of trust in the banks’ operations, with this leading to many customers withdrawing their deposits in a short period of time. The banks did not have sufficient liquidity to handle the large withdrawals and were therefore forced to dispose of assets with significant losses to procure the liquidity they needed, and this reduced their equity capital. KBN has no exposure to these banks and has therefore not been directly impacted by the bank turmoil. Indirectly KBN is impacted by associated currency fluctuations and changes in other market parameters. The Norwegian krone weakened over the first quarter. This led to an inflow of liquidity from currency hedging instruments for KBN, which in turn led to an increase in KBN's liquidity holdings and balance sheet assets.

KBN’s core earnings¹ totalled NOK 280 million for the first quarter of 2023, compared to NOK 248 million in the first quarter of 2022. The main reason for the increase in KBN’s core earnings was an increase in net interest income.

KBN’s net interest income totalled NOK 508 million in the first quarter of 2023, compared to NOK 436 million in the first quarter of 2022. The main reason for the improvement in net interest income was rising interest rates. Money-market interest rates increased further in the quarter as a result of Norges Bank increasing its key policy rate by 0.25 percentage points at its policy meeting on 23 March and signalling further increases in the time ahead. The key policy rate now stands at 3.0%. KBN increased its standard variable rate by 0.4 percentage points with effect from 11 April.

KBN’s result for the period in the first quarter of 2023 was a profit of NOK 389 million as compared to a loss of NOK 352 million in the first quarter of 2022. In the first quarter of 2023, KBN recognised unrealised gains on financial instruments totalling NOK 114 million, while in the first quarter of 2022 it recognised unrealised losses totalling NOK 821 million. The portion of KBN’s fixed-rate lending that is carried at fair value contributed an unrealised loss of NOK 116 million in the first quarter of 2023 as a result of a widening of credit spreads for the local government sector in connection with the banking turmoil seen in March, which compares with an unrealised loss of NOK 462 million in the first quarter of 2022. 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. At 31 March 2023, hedge accounting has been used for approximately 20% of KBN’s portfolio of fixed rate loans.

KBN’s liquidity portfolio and associated hedging instruments contributed an unrealised gain of NOK 22 million for the first quarter of 2023, while KBN's own bonds and associated hedging instruments contributed an unrealised gain of NOK 207 million. KBN’s unrealised gains and losses are expected to reverse, either as market conditions normalise or as the instruments approach maturity. Sales of securities from the liquidity portfolio resulted in realised gains totalling NOK 1 million in the first quarter.

KBN’s provision for 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 decreased its provision for losses in the first quarter of 2023 by NOK 3 million.

KBN’s total operating costs for the first quarter of 2023 were NOK 77 million, compared to NOK 66 million in the same period in 2022. The increase in operating costs was due to a higher level of activity and the high rate of inflation.

Table 1: Profit after tax and other comprehensive income

KBN’s lending portfolio totalled NOK 330 billion at the end of the first quarter of 2023. The lending portfolio increased by NOK 1.6 billion in the quarter, while it decreased by NOK 2.4 billion in the same period last year. The relatively unattractive terms available to KBN’s customers in the capital markets created better market conditions for KBN’s long-term instalment-based loans. The favourable market conditions for fixed rate loans, with lower pricing for long-term interest rates than for short-term rates, resulted in many customers choosing to change from floating to fixed-rate loans.

Increasing demand for new loans is expected over the course of the rest of the year. With the capital markets continuing to be relatively unattractive for KBN’s customers, KBN expects strong demand for long-term, instalment-based loans to refinance maturing loans.

KBN continued to experience a good level of growth in its green lending, and its portfolio of green loans increased by NOK 1.3 billion in the first quarter of 2023, as compared to NOK 1.6 billion in the same period in 2022. Examples of projects granted green loans in the quarter include new school buildings in Trondheim municipality, Klepp municipality and Narvik municipality. At the end of the first quarter, KBN’s green lending represented 13.0% of its overall lending portfolio. KBN’s target is for 15% of its lending to be green lending by the end of 2023.

The annual rate of debt growth in the local government sector as at the end of February 2023 was calculated to be 5.5%. After adjusting for borrowing from the Norwegian State Housing Bank, the rate of debt growth was 4.7%. The strong growth in prices and higher interest rates mean that weaker investment growth and thus lower debt growth are expected in 2023 compared with previous years. After adjusting for borrowing from the Norwegian State Housing Bank, KBN’s market share at the end of February was 49.1%. Development in quarterly lending growth is showed in below chart.

Chart 1: Quarterly lending growth in billion kroner

The rate of inflation fell somewhat in the first quarter of 2023, but it remains well above the targets set by central banks in many countries across the world. A number of central banks consequently raised their key policy rate further in the quarter. The central banks of the USA and Norway raised their key policy rates by 0.25 percentage points in March. At the most recent assessment, inflation in Norway was running at 6.5%. The US dollar and Euro strengthened against the majority of currencies in the first quarter, including the Norwegian krone. The market expects further interest rate rises in 2023, but there is much uncertainty about how high rates will become. The uncertainty is leading to a high level of volatility in the fixed income market, the equity market and for the Norwegian krone, which at present is weak.

The credit spreads on local government and covered bonds fell at the start of the year but rose again in March as a result of the market turmoil. At the end of the first quarter spreads were higher than at the start of 2023. There is some uncertainty about future changes in the spreads on local government and covered bonds both in Norway and internationally.

KBN’s funding activities in the first quarter of 2023 were at a relatively normal level. The market turmoil in the period did not impact KBN’s access to the international capital markets to any significant extent, and KBN completed its funding transactions as planned. KBN issued a five-year USD 1 billion benchmark bond in January, which attracted a good level of interest. The weakness of the Norwegian krone relative to the US dollar increased KBN’s liquidity as a result of inflow of liquidity from currency hedging instruments in March, and its funding activities were therefore somewhat less extensive during the month. New borrowings in the first quarter of 2023 totalled approximately NOK 24.5 billion through 15 bond issues in five currencies, compared to NOK 35.6 billion in the same period in 2022. Below chart shows the total borrowing by currency.

Chart 2: Total borrowing by currency in first quarter 2023

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

KBN’s liquidity portfolio totalled NOK 110 billion at the end of the first quarter of 2023 as compared to NOK 87 billion at the same point in 2022. 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 represent 61% of the portfolio. 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.

At the end of the first quarter of 2023, KBN’s total common equity Tier 1 capital was NOK 15.6 billion, its total Tier 1 capital was NOK 18.0 billion, and its total primary capital was NOK 20.0 billion. KBN’s total assets at the end of the first quarter of 2023 amounted to NOK 505 billion, up from NOK 492 billion at the end of 2022. KBN’s total assets at the end of the first quarter of 2022 amounted to NOK 455 billion. The increase from the end of 2022 is primarily due to liquidity inflows from cash collateral from currency hedging instrument caused by the weakening of the Norwegian krone, and an increase in the NOK value of balance sheet assets as a result of currency conversion.

At the end of the first quarter of 2023, KBN had a common equity Tier 1 capital adequacy ratio of 18.8%, a Tier 1 capital adequacy ratio of 21.6%, and a total capital adequacy ratio of 24.0%. The capital adequacy ratio requirements imposed by the authorities at the end of the first quarter were 16.5% (common equity Tier 1 capital), 18.0% (Tier 1 capital) and 20.0% (total capital).

KBN’s leverage ratio at the end of the first quarter was 3.8%, 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 both through the conversion into NOK and because changes in the value of KBN’s outstanding currency hedging contracts cause fluctuations in cash collateral. When the krone weakens, KBN receives collateral, the size of KBN’s balance sheet increases and KBN’s capital adequacy decreases. When the krone strengthens, KBN’s capital adequacy increases. The figures for weighted capital adequacy are also temporarily affected by changes in the value of KBN’s hedging contracts until the cash collateral is received the following day and the additional effect is offset. 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.

Norges Bank raised its key policy rate to 3% at its monetary policy committee meeting in March 2023, and communicated that it will increase the rate further at its meeting in May. Norges Bank utters that the reason for the increase is the need to reduce inflation. The goal for monetary policy is an inflation that over time is close to the target of 2% annual growth. The forecast for the key policy rate indicates that it will reach 3.5% this summer. The future path of the policy rate will depend on economic developments.

The war in Ukraine, uncertainty about the economic outlook, and the bank turmoil have caused long-lasting uncertainty in the fixed income market. The widening in credit spreads for local government sector issuers in the capital markets has continued in 2023, and at the end of the first quarter spreads for five-year financing were approximately 5 basis points higher that at the end of 2022. It is still uncertain whether credit spreads will fall this spring 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. Seen in isolation, these factors may result in a decrease in demand for financing going forward, and KBN also expects to see a lower rate of growth in borrowing by the local government sector in 2023 relative to previous years.

The level of demand for KBN-issued bonds continues to be good, and the increase in the credit spreads on KBN’s bonds has been relatively moderate. This means that KBN is in a good position to improve its profitability and to further strengthen its long-term capitalisation and lending capacity.

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

KBN received the Financial Supervisory Authority of Norway’s decision on its capital requirements on 11 April 2023. The Financial Supervisory Authority of Norway has determined that KBN will have a Pillar 2 capital requirement that represents 2.1% of the basis for calculation under Pillar 1. The Pillar 2 capital requirement is hence reduced by 0.1 %-point. 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. The decision will enter into force on 30 April 2023.

Oslo, 27 April 2023

The Board of Directors of Kommunalbanken AS