Report for 2nd quarter 2023

Kommunalbanken AS (KBN) prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The condensed interim financial statements as of 30 June 2023 are prepared in accordance with IAS 34 Interim Financial Reporting and follow the same accounting policies and methods of computation as presented in the annual financial statements for 2022. The interim financial statement does not include all the information required in a full annual financial statement and should be read in conjunction with the annual financial statement for 2022. The Company has one operating segment: lending to the Norwegian municipalities and municipal companies. The Company does not provide separate segment reporting other than disclosures on the lending portfolio and the business as a whole.

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 will 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.

From 2023, KBN has changed the presentation of interest from financial instruments in hedge accounting. This means that interest that has previously been below fair value has been moved to amortised cost. The change only affects the presentation of interest on financial derivatives. Historical data has been adjusted accordingly.

(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. 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. Investments in the liquidity portfolio, fixed interest-rate loans to customers and issued debt securities measured at fair value, may lead to significant effect in income statement and other comprehensive income due to changes in credit spreads. Similarly, changes in basis swap spreads may lead to significant net effects in the income statement.

KBN hedges currency risk. The bank's guidelines require hedging of all currency risks related to holdings in foreign currency. However, short-term net exposure linked to income and balance sheet items in USD and EUR may arise. KBN's limit for currency risk in these currencies is 1.6 per cent of primary capital. This means that net profit effects from short-term exchange rate changes are limited. Effects from the currency conversion of principal from non-derivative interest instruments in foreign currency, including among other commercial paper and bonds and debt securities issued, and from interest and fees/discounts are presented net in the income statement. Corresponding changes in value from foreign exchange derivatives used as a hedging instrument in financial hedging of the mentioned currency exposure, are presented net with currency conversion effects from the hedging object. In the tables above, only effects from exchange rate changes on fair value changes are presented.

(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 are distributed in the following levels:

(Amounts in NOK 1 000 000)

Reconciliation of movements in Level 3

The transfers into and out of Level 3 are mainly due to changes in market conditions that affect the assessment of inputs to the valuation techniques during the reporting period, and refinancing of change of loan product for loans to customers. In the first six months of 2023, net holdings amounting to NOK 210 million have been transferred from Level 2 to Level 1, and correspondingly no transfers from Level 1 to Level 2 have been made.

Realised gains/(losses) on financial instruments in Level 3 are recognised in the Income statement under “Net realised gain/(loss) on market transactions”, while unrealised gains/(losses) are recognised under “Net unrealised gain/(loss) on financial instruments” and in the Statement of other comprehensive income (for changes in fair value due to changes in own credit risk). Effects from the currency conversion of principal from non-derivative interest instruments in foreign currency and from interest and fees/discounts are presented net in the income statement. Corresponding changes in value from foreign exchange derivatives used as a hedging instrument in financial hedging of the mentioned currency exposure, are presented net with currency conversion effects from the hedging object.

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.

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

KBN’s expected credit losses are allocated into 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 credit-impaired.

All exposures are estimated to be in Stage 1, both as of 30 June 2023, 30 June 2022 and 31 December 2022.

(Amounts in NOK 1 000 000)

Amounts in the tables below represent actual credit exposure.

Primary capital has been calculated under Capital Requirements Regulation (CRR). Unrealised gain/(loss) on liabilities that is due to changes in own credit risk is related to debt securities issued.

In the quarter, KBN carried out a buy-back of subordinated loan capital of NOK 1.2 billion and a related issue of Tier 1 capital with the same first repayment date as the subordinated loan. The buyback resulted in a realised gain of NOK 101 mill. before tax, which has been recognised as income in the quarter. The transaction results in a strengthening of the bank's Tier 1 capital ratio and Leverage ratio.