Annual report 2021 KLP Banken AS/KLP Banken Group

KLP Banken launched green mortgages (the “Grønt Boliglån” product) in September 2018. This product is offered to members of KLP who have energy-friendly housing, or who choose to take measures that make the house more energy-friendly. To get a green mortgage, with a lower interest rate on the mortgage, one of these two criteria must be satisfied:

• The house must be energy-rated A or B
• The customer must have received an Enova¹ grant for upgrading or for energy advice on their house within the last two years.

As of December 2021, green mortgages in KLP Banken amounted to NOK 1.1 billion, corresponding to 4.4 per cent of the mortgage portfolio.

The graph below shows the development of green mortgages as a share of the total mortgage portfolio, from the launch of the product and to December 2021. As this shows, there has been a growth in green mortgages since the product was launched. We can see an increasing knowledge of the product among our customers, and green mortgages make an increasing share of the mortgage portfolio.

In 2021, KLP Banken targeted to send out minimum eight sustainability messages to influence customers into a greener direction. The messages sent out included tips on sustainable and energy-efficient refurbishment related to green mortgage, power-saving measures in connection with high electricity prices, and sustainable holiday tips ahead of the Easter, summer, and Christmas holidays. The messages were posted on our website and informed by newsletters, dynamic notifications in online and mobile banking as well as social media. KLP Banken produced a total of 14 sustainability messages in 2021, surpassing the target. In this way, we contribute to increased knowledge and focus on sustainability among our customers.

KLP Banken wants to be a driving force and sparring partner to get the municipalities to make sustaianable choices in the public administration. In 2021, we developed our own climate and environmental guide that has been well received by the municipalities. The guide contains information on various financing and support schemes, so that it becomes easier for the municipalities and the public sector enterprises to make climate- and environment-friendly investments.

In 2022, we will implement a new framework to integrate sustainability into the credit process for lending to the public sector. For municipalities and county municipalities, we will establish a model for an annual sustainability assessment, where the customers are assessed regarding to environmental, social and governance (ESG). The model will be based on publicly available sources. For public sector enterprises, sustainability will be integrated in the individual credit cases (loans must be subject to a thorough credit assessment in advance, where the purpose of the loan, finances, management and ownership are assessed.)

KLP Banken has, as a part of the management of KLP’s funds, offered green loans to municipalities, counties and enterprises related to the public sector, since 2019. Green loans are loans used to finance projects focusing on climate, the environment and sustainability. The loan can be given for investments in construction, transport, water, sewerage, refuse disposal or other public projects with a clear focus on climate. If the project to be financed with a green loan, qualifies according to KLP Banken’s criteria, the loan will carry a lower interest rate than an ordinary loan.

At the end of 2021, green loans in KLP and KLP Banken amounted to just over NOK 2.5 billion. The bulk of these are for climate-friendly new buildings, followed by loans to the water and waste sector, transport and rehabilitation of buildings. Among the projects that were financed with green loans in 2021, is a new primary and secondary school in Surnadal municipality. The school is built as a low-energy building in solid wood and will also produce its own energy. The building’s high environmental ambitions give an estimated saved CO2 emission of 6,850 kg per year. A green loan was also given to the Fire Brigade SØR IKS for the purchase of an electric van. By replacing the old fossil-powered car, the fire brigade saves 20,000 liters of fossil fuel a year.

KLP Banken has started working on mapping climate risks in its operations. The bank has looked at how climate change and the transition to a zero-emission society could affect the bank’s risk, and what opportunities this could give. KLP Banken is exposed to Norwegian mortgage customers and public-sector activities in Norway. There is a risk that some of the bank’s customers could be hit by extreme weather, which could affect the market price of their home in the short and/or long term, impairing the bank’s collateral.

In 2021 we carried out an analysis of the mortgage portfolio by mapping data from the Norwegian Water Resources and Energy Directorate (NVE), The Norwegian Mapping Authority, and Norwegian Geotechnical Institute (NGI), to map the risk of flood, sea level rise and landslides. This analysis showed that mortgages for approximately NOK 3 billion, or 12.5 percent of the bank’s mortgage portfolio, is exposed to risks such as flood, sea level rise, and landslides to a certain degree. The data do not say anything about which security measures have been implemented for the various homes or to what extent this has reduced or eliminated the risk. The bank’s loan portfolio thus has a not insignificant exposure to physical risk. The direct risk is covered through home insurance, but for the bank the risk is, for example, a fall in market value of the object due to climate-related events.

The public sector will also be affected by climate change and will need significant investments related to e.g. water and sanitation to handle extreme precipitation. Here, the bank has an opportunity to be an advisor and sparring partner within climate and sustainable business for the municipalities. Offering green financing products to meet customers’ and the government’s expectations for climate-related and sustainable investments is one way for the bank to contribute to achieve society’s overriding goals in line with the UN Sustainable Development Goals and the Paris Climate Agreement.

As part of the KLP Group, KLP Banken follows the Group’s guidelines on equality and diversity. KLP Banken shall be an attractive workplace. We believe that gender equality and diversity in the workplace strengthen value creations, increase employee satisfaction and contribute to influencing good attitudes and actions. All people should have the same rights and opportunities. That is why we are working to integrate gender equality and diversity perspectives into strategies, guidelines and measures. We also expect our employees to contribute to an inclusive working environment, where everyone is respected for who they are. This contributes to Sustainable Development Goal no. 5, Gender equality.

The table below shows selected key figures within equality in KLP Banken and KLP.

For more key figures related to equality and diversity, please see the sustainability statement in KLP’s annual report.

KLP Banken works actively, purposefully and systematically to promote gender equality and prevent discrimination. For several years, we have focused on work with gender equality and diversity, because we know that increased gender equality and diversity increases value added and increases employee satisfaction. We have goals for gender balance in management positions and higher-paid positions, because we believe balance in the composition of workers is good and because this will gradually contribute to achieving a better wage balance between men and women. Additionally, we have objectives in other areas of diversity; overall that all employees should experience being respected for who they are, and that we should increase our efforts in relation to employees with disabilities and increase the average retirement age.

Developments in the areas of gender and wage balance are too slow. We therefore decided in 2021 to participate in the joint initiative "Women in Finance", to further strengthen a targeted and concrete work to help increase the proportion of women in leading positions and specialist functions in the financial industry in Norway.

Other measures in KLP and KLP Banken are aimed at the gender and salary balance, and are related to recruitment processes, management development, salary process as well as identification and development of talents.

Both KLP Banken’s locations in Trondheim and Oslo are certified as an Eco-lighthouse (Miljøfyrtårn) through the Eco-lighthouse Foundation. As an Eco-lighthouse enterprise, the bank has received help to implement concrete and profitable sustainability initiatives within areas such as health and safety, waste disposal, energy use, purchasing and transport. The bank’s locations were first certified in 2012, in Oslo as a part of the KLP House in Bjørvika, and a separate certification in Trondheim. Both locations were recertified in 2021.

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

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

KLP Banken has a total of over 46,000 (45,000) active retail customers. The table below shows the breakdown by numbers of customers who actually use the bank’s products actively (one customer may use one or more products).

As expected, customer growth in 2021 continued from the previous year. The slightly lower membership share is due to a clean-up of inactive credit card customers.

KLP Banken’s main products in the retail market are mortgages and savings. The mortgage products include ordinary mortgages, Flexilån, Boliglån Ung, bridging finance for house purchases, loans for holiday homes and Seniorlån. The bank also offers green mortgages with lower interest rates for energy-friendly homes.

Other banking products in the retail market include current accounts, savings accounts, Boligsparing for Ungdom (BSU), and debit and credit cards. Retail customers are largely self-managing through mobile and online banking.

In 2021, the KLP Group’s mortgage portfolios increased from NOK 23.7 billion to NOK 25.0 billion. Net growth in 2021 was NOK 1.3 (2.0) billion, or 5.6 (9.3) per cent. Gross new payments totalled NOK 9.9 (9.7) billion. Mortgages are secured using cautious valuations whereby all borrowers are assessed with respect to solvency and willingness to pay before a loan is approved. Fixed-interest loans accounted for 8 (7) per cent of outstanding loans at year-end. Other loans were at floating interest rates.

KLP Banken’s outstanding mortgages in the retail market totalled NOK 22.0 (20.5) billion at the end of 2021.

At the end of 2021, the mortgage portfolios in KLP Banken had an average loan-to-value ratio (LTV - debt as a percentage of the estimated property value) of 53 (58) per cent.

At year-end, outstanding debt on credit cards issued by the bank was NOK 43.0 (49.2) million. Both the introduction of a central debt register and the coronavirus pandemic contributed to a general reduction in consumer debt.

Loans more than 90 days past due amounted to NOK 19.4 (21.1) million at the end of the year. That represents 0.09 (0.10) per cent of KLP Banken’s total lending in the retail market. Both defaults and losses therefore decreased further in 2021 and are at a stable low level compared to most other banks.

Loans to the public sector are provided by KLP and KLP Kommunekreditt AS and managed by KLP Banken.

KLP Kommunekreditt AS, together with KLP, has a good position in the market for long-term financing of municipalities, county municipalities and enterprises that work for the public sector. The bank also has an important role as an advisor for customers on financial matters for example. Customers appreciate this, as shown by the fact that customers are expressing increasing satisfaction satisfied with the bank.

Total loans from KLP and KLP Kommunekreditt AS to public-sector borrowers and enterprises amounted to NOK 84.1 (80.4) billion at the end of 2021, an increase of NOK 3.7 (8.2) billion, or 4.6 per cent, in the financial year. For the local government sector as a whole, the estimated net debt growth was 5.4 per cent in 2021.

Loans at fixed interest rates made up 35 (36) per cent of total loans at the end of the year.

In 2021, new loans were paid to the public sector from the companies in the KLP Group for a total of NOK 11.2 (15.3) billion. Repayments and loan redemptions during the year amounted to NOK 7.5 (7.1) billion.

During 2021, applications for loans totalling NOK 154.9 (NOK 141.8) billion were received.

The credit risk associated with loans to municipalities and county municipalities in Norway is limited to deferred payments postponement and not to a lapse in payment obligations. This is pursuant to Norwegian law, which provides the lender with security against loss if a municipality cannot meet its payment obligations. In the event of a payment deferral, the lender is also assured of compensation for accrued interest, interest on overdue payments and debt recovery costs under the Norwegian Local Government Act . Neither KLP nor the KLP Banken Group has had any credit losses on loans to municipalities or county authorities.

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

Total lending in KLP Kommunekreditt AS amounted to NOK 17.8 (17.7) billion at the end of 2021. The proportion of loans at fixed interest rates was 11 (17) per cent.

KLP Kommunekreditt AS paid out new loans totalling NOK 1.3 (3.4) billion in 2021. 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 2021. Nor were any individual losses recognised in the accounting year. Calculated loss provisions had very little profit effect in the mortgage company in 2021.

KLP Banken’s activities in the retail market are financed with deposits, borrowing and equity.

The bank’s deposits from retail customers increased from NOK 10.5 billion to NOK 11.6 billion in 2021. Deposit growth was higher than the previous year.

At the end of the financial year, KLP Banken AS had outstanding securities debt of NOK 0.9 (0.8) billion. This is also used in financing the subsidiaries in addition to deposits.

KLP Banken uses KLP Boligkreditt AS to finance part of the lending activities in the retail market by issuing covered bonds backed by mortgages. In 2021, new mortgage-backed bonds in the amount of NOK 3.5 (6.0) billion were issued. Outstanding bond debt in KLP Boligkreditt AS was NOK 12.4 (10.6) billion at the end of 2021. KLP Boligkreditt AS has achieved the best rating for its borrowing programme.

KLP Boligkreditt AS purchased mortgages amounting to NOK 6.0 (7.5) billion from KLP Banken AS during 2021. At the end of the year, mortgages totalling NOK 12.3 (10.8) billion were financed on KLP Boligkreditt’s balance sheet and NOK 9.7 (9.7) billion on KLP Banken AS’s balance sheet.

The credit company KLP Kommunekreditt AS issues covered bonds secured on loans to municipalities and county authorities and to enterprises with a municipal loan guarantee. Cost-effective financing will enable KLP Banken to offer long-term lending on good terms.

At the end of 2021, the bank had issued covered bonds backed by loans to the municipal sector amounting to NOK 18.6 (17.4) billion. New issues in 2021 amounted to NOK 5.5 (4.0) billion. No bonds have been issued outside Norway. KLP Kommunekreditt AS has achieved the best rating for its borrowing programme.

KLP Banken AS also offers deposit products for municipalities and public-sector corporate customers that are used for financing loans in the public market etc. At the end of 2021, deposits from municipalities and enterprises amounted to NOK 1.3 (1.3) billion, which corresponds to 10 (11) per cent of the bank’s total deposits.

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

To prepare the accounts in accordance with IFRS, management has to 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 recognised in the financial statements. Actual figures may differ from estimates used. Areas in which discretionary valuations and estimates of material significance to the Company/Group have been used are described in Note 3.

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

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

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

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

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

• Office machinery: 4 years
• Inventory: 4 years

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

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

The Company/Group’s intangible assets consist primarily of capitalised IT systems.

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

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

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

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

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

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

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

The Group financial statements cover the Bank and its wholly owned subsidiaries KLP Boligkreditt AS and KLP Kommunekreditt AS. All entities in which the Group has a decisive influence/control are considered to be subsidiaries. Control is normally achieved through ownership of more than half of the voting capital. The effect of potential voting rights that can be exercised or converted at the end of the reporting period is included in the assessment of control. Subsidiaries are consolidated from the date on which the Group takes over control and they are omitted from consolidation when that control ceases. Intercompany transactions are eliminated in the financial statements.

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

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

On initial recognition, the right of use is measured at acquisition cost, i.e. the lease liability (present value of the lease payments) plus advance lease payments and any direct acquisition costs. In subsequent periods, the right of use is measured using an acquisition model.

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 goods 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 capitalised to the extent that it can be demonstrated that the Company/Group will have sufficient taxable profit in the future to exploit the tax asset.

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

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

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

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

Presentation of the pension costs in the income statement is in accordance with IAS 1. This standard allows the option of classifying the net interest element either as an operating cost or as a financial cost. The option the Company adopts must be followed consistently for later periods. The Company 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 Note 15 and 16.

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

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

In the company/group, the assessment of what is considered to be a significant change in credit risk for home mortgage loans is based on a combination of quantitative and qualitative indicators and ‘backstops’. The most important driver for a significant change in credit risk for home mortgage loans in the group is a change in the probability of default (PD) from initial recognition up to the reporting date. A relative change in PD of more than 2.5 is considered to be a significant change in credit risk. The change in PD must also be at least 0.6 percentage points for the change to be considered significant.

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

The lending portfolio has historically shown low losses and has generally very good collateral in public sector guarantees or mortgages. As a result, the loan loss provisions for the company/group are low. In 2021 individual losses and provisions related to lending and other credit reduced by 47 percent compared to the previous year.

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 2.5 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.

Finanstilsynet published in Circular 4/2020 criteria for identification of default and this gave some minor changes in the definition of default. The changes has not have any major consequences for the company. 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 2005-2014 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 realisation 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.

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.

Logistical regression was used to create the PD model. This method is considered an industry standard for PD models, it is easy to interpret and analyse the output from the model and it can provide high coefficient of determination given that certain assumptions are met. The method also makes it possible to combine pure quantitative analyses with expert assessments, which was useful when the data was somewhat limited. A thorough manual analysis of a relatively small sample of potential variables (due to limited data) was carried out to arrive at an optimal combination of variables.

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 validated autumn 2021, and the results showed that the model has a good ranging ability and stabile PD values without large fluctuations even that time period for the valuation was characterized by very low degree of default based on the corona measures such as low interest and exemption from repayment. The model is recalibrated at least yearly and the coefficient values ​​can then be updated and the updated prediction level adjusted.

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.

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

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

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