Q2 Interim report 2024KLP Banken Group

KLP Banken Group’s operating profit before tax at the end of the first half-year was NOK 166.9 (121.5) million. The result for the second quarter alone was NOK 91.8 (68.3) million. The change in results is mainly due to increased net interest income in both business areas and net gains on financial instruments.

Segmented results show NOK 121.9 (87.5) million in the retail market and NOK 45.0 (34.0) million in the public market.

Net interest income in the KLP Banken Group for the first half-year was NOK 254.6 (220.8) million. The increase is mainly due to higher interest rates providing higher returns on loans financed with equity, as well as somewhat higher margins between loans and funding in the retail market.

At the end of the quarter, the income statement includes a net gain on value changes in financial instruments of NOK 5.9 (-9.3) million. This result effect is mainly related to changes in the market value of the bank’s liquidity investments. An insignificant part of this is realized income.

Net fee and commission income amounts to NOK 15.1 (13.2) million per second quarter.

The bank group manages mortgages and public loans financed by the parent company (KLP). The management fee for this assignment amounted to NOK 31.3 (30.7) million for the first half-year.

Operating costs and depreciation amount to NOK -140.0 (-133.4) million so far this year. Most of the increase is due to price increases on purchases of external services and wage growth. Other operating costs also include reimbursements to customers due to fraud amounting to NOK -0.6 (-0.7) million.

Recognized losses and loss provisions so far in 2024 are NOK -0.0 (-0.4) million. KLP Banken’s individual write-downs on mortgages have increased in the first half-year, but estimated provisions for future losses have been reduced by approximately the same amount. High inflation and high interest rates are expected to eventually lead to reduced repayment capacity among loan customers. Nor in 2024 there have been realized losses related to public loans.

The group’s total result per the second quarter of 2024 was NOK 173.1 (155.1) million.

KLP Banken manages loans on its own balance sheet and loans financed by KLP for a total of NOK 125 (120) billion. On its own balance sheet, KLP Banken Group had loans to customers amounting to NOK 42.8 (42.9) billion as of June 30, 2024. The distribution between the retail market and public loans was NOK 24.5 (23.5) billion and NOK 18.3 (19.4) billion, respectively.

Net mortgage growth in the first half-year was NOK 0.5 (0.2) billion. KLP Banken experiences that the growth in demand for new mortgages is lower than in previous years, which is related to the current high interest rate and inflation. The bank’s main target group for mortgages is members of the pension schemes in KLP.

Mortgages amounting to NOK 1.6 (2.4) billion were sold from KLP Banken AS to the credit institution KLP Boligkreditt AS in the first half-year. The volume of managed mortgages for KLP has been relatively stable and amounted to NOK 2.7 billion at the end of the quarter.

Outstanding drawn credit on credit cards shows a slight reduction in the first half-year, but the number of customers using the bank’s credit cards has increased by over 20 percent since the previous year-end.

KLP Banken’s loan volume in the public sector market has decreased by NOK -0.7 (0.3) billion so far this year. Loans to public borrowers managed for KLP have increased by NOK 1.8 (1.0) billion.

Available liquidity is placed in other banks and interest-bearing securities. Placements in credit institutions amounted to NOK 1.8 (1.3) billion in the KLP Banken Group at the end of the quarter. The book value of interest-bearing securities measured at fair value was NOK 5.1 (5.1) billion.

Market value changes on interest-bearing securities in the first half-year resulted in an accounting effect of NOK 13.2 (-5.6) million.

KLP Banken Group’s external financing consists of deposits and bonds. At the reporting date, deposits from individuals and businesses amounted to NOK 15.6 (14.5) billion. Deposit growth so far this year is over 10 percent, which follows the bank’s focus on attractive deposit products. This has given the bank a very positive growth in new deposit and daily banking customers. Fixed-rate deposits for personal customers were launched in the second quarter.

Debt incurred by issuing securities in the KLP Banken Group was NOK 30.8 (31.7) billion at the end of the second quarter. Of this, covered bonds issued by KLP Kommunekreditt AS amounted to NOK 18.8 (18.6) billion and by KLP Boligkreditt AS to NOK 11.1 (12.0) billion. All OMF issuances have achieved an Aaa rating. The debt securities in KLP Banken AS amounted to NOK 0.8 (1.1) billion.

KLP Banken Group is exposed to various types of risk and has established a risk management framework to ensure that risks are identified, analysed, and managed through guidelines, frameworks, routines, and instructions.

The bank should have a cautious risk profile, and earnings should primarily result from lending and borrowing activities as well as liquidity management. This means that the business should have low market risk and that interest rate risk arising from lending and borrowing activities is reduced by using derivatives.

KLP Banken Group and its subsidiaries should have prudent long-term financing due to regulatory requirements, and frameworks have been established to ensure that this goal is met.

The bank’s credit risk is low, and the bank’s loans are mainly limited to loans with municipal risk and loans secured by real estate. The bank’s liquidity is managed as placements in other banks and in securities that meet certain credit quality requirements in accordance with board-approved credit lines.

Equity capital according to capital adequacy rules at the end of the second quarter of 2024 was NOK 3,088 (2,897) million. Equity capital consists of core capital only. Loans are risk-weighted according to the capital requirements regulations. KLP Banken Group has a capital adequacy ratio and core capital ratio of 20.9 (20.3) percent at the reporting date. The current capital requirements, including buffer requirements, are 14.8 percent core capital ratio and 18.6 percent capital adequacy ratio. The leverage ratio was 6.1 (5.7) percent. The requirement here is 3.0 per cent.

KLP Banken Group’s target group in the retail market is KLP’s membership base. It includes a significant portion of the population, and the basis for further developing KLP Banken Group’s position among these is considered good. KLP Banken Group will continue to work on developing favorable and relevant products and services for its members.

Norwegian society is still in a period of macroeconomic uncertainty, which has consequences for households. High price growth and increased interest rates particularly affect people’s personal finances. KLP Group’s members, who are mainly public employees and their households, are more shielded from employment-related risks than other groups, as they are employed by municipalities and health enterprises. KLP Banken Group therefore assumes that growth ambitions can remain, and that the risk of defaults and losses also will be limited in the future. The current high-cost period has also significantly reduced members’ ability to save. Nevertheless, the bank maintains its growth ambitions for deposits, which should primarily be achieved by recruiting more deposit customers.

Household debt is subject to strict government-imposed credit granting requirements in the retail market. KLP Banken Group sees this as a good basis for further developing our banking products and services in the retail market. KLP Banken Group will continue conservative credit granting routines to maintain low risk in the bank’s loan portfolios, but also support customers facing challenges in difficult times.

The banking industry is at the forefront of technological development, and customers’ expectations for simple and digital solutions are increasing. KLP Banken Group aims to utilize proven technology to offer relevant, customer-friendly, and efficient services to customers. This entails a continuous need for IT investments to achieve the bank’s goals of further growth and profitability.

Norwegian municipalities have developed a good and comprehensive service offering to the population. Increased life expectancy, demographics, income development, and climate risk provide reasons to expect a significant level of investment in the public sector in the coming years. Higher costs due to increased inflation and higher interest rates may in the short term contribute to somewhat lower loan growth than has been normal in recent years. However, municipalities in KS’s annual budget survey express that the level of investment and borrowing should remain high in 2024. The demand for loans for projects that contribute to climate adaptation will likely continue to increase in the coming years.

KLP Kommunekreditt AS is the country’s only credit institution that issues bonds secured by loans to the public sector. The presence of KLP Kommunekreditt AS together with KLP in the public sector loan market contributes to competition and thus ensures that the public sector has stable access to long-term financing on favorable terms.

KLP Banken AS has good solidity and an equity situation that meets all regulatory requirements. Combined with low credit risk in the lending business, this is a good basis for achieving the best possible financing in the capital markets.

KLP Banken is well-positioned for further development and growth.

Nordic Bond Pricing is used as a source for pricing Norwegian government bonds.

Norwegian fixed-income securities are generally priced based on rates from Nordic Bond Pricing. Securities not covered by Nordic Bond Pricing are priced theoretically. The theoretical price should be based on the discounted value of the security's future cash flows. Discounting is done using a swap curve adjusted for credit spread and liquidity spread. The credit spread should, to the extent possible, be based on a comparable bond from the same issuer. Liquidity spread is determined at the discretion of the evaluator.

These transactions are valued based on the applicable swap curve at the time of valuation. Derivative contracts are to be used only to hedge balance amounts and to enable payments obligations to be met. Derivative contracts may be struck only with counterparties with high credit quality.

For liquid shares and units, the closing price on the balance sheet date is used as the basis for measurement at fair value. If the prices are not quoted, the last price traded is used. Illiquid shares are priced on the basis of the Oslo Stock Exchange’s index algorithm based on the last traded prices. If the pricing information is outdated, a derived valuation is produced from relevant stock indices or other similar securities. If this is also considered unsatisfactory, a discretionary valuation is made. This may be based on fundamental analysis, broker assessment, or adjustments for risk or liquidity considerations in relation to the price.

The fair value through profit/loss is calculated by discounting contractual cash flows to present values. The discount rate is determined as the market rate, including a suitable risk margin. For loans measured at fair value through other comprehensive income, the fair value is calculated as the recognised principal minus estimated loss provisions on loans classified in Stage 2 and 3 (see note 14 Loan losses provision).

The fair value of these loans is considered to be virtually the same as the book value, as the contract terms are constantly adjusted in line with market interest rates. The fair value of fixed rate loans is calculated by discounting contractual cash flows by market interest rates including a suitable risk margin at the end of the reporting period. This is valued at Level 2 in the valuation hierarchy, cf. Note 6.

The fair value of floating rate deposits is taken to be approximately equal to the deposit amount including accrued interest. The fair value of fixed rate deposits is calculated by discounting contractual cash flows by market interest rates including a suitable risk margin. Discounting contractual cash flows by market interest rates including a suitable risk margin.

All receivables from credit institutions (bank deposits) are at variable interest rates. The fair value of these is considered to be virtually the same as the book value, as the contract terms are continuously changed in step with change in market interest rates. This is valued at Level 2 in the valuation hierarchy, cf. Note 6.  

Fair value in this category is determined on the basis of internal valuation models based on external observable data. This is valued in Level 2 in the valuation hierarchy, cf. Note 6.