Annual report 2020 KLP Banken AS

The activities of KLP Banken AS are divided between two nationwide business areas: the retail market and the public-sector market.

KLP Banken AS is an online bank with no physical branch network. The bank offers simple and competitive savings and loan products, and digital solutions to establish and manage them.

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

The bank aims to provide products and services on competitive terms to help ensure that businesses that have chosen KLP as pension provider are perceived as attractive employers. At the end of 2020, employees in these enterprises accounts for over 70 per cent of KLP Banken’s retail customers.

Presence in the market for loans to public sector enterprises contributes to competition and provides the target group of municipalities, county municipalities and businesses with public guarantees access to favourable long-term financing. The bank also provides guidance to customers within financing and municipal finance.

As part of a customer-owned group, KLP Banken AS has taken its share of responsibility for dealing with the situation that the pandemic brought upon the KLP Group’s customers and members this year. In the retail market, rapid interest rate reductions and closer membership follow-up and guidance have been implemented, as well as granting deferral of repayments for customers in need for it. In the public-sector market, the bank has increased its lending based on the extraordinary liquidity provided by KLP, as well as providing guidance and information through close contact with the customers.

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. KLP Bankholding AS was the head of the KLP Banken Group until the autumn of 2020. The company was then merged with KLP Banken AS.

The profit contribution from the two business areas is NOK 101.5 (75.6)¹ million from the retail market and NOK 35.2 (26.7) million from the public-sector market.

The KLP Banken Group’s return on equity was 6.2 (4.8) per cent before tax and 5.9 (3.7) per cent after tax.

The loan balance in the KLP Banken Group increased by NOK 3.3 (1.5) billion in 2020, or 9 (4) per cent. This figure includes growth in mortgages of NOK 2.2 (1.7) billion and in public loans of NOK 1.1 (-0.2) billion. Public loans managed for KLP showed good growth in 2020, increasing by NOK 7.1 (5.9) billion, or 12 (12) per cent.

Money market rates, and hence general interest rates, fell in the spring of 2020 as a result of the pandemic and have remained at historically low levels throughout the year. From the start, this resulted in a rapid reduction in lending rates for loan customers. Lower interest rates ultimately affected the bank’s financing costs too. The bank’s current margins between lending and borrowing fell in the second quarter, but remained stable at about normal levels in the retail market in the third and fourth quarters. Strong growth in lending volume in the retail market has contributed to an increase in net interest income in this segment compared to last year. The Group saw a similar trend in the public-sector market, where increased volumes and fluctuating margins helped to increase net interest income compared to last year.

The bank’s total net interest income increased by NOK 35.7 million, or 12 per cent, in 2020 compared to the previous year. 78 per cent of the KLP Banken Group’s net interest income in 2020 comes from the retail market.

Changes in the value of financial instruments also turned out negative in 2020. As was the case last year, this mainly applies to accounting effects of the buy-back of own loan issuances. In 2020, falling interest rates and credit premiums also resulted in significant gains on liquid investments. This compensates for some of the costs on the borrowing side.

The accounting line for net profit/loss on financial instruments includes the effects of changes in the value of securities and buy-back of issuances, in addition to the effects of changes to pension estimates and changes in the value of loans. In all, financial instruments had a total cost of NOK 26.1 (30.2) million for the financial year.

The KLP Banken group charges its banking services to a limited extent Changes in the bank’s earnings from fees mainly follow changes in the volume of outstanding credit in the retail market. Net fees and commission income amounted to NOK 18.5 (19.2) million in 2020.

Total operating costs and depreciations amounted to NOK 239.1 (231.9) million in 2020. This produced an increase in costs of 3 (5) per cent. The cost increase is mainly related to investments in IT technology and digitisation together with streamlining processes for the bank’s customers and internally within the bank

In addition to individual loan losses and loss provisions, group-level loss provisions in 2020 resulted in an effect on profits of NOK 0.6 (0.5) million. Group-level loss provisions are calculated on loans both in the retail market and in the public sector market (see Note 18).

In 2020, individual loan losses and loss provisions on loans and other credits amounted to NOK 3.7 (6.1) million; all of these are related to lending in the retail market. NOK 0.4 (1.3) million of the recorded losses and loss provisions are related to mortgages and NOK 3.3 (5.3) million to credit cards and other credits. The bank's losses are at a low level and the Board of Directors perceive the loss provisions as sufficient. Nor has the public-sector market seen any individual loan losses in 2020.

Total loan losses and loss provisions decreased by approximately 35 per cent compared to the previous year.

The KLP Banken Group manages loans for KLP and has a total loan portfolio of NOK 115.2 (105.8) billion on its own balance sheet.

The KLP Banken Group’s lending activities within KLP Kommunekreditt AS are mainly based on loans directly from the mortgage company.

Total loans in KLP Kommunekreditt AS amounted to NOK 17.7 (16.5) billion at the end of 2020. The average loan volume was higher than in 2019. The proportion of loans at fixed interest rates was 20 (17) per cent.

KLP Kommunekreditt AS paid out new loans totalling NOK 3.4 (1.6) billion in 2020. The loan portfolio consists of direct loans to Norwegian municipalities and county authorities, or to enterprises that perform assignments for the public sector where loans are guaranteed by municipalities or county authorities. The credit risk in the loan portfolio is considered very low.

KLP Kommunekreditt AS had no non-performing loans more than 90 days past due at the end of 2020. Nor were any individual losses recognised in the accounting year. Calculated loss provisions had very little profit effect in the mortgage company in 2020.

The KLP Banken Group’s liquidity situation is satisfactory as the Group’s financing more than covers the liquidity needs from operations.

Liquidity is invested in other banks and in interest-bearing securities. Investments in credit institutions, including financing of the subsidiaries, amounted to NOK 1.2 (1.5) billion. The book value of interest-bearing securities measured at fair value was NOK 3.1 (3.1) 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 Norwegian municipalities, the State of Norway or other government enterprises.

In 2020, KLP Banken AS used the extended access to F-loans in Norges Bank for the first time. Both bonds and certificates issued by others and own holdings of issues in the bank’s subsidiaries are used as collateral for such loans. Access to F-loans has contributed to sufficient liquidity during a period of market turmoil caused by the pandemic. It has also contributed positively to the bank’s interest income.

The bank reports the liquidity coverage ratio (LCR) monthly for the KLP Banken Group as a whole and quarterly for each company. At the end of 2020, the LCR was 443 (313) per cent for the Group and 157 (140) per cent for KLP Banken AS.

The total assets of KLP Banken Group amounted to NOK 42.7 (39.7) billion at the end of 2020. 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 the profit from the Group companies for 2020, was NOK 2.4 (2.2) billion. Equity were extended with a private placement of NOK 100 million in 2020. Tier 1 and Tier 2 capital comprise core capital only. This gives a capital adequacy ratio of 19.5 (19.1) per cent. Current statutory capital requirements, including capital buffers, are 12.5 per cent core capital ratio and 16.0 per cent capital ratio.

KLP Banken AS has a Pillar 2 supplement of 1.5 per cent which is included in the bank’s capital requirements at the end of 2020. In addition, a buffer of at least 0.5 per cent is maintained above the actual capital requirement for Pillar 1 and Pillar 2 risks, so the bank’s capital target is 16.5 per cent.

The risk-weighted balance sheet was NOK 11.7 (10.8) billion at the end of 2020.

The leverage ratio in the KLP Banken Group was 5.5 (5.4) per cent. The requirement for leverage ratio for KLP Banken AS is 3 per cent. Capital adequacy is considered to be good.

In the opinion of the Board of Directors, the annual financial statements give a true and fair view of the bank's assets and liabilities, financial position and profit. The conditions for continued operations are present, and this is assumed in the annual financial statements.

The financial statements for KLP Banken AS show a total profit for 2020 of NOK 98.5 (60.1) million after tax. The Board of Directors proposes that a group contribution of NOK 81.0 (72.1) million be paid to KLP. NOK 60.7 (105.8) million will be returned from KLP as a group contribution without any tax effect. Profit after tax and group contribution will be transferred to other equity. The group contribution will first have an accounting effect at the time of the decision.

The rating agencies’ assessment of the companies in KLP Banken Group is important for the borrowing terms. The companies use Moody’s for credit rating of bonds. All issuances of covered bonds have the best rating, Aaa.

KLP Banken AS and its subsidiaries are exposed to different types of risks. The bank has established a risk management framework aimed at ensuring that risks are identified and analysed and are subject to governance using guidelines, frameworks, procedures and instructions.

Separate guidelines have been established for the most significant individual risks (liquidity, credit, market, operational and compliance risks) and overarching guidelines for risk management that govern the principles, organisation, limits etc. for the bank group’s overall risk. The guidelines are adopted by the Board of Directors and revised at least once a year. The guidelines are of an overarching nature and are supplemented with procedures, regulations and instructions established 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. The purpose of the risk control function is, among other things, to control that the guidelines are being followed.

Stress testing is used as a risk assessment method and as a tool for communication and exchange of opinion related to risk conditions. In this context, stress testing is understood to include both sensitivity- and scenario analyses.

The guidelines include risk tolerance for the individual risks and for the overall risk. Risk tolerances are defined for different stress scenarios, and different forms of stress testing are regularly carried out to ensure that the actual exposure is within the approved tolerance limits.

KLP Banken AS aims to maintain a cautious risk profile and earnings should mainly be the result of borrowing and lending activities and liquidity management. This means that KLP Banken AS 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. KLP Banken AS should have prudent long-term financing and frameworks have been established to ensure that this objective is achieved. The credit risk in KLP Banken Group is low and lending is limited to loans with municipal risk and loans secured in residential and holiday property. Management of KLP Banken’s liquidity takes the form of investments which satisfy given credit quality requirements, and securities in line with credit lines approved by the Board of Directors.

The boards of directors of KLP Banken AS, KLP Kommunekreditt AS and KLP Boligkreditt AS have appointed a joint risk committee. This is not legally required, based on the amount of the total assets. The risk committee deals with matters related to the bank’s various risks, and has an advisory function to 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 day-to-day management.

The Board of Directors establishes the guidelines for the company. The Board of Directors held eight board meetings in 2020.

The Managing Director is responsible for the day-to-day management of the company in accordance with instructions determined by the Board of Directors.

An account of KLP Banken's corporate governance is available on KLP's website

KLP Banken AS and its subsidiaries had 71 (69) permanent employees at the end of 2020. All employment relationships are with KLP Banken AS. Two employees also have functions in the subsidiaries KLP Kommunekreditt AS and KLP Boligkreditt AS.

The unusual situation created by the pandemic through most of 2020 has meant that employees have been working mainly from home. Nevertheless, the Group has maintained operations more or less as normal.

As KLP Banken’s most important resource, most employees have extensive experience and significant credit and market expertise within the retail and public-sector markets. The development of products and services and regulatory requirements for KLP Banken result in constant changes within the business and create a need for adaptation and new expertise. Further development of the organisation and training are therefore important elements of the bank’s plans and activities.

Surveys are carried out regularly among all employees to measure engagement, working environment, well-being and compliance with KLP’s values. The results of these measurements show that most employees are committed to their work and thrive at KLP. The bank has a working environment and cooperation committee (AMU) which is made up of representatives from the management, KLP’s HR Department and the employees’ representatives. The Board of Directors believes that cooperation between the management of KLP Banken and its employees is in a good state. The Board also wishes to thank the employees for their sustained effort through the exceptional situation created by the pandemic, which made it possible to operate more or less as normally.

The KLP Group aims to maintain absence due to illness below 4 per cent. Absence due to illness at KLP Banken was 3.5 (4.5) per cent in 2020, of which long-term absence was 2.6 (2.8) per cent and short-term absence 0.9 (1.8) per cent. Absence is followed up by managers and KLP’s HR Department and by the bank’s Board of Directors when there is an increase in absence over time. There were no work-related injuries or accidents in 2020. The reduction in short-term absence is believed to be driven by the pandemic, in that employees have mainly worked from home.

As part of the KLP Group, KLP Banken AS follows the Group’s guidelines on gender equality and diversity, in which the objectives, measures and activities take into account the basis for discrimination described in the legislation. Separate objectives for gender equality and diversity have been adopted in the central working committee. The standard recruitment procedure is that all qualified applicants should be contacted regardless of age, gender, functional ability, political point of view, sexual orientation or ethnicity.

KLP Banken's Board of Directors recognises the activity and reporting obligation pursuant to the Norwegian Anti-Discrimination Act. Active work in respect of diversity, gender equality, equal pay and reduced absence due to illness are an integral part of the company’s corporate social responsibility.

KLP Banken AS also adheres to the KLP Group’s Code of Conduct and the guidelines on whistleblowing.

55 (55) per cent of the KLP Banken Group’s employees are women. The company endeavours to achieve a balance between women and men in all positions. The proportion of women in senior positions was 46 (46) per cent. At the end of 2020, the Board of Directors of KLP Banken AS comprised three women and four men, of whom one woman and one man were elected from among the employees.

KLP is a signatory to the United Nations Global Compact and is committed to working for human rights, workers’ rights, the environment and anti-corruption initiatives. KLP works on issues related to climate, corruption, human rights, workers’ rights and taxes, among others. KLP also works to ensure that its lending activities affect people, the environment and the community around us in a positive way. The KLP Banken Group has for many years contributed to the sustainable development of society through loan financing of projects throughout Norway, such as roads, schools, day-care centres, 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. More than three-quarters of KLP’s owners have loans in KLP or in the KLP Banken Group. KLP Banken AS is environmentally certified as an office-based company.

KLP Banken also helps to finance energy-saving measures through green mortgages and green loans to the local government sector.

KLP Banken AS signed the United Nations Principles for Sustainable Banking in the autumn of 2019 and has committed to implementing these principles in its operations. 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.

Corporate social responsibility is also included in the governing documents through guidelines for ethics, the environment and responsible investments, among others. A more detailed description of goals, measures and results is available on KLP’s website

KLP Banken’s target group in the retail market are the KLP members. They include a significant part of the population, and the prospects for further development of KLP Banken’s position are considered good. KLP Banken will continue to work on developing profitable banking products while ensuring that its members have the best possible conditions, and that these are predictable.

The KLP Banken organization has operated very well during the period with employees working from home offices, but it is assumed that all will return to office as it opens again. The positive experiences learned from home office working will be taken into consideration and may form the basis for increased flexibility ahead.

New technology and new players from other industries are challenging the banking industry. KLP Banken aims to exploit proven technology in order to offer relevant, customer-friendly and efficient services to its customers. This requires extensive IT investments in order to achieve KLP Banken’s targets for further growth and profitability. Most bank customers in Norway have adopted digital tools. As an online bank, KLP Banken AS has thus gained an ever-greater competitive presence, which is positive for the bank. This has become even more of a factor during the pandemic, but the trend is expected to continue regardless of it.

The debt burden on households is subject to strict official requirements for credit approval in the retail market. KLP Banken sees this as a positive sign and a good basis for further development of our personal banking products in the retail market.

The ability to service residential mortgages by KLP Banken’s main customer groups, who are mainly public employees, is believed to be satisfactory going forward and will help to limit defaults and losses. KLP Banken AS will retain its conservative procedures for credit approval in order to maintain low risk in the bank’s lending portfolios.

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 sustained high level of investment in the public sector over the next few years. Especially the demand for financing projects that contribute to climate adaptation is expected to grow in the future.

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

The Covid-19 situation has influenced large parts of the Norwegian economy, and many employees have been temporarily laid off or lost their jobs. The owners and members of KLP Banken are to a large extent shielded against this through their employment in municipalities and health care enterprises. On that background the Bank will not be impacted strongly, and thus can assume that its growth ambitions may continue and that the risk of credit loss will remain low also in the future.

KLP Banken AS has good capital adequacy and an equity situation that satisfies all regulatory requirements. Combined with low credit risk in the lending activities, this is a good starting point for access to the best possible financing in the capital markets.

As a planned strengthening of capital to facilitate the desired growth, a capital increase of NOK 100 million was completed in February 2020. KLP Banken AS is well equipped for further development and growth.

We hereby declare that, to the best of our knowledge, the annual financial statements for the period from 1 January to 31 December 2020 have been prepared in accordance with applicable accounting standards, and that the information in the financial statements gives a true and fair view of the Company’s and the Group’s assets, liabilities, financial position and overall profit or loss.

We also declare that the Directors’ report provides a true and fair overview of the development, profit or loss and the financial position of the Company and the Group, together with a description of the most significant risk and uncertainty factors the Company and the Group face.

KLP Banken AS was founded on 25 February 2009. KLP Banken AS and its subsidiaries provide or acquire loans to Norwegian municipalities and county authorities, as well as to companies with a public sector guarantee. The lending activities are principally financed by the issuance of covered bonds. The Group also offers standard banking products to private customers. The Company, KLP Banken AS, is registered as domiciled in Norway. The bank is an online bank without branches. Its head office is at Beddingen 8 in Trondheim. The Company has a branch office in Oslo.

KLP Banken AS owns all the shares in KLP Kommunekreditt AS and KLP Boligkreditt AS. These companies together form the KLP Banken Group.

In 2020, KLP Banken AS merged with the parent company KLP Bank Holding AS, where KLP Banken AS was the acquiring company. The merger had accounting effect from 01.01.2020. KLP Banken AS is a wholly owned subsidiary of Kommunal Landspensjonskasse (KLP). KLP is a mutual insurance company.

The annual financial statements are available at klp.no

Below is a description of the most important accounting principles used in the preparation of the Company and Group financial statements for KLP Banken AS. These principles are applied in the same way in all periods presented unless indicated otherwise.

The company/group prepares estimates and assumptions about future situations. These are constantly evaluated and are based on historical data and expectations concerning probable future events considered on the basis of data available at the time of presentation of the financial statements.

The estimates may be expected to differ from the final outcome and the areas where there is significant risk of substantial change in capitalised values in future periods are discussed below.

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 should 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.

Level 1: Instruments in this level obtain fair value from listed prices in an active market for identical assets or liabilities that the entity has access to at the reporting date. Example instruments at Level 1 are stock market listed securities.

Level 2: Instruments in this level obtain fair value from observable market data. This includes prices based on identical instruments, but where the instrument does not maintain a high enough trading frequency and is not therefore considered to be traded in an active market, as well as prices based on corresponding assets and price-leading indicators that can be confirmed from market information. Example instruments at Level 2 are fixed-income securities priced on the basis of interest rate paths.

Level 3: Instruments at Level 3 contain non-observable market data or are traded in markets considered to be inactive. The price i based generally on discrete calculations where the actual fair value may deviate if the instrument were to be traded.

Note 6 discloses the fair value of financial assets and financial liabilities that are recognized at amortized cost and according to the rules on hedge accounting . Financial assets measured at amortized cost and hedge accounting comprise lending to and due to credit institutions, Norwegian municipalities and retail customers. The stated fair value of these assets is determined on terms qualifying for level 2.

Financial liabilities recognized at amortized cost and hedge accounting consist of debt securities issued and deposits. The stated fair value of these liabilities is determined by methods qualifying for level 2.

There have been no transfers between level 1 and level 2.

Credit risk is defined as the risk of loss associated with loan customers, derivative counterparties, issuers of securities and other counterparties being unable or unwilling to settle at the agreed time and in accordance with written contracts, where the collateral established does not cover the outstanding claim. The Group provides loans to retail customers, Norwegian municipalities and county administrations, local government enterprises, intermunicipal companies and loans to companies where the loan is guaranteed by a Norwegian municipality or county administration.