January September 2012

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2 January About KBN Established by an act of Parliament in 1926 as a state administrative body called Norges Kommunalbank, Kommunalbanken AS (KBN) gained its current status and structure through a conversion act dated 1 November KBN s primary objective is to provide stable access to low cost funding to Norwegian municipalities, counties, intermunicipal companies and other companies with a municipal guarantee that carry out tasks at a municipal level. KBN s financial objectives are to secure a satisfactory return to its owners and further strengthen the capital base. FINANCIAL HIGHLIGHTS RESULTS Net interest income Core earnings Profit before tax Profit for the period Return on equity after tax % % % Return on equity after tax (core earnings) % % % Return on assets after tax % 0.18 % 0.22 % Return on assets after tax (core earnings) % 0.31 % 0.34 % LENDING New disbursements Outstanding loans LIQUIDITY PORTFOLIO BORROWINGS New long-term borrowings Repurchase of own debt Redemptions Total borrowings TOTAL ASSETS EQUITY Equity Core capital adequacy ratio % 9.01 % 9.79 % Total capital adequacy ratio % % % 1 Profit after tax adjusted for unrealised gains/losses on financial instruments 2 Annualised return on equity and return on assets as percentage of average equity and average assets 3 Principal amounts 2

3 January SUSTAINABLE GROWTH AND GOOD RESULTS Kommunalbanken Norway (KBN) experienced stable interest rate margins on KBN s loan products and surplus liquidity during the third quarter. Profit for the period amounted to NOK 429 million. The reduced growth in KBN s loan disbursement must be seen in relation to KBN s strategy of sustainable growth in total assets and maintaining a sound core capital level. LENDING Demand for loans reflects the high level of investments in the local government sector owing to the last few years population growth and demographic shifts. KBN paid out NOK 23.2 billion in new loan disbursements during the first three quarters, down from NOK 32.7 billion for the same period of last year. The reduction is mainly due to the discontinuance of short term lending. During the third quarter of the loan portfolio was reduced by NOK 1.7 billion to NOK billion. Total loan growth so far this year was NOK 8.7 billion (4.2 per cent), compared to NOK 17.1 billion (9.3 per cent) during the same period of last year. To meet the future regulatory capital requirements, KBN set a target for net lending growth at 6 per cent in. Loan disbursements so far this year have mainly consisted of loans to new local government sector projects related to the building and rehabilitation of schools, kindergartens, water supply, waste management, infrastructure, care homes and IT. FUNDING KBN has experienced continued good access to funding during the third quarter of. New borrowings during the first nine months of amounted to NOK 93 billion through 398 transactions in 13 currencies. Demand for KBN bonds in public markets has been solid and KBN has completed its USD benchmark programme for with three issuances totalling USD 4 billion in addition to a number of other public transactions in USD, AUD, GBP, NZD and NOK. Japan has traditionally been KBN s most important funding market, and 42 per cent of new funding for the first nine months of originated in the Uridashi market. This is slightly down compared to the same period of, and is mainly due to the size limits on new Uridashi-borrowings set by KBN in the third quarter. Favourable USD-NOK basis swap levels have contributed to reduced cost of funding in NOK throughout the year. There has been no issuance of short term commercial paper so far in. As of third quarter KBN has completed approx. 90 per cent of planned borrowings for the fiscal year. Both Standard & Poor s and Moody s Investors Service affirmed during the third quarter KBN s AAA/Aaa rating with stable outlook. LIQUIDITY MANAGEMENT KBN s liquidity reserve over time is equivalent to net debt service for a minimum of 12 months, so that in a given situation KBN can cover all its obligations for the next 12 months without additional borrowings. The liquidity reserve has increased by NOK 12.1 billion the first nine months of the year to NOK billion by the end of. The liquidity portfolio is managed using a low risk investment policy and is placed in notes issued by highly creditworthy states, regional authorities, supranationals and financial institutions. 3

4 January RESULTS Net interest income in the third quarter of was NOK 491 million, up from NOK 384 million in the third quarter of. The accumulated net interest income for the first nine months of is NOK million, compared to NOK million for the same period of last year. Interest rate margins on KBN s loan products and placements of surplus liquidity were stable in the third quarter of, and net interest income stays at the same level as in the second quarter. Favourable basis swap levels give a positive contribution to the net interest income. However, the price trend in the derivative markets during the last months shows a tightening of basis swap spreads on USD- NOK and USD-EUR contracts. Over time this will reduce the contribution from financial derivatives to net interest income. Net trading income shows a profit of NOK 23 million in the third quarter of, remaining unchanged compared to previous year. Year-to-date net trading income amounted to NOK 56 million as against NOK 60 million during the same period last year. Net unrealised gains on financial instruments had a positive effect on the profit of NOK 110 million in the third quarter of, as against minus NOK 583 million during the same quarter of. This is mainly owing to a reversal of negative value changes on basis swaps. Net unrealised gains on financial instruments year-to-date amount to NOK 635 million, as against minus NOK 420 million for the same period of last year. Profit for the third quarter of was NOK 429 million, against minus NOK 147 million during the third quarter of. Profit year-to-date is NOK million, an increase from NOK 444 million last year. Core earnings¹ year-to-date amounted to NOK million, up from NOK 746 million during the same period in. Annualised return on equity after tax is per cent. Return on equity after tax adjusted for unrealised gains on financial instruments is per cent. CAPITAL As of 30 KBN s total eligible capital amounted to NOK 8.2 billion, with core capital at NOK 6.6 billion. Total assets have increased by NOK 13.9 billion to NOK billion since the beginning of the year. As of 30 KBN s core capital ratio was per cent, compared with 9.01 per cent in the same period last year. The total capital ratio was per cent, compared with per cent at 30. FUTURE PROSPECT There has been less turbulence in the international financial markets in the third quarter. The long term problems within the Eurozone, with high public debt and weak GDP, remain unsolved indicating weak international growth going forward. There are clear signs pointing to lower growth in local government sector investments so far in compared to last year according to Statistics Norway. 12 months growth was 9.2 per cent by the end of August, down from 11.8 per cent during the same period of. KBN expects present loan demand in the local government sector to be maintained. Population growth and changes in demographics, as well as increasing need for maintenance and rehabilitation of property and infrastructure, will demand increased investments in the local government sector. Good access to funding in international capital markets is essential to maintaining KBN s role as a cost-effective and reliable lender to the local government sector. KBN s funding strategy with considerable diversification both geographically and between types of investors, has ensured good supply of funding through the financial and debt crisis. Going forward it will be essential to maintain focus on diversification of funding sources and adjustment of debt structure to the local government sector s loan profile. New regulatory framework to be introduced in Europe and Norway can lead to increased financing costs for financial sector. KBN follows developments closely as to what effects new and stricter capital regulation will mean for KBN s operations. Oslo, 9 November The Board of Directors, Kommunalbanken AS ¹Profit after tax adjusted for unrealised gains/losses on financial instruments 4

5 January INCOME STATEMENT Note July- July- Interest income Interest expense NET INTEREST INCOME Fees and commission expenses Net unrealised gain/(loss) on financial instruments (583) (420) (575) Net trading income TOTAL OTHER OPERATING INCOME (566) (374) (485) Salaries and administrative expenses Depreciation on fixed assets Other expenses TOTAL OPERATING EXPENSES PROFIT BEFORE TAX (205) Income tax (57) PROFIT FOR THE PERIOD (147) STATEMENT OF COMPREHENSIVE INCOME Note July- July- Profit for the period (147) Other comprehensive income TOTAL COMPREHENSIVE INCOME FOR THE PERIOD (147)

6 January STATEMENT OF FINANCIAL POSITION Note December ASSETS Deposits with credit institutions Instalment loans 3, Notes, bonds and other interest-bearing securities 3,6, Financial derivatives Other assets TOTAL ASSETS LIABILITIES AND EQUITY Loans from credit institutions Commercial paper Senior securities issued 3, Financial derivatives Other liabilities Current tax liabilities Deferred tax liabilities Pension liabilities Subordinated debt Hybrid Tier 1 capital instruments TOTAL LIABILITIES Share capital Retained earnings Total comprehensive income for the period TOTAL EQUITY 8, TOTAL LIABILITIES AND EQUITY

7 January STATEMENT OF CHANGES IN EQUITY 1 January 30 Share capital Retained earnings Total equity Equity as of 1 January Issue of share capital Total comprehensive income for the period Dividends Equity as of January 30 Share capital Retained earnings Total equity Equity as of 1 January Issue of share capital Total comprehensive income for the period Dividends 0 (165) (165) Equity as of January 31 December Share capital Retained earnings Total equity Equity as of 1 January Issue of share capital Total comprehensive income for the period Dividends 0 (165) (165) Equity as of 31 December

8 January STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Interest received Interest paid (3 910) (3 675) (5 091) Fees and commissions paid (16) (15) (21) Receipts from repurchase of issued securities Cash payments to employees and suppliers (75) (63) (92) Income taxes paid (442) (290) (260) Net disbursement of loans to customers (8 722) (17 112) (23 734) Net (increase)/decrease in deposits with credit institutions (11 012) (1 568) Net (increase)/decrease in notes, bonds and other interest-bearing securities (8 956) (14 890) (21 489) Net (increase)/decrease in other assets 0 (1) 0 Net increase/(decrease) in other liabilities (28) (15) 21 NET CASH FLOWS FROM OPERATING ACTIVITIES (27 657) (33 090) (35 324) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (3) (1) (2) NET CASH FLOWS FROM INVESTING ACTIVITIES (3) (1) (2) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of commercial paper Repayment of commercial paper 0 (14 385) (14 385) Proceeds from issuance of debt securities Repayment of debt securities (74 114) (74 378) ( ) Proceeds from other borrowed funds Repayment of other borrowed funds (487) Proceeds from issuance of subordinated debt Repayment of subordinated debt (955) 0 0 Dividends paid 0 (165) (165) Paid in share capital NET CASH FLOWS FROM FINANCING ACTIVITIES NET CHANGE IN CASH AND CASH EQUIVALENTS (8 018) Effects of foreign exchange differences (9 337) (264) Cash and cash equivalents at 1 January Net change in cash and cash equivalents (96) (120) 72 Cash and cash equivalents at end of period 54 (41) 150 Deposits with credit institutions without agreed period of notice 54 (41) 150 8

9 January ACCOUNTING POLICIES KBN prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted by EU. Interim financial statements as of 30 are prepared in accordance with IAS 34 Interim Financial Reporting, and follow the same accounting policies as annual financial statements for. Preparation of financial statements in accordance with IFRS requires the management to make use of estimates and make assumptions which can affect carrying values of assets and liabilities, and revenues and costs. Estimates and assumptions are based on historical experience and expectations of future trends, and actual results may deviate from the estimates. The fair value of financial instruments that are not traded in an active market, or do not have available quoted prices at Balance Sheet date, is determined using valuation techniques. The valuation requires the management to make assumptions and use estimates when considering credit risk and liquidity risk. Even if the assumptions and estimates are based to the greatest extent on actual market conditions prevailing at Balance Sheet date, actual results may differ from accounting estimates. NOTE 1 NET INTEREST INCOME July - July Deposits with credit institutions Instalment loans Notes, bonds and other interest-bearing securities Financial derivatives (502) (1 421) (570) (1 783) (2 173) Total interest income Loans from credit institutions Senior securities issued Financial derivatives (1 157) (3 605) (1 345) (3 945) (4 960) Subordinated debt and Hybrid Tier 1 capital instruments Total interest expenses Net interest income NOTE 2 NET UNREALISED GAIN/(LOSS) ON FINANCIAL INSTRUMENTS July - July Instalment loans Notes, bonds and other interest-bearing securities (13) (168) Financial derivatives (453) (2 608) (1 726) (252) Loans from credit institutions (3) Senior securities issued 83 (2 586) (544) Subordinated debt and Hybrid Tier 1 capital instruments 0 12 (121) (132) (132) Net unrealised gain/(loss) on financial instruments (583) (420) (575) 9

10 January NOTE 3 CLASSIFICATION OF FINANCIAL INSTRUMENTS At 30 Total At fair value through profit or loss Held to FVO Held for trading Fair value hedge maturity Loans and receivables Other liabilities Deposits with credit institutions Instalment loans Notes, bonds and other interest-bearing securities Financial derivatives Total financial assets Loans from credit institutions Commercial paper Senior securities issued Financial derivatives Subordinated debt Hybrid Tier 1 capital instruments Total financial liabilities At 30 Total At fair value through profit or loss Held to FVO Held for trading Fair value hedge maturity Loans and receivables Other liabilities Deposits with credit institutions Instalment loans Notes, bonds and other interest-bearing securities Financial derivatives Total financial assets Loans from credit institutions Commercial paper Senior securities issued Financial derivatives Subordinated debt Hybrid Tier 1 capital instruments Total financial liabilities At 31 December Total At fair value through profit or loss Held to FVO Held for trading Fair value hedge maturity Loans and receivables Other liabilities Deposits with credit institutions Instalment loans Notes, bonds and other interest-bearing securities Financial derivatives Total financial assets Loans from credit institutions Commercial paper Senior securities issued Financial derivatives Subordinated debt Hybrid Tier 1 capital instruments Total financial liabilities

11 January NOTE 4 INSTALMENT LOANS December Principal amount Accrued interest Adjustment for fair value Total instalment loans NOTE 5 SENIOR SECURITIES ISSUED December Senior securities issued (nominal amounts) at 1 January New issuance Redemptions (74 387) (74 174) ( ) Amortisation 272 (204) (81) Translation differences (15 115) Senior securities issued (nominal amounts) at end of period Accrued interest Adjustment for fair value (1 753) (5 764) (4 340) Total senior securities issued NOTE 6 NOTES, BONDS AND OTHER INTEREST-BEARING SECURITIES Assets by issuer December Domestic Issued by public bodies¹ Issued by other borrowers Non-domestic Issued by public bodies¹ Issued by other borrowers Total notes, bonds and other interest-bearing securities ¹Issued by or guaranteed by sovereigns, central banks, regional authorities and multilateral development banks. Assets by maturity December Under 1 year year Over 5 year Total notes, bonds and other interest-bearing securities

12 January NOTE 7 CREDIT EXPOSURE IN NOTES, BONDS AND OTHER INTEREST-BEARING SECURITIES Exposure as at 30 Maturity < 1 year > 1 year Total Risk class A-2 A-1/A-1+ Not rated BBB+ A/A+ AA AAA Not rated Sovereigns and central banks 479* Multilateral development banks Regional authorities Financial institutions Securitisation Covered bond Total *KBN has exposure to two sovereign-guaranteed issuers in Spain Instituto de Credito Oficial and Fondo de Reestructuracion Ordenada Bancaria. As of KBN s total exposure to Spain was NOK 868 million. KBN has no exposure to Greece, Italy, Ireland or Portugal. Exposure as at 30 Maturity < 1 year > 1 year Total Risk class A-2 A-1/A-1+ Not rated A- A/A+ AA AAA Not rated Sovereigns and central banks Multilateral development banks Regional authorities Financial institutions Securitisation Covered bond Total NOTE 8 EQUITY AND SUBORDINATED LOAN CAPITAL Core capital Share capital Retained earnings Total equity Hybrid Tier 1 capital instruments Pre-tax profit for the period (reduced by 50 %) Deferred tax asset 0 0 Goodwill (1) (1) Allocated to dividend 0 0 Unrealised (gain)/loss on liabilities attributable to changes in own credit risk 6 (98) Total Tier 1 capital Supplementary capital Ordinary subordinated debt Perpetual subordinated debt 8 80 Total supplementary capital Total capital Subordinated capital has been calculated pursuant to the Regulation governing calculation of subordinated capital for financial institutions. Unrealised gain/ loss on liabilities that are due to changes in own credit risk include both non-derivative and derivative liabilities. 12

13 January NOTE 9 CAPITAL ADEQUACY 30 Book value Risk-weighted assets Minimum capital requirements Credit risk Sovereigns and central banks Regional governments and local authorities Of which are Norwegian municipalities Public sector entities Multilateral development banks Financial institutions Of which counterparty exposure on derivatives Corporates Claims secured by residential property Covered bonds Other assets Securitisation Total credit risk Market risk Operational risk (Basic Indicator Approach) Minimum capital requirements Capital adequacy ratio % Core capital adequacy ratio % 13

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