INTERIM REPORT - KommuneKredit · KK_AR16_designoplaeg.indd 1 06/09/16 09:17 Since 1899, KommuneKredit has provided funding to Danish local authorities. KommuneKredit is a steady

INTERIM REPORT1ST HALF 2017

KK_AR16_designoplaeg.indd 1 06/09/16 09:17

CONTENTS

MANAGEMENT’S REVIEW

Financial summary for KommuneKredit 3KommuneKredit in brief 4CEO Letter 6Financial review 10

INTERIM FINANCIAL STATEMENTS

Statement of comprehensive income 13Statement of financial position 13Statement of changes to equity 14Statement of cash flows 14Notes 15

CONTACTS

Jens Lundager, CEO and Managing DirectorJohnny Munk, Managing DirectorMorten Søtofte, Chief Financial and Risk Officer

For questions regarding issuances please contact: Eske Hansen, Head of Funding and Treasury

Address:KommuneKredit Kultorvet 16DK-1175 Copenhagen KDenmark

Tel. +45 33 11 15 [email protected] no. 22 12 86 12

Announcement date: 25 August 2017

Cover photo: Sankt Annæ Square, Copenhagen

STATEMENT AND REPORTS

Statement by the Board of Directors and Management 20The independent auditor’s report on review of the interim financial statements 21Report by the auditor appointed by the Ministry of Economic Affairs and the Interior 22

CASES

Sankt Annæ Square 8The Green Committee 12

2 INTERIM REPORT 2017KOMMUNEKREDIT

Contents

2013 2014 2015 2016 2017P

DKKm %

0

2,000

4,000

6,000

8,000

10,000

0

1

2

3

4

5

2013 2014 2015 2016 2017P

DKKm

0

200

400

600

800

1,000

FINANCIAL SUMMARY FOR KOMMUNEKREDIT

1st Half 1st Half 1st Half Year DKKm 2017 2017 2016 2016

EUR DKK DKK DKK

KEY FIGURES Net interest income 46 340 361 656Administrative expenses -8 -58 -54 -106Profit before value adjustments 38 282 307 550Value adjustment of financial instruments 8 63 88 89Tax on profit for the period -10 -76 -87 -141Comprehensive income for the period 36 269 308 497 Lending and lease receivables 23,156 172,271 166,257 168,589Portfolio of securities 5,740 42,706 35,690 34,049Total assets 30,943 230,199 223,599 223,938Debt securities issued 28,276 210,357 204,369 202,642Equity 956 7,113 6,655 6,844 ACTIVITIES DURING THE PERIOD Lending and lease receivables, net addition at nominal value (net new lending) 664 4,939 5,090 8,998Lending and lease receivables, gross addition at nominal value 2,555 19,008 16,670 31,113Debt securities issued, gross addition at nominal value 7,358 54,741 52,090 85,963 CAPITAL STRUCTURE Total risk exposure (REA) 1,304 9,699 7,582 7,393Common Equity Tier 1 (CET1) capital 956 7,113 6,655 6,844Capital base 886 6,590 6,450 6,324Capital ratio* N/A 68 85 86Equity ratio, pct. N/A 3.1 3.0 3.1 SELECTED FINANCIAL RATIOS Loss on lending and lease receivables 0 0 0 0Administrative expenses/assets, pct. N/A 0.03% 0.02% 0.05%Net interest income/assets, pct. N/A 0.15% 0.16% 0.29%Liquidity resources, pct. N/A 24% 18% 16% Number of full-time employees N/A 69 67 66

* = Capital ratio for 1st half of 2017 has been adjusted for risk-weight in accordance with the principles of CRR/CRD IV. Key figures and financial ratios are calculated in accordance with The Danish Finance Society’s “Recommendations and Financial Ratios 2015”. Exchange rate at 30.06.2017, EUR 100 = DKK 743,95. The format is unchanged from the annual report for 2016.

NET NEW LENDING AND EQUITY RATIO 2013-2017 FORECAST

Net new lending Equity ratio, pct.

NET INTEREST INCOME AND PROFIT BEFORE VALUE ADJUSTMENT 2013-2017 FORECAST

Net interest income Profit before value adjustment

MANAGEMENT’S REVIEW


Financial summary


Since 1899, KommuneKredit has provided funding to Danish local authorities. KommuneKredit is a steady and stable business partner.

The steadiness is founded on KommuneKredit’s struc-ture as an association where all Danish local authorities are jointly and severally liable for KommuneKredit’s liabilities and on its low risk tolerance, prudent risk management and strong financial position.

KommuneKredit’s stability is demonstrated by the fact that it has been acting as a link between clients’ financing requirements and the investors for more than a hundred years.

KommuneKredit has obtained the highest rating from both Standard & Poor’s and Moody’s in line with the rating for the Danish government. Therefore, Kom-muneKredit can finance itself at low interest rates and on-lend to its clients at a modest margin. The associa-tion does not need to make a profit.

KommuneKredit plays in important part in society by creating financial latitude for the Danish local commu-nities.

By mid-2017 total lending amounted to DKK 172 billion, and profit for the period before value adjustments was DKK 282 million.

The equity ratio at the end of June 2017 corresponded to the Board of Directors’ objective of at least 3 pct. KommuneKredit has a capital ratio of 68 and a strong liquidity position.

KommuneKredit is subject to Act no. 383 of 3 May 2006 on KommuneKredit and is under supervision by the Ministry of Economic Affairs and the Interior.

The association has 69 employees and is based in Copenhagen.

KOMMUNEKREDIT IS STEADY AND STABLE

KOMMUNEKREDIT IN BRIEF

HIGHEST INTERNATIONAL CREDIT RATING

KommuneKredit is rated by Standard & Poors and Moody’s. The outlook is stable.

KommuneKredit’s issues are in the highest liquidity category in the LCR delegated act.

CAPITAL RATIO EQUITY RATIO

RISK WEIGHT

when investing in KommuneKredit’s issuances.

LONG

-TERM DEBT

AAA/ Aaa

SHOR

T-TERM DEBT

A-1+/ P-1

LCR:

HQLALevel 1 assets


KK in brief

JOINT AND SEVERAL LIABILITY FOR ALL OF KOMMUNEKREDIT’S LIABILITIES

JOINT AND SEVERAL LIABILITYKommuneKredit’s members are Denmark’s 98 municipalities and 5 regions, and the association thus represents the entire Danish population. The members are jointly and severally liable for all of KommuneKredit’s liabilities. That is the members’ musketeer oath where everyone is obligated – one for all, all for one.

FUNDING OF LENDINGKommuneKredit’s lending is financed by the issue of securities in the Danish and international capital markets.

KOMMUNEKREDIT IS A LINKKommuneKredit acts as a steady and stable link between local lending and global funding.

5 INTERIM REPORT 2017KOMMUNEKREDIT ›

STABLE FINANCIAL DEVELOPMENT CEO LETTER

KommuneKredit has continued the stable financial de-velopment in the first half of 2017. Earnings have been satisfactory and consistent with expectations for the year, while expenses have risen slightly due to implementation of the IT-strategy. The equity ratio at the end of June was just over 3 pct. and thus in compliance with the target.

KommuneKredit’s total lending continues to grow and measured at fair value amounted to DKK 172 billion at the end of June 2017 against DKK 169 billion at the end of June 2016. In the first half of the year loans were granted to 67 of the 98 Danish municipalities. The loans finance a broad variety of purposes including energy optimisation, climate adaptation and housing for the elderly. For the most part new lending to the utilities sector funded water and waste water distribution as well as investments in district heating.

KommuneKredit means economics of scale for munici-palities and regions, who, through their own joint credit association, may raise loans and receive professional, impartial advice on relevant regulation and financing. KommuneKredit does not have to make a profit, and so this is done on equal terms for all borrowers regardless of their zip code.

Varde Kloak og Spildevand A/S has, for example, raised a loan of DKK 18 million with a 40-year term to matu-rity in KommuneKredit. The loan finances separation of existing sewers into two pipes, so that rainwater is drained separately from waste water. Torrential rain has thus far put pressure on the sewerage systems. For the joint sewerage systems this has meant that many of the pipes were too small, creating a risk that they couldn’t drain the water away quickly enough. By keeping the waste water in a separate system, from source to sew-age treatment plant, the health hazard associated with floods of mixed rainwater and waste water is reduced.

FOCUS ON GREEN INVESTMENTS IN THE LOCAL COMMUNITIESKommuneKredit wants to highlight the improvements to environmental and climate conditions that are achieved through investing in the Danish local com-munities. This is done by issuing green bonds, the proceeds of which are used for selected environment- and climate-related projects in water and waste water, district heating, energy optimisation and environmen-tally sound public transportation. KommuneKredit has appointed a green committee to ensure that the funded projects meet specific green guidelines.

Earnings and financial ratios show satisfactory development. The association’s focus is on continuously adapting to varying conditions, so that we remain cost-effective.


CEO letter

CEO LETTER

The first green bond issuance, in the amount of EUR 500 million, was carried out in May 2017. The proceeds have been distributed to more than 100 green projects in the Danish local communities including water purifi-cation in Svendborg and district heating on Bornholm.

KOMMUNEKREDIT ADAPTS TO VARYING CONDITIONSOn 21 June 2017, the Government announced in a press release, that it would be introducing a law reform which makes it possible to use government loans to finance social housing – state aid developments and renovations subsidized by Landsbyggefonden. Today these devel-opments are financed through subsidized mortgage loans and through loans from KommuneKredit. Per the Government, the social housing sector holds subsidized loans in the amount of DKK 180 billion. Of this Kom-muneKredit has total lending of approx. DKK 25 billion to the financing of subsidized social housing for the elderly. The proposal to use government loans for social housing will be part of a future proposal to amend the Act on Social Housing (Almenboligloven), which is expected to be introduced in Parliament in the Fall. Assuming the Government’s proposal passes, there will be a 10-year period of gradual introduction commencing in 2018.

KommuneKredit finances housing for the elderly through the issuance of bonds, with a mortgage credit similar nature, on Nasdaq Copenhagen, and the passing of the proposal will only affect bond issuances in Den-mark and not the extent of KommuneKredit’s interna-tional funding. The proposal is not expected to materi-ally affect KommuneKredit’s key figures, either.

has been based on the good, Danish model – when we unite in an association with joint and several liability, we become stronger as a community. We concentrate on a continuous adaptation of our business to the changing conditions, so that we may continue to be focused on our clients, adaptable and cost-effective regardless of the size of our lending.

NO LOSS ON LENDING FOR 118 YEARSThe municipal and regional lending and guarantees are strictly regulated by Parliament and by the Ministry of Economic Affairs and the Interior. The same applies to KommuneKredit’s business and in 118 years Kom-muneKredit has not lost one single Danish krone on lending. The joint and several liability has never been invoked – KommuneKredit is low risk.

The bonds KommuneKredit issues to fund our lending are thus very safe and carry a very low interest rate. The people who buy our bonds do not expect a high yield but rather the certainty of getting their invest-ment back.

Copenhagen, 25 August 2017

Furthermore, in their 2025-plan the Government main-tains their proposed amendment to the utility strategy with the purpose of making the Danish utility sector more effective. The proposal includes a principle on making utility companies subject to competition, which may affect KommuneKredit’s ability to continue to offer funding. It will, among other things, be dependent on the future organisation and ownership structure in the utility companies. There may also be a spill-over effect across the country, so that the privatisation of one company in Copenhagen causes companies in other parts of the country to become subject to competition – thus losing the chance to receive cost-effective funding through KommuneKredit.

Based on population size, KommuneKredit’s loans to the utility sector have the highest impact in rural areas. It is here that getting private funding can be expect-ed to be the most difficult. One example is Marstal Fjernvarme (district heating), which was most recently expanded in 2012 for DKK 130 million. This included EU-grants of DKK 35 million. The rest was borrowed in KommuneKredit against a guarantee from the Mu-nicipality of Ærø. The expansion meant that Marstal Fjernvarme is 100% fossil free with 55% of the annual heat production coming from the sun. At Marstal Fjern-varme they doubt that the investment would have been realised without the opportunity to borrow through KommuneKredit.

KommuneKredit has no opinion on the future organi-sation of the utility sector. Since 1899, KommuneKredit

Jens LundagerCEO


A SUSTAINABLE URBAN ENVIRONMENT IN THE CENTRE OF COPENHAGEN

KommuneKredit’s funding contributes to climate proofing of Sankt Annæ Square.

CASE: SANKT ANNÆ SQUARE


Sankt Ann Square


FUNDING OF CLOUDBURST- AND CLIMATE-PROJECT ON SANKT ANNÆ SQUAREThe Sankt Annæ Project includes renovation, traffic calming and climate protection of both Sankt Annæ Square, Kvæsthusgade and the sunny side of Nyhavn from Toldbodgade to the harbour. The pier, Kvæsthusmolen, has also been renovated and a subterranean car park has been established.

The project, opened in 2016, is backed by Realdania, the Municipality of Copenhagen and HOFOR. Furthermore, a number of private foundations have subsidized the project.

KommuneKredit has granted loans to HOFOR and the Municipality of Copenhagen in connection with this project.

“The project truly lives up to HOFOR’s vision for creating sustainable cities. And we are pleased with the collab-oration with KommuneKredit which makes projects like this possible”, says Carsten Cronqvist, Project Manager for Cloudburst Protection and Climate Adaptation at HOFOR.

Each year since 1902 the Municipality of Copenhagen has honoured several developments and urban areas,

which a committee finds to be particularly beautiful and contributing to the Copenhagen Experience.

In 2016, Sankt Annæ Square was among the seven de-velopments that received the award for an environment with an especially positive contribution to Copenhagen.

Sankt Annæ Square is an important example of the fact that a large investment in a community may serve several purposes: protecting the city against floods and organising new and exciting urban spaces with the op-portunities to create urban life and happiness.

FOR FURTHER INFORMATION Jette Moldrup, Head of [email protected]

CASE: SANKT ANNÆ SQUARE

It may not be something you notice at first glance, but the cloudburst-grating makes a huge difference when rainwater has to be drained away. A “river” in the middle of the square leads the water from the cloudburst into the harbour.


When currency rates fluctuate, it causes great shifts in the balance sheet but no material effects on profit as currency risk is hedged”

Morten SøtofteChief Financial and Risk Officer

FINANCIAL REVIEW

A SATISFACTORY RESULT IN A PERIOD WITH MUCH FLUCTUATIONThe profit for the first half of 2017 was at a level with expectations for the period. The core business showed increased levels of activity for both lending and leasing, and the profit before value adjustments was DKK 282 million. The great shifts in the balance sheet for the period, due to fluctuations in currency rates, had no effect on profit as currency risk is hedged.

EARNINGS AND CAPITAL BASENet interest income amounted to DKK 340 million for the first half of 2017, which is a decrease of DKK 21 million against the first half of 2016. KommuneKredit has adjusted lending prices throughout the period, to ensure a match with funding costs including deriv-atives. Thus, the lending margin is kept stable. Both interest income and interest expenses have dropped compared to the same period last year, primarily due to lower exchange rates for USD and GBP.

Administrative expenses rose to DKK 58 million for the first half of 2017 against DKK 54 million for the same period last year. The increase is primarily due to an increase in IT-expenses due to the IT-strategy, which is being implemented across several years. However, the annual administrative expenses continue to remain stable at 0.05 pct. of assets in recent years.

Profit for the period before value adjustments de-creased to DKK 282 million against DKK 307 million for the same period last year. The development is caused by the decrease in net interest income.

Comprehensive income for the period decreased to DKK 269 million compared to DKK 308 million for the same period last year. Comprehensive income for the period is transferred to equity, which now totals DKK 7,113 million.

KommuneKredit’s equity consists in its entirety of re-tained earnings, meaning that the Common Equity Tier 1 (CET1) capital corresponds to equity.

During this period the liquidity resources have been increased to extend the survival horizon beyond 180 days in an extremely stressful liquidity scenario. This has


Financial review

FINANCIAL REVIEW

been achieved by increasing the portfolio of secured and liquid securities. The greater portfolio of securities has increased credit risk, which only corresponds partially to a decrease in the value of derivative financial instru-ments. The increased exposure together with adjusted risk-weighting in accordance with the principles of CRR/CRD IV has increased the total risk exposure. The result is a capital ratio of 68 pct. against 86 pct. at the end of 2016. KommuneKredit remains highly capitalised with an equity ratio of 3.1 pct. and a strong cash position.

LENDING AND LEASE RECEIVABLESTotal lending including lease receivables increased by DKK 3 billion to DKK 172 billion in the first half of 2017. Net new lending for the period increased by DKK 5 bil-lion, but is partially equalled by a negative value adjust-ment of DKK 2 billion on lending. The favourable net new lending is on a level with the first half of 2016 and reflects a continued rising activity in both lending and leasing. The negative value adjustment on lending is due to a slightly higher interest-rate level for Danish interest rates.

26 pct. of gross lending for the period was provided directly to municipalities and regions, while 74 pct. was provided to companies that solve municipal or regional tasks, including water and waste water distribution, the production and distribution of district heating, waste incineration plants with heat utilization etc.

FUNDING AND INVESTMENTSFunding – debt to credit institutions and debt securities issued – have increased by DKK 6 billion since year-end 2016. The nominal value of funding has increased by DKK 7 billion, which is partially equalled by a negative value adjustment of DKK 1 billion.

The nominal increase in funding is due to several things including increased lending, the fact that more than half the annual funding target has been met due to advantageous funding terms and a more general wish to improve the cash position. Among other things the first half of the year saw 4 benchmark issues, two in USD and two in EUR. One of these benchmarks was a green bond, which finances more than 100 green lending projects.

The value adjustment on funding is primarily due to a decrease in rates for big funding currencies like USD and GBP.

Total investments for the period – receivables from credit institutions as well as the portfolio of securities – have increased by DKK 12 billion to DKK 48 billion. This is pri-marily due to a nominal increase caused by the fact that the increase in funding more than equals the increase in lending. On the asset side the value of derivative financial instruments has decreased by DKK 10 billion. This is because the currency risk on issuances in foreign currency is fully hedged by derivatives. When currency rates fluctuate, as they have done in the first half of 2017, there are great shifts to the balance sheet but no material effects on profit since currency risk is hedged.

EXPECTATIONS FOR 2017The expectation is still an aggregate net new lending for 2017 of DKK 7 billion and net interest income of approximately DKK 650 million.

Profit before value adjustment is still expected to be around DKK 550 million, with an equity ratio of at least 3 pct. depending on the influence of currency rates on assets and liabilities.

ADMINISTRATIVE EXPENSES

Salaries and remuneration Pension contributions etc. Other staff costs Consultancy fees IT-costs Depreciation of property, plant and equipment and intangible assets

Other administrative expenses

43%

6%5% 3%

17%

3%

7%4%

23%

GROSS LENDING FOR THE PERIOD BY PURPOSE

Municipalities and regions Waste and heat supply Water and waste water Public transportation and harbours

Other purposes

26%17%

46%

Future expectations mentioned in the Interim Report, are naturally subject to uncertainty and may be affected by external factors. Thus, the actual development and the actual results may differ from the expectations of the Interim Report.



The members of the green committee are (standing from the left): Eske Hansen (chairman) and Hans-Martin Friis Møller (external member); (sitting from the left): Tabita Falk Thorsen and Carl Hellmers (external member). Also pictured are Guri Weihe and Lasse Vest, alternate and committee secretary respectively.

The two external members, Hans-Martin Friis Møller, CEO of Kalundborg Forsyning A/S, and Carl Hellmers, CEO of Fredericia Fjernvarme a.m.b.a. play a particularly important role given their long experience with the utility sector and its green transition.

ISSUING GREEN BONDS FINANCES GREEN LENDINGKommuneKredit has issued its inaugural green bond. And to ensure full transparency for the investors a green committee has been appointed to approve all green loans.

In May 2017 KommuneKredit issued EUR 500 million green bonds for the first time – and with great suc-cess. Proceeds from the bonds are used to finance environmental- and climate-related investments in the Danish local communities within the areas of: water and waste water, district heating, energy optimisation and eco-friendly public transportation.

With this new type of green funding to municipalities, regions and utility companies KommuneKredit contrib-utes to highlighting the improvements of environmental and climate conditions, which are achieved by investing in Danish local communities. The first bond issuance covers 128 green projects, incl. water purification in Svendborg and district heating on Bornholm.

THE GREEN COMMITTEE EVALUATES THE PROJECTSIn connection with the issue of green bonds, Kommune-Kredit has established a set of specific guidelines that the underlying green investments must comply with. The guidelines are in accordance with the global prin-ciples established by the International Capital Market

Association as a benchmark for guidelines for green bonds.

Among other things, KommuneKredit’s guidelines for green bonds define the criteria that the green invest-ments have to comply with. Generally, the investments have to contribute to a reductions of CO₂ or a reduction in energy consumption. As a starting point, it is also a requirement that energy usage is based on non-fossil resources.

A green committee consisting of four members has been appointed and tasked with ensuring that the financed projects comply with these guidelines.

KommuneKredit has asked CICERO, a renowned, international and independent rating agency in the environmental field, to advice and give an independent evaluation – an official approval so to speak – of Kom-muneKredit’s green bonds for the investors. Kommune-Kredit has received the second highest rating from CICERO.

CASE: THE GREEN COMMITTEE


Green committee

STATEMENT OF COMPREHENSIVE INCOME 1st Half 1st Half DKKm Note 2017 2016

Interest income 947 1,036

Interest expenses -607 -675

Net interest income 340 361

Administrative expenses -58 -54

Profit before value adjustments of financial instruments 282 307

Value adjustments of financial instruments 63 88

Profit before tax 345 395

Tax on profit for the period -76 -87

Profit for the period 269 308

Other comprehensive income

Actuarial gains and losses 0 0

Total comprehensive income for the period 269 308

Appropriation:

Transferred to equity 269 308

Total 269 308

STATEMENT OF FINANCIAL POSITION 30 Jun 31 Dec DKKm Note 2017 2016

Assets

Receivables from credit institutions 2 5,387 1,592

Lending 2 166,071 162,990

Lease receivables 6,200 5,599

Portfolio of securities 2 42,706 34,049

Derivative financial instruments 2, 4 9,684 19,557

Other assets 151 112

Current tax assets 0 39

Total assets 230,199 223,938

Liabilities and equity

Liabilities

Debt to credit institutions 1,234 2,475

Debt securities issued 2 210,357 202,642

Derivative financial instruments 2, 4 10,502 10,992

Other liabilities 556 571

Pension obligations 57 57

Deferred tax liabilities 380 357

Total liabilities 223,086 217,094

Equity 7,113 6,844

Total liabilities and equity 230,199 223,938

INTERIM FINANCIAL STATEMENTS 2017


Interim financial statements

comprehensive + financial

STATEMENT OF CHANGES IN EQUITY 1st Half 1st Half DKKm Note 2017 2016

Equity

Equity at 1 January 6,844 6,347

Transferred to equity for the period

Profit for the period 269 308

Other comprehensive income

Actuarial gains and losses 0 0

Tax on other comprehensive income 0 0

Other comprehensive income after tax 0 0

Transferred to equity in total for the period 269 308

Equity at 30 June 7,113 6,655

Comprehensive income for the period is transferred to equity in accordance with Kommune-Kredit’s articles of association.

Equity rose to DKK 7,113 million by mid-2017 from DKK 6,655 million by mid-2016. At the end of June 2017 equity was 3.1 pct. of assets, which is a minor increase compared to end of June 2016. Equity consists in its entirety of retained earnings.

In accordance with KommuneKredit’s legal framework, equity must be at least 1 pct. of total liabilities, corresponding to DKK 2.231 million. The long-term objective of the Board of Directors is for equity to be at least 3 pct. of assets, which is considered to be an adequate capital base to support the association’s activities.

STATEMENT OF CASH FLOWS 1st Half 1st Half DKKm Note 2017 2016

Cash flows for the period

Cash flows from operating activities

Profit before tax 345 395

Taxes paid -14 -29

Adjustment for non-cash operating items etc. 1 0

Changes to other assets -39 -35

Changes to other liabilities -16 -328

Changes to debts to credit institutions -30 0

Changes to portfolio of securities -8,657 -1,707

Changes to lending and derivative financial instruments 6,192 -9,495

Changes to debt securities issued and derivative financial instruments 7,224 10,421

Total cash flows from operating activities 5,006 -778

Total cash flows for the period 5,006 -778

Cash and cash equivalents at 1 January 380 818

Cash and cash equivalents at 30 June 5,386 40

Cash and cash equivalents 5,387 40

Debt to credit institutions -1 0

Debt to credit institutions with a term to maturity greater than 3 months -1,233 0

Total receivables/debts to credit institutions 4,152 40

INTERIM FINANCIAL STATEMENTS 2017


Equity + cash flows

NOTE 1

ACCOUNTING POLICIES

IN GENERALThe Interim Report is prepared in accordance with IAS 34, ”Interim Financial Reporting”, as adopted by the EU.

Accounting policies are, in all materiality, unchanged from the Annual Report for 2016. Reference is made to the Annual Report for a full description of accounting policies.

For financial instruments with quoted prices in an active market, or for which valuation is based on generally accepted valuation methods with observable market data, there

are no material estimates associated with the valuation.

For financial instruments where valuation is only based on observable market data to a lesser degree, valuation is affected by estimates. This is the case for certain secu-rities for which there is no active market, for example.

The applied methods and principles for deter-mining accounting estimates as regards fair value of financial instruments are described in full in the Annual Report for 2016.

FAIR VALUE

In accordance with IFRS 13, financial in-struments measured at fair value are to be classified in a fair value hierarchy, ranging from level 1 to 3, depending on how the fair value has been determined and the data on which it is based.

Fair value is the value at which a financial asset may be traded between independent counterparties.

Fair value is determined based on the follow-ing hierarchy:

Level 1:Quoted prices in an active market for identical assets or liabilities.

Level 2:Observable input based on quoted prices in an active market for similar assets or liabilities or other valuation methods, in which all ma-terial input is based on observable input.

Level 3:Unobservable input in which the material input for the valuation is not based on ob-servable input.

There have not been any transfers between the levels in the first half of 2017.

NOTES

NOTE 2


Notes

NOTE 2 – CONTINUED NOTES

SPECIFICATION OF FAIR VALUE OF FINANCIAL INSTRUMENTS

DKKm Level 1 Level 2 Level 3 Total

30 Jun 2017

Assets

Receivables from credit institutions 7 5,380 0 5,387

Lending 0 166,071 0 166,071

Portfolio of securities 38,201 4,505 0 42,706

Derivative financial instruments 0 8,546 1,138 9,684

Total assets 38,208 184,502 1,138 223,848

Liabilities

Debt to credit institutions 0 1,234 0 1,234

Debt securities issued on nasdaq 0 40,692 692 41,384

Debt securities issued internationally 0 149,796 19,177 168,973


Total liabilities 0 200,993 21,100 222,093

DKKm Level 1 Level 2 Level 3 Total

31 Dec 2016

Assets

Receivables from credit institutions 74 1,518 0 1,592

Lending 0 162,990 0 162,990

Portfolio of securities 28,526 5,523 0 34,049


Total assets 28,600 188,330 1,258 218,188

Liabilities

Debt to credit institutions 0 2,475 0 2,475

Debt securities issued on nasdaq 0 41,117 1,210 42,327

Debt securities issued internationally 0 141,755 18,560 160,315


Total liabilities 0 195,129 20,980 216,109


NOTE 2 – CONTINUED

SPECIFICATION OF FAIR VALUE LEVEL 3

DKKm Assets Liabilities

30 Jun 2017

Balance at 1 January 1,258 20,980

Additions 394 9,090

Disposals -86 -6,938

Included in comprehensive income -428 -2,032

Balance at 30 June 1,138 21,100

31 Dec 2016

Balance at 1 January 1,392 29,250

Additions 52 7,715

Disposals -419 -16,333

Included in comprehensive income 233 348

Balance at 30 December 1,258 20,980

NOTES

NOTE 3

EVENTS AFTER THE BALANCE SHEET DATE

No events have occurred in the period from 30 June 2017 to the signing of the interim report, which in management’s opinion have a material effect on the association’s financial position.


NOTE 4

OFFSETTING

KommuneKredit has entered into master netting agreements (ISDA Master Agreement) and related unilateral or bilateral collateral agreements for derivative financial instruments. The received and posted collateral is solely comprised of highly rated bonds.

KommuneKredit has not entered into master netting agreements nor posted or received collateral in relation to lending, lease receivables and debt securities issued. Consequently, these financial instruments have not been included in the table below. The carrying amounts appear from the statement of financial position.

Derivative financial instruments presented in the statement of financial position Amounts offset Amounts not offset

Gross Net Financial carrying carrying instru- Net DKKm amount Offset amount ments Collateral amount

30 Jun 2017

Assets 11,974 -2,290 9,684 -3,495 -3,900 1,839

Liabilities 12,792 -2,290 10,502 -3,945 -4,625 1,932

Net -818 0 -818 0 725 -93

31 Dec 2016

Assets 19,705 -148 19,557 -7,243 -9,664 2,650

Liabilities 11,140 -148 10,992 -7,243 -2,258 1,491

Net 8,565 0 8,565 0 -7,406 1,159

The carrying amount of FX-trades is offset, when payments are subject to net settlement. Offsetting constitutes DKK 2,290 million.

The value of derivative financial instruments not offset has been limited to the lesser of assets and liabilities, respectively, and is calculated per counterparty. The amount is included in both assets and liabilities.

The value of collateral is determined per counterparty and has been limited to the calculated net receivable.

The net values represent the carrying amounts corresponding to the potential accounting effect of offsetting.

NOTES


LIQUIDITY RESOURCES

The Ministry of Economic Affairs and the Interior permits KommuneKredit to build up liquid-ity resources of prefunding of up to 25 pct. of total lending as at the end of the previous quarter. The upper limit amounted to DKK 42 billion at the end of the period, and Kom-muneKredit’s liquidity resources amounted to DKK 40 billion. The utilization of the limit has fluctuated during the first half of 2017, and the highest level of liquidity resources has been 24 pct.

Liquidity resources are determined at carrying amount as debt to credit institutions, debt securities issued and derivative financial instruments less lending and lease receivables.

30 Jun 31 Dec DKKm 2017 2016

Liquidity resources

Debt to credit institutions, debt securities issued and derivative financial instruments

Debt to credit institutions 1,234 2,475

Debt securities issued 210,357 202,642

Derivative financial instruments 10,502 10,992

Derivative financial instruments -9,684 -19,557

Total debt to credit institutions, debt securities issued and derivative financial instruments 212,409 196,552

Lending and lease receivables

Lending 166,071 162,990

Lease receivables 6,200 5,599

Total lending and lease receivables 172,271 168,589

Liquidity resources 40,138 27,963

Liquidity resources may not exceed 25 pct. of total lending and lease receivables as at the end of the previous quarter.

Liquidity resources 40,138 27,963

Total lending and lease receivables as at the end of the last quarter 169,616 169,626

Liquidity resources in pct. 24 16

NOTE 5 NOTES


STATEMENT BY THE BOARD OF DIRECTORS AND MANAGEMENT


The Board of Directors and Management have today discussed and approved the interim financial state-ments for the period 1 January 2017 – 30 June 2017 for KommuneKredit.

The interim financial statements are prepared in ac-cordance with IAS 34, Interim Financial Reporting, as adopted by the EU.

In our opinion, the interim financial statements give a fair representation of the association’s financial position as of 30 June 2017 and of comprehensive income from the association’s activities and cash flows for the period 1 January 2017 – 30 June 2017.

Further, in our opinion, Management’s review contains a fair representation of the development in the asso-ciation’s activities, financial matters, comprehensive income for the period and of the association’s financial position in its entirety.


MANAGEMENT

Jens Lundager Johnny Munk /Morten SøtofteCEO & Managing Director Managing Director Chief Financial and Risk Officer

BOARD OF DIRECTORS

Erik Nielsen Lars Krarup Hans ToftChairman Vice Chairman

Henrik Zimino Anker Boye Sophie Hæstorp Andersen

Kaj V. Holm Mikael Klitgaard Anne V. Kristensen


Statement by BoD

THE INDEPENDENT AUDITORS’ REPORT ON REVIEW OF THE INTERIM FINANCIAL STATEMENTS


TO THE BOARD OF DIRECTORS OF KOMMUNEKREDIT

We have conducted a review of the interim financial statements of KommuneKredit for the period 1 January 2017 – 30 June 2017, which comprises statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash flows, and notes including applied accounting policies.

MANAGEMENT’S RESPONSIBILITY FOR THE INTERIM FINANCIAL STATEMENTS Management is responsible for the preparation of the interim financial statements in accordance with IAS 34, Interim Financial Reporting, as adopted by the EU. Man-agement is, furthermore, responsible for such internal controls as Management deems necessary to prepare interim financial statements free of material misstate-ment, whether due to fraud or error.

AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on the interim financial statements. We have conducted our review in accordance with the international standard on Review of Interim Financial Information Performed by the Independ-ent Auditor of the Entity and further requirements under

Danish audit regulation. This requires us to conclude whether anything has come to our attention, which caus-es us to believe that the interim financial statements, as a whole, has not in all material aspects been prepared in accordance with the relevant accounting framework. This also requires us to comply with ethical requirements.

A review of the interim financial statements conduct-ed in accordance with the international standard on Review of Interim Financial Information Performed by the Independent Auditor of the Entity is a limited assurance engagement. The auditors perform procedures primarily consisting of making inquiries of Management and others in KommuneKredit, as appropriate, as well as applying an-alytical procedures and evaluating the evidence obtained.

The extent of the procedures carried out in a review is substantially less than in an audit performed in ac-cordance with the International Standards on Auditing. Accordingly, we do not express an audit opinion on the interim financial statements.

OPINIONBased on our review, nothing has come to our atten-tion that causes us to believe that the interim financial statements for the period 1 January 2017 – 30 June


DELOITTE Statsautoriseret Revisionspartnerselskab CVR-no. 33 96 35 56

Anders Oldau GjelstrupState Authorised Public Accountant

Thomas Hjortkjær PetersenState Authorised Public Accountant

2017 have not, in all material respects, been prepared in accordance with IAS 34, Interim Financial Reporting, as adopted by the EU.

STATEMENT ON MANAGEMENT’S REVIEWAs part of our review we have read Management’s review. We have not performed further actions in addition to the completed review of the interim financial statements.

On this basis, we are of the opinion that the informa-tion in Management’s review is in accordance with the interim financial statements.


Statement by auditor

REPORT BY THE AUDITOR APPOINTED BY THE MINISTRY FOR ECONOMIC AFFAIRS AND THE INTERIORTO THE BOARD OF DIRECTORS OF KOMMUNEKREDIT

As the auditor appointed by the Ministry for Econom-ic Affairs and the Interior, I have reviewed the interim financial statements of KommuneKredit for the period 1 January 2017 – 30 June 2017, prepared by Manage-ment. In addition, I have read Management’s review.

During my review, I did not identify any non-compli-ance with the Danish act governing KommuneKredit or KommuneKredit’s articles of association. The audit procedures performed by Deloitte did not give rise to any comments on my part.


Emil le MaireFormer Prefect



Statement by economic

KK_AR16.indd 46 09/12/16 11:22

READ MORE ABOUT KOMMUNEKREDIT AT KOMMUNEKREDIT.DK

PHOTOS Tuala Hjarnø and Nicky Bonne

THANK YOU to The Sankt Annæ project and the members of the green committee for participating in the cases.

DESIGN AND PRODUCTION noted.dk

DISCLAIMER The annual report is prepared in Danish and translated into English. In case of discrepancies the Danish version shall prevail.

KOMMUNEKREDITKultorvet 16DK-1175 Copenhagen KDenmark

Tel. +45 33 11 15 [email protected]

CVR-no. 22 12 86 12

Documents

INTERIM REPORT - KommuneKredit · KK_AR16_designoplaeg.indd 1 06/09/16 09:17 Since 1899, KommuneKredit has provided funding to Danish local authorities. KommuneKredit is a steady