Interim reportKLP Banken Group Q2 2021

Net interest income for the KLP Banken Group by second quarter end amounted to NOK 152.8 (136.0) million. Increased net interest income is mainly due to growth in mortgage lending as well as more stable lending margins followed the market turmoil created by the pandemic in the second quarter last year.

Net charges and commission income amounted NOK 8.9 (9.4) million. The change is mainly due to the adjustment of some fee rates in the retail market.

The bank group administers housing mortgages and public sector lending financed by its parent company (KLP). The management fee for this task amounted to NOK 29.7 (29.6) million for the first half year.

Operating expenses including depreciations amounted to NOK -117.4 (-116.2) million. In previous years expenses related to deposit guarantees from Bankenes Sikringsfond have been booked as administrative costs. From and including 2021 these are booked as interest expenses. Comparative figures are adjusted accordingly.

At the end of the first half, the income statement includes a net loss associated with securities of NOK -18.6 (-16.1) million. The profit and loss effects are mainly due to one-off expenses from buy-back of own bond issues in the daughter enterprises and to market value changes in the liquidity investment portfolios.

Loan loss provisions and realized losses in total amounted to NOK -1.2 (-2.9) million. This is mainly due to loss on credit card credits. The pandemic has so far given lower loan losses than anticipated. The credit card activities also show a falling volume of outstanding credits. Neither in 2021 the public sector market has incurred realized loan losses.

By the end of the first half, the KLP Banken Group achieved a pre-tax profit of NOK 54.3 (39.8) million. The retail market segment generated a profit of NOK 46.3 (30.0) million and the public sector segment a profit of NOK 8.0 (9.8) million. Group total income after taxes and actuarial adjustments amounted to NOK 74.1 (46.2) million as at second quarter of 2021.

On 30 June 2021, the KLP Banken Group had a lending balance of NOK 38.2 (37.5) billion. The distribution between the retail market and public sector lending was NOK 21.4 (20.1) billion and NOK 16.8 (17.4) billion, respectively.

Compared to last year, the KLP Banken had a lower mortgage lending growth at NOK 0.8 (1.8) million in the first half. Last year’s strong growth was due to special circumstances, and this year’s growth is thus in line with previous years. The bank’s mortgage loan products are well adapted among the target group members of the KLP pension schemes.

Mortgage loans amounting NOK 3.0 (4.7) billion was sold to the daughter company KLP Boligkreditt AS so far this year. Managed mortgages for KLP was reduced by NOK -105 (-104) million due to ordinary repayments and redemptions.

KLP Banken credit card activities have decreased by -7.5 (-14.9) per cent in the first half, measured by outstanding credits drawn. This is due to a general decrease in the market for unsecured credits. The number of credit card customers show, on the other hand, a slight increase. The card products are continuously developed in order to meet the needs of our customer groups.

The public sector lending balance has decreased during the first half by NOK -0.9 (0.7) billion. Managed public sector loans on behalf of KLP has in the same period increased by a corresponding amount. Managed loans to foreign debtors in foreign currencies is reduced by NOK 2.5 billion since last year-end.

Available liquidity is invested in other banks and in interest-bearing securities. Deposits in credit institutions was NOK 1.8 (1.8) billion. Securities held, booked at fair value, was NOK 5.1 (4.4) billion at the end of the quarter.

Net profit and loss due to market value changes on securities in the first half was an income of NOK 7.4 (5.8) million.

The KLP Banken Group's external financing comprises deposits, certificates and bonds. On the reporting date, deposits from individuals and companies was NOK 12.6 (12.2) billion and issued securities amounted to NOK 29.2 (26.0) billion. Of the outstanding volume of issued securities, covered bonds issued by KLP Kommunekreditt AS and KLP Boligkreditt AS amounted to NOK 17.7 (18.2) billion and NOK 11.6 (10.4) billion respectively. All covered bond issues have achieved AAA rating. Outstanding securities debt in KLP Banken AS amounted to NOK 0.9 (1.0) billion.

In the first half year KLP Banken AS used the extended access to F-loans in Norges Bank. This arrangement discontinues in 2021. At quarter end the volume of F-loans reduced to NOK 0.7 billion. This borrowing involves deposition of securities with equivalent value. Deposited securities are booked in KLP Banken AS at fair value and may comprise own holdings of issued bonds. If a profit/loss occurs at maturity and the holding is sold externally, the P&L effects are amortized at bank-group level through the duration of the underlying bond issue.

The KLP Banken Group is exposed to various types of risks and the bank has established a framework for risk management aimed at ensuring risks are identified, analysed and subjected to management using policies, limits, procedures and instructions.

The bank is to have a prudent risk profile and earnings are to be principally a result of borrowing and lending activities as well as liquidity management. This means that the bank is to have low market risk, and interest risk arising within the borrowing and lending activity is reduced using derivatives.

The KLP Banken Group and its subsidiaries are to have responsible long-term financing and limits have been established to ensure that that this objective is achieved.

The credit risk associated with the banking group assets is low, and lending is mainly limited to loans with local government risk and loans with lien on housing property. Management of the bank's liquidity is conducted through investments in other banks satisfying set credit quality requirements and in securities in accordance with Board-approved credit lines.

At the end of the second quarter 2021, eligible Tier 1 and Tier 2 capital i.a.w. the capital adequacy rules were NOK 2 404 (2 283) million. Eligible Tier 1 and Tier 2 capital comprises core capital only. Lending is risk-weighted in accordance with the authorities' capital adequacy regulations. The KLP Banken Group had a capital adequacy ratio of 18.4 (18.4) per cent at the end of the second quarter. The minimum statutory requirement is 12.5 per cent core capital adequacy and 16.0 per cent capital adequacy. Leverage ratio was 5.2 (5.1) per cent. Here the requirement is 3.0 per cent.

KLP Banken have good opportunities to develop further its position in the target group, retail members. One important aim is to provide favorable and predictable terms on our retail products and at the same time develop forms of financing that contribute to environment protection and sustainability.

The banking industry is challenged by new technologies and new players outside it. KLP Banken's aim is to utilize proven technology to be able to offer relevant, customer friendly and efficient services to its customers. To maintain the Bank’s investment level in IT solutions ahead is thus considered a central prerequisite to achieve the Bank's ambitions for continued growth and profitability.

Most Norwegian bank customers utilizes their bank’s digital tools. KLP Banken, as a digital bank, has thus entered a growing competitive surface. This is positive for the bank and has been even more actualized during the pandemic. It is nevertheless assumed that this development will continue independently of it.

The ability to service mortgage loans among the Bank's most important customer groups, who are mainly public employees, is expected to remain satisfactory also looking ahead. This will limit defaults and losses in the future too. KLP Banken will continue conservative credit procedures to maintain low credit risk in the bank’s lending portfolios.

Norwegian municipalities have through many years developed good and comprehensive public service offerings to the population. The combination of increased life-time prospects and population growth gives reason to expect a continued high level of investments in the public sector. The demand for long-term credits from municipalities as well as infrastructure development and environmental projects is therefore expected to stay high also in the years to come.

KLP Kommunekreditt AS is the only issuer of covered bonds secured by public sector loans in the country. The presence of the Bank's daughter enterprise, together with KLP, contribute to competition in the public sector lending market and thus offering the sector access to long-term financing at favorable terms.

KLP Banken AS is in a good solvency and capital adequacy state. Combined with low credit risk in the lending business, this gives a good foundation for access to the best possible financing in the capital markets.

KLP Banken AS was formed on 25 February 2009. KLP Banken AS owns all the shares in KLP Kommunekreditt AS and KLP Boligkreditt AS. These companies together form the KLP Banken AS Group. KLP Banken AS Group provide or acquire loans to Norwegian municipalities and county authorities, as well as to companies with public sector guarantee. The lending activities are principally financed by issuance of covered bonds. The Group also offers standard banking products to private customers. KLP Banken AS is registered and domiciled in Norway. It's head office is at Beddingen 8 in Trondheim. The company has a branch office in Dronning Eufemiasgate 10, Oslo.

The company, KLP Banken AS, is a wholly owned subsidiary of Kommunal Landspensjonskasse (KLP). KLP is a mutual insurance company.

The interim report includes the interim Financial Statements of KLP Banken Group for the period 1 January 2021 – 30 June 2021, with a specification of the results in the second quarter. The interim Financial Statements has not been audited.

The interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting".

The Groups contribution to the Deposit Guarantee Fund has previously been classified as an operating expense in the accounts. The classification of this cost has been changed and is now presented in the accounts as “Other interest costs”. The cost amounted to NOK 8.7 million per 30.06.2021 and NOK 5.6 million per 30.06.2020.

Other accounting principles and calculations are the same in the interim financial statement as in the annual report for 2020.

Fair value shall be a representative price based on what a corresponding asset or liability would have been traded for on normal market terms and conditions. A financial instrument is considered to be listed in an active market if the listed price is simply and regularly available from a stock market, dealer, broker, industry grouping, price setting service or regulatory authority, and these prices represent actual and regularly occurring transactions at arm’s length. If the market for the security is not active, or the security is not listed on a stock market or similar, valuation techniques are used to set fair value. These are based for example on information on recently completed transactions carried out on business terms and conditions, reference to trading in similar instruments and pricing using externally collected yield curves and yield spread curves. As far as possible the estimates are based on externally observable market data and rarely on company-specific information.

Fair value shall be a representative price based on what a corresponding asset or liability would have been traded for at normal market terms and conditions. Highest quality in regard to fair value is based on listed prices in an active market. A financial instrument is considered as listed in an active market if listed prices are simply and regularly available from a stock market, dealer, broker, industry group, price-setting service or regulatory authority, and these prices represent actual and regularly occurring transactions at arm's length.

In the second quarter of 2021 the bank has made some minor adjustments in the expected loss model, but the level of loan loss provisions has not changed substantially, compared to the first quarter of 2021. The total loan loss provisions in KLP Banken AS were reduced by 2.8 percent and by 2.7 percent on the group level.

Refer to Note 18 and Note 2 in the annual report for more details of the model.

Credit facilities for lending not utilized: The ‘Fleksilån’ product is included here; this is a credit facility which allows the customer to borrow up to a specified credit limit.

Credit facilities issued credit card: Customers’ credit card limits are a contingent liability for the Bank, where the customer can choose to utilise the credit up to the allocated credit limit.

Loan commitment: The Bank issues funding certificates that customers can use in bidding procedures for home purchases. This also includes other loans that have been granted but not disbursed.