Report for 1st quarter 2023

KBN prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The interim financial statements as of 31 March 2023 are prepared in accordance with IAS 34 Interim Financial Reporting and follow the same accounting policies as presented in the annual financial statements for 2022, with following clarifications.

The preparation of financial statements in accordance with IFRS requires that management uses estimates and judgments that may affect the carrying amounts of assets and liabilities, and revenues and costs. Estimates and judgments are based on historical experience and expectations regarding future developments, and actual outcomes may deviate from the estimates.

Fair value of financial instruments that are not traded in an active market or where quoted prices are not readily available on the reporting date is determined using valuation techniques. The measurement of fair value requires management to make judgments and assumptions related to credit and liquidity risk related to the financial instruments. Even though the judgments and assumptions are based to the largest extent possible on actual market conditions on the reporting date, they entail uncertainty related to carrying amounts.

(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 unrealised 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. See Note 9 Debt securities issued for information on calculating such value changes. The change in fair value arising from Debt securities issued presented in the above table is due to changes in parameters other than credit.

Changes in fair value are the result of changes in market parameters, mainly prices on bonds, market 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 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 other comprehensive income.

Of Total unrealised gains of NOK 114 million in the first quarter of 2023, loans to customers at fair value and associated hedging contracts contribute with a loss of NOK 116 million, mainly due to widening of credit spreads. Commercial paper and bonds and their associated hedging contracts contribute with a gain of NOK 22 million. Debt securities issued and related hedging derivatives contribute with a gain of NOK 207 million, mainly due to gains on basis swaps.

Recognised value changes on financial instruments in fair value hedges of Debt securities issued and associated hedging instruments amount to NOK 20 million in the first quarter of 2023. This amount is included in the above table as net unrealised changes in value. The carrying amount of the Debt securities issued included in fair value hedges amounts to NOK 231 billion.

KBN has implemented hedge accounting for fixed-rate lending from 2022. For fixed-rate lending, interest rate risk is hedged financially through the use of interest rate swaps, and fair value hedging has been introduced for accounting purposes. This only applies for new fixed-rate lending from 2022 on. For fixed-rate lending with associated hedging instruments that are included in hedge accounting, recognized value changes amount to NOK -4 million in the first quarter of 2023, which are included as net unrealized changes in value in the table above. The carrying amount of hedged fixed-rate loans amounts to NOK 21 billion.

(Amounts in NOK 1 000 000)

Methods used for the determination of fair value fall 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 11 in the Annual Report for further information about valuation techniques, inputs, value change analysis and sensitivities. Financial instruments measured at fair value in KBN's Statement of financial position as of 31 March 2023 are distributed in the following levels:

Reconciliation of movements in Level 3

Net holdings amounting to NOK 0.5 billion have been transferred from Level 1 and Level 2 to Level 3 in 2023. There have been net transfers of NOK 2.4 billion out of Level 3 during 2023. 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, and refinancing/change of loan product for loans to customers.

All gains/(losses) on financial instruments in Level 3 are recognised in the Income statement under "Net interest income", "Net unrealised gain/(loss) on financial instruments" or "Net realised gain/(loss) on financial instruments", or in Other comprehensive income.

Information on valuation techniques:

The methods used for determining the fair value of financial instruments are defined based on the instruments' features and structure. Fair value of financial instruments without embedded derivatives or option elements is determined using the discounted cash flows method, where discount rates are derived from the relevant observable money market interest rates and other significant risk factors that may affect the fair value of the instruments. When such factors cannot be reliably observed at a reporting date, management may make assumptions and use estimates when determining fair value. Fair value of financial instruments with embedded derivatives or option elements is determined using a combination of a discounted cash flow method and option pricing models with observable market data and estimates as inputs. The most significant unobservable inputs used in the valuation in Level 3 are credit spreads for financial instruments not traded in an active market.

Sensitivity analysis, level 3

The table below shows the impact of a 10 bp increase in the credit spread for financial assets and liabilities in Level 3 at 31 March 2023.

Financial instruments measured at amortised cost

Financial instruments measured at amortised cost include debt securities issued and fixed-rate lending that are subject to fair value hedge accounting. In addition, all other lending, except for fixed-rate lending with contract start before 2022 and lending with certificate terms, are measured at amortised cost as well. Further, floating rate bonds and commercial papers are measured at amortised cost, if they are not hedged 1:1 with interest rate swaps. For these financial assets and liabilities it is assumed that amortised cost is a reasonable approach to fair value.

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. Positive numbers here indicate a reduction in expected credit loss, while negative numbers indicate an increase in expected credit loss.

The following table shows an allocation of KBN’s expected credit losses as of 31 March 2023 to stage 1, 2 and 3. According to the impairment principles described in IFRS 9 Financial Instruments, Stage 1 implies no significant increase in credit risk since recognition of the asset. Stage 2 implies such a significant increase, while stage 3 implies that the asset is creditimpaired.

All exposures are estimated to be in Stage 1.

(Amounts in NOK 1 000 000)

Amounts in the table below represent actual credit exposure.

Value changes in the table above are before tax.

Value changes due to changes in own credit risk for Bonds issued in a foreign currency other than USD are calculated from changes in the credit curve measured in USD, and may therefore contain effects that are not due to direct changes in own credit risk. Value changes on liabilities that are due to changes in own credit risk are recognised in Total comprehensive income, while value changes on liabilities that are due to changes in other market parameters are recognised in the Income statement on the line Net unrealised gain/(loss) on financial instruments.

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.