Report for 4th quarter 2023

KBN’s lending grew by NOK 26 billion in 2023, and KBN increased its market share to 51.1%, adjusting for borrowing from the Norwegian State Housing Bank. For comparison, this market share at the end of 2022 was 49.7%. KBN’s green lending grew by NOK 11 billion in 2023 as compared to an increase of NOK 8 billion in 2022. Green lending represented 15.4% of KBN’s total lending at the end of 2023. KBN’s net interest income increased from NOK 1,866 million in 2022 to NOK 2,105 million in 2023. Good growth in profitable lending products together with higher interest rates helped KBN achieve higher earnings in 2023.

KBN’s core earnings¹ totalled NOK 273 million in the fourth quarter of 2023, compared to NOK 242 million in the fourth quarter of 2022. An increase in net interest income resulting from higher interest rates was the main reason for the strong increase in core earnings.

KBN’s net interest income totalled NOK 534 million in the fourth quarter of 2023, as compared to NOK 479 million in the corresponding period of 2022. There was relatively little change in money-market interest rates in the quarter despite Norges Bank increasing its key policy rate by a further 0.25 percentage points at its meeting on 15 December. Norway’s key policy rate now stands at 4.5%.

KBN’s result for the accounting period in the fourth quarter of 2023 was a profit of NOK 566 million, compared to a profit of NOK 224 million in the same period in 2022. In the fourth quarter of 2023, KBN recognised a net gain on financial instruments totalling NOK 338 million, as compared to a net loss of NOK 64 million in the fourth quarter of 2022. KBN’s fixed-rate lending and associated hedging instruments contributed a net unrealised gain of NOK 193 million in the fourth quarter of 2023, primarily as a result of a moderate decrease in credit spreads for the local government sector. There was an equivalent net unrealised gain on fixed-rate lending and associated hedging instruments of NOK 383 million in the fourth 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.

KBN’s liquidity portfolio and associated hedging instruments contributed a net unrealised loss of NOK 21 million for the fourth quarter of 2023, while KBN's own bonds and associated hedging instruments contributed a net unrealised gain of NOK 165 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 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 increased its provision for losses in the fourth quarter of 2023 by NOK 1 million as a result of growth in its portfolios.

KBN’s total operating costs for the fourth quarter of 2023 were NOK 87 million, compared to NOK 74 million in the same period in 2022. The increase in operating costs was primarily due to wage growth and a provision for the variable element of salaries.

KBN’s core earnings¹ for 2023 as a whole totalled NOK 1,211 million, compared to NOK 1,081 million for 2022. KBN’s net interest income in 2023 as a whole was NOK 2,105 million, as compared to NOK 1,866 million in 2022. The increase was primarily due to higher interest rates in combination with higher lending margins and good lending growth.

KBN’s result for the period for 2023 as a whole was a profit of NOK 1,432 million as compared to a loss of NOK 60 million in 2022. KBN recognised net gains on financial instruments totalling NOK 212 million in 2023, compared with net losses totalling NOK 1,615 million in 2022.

KBN’s total operating costs in 2023 as a whole were NOK 325 million, compared to NOK 271 million in 2022. The increase was due to a higher level of activity, wage growth and inflation. KBN’s cost-to-income ratio² for 2023 was 15.6%, compared to 15.8% in 2022.

Based on its result from ordinary activities, KBN’s annualised return on equity in 2023 was 7.9%, compared to -0.8% in 2022. Based on its core earnings, KBN’s annualised return on equity in 2023 was 7.3%, compared to 6.6% in 2022. The return requirement set for KBN by its owner for the 2023-2025 period is 5.5%.

KBN’s total comprehensive income in 2023 was NOK 1,789 million, compared to NOK 541 million in 2022. KBN’s total comprehensive income includes gains and losses on KBN’s own bonds resulting from changes to KBN’s own credit risk. For 2023 as a whole, there was a gain after tax from changes to KBN’s own credit risk of NOK 363 million, as compared to a gain of NOK 600 million in 2022.

Table 1: Result for the period and total comprehensive income

KBN’s lending portfolio totalled NOK 354 billion³ at the end of 2023. The lending portfolio increased by NOK 12.9 billion in the fourth quarter of 2023, while it increased by NOK 5.8 billion in the same period in 2022. 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 fourth quarter.

KBN continued to experience a good level of growth in its green lending, and its portfolio of green loans increased by NOK 6.2 billion in the fourth quarter of 2023, as compared to NOK 2.3 billion in the same period in 2022. KBN's green lending in the fourth quarter of 2023 included two sizeable green loans to the City of Oslo as financing for new environmentally friendly nursing homes and schools. At the end of 2023, KBN’s green lending represented 15.4% of its overall lending portfolio. KBN’s target was 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 2023 was calculated to be 7.9%. After adjusting for borrowing from the Norwegian State Housing Bank, the rate of debt growth was 7.2%. After adjusting for borrowing from the Norwegian State Housing Bank, KBN’s market share at the end of 2023 was 51.1%.

Chart 1: Quarterly lending growth in billion kroner

The rate of inflation decreased over 2023, but it remains materially above the targets of the central banks of many countries across the world, including in Norway. A number of central banks have consequently raised their key policy rates. Norway’s central bank raised its key policy rate by a total of 1.75 percentage points in 2023. The market now expects that the key policy rate has peaked. The rate of inflation in Norway was running at 4.8% at the most recent assessment in December, while core inflation was 5.5%. 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 2023, including the Norwegian krone. The Norwegian krone did strengthen somewhat towards the end of 2023, but continues to be at a historically low level. The continuing uncertainty is leading to a high level of volatility in the fixed income market and the equity market, and for the Norwegian krone.

The credit spreads on local government and covered bonds fell at the start of 2023 but rose again over the following months. At the end of 2023 spreads were at around the same level as at the end of 2022. The outlook for future changes in the spreads on local government and covered bonds is uncertain, both in Norway and internationally.

In 2020 the UK’s Financial Conduct Authority (FCA) decided that LIBOR would be discontinued and would cease to be quoted with effect from 1 July 2023. The reference rate therefore had to be replaced by a new, risk-free reference rate for current contracts and activities. For the USD, LIBOR was replaced by the Secured Overnight Financing Rate (SOFR) reference rate. KBN did not have any bonds with a floating LIBOR rate at the time of the transition, but it did have a significant portfolio of financial derivatives with USD LIBOR as their reference rate. The transition was regulated by a transition clause in the ISDA agreement for financial derivatives, which meant that the reference rate changed from three-month USD LIBOR to USD SOFR with a spread premium of 26.16 basis points. In line with this, KBN converted all its ongoing derivative contracts to USD SOFR in 2023. The conversion did not have a material impact on KBN’s earnings.

KBN enjoyed good access to the international capital markets in 2023 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 2023, and KBN's funding activities were therefore somewhat less extensive. In 2023 as a whole KBN’s new borrowings totalled approximately NOK 78 billion through 46 bond issues in 10 currencies, as compared to NOK 87 billion in 2022.

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

Chart 2: New borrowings by currency in 2023

KBN’s liquidity portfolio totalled NOK 115 billion⁴ at the end of 2023, as compared to NOK 110 billion at the end of 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 represented 58% of the portfolio at 31 December 2023. 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 2023 was in excess of the requirements set by the authorities.

Table 2: Capital adequacy key figures

KBN’s total assets at the end of 2023 amounted to NOK 522 billion, up from NOK 492 billion at the end of 2022. 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 received the Financial Authority of Norway’s (Finanstilsynet’s) decision regarding its Pillar 2 requirement (SREP) on 22 December 2023. The Financial Supervisory Authority of Norway determined that KBN will have a Pillar 2 requirement consisting of 2.0% of the basis for calculation under Pillar 1. KBN’s Pillar 2 requirement has therefore been reduced by 0.1 percentage points. 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 came into force on 31 December 2023.

KBN’s leverage ratio at the end of 2023 was 4.0%, 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.

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 2023 should be a maximum of 65% of the 2019 level, which corresponds to approximately 125 tonnes of CO2e for the year. KBN’s calculated CO2 emissions increased in 2023 relative to 2022, mainly due to more normalized travel activities in 2023. KBN’s calculated CO2 emissions for 2023 were at 111.5 tonnes of CO2e⁵, which is better than the targeted emissions pathway.

Norges Bank raised its key policy rate to 4.5% at its December 2023 monetary policy committee meeting, and it has implied that it will probably keep the key policy rate at this level for some time ahead. Norges Bank has stated that the reason for the increases is the need to reduce inflation. Norges Bank’s forecast for its key policy rate indicates that it will remain at the current level until autumn 2024 before gradually decreasing. The future path of the policy rate thereafter will depend on economic developments. 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 wars in Ukraine and in the Middle-East and uncertainty about the economic outlook have caused long-lasting uncertainty in the fixed income market. For 2023 as a whole, credit spreads for local government sector issuers were at a high and stable level. The fact credit spreads have remained high as we moved into 2024 reveals the continuing nervousness in financial markets. It is still 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.

The level of demand for KBN-issued bonds is 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, which will help to further strengthen its long-term capitalisation and lending capacity.

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

The Board of Directors proposes a dividend for 2023 of NOK 700 million. This represents 48,9% of KBN’s profit and 57.8% of its core earnings.

Oslo, 15 February 2024

The Board of Directors and CEO of KBN AS