Annual report 2023KLP Banken AS/KLP Banken Group

KLP Banken AS is wholly 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 are divided into two nationwide business areas: the retail market and the public-sector market.

The KLP Banken Group offers simple and competitive banking products and services combined with good digital solutions to set up and manage them. In this way, the Bank also aims to reinforce the perception that businesses which have chosen KLP as a pension provider are attractive employers. Employees in these companies, together with pensioners, make up almost 70 per cent of the KLP Banken Group’s retail customer base.

The KLP Banken Group’s presence in the market for loans to public sector enterprises contributes to competition and provides the target group of municipalities, county authorities and businesses with public guarantees with access to favourable long-term financing. The Bank also provides guidance to customers within financing and municipal finance.

The KLP Banken Group aims to be a major lender and financial partner for KLP’s owners, and strengthen the KLP Group’s membership investments by offering banking products and services at competitive terms.

The profit contribution from the two business areas is NOK 199.4 (107.7)¹ million from the retail market and NOK 86.0 (72.8) million from the public-sector market.

The KLP Banken Group's return on equity was 9.6 (7.0) per cent before tax and 8.7 (6.7) per cent after tax.

The loan balance in the KLP Banken Group increased by NOK 0.4 (2.4) billion in 2023. This figure includes growth in mortgages of NOK 0.6 (1.1) billion and in public loans of NOK -0.2 (1.3) billion. Loans managed for KLP increased by NOK 3.5 (-1.6) billion in 2023.

Money market rates, and hence general interest rates, continued to increase in 2023. The KLP Banken Group has increased lending rates in line with market developments to compensate for increasing borrowing costs. On average, the Bank, however, has increased lending rates significantly less than Norges Bank’s key interest rate in 2023. The generally increased interest rate level is a major reason for higher net interest income, in that lending financed with equity has produced higher returns compared to last year.

In the Bank’s lending to the public-sector market, margins have come down compared to last year and have generally been similar to a normal year. In the retail market, lending margins are little changed. Total net interest income increased by 26 (19) per cent compared to the previous year, and 76 (71) per cent of the KLP Banken Group’s net interest income in 2023 came from the retail market.

Profit/loss effects from changes in value on financial instruments turned from negative to positive in 2023. The main reason for this is that the value of the Bank’s liquidity investments has risen. Accounting effects from buy-backs of issued loans are at around the same level as the previous year.

The accounting item for net profit/loss on financial instruments includes the effects of changes in the value of securities and buy-back of borrowings, in addition to the effects of changes to pension estimates and changes in the value of loans. In all, financial instruments contributed income totalling NOK 2.5 (-26.3) million in the financial year.

The KLP Banken Group charges fees for some of its banking services. Changes in the Bank’s earnings from fees mainly follow changes in the volume of outstanding credit in the retail market. Slightly higher lending volume, adjustments to annual fees on debit cards, and income from increased credit card usage caused net fees and commission income to rise to NOK 27.9 (26.9) million in 2023.

Total operating costs and depreciation amounted to NOK 270.1 (246.7) million in 2023. This produced an increase in costs of 10 (4) per cent. The change over and above normal cost growth is mainly related to increased costs for IT operations and digitisation projects.

Loss provisions are calculated on loans in both business areas; see Note 10.

Individual losses and loss provisions on loans and other credit are all related to lending in the retail market, while the public-sector market did not see any individual loan losses in 2023.

Losses and loss provisions taken to profit/loss were NOK 0.9 (0.3) million in the financial year. Capitalised loan loss provisions were NOK 6.2 (5.5) million. Of this, Step 3 accounted for write-downs of NOK 1.5 (1.0) million and Steps 1 and 2 totalled NOK 4.7 (4.5) million. The Bank’s losses are at a very low level and the Board of Directors believes that the loss provisions are sufficient.

The KLP Banken Group manages a total loan portfolio of NOK 122.4 (118.6) billion for KLP and on its own balance sheet. Outstanding loans (principal) per company in the KLP Banken Group as at 31.12.2023:

Drawn credit on credit cards comes in addition to mortgages in the retail market.

Some of the managed loans to the public-sector market are pure management assignments for KLP, whereby the conclusion of loan agreements, documentation and follow-up are handled by the principal. For the other management assignments the KLP Banken Group also has a responsibility for offers, contracts and loan documentation under its mandate from KLP.

The KLP Banken Group’s liquidity situation is satisfactory, as the Group’s financing more than covers the liquidity needs from operations. The year-end cash flow statement shows a positive net result overall. Operational activities produced a positive net cash flow driven by higher interest rates resulting in larger payments of interest and commissions compared to last year. On the other hand, financing activities in 2023 reflect a slightly lower external refinancing need compared to the year before.

Free liquidity is invested in other banks and in interest-bearing securities. Investments in credit institutions amounted to NOK 1.7 (1.4) billion. The book value of interest-bearing securities measured at fair value was NOK 4.3 (6.6) billion in the KLP Banken Group at the end of the year. The portfolio consists entirely of high-rated covered bonds issued by banks and bonds issued by the Norwegian government or other public institutions.

The Bank reports the liquidity coverage ratio (LCR) monthly for the KLP Banken Group as a whole and quarterly for each company.

The total assets of KLP Banken Group amounted to NOK 48.9 (50.5) billion at the end of 2023. The breakdown is shown in the table below:

The Group's equity and subordinated loan capital, based on the Board of Directors' proposal for allocation of profits between the Group companies for 2023, was NOK 3.2 (2.9) billion. Core capital is identical to equity and subordinated loan capital. This gives a capital adequacy and tier 1 capital ratio of 21.7 (20.7) per cent. The current capital requirement, including capital buffers, is 19.0 per cent.

KLP Banken AS has a Pillar 2 supplement of 1.5 per cent, which is included in the Group’s capital requirements at the end of 2023. The Bank also maintains a buffer of at least 0.5 per cent above the actual capital requirement for Pillar 1 and Pillar 2 risks, so the capital target is 19.5 per cent.

The risk-weighted balance was to NOK 13.7 (13.5) billion at the end of 2023.

The leverage ratio in the Group was 6.3 (5.7) per cent. The leverage ratio requirement is 3 per cent. Capital adequacy is considered to be 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 a going concern are present, and this is assumed in the financial statements.

The financial statements for KLP Banken AS show total comprehensive income for 2023 of NOK 152.4 (106.4) million after tax. The Board of Directors proposes that a group contribution of NOK 172.3 (119.5) million be paid to KLP. NOK 129.2 (89.6) million will be transferred from KLP in return as a group contribution without any tax effect. Profit after tax 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 aimed at ensuring that risks are identified, analysed and managed by means of policies, limits, procedures and instructions.

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

The overall risk management policy governs roles related to the Bank'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 discussion. 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 for different stress scenarios, and various forms of stress testing are regularly carried out to ensure that the actual exposure is within the approved tolerance limits.

The Bank is also exposed to ESG risk through its own business 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 where the Bank’s exposure to counterparties is 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.

• Governance 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 influences the market price of a 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 sparring partner for the municipalities within climate and sustainability and offers, as previously mentioned, 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 mainly be the result of borrowing and lending activities and liquidity management. This means that the KLP Banken Group should maintain a low level of market risk and that interest rate risk arising from its borrowing and lending activity should be reduced by means of derivatives. The KLP Banken Group should have prudent long-term financing and limits have been set to ensure that this objective is achieved. The credit risk in KLP Banken is low and lending is limited to loans with municipal risk and loans with security in residential and holiday property. Management of the KLP Banken Group’s liquidity takes the form of investments which satisfy credit quality requirements, and securities in line with Board-approved credit lines.

The boards of KLP Banken, 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 of Directors.

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

The Board of Directors sets the guidelines for the business. It held six board meetings in 2023.

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 directors’ liability insurance. This also covers the CEO. The directors’ liability insurance also covers the subsidiaries.

KLP Banken AS and its subsidiaries had 73 (75) permanent employees at the end of 2023. All employment contracts are with KLP Banken AS. Two employees have additional functions in 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 and have extensive significant credit and market expertise, in both the retail market and the public sector. The development of products and services, and regulatory requirements placed on the KLP Banken Group, lead to constant changes within the business and demand a adaptation and fresh skills. Further development of the organisation and staff training are therefore important elements of 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 (Man and Organization - MO), elected employee representatives as well as health and safety services. The Board considers that cooperation between the management of the KLP Banken Group and the employees is working well.

The KLP Group aims to keep sickness absence below 4 per cent. In 2023, the KLP Banken Group had a sickness absence rate of 2.7 (4.7) per cent. Long-term absence totalled 0.8 (2.8) per cent, and short-term absence 1.9 (1.9) per cent. Sickness absence has been reduced, but it is followed up by managers and the MO, and by the Bank’s Board of Directors in the event of increased absence over time. There were no work-related injuries or accidents in 2023.

As part of the KLP Group, KLP Banken 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. Separate objectives for equality and diversity have been adopted in the central working committee. 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 Board of Directors of the KLP Banken Group recognises the activity and reporting requirements resulting from the Norwegian Equality and NonDiscrimination Act. Active work for diversity, equality, equal pay and reduced sickness absence are part of corporate social responsibility.

The KLP Banken Group also adheres to the KLP Group’s code of conduct and the guidelines for reporting suspected wrongdoing in the workplace (whistleblowing).

Of the KLP Banken Group’s employees, 57 (56) per cent are women. Every effort is made to achieve a balance between women and men at all levels. The proportion of women in senior positions is 58 (54) per cent. In the KLP Banken Group’s central management team (levels 1 and 2) the proportion of women was 63 (56) per cent.

At the end of 2023, the Board of Directors of KLP Banken AS comprised three women and four men, including one woman and one man elected from among the employees.

For further details, see KLP’s sustainability report for 2023.

In 2023, a new sustainability strategy was formed, which states that KLP will be the municipality- and health-Norway's partner for a sustainable transition. The strategy work and process was based on the elements of the EU's new directive on sustainability reporting, CSRD, and a double materiality analysis has been carried out to identify the sustainability topics on which KLP has or may have a material impact and which constitutes or may constitute a material financial risk.  

KLP works continuously to integrate sustainability throughout its business, not only as a pension manager, but also as a purchaser, employer and company. Sustainability is integrated into KLP's corporate governance and a central part of its corporate strategy. All business areas and subsidiaries are responsible for implementing the strategy and developing measures and goals for sustainability in their own operations.  

For many years, KLP and the KLP Banken Group have been contributing to sustainable development of society 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. Loans to Norwegian municipalities are used for purposes that help reduce national greenhouse gas emissions and benefit society as a whole. Nearly 90% of KLP’s owner municipalities have loans from KLP or the KLP Banken Group.

KLP and KLP Banken Group have provided loans for many projects throughout the year, covering different needs for the municipalities. Among other things, we have provided loans for the construction of bicycle velodrome in Asker municipality, a green loan for a new nursing home in Ringsaker municipality, and loans for the construction of homes for people with disabilities in Råde municipality. 

KLP Banken signed the UN Principles for Responsible Banking (PRB) in 2019. 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 United Nations Sustainable Development Goals and the Paris Agreement. The Bank reports annually to the United Nations on its work on these principles. The reports can be read www.klp.no/en

The KLP Banken Group has set a goa” of ’educing emissions from lending (home mortgages) to net zero by 2050, and worked in 2023 to set more short-term goals and improve the calculation of financed emissions. The work of producing concrete action plans will continue in 2024.

As of today, we do not have sufficient data to analyse financed emissions relating to loans to the public sector. One reason for this is that we have limited access to investment-specific information, and the municipalities themselves do not currently report emissions related to investments to any great extent. In 2023, we carried out a pre-project together with several other players to look at how to map financed emissions in the public sector. This work will continue in 2024.

KLP is a signatory to the UN Global Compact and the whole Group is thereby committed to working for human rights, employment rights, the environment and anti-corruption initiatives. KLP is working on issues related to climate, corruption, human rights, employment rights and taxes. The Transparency Act, which came 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 report will be published on klp.no within 30 June 2024. 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. This year, KLP Banken is reporting on assets covered by the taxonomy, and other assets that conform to the taxonomy.

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 the employees. A more detailed description of goals, measures and results can be found in the sustainability accounts in KLP’s annual report on KLP’s website (https://www.klp.no/en/corporate-responsibility-and-responsible-investments/corporate-responsibility-and-reporting).

Financial crime is a serious social problem, and preventing financial crime is an important part of the 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, and to provide our customers with secure digital finance. We are working to combat financial crime to reduce financial losses for our customers, for the KLP Banken Group and for society as a whole. Effective measures to prevent money laundering and terrorist financing take a very high priority for the KLP Banken Group.  

The KLP Banken Group’s premises 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 been helped to implement concrete and profitable sustainability measures in areas such as the working environment, waste management, energy use, procurement and transport. The Bank’s locations were first certified when it was established in 2012 as part of the KLP Huset in Oslo, later on with a separate new certification in Trondheim. Both locations were recertified in 2021.

KLP Banken is a subsidiary of KLP, which has prepared a report on corporate social responsibility under Section 3-3c of the Accounting Act, including KLP Banken in its annual report for the Group. The report can be accessed at klp.no (https://www.klp.no/en/financial-information).

The KLP Banken Group's target group in the retail market is KLP members. This comprises a significant proportion of the population, and the basis for further developing the KLP Banken Group’s position in this market 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. Reduced spending power among borrowers means that the Bank expects lower mortgage growth in the near term before a gradual normalisation. KLP Group members, who are mainly public-sector employees and their households, are more shielded than other groups from risk associated with their emplyment conditions as employees in municipalities and health enterprises. The KLP Banken Group therefore assumes that the risk of defaults and losses will remain limited in the future. The present high cost of living has also significantly reduced members’ ability to save. Nevertheless, the Bank is maintaining its adopted growth ambitions for deposits, and aim to achieve targets manly by recruiting more deposit customers.

The debt burden on households is subject to strict official requirements for the provision of credit in the retail market. The KLP Banken Group sees 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 growing. The KLP Banken Group aims to exploit proven technology in order to offer relevant, customer-friendly and efficient services to its customers. This raises a long-term need for IT investments to achieve the Bank’s targets for further growth and profitability.

Norwegian municipalities have developed a good and comprehensive range of services to the public. Increased life expectancy, demographics, income growth and climate risk give grounds to expect a substantial level of 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 However, the municipalities in the annual budget survey from the Norwegian Association of Local and Regional Authorities (KS) expect the levels of investment and borrowing to remain high in 2024 too. 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 against loans to the public sector. The presence of KLP Kommunekreditt AS together with KLP in the market for public loans contributes to competition and provides the public sector with stable 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 basis for access to the best possible financing in the capital markets. This is an important prerequisite if we are to offer 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 IFRS Accounting Standards® 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 Accounting Standards. 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.

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.

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 2023 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 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 some lendingproducts, the company/group has not developed its own PD and LGD (loss given default) models. This is because the products are considered to have a low credit risk due to municipal gurarantees, or because the scope of the product and thus the consequences of losses are small. For these products, 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 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 15 percent and a doubling of the average PD, 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.

Sustainability risk includes risks related to environmental, social or governance (ESG) events that could pose a threat to the Bank if they occur. Climate risk is part of the Bank’s sustainability risk. Climate change and the actions that society is taking to achieve its climate target may involve financial risk. Three areas have been identified where the climate issue entails risk. These are physical risk, transition risk and liability risk. Physical risk is associated with the cost of physical damage resulting from climate change, such as extreme weather. Transition risk is financial risk associated with the transition to a low-emission society, and liability risk involves compensation claims related to decisions or non-decisions that may be linked to climate policy or climate change in one way or another.

In the Bank’s risk analysis for 2024, an assessment has been made of how sustainability risk affects the different types of risk to which the Bank is exposed. Credit risk is the type of risk that may be expected to arise first, specifically physical climate risk in the mortgage portfolio. The Bank’s direct exposure to physical climate risk is generally close to zero, as customers are insured and will recover their losses should the Bank’s collateral (residential property) be impaired due to a climate-related incident. It is therefore a greater risk to the Bank if customers are indirectly affected by reduced prices or difficulties selling properties in specific areas affected by climate change, either by certain areas becoming “uninhabitable” or by key companies being forced to close down as a result of physical or transition risk. This can reduce the value of the Bank’s collateral, increasing the risk of a loss if the customer defaults on their mortgage.

In order to monitor this risk, the Bank collects data on the risk of flooding, sea level rise and landslides in the mortgage portfolio from Eiendomsverdi. Data from the Bank’s mortgage portfolio is combined with data from NVE² (floods), the Norwegian Mapping Authority (sea levels) and NGI³ (avalanches). In total, approximately NOK 5.4 billion, or 20 per cent of the Bank’s mortgage portfolio, is exposed to the physical risks mentioned here, to a greater or lesser extent. As mentioned earlier, the direct risk is covered through mortgage insurance, but a decrease in the market value of the mortgage portfolio due to climate-related events in the immediate area is a risk to the Bank. At this stage, it is hard to imagine the Bank excluding individual customers on the basis of this risk, but it is conceivable that an industry standard could be developed in the future, where banks require a lower loan to value ratio for houses located in areas with significant climate risk.