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 1999. 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 1 550 1 058 1 582 Core earnings 1 1 090 746 1 138 Profit before tax 2 148 616 1 001 Profit for the period 1 548 444 724 Return on equity after tax 2 42.09 % 14.87 % 18.33 % Return on equity after tax (core earnings) 2 29.65 % 25.01 % 28.80 % Return on assets after tax 2 0.56 % 0.18 % 0.22 % Return on assets after tax (core earnings) 2 0.39 % 0.31 % 0.34 % LENDING New disbursements 23 226 32 712 46 921 Outstanding loans 3 216 291 200 948 207 572 LIQUIDITY PORTFOLIO 3 115 403 111 263 103 263 BORROWINGS New long-term borrowings 93 775 114 751 142 341 Repurchase of own debt 1 781 1 939 3 416 Redemptions 72 606 72 235 104 162 Total borrowings 3 343 160 336 658 338 615 TOTAL ASSETS 380 804 366 062 366 901 EQUITY Equity 7 065 4 313 4 594 Core capital adequacy ratio 11.18 % 9.01 % 9.79 % Total capital adequacy ratio 13.85 % 12.48 % 13.22 % 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
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 216.2 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 115.4 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
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 1 550 million, compared to NOK 1 058 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 1 548 million, an increase from NOK 444 million last year. Core earnings¹ year-to-date amounted to NOK 1 090 million, up from NOK 746 million during the same period in. Annualised return on equity after tax is 42.09 per cent. Return on equity after tax adjusted for unrealised gains on financial instruments is 29.65 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 380.8 billion since the beginning of the year. As of 30 KBN s core capital ratio was 11.18 per cent, compared with 9.01 per cent in the same period last year. The total capital ratio was 13.85 per cent, compared with 12.48 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
January INCOME STATEMENT Note July- July- Interest income 1 693 5 345 1 733 4 789 6 730 Interest expense 1 202 3 795 1 348 3 731 5 148 NET INTEREST INCOME 1 491 1 550 384 1 058 1 582 Fees and commission expenses 5 16 5 14 19 Net unrealised gain/(loss) on financial instruments 2 110 635 (583) (420) (575) Net trading income 23 56 23 60 109 TOTAL OTHER OPERATING INCOME 128 676 (566) (374) (485) Salaries and administrative expenses 19 62 19 54 77 Depreciation on fixed assets 1 3 1 3 4 Other expenses 4 14 4 10 15 TOTAL OPERATING EXPENSES 24 79 23 68 96 PROFIT BEFORE TAX 595 2 148 (205) 616 1 001 Income tax 165 600 (57) 173 276 PROFIT FOR THE PERIOD 429 1 548 (147) 444 724 STATEMENT OF COMPREHENSIVE INCOME Note July- July- Profit for the period 429 1 548 (147) 444 724 Other comprehensive income 0 0 0 0 0 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 429 1 548 (147) 444 724 5
January STATEMENT OF FINANCIAL POSITION Note 30 30 31 December ASSETS Deposits with credit institutions 3 11 338 13 239 3 151 Instalment loans 3,4 219 486 203 781 210 189 Notes, bonds and other interest-bearing securities 3,6,7 121 829 110 017 116 657 Financial derivatives 3 28 136 39 008 36 889 Other assets 15 17 15 TOTAL ASSETS 380 804 366 062 366 901 LIABILITIES AND EQUITY Loans from credit institutions 3 9 710 12 635 11 915 Commercial paper 3 0 0 0 Senior securities issued 3,5 343 954 334 147 336 942 Financial derivatives 3 17 658 11 924 10 165 Other liabilities 27 22 53 Current tax liabilities 601 142 445 Deferred tax liabilities 14 182 14 Pension liabilities 30 25 30 Subordinated debt 1 745 2 005 2 080 Hybrid Tier 1 capital instruments 0 667 663 TOTAL LIABILITIES 373 739 361 749 362 307 Share capital 2 145 1 221 1 221 Retained earnings 3 373 2 649 3 373 Total comprehensive income for the period 1 548 444 TOTAL EQUITY 8,9 7 065 4 313 4 594 TOTAL LIABILITIES AND EQUITY 380 804 366 062 366 901 6
January STATEMENT OF CHANGES IN EQUITY 1 January 30 Share capital Retained earnings Total equity Equity as of 1 January 1 221 3 373 4 594 Issue of share capital 924 0 924 Total comprehensive income for the period 0 1 548 1 548 Dividends 0 0 0 Equity as of 30 2 145 4 920 7 065 1 January 30 Share capital Retained earnings Total equity Equity as of 1 January 1 221 2 814 4 034 Issue of share capital 0 0 0 Total comprehensive income for the period 0 444 444 Dividends 0 (165) (165) Equity as of 30 1 221 3 093 4 313 1 January 31 December Share capital Retained earnings Total equity Equity as of 1 January 1 221 2 814 4 034 Issue of share capital 0 0 0 Total comprehensive income for the period 0 724 724 Dividends 0 (165) (165) Equity as of 31 December 1 221 3 373 4 594 7
January STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Interest received 5 448 4 479 6 396 Interest paid (3 910) (3 675) (5 091) Fees and commissions paid (16) (15) (21) Receipts from repurchase of issued securities 56 60 111 Cash payments to employees and suppliers (75) (63) (92) Income taxes paid (442) (290) (260) 1 061 497 1 044 Net disbursement of loans to customers (8 722) (17 112) (23 734) Net (increase)/decrease in deposits with credit institutions (11 012) (1 568) 8 835 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 0 14 417 14 417 Repayment of commercial paper 0 (14 385) (14 385) Proceeds from issuance of debt securities 93 786 114 760 142 374 Repayment of debt securities (74 114) (74 378) (107 659) Proceeds from other borrowed funds 0 0 0 Repayment of other borrowed funds 0 487 (487) Proceeds from issuance of subordinated debt 0 1 571 1 565 Repayment of subordinated debt (955) 0 0 Dividends paid 0 (165) (165) Paid in share capital 924 0 0 NET CASH FLOWS FROM FINANCING ACTIVITIES 19 641 42 307 35 661 NET CHANGE IN CASH AND CASH EQUIVALENTS (8 018) 9 217 335 Effects of foreign exchange differences 7 922 (9 337) (264) Cash and cash equivalents at 1 January 150 78 78 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
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 9 33 15 30 45 Instalment loans 1 545 4 799 1 628 4 518 6 271 Notes, bonds and other interest-bearing securities 641 1 934 660 2 025 2 588 Financial derivatives (502) (1 421) (570) (1 783) (2 173) Total interest income 1 693 5 345 1 733 4 789 6 730 Loans from credit institutions 1 4 2 8 12 Senior securities issued 2 352 7 363 2 680 7 640 10 049 Financial derivatives (1 157) (3 605) (1 345) (3 945) (4 960) Subordinated debt and Hybrid Tier 1 capital instruments 6 34 11 29 48 Total interest expenses 1 202 3 795 1 348 3 731 5 148 Net interest income 491 1 550 384 1 058 1 582 NOTE 2 NET UNREALISED GAIN/(LOSS) ON FINANCIAL INSTRUMENTS July - July Instalment loans 378 483 929 574 525 Notes, bonds and other interest-bearing securities 102 339 632 (13) (168) Financial derivatives (453) 2 384 (2 608) (1 726) (252) Loans from credit institutions 1 4 0 0 (3) Senior securities issued 83 (2 586) 584 877 (544) Subordinated debt and Hybrid Tier 1 capital instruments 0 12 (121) (132) (132) Net unrealised gain/(loss) on financial instruments 110 635 (583) (420) (575) 9
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 11 338 5 799 0 0 0 5 539 0 Instalment loans 219 486 126 457 0 0 0 93 029 0 Notes, bonds and other interest-bearing securities 121 829 97 583 3 979 0 4 395 15 872 0 Financial derivatives 28 136 0 25 007 3 129 0 0 0 Total financial assets 380 789 229 839 28 986 3 129 4 395 114 440 0 Loans from credit institutions 9 710 479 0 0 0 0 9 231 Commercial paper 0 0 0 0 0 0 0 Senior securities issued 343 954 270 202 0 0 0 0 73 752 Financial derivatives 17 658 0 16 171 1 487 0 0 0 Subordinated debt 1 745 1 745 0 0 0 0 0 Hybrid Tier 1 capital instruments 0 0 0 0 0 0 0 Total financial liabilities 373 067 272 426 16 171 1 487 0 0 82 983 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 13 239 12 121 0 0 0 1 118 0 Instalment loans 203 781 111 903 11 064 0 0 80 814 0 Notes, bonds and other interest-bearing securities 110 017 74 592 17 048 0 4 596 13 781 0 Financial derivatives 39 008 0 36 555 2 453 0 0 0 Total financial assets 366 047 198 616 64 668 2 453 4 596 95 712 0 Loans from credit institutions 12 635 517 0 0 0 0 12 118 Commercial paper 0 0 0 0 0 0 0 Senior securities issued 334 147 277 182 0 0 0 0 56 964 Financial derivatives 11 924 0 10 802 1 122 0 0 0 Subordinated debt 2 005 2 005 0 0 0 0 0 Hybrid Tier 1 capital instruments 667 667 0 0 0 0 0 Total financial liabilities 361 378 280 373 10 802 1 122 0 0 69 082 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 3 151 2 350 0 0 0 801 0 Instalment loans 210 189 115 635 11 910 0 0 82 643 0 Notes, bonds and other interest-bearing securities 116 657 84 801 13 679 0 4 532 13 645 0 Financial derivatives 36 889 0 34 283 2 606 0 0 0 Total financial assets 366 885 202 786 59 872 2 606 4 532 97 089 0 Loans from credit institutions 11 915 510 0 0 0 0 11 405 Commercial paper 0 0 0 0 0 0 0 Senior securities issued 336 942 278 251 0 0 0 0 58 692 Financial derivatives 10 165 0 9 047 1 118 0 0 0 Subordinated debt 2 080 2 080 0 0 0 0 0 Hybrid Tier 1 capital instruments 663 663 0 0 0 0 0 Total financial liabilities 361 766 281 504 9 047 1 118 0 0 70 097 10
January NOTE 4 INSTALMENT LOANS 30 30 31 December Principal amount 216 291 200 948 207 615 Accrued interest 1 465 1 537 1 327 Adjustment for fair value 1 730 1 296 1 247 Total instalment loans 219 486 203 781 210 189 NOTE 5 SENIOR SECURITIES ISSUED 30 30 31 December Senior securities issued (nominal amounts) at 1 January 338 615 290 231 290 231 New issuance 93 775 114 751 142 341 Redemptions (74 387) (74 174) (107 578) Amortisation 272 (204) (81) Translation differences (15 115) 6 054 13 702 Senior securities issued (nominal amounts) at end of period 343 160 336 658 338 615 Accrued interest 2 548 3 253 2 667 Adjustment for fair value (1 753) (5 764) (4 340) Total senior securities issued 343 954 334 147 336 942 NOTE 6 NOTES, BONDS AND OTHER INTEREST-BEARING SECURITIES Assets by issuer 30 30 31 December Domestic Issued by public bodies¹ 0 0 0 Issued by other borrowers 1 507 1 708 2 080 Non-domestic Issued by public bodies¹ 91 948 77 208 85 035 Issued by other borrowers 28 373 31 101 29 542 Total notes, bonds and other interest-bearing securities 121 829 110 017 116 657 ¹Issued by or guaranteed by sovereigns, central banks, regional authorities and multilateral development banks. Assets by maturity 30 30 31 December Under 1 year 72 121 45 265 53 818 1-5 year 49 443 62 360 60 911 Over 5 year 265 2 392 1 927 Total notes, bonds and other interest-bearing securities 121 829 110 017 116 657 11
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* 8 538 0 390 0 6 199 2 365 0 17 970 Multilateral development banks 0 10 153 0 0 0 241 9 963 0 20 357 Regional authorities 0 26 515 176 0 0 17 465 8 012 1 454 53 621 Financial institutions 0 14 435 0 0 173 0 63 0 14 672 Securitisation 0 187 0 0 0 0 0 0 187 Covered bond 0 11 639 0 0 0 441 2 943 0 15 022 Total 479 71 467 176 390 173 24 345 23 346 1 454 121 829 *KBN has exposure to two sovereign-guaranteed issuers in Spain Instituto de Credito Oficial and Fondo de Reestructuracion Ordenada Bancaria. As of 30.09. 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 0 2 867 0 0 0 1 342 5 511 0 9 719 Multilateral development banks 0 5 123 0 0 0 0 13 084 0 18 207 Regional authorities 0 16 651 0 0 669 18 708 12 321 933 49 282 Financial institutions 0 16 583 0 70 1 877 97 35 0 18 663 Securitisation 0 208 0 0 18 0 82 0 309 Covered bond 0 3 833 0 0 0 0 10 005 0 13 838 Total 0 45 265 0 70 2 564 20 146 41 038 933 110 017 NOTE 8 EQUITY AND SUBORDINATED LOAN CAPITAL 30 30 Core capital Share capital 2 145 1 221 Retained earnings 3 373 2 649 Total equity 5 518 3 870 Hybrid Tier 1 capital instruments 0 667 Pre-tax profit for the period (reduced by 50 %) 1 074 308 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 6 597 4 747 Supplementary capital Ordinary subordinated debt 1 571 1 752 Perpetual subordinated debt 8 80 Total supplementary capital 1 579 1 832 Total capital 8 176 6 579 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
January NOTE 9 CAPITAL ADEQUACY 30 Book value Risk-weighted assets Minimum capital requirements Credit risk Sovereigns and central banks 8 059 434 35 Regional governments and local authorities 278 512 47 401 3 792 Of which are Norwegian municipalities 219 439 47 276 3 782 Public sector entities 10 292 0 0 Multilateral development banks 20 357 0 0 Financial institutions 41 209 6 629 530 Of which counterparty exposure on derivatives 18 411 2 070 166 Corporates 2 070 414 33 Claims secured by residential property 47 47 4 Covered bonds 15 022 1 502 120 Other assets 15 15 1 Securitisation 187 54 4 Total credit risk 375 770 56 496 4 519 Market risk 3 982 165 13 Operational risk (Basic Indicator Approach) 2 372 190 Minimum capital requirements 59 033 4 723 Capital adequacy ratio 13.85 % Core capital adequacy ratio 11.18 % 13