Annual report 2022 KLP Banken AS/KLP Banken Group

KLP Banken AS is 100% owned by Kommunal Landspensjonskasse gjensidig forsikringsselskap (KLP), and has its head office in Trondheim. KLP Banken AS has two subsidiaries, KLP Kommunekreditt AS and KLP Boligkreditt AS, which are part of the KLP Banken Group. The operations of the KLP Banken Group and its subsidiaries are divided into the Retail and Public Sector business areas, both nationwide.

The KLP Banken Group offers simple and competitive savings and loan products and digital solutions to establish and manage them. The Bank aims to reinforce the perception that businesses which have chosen KLP as a pension provider are attractive employers. At the end of 2022, employees in these businesses accounted for almost 70 per cent of the KLP Banken Group’s retail customers.

The KLP Banken Group’s presence in the market for public loans encourages competition and benefits the target group of municipal and county authorities and enterprises with public guarantees providing access to favourable long-term financing. The Bank provides guidance to customers in financing and municipal funding.

The KLP Banken Group aims to be a significant lender and financial sparring partner for KLP’s owners, and the preferred bank for members of KLP’s pension schemes.

The financial contributions from the two business areas were NOK 107.7 (87.6¹) million from the retail market and NOK 72.8 (28.5) million from the public sector.

The KLP Banken Group achieved a return on equity of 7.0 (4.8) per cent before tax and 6.7 (5.1) per cent after tax.

Net lending in the KLP Banken Group increased by NOK 2.4 (1.7) billion, or 6 (4) per cent. The figure includes growth of NOK 1.1 (1.5) billion in home mortgages and NOK 1.3 (0.3) billion in public loans. Managed loans for KLP increased by NOK 0.7 (6.0) billion in 2022.

Money market rates, and hence general interest rates, continued to rise throughout 2022. The KLP Banken Group has increased its lending rates in line with market developments to compensate for rising borrowing costs. Growth in the volume of loans also contributed to higher net interest income compared with the previous year.

In the public-sector market, net interest income was significantly higher than in a normal year, and hence higher than in 2021. Total net interest income increased by 19 per cent in 2022 compared to the previous year. 71 (79) per cent of the KLP Banken Group’s net interest income in 2022 came from the retail market.

Changes in the value of financial instruments were also negative in 2022. In previous years, this has been mainly due to the accounting effects of loan buybacks. In 2022, higher interest rates also resulted in losses on the Bank’s liquidity investments recognised at market value.

The accounting item for net gains/losses on financial instruments contains not only the effects of changes in value for securities and buybacks of borrowing but also the effects of amended pension estimates and changes in the value of loans made. In total, financial instruments show a cost of NOK 26.3 (32.9) million for the financial year.

The KLP Banken Group does not charge high fees for its banking services. The Bank’s earnings from fees generally follow changes in the volume of outstanding loans in the retail market. Increased deposit volume, adjustment of annual fees for debit cards and increased revenues from credit card use meant that fees and commission income increased to NOK 26.9 (19.5) million in 2022.

Operating costs and depreciation totalled NOK 246.7 (236.2) million in 2022. This corresponds to a rise in costs of 4 (4) per cent. The growth in expenses is mainly related to staff costs and investments in IT technology and digitalisation.

Loan loss provisions have been calculated on commitments both in the retail market and on public-sector loans (see note 10).

Individual losses and loan loss provisions are all associated with investments in the retail market. The public-sector market did not incur any individual loan losses in 2022 either.

Losses recognised through profit/loss and loan loss provisions amounted to NOK 0.3 (2.3) million in the financial year. Capitalised loan loss provisions amounted to NOK 5.5 (6.4) million. Of this, step 3 impairments amounted to NOK 1.0 (1.8) million while steps 1 and 2 totalled NOK 4.5 (4.6) million. The Bank’s losses are at a very low level and the Board believes that the loan loss provisions are sufficient.

On behalf of KLP and on its own account, the KLP Banken Group manages a lending portfolio totalling NOK 120.8 (117.7) billion. Outstanding loans (principal) per company in KLP Banken as at 31.12.2022:

In addition to mortgages in the retail market there is drawn credit on credit cards.

A part of the managed loans to the public sector/enterprises are pure management jobs where KLP handle loan agreements, documentation and follow-up. With regard to the remaining management activities on behalf of KLP, the KLP Banken Group is also responsible for making offers, entering into agreements and producing loan documentation in accordance with its mandate.

The KLP Banken Group’s liquidity situation is satisfactory, as its financing more than covers the liquidity requirement from operations. The cash flow statement at year-end shows a slightly negative net cash flow. Operating activities have a negative cash flow because new lending exceeds repayments and redemptions, resulting in a growth in net lending. The investment activities show that new investments in fixed income instruments for the liquidity portfolio were greater than sales from the portfolio. This difference has increased the liquidity reserve. Financing activities in 2022 reflect somewhat lower external refinancing needs compared to the previous year, and the KLP Banken Group increased its equity in 2022.

Surplus liquidity is invested in other banks and in interest-bearing securities. Investments in credit institutions amounted to NOK 1.4 (1.5) billion. The book value of interest-bearing securities was NOK 6.6 (6.0) billion in the KLP Banken Group at the end of the year. The portfolio is entirely composed of high-rated covered bank bonds and bonds issued by the Norwegian government or other public institutions.

The Bank reports the liquidity reserve (LCR) for the KLP Banken Group as a whole each month, and for the individual companies in the Group each quarter.

The KLP Banken Group had total assets of NOK 50.5 (47.5) billion at the end of 2022. The table below shows a breakdown of this amount:

The Group’s equity and subordinated loan capital, based on the Board of Directors’ proposal for allocation of the profit from the Group companies, was NOK 2.9 (2.5) billion at the end of 2022. Core capital was increased by NOK 300 million in September 2022 and is identical to equity and subordinated loan capital. This gives a capital adequacy and tier 1 capital ratio of 20.7 (18.7) per cent. The current capital requirement, including capital buffers, is a 13.5 per cent tier 1 capital ratio and 17.0 per cent capital adequacy.

KLP Banken AS has been given a Pillar 2 supplement of 1.5 per cent, which is included in the Group’s capital requirements at the end of 2022. The bank also maintain a buffer of at least 0.5 per cent above the actual capital requirement for Pillar 1 and Pillar 2 risks, so the Bank’s capital target is 17.5 per cent.

The risk-weighted balance came to NOK 13.5 (12.7) billion at the end of 2022.

The Group’s leverage ratio was 5.7 (5.2) per cent. The leverage ratio requirement is 3 per cent. Capital adequacy is considered good.

The Board of Directors believes that the financial statements provide a true and fair picture of the Banks’s assets and liabilities, financial position and results. The conditions for continued operation are present, and this is assumed in the financial statements.

KLP Banken AS’s financial statements for 2022 show total comprehensive income of NOK 106.4 (65.6) million after tax. The Board of Directors proposes that a group contribution of NOK 119.5 (89.8) million be paid to KLP. NOK 89.6 (67.4) million will be received from KLP in return, as a group contribution without any tax effect. Net profit and group contribution will be transferred to other equity. The group contribution only has an accounting effect from the date of the decision.

The rating agencies’ assessments of the companies in the KLP Banken Group have a bearing on its borrowing terms. The companies use Moody’s for credit rating of bonds. KLP Banken AS has a rating of A3. All covered bond issues have the best rating, Aaa.

KLP Banken AS and its subsidiaries are exposed to different types of risk. The Bank has established a risk management framework whose purpose is to ensure that risks are identified, analysed and managed by means of policies, limits, routines and instructions.

Separate guidelines are established for the most important individual risks (liquidity, credit, market, operational and compliance risk) and an overall policy for risk management, which includes principles, organisation, limits, etc. for the Bank group’s overall risk. The risk policies are adopted by the Board of Directors and are reviewed at least once a year. The policies are of an overarching nature and are complemented by procedures, rules, and instructions determined at the administrative level.

The overarching risk management policy covers, among other things, roles in the Banks’s risk management, including requirements and guidelines for the risk control function. One purpose of the risk control function is to check that the guidelines are being followed.

Stress testing is used as a method for risk assessment, and as a tool for communication and risk discussions. In this context, stress testing includes both sensitivity analyses and scenario analyses.

The policies include tolerance for the individual risks and for the overall risk. Risk tolerances are defined on the basis of various stress scenarios, and various forms of stress testing are regularly carried out to measure whether actual exposure is within the predefined tolerance limits.

The Bank is also exposed to ESG risk through its own operations and indirectly through its lending portfolio. ESG risk is defined as the risk of losses where the Bank’s exposure to counterparties is adversely affected by ESG factors. ESG risk is a risk driver for credit risk, counterparty risk and market risk, and can be divided as follows:

• Environmental risk (E) is the risk of losses as a result of exposure to counterparties that are adversely affected by environmental factors, including climate change and/or environmental degradation.
• Social risk (S) is the risk of losses where the Bank’s exposure to counterparties is adversely affected by societal factors such as social conditions, labour rights, human rights, poverty, etc.
• Management risk (G) is the risk of losses where the Bank’s exposure to counterparties is adversely affected by poor management and control within the counterparty.

The KLP Banken Group is working to map climate risk in its operations. The Bank has a risk that some of its mortgage customers could be affected by extreme weather, which influence the market price of the home in the short and/or long term, hence reducing the collateral. To take a closer look at this, the Bank uses data from the Norwegian Water Resources and Energy Directorate (NVE), the Norwegian Mapping Authority and the Norwegian Geotechnical Institute (NGI) on floods, sea level rise and landslides to see how its mortgage portfolio is exposed to these events. Within the public-sector market, the Bank has a role as a sparring partner for the municipalities within climate and sustainability, and offers green financing products to meet the municipalities’ and authorities’ expectations for climate-related and sustainable investments.

The KLP Banken Group aims to maintain a prudent risk profile, and earnings should largely be the result of borrowing and lending activities as well as liquidity management. This means that the KLP Banken Group should have a low market risk, and that interest rate risks which arise in the course of borrowing and lending activities should be reduced through hedging using derivatives. The KLP Banken Group should have a prudent long-term financing structure, and limits have been set to ensure that this objective is achieved. Credit risk in the KLP Banken Group is low, and lending is limited to loans with municipal risk and loans secured through mortgages on residential and holiday property. Management of the KLP Banken Group’s liquidity takes form of investments which meet requirements for credit quality and securities in line with board-approved credit lines.

The boards of KLP Banken AS, KLP Kommunekreditt and KLP Boligkreditt have appointed a joint risk committee. The risk committee deals with matters relating to the Bank’s different risks and has an advisory function vis-à-vis the board.

The Bank’s articles of association and applicable legislation provide guidelines for corporate governance and management, and define a clear division of roles between governing bodies and the chief executive officer.

The Board of Directors sets the guidelines for the business. The Board held eight board meetings in 2022.

The chief executive officer is in charge of the day-to-day management of the Company in accordance with instructions issued by the Board of Directors.

The board members have taken out a directors’ liability insurance. This also covers the chief executive officer. Directors’ liability insurance also covers the subsidiaries.

KLP Banken AS and its subsidiaries had 75 (76) permanent employees at the end of 2022. All employment contracts are with KLP Banken AS. Two employees have additional functions with the subsidiaries, KLP Kommunekreditt AS and KLP Boligkreditt AS.

The KLP Banken Group’s most important resource is its employees, most of whom are highly experienced in both the private market and the public sector and have acquired considerable credit and market expertise. The development of products and services, and regulatory requirements placed on the companies in the KLP Banken Group, lead to constant changes in the business and demand reorganisation and new skills. Further development of the organisation and the employees’ expertise are therefore important elements in the Bank’s plans and activities.

Regular surveys are conducted among all employees to measure commitment, health and safety, job satisfaction and compliance with KLP’s core values. These surveys show that the vast majority of employees are highly committed and enjoy working for KLP. The Bank has a works council (AMU), made up of representatives from management, KLP’s HR department, elected employee representatives and health and safety. The Board considers that cooperation between the management of the KLP Banken Group and the employees is working well.

The KLP Group’s goal is sickness absence below 4 per cent. In 2022 the KLP Banken Group had a sickness absence rate of 8.0 (2.6) per cent. Long-term absence totalled 5.6 (2.1) per cent, while short-term absence totalled 2.4 (0.5) per cent. The absence is followed up by managers and the HR department in KLP, and by the Bank’s Board of Directors in the event of increased absence over time. The increase in long-term absence last year is not related to workplace conditions and is assumed to be coincidental in an organisation with relatively few employees. Nor were there any work-related injuries or accidents in 2022.

As part of the KLP Group, the KLP Banken Group complies with the Group’s guidelines on equality and diversity, whose objectives, initiatives and activities take account of the basis for discrimination described in the legislation. A central working group has drawn up internal targets for equality and diversity. In connection with recruitment, the Company routinely states its desire to be contacted by all qualified job applicants irrespective of age, gender, disability, political opinions, sexual orientation or ethnic background.

The KLP Banken Group’s Board of Directors recognises the activity and reporting requirements arising from the Equality and Non-Discrimination Acts. Active work for diversity, equality, equal pay and reduced sickness absence are part of corporate social responsibility.

The KLP Banken Group also complies with the KLP Group’s code of conduct and guidelines for reporting suspected wrongdoing in the workplace.

Of the KLP Banken Group’s employees, 56 (49) per cent are women. Every effort is made to achieve a balance between women and men at all levels. Women hold 54 (46) per cent of management positions. In the KLP Banken Group’s central management team (levels 1 and 2), the proportion of women was 56 (44) per cent.

At the end of 2022, the Board of Directors of KLP Banken AS comprised three women and three men, with one woman and one man having been elected from among the employees.

For further details, see KLP’s sustainability report for 2022.

KLP aims to be a leader in corporate social responsibility and sustainability in its industry. Corporate social responsibility is therefore a clearly defined responsibility in the KLP Group’s strategy. KLP and the KLP Banken Group have been contributing to sustainable development in the community for many years through loan financing of projects throughout Norway, such as roads, schools, kindergartens, swimming pools, sports facilities, care homes, cultural centres and many other socially beneficial projects. Lending to Norwegian municipalities is used for purposes that contribute to reducing national greenhouse gas emissions and that benefit society as a whole. More than three-quarters of KLP’s owner municipalities have loans from KLP or the KLP Banken Group. 

As part of KLP, the KLP Banken Group aims to help KLP to achieve its goals within corporate social responsibility. That is why the Bank signed the UN Principles for Responsible Banking (PRB) in 2019. The Bank then undertakes to implement the principles in the business over a four-year period. The Principles for Sustainable Banking mean that banks are transparent about how their products and services create value for customers and investors, as well as for society as a whole. The Principles are intended to guide banks in their work on sustainability, and support society’s overall goals in line with the UN Sustainable Development Goals and the Paris Agreement. The Bank reports annually to the UN on its work on these principles. The reports can be read here.

In 2022, KLP became a member of the PCAF, a global partnership of financial institutions working to develop and standardise the assessment and reporting of greenhouse gas emissions in investment portfolios. The KLP Banken Group is in the process of mapping financed emissions in the retail market portfolio, and will continue to work on calculations and targets related to this in 2023.

KLP is a signatory to the UN Global Compact, and is thereby committed to working for human rights, workers’ rights and the environment, and against corruption throughout the Group. KLP is working on issues related to climate, corruption, human rights, employment rights and tax. The Norwegian Transparency Act, which entered into force on 1 July 2022, requires enterprises to carry out due diligence and account for this in their public reporting. For the KLP Banken Group, this will form part of KLP’s reporting.

Corporate social responsibility and sustainability are also included in policy documents in the form of guidelines for ethics, the environment and responsible investments, and in the Bank’s own guidelines and job descriptions for employees. A detailed description of goals, measures and results is available on KLP’s website (https://www.klp.no/om-klp/samfunnsansvar).

Preventing financial crime is an important part of KLP Banken Group’s corporate social responsibility. The KLP Banken Group works systematically to prevent our products and services from being used for illegal activities such as money laundering, corruption, terrorist financing or other criminal activity. Effective measures to prevent money laundering and terrorist financing take a very high priority in the KLP Banken Group.

The premises of the KLP Banken Group in both Oslo and Trondheim are certified as “eco-lighthouses” through the Eco-Lighthouse Foundation. As an Eco-Lighthouse company, the KLP Banken Group has received help to implement concrete and profitable sustainability measures in areas such as the working environment, waste management, energy use, purchasing and transport. The Bank’s locations were first certified when it was established in 2012, as part of KLP Huset in Oslo and with a separate fresh certification in Trondheim. Both locations were recertified in 2021.

Legal requirements have been drawn up for companies’ sustainability work. The main driver behind this paradigm shift is the EU and the ‘Fit for 55’ climate package. This is a series of bills and regulations to ensure that the EU achieves its climate target of cutting emissions by at least 55 per cent by 2030. The EU taxonomy, which defines what may be called sustainable activities, is key to this, and it is supported by the other regulations. In Norway, the Sustainable Finance Act was introduced from 1 January 2023, and this Act implements the Taxonomy Regulation and the EU Disclosure Regulation in Norwegian law. KLP welcomes the legal requirements that are coming, and is preparing the Company and its subsidiaries for this.

For further information and details on corporate social responsibility and sustainability, please refer to KLP’s sustainability reports at klp.no Reports and presentations - Finance and IR - About KLP - KLP.no

The KLP Banken Group’s target group in the retail market is KLP members. This covers a significant proportion of the population, and the basis for developing the KLP Banken Group’s position further is considered to be good. The KLP Banken Group will go on working to develop favourable and predictable products and services for its members.

Norwegian society is experiencing turbulent times with considerable macroeconomic uncertainty, and this also affects households. High inflation and higher interest rates on people’s personal finances are particularly noticeable. The KLP Banken Group’s members, who are mainly public-sector employees and their households, are more shielded than other groups from risk associated with their working conditions as employees in municipalities and health enterprises. The KLP Banken Group therefore assumes that its growth ambitions can be sustained and that the risk of defaults and losses will continue to be limited in the future.

The household debt burden is subject to strict regulatory requirements for the provision of credit in the retail market. The KLP Banken Group regards this as a good basis for further development of our banking products and services in the retail market. The KLP Banken Group will pursue conservative procedures for granting credit in order to maintain low risk in the Bank’s lending portfolios, but will also be there wherever possible for customers facing challenges in difficult times.

The banking industry is at the forefront of technological development, and customers’ expectations for simple and digital solutions are increasing. The KLP Banken Group aims to exploit tried and tested technology to offer relevant, customer-friendly and efficient services to our customers. This creates a lasting need for IT investments if the Bank’s goals for further growth and profitability are to be achieved.

Norwegian municipalities have developed a good and comprehensive range of services to the public. Increased life expectancy, demographics, income growth and climate risk give reason to expect a significant need for investment in the public sector over the next few years. In the short term, increased costs resulting from higher inflation and interest rates could contribute to slightly lower lending growth than has been normal in recent years. Demand for loans for projects that contribute to climate adaptation is likely to continue to increase in the years ahead.

KLP Kommunekreditt AS is the only mortgage company in Norway that issues bonds secured by loans to the public sector. The presence of KLP Kommunekreditt AS together with KLP in the market for public loans contributes to competition and so provides the public sector with access to long-term financing on favourable terms.

KLP Banken AS has good solvency and an equity capital situation that meets all regulatory requirements. Combined with low credit risk in its lending business, this is a good position for accessing the best possible financing in the capital markets. This is an important prerequisite for offering favourable lending terms.

The KLP Banken Group is well equipped for further development and growth.

The financial statements for KLP Banken AS and the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations from the IFRS Interpretations Committee (IFRIC), as adopted by the EU. The Norwegian Accounting Act and the Regulations concerning Annual Accounts for Banks, Mortgage Firms and Finance Companies (the Accounting Regulations) contain individual requirements for additional information which is not required under IFRS. These supplementary information requirements have been incorporated into the notes to the financial statements.

To prepare the accounts in accordance with IFRS, management must make accounting estimates and approximate valuations. This will affect the value of the company’s and the Group’s assets and liabilities, income and expenses recognized in the financial statements. Actual figures may differ from estimates used. Areas in which discretionary valuations and estimates of material significance to the company/group have been used are described in Note 3.

All amounts are presented in NOK thousands without decimals unless stated otherwise.

The financial statements have been prepared in accordance with the going concern assumption.

Tangible fixed assets mainly comprise office machinery and inventory used by the company/group in its business.

Tangible fixed assets are recognized at acquisition including costs that can be attributed directly to the acquisition of the fixed asset, with a deduction for depreciation. Subsequent costs relating to fixed assets are capitalized as part of the fixed asset if it is likely that the expenditure will contribute to future financial benefit for the company/group and the cost can be measured reliably. Repair and maintenance are recognized through profit or loss during the period in which the expenses are incurred.

Depreciation is calculated by the straight-line method so the acquisition cost of tangible fixed assets, including subsequent costs, is depreciated to their residual value over the expected service life, which is:

Office machinery:   4 years

Inventory:                4 years

The service life of current assets is calculated annually. If there are indications of a fall in value below the residual value, the recoverable amount is calculated. If the recoverable amount is less than the residual value, the asset is written down to the recoverable amount.

The profit or loss from disposal is made up of the sale price minus the book value at the date of sale. The profit or loss from disposal is charged to the income statement.

The company/group’s intangible assets consist primarily of capitalized IT systems.

On the purchase of a new IT system, directly attributable costs for the system/software and costs of having the system installed and readied for use are capitalized.

On further development of IT systems and software, both external and internal costs are capitalized in accordance with the above. System changes regarded as maintenance are taken to expenses as they occur.

When an IT system is operational, the capitalized costs are depreciated on a linear basis over its expected life. In the event of subsequent capitalization because of further development, this is depreciated over the original lifetime unless the expenditure increases the total expected life of the system.

If there are indications that the book value of a capitalized IT system is higher than the recoverable amount, an impairment test is carried out. If the book value is higher than the recoverable sum (present value on continued use/ownership), the asset is written down to the recoverable amount.

The most important accounting policies relating to financial instruments are described below.

Cash and cash equivalents are defined as receivables from credit institutions without any termination date. The amount does not include receivables from credit institutions that are linked to the purchase and sale of securities in the management of the securities portfolios. The statement of cash flows has been prepared in accordance with the direct method.

Investments in group companies are investments for permanent ownership or use and are valued at acquisition cost.

The Group financial statements cover the Bank and its wholly owned subsidiaries KLP Boligkreditt AS and KLP Kommunekreditt AS. All entities in which the Group has a decisive influence/control are considered to be subsidiaries. Control is normally achieved through ownership of more than half of the voting capital. The effect of potential voting rights that can be exercised or converted at the end of the reporting period is included in the assessment of control.

On entering into a contract, the company/group assesses whether the contract constitutes a lease. A contract constitutes a lease if it transfers control over the use of an identified asset for a period in exchange for a consideration. At the date of implementation, the company/group recognises a right-of-use asset and a lease liability, and these are presented on separate lines in the accounts.

The lease liability is measured on initial recognition at the present value of lease payments not yet paid at the reporting date. The discount rate used is the company/group's marginal loan rate. Subsequent measurements measure the lease liability at amortized cost by the effective interest method. The lease liability is re-measured when there is a change in future lease payments arising from a change in an index or if the company/group changes its decision whether to exercise extension or termination options. When the lease liability is re-measured in this way, a corresponding adjustment is made to the recognized value of the right of use or is taken to profit/loss if the recognized value of the right of use is reduced to zero. 

On initial recognition, the right of use is measured at acquisition cost, i.e. the lease liability (present value of the lease payments) plus advance lease payments and any direct acquisition costs. In subsequent periods, the right of use is measured using an acquisition model. When applying an acquisition model, the company/group measures the right-of-use assets at acquisition cost minus accumulated depreciation and impairment losses, and further adjust for any new measurements of the lease liability to reflect any revisions or changes to the agreement.

The company/group’s financial liabilities comprise liabilities to credit institutions, covered bonds issued and deposits from customers.

The owners’ equity in the Group comprises owners’ equity contributed and retained earnings.

Income from the sale of products and services is valued at the fair value of the consideration, net of any discounts. Intragroup sales are eliminated in the consolidated financial statements.

Tax costs in the income statement comprise tax payable and changes in deferred tax. Tax is charged to the income statement, apart from tax relating to items reported under ‘Other comprehensive income’. Deferred tax and tax assets are calculated as differences between the accounting and taxation value of assets and liabilities. Deferred tax assets are capitalized to the extent that it can be demonstrated that the company/group will have sufficient taxable profit in the future to exploit the tax asset.

The company is a part of a financial services group and a tax group. Except for the limitations pursuant to the Financial Institutions Act, any tax-related surplus may be passed in its entirety to the parent company and subsidiaries as a group contribution with tax effect.

Provisions for group contributions are classified as equity until they have been approved by the general meeting and are then settled.

The company/group is covered by the rules on capital activity tax. Capital activity tax is calculated on the company’s total employer-taxable benefits in addition to salary benefits etc. that were earned in 2021 but not paid until later years.

The company/group’s pension obligations are partially insurance-covered through KLP’s public-sector occupational pensions by way of membership of the joint pension scheme for municipalities and enterprises (‘Fellesordningen’). Pension liability beyond these schemes is covered through operations. Pension costs are treated in accordance with IAS 19. The company/group has a defined-benefit pension scheme for its employees. The accounting liability for defined-benefit schemes is the present value of the obligation on the reporting date, with a deduction for the fair value of the pension assets. The gross obligation is calculated using the straight-line method. The gross obligation is discounted to present value using the interest rates on Norwegian high-quality bonds. Gains and losses arising on recalculation of the obligation as a result of known deviations and changes in actuarial assumptions are charged to owners’ equity via other comprehensive income during the period in which they arise. The effect of changes in the benefits from the scheme is taken to profit/loss immediately.

Presentation of the pension costs in the income statement is in accordance with IAS 1. This standard allows the option of classifying the net interest element either as an operating cost or as a financial cost. The option the company/group adopts must be followed consistently for later periods. The company/group has presented the pension costs under the accounting line ‘Salary and administrative costs’, while the net interest element is presented in the accounting line ‘Net gain/(loss) on financial instruments. The estimate deviation has been classified under ‘Items that will not be reclassified to income’ in the accounting line ‘Estimate deviation pension obligations and pension assets.

The ‘Fellesordningen’ is a multi-undertaking scheme, which means that the actuarial risk is distributed across all the municipalities and companies included in the scheme. The financial and actuarial assumptions behind the calculation of net pension obligations are therefore based on factors that are representative of the whole Group.

The company/group has invested surplus liquidity in income-bearing securities. These were initially recognised at fair value in the statement of financial position. The securities in the portfolio are classified under “Financial assets at fair value through profit or loss” as they are managed, and their earnings are measured on the basis of fair value. The principles for calculating the fair value of the various instruments are described in Notes 15 and 16.

Financial assets not measured at market value are assessed for impairment at the end of the reporting period.

Financial instruments are assessed for impairment for expected losses. The method for measuring impairment for expected loss depends on whether the credit risk has increased significantly since initial recognition. Upon initial recognition, and when the credit risk has not increased significantly after initial recognition, provisions are based on 12 months’ expected loss (stage 1). If the credit risk has increased significantly since initial recognition, but there is no objective evidence of impairment, write-downs are based on expected loss over the lifetime (stage 2). If the credit risk has increased significantly and there is objective evidence of impairment, a provision should be raised for the expected loss over its lifetime (stage 3).

In the company/group, the assessment of what is considered to be a significant change in credit risk for home mortgage loans is based on a combination of quantitative and qualitative indicators and ‘backstops’. The most important driver for a significant change in credit risk for home mortgage loans in the group is a change in the probability of default (PD) from initial recognition up to the reporting date. A relative change in PD of more than 1.5 is considered to be a significant change in credit risk. The change in PD must also be at least 0.6 percentage points for the change to be considered significant.

For the products where the company/group has not developed its own PD and LGD (loss given default) models, the simplified loss ratio method is used. Here a change in risk rating of at least one grade from initial recognition to the reporting date is considered to be a significant increase in credit risk.

The lending portfolio has historically shown low losses and has generally very good collateral in public sector guarantees or mortgages. As a result, the loan loss provisions for the company/group are low.

The measurement of the provision for expected credit losses on financial assets according to IFRS 9 depends on whether the credit risk has increased significantly since initial recognition. At initial recognition and if the credit risk has not increased significantly, the provision should equal 12-month expected credit losses (stage 1). If the credit risk has increased significantly from the initial recognition (stage 2) or if the asset is classified as impaired (stage 3), the provision should equal lifetime expected credit losses.

Expected credit loss (ECL) is calculated as the exposure at default (EAD) multiplied by the probability of default (PD) multiplied by the loss given default (LGD).

Probability of Default (PD) is a calculated probability based on statistical models to estimate the probability of an exposure going into default during the following 12-month period (12-month PD). In addition to calculating 12 months PD, the bank has developed PD graphs used for calculating marginal PD for the exposure’s remaining lifetime (Lifetime PD).

Loss given default (LGD) is what the bank expects to lose given that an exposure goes into default. The calculation is based on how probable it is that a defaulted exposure is cured and expected credit loss if the exposure is not cured.

Exposure at default (EAD) is expected exposure at the moment of a future default.

In KLP Banken/the Group, the assessment of what is considered to be a significant change in credit risk for retail mortgage loans are based on a combination of quantitative and qualitative indicators and ‘backstops’. The most important driver for a significant change in credit risk for retail mortgage loan is a change in the probability of default (PD) from the initial recognition up to the reporting date. A relative change in 12 month PD of more than 1.5 is considered a significant change in credit risk. In addition, the change in 12 month PD must also be at least 0.6 percentage points for the change to be considered significant. Exposures that are more than 30 days past due will automatically be placed in Stage 2, and exposures more than 90 days past due will be placed in Stage 3. The loans go back to Stage 2 and Stage 1 when the criteria for significant change in credit risk and default are no longer fulfilled. A loan in stage 3 will be three months in quarantine before it will be moved back to stage 2 or 1. Based on this a loan will remain in stage three for three months after the loan is reported “healthy”.

Default is defined as "a claim that is over 90 days past due, or an account that has been continuously overdrawn for a minimum of 90 days (minimum amount NOK 1,000). Furthermore, a commitment is considered defaulted if for various reasons it has been written off, e.g. through debt negotiations, established debt settlement and/or bankruptcy.

For products where the bank has not developed PD and LGD (loss given default) models, a simplified loss ratio method is used. Here a change in risk rating of at least one grade from initial recognition to the reporting date is considered to be a significant increase in credit risk. This applies to the senior loan and credit card products within the retail market. For credit cards, the bank has calculated a loss ratio based on the average estimated PD for the credit card portfolio obtained from an external credit information agency and the average LGD for credit cards for the period 2006-2018 calculated by a debt collection agency. For senior loans, a loss ratio of 0.001 percent is used based on the fact that senior loans cannot, in principle, go into default since the product is such that no interest or instalments are to be paid on the loan before the home is sold or the customer dies. In addition to that, the loan calculation is conservative, with lower loan to value (LTV) the younger the customer is (minimum age of 60 years).

For public lending in KLP Kommunekreditt AS the simplified loss rate method is used, but here with the exception for low credit risk so that all loans are in stage 1. For these loans, a loss rate of 0.001 per cent is used.

Mortgages in arrears are handled by a special commitments department in the bank. KLP Banken/Group currently uses its own collection process up to and including legally enforced recovery and execution of sale/foreclosure. If a repayment agreement is not reached, any residual debt after realization of the collateral is transferred to a collection agency for further follow-up.

For credit cards, KLP Banken/ Group has an agreement with a debt collection agency where unpaid instalments are followed up with pre-collection. The debt collection agency also handles unpaid claims with termination, legally enforced recovery and, if applicable, monitoring in cases where legally enforced recovery has so far been in vain.

Mortgages over 90 days past due are reviewed and followed up regularly. In addition, exposures are also reviewed when the bank receives information about debt negotiations or other conditions that would indicate increased risk. A loss assessment is carried out for all such exposures. The collateral is assessed on the basis of previously determined value, in addition to new information about the bank's collateral, for example from a broker if a sale/foreclosure has already been initiated. If the realisation value proves to be lower than the residual debt of the commitment, a loss write-down of the exposure is carried out.

Exposures with individual loss write-downs are followed up with a view to the realisation of the collateral. This can be undertaken by agreement on an ordinary sale or legally by means of a foreclosure. In some cases, a payment agreement to repay the full amount of residual debt is reached. In these cases, the loss write-down will be maintained for a minimum of 1 year after the loan has been satisfactorily served, before the exposure is considered cured.

For mortgages, the determination of loss will only occur after the security has been realised and further legal proceedings have not succeeded, that is after an application for distraint has not yielded a result. The case is then monitored by a debt collection agency and followed up on a regular basis.

Credit cards are recognised as established losses when a case is closed due to insolvency or passed for monitoring by the debt collection company. A case is primarily monitored after legal action has not succeeded. Closure/waiver of a case occurs when there is nothing to be obtained in the estate after death, for bankruptcy or by debt negotiation.

In connection with IFRS 9 and new methods for loss calculation, KLP Banken/Group has developed PD and LGD models for the bank's/group's mortgage loan portfolio. A PD model has been developed for new mortgage customers and a PD model for existing mortgage customers. The first model uses data that is available at the time of application and is valid for three months after the mortgage is granted. The second model begins after three months, and also uses data that depends on the customer's behaviour (for example the number of days in arrears). Explanatory variables are age, income, number of payment reminders sent in the last 12 months, total number of days in arrears in the last 12 months, loan-to-value ratio, co-borrower, default in the last 12 months and product type.

The most important measure for a PD model is the model's ability to discriminate, i.e. the ability to distinguish bad customers from good customers. The ability to discriminate is measured using ROC (Receiver Operating Characteristic), which provides some information about the proportion of predictions that are correct. The PD model for mortgage was in 2022 updated with data from 2020 and 2021. In addition the basis for the calculation of LTV has been updated, based on this the PD-model was recalibrated.

The lifetime probability of default (Lifetime PD) is used for all mortgage loans in KLP Banken excluding senior loans where a simplified model for expected loss is used. The lifetime probability of default (LTPD) of an exposuer is calculated based on aggregated figures for historically observed default rates for each year of all exposures and each exposure's probability of default 12 months after start. The results from model development show that the default rate increases slightly in year 2 before then decreasing, so that the PD in year 2 is higher than in year 1. This is in line with the expected result, since it is expected that it will take some time before a newly granted mortgage loan experiences problems. A customer will typically seek to avoid default on a mortgage loan, and will typically default on other debts before he goes into default on the mortgage loan. The reduction in PD after year 2 can be explained by a "survivalship effect", i.e. the contracts that have not defaulted in the first 2 years are typically of better credit quality, and as the loans are repaid the risk becomes lower. Experience from the industry is that contracts that have existed for a certain period of time converge towards a stable observed default rate. For KLP Banken/Group's mortgage loan portfolio, 3 years has been set as the parameter for when the default level converges towards a long-term PD level. The long-term PD level is set at 0.3 per cent, which corresponds to the average PD for the best contracts in the portfolio.

Exposure at default (EAD) is used for all mortgages in KLP Banken/Group excluding senior loans where a simplified model for expected loss is used. The EAD model has the same data sample as the LTPD model. If an exposureis in default, the exposure's balance at the time will be the bank's/group's exposure at default. EAD can be expressed for an exposure as a function of the likelihood that the contract will not be repaid within the time t. For repayment loans, EAD at time t is estimated as the exposure's balance at the time pursuant to the repayment schedule multiplied by the likelihood of the contract not being repaid within time t. The probability of a contract being terminated early within the year t is calculated as a percentage for each year in the future from 1 to 7 years.

When estimating future credit loss it is important to look at the proportion of customers in default whose accounts become cured. The bank/group has examined at all historical defaults over 90 days and analysed the outcomes of these defaults. The results of the analysis show a very high level of defaults becoming cured. KLP Banken/Group has, since its inception, handled defaults and debt collection internally within the bank/group, and has one dedicated employee who handles exposures in default. The cases are followed closely, and there has been a limited number of defaults since the bank's inception. The analysis shows that the bank has had minimal losses, and most defaults have been reported as cured.

Cured default is defined as the account returning to ongoing status (no longer 90 days past due/90 days overdrawn over the bank's significant amount), or that the account is terminated without loss (typically through voluntary sale of collateral or refinancing in another bank). Non-cured default is defined as where the recovery process has resulted in the account having an established loss, or that an application for distraint has been made against the customer (foreclosure of the property or recovery of guarantee). Customers with status "nothing for distraint" also belong in this category). If the customer has entered debt negotiations, this is also defined as non-cured default. One last possibility is that the final outcome of the default is still unknown due to a short time horizon between the default date and modelling date. The figure below illustrates the various outcomes for a default.

The observed cure rate is calculated and validated at least yearly in the same way as during model development. If the observed cure rate deviates by more than 10 percentage points from the estimate used in the IFRS 9 model, an assessment shall be made of whether measures are needed, e.g. a re-estimation of the model.

A part of the assessment of future losses is the assessment of how the future will look with regard to the macroeconomic conditions that affect the bank's credit losses, e.g. interest rates, housing prices, unemployment rates etc. To calculate the expected credit loss (ECL), the bank has assumed three different scenarios, which are weighted for probability based on an assessment of the probability of each of the three outlined scenarios occurring. The scenarios used by the bank are one expected outcome, one pessimistic outcome and one optimistic outcome for expected credit loss, where the three scenarios have a factor for outcome and a probability that the scenario occurs. The sum of the weighted scenarios constitutes the expected credit loss, and the probability that each scenario will occur will thus affect the expected credit loss. In the expected outcome we assume unchanged house prices and stabile PD. In the negative scenario, a house price fall of 10 percent and an increase in average PD of 32 per cent, while the cure rate falls by 5 percentage points. This scenario is assigned 30 percent probability. In the positive scenario, the bank has assumed that house prices will increase by 5 percent and that the average PD will be halved. This scenario is assigned 10 percent probability. The expected scenario is thus weighted with a 60 percent probability.

If one only assumes a pessimistic scenario, the expected credit losses will roughly triple, and if one only assumes an optimistic scenario, the expected loss will increase with about 60 percent compared to the current losses. If only the positive scenario is assumed the expected losses will be reduced to about 40 per cent of the current losses.

KLP Banken's risk forum assesses these scenarios and their weighting on a quarterly basis, based on changes in macroeconomic factors or other factors that may affect expected credit loss in the bank.