Q3 Interim report 2024KLP Banken Group

KLP Banken Group’s pre-tax profit for the third quarter was NOK 87.7 (81.6) million. At the end of the third quarter, the group’s operating profit was NOK 254.7 (203.1) million. The change is mainly due to increased net interest income in both business areas and net gains on financial instruments.

Segmented results show NOK 192.1 (139.0) million in the retail market and NOK 62.6 (64.1) million in the public sector market.

Net interest income in the KLP Banken Group as at third quarter amounts to NOK 385.8 (339.7) million. The increase is mainly due to higher interest rates providing higher returns on loans financed with equity. The bank has also achieved slightly higher margins between loans and financing in the retail market.

At the end of the quarter, the income statement includes net income from value changes in financial instruments of NOK 5.8 (-2.9) million. This result effect is mainly related to changes in the market value of the bank’s liquidity placements. An insignificant part of this is realized income.

Net fee and commission income was NOK 24.3 (20.9) million at the end of the quarter.

The bank group manages mortgages, public loans, and other credits financed by the parent company (KLP). The management fee for this assignment amounted to NOK 46.9 (46.0) million per third quarter.

Operating expenses including depreciations amounted to NOK -208.0 (-199.6) million. Most of the increase is due to price increases for external services and wage growth. Operating expenses also include reimbursements to customers due to fraud amounting to NOK -1.3 (-1.7) million.

So far in 2024, losses and loan loss provisions amount to NOK -0.1 (-1.0) million in the retail market. The bank’s individual write-downs on mortgages have increased so far this year, but estimated provisions for future losses have been reduced by approximately the same amount. High inflation and high interest rates may eventually lead to reduced repayment capacity among borrowers. Nor in 2024 there have been loan losses related to public sector loans.

After taxes and estimate deviations, the group’s total result as at third quarter was NOK 252.3 (215.6) million.

KLP Banken manages loans on its own balance sheet and loans financed by KLP for a total of NOK 124 (122) billion. On its own balance sheet, the KLP Banken Group had loans to customers amounting to NOK 42.2 (43.1) billion as of 30 September 2024. The distribution between the retail market and the public market was NOK 24.2 (23.7) billion and NOK 18.0 (19.4) billion, respectively.

The retail market in KLP Banken has a mortgage growth of NOK 0.4 (0.5) billion so far in 2024. New mortgage disbursements so far this year amount to NOK 5.8 (6.0) 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 rates and inflation. The bank’s main target group for mortgages is members of the pension schemes in KLP.

Mortgages amounting to NOK 2.9 (3.5) billion are sold from KLP Banken AS to the credit institution KLP Boligkreditt AS by the end of the third quarter. The volume of managed mortgages for KLP has been relatively stable and amounts to NOK 2.8 billion at the end of the quarter.

Outstanding drawn credits on credit cards has been at a stable level since the turn of last year. However, unused credits and the number of active credit card customers have steadily increased in 2024.

KLP Banken’s lending volume in the public sector market has decreased by NOK -1.0 (0.2) billion so far this year. Loans to public borrowers managed on behalf of KLP have increased by NOK 1.5 billion. New disbursements of public sector loans so far in 2024 amount to NOK 4.5 (5.4) billion for KLP and KLP Banken together.

Available liquidity is invested in other banks and interest-bearing securities. Deposits in credit institutions amounted to NOK 1.6 (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 7.8 (4.7) billion.

Market value changes in interest-bearing securities have resulted in an accounting effect of NOK 14.6 (3.1) million as of the third quarter.

The KLP Banken Group’s external financing comprises deposits and bonds. At the reporting date, deposits from individuals and businesses amounted to NOK 15.7 (14.4) billion. Deposit growth so far this year is 11.6 percent, which follows the bank’s focus on attractive deposit products. This has resulted in very positive growth in new deposit and daily banking customers. Fixed-rate deposits for personal customers were launched in the second quarter.

Debt incurred through the issuance of securities in the KLP Banken Group was NOK 32.5 (31.6) billion at the end of the third quarter. Of this, covered bonds (OMF) issued by KLP Kommunekreditt AS amounted to NOK 21.2 (19.4) billion and by KLP Boligkreditt AS to NOK 10.5 (11.2) billion. All OMF issuances have achieved Aaa rating. The securities debt in KLP Banken AS was NOK 0.8 (1.0) billion.

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 subject 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 rate risks arising within the borrowing and lending activities are 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 third quarter 2024, eligible Tier 1 and Tier 2 capital i.a.w. the capital adequacy rules were NOK 3,086 (2,898) million. Eligible Tier 1 and Tier 2 capital comprises core capital only. Loans are risk-weighted according to the capital requirements regulations. The KLP Banken Group had a capital adequacy and core capital ratio of 20.6 (20.2) percent at the reporting date. The minimum statutory requirements, including buffer requirements, are 14.8 percent core capital ratio and 18.6 percent capital adequacy. The leverage ratio was 5.8 (5.8) percent. The requirement here is 3.0 percent.

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.