Report for 3rd quarter 2024

KBN’s net interest income totalled NOK 595 million in the third quarter of 2024, compared to NOK 556 million in the third 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 aggregate customer financing grew by NOK 8.0 billion in the third quarter of 2024, with green lending accounting for NOK 5.5 billion of this growth. Green lending represented 17.1% of KBN’s total lending at the end of the third quarter.

KBN’s core earnings¹ totalled NOK 345 million in the third quarter of 2024, compared to NOK 298 million in the third quarter of 2023. KBN’s net interest income totalled NOK 595 million in the third quarter of 2024, as compared to NOK 556 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 September meeting. Norway’s key policy rate has remained unchanged at 4.5% throughout 2024.

KBN’s result for the accounting period in the third quarter of 2024 was a profit of NOK 310 million, compared to a profit of NOK 197 million in the same period in 2023. In the third quarter of 2024, KBN recognised a net loss on financial instruments totalling NOK 54 million, as compared to a net loss of NOK 191 million in the third quarter of 2023. These net losses comprise the sum of the realised and unrealised gains and losses recognised by KBN. Realised gains from market transactions of NOK 47 million were included in the net loss on financial instruments reported for the third quarter of 2024, while there was a net realised loss from market transactions of NOK 5 million in the third quarter of 2023. Unrealised losses amounted to NOK 101 million in the third quarter of 2024, compared to unrealised losses of NOK 187 million in the same period in 2023. KBN’s fixed rate lending and associated hedging instruments contributed a net unrealised gain of NOK 64 million in the third 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 gain on fixed rate lending and associated hedging instruments of NOK 152 million in the third 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. At the end of the third quarter of 2024, 50% of KBN’s portfolio of fixed lending was carried at fair value.

KBN’s liquidity portfolio and associated hedging instruments contributed a net unrealised loss of NOK 39 million for the third quarter of 2024, while KBN's own bonds and associated hedging instruments contributed a net unrealised loss of NOK 126 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 expected credit 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 increased its provision for expected credit losses by NOK 4 million in the third quarter of 2024.

KBN’s total operating costs for the third quarter of 2024 were NOK 102 million, compared to NOK 87 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 nine months of 2024 totalled NOK 984 million as compared to NOK 938 million in the first nine months of 2023. KBN’s net interest income in the first nine months of 2024 was NOK 1,699 million, compared to NOK 1,572 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 nine months of 2024 was a profit of NOK 1,194 million as compared to a profit of NOK 866 million in the same period in 2023. KBN recognised a net gain on financial instruments totalling NOK 219 million in the first nine months of 2024, compared to a net loss totalling NOK 125 million in the same period in 2023.

KBN’s total operating costs for the first nine months of 2024 were NOK 285 million, compared to NOK 238 million in the first nine months of 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 cost-to-income ratio³ for the first nine months of 2024 was 16.7%, compared to 15.1% in the same period in 2023.

KBN’s annualised return on equity in the first nine months of 2024 was 8.0%, compared to 6.3% in the same period in 2023. Based on its core earnings, KBN’s annualised return on equity in the first nine months of 2024 was 7.3%, compared to 7.6% 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 nine months of 2024 was NOK 1,024 million, compared to NOK 758 million in the first nine 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 nine months of 2024, there was an unrealised loss from changes to KBN’s own credit risk of NOK 227 million, as compared to an unrealised loss of NOK 143 million in the same period in 2023.

Table 1: Result for the period and total comprehensive income

KBN’s lending portfolio totalled NOK 365 billion⁴ at the end of the third quarter of 2024, while aggregate customer financing⁵ totalled NOK 369 billion⁶ at the end of the third quarter. KBN's aggregate customer financing increased by NOK 8.0 billion in the third quarter of 2024, as compared to an increase of NOK 5.6 billion in the third quarter of 2023. The main reason for the growth in the third quarter of 2024 was a high level of demand for new loans.

KBN continued to experience a good level of growth in its green lending, and its portfolio of green loans increased by NOK 5.5 billion in the third quarter of 2024, as compared to NOK 2.4 billion in the same period in 2023. KBN's green lending in the third quarter of 2024 included green loans for an upper secondary school in Trondheim, a water and wastewater project in Oslo, and Bergen Light Rail. At the end of the third quarter of 2024, KBN’s green lending represented 17.1% of its overall lending portfolio.

The annual rate of debt growth in the local government sector as at the end of September 2024 was calculated to be 9.5%. After adjusting for borrowing from the Norwegian State Housing Bank, the rate of debt growth was 9.3%. The debt growth is expected to fall towards the end of the year. After adjusting for borrowing from the Norwegian State Housing Bank, KBN’s market share based on its aggregate customer financing as at the end of the third quarter of 2024 was 51.1%.

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

Inflation has slowed in 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 3.0% at the most recent assessment in September, while core inflation was 3.1%. 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 third quarter of 2024, including the Norwegian krone.

The credit spreads on local government and covered bonds fell through the third 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 third quarter of 2024 and completed all its funding transactions as planned. In the first nine months of 2024, KBN’s new borrowings totalled approximately NOK 83 billion through 28 bond issues in eight currencies, as compared to NOK 63 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 128 billion⁷ at the end of the third quarter of 2024, as compared to NOK 129 billion at the end of the third 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 largely held in zero-risk-weighted assets that are particularly liquid. Investments denominated in foreign currencies represented 47% of the portfolio at 30 September 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.

Table 2: Capital adequacy key figures

KBN’s total assets at the end of the third quarter of 2024 amounted to NOK 536 billion, up from NOK 528 billion at the end of the third quarter of 2023 and from NOK 522 billion at the end of 2023. The increase was in part 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 third 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 third quarter of 2024 was 4.0%, as compared to the requirement of 3.0%.

KBN’s capital adequacy at the end of the third quarter of 2024 was in excess of the requirements set by the authorities.

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 CO₂e 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 that its own CO₂e emissions⁸ in the first nine months of 2024 were 69.9 tonnes of CO₂e, which is a moderate decrease from 71.9 tonnes of CO₂e in the same period in 2023.

At its monetary policy committee meeting in September 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, as it remains somewhat over the target. The outlook for the global economy has strengthened somewhat during the third quarter, but there is still considerable uncertainty. The future path of the policy rate thereafter will depend on economic developments.

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

Oslo, 7 November 2024

The Board of Directors and Chief Executive Officer of Kommunalbanken AS