Report for 2nd quarter 2024

KBN’s net interest totalled NOK 550 million in the second quarter of 2024, compared to NOK 507 million in the second quarter of 2023. Growth in profitable lending products over the last twelve months together with higher interest rates contributed to this increase in KBN’s income. KBN’s lending grew by NOK 1 billion in the second quarter of 2024, with green lending accounting for NOK 0.6 billion of this growth. Green lending represented 15.8% of KBN’s total lending at the end of the quarter, compared to 13.2% at the end of the second quarter of 2023.

KBN’s core earnings¹ totalled NOK 330 million in the second quarter of 2024, compared to NOK 360 million in the second quarter of 2023. KBN’s core earnings in the second quarter of 2023 were positively affected by a realised gain of NOK 101 million before tax resulting from KBN repurchasing subordinated debt capital. KBN’s net interest income totalled NOK 550 million in the second quarter of 2024, as compared to NOK 507 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 May and June meetings. Norway’s key policy rate currently stands at 4.5%.

KBN’s result for the accounting period in the second quarter of 2024 was a profit of NOK 493 million, compared to a profit of NOK 280 million in the same period in 2023. In the second quarter of 2024, KBN recognised a net gain on financial instruments totalling NOK 193 million, as compared to a net loss of NOK 48 million in the second quarter of 2023. Realised gains from market transactions represented NOK 28 million of the net gain in the second quarter of 2024 compared to NOK 95 million in the second quarter of 2023. Unrealised gains amounted to NOK 164 million in the second quarter of 2024, compared to unrealised losses of NOK 143 million in the same period in 2023. KBN’s fixed rate lending and associated hedging instruments contributed a net unrealised gain of NOK 171 million in the second 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 128 million in the second quarter of 2023. KBN started to apply hedge accounting to all its new fixed rate lending with effect from 1 January 2022. KBN’s introduction of hedge accounting to its 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 net unrealised gains and losses included in KBN’s earnings.

KBN’s liquidity portfolio and associated hedging instruments contributed a net unrealised gain of NOK 36 million for the second quarter of 2024, while KBN's own bonds and associated hedging instruments contributed a net unrealised loss of NOK 15 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 very 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’s provision for losses was unchanged in the second quarter of 2024.

KBN’s total operating costs for the second quarter of 2024 were NOK 88 million, compared to NOK 75 million in the same period in 2023. The increase in operating costs was primarily due to inflation and the weakness of the Norwegian krone, a higher level of activity in developing and improving KBN's operations, and hiring in temporary employees pending new appointments.

KBN’s core earnings² in the first six months of 2024 totalled NOK 638 million as compared to NOK 640 million in the first six months of 2023. KBN’s core earnings in the first six months of 2023 were positively affected by a realised gain of NOK 101 million before tax resulting from KBN repurchasing subordinated debt capital. KBN’s net interest income in the first six months of 2024 was NOK 1,104 million, compared to NOK 1,015 million in the same period in 2023. The increase was primarily due to higher interest rates in combination with lending growth.

KBN’s result for the period in the first six months of 2024 was a profit of NOK 884 million as compared to NOK 669 million in the same period in 2023. KBN recognised net gains on financial instruments totalling NOK 273 million in the first six months of 2024, compared with net gains totalling NOK 66 million in the same period in 2023.

KBN’s total operating costs for the first six months of 2024 were NOK 184 million, compared to NOK 151 million in the first six months of 2023. The increase was due to a higher level of activity, wage growth and inflation. KBN’s cost-to-income ratio³ for the first six months of 2024 was 16.7%, compared to 14.4% in the same period in 2023.

KBN’s annualised return on equity in the first six months of 2024 was 8.9%, compared to 7.5% in the same period in 2023. Based on its core earnings, KBN’s annualised return on equity in the first six months of 2024 was 7.1%, compared to 7.8% in 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 six months of 2024 was NOK 652 million, compared to NOK 628 million in the first six months 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 six months of 2024, there was an unrealised loss from changes to KBN’s own credit risk of NOK 309 million, as compared to an unrealised loss of NOK 54 million in the same period in 2023. Reduced creditspreads on KBN’s debt securities issued is the main reason for the unrealised losses.

Table 1: Result for the period and total comprehensive income

KBN’s lending portfolio totalled NOK 358 billion⁴ at the end of the second quarter of 2024, while aggregate customer financing⁵ at the same time was NOK 361 billion⁶. KBN’s aggregate customer financing increased by NOK 3.1 billion in the second quarter of 2024, while it increased by NOK 5.5 billion in the same period in 2023. Strong competition and the improved terms available to KBN’s customers in the capital markets in particular were the reasons for the more moderate growth in the second quarter of 2024 compared with the second quarter of 2023.

KBN continued to experience a good level of growth in its green lending, and its portfolio of green loans increased by NOK 0.6 billion in the second quarter of 2024, as compared to NOK 1.2 billion in the same period in 2023. KBN's green lending in the second quarter of 2024 included green loans for a biogas project in Nedre Romerike and for a fjord-based heating project in Stad municipality. At the end of the second quarter of 2024, KBN’s green lending represented 15.8% of its overall lending portfolio.

The annual rate of debt growth in the local government sector as at the end of June 2024 was calculated to be 9.8%. After adjusting for borrowing from the Norwegian State Housing Bank, the rate of debt growth was 9.5%. After adjusting for borrowing from the Norwegian State Housing Bank, KBN’s market share based on its total customer financing as at the end of the second quarter of 2024 was 50,2%.

Chart 1: Quarterly growth in aggregate customer financing in billion kroner

Inflation slowed over the second quarter of 2024 and is approaching 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 2.6% at the most recent assessment in June, while core inflation was 3.4%. 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. The US dollar and Euro remained relatively stable against the majority of currencies in the second quarter of 2024, including the Norwegian krone. The Norwegian krone continues to be at a historically weak level.

The credit spreads on local government and covered bonds fell through the second 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 second quarter of 2024 and completed all its funding transactions as planned. In the first six months of 2024, KBN’s new borrowings totalled approximately NOK 62 billion through 22 bond issues in eight currencies, as compared to NOK 33 billion in the corresponding period 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 six months of 2024

KBN’s liquidity portfolio totalled NOK 121 billion⁷ at the end of the second quarter of 2024, as compared to NOK 124 billion at the end of the second 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 57% of the portfolio at 30 June 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 second 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 second quarter of 2024 amounted to NOK 530 billion, up from NOK 516 billion at the end of the second 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 second 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 second 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.

KBN has a long-term goal of reducing its own emissions by 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 55% of the 2019 level, which corresponds to approximately 106 tonnes of CO2e for the year. KBN’s calculated CO2e emissions in the first six months of 2024 were 52 tonnes of CO2e⁸, which is a moderate increase from the first six months of 2023.

At its monetary policy committee meeting in June 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 keeps declining towards the target of 2% per year within a reasonable time horizon. The future path of the policy rate thereafter will depend on economic developments.

After weaker company results for the second quarter in the USA in combination with increased unemployment and weaker economic prospects, there has been market turmoil at the beginning of August. The stock markets have fluctuated sharply and interest rates in the market have fallen. Market expectations now are weaker economic development in the world economy in the second half of the year. KBN is to a small extent affected by short-term fluctuations in the market. Over time, the level of interest rates and the general economic development could affect the markets for municipal debt in Norway and for KBN.

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

We confirm that the half-year financial statements for the period 1 January 2024 to 30 June 2024 have, to the best of our knowledge, been prepared in accordance with IAS 34 Interim Financial Reporting, and that the information contained in the financial statements gives a true and fair view of the company’s assets, liabilities, financial position and results as a whole.

We also confirm that, to the best of our knowledge, the half-year report provides a true and fair overview of important events during the accounting period and their effects on the half-year financial statements, and also of the material risks and uncertainties facing the company during the next accounting period.

Oslo, 8 August 2024

The Board of Directors and Chief Executive Officer of Kommunalbanken AS