annual report 2014

Transcription

annual report 2014

ANNUAL REPORT 2014
MANAGEMENT COMMENTARY & FINANCIAL STATEMENTS
Contacts
Søren Høgenhaven, CEO, Managing Director
Johnny Munk, Managing Director
Jens Bloch Behrendt, CFO
Address
KommuneKredit
Kultorvet 16
DK-1175 Copenhagen K
Telephone +45 33 11 15 12
[email protected]
www.kommunekredit.dk
CVR no. 22 12 86 12
Announcement date: 6 March 2015
The annual report comprises 60 pages
The series of pictures shows the ongoing construction
of Amager Ressourcecenter, one of many local
government projects financed by KommuneKredit
„The English text is a translation of the original Danish
text. The original Danish text is the governing text
for all purposes, and in case of any discrepancy,
the Danish wording will be applicable.“
CONTENTS
KommuneKredit in brief . . . . . . . . . . . . . . . . 4
Financial summary for KommuneKredit . . . . . . 5
Management commentary
Operating review . . . . . . . . . . . . . . . . . . . . 6
Local governments and the economy . . . . . . 10
Organisation and management . . . . . . . . . . 13
Risk management . . . . . . . . . . . . . . . . . . . 16
Financial statements
Statement of comprehensive income . . . . . . 20
Statement of financial position . . . . . . . . . . 21
Statement of changes in equity . . . . . . . . . . 22
Statement of cash flows . . . . . . . . . . . . . . 23
List of notes . . . . . . . . . . . . . . . . . . . . . . 24
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Statements . . . . . . . . . . . . . . . . . . . . . . . 53
Management . . . . . . . . . . . . . . . . . . . . . . 56
Managerial posts . . . . . . . . . . . . . . . . . . . 57
ANNUAL REPORT 2014
3
KOMMUNEKREDIT IN BRIEF
KommuneKredit’s mission is to provide the funding
and related services required by local government
KOMMUNEKREDIT
IN BRIEF
A Board of Directors is responsible for the general management
of KommuneKredit. The Board of Directors consists of nine
members, of whom six are elected by the municipalities, two
by the regions and one by the Board of Directors. The member
elected by the Board of Directors must be independent of the
Association and possess accounting or auditing qualifications.
KommuneKredit is an association with the objective to provide
Management, consisting of two managing directors, is respon
funding and leases to Danish municipalities, regions and com
sible for the day-to-day management.
panies and institutions against full municipal guarantee. Kom
muneKredit operates under a special act and is under supervi
KommuneKredit’s lending is financed by the issue of securi
sion by the Ministry of Economic Affairs and the Interior.
ties in the Danish and international capital markets. Kom
muneKredit is rated by Moody’s Investors Service and Standard
KommuneKredit’s mission is:
& Poor’s. KommuneKredit’s long-term rating is Aaa/AAA, and
to provide the funding and related services required by Dan
the short-term rating is P-1/A-1+, which is the same rating as
ish municipalities and thereby contribute to greater financial
that of Danish government bonds and the highest international
latitude in the Danish society.
credit rating.
KommuneKredit’s vision is:
The high rating is attributable to the joint and several liability
to be the absolute leading provider of funding to munici
of the municipalities and regions and the fact that they are
palities,
to be acknowledged as a professional advisor and trust
worthy cooperative partner,
to be an attractive, development-oriented organisation
strong players in the domestic economy, which is also why
KommuneKredit can raise funding at attractive prices. More
over, KommuneKredit’s cost level is low, which means that the
funding raised can be relent at a modest margin.
committed to effective processes and high quality achieved
by dedicated and highly qualified employees.
The core values of KommuneKredit are:
KommuneKredit’s members are municipalities and regions that
The customer in focus
have raised loans in or entered into leases with KommuneKredit
Job satisfaction and a positive working environment
or have guaranteed or are liable for loans raised in or leases en
Quality in work
tered into with KommuneKredit. The members are jointly and
Openness and a positive working relationship
severally liable for KommuneKredit’s liabilities. All municipalities
Delegation and responsibility and regions in Denmark are members of KommuneKredit.
4
ANNUAL REPORT 2014
FINANCIAL SUMMARY FOR KOMMUNEKREDIT
NET LENDING AND CONVERSIONS 2005-2014
TOTAL ASSETS AND EQUITY 2005-2014
Equity, DKKbn
7
50 DKKbn
250 Total assets, DKKbn
40
200
6
30
150
5
20
100
4
10
50
3
2
0
0
05 06 07 08 09 10 11 12 13 14
05 06 07 08 09 10 11 12 13 14
Conversions
Total assets
Total net lending
Equity
FINANCIAL SUMMARY FOR KOMMUNEKREDIT
DKKm
2014
2014
2013
2012
2011
2010
EUR
DKK
DKK
DKK
DKK
DKK
Lending, nominal values
Bond loans
228
1,700
2,286
1,870
2,396
1,373
Tailor-made loans
3,725
27,727
28,009
33,992
23,403
33,478
Total gross lending
3,953
29,427
30,295
35,862
25,799
34,851
Conversions/refinancing
1,611
11,994
12,433
18,837
10,167
13,904
Total net lending
2,342
17,433
17,862
17,025
15,632
20,947
Gross lending
195
1,453
1,525
813
1,539
756
Instalments and repayments
141
1,048
1,189
905
847
783
54
405
336
-92
692
-27
Net interest income
60
450
503
603
611
453
Administrative expenses
13
95
96
100
95
89
Value adjustments of financial instruments
-2
-17
-75
191
175
47
Profit before tax
45
338
332
694
691
411
Tax on profit for the year
11
84
53
178
175
102
Profit for the year
34
254
279
516
516
309
Comprehensive income for the year
33
249
279
516
516
309
Profit for the year excl. value adjustments
36
268
305
378
388
274
Lending and lease receivables
20,432
152,085
142,711
136,296
128,979
125,136
Total assets
27,059
201,413
184,239
181,885
177,113
166,206
Debt securities issued
24,726
184,049
169,076
166,045
164,751
156,235
839
6,244
5,995
5,716
5,200
4,684
Equity in pct. of assets
3.1
3.1
3.3
3.1
2.9
2.8
Number of full-time employees
62
62
58
59
60
60
Leasing
Total net lending
Key figures
Equity
Exchange rate 31.12.2014, EUR 100 = DKK 746,03
ANNUAL REPORT 2014
5
OPERATING REVIEW
LENDING BY BORROWER
LENDING BY TYPE OF PURPOSE
Guaranteed loans
31%
Municipalities
30%
Partnerships
22%
Regions
17%
31+30+2217
OPERATING REVIEW
Municipalities and regions
47 %
Waste, heating and energy
30 %
Water and waste water disposal
16%
Public transportation and harbours5%
Other purposes
2 %
47+30+1652
KommuneKredit’s funding position on international capital mar
kets remained favourable in 2014 due to considerable interest
from investors in acquiring securities with a strong credit rating.
KommuneKredit’s earnings target is based on two principles.
In 2014, KommuneKredit completed a USD 1.75 billion bench
First of all, members must be able to borrow at the most at
mark issue, its largest ever. 72 per cent of the issue was ac
tractive prices possible. Secondly, the equity ratio must be
quired by central banks and public institutions.
maintained at a solid level of approximately 3 per cent of
the assets. KommuneKredit prepares regular long-term fore
Liquidity resources amounted to DKK 25.6 billion at year-
casts for developments in the balance sheet and, on the ba
end 2014, which is unchanged from year-end 2013. Kom
sis of these, sets earnings targets for individual years. Kom
muneKredit’s refinancing risk is very limited as all binding
muneKredit considers the level of net interest income for 2014
lending commitments must be fully financed before the com
satisfactory.
mitment is entered into.
As a result of the declining level of interest rates, Kom
In 2013, KommuneKredit decided to switch from one-way col
muneKredit’s gross interest income and interest expenses
lateral to two-way collateral (CSA), thus going forward, Kom
decreased in 2014. Net interest income amounted to DKK 450
muneKredit will both receive collateral and, if the derivatives
million, against DKK 503 million in 2013. The decline in net inter
portfolio is in the counterparty’s favour, post collateral. In 2014,
est income was primarily caused by lower interest income on
KommuneKredit entered into a total of 19 two-way CSA agree
the own portfolio in 2014 compared to 2013 as a result of the
ments with a broad selection of relevant financial counterpar
general decline in the level of interest rates. Of the DKK 450
ties. This has resulted in improved derivatives terms and in an
million net interest income obtained in 2014, DKK 368 million
increasing number of counterparties quoting prices, which has
was generated by lending activities, while DKK 82 million came
given rise to increased competition.
from interest income on the own portfolio of bonds, a decline of
DKK 60 million from 2013.
Value adjustments of financial instruments resulted in a net
loss of DKK 17 million in 2014. Positive market value adjust
KommuneKredit remains the cheapest source of funding for lo
ments of the own portfolio of bonds came to DKK 87 million,
cal government, and having their own financial institution pro
while adjustments of other financial instruments were negative
vides the municipalities with substantial financial latitude.
in the amount of DKK 104 million.
Net lending was largely unchanged from 2013 at DKK 17.4 bil
Administrative expenses came to DKK 95 million, in line with
lion against DKK 17.9 billion in 2013. Gross lending fell from DKK
2013.
30.3 billion in 2013 to DKK 29.4 billion in 2014, due mainly to a
lower level of conversion activity.
6
ANNUAL REPORT 2014
OPERATING REVIEW
LEASE RECEIVABLES YEAR END
FUNDING, ADDITIONS BY MARKET
Properties
36%
Cars
20%
IT equipment 16%
Medical-tech. equipment
13%
Office equipment
5 %
Vessels
7 %
Technical equipment
3%
36+20+1613573
Denmark
3 %
Europe
55 %
North & South America 29 %
Asia
9 %
The Middle East & Africa
4%
3+55+2994
KommuneKredit’s comprehensive income for 2014 was DKK
cent, against 10 per cent in 2013. Lending to enterprises and
249 million, a decrease of DKK 30 million from 2013. This cor
institutions with municipal guarantee or municipal liability ac
responds to a profit of DKK 268 million, excluding value adjust
counted for 53 per cent. Utilities, i.e. heating and water provid
ments. The H1 2014 interim report estimated a full-year profit
ers, accounted for the majority of lending.
of DKK 275 million, excluding value adjustments.
Tailor-made loans accounted for 94 per cent and bond loans
At year-end 2014, KommuneKredit’s total assets amounted to
for 6 per cent in line with 2013. Most bond loans were granted
DKK 201.4 billion, an increase of DKK 17.2 billion against year
to municipal housing for the elderly. Lending to this segment
end 2013. Total lending increased by DKK 9.4 billion, and the
totalled DKK 1.4 billion in 2014, against DKK 2.1 billion in 2013.
portfolio of securities increased by DKK 0.7 billion. The value of
derivative financial instruments increased by DKK 7.3 billion as
Tailor-made loans primarily comprise floating-rate loans with
a result of movements in interest and foreign exchange rates.
interest rates fixed every three or sixth months. Owing to the
low level of interest rates, the volume of fixed-rate tailor-
In accordance with KommuneKredit’s articles of association, the
made loans has increased to DKK 8.3 billion, corresponding
year’s comprehensive income is transferred to equity. Equity
to 28 per cent of total lending. Bond loans are also fixed-rate.
amounted to DKK 6.2 billion at year-end 2014, corresponding
The volume of capped floating-rate loans amounted to DKK
to 3.1 per cent of assets. KommuneKredit’s long-term target is
0.5 billion.
for equity to amount to approximately 3 per cent of assets. Un
der the legal framework for KommuneKredit, equity must equal
In 2014, floating-rate loans accounted for 66 per cent and
at least 1 per cent of total liabilities, i.e. DKK 2.0 billion.
fixed-rate loans for 34 per cent of total lending. The 2013 dis
tribution was 75 per cent floating-rate loans and 25 per cent
Lending and leasing
fixed-rate. Borrowers have chosen to convert a substantial
KommuneKredit is committed to developing new products and
number of floating-rate loans into fixed-rate loans using de
services for the benefit of municipalities, regions and other cli
rivatives.
ents. Accordingly, KommuneKredit offers a variety of financial
services in addition to loans and leasing, including advisory ser
Leasing amounted to DKK 1.5 billion in 2014, taking the total
vices in relation to municipal borrowing, risk management and
leasing portfolio to DKK 4.2 billion, an increase of DKK 0.4 bil
refinancing of long-term debts. KommuneKredit is also com
lion against 2013. Leasing of IT and medical-technical equip
mitted to improving its digital services, including information
ment accounted for the major part of the increase.
on loan and leasing portfolios and online budget tools.
No foreign-currency loans were granted in 2014.
The segment distribution of lending shifted in 2014. Lend
ing to municipalities amounted to 30 per cent against 41 per
2014 saw increasing interest in public-private partnerships
cent in 2013, while lending to regions accounted for 17 per
(PPP) among municipalities and regions. In recent years,
ANNUAL REPORT 2014
7
OPERATING REVIEW
FUNDING, ADDITONS BY CURRENCY
USD
58 %
DKK
20 %
EUR
2 %
CHF
0 %
JPY
6 %
GBP
10 %
Other
4%
FUNDING YEAR END
58+20+26104
USD
48%
DKK
24%
EUR
7%
CHF
8%
JPY
4%
GBP
2%
Other
7%
48+24+7842
KommuneKredit has financed several PPP projects with pub
In 2014, securities issues totalled DKK 79.7 billion against DKK
lic funding, including three schools, a healthcare centre and
108.7 billion in 2013. The decline is largely explained by a de
a swimming and sports centre. KommuneKredit continues its
creasing volume of short-term securities (less than 1 year) and
work to develop public funding PPP models and to heighten
an increasing volume of papers with a longer term to maturity
awareness of KommuneKredit’s PPP solutions with loan or
being issued. 3 per cent of funding was issued on OMX and 97
lease financing.
per cent internationally, of which 58 per cent was issued in Eu
rope and 42 per cent overseas.
Issues of securities
KommuneKredit obtains funding through bond issues on NAS
The volume of securities issued on OMX deceased to DKK 2.9
DAQ OMX Copenhagen A/S (OMX) and international issues of
billion from DKK 8.7 billion in 2013. Issues funding adjustable-
securities.
rate loans amounted to DKK 1.5 billion against DKK 4.5 billion
in 2013. Issues of structured bonds deceased to DKK 0.5 billion
KommuneKredit carefully spreads its issues of securities among
against DKK 1.8 billion in 2013. Issues of conventional mort
different markets and products in order to minimise depend
gage-like bonds came to DKK 0.8 billion against DKK 2.5 billion
ency on individual markets and products. KommuneKredit’s re
in 2013.
financing risk is very limited as all binding lending commitments
must be fully financed before the commitment is entered into.
ECP notes worth DKK 23.3 billion were issued on international
markets in 2014 against DKK 32.7 billion in 2013. Issues were
Financial markets were still affected by the eurozone crisis in
primarily made in USD. Internationally, EMTN notes and private
2014, but less severely than in the preceding years. Due to
placements worth DKK 40.0 billion were issued, against DKK
Denmark’s relatively moderate public debt, investors showed
49.8 billion in 2013.
significant interest in highly rated Danish securities. As a result,
KommuneKredit had easy access to favourably priced funding
The distribution of issuers by currencies and markets is speci
throughout 2014, and 2014 saw the largest ever benchmark
fied in the charts.
issue in KommuneKredit’s history at USD 1.75 billion.
KommuneKredit’s
Members of KommuneKredit
Moody’s
Standard
Investors Service
& Poor’s
Long-term rating
Aaa
AAA
5
Short-term rating
P-1
A-1+
2
Outlook
Stable
Stable
2014
2013
98
98
Regions
5
Faroese municipalities
2
Municipalities
8
ANNUAL REPORT 2014
rating
OPERATING REVIEW
Since KommuneKredit is able to provide loans at very
modest margins, it is expected that KommuneKredit
will retain its position as the absolute leading supplier
of funding to local government
Liquidity resources
KommuneKredit anticipates that international funding oppor
By authorisation of the Danish Ministry of Economic Affairs
tunities will remain favourable in 2015 against the backdrop
and the Interior, KommuneKredit’s liquidity resources may con
of persistently solid investor interest in issues from institutions
stitute up to 25 per cent of total lending. This ensures a high
and countries with strong credit ratings.
degree of flexibility in respect of lending to municipalities and
regions and also ensures that sufficient liquidity resources are
As, owing to its solid capitalisation, KommuneKredit is able to
available during periods when Danish or international capital
provide loans at very moderate margins, it is expected that
markets are less liquid. At the end of 2014, liquidity resources
Kommunekredit will retain its position as the preferred supplier
amounted to 17 per cent of lending, which is in line with 2013.
of funding to local government.
Liquidity resources are managed so as to ensure that invest
Moreover, KommuneKredit will continue its efforts to develop
ments are made in securities that generate satisfactory returns
systems and processes to further improve customer services
until the liquidity is to be used for lending. Investments must
and work processes in order to minimise costs.
exhibit low credit risk and high liquidity. Liquidity resources are
mainly invested in short-term debt securities issued by interna
The profit for 2015, excluding value adjustments, is expected
tional financial institutions and central banks.
to amount to DKK 275 million, in line with the level obtained in
2014.
Liquidity resources amounted to DKK 25.6 billion at year-end 2014,
in line with the level at year-end 2013. Total liquidity resources
also comprise KommuneKredit’s own portfolio of securities.
Outlook for 2015
The municipal framework for capital expenditure has been
reduced to DKK 17.5 billion in 2015 from DKK 18.1 billion in
2014. Thus, lending volumes are expected to remain largely
unchanged in 2015.
ANNUAL REPORT 2014
9
LOCAL GOVERNMENTS AND THE ECONOMY
Municipalities and regions are responsible
for most of the public services offered to
citizens and enterprises
LOCAL GOVERNMENTS
AND THE ECONOMY
per cent of the gross domestic product (GDP), and together
municipalities and regions pay almost two thirds of the total
public expenditure.
Due to the impact of municipalities on the economy, they are
subject to the overall economic policy adopted by the central
Responsibilities and supervision
government and the national parliament. In connection with an
The local government sector plays a very important role in the
nual negotiations between the central government and munici
Danish welfare society as municipalities and regions are re
pal organisations, the framework for the level of expenditure
sponsible for most of the public services offered to citizens and
and for levying taxes is agreed for the municipalities as a whole.
enterprises.
Municipal economies as a whole are not affected by economic
The municipalities are responsible for public schools, elder care,
setbacks as the central government bears the risk of an eco
day care facilities for children and young people, employment-
nomic downturn. Through a special government grant, addi
creating measures, unemployment benefit, roads, environ
tional expenditure for social transfer payments and decreasing
ment, culture and preventive health care services.
revenue from taxation as a result of the economic slowdown
are compensated for via the block grant.
The regions are responsible for hospitals, regional development
and specialised social institutions.
Funding and equalisation
Income taxes represent the dominant source of income for
The municipalities’ right to manage their affairs autonomously
municipalities and account for approximately half of total mu
is regulated in section 82 of the Danish Constitutional Act:
nicipal funding. The income tax rate is fixed by the individual
municipalities.
“The municipalities’ right to manage their affairs autonomously under the supervision of the State is regu-
Moreover, municipalities are funded through block grants and
lated by an Act”.
central government reimbursements as well as user fees and
property taxes that are set by the individual municipalities.
The municipalities are under supervision by the Ministry of
Economic Affairs and the Interior through the regional state
Denmark has one of the most comprehensive equalisation sys
administration.
tems in the world. Equalisation of local government resources
comprises the tax base as well as the service expenditure and
Economic impact
aims at ensuring consistency in local governments’ ability to
The great importance of the local government sector is illus
provide satisfactory services in all parts of the country.
trated by the fact that municipal expenditure amounts to 32
10
ANNUAL REPORT 2014
Borrowing and debt
of the annual expenses. Accordingly, borrowing costs are of lit
Municipal borrowing is governed by the Ministry of Economic Af
tle consequence to municipal economies as a whole.
fairs and the Interior through the Ministry’s executive order on
borrowing.
In 2014, the long-term debt of municipalities and regions in
creased by 0.7 percent to DKK 99.1 billion from DKK 98.4 billion
Pursuant to the executive order on borrowing applicable to
in 2013.
municipalities, Executive Order no. 1580 dated 17 December
2013, the municipalities’ automatic access to raise loans is re
Collateral
stricted to specific investment purposes such as housing for
Municipalities are a cornerstone of the Danish welfare society,
the elderly and energy-saving measures. Moreover, municipali
and ultimately, the central government must be responsible for
ties may guarantee loans to most utility companies. In addition,
ensuring that they are able to meet their obligations. Through
one or several additional loan pools are created each year from
out the history of municipalities, no lenders to municipalities
which municipalities may apply for loans for other investment
have suffered losses on lending.
purposes.
Moreover, the Court has ruled that Danish municipalities cannot
Owing to the strong regulation in the area, the annual borrow
file for restructuring proceedings as it is the responsibility of the
ing of municipalities amounted to approximately 1 per cent of
supervisory authority to ensure that municipalities are able to
total funding, and interest expenses amounted to 0.5 per cent
meet their financial obligations.
Local government long-term debt and liquidity
Economic indicators for 2014
Source: Statistics Denmark (excluding debt regarding assets
Source: The Ministry of Finance and the European Commission
held under finance leases)
Long-term debt
Liquid assets
DK
EU
Year
DKKbn
Pct.*
DKKbn
Pct.*
Real growth as a percentage of GDP
0.8
1.3
2014
99.1
12.4
19.7
2.5
Balance of payments surplus as a pct. of GDP
6.9
1.4
2013
98.4
11.2
20.6
2.4
Annual increase in consumer prices (percentage)
0.4
0.6
2012
97.7
11.9
20.7
2.5
Government budget balance as a pct. of GDP
1.8
-3.0
2011
95.2
11.8
24.4
3.0
Unemployment rate (percentage)
6.7
10.3
2010
95.3
12.2
18.6
2.4
EMU debt as a percentage of GDP
44.1
88.1
*Percentage of tax base
ANNUAL REPORT 2014
11
Municipal economies
growth of 0.8 per cent. However, growth is slower than previ
The framework for municipal service expenses for 2015 is in
ously predicted, due mainly to lower than expected demand
line with the level for 2014, while at the same time efficiency
from key export markets.
improvements are paving the way for intensified preventive
health efforts.
The Government forecasts growth of just under 1.5 per cent
in 2015 and 2 per cent in 2016. These forecasts are based on
The capital expenditure framework is DKK 17.5 billion, which is
expectations of growing exports in the wake of improved com
DKK 0.6 narrower than in 2014 but still high in a historical context.
petitiveness and expectations of higher domestic demand.
Within their expense framework, the regions will be able to
In the years leading up to the financial crisis, Denmark boasted
cover increasing expenses for hospital drugs, new treatments,
a substantial budget surplus, as a result of which, despite the
etc., while a capital expenditure framework of DKK 7 billion will
recent budget deficits, the debt amounts to 44.1 per cent
be channelled into, among other things, the construction of
against an EU average of 88.1 per cent.
new super hospitals.
Moreover, Denmark has a sizeable surplus on the balance of
Local government budgets show that both municipalities and
payments of 6.9% of GDP. The unemployment rate is 6.7%, sig
regions have been able to stay within the agreed frameworks.
nificantly lower than the 10.3% EU average.
The Danish economy
The Danish economy showed slow progress in 2014. Private
sector employment improved and forecasts predict GDP
12
ANNUAL REPORT 2014
ORGANISATION AND MANAGEMENT
ORGANISATION
AND MANAGEMENT
all the decisions made by the Board of Directors are carried out.
Management is responsible for presenting to the Board of Di
rectors all significant changes to KommuneKredit’s situation
and Management’s position on important events of conse
quence for KommuneKredit’s activities. Management is also
Corporate governance
responsible for directing to the Board of Directors any financial
KommuneKredit is governed by Act No. 383 of 3 May 2006 on
information and other disclosures that describe developments
the Credit Institution for Local and Regional Authorities in Den
in KommuneKredit and that are necessary in order to ensure
mark (Lov om kreditforeningen af kommuner og regioner i Dan
that the Board of Directors complies with its overall managerial
mark).
responsibility for KommuneKredit.
KommuneKredit is managed by a Board of Directors and a Man
At board meetings, Management reports on the compliance
agement. The Board of Directors consists of nine members, of
with the guidelines on financial risk management laid down by
whom six are elected by the municipalities, two by the regions
the Board of Directors.
and one independent member with accounting or auditing quali
fications by the Board of Directors. Eight of the seats on the
Within the framework of the guidelines laid down by the Board
Board of Directors are distributed between political parties and
of Directors, Management is authorised to make all necessary
electoral alliances in accordance with the method of propor
decisions. Decisions regarding guidelines for lending, funding
tional representation on the basis of the number of votes cast
and derivative financial instruments require Management’s con
for a party or candidate in the latest local elections for municipal
sensus of opinion.
and regional councils.
KommuneKredit is under supervision by the Ministry of Eco
The Board of Directors is responsible for the general manage
nomic Affairs and the Interior.
ment of KommuneKredit and for the proper organisation of its
activities. The Board of Directors prepares guidelines for Kom
Board of Directors
muneKredit’s most important activities, in which the segregation
KommuneKredit’s Board of Directors is elected by member mu
of duties between the Board of Directors and Management is
nicipalities and member regions for a four-year term. The election
laid down. The Board of Directors outlines the guidelines for the
term differs by five months from the term for municipalities and
management of financial risks and the use of derivatives.
regions. The current term runs from 1 June 2014 to 31 May 2018.
Management is responsible for the day-to-day management of
Up until 31 May 2014, the Board of Directors comprised the fol
KommuneKredit in accordance with the policy adopted by the
lowing members:
Board of Directors and the guidelines prepared by the Board of
Henning G. Jensen, former mayor, Chairman
Directors. KommuneKredit’s Management, which consists of one
Erik Fabrin, former mayor, Vice chairman
chief executive officer and one managing director, ensures that
Kaj Petersen, former mayor
ANNUAL REPORT 2014
13
Vibeke Storm Rasmussen, former region council chairman
A management team has been appointed consisting of:
Hans Toft, Mayor
Henrik Zimino, Mayor
Søren Høgenhaven, Chief Executive Officer
Anker Boye, Mayor
Lars Krarup, Mayor
Jette Moldrup, Senior Vice President and Head of Lending
Mariann Nørgaard, Council member
Eske Hansen, Senior Vice President and Head of Funding
Aleksander Aagaard, Region council member
and Treasury
Jens Bloch Behrendt, Chief Financial Officer
In connection with the election for KommuneKredit’s Board of
Morten Søtofte, Senior Vice President and Chief Risk Officer
Directors in the spring of 2014, the number of members was
Frank Hammer, Director (Leasing)
reduced from ten to nine. As of 1 June 2014, the Board of Direc
tors comprises the following members:
There were no changes in the composition of the management
team in 2014.
Erik Nielsen, Mayor, Rødovre, Chairman
Lars Krarup, Mayor, Herning, Vice Chairman
Governance and human resources
Hans Toft, Mayor, Gentofte
KommuneKredit’s Management and employees have jointly
Henrik Zimino, Mayor, Tårnby
outlined KommuneKredit’s core values and the obligation of
Sophie Hæstorp Andersen, Region council Chairman,
Management and employees to comply with these values. Fo
The Capital Region of Denmark
cus is on extensive delegation of decision-making competence
Erik Christensen, Deputy Mayor, Nyborg
to employees.
Kaj V. Holm, Deputy CEO, Øresundsbro Konsortiet,
independent member
KommuneKredit gives high priority to developing the employ
Mikael Klitgaard, Mayor, Brønderslev
ees’ professional and personal qualifications to enable them to
Anne V. Kristensen, Region council Vice Chairman,
meet the demands of the outside world for product develop
Central Denmark Region
ment and work processes. High priority is also given to in-house
knowledge sharing and overlapping of job functions in order to
Audit committee
maintain stability in operations.
KommuneKredit has established an audit committee whose
duties are carried out by the collective members of the Board
With a view to strengthening IT development activities, four
of Directors. The audit committee has held three meetings in
IT consultants have been taken on. This has increased payroll
2014.
costs and reduced general administrative expenses.
Management
KommuneKredit has 62 full-time employees.
KommuneKredit’s Management consists of:
Søren Høgenhaven, Chief Executive Officer
14
ANNUAL REPORT 2014
Remuneration
KommuneKredit’s Board of Directors comprises nine members,
KommuneKredit’s remuneration policy is determined by the
of whom two are of the underrepresented gender. The Board of
Board of Directors. Under a bonus plan, a total bonus of up to one
Directors targets a 40 per cent share of women on the Board.
month’s salary may be paid out. The bonus amount is determined
based on the achievement of the overall performance goals set
Policy for other levels of management
for the year.
KommuneKredit’s levels of management consist of Manage
ment, heads of department and heads of executive functions.
The members of Management are not included in Kommune
The share of the underrepresented gender is 20 per cent.
Kredit’s bonus plan.
KommuneKredit’s policy is to improve the gender balance at
Corporate social responsibility
all levels of management in KommuneKredit. KommuneKredit
KommuneKredit fills an important function for the Danish so
aims to achieve this by indicating in job advertisements and
ciety when it provides funding for investments in the local
when recruiting employees for management positions that
government sector. The investments among other things con
contenders for the job should include candidates of the under
tribute to conserving the environment and combating climate
represented gender. When filling a vacancy, focus will be on
change as well as to improving social welfare. Through attrac
ensuring the inclusion of suitable candidates of the underrep
tive funding, KommuneKredit creates financial latitude for local
resented gender for the final selection.
and regional services.
It is also important that a culture is created where employees,
KommuneKredit has been certified as an ELENA cooperator for
regardless of gender, have the same opportunities to establish
Denmark by the European Commission. In this capacity, Kom
a career at KommuneKredit.
muneKredit is supporting energy efficiency projects in mu
nicipalities and regions by providing funding and administering
Compliance
legal and technical assistance grants, thus contributing to the
Management is responsible for ensuring that KommuneKredit
EU’s 20-20-20 climate and energy targets.
complies with applicable laws and regulations. In cooperation
with the management team and the compliance function, Man
KommuneKredit has also established an education fund that
agement monitors compliance and initiates necessary meas
aims to further develop training and education of municipal pol
ures.
iticians, municipal workers, etc. The contributed capital of the
fund amounts to DKK 30 million.
The head of the legal department oversees the compliance
function. The compliance function reports directly to the Chief
Goals and policies for the gender composition
of management
Executive Officer and reports on relevant compliance issues to
While not formally subject to the rules governing the gender com
pares an annual review, which is presented to the Board of Di
position of management in major Danish enterprises and related
rectors.
Management on a regular basis. The Compliance Officer pre
reporting, KommuneKredit has chosen to comply with these rules.
ANNUAL REPORT 2014
15
RISK MANAGEMENT
RISK MANAGEMENT
committee and Board of Directors, at which the guidelines set
out by the Board of Directors and KommuneKredit’s financial
and operational risks are discussed. On a quarterly basis, the
Financial risks
risk management department reports to the supervisory au
KommuneKredit is exposed to financial risks. These risks are
thority on the most important financial risks and the compli
identified, controlled and managed on an ongoing basis so that
ance with the guidelines.
they will correspond to KommuneKredit’s risk tolerance at any
given time. KommuneKredit’s risk tolerance is low and only
KommuneKredit distinguishes between the following types
comprises financial risks that are considered absolutely neces
of financial risks:
sary for the compliance with KommuneKredit’s mission.
Credit risk is the risk that the counterparty to a financial
instrument does not settle a liability and thus exposes
KommuneKredit’s overall guidelines for managing financial
risks, including a definition of risk tolerance, are determined
by the Board of Directors. Moreover, the Ministry of Economic
Affairs and the Interior has established guidelines for inter
est rate risk and liquidity resources and is also authorised to
KommuneKredit to a loss.
Liquidity risk is the risk that KommuneKredit will not be
able to meet its financial obligations.
Market risk is the risk that changes in market prices will
affect the market value of a financial instrument.
make changes to the guidelines adopted by the Board of Di
rectors.
Financial risk management is disclosed in notes 1.9, 1.10 and
1.11 to the financial statements, to which we refer.
Management is responsible for ensuring that the overall guide
lines are implemented in specific work processes and instruc
Operational risks
tions to the employees. Management has delegated the re
KommuneKredit is exposed to operational risks, which are
sponsibility for the supervision and control of financial risks to
identified, controlled and managed on an ongoing basis.
the risk management department, and the head of department
reports directly to the Chief Executive Officer.
KommuneKredit is exposed to operational risks when losses
may occur as a result of:
The risk management department validates and reports the
inappropriate or inadequate internal procedures,
most important financial risks to Management on a daily basis,
human errors and/or system errors,
and in addition Management receives detailed monthly reports
external events, including legal risks.
on all financial risks. In connection with the meetings of the
Board of Directors, the Board of Directors receives a report on
KommuneKredit’s overall guidelines for managing operational
the most important financial risks, including information about
risks are determined by the Board of Directors.
general compliance with the guidelines. At least once a year,
the Chief Risk Officer participates in meetings with the audit
16
ANNUAL REPORT 2014
RISK MANAGEMENT
Management is responsible for ensuring that the overall
Management and are recorded specified by type of risk event.
guidelines are implemented in specific work processes and in
KommuneKredit is exposed to operational risks in most of its
structions to the employees.
activities. By registering risk events in a database, focus is
maintained on avoiding as many risk events as possible, and
Management presents the IT security policy, the IT strategy and
at the same time, KommuneKredit is able to systematically
emergency test results to the Board of Directors at least once
improve business procedures and processes.
a year. Management has delegated the responsibility for super
vision and control of operational risks to the risk management
The written business procedures describe allocation of re
department and the responsibility for the IT security policy to
sponsibilities, segregation of duties, process management
the IT department.
and business practice. KommuneKredit’s policy is to support
automation as far as possible, and where appropriate, in or
KommuneKredit is highly dependent upon its IT infrastructure,
der to reduce the risk of human errors. The most significant
and therefore special focus is on this area via a disaster recov
automatic and manual processes must either be supported
ery plan and an IT security policy that includes guidelines in re
by a colleague check or by means of objective controls.
spect of access control, assignment of roles and rights, busi
ness breakdown, system errors, etc.
According to the guidelines set out by the Board of Direc
tors, the business procedures must also comply with the
In order to limit the risk of system failure, a back-up copy is cre
Danish FSA’s Executive Order on Management and Control of
ated of all production systems and the most significant testing
Banks, etc., adapted to the special characteristics of Kom
and development systems on a daily basis. In addition, all ser
muneKredit’s business.
vers, systems and documents are automatically synchronised
to the recovery centre every two minutes.
All employees of KommuneKredit are responsible for know
ing and updating the business procedures that cover their
KommuneKredit’s disaster recovery plan is to ensure that
respective fields of work. The risk management department
KommuneKredit can continue its activities if a situation arises
carries out and documents spot checks of compliance with
which makes it impossible to operate at KommuneKredit’s ad
the business procedures on an ongoing basis.
dress. The disaster recovery plan is tested annually.
Each month, the risk management department prepares a re
Each year, KommuneKredit’s auditors conduct an IT audit of
port on operational events, including any losses, to Manage
KommuneKredit’s IT security. The IT security is classified as be
ment. In connection with board meetings, the Board of Direc
ing at the highest level.
tors is informed of important operational events.
All operational risk events in KommuneKredit are registered in a
database and presented to the relevant head of department and
ANNUAL REPORT 2014
17
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF COMPREHENSIVE INCOME
DKKm
Note20142013
Interest income
1.1
2,854
3,741
Interest expense 1.2
2,404
3,238
Net interest income 450
503
1.3, 1.4-17-75
2.1-2.39596
Profit before tax
338
332
3.1
84
53
Profit for the year
254
279
Other comprehensive income
Actuarial gains and losses
2.3, 3.1-5
249
0
279
Appropriation:
Transferred to equity
249
279
Total249279
20
ANNUAL REPORT 2014
STATEMENT OF FINANCIAL POSITION
STATEMENT OF FINANCIAL POSITION
Assets
DKKm
Note20142013
Receivables from credit institutions
1.4
5
367
Lending 1.4, 1.5147,898138,929
Lease receivables
1.64,1873,782
Portfolio of securities
1.4, 1.7
32,376
31,709
Derivative financial instruments
1.4
16,634
9,292
Other assets248147
Current tax assets
3.2
65
13
Total assets201,413184,239
Liabilities and equity
DKKm
Note20142013
Liabilities
Due to credit institutions
1.4
15
8
Debt securities issued 1.4, 1.8
184,049
169,076
1.4
10,315
8,386
Other liabilities480476
Pension obligations2.36462
Deferred tax liabilities
3.3
246
236
Total liabilities195,169178,244
Equity6,2445,995
Total liabilities and equity
201,413
184,239
ANNUAL REPORT 2014
21
STATEMENT OF CHANGES IN EQUITY
STATEMENT OF CHANGES IN EQUITY
DKKm
Note20142013
Equity
Equity at 1 January
5,995
5,716
254
279
2.3-6
0
Profit for the year
Other comprehensive income
Actuarial gains and losses
Estimated tax on other comprehensive income
1
0
Other comprehensive income after tax
-5
0
Comprehensive income for the year 249
279
Equity at 31 December
6,244
5,995
The comprehensive income for the year is transferred to equity in accordance with the articles of association of KommuneKredit.
Equity increased to DKK 6.2 billion at year end 2014 from DKK 6.0 billion at year end 2013. At year end 2014, equity amounted to 3.1
per cent of the assets against 3.3 per cent at year end 2013. Equity consists in its entirety of retained earnings.
KommuneKredit’s long-term objective is for equity to amount to approx. 3 per cent of total assets, which is considered adequate
to support KommuneKredit’s activities. Under the legal framework of KommuneKredit, equity must equal at least 1 per cent of
KommuneKredit’s total liabilities, i.e. DKK 2.0 billion.
22
ANNUAL REPORT 2014
STATEMENT OF CASH FLOWS
STATEMENT OF CASH FLOWS
DKKm
Note20142013
Cash flows for the year
Cash flows from operating activities
Profit before tax
338
332
Corporation tax paid-134-101
Adjustment for non-cash operating items
4.1
7
9
Other assets-104-4
Other liabilities
3
33
0
200
Portfolio of securities-667-3,256
Lending and derivative financial instruments-16,715-1,020
Debt securities issued and derivative financial instruments
16,903
2,074
Total cash flows from operating activities
-369
-1,733
Total cash flows for the year
-369
-1,733
Cash and cash equivalents at 1 January
359
2,092
Cash and cash equivalents at 31 December -10
359
Cash and cash equivalents
5
367
Due to credit institutions-15-8
Total receivables from credit institutions
-10
ANNUAL REPORT 2014
359
23
LIST OF NOTES
LIST OF NOTES
Note
Note
Notes in general..................................................................................... 25
2.1
Administrative expenses..................................................... 46
Financial instruments
2.2
Management’s remuneration............................................. 47
Core earnings
2.3
Pension obligations................................................................ 48
1.1
Interest income....................................................................... 26
1.2
Interest expense..................................................................... 26
Tax
3.1
Tax on profit for the year..................................................... 49
Fair value adjustments and lease receivables
3.2
Current tax assets.................................................................. 49
1.3
Value adjustments of financial instruments ............... 26
3.3
Deferred tax liabilities........................................................... 50
1.4
Fair value of financial instruments................................... 27
1.4.1
Specification of fair value of
Statement of cash flows
financial instruments............................................................. 28
4.1
1.4.2
Specification of level 3 for fair
value of financial instruments........................................... 29
Other notes
1.4.3
Monetary effect of credit spread
5.1
Contingent assets and liabilities....................................... 52
on fair value adjustments.................................................... 29
5.2
Related party disclosures.................................................... 52
1.4.4
Set-off of financial assets and financial liabilities...... 30
5.3
Events after the reporting period..................................... 52
1.4.5
Specification of collateral.................................................... 31
5.4
Future accounting regulation............................................. 52
1.4.6
Financial position regarding distribution
5.5
Exchange rates at year end ............................................... 52
of maturity according to remaining term....................... 32
1.5Lending....................................................................................... 33
1.6
Lease receivables................................................................... 33
1.7
Portfolio of securities............................................................ 34
1.8
Debt securities issued........................................................... 34
Risk management of financial instruments
1.9
Credit risk................................................................................... 36
1.9.1
Credit risk rating...................................................................... 37
1.9.2
Credit quality............................................................................ 39
1.9.3
Received collateral................................................................. 40
1.10
Liquidity risk.............................................................................. 40
1.10.1 Distribution of maturity according
to remaining term................................................................... 41
1.10.2 Liquidity resources................................................................. 42
1.11
Market risk................................................................................. 43
1.11.1 Currency risk............................................................................. 43
1.11.2 Interest rate risk...................................................................... 45
1.11.3 Other price risk......................................................................... 45
24
ANNUAL REPORT 2014
Adjustment for non-cash operating items.................... 51
NOTES IN GENERAL
NOTES IN GENERAL
General
Offsetting
The annual report of the credit association KommuneKredit
Positive and negative fair values of financial instruments are in
for 2014 has been prepared in accordance with International
cluded in separate items in the statement of financial position,
Financial Reporting Standards (IFRS) as adopted by the EU. In
and set-off of positive and negative values is only made when
addition, the annual report has been prepared in compliance
the Association has the right and the intention to settle several
with IFRSs as issued by the International Accounting Standards
financial instruments net. Transaction costs and income are
Board (IASB).
measured on initial recognition.
The financial year follows the calendar year. The functional cur
Determination of the value of financial instruments by
rency is Danish kroner. The annual report is presented in DKK
application of fair value option
million.
The fair value option comprises financial instruments desig
nated at fair value with value adjustment in the statement of
New standards and amendments to standards
comprehensive income. KommuneKredit has decided to use the
In 2014, KommuneKredit implemented the following new IAS
fair value option under IAS 39 to ensure consistent accounting
and IFRS standards and interpretations and IFRIC interpreta
treatment of receivables from credit institutions, lending, port
tions as adopted by the EU, effective from the financial year
folio of securities, issued securities and derivative financial in
starting on 1 January 2014: Amendments to IASs 32, 36 and
struments in respect of risk and matching hedges. This implies
39, new IFRIC 21 and ”Annual improvements to IFRSs 2010-
that lending, securities and derivative financial instruments are
2012, 2011-2013”. The amended standards and the new IFRIC
measured at fair value with value adjustment in the statement
interpretation have no effect on recognition and measurement.
of comprehensive income.
Foreign currency translation
The fair value option is also applied as the Association’s meas
The financial statements are presented in Danish kroner (DKK).
urement of investment returns is based on fair values, and the
Items denominated in foreign currencies are translated at the
disclosures to Management and the Board of Directors are
exchange rates at the balance sheet date. Realised and unreal
based on fair values.
ised foreign currency translation adjustments are recognised in
the statement of comprehensive income.
Unless market prices or other observable market data are used,
losses or gains cannot be recognised in connection with or im
Change in presentation
mediately after the conclusion of transactions with financial
Minor adjustments have been made to the determination of
instruments.
cash flows and to notes 1.4.5 and 1.9.1. The comparatives have
been restated to reflect these adjustments.
Segment information
The annual report of KommuneKredit does not include informa
Date of recognition
tion on operating segments as the Association solely operates
Financial assets are recognised at the settlement date, and
in one reportable business segment.
financial liabilities are recognised at the trade date. Unsettled
trade is value adjusted and recognised. Derecognition of both
financial assets and financial liabilities is made at the settle
ment date.
ANNUAL REPORT 2014
25
NOTES TO FINANCIAL INSTRUMENTS
CORE EARNINGS
Note 1.1 Interest income and note 1.2 Interest expense
Interest income and interest expense are accrued and recognised over the term to maturity. Interest income and interest expense
comprise interest on financial instruments, lease receivables as well as administrative fees, fees for advisory services and fees paid.
Interest income and interest expense regarding financial instruments determined at fair value with value adjustments in the state
ment of comprehensive income are recognised as net interest income.
DKKm20142013
Interest income
Lending2,2313,173
Lease receivables5351
1
1
545
494
Administrative fees2422
Total interest income
2,854
3,741
Interest expense
Debt securities issued on OMX
1,060
1,139
Debt securities issued internationally
1,336
2,090
Fees paid89
Total interest expense
2,404
3,238
FAIR VALUE ADJUSTMENTS AND LEASE RECEIVABLES
Note 1.3 Value adjustments of financial instruments
Value adjustments comprise realised and unrealised translation and value adjustments of financial instruments.
DKKm20142013
Portfolio of securities financed by equity
87-115
Portfolio of securities related to treasury
62-75
Lending
2,548-3,301
Debt securities issued-2,408
1,011
Derivative financial instruments-306
2,405
Total value adjustments of financial instruments
26
ANNUAL REPORT 2014
-17
-75
Note 1.4 Fair value of financial instruments
In accordance with IFRS 7 regarding further disclosure requirements for financial instruments, financial instruments 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 level 1: Quoted prices
This level is used when the fair value is based on quoted prices in active markets for identical assets and liabilities.
The level is used for listed securities and issues traded in an active market as well as receivables from and payables to credit institu
tions in the form of bank account deposits.
Fair value level 2: Observable market data
This level is used if there is no quoted price in an active market as a valuation based on observable market data is to be applied sub
sequently if possible. Examples of this are valuation models such as discounted cash flow models where all estimated and fixed cash
flows are discounted using zero-coupon yield curves or option models.
The level is used for deposits, lending, illiquid securities, unlisted securities and derivative financial instruments. Bonds issued on OMX
are all listed, but the market price does not reflect the fair value due to the fact that the bonds are illiquid. Consequently, the fair value
of securities issued on OMX is calculated by an unbiased calculation agent and, in some cases, also based on own valuation models.
The valuation includes listed prices of similar issues adjusted for liquidity and credit risk. In connection with callable bonds, prices are
also adjusted for the right of early redemption at par. Bond loans are based on the fair value of the underlying issued bonds. The fair
value adjustment of the bond loans essentially offsets the fair value adjustment of the issued bonds.
Fair value level 3: Non-observable market data
This level is used if there is no quoted price in an active market and the valuation is based partly or wholly on non-observable market
data.
The level is used for structured issues on OMX and international securities and the related hedging by means of derivative financial
instruments. The fair value of structured, illiquid and unlisted issues and related derivative financial instruments is calculated based
on valuation models such as yield curve models or option models. The expected cash flows of the individual contracts are based on
observable market data, e.g. yield curves, exchange rates as well as share and raw material prices, and on unobservable data, e.g.
currency correlations and volatilities in currency, shares, raw materials and interest rate swap options.
The calculation of non-observable market data is based on assumptions and estimates. Changes to these assumptions and estimates
may have a significant gross effect on the estimated fair value of unlisted and illiquid financial assets and liabilities. KommuneKredit
follows a risk management strategy with the purpose of eliminating market risk by applying derivative financial instruments (see
notes 1.9 – 1.11). The total net effect on the statement of comprehensive income and the statement of financial position of changes
in estimates and assumptions when assessing the fair value is therefore considered to be limited.
ANNUAL REPORT 2014
27
Note 1.4.1 Specification of fair value of financial instruments
DKKm
Level 1
Level 2
Level 3
Total
2014
Assets
Receivables from credit institutions5005
Lending
0147,898
0147,898
Portfolio of securities19,99512,381
0
032,376
14,806
1,828
Total assets 20,000175,085
16,634
1,828196,913
Liabilities
15
0
0
15
0
42,236
2,637
44,873
6,178
99,847
33,151
139,176
0
7,404
2,911
10,315
Total liabilities
6,193149,487 38,699194,379
2013
Assets
7
Lending
0138,929
360
Portfolio of securities20,38011,329
0
367
0138,929
031,709
07,7891,5039,292
Total assets 20,387158,407
1,503180,297
Liabilities
Due to credit institutions8008
0
42,261
4,076
46,337
12,170
87,604
22,965
122,739
06,3372,0498,386
Total liabilities 12,178136,202 29,090177,470
The liquidity of some international issues decreased in 2014. As a result, the market price no longer represents the fair value, and
these issues have therefore been reclassified from level 1 to level 2.
In determining the carrying amount of certain financial instruments, estimates are required of the effect of future events on the
value of these financial instruments at the reporting date. The estimates used are based on assumptions that Management finds
reasonable but which are inherently uncertain and unpredictable. The assumptions may be incomplete or inaccurate, and unexpected
events or circumstances may arise. Moreover, the Association is subject to risks and uncertainties that may cause actual results to
deviate from these estimates.
Financial risks for KommuneKredit are disclosed in notes 1.9, 1.10 and 1.11.
28
ANNUAL REPORT 2014
Note 1.4.2 Specification of level 3 for fair value of financial instruments
DKKm
Assets
Liabilities
2014
Balance at 1 January
1,503
29,090
Additions
86
24,216
Disposals
213
15,025
Included in comprehensive income
452
418
Balance at 31 December
1,828
38,699
2013
2,806
35,193
Additions
18
15,264
Disposals
573
20,352
Included in comprehensive income-748-1,015
Balance at 31 December
1,503
29,090
There is no effect of level 3 issues on net profit, and the fair value calculation will primarily affect the recognition of the value in the
statement of financial position. As a consequence, a sensitivity analysis is not presented.
Note 1.4.3 Monetary effect of credit spread on fair value adjustments
The monetary effect of credit spread on fair value adjustments of the statements of comprehensive income and financial position is
shown below. The calculations are based on a model based on the future positive and negative exposure adjusted for the probability
of default and losses given default. The calculations rely on rating-based probabilities of default.
Information about the monetary effect of developments in credit spread on fair value adjustments of derivative financial
instruments
DKKm
1 Jan
2014
31 Dec
Statement of comprehensive income
Value adjustments of financial instruments-10-1-11
Total effect on statement of comprehensive income
-10
-1
-11
Statement of financial position
Assets-12 2-10
Liabilities-231
Total effect on statement of financial position
-10
-1
ANNUAL REPORT 2014
-11
29
Note 1.4.4 Set-off of derivative financial instruments
KommuneKredit has entered into master netting agreements and related one-way agreements on collateral for derivative financial
instruments as well as a number of two-way agreements where KommuneKredit both receives and posts collateral. Collateral re
ceived and posted, which only includes bonds with a strong credit rating, is recognised on the trade date.
KommuneKredit has not entered into any offsetting agreements and has not posted or received any collateral in relation to lending,
leasing or securities. Accordingly, these financial instruments are not included in the table below. Carrying amounts appear from the
statement of financial position. The value of derivative financial instruments that are not offset is limited to the lower of assets and
liabilities for each counterparty. The amount is included under both assets and liabilities. The value of collateral is stated for each
counterparty and is limited to the calculated net receivable. Net values represent the potential accounting effect of offsetting.
The effect of master netting agreements and collateral agreements is shown in the table.
Financial assets and financial liabilities subject to offsetting, master netting agreements or similar agreements
DKKm
Derivative financial instruments presented in the statement of financial position
Amounts offset
Carrying
amount
Assets
16,634
Liabilities
Amounts not offset
Offset
Net book
value
Financial
instruments
Collateral
Net amount
0
16,634
-8,011
-5,666
2,957
10,315
0
10,315
-8,011
-1,227
1,077
6,319
0
6,319
0
-4,439
1,880
Assets
9,292
0
9,292
-5,664
-2,754
874
Liabilities
8,386
0
8,386
-5,664
-
2,722
906
0
906
0
-2,754
-1,848
2014
Total
2013
Total
The table shows that derivative financial instruments are not subject to offsetting in the statement of financial postition.
The amount of derivative financial instruments that are not offset has been limited to the lesser amount of assets and liabilities
respectively and is calculated per counterparty. The amount is included in both assets and liabilities. The amount of collateral is calcu
lated per counterparty and has been limited to the calculated net asset amount.
Net amounts represent the potential accounting effect of offsetting. KommuneKredit’s clients are not required to post collateral to
KommuneKredit regarding derivative financial instruments. If clients were subject to collateral agreements, KommuneKredit would
have received DKK 1,534 million in collateral in 2014 and DKK 230 million in 2013.
30
ANNUAL REPORT 2014
Note 1.4.5 Specification of collateral
DKKm
2014
Type of bond
Posted collateral
Rating
Market value
Received collateral
Market value
after haircut
Market value
Market value
after haircut
Danish mortgage credit bonds
AAA
0
0
242
237
Danish government bonds
AAA
58
54
951
906
German government bonds
AAA
141
129
473
456
French government bonds
AA
748
709
1,453
1,402
English government bonds
AA+
451
412
3,007
2,882
1,398
1,304
6,126
5,883
Total
Of which non-nettable collateral
Total nettable collateral
-77
-217
1,227
5,666
2013
Danish mortgage credit bonds
AAA
0
0
524
513
Danish government bonds
AAA
0
0
22
22
German government bonds
AAA
0
0
306
292
French government bonds
AA+
0
0
545
529
French treasury bills
Not rated
0
0
1,100
1,099
English government bonds
AA+
0
0
456
433
0
0
2,953
2,888
Total
Of which non-nettable collateral
Total nettable collateral
-134
2,754
ANNUAL REPORT 2014
31
Note 1.4.6 Financial position regarding distribution of maturity according to remaining term
DKKm
2014
2013
Assets Under 1 year
Over 1 year Under 1 year
5
0
Over 1 year
367
0
Lending84,47263,42676,54062,389
Lease receivables1,4822,705 8002,982
24,429
7,947
26,631
5,078
Derivative financial instruments8,4178,2173,4295,863
Other assets
165836483
Current tax assets
65
0
13
0
Total assets119,035 82,378107,844 76,395
Liabilities and equity
15
0
8
0
79,209
104,840
52,520
116,556
Derivative financial instruments5,2195,0963,0945,292
Other liabilities480
0476
0
Pension obligations 361 359
0
246
0
236
Total liabilities 84,926110,243 56,101122,143
Equity
06,244
05,995
Total liabilities and equity
84,926
116,487
The distribution of fair values according to remaining term is based on a distribution scale.
32
ANNUAL REPORT 2014
56,101
128,138
Note 1.5 Lending
Lending is measured at fair value with value adjustment in the statement of comprehensive income.
DKKm
No. of loans 2014
2013
Lending
5,672
Additions
Disposals
Total lending
138,929
132,850
72629,88526,816
48320,91620,737
5,915147,898138,929
Bond loans 2,54934,91435,191
Tailor-made loans
3,366112,984103,738
Total lending
5,915147,898138,929
Note 1.6 Lease receivables
Lease receivables are not covered by the fair value option. KommuneKredit is the lessor of finance leases. Finance leases are rec
ognised in the statement of financial position as a receivable at an amount corresponding to the future minimum lease payments
discounted at the interest rate implicit in the lease. Subsequently, lease receivables are measured at amortised cost in accordance
with the effective interest rate method. The difference between the value on initial recognition and nominal value is amortised over
the term to maturity and is recognised as “lease receivables” under interest income.
DKKm
No. of loans 2014
2013
Lease receivables
6,678
3,782
3,446
Additions2,7271,4531,525
Disposals1,8601,0481,189
Total lease receivables7,5454,1873,782
Net investments in finance leases by lease term
Up to 1 year
1,482
800
From 1 to 5 years
1,702
2,099
Over 5 years
1,003
883
Total lease receivables
4,187
3,782
Gross investments in finance leases by lease term
Up to 1 year
1,522
842
From 1 to 5 years
1,808
2,210
Over 5 years
1,127
1,014
Total gross lease receivables
4,457
4,066
Unearned finance income
270
ANNUAL REPORT 2014
284
33
Note 1.7 Portfolio of securities
The portfolio of securities is measured at fair value with value adjustment in the statement of comprehensive income.
DKKm20142013
Government/Public authorities
9,024
11,955
Multilateral development banks
1,682
2,599
Mortgage credit institutions
19,952
12,942
Banks1,7184,213
Total portfolio of securities
32,376
31,709
The specification reflects other categories than in the 2013 financial statements.
Note 1.8 Debt securities issued
Debt securities issued are measured at fair value with value adjustment in the statement of comprehensive income.
DKKm20142013
44,873
46,337
139,176
122,739
Total debt securities issued
184,049
169,076
44,873
46,337
Fair value adjustment -2,740-2,435
Debt securities issued on OMX at nominal value
42,133
43,902
139,176
122,739
Fair value adjustment -2,178-196
Debt securities issued internationally at nominal value
34
ANNUAL REPORT 2014
136,998
122,543
DKKm
Note 18 continued
Debt securities issued on OMX per instrument
Nominal value
Disposals and
1 January
Additions adjustments 31 December
2014
Rate adjustable bonds
19,330
1,534
681
20,183
Callable bonds4,827 8401,3694,298
Non-callable bonds10,380
0
Index-linked bonds5,614
0 5865,028
010,380
Structured bonds3,751 5292,0362,244
Total debt securities issued on OMX
43,902
2,903
4,672
42,133
2013
Rate adjustable bonds
19,846
4,486
5,002
19,330
Callable bonds3,1382,459 7704,827
Non-callable bonds10,770
0
Index-linked bonds6,189
0 5755,614
39010,380
Structured bonds4,0151,8012,0653,751
Total debt securities issued on OMX
43,958
8,746
8,802
43,902
Debt securities issued internationally per instrument
Nominal value
2014
EMTN105,270 39,139 26,247118,162
ECP11,08423,32922,57611,837
Private Placements4,515 819 3494,985
Bank loans 1,67413,46213,122 2,014
Total debt securities issued internationally
122,543
76,749
62,294
136,998
2013
EMTN99,05649,63643,422
105,270
ECP11,60232,73133,24911,084
Private Placements4,627 186 2984,515
Bank loans 2,08317,44617,855 1,674
Total debt securities issued internationally
117,368
99,999
94,824
122,543
ANNUAL REPORT 2014
35
RISK MANAGEMENT OF FINANCIAL INSTRUMENTS
KommuneKredit distinguishes between the following types of financial risks:
Credit risk is the risk that the counterparty to a financial instrument does not settle a liability and thus exposes KommuneKredit
to a loss.
Liquidity risk is the risk that KommuneKredit will not be able to meet its financial obligations.
Market risk is the risk that changes in market prices will affect the market value of a financial instrument. Market risk comprises
currency risk, interest rate risk and other price risk.
Note 1.9 Credit risk
Policies and procedures
Credit risk accounts for the majority of KommuneKredit’s financial risks as, in spite of the low risk tolerance, credit risks are most likely
to occur in relation to the compliance with KommuneKredit’s mission.
Loans are secured as follows:
Loans are only granted to Danish municipalities and regions or against a 100 per cent guarantee from these authorities.
Previously granted loans to Faroese municipalities, totalling DKK 4.5 million, are 100 per cent guaranteed by the Faroese home rule
government and reguaranteed by the Danish central government with 100 per cent of interest and contributions and 75 per cent
of instalments.
The members are jointly and severally liable for KommuneKredit’s liabilities.
All Danish municipalities and regions are members of KommuneKredit.
KommuneKredit’s policy is to reduce the credit risk associated with derivative financial instruments by entering into as many collateral
agreements as possible with other counterparties. According to the instructions on the posting of collateral, the agreements must
among other things meet the following requirements:
The agreements must have daily exchange and low threshold values.
Collateral received under the agreements must be high-quality liquid bonds.
In order to further reduce the credit risk on other counterparties, the credit risk instructions include strict requirements as to the credit
quality, both in relation to the type of counterparty and the rating of the counterparty by credit rating agencies. As a result, financial
instruments may only be entered into with the following types of counterparties:
Central governments, regions, municipalities and other public authorities.
Multilateral development banks and international organisations.
Banks, other financial institutions and issuers of covered bonds.
These counterparties must maintain residency in a country that has obtained the least risky OECD Country Risk Classification or a
country that has not been audited or classified for these purposes but is included as a high income OECD or Eurozone country. In ad
dition, the counterparty must have a rating of at least AA- from Standard & Poor’s or a similar rating from Moody’s Investors Services
and/or Fitch Ratings. If a collateral agreement has been made with the counterparty, ratings down to A- are accepted. Finally, based
on an individual assessment, the Management may permit agreements with lower-rated Danish banks.
According to the Board of Directors’ guidelines, counterparties satisfying these requirements may be granted a credit risk line by
Management.
36
ANNUAL REPORT 2014
The daily utilisation of credit risk lines on financial instruments is now calculated according to the same calculation method that socalled IRB banks make use of in order to reserve capital for unexpected credit risk losses in accordance with EU Regulation on pruden
tial requirements for credit institutions and investment firms. The expected credit risk loss is recognised in comprehensive income on
an ongoing basis.
KommuneKredit sets limits for the concentration of credit risks based on the EU Regulation on prudential requirements for credit
institutions and investment firms. According to this Regulation, exposures to a single client or a group of connected clients, net of
fully and completely secured exposures, may not exceed 25 per cent of the capital base, which for KommuneKredit’s purposes cor
responds to equity.
Management and the heads of department for risk management and funding meet at least once a month in a credit committee and
assess the current credit risk.
Note 1.9.1 Credit risk rating
Measurement
The rating is based on Moody’s Investors Services, Standard & Poor’s and/or Fitch Ratings. If the counterparty is rated by two credit rat
ing agencies, the lower rating of the two credit ratings is used. If the counterparty is rated by three credit rating agencies, the middle
rating of the three credit ratings is used. When investing in securities, the rating of the securities is used, and for all financial instruments
covered by a guarantee, the rating of the guarantor is used.
In respect of counterparties providing collateral for their liabilities to KommuneKredit, the collateral is classified based on the counter
party’s rating. Thus, the classification does not reflect the rating of the collateral. The credit risk reducing portion of the collateral equals
the value of the nettable collateral in note 1.4.5. Accordingly, any collateral received that exceeds the fair value of derivative financial
instruments at counterparty level is not included in the credit risk reducing collateral.
As the credit risk at counterparty level cannot be negative, an adjustment in this respect has been made in the column “Correction for
neg. MV per counterparty”.
The credit risk may be divided into two key components. The first component is credit risk on cash and cash equivalents as well as
receivables from credit institutions and securities, collectively called investment credit risk. The other component is credit risk on deriva
tive financial instruments and related collateral, collectively called derivative credit risk.
The majority of the total credit risk relates to investments made using means from the liquidity resources and the own portfolio of bonds
as the credit risk on derivatives is limited by collateral agreements; cf. KommuneKredit’s business model.
The total credit risk increased by DKK 1.4 billion, from DKK 32.5 billion in 2013 to DKK 33.9 billion in 2014. The credit risk on investments
increased by DKK 0.3 billion, while the credit risk on derivatives increased by DKK 1.1 billion.
The increase in the total credit risk on derivative financial instruments is primarily attributable to general market developments, including
the increase in the USD rate of exchange. As a result of these market developments, the market value of KommuneKredit’s portfolio of
derivatives, including the value of collateral, has increased by DKK 4.0 billion. However, this increase is offset by an increase in the value
of collateral agreements of DKK 2.9 billion. As a result, 79 per cent of the market value of the derivatives portfolio was covered by col
lateral received at year-end 2014, compared with 87 per cent at the end of 2013.
ANNUAL REPORT 2014
37
Including collateral received, the credit risk on derivative financial instruments at the end of 2014 was DKK 1.5 billion. Excluding collateral
received, this corresponds to a reduction of the credit risk on derivative financial instruments of DKK 5.7 billion. This underlines Kom
muneKredit’s moderate credit risk on counterparties with derivatives.
Given KommuneKredit’s special client basis with strong credit ratings and joint and several liability, credit risks on KommuneKredit’s
clients are not calculated.
DKKm
Investment credit risk
Rating
Cash and
cash equivalents
Derivative credit risk
Receivables from
creditinstitutions
Portfolio
of securities
Total
Derivative financial
instruments
Positive
Negative
Correction
for neg. MV
per counterparty
Total
Collateral
after
haircut
Total
Net
credit
risk
2014
AAA
0
0
20,127
20,127
5
-9
5
0
1
20,128
AA+
0
0
7,088
7,088
28
0
0
0
28
7,116
AA
0
0
1,224
1,224
87
-29
0
0
58
1,282
AA-
1
0
3,937
3,938
4,415
-4,684
1,132
-98
765
4,703
A+
0
0
0
0
1,149
-769
194
-427
147
147
A
4
0
0
4
6,564
-4,238
1,038
-3,107
257
261
A-
0
0
0
0
1,663
-227
0
-1,432
4
4
BBB+
0
0
0
0
1,201
-369
0
-602
230
230
Total
5
0
32,376
32,381
15,112
-10,325
2,369
-5,666
1,490
33,871
0
0
21,870
21,870
9
-4
2
0
7
21,877
5,965
2013
AAA
AA+
0
0
5,901
5,901
118
-54
0
0
64
AA
0
0
0
0
0
0
0
0
0
0
361
0
3,396
3,757
2,148
-2,363
396
0
181
3,938
AAA+
3
0
542
545
886
-1,570
721
-19
18
563
A
3
0
0
3
3,005
-2,129
856
-1,604
128
131
A-
0
0
0
0
2,561
-1,535
107
-1,131
2
2
BBB+
0
0
0
0
124
-396
272
0
0
0
Total
367
0
31,709
32,076
8,851
-8,051
2,354
-2,754
400
32,476
38
ANNUAL REPORT 2014
Note 1.9.2 Credit quality
KommuneKredit has never incurred a loss as a result of a counterparty not settling an obligation.
60 per cent of the total credit risk relates to counterparties with the highest rating, 39 per cent has a credit rating between AA+ and
AA-, and only 1 per cent has a lower credit rating. The credit quality of KommuneKredit’s counterparties is thus very good.
The share of counterparties with strong credit ratings should be seen against the background of generally deteriorating ratings of a
number of European states and related public authorities in 2014. As a result of KommuneKredit’s persistently strict rating require
ments, a larger share of the credit risk is now placed in Danish mortgage credit institutions rather than European government bonds
and short-term bank deposits. Accordingly, the credit risk is increasingly concentrated with Danish counterparties.
CREDIT RISK BY EXTERNAL RATING
CREDIT RISK BY AREA
80%
80%
70%
70%
60%
60%
50%
50%
40%
12%
40%
30%
30%
2%
20%
20%
0%
10%
10%
0%
0%
67%
18%
0%
0%
AAA
0%
2014
AA+
AA
AA-
A+
A
A-
BBB+
Denmark
2013
2014
The other
Rest of
Nordic countries Europe
2013
CREDIT RISK BY TYPE OF COUNTERPARTY
CREDIT RISK BY TYPE OF INSTRUMENT
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
Central governments/ Multilateral
Mortgage
Banks
public authorities counterparties credit institutions
2014
2013
Bank deposit
2014
Rest of
Multilateral
the world counterparties
CP
Covered
bonds
Bonds
Derivatives
2013
Note 1.9.3 Collateral
All KommuneKredit’s collateral agreements have been concluded as annexes to ISDA agreements. In order to ensure as high a credit
risk reduction as possible, low threshold values have been established as well as daily valuations and exchange of collateral.
ANNUAL REPORT 2014
39
When collateral is posted, a haircut (deduction) of the collateral is calculated dependent on the type of security, rating and remaining
term. This haircut is a buffer safeguarding both parties against fluctuations in market values if the collateral is to be realised.
During 2014, there were 1,624 transfers of collateral at a total nominal value of more than DKK 58.8 billion. The high level of activity
reflects the low threshold values and the daily exchange ensuring that as large a part of the credit risk as possible is collateralised on
an ongoing basis.
In order to further reduce the credit risk, the collateral agreements also include strict requirements as to the quality of the provided
collateral. Under the collateral agreements, collateral must be highly rated mortgage bonds or government bonds issued by highly
rated countries. As presented in note 1.4.5, at year end 2014, 96 percent of the received collateral was Danish, German, French or
English government bonds. The remaining 4 per cent was Danish mortgage bonds with the highest credit quality. Thus, all collateral
received is high-quality liquid bonds. Moreover, collateral is received as tranfer of title.
A minor share of collateral received exceeds the net value of counterparty derivatives. Accordingly, these are not included as credit
risk reducing collateral.
Note 1.10 Liquidity risk
KommuneKredit’s willingness to accept liquidity risks is very low as it is not necessary to assume liquidity risks to fulfil KommuneKredit’s
mission.
The overall liquidity risk principle is based on a maturity match between deposits and lending. The liquidity limit implies that binding
lending commitments may not be entered into unless at least corresponding binding deposits are in place, and that investments of
excess liquidity may not have longer terms than the underlying deposits. The limit also implies that sufficient deposits must be in
place to cover the expected collateral. However, the share of equity that is in addition to the statutory requirement of 1 per cent may
temporarily be used for funding purposes.
According to the short-term liquidity instructions, the total holding of high-quality unrestricted liquid assets must exceed the accu
mulated liquidity outflows in a 30-day stress scenario. The instructions are inspired by the preliminary principles of the international
standards on liquidity, including Liquidity Coverage Ratio (LCR) known from CRD IV.
According to the long-term liquidity instructions, the stable medium-term and long-term funding, i.e. more than one year, must ex
ceed the liquidity needs in a stressed scenario. The instructions are also inspired by the preliminary principles of the international
standards on liquidity, including Net Stable Funding Ratio (NSFR) known from CRD IV.
In order to ensure that the investments are highly liquid, KommuneKredit has strict requirements for the rating of the investments.
This means that 62 per cent of all investments at year end 2014 were AAA rated, and 38 per cent were rated from AA+ to AA-. There
fore, there are restrictions on the remaining term as short-term investments are more liquid. At year end 2014, the remaining term of
the majority of KommuneKredit’s investments was very short, which ensures a high degree of liquidity.
40
ANNUAL REPORT 2014
Note 1.10.1 Distribution of maturity according to remaining term
Distribution of maturity according to remaining term is measured in nominal values.
DKKm
Distribution of maturity
0-3 months 3-12 months
1-5 years Over 5 years
Total
2014
Financial assets
50005
13,062
Lending
53,89927,04418,99841,941
141,882
Lease receivables
10,836
7,876
0
31,774
1751,3071,7021,0034,187
Total recognised financial assets
67,141
Loan commitments received
10,164000
10,164
39,187
28,576
42,944
177,848
Total financial assets
77,30539,18728,57642,944
188,012
Financial liabilities
15
0
0
0
15
10,641
5,627
13,320
12,546
42,134
19,658
40,284
60,046
17,011
136,999
Derivative financial instruments-1,315-639-5,279-635-7,868
Total recognised financial liabilities
Loan commitments made
Total financial liabilities
28,999
45,272
68,087
28,922
171,280
3,696000
3,696
32,69545,27268,08728,922
174,976
2013
Financial assets
367
0
0
0
367
20,041
6,248
5,070
0
31,359
Lending
49,37625,14335,32225,611
135,452
Lease receivables
Total recognised financial assets
Loan commitments received
Total financial assets
156 6432,100 8833,782
69,940
32,034
42,492
26,494
170,960
2,376000
2,376
72,31632,03442,49226,494
173,336
Financial liabilities
Total recognised financial liabilities
Loan commitments made
Total financial liabilities
80008
1,294
7,057
22,702
12,849
43,902
14,326
28,196
60,301
19,719
122,542
160-465-1,194-678-2,177
15,788
34,788
81,809
31,890
164,275
3,538000
3,538
19,32634,78881,80931,890
167,813
ANNUAL REPORT 2014
41
Note 1.10.2 Liquidity resources
The Ministry of Economic Affairs and the Interior allows KommuneKredit to build up liquidity resources of up to 25 per cent of total
lending at the end of the previous quarter. The upper limit amounted to DKK 37.4 billion at the end of 2014, and KommuneKredit’s
liquidity resources amounted to DKK 25.6 billion. The utilisation of the limit fluctuated throughout 2014, and the highest level of liquid
ity resources at month end amounted to 21 per cent.
Liquidity resources are calculated as debt securities issued less total lending at book value. Debt securities issued are adjusted for the
total net value of derivative financial instruments.
DKKm20142013
Liquidity resources
Debt securities issued 184,049
169,076
10,315
8,386
Derivative financial instruments-16,634-9,292
Debt securities issued and derivative financial instruments
177,730
168,170
Lending147,898138,929
Lease receivables4,1873,782
Total lending152,085142,711
Total liquidity resources
25,645
25,459
Liquidity resources as a percentage of total lending
Liquidity resources25,64525,459
Total lending at 30 September
149,582
142,164
Liquidity resources as a percentage of total lending
17
18
Total liquidity resources also comprise the part of the portfolio of securities financed by equity.
42
ANNUAL REPORT 2014
Note 1.11 Market risk
KommuneKredit distinguishes between three types of market risks:
Currency risk is the risk that changes in exchange rates will affect the market value of a financial instrument.
Interest rate risk is the risk that changes in interest rates will affect the market value of a financial instrument.
Other price risk is the risk that other changes in market prices than those attributable to the interest rate risk or currency risk, e.g.
a share index, will affect the market value of a financial instrument.
Note 1.11.1 Currency risk
KommuneKredit’s willingness to accept a currency risk is very low as it is not necessary to accept currency risks to comply with Kom
muneKredit’s mission.
According to the Board of Directors’ guidelines on currency risk instructions, funding must be translated by the use of financial instru
ments to the same currency as the currency in which loans were granted. Similarly, placement of liquidity resources must be made
in the same currency as funding. In practice, all funding is translated into DKK, EUR or USD. Subsequently, when funding is to finance
lending or investments, funding is translated into the relevant currency.
According to the guidelines, the net position calculated as the present value of future payments in EUR must not exceed DKK 1,000
million, and the net position for all other currencies combined must not exceed DKK 100 million. So far, these limits have only been
used to a very limited extent.
Measurement
The currency position is presented separately for receivables and liabilities as well as derivative financial instruments. The distribution
shows how derivative financial instruments are used to hedge the resulting currency position from receivables and liabilities.
At the end of 2014, KommuneKredit’s currency position was close to 0, which was also the case at year end 2013. This reflects Kom
muneKredit’s low willingness to accept currency risks.
ANNUAL REPORT 2014
43
DKKm
Currency risk
Derivative
financial
Currency
Market values Receivables
Liabilities instruments
position
2014
Australian dollar
AUD
Swiss franc
CHF 2,66215,28112,619
05,2265,226
0
0
Euro
EUR8,331
14,5316,200
0
British pounds
GBP1,2134,3723,159
0
Hong Kong dollar
HKD
0
Japanese yen
JPY
0
1,139
1,139
68,0007,993-1
Norwegian kroner
NOK
03,4493,449
0
Swedish kroner
SEK
0983983
0
American dollar
USD 4,20283,70279,501
Other currencies*
01,7361,736
Total 16,414138,419122,005
1
0
0
2013
Australian dollar
AUD 3833,5313,148
Swiss franc
CHF 2,90414,75511,851
0
Euro
EUR10,05814,627 4,569
0
British pounds
GBP1,5046,7875,283
0
Hong Kong dollar
HKD
0
1,007
1,007
0
JPY
145
8,274
8,129
0
Japanese yen
0
Norwegian kroner
NOK 2614,1053,844
0
Swedish kroner
SEK
0
American dollar
USD 8,46566,31757,850-2
Other currencies*
174
1,548
1,374
01,5611,561
Total23,894
122,51298,616
0
-2
* Other currencies comprise CAD, HUF, MXN, NZD, RON, TRY, ZAR.
Note 1.11.2 Interest rate risk
KommuneKredit’s willingness to accept interest rate risks is limited but it is deemed necessary to accept certain interest rate risks to
comply with KommuneKredit’s mission.
KommuneKredit primarily accepts interest rate risks when equity is invested in bonds. Interest rate risks are accepted in order to ensure
a return that contributes to the necessary return on equity and thus to the capitalisation of KommuneKredit. Interest rate risks are ac
cepted to a lesser degree between lending and funding when floating-rate loans and floating-rate funding are fixed at varying dates.
44
ANNUAL REPORT 2014
According to the Board of Directors’ guidelines on the interest rate risk, interest rate risks may not be accepted in respect of fixedrate lending, funding or investments of the liquidity resources. This is complied with by hedging all fixed-rate transactions of a certain
amount at the agreement date by applying financial instruments. Similarly, fixed-rate funding and investments of excess liquidity are
converted to floating-rate funding and investments at the agreement date. According to the interest rate risk instructions, interest
rate risks must not exceed 4.5 per cent of equity at year end, corresponding to DKK 270 million. The risk management department
calculates the interest rate risk on the basis of a one per cent parallel shift of the yield curve.
Measurement
At year end 2014, KommuneKredit utilised 69 per cent of the interest rate risk limit determined by the supervisory authority.
DKKm20142013
Interest rate risk
Core business72
Portfolio of securities financed by equity
179
223
Total interest rate risk
186
225
Equity 1 January
5,995 5,716
Interest rate risk limit of 4.5 percent of equity 1 January
270 257
Total Interest rate risk
186225
Interest rate risk limit
270
257
Utilisation of the limit in per cent
69
88
Note 1.11.3 Other price risk
KommuneKredit’s willingness to accept other price risks is very low as it is not necessary to accept other price risks to comply with
KommuneKredit’s mission.
Other price risk may, for instance, occur when KommuneKredit issues bonds related to a commodity index or the like. According to
the Board of Directors’ guidelines, other price risks related to issues must be completely hedged at the issue date. However, to a very
limited extent, other price risks in the form of interest rate volatility risks may be assumed. Interest rate volatility risks arise when
KommuneKredit invests in bonds with cap/floor or convertability.
According to the Board of Directors’ guidelines on interest rate volatility risk, interest rate volatility risk may constitute up to 0.2 per
cent of equity at year end, corresponding to DKK 12 million. The risk management department calculates interest rate volatility risk
based on a one percentage point shift in interest rate volatility risk. At year end 2014 interest rate volatility risk constituted DKK 1.8
million, corresponding to a 15 per cent utilisation of the limit for interest rate volatility risk.
ANNUAL REPORT 2014
45
NOTES TO ADMINISTRATIVE EXPENSES
Note 2.1 Administrative expenses
Administrative expenses comprise staff costs, other administrative expenses, adjustment of pension obligations, and amortisation of
intangible assets and depreciation on property, plant and equipment.
Intangible assets and property, plant and equipment are measured at cost less accumulated amortisation, depreciation and impair
ment losses.
Cost comprises the acquisition price and any costs directly attributable to the acquisition until the date when the asset is available for
use. Where individual components of an intangible asset or an item of property, plant and equipment have different useful lives, they
are accounted for as separate items, which are amortised/depreciated separately.
Development costs regarding software comprise salaries and other costs attributable to the Association’s development activities.
Development projects that comply with the relevant accounting requirements are recognised as intangible assets. Amortisation and
depreciation are provided on a straight-line basis over the expected useful lives of the assets/components. The expected useful lives
are as follows:
Intangible assets (software, etc.) .......................................... 3 years
Properties ...................................................................................... 75 years
Equipment (IT equipment, etc.) ...................................... 3 to 5 years
Cars ........................................................................................... 3 to 4 years
Leasehold improvements .......................................................... 5 years
Land is not depreciated.
The carrying amount is tested annually for indications of impairment. When there is an indication that assets may be impaired, the re
coverable amount of the asset is determined. The recoverable amount is the higher of an asset’s fair value less expected costs to sell
and its value in use.
DKKm20142013
Salaries, remuneration, etc.
43
39
Administrative expenses4447
Pension contributions55
Adjustment of pension obligations-1
0
Amortisation of intangible assets and depreciation on property, plant and equipment
4
5
Total administrative expenses
95
96
Number of full-time employees
46
ANNUAL REPORT 2014
62
58
Note 2.2 Management’s remuneration
Remuneration of the Board of Directors comprises fixed remuneration for KommuneKredit as well as remuneration of the audit com
mittee. At 1 June 2014 an election for the Board of Directors was held, and new Directors were elected and several Directors retired.
Management is not included in KommuneKredit’s bonus plan. Management is covered by a defined benefit plan. The pension obliga
tion has been calculated on the basis of actuarial assumptions.
DKK’00020142013
Management’s remuneration
Remuneration of the Board of Directors
Erik Nielsen, chairman
121
0
Lars Krarup, vice chairman
97
70
Hans Toft7170
Henrik Zimino7170
Sophie Hæstorp Andersen
40
0
Erik Christensen
40
0
Kaj V. Holm
40
0
Mikael Klitgaard
40
0
Anne V. Kristensen
40
0
Retired members
Hennning G. Jensen, former Chairman and Vice chairman
90
144
Erik Fabrin, former Vice chairman and Chairman 53
185
Kaj Petersen3170
Vibeke Storm Rasmussen
31
70
Anker Boye3170
Mariann Nørgaard3170
Aleksander Aagaard3170
Total remuneration of the Board of Directors
858
889
Remuneration of Management
Søren Høgenhaven 1,702
1,693
Johnny Munk1,4711,430
Total remuneration of Management
3,165
3,123
Management pension provision for the year
Søren Høgenhaven 1,700
100
Johnny Munk
1,700
200
Total management pension provision for the year
3,400
ANNUAL REPORT 2014
300
47
Note 2.3 Pension obligations
KommuneKredit has entered into pension plans with the majority of the employees. Contributions to defined contribution plans are
recognised in the statement of comprehensive income in the period to which they relate, and any contributions outstanding are rec
ognised in the statement of financial position as other liabilities.
KommuneKredit has entered into defined benefit plans with a few present and former employees. For defined benefit plans, an annual
actuarial calculation is made of the present value of future benefits under the defined benefit plan. The present value is determined
on the basis of assumptions about the future development in variables such as salary levels, interest rates, inflation and mortality. The
present value is determined only for benefits already earned by employees from their employment with the Association. The actuarial
present value is recognised in the statement of financial position under pension obligations.
The calculations for 2014 are based on the Danish Financial Supervisory Authority’s benchmark for mortality rates and longevity im
provements. This is a change compared with 2013, when calculations were based on G82. This has affected the determination of life
expectancy, which has been prolonged. Adjustments to the calculated value in use attributable to changes in actuarial assumptions
are recognised in other comprehensive income. The interest rate is unchanged at 1.5 per cent.
If changes in benefits relating to services rendered by employees in previous years result in changes in the actuarial present value, the
changes are recognised as historical costs. Such costs are recognised immediately, provided that the employees have already earned
the changed benefits. If employees have not earned the benefits, the historical costs are recognised in the statement of comprehen
sive income for the period in which the changed benefits are earned by the employees.
DKKm20142013
Pension obligations
62
65
Additions50
Disposals33
Total pension obligations
64
62
Including remuneration of Management
29
26
The addition reflects actuarial adjustments of DKK 6 million before tax through other comprehensive income and other adjustments
of DKK -1 million, cf. note 2.1.
48
ANNUAL REPORT 2014
NOTES TO TAX
NOTES TO TAX
KommuneKredit computes tax on financial instruments based on the market-value principle. The current corporation tax rate is 24.5
per cent. On 27 June 2013, the Danish Parliament passed a bill entailing a gradual reduction of the corporation tax rate from 25 per cent
to 22 per cent in the period 2014-2016. The measurement of deferred tax on all temporary differences between the carrying amount
and the tax value of assets and liabilities depends on the expected date of realisation of those differences. On this basis, the average
tax rate is calculated at 25 per cent.
Note 3.1 Tax on profit for the year
Tax for the year comprises current tax for the year, changes in deferred tax for the year, estimated tax on other comprehensive in
come and adjustments regarding previous years.
DKKm20142013
Corporation tax for the year
73
92
Adjustment due to change in tax rate
0-28
Deferred tax for the year
10-9
Adjustment regarding previous years
Total tax on profit for the year
1
0
0-2
84
53
Tax on profit for the year relates to:
Computed tax on profit for the year before tax
83
83
0-28
1
0-2
Total tax on profit for the year
84
0
53
Effective tax rate
25
16
Note 3.2 Current tax assets
Current tax assets and tax liabilities are recognised in the statement of financial position as the sum of current tax, tax receivable or
tax payable from previous years and tax paid for the year.
DKKm20142013
Current tax assets Balance at 1 January
13
9
Current tax-73-92
Adjustment regarding previous years-9-5
Corporation tax paid for the year
134
101
Total current tax assets
65
13
ANNUAL REPORT 2014
49
NOTES TO TAX
Note 3.3 Deferred tax liabilities
Deferred tax assets and tax liabilities are measured on all temporary differences between the carrying amount and the tax value of
assets and liabilities. Deferred tax is measured according to the tax rules applicable for the reporting period when the deferred tax is
expected to crystallise as current tax. The change in deferred tax as a result of changes in tax rates is recognised in the statement
of comprehensive income.
DKKm20142013
236
274
0-28
0-1
Deferred tax for the year
10-9
Total deferred tax liabilities
246
236
Deferred tax liabilities relate to:
Property, plant and equipment and intangible assets
7
7
Lease assets253243
Pension obligations-14-14
Total deferred tax liabilities
50
ANNUAL REPORT 2014
246
236
NOTES TO THE STATEMENT OF CASH FLOWS
NOTES TO THE STATEMENT OF CASH FLOWS
The statement of cash flows shows cash flows from operating activities for the year, the year’s changes in cash and cash equivalents
and cash and cash equivalents at the beginning and end of the year.
Cash flows from operating activities
Cash flows from operating activities are determined as profit before tax adjusted for corporation tax paid, non-cash operating items
etc. and also comprise cash flows from lending and funding activities, payments in connection with acquisitions and disposals of
intangible assets and property, plant and equipment as well as acquisition and disposal of securities if the term to maturity exceeds
three months at the date of conclusion. Receivables from credit institutions comprise deposits with fixed maturity and ECP notes with
a term to maturity of more than three months at the date of conclusion.
Cash flows for the year
Cash flows for the year comprise cash flows from operating activities.
Cash at hand and in the bank
The item comprises deposits on demand with credit institutions and ECP notes with a term to maturity of less than three months at
the date of conclusion.
Note 4.1 Adjustment for non-cash operating items
DKKm20142013
Adjustment for non-cash operating items
Pension obligations-4-3
Depreciation and provisions, etc.
4
5
7
7
Total adjustment for non-cash operating items
7
9
ANNUAL REPORT 2014
51
OTHER NOTES
OTHER NOTES
Note 5.1 Contingent assets and liabilities
Note 5.4 Future accounting regulation
Pursuant to section 81(4) of the Danish Securities Trading Act,
The IASB has issued a new version of IFRS 9 to take effect in
KommuneKredit together with other custodian institutes is li
2018. IFRS 9 has still to be approved by the EU. The IASB has
able for compensation for losses resulting from mistakes in the
also issued an exposure draft for a new standard on leases,
reporting, etc., to VP Securities A/S. KommuneKredit’s liability is
which is expected to take effect in 2017 or later.
maximised to DKK 1.4 million.
Adopted but not yet effective standards will be implemented
Pursuant to section 82 of the Danish Securities Trading Act,
as they become compulsory for KommuneKredit. The new
KommuneKredit together with other custodian institutes guar
IFRS 9 standard is not expected to have any significant impact
antees the liabilities of VP Securities A/S. KommuneKredit’s
on the financial statements. Based on the current draft IFRS
guarantee is maximised to DKK 3.0 million.
standard on leases, implications for KommuneKredit are not ex
pected to be significant.
The Danish tax authorities have selected KommuneKredit for
an audit and have instructed the Association to pay additional
The standards and interpretations that are adopted with a dif
payroll tax. KommuneKredit has appealed this decision to the
ferent effective date in the EU than the corresponding effec
Danish National Tax Tribunal, where the case is pending. In
tive dates from the IASB will generally be early adopted so that
KommuneKredit’s opinion, there is every probability that Kom
the adoption follows the IASB’s effective dates.
muneKredit will win the case, and no expense or provision has
consequently been recognised in the financial statements.
Note 5.5 Exchange rates at year end
Official exchange rates at year end 2014 quoted by Danmarks
Note 5.2 Related party disclosures
Nationalbank.
KommuneKredit has no related parties exercising control over
KommuneKredit. KommuneKredit’s related parties exercising
DKK per 100 units of foreign currency.
significant influence comprise the members of the Associa
tion’s Board of Directors and Management and their close fam
Currency
ily members.
Australian dollar
AUD
500.31
Swiss franc
CHF
618.86
Board of Directors and Management
Euro
EUR744.36
For information on remuneration, reference is made to note
British pounds
GBP
951.50
2.2. For information on managerial posts, reference is made to
Hong Kong dollar
HKD
78.90
pages 57-58. Apart from this, no other transactions have been
Japanese yen
JPY
5.12
carried out with the Board of Directors, Management or other
Norwegian kroner
NOK
82.32
related parties during the year.
Swedish kroner
SEK
78.56
American dollar
USD
612.14
Note 5.3 Events after the reporting period
No events have occurred after the reporting period that have a
significant effect on KommuneKredit’s results.
52
ANNUAL REPORT 2014
STATEMENTS
STATEMENTS
The Board of Directors and Management have today discussed
and of the comprehensive income of the Association’s ope
and approved the annual report of KommuneKredit for the
rations and cash flows for the financial year 1 January – 31 De
financial year 1 January to 31 December 2014.
cember 2014.
The annual report has been prepared in accordance with Interna
Further, in our opinion, the Management commentary gives a
tional Financial Reporting Standards (IFRS) as adopted by the EU.
fair review of the development in the Association’s operations
and financial matters, the comprehensive income for the year
It is our opinion that the financial statements give a true and fair
and the Association’s financial position and describes the mate
view of the Association’s financial position at 31 December 2014
rial risks and uncertainties affecting the Association.
Copenhagen, 6 March 2015
Management:
Søren Høgenhaven
Johnny Munk
/Jens Bloch Behrendt
Chief Executive Officer, Managing Director
Managing Director
Chief Financial Officer
Erik Nielsen
Lars Krarup
Hans Toft
Chairman
Vice chairman
Henrik Zimino
Sophie Hæstorp Andersen
Erik Christensen
Kaj V. Holm
Mikael Klitgaard Anne V. Kristensen
Board of Directors:
ANNUAL REPORT 2014
53
STATEMENTS
Independent auditors’ report
To the Board of Directors of KommuneKredit
Independent auditors’ report on the financial statements
judgement, including the assessment of the risks of material
We have audited the financial statements of KommuneKredit
misstatement of the financial statements, whether due to
for the financial year 1 January – 31 December 2014. The finan
fraud or error. In making those risk assessments, the auditors
cial statements comprise statement of comprehensive income,
consider internal control relevant to the Association’s prepa
statement of financial position, statement of changes in eq
ration of financial statements that give a true and fair view in
uity, statement of cash flows and notes, including a summary
order to design audit procedures that are appropriate in the cir
of significant accounting policies. The financial statements are
cumstances, but not for the purpose of expressing an opinion
prepared in accordance with International Financial Reporting
on the effectiveness of the Association’s internal control. An
Standards as adopted by the EU.
audit also includes evaluating the appropriateness of account
ing policies used and the reasonableness of accounting esti
Management’s responsibility for the financial statements
mates made by Management, as well as evaluating the overall
Management is responsible for the preparation of financial
presentation of the financial statements.
statements that give a true and fair view in accordance with
International Financial Reporting Standards as adopted by the
We believe that the audit evidence we have obtained is suffi
EU. Management is also responsible for such internal control
cient and appropriate to provide a basis for our opinion.
that Management determines is necessary to enable the prep
Our audit has not resulted in any qualification.
aration of financial statements that are free from material mis
statement, whether due to fraud or error.
Opinion
In our opinion, the financial statements give a true and fair view
Auditors’ responsibility
of the Association’s financial position at 31 December 2014 and
Our responsibility is to express an opinion on the financial state
of the result of the Association’s operations and cash flows for
ments based on our audit. We conducted our audit in accord
the financial year 1 January – 31 December 2014 in accordance
ance with International Standards on Auditing and additional
with International Financial Reporting Standards as adopted by
requirements under Danish audit regulation. This requires that
the EU.
we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance as to whether the finan
Statement on the Management commentary
cial statements are free from material misstatement.
We have read the Management commentary. We have not per
formed any further procedures in addition to the audit of the
An audit involves performing procedures to obtain audit evi
financial statements. On this basis, it is our opinion that the in
dence about the amounts and disclosures in the financial
formation provided in the Management commentary is consist
statements. The procedures selected depend on the auditors’
ent with the financial statements.
ERNST & YOUNG
Godkendt Revisionspartnerselskab
Torben Bender
Hans Peter Lindegård Buhrkal
State Authorised Public Accountant
State Authorised Public Accountant
54
ANNUAL REPORT 2014
STATEMENTS
Report by the auditor appointed by the Ministry of Economic Affairs and the Interior
To the Board of Directors of KommuneKredit
As auditor appointed by the Ministry of Economic Affairs and
During my review, I did not identify any non-compliance with
the Interior, I have reviewed the financial statements of Kom
neither the Act on KommuneKredit nor the articles of associa
muneKredit for the financial year 1 January – 31 December
tion of KommuneKredit. The audit procedures carried out by
2014, prepared by the Board of Directors and Management. In
Ernst & Young did not give rise to any comments on my part.
addition, I have read the Management commentary.
Emil le Maire
Former Prefect
ANNUAL REPORT 2014
55
MANAGEMENT
MANAGEMENT
Board of Directors
Lars Krarup, Mayor, Herning, Vice Chairman
Sophie Hæstorp Andersen, Region council Chairman, Capital Region of Denmark
Kaj V. Holm, Deputy CEO, Øresundsbro Konsortiet, independent member
Anne V. Kristensen, Region council Vice Chairman, Central Denmark Region
Management
Søren Høgenhaven, Chief Executive Officer and Managing Director
Departments
Lending
Jette Moldrup, Senior Vice President and Head of Lending
Funding and Treasury
Eske Hansen, Senior Vice President and Head of Funding and Treasury
Finance
Jens Bloch Behrendt, Chief Financial Officer
Risk management
Morten Søtofte, Senior Vice President and Chief Risk Officer
Leasing
Frank Hammer, Director
Auditors
Ernst & Young (EY), appointed by the Board of Directors
Emil le Maire, Former Prefect, appointed by the Ministry of Economic Affairs and the Interior
56
ANNUAL REPORT 2014
MANAGERIAL POSTS
MANAGERIAL POSTS
Board of Directors
Sophie Hæstorp Andersen, Region council Chairman
Year of birth: 1953
Capital Region of Denmark
Joined the Board of Directors: 1 June 2014
Year of birth: 1974
Directorships:
KL (Vice chairman)
Directorships:
KL (Chairmanship)
Danske Regioner
Kombit A/S (Chairman)
Vækstforum i Hovedstaden (Chairman)
Kommunernes Lønningsnævn
Amgros I/S (Chairman)
DAB (Dansk Almennyttigt Boligselskab)
Plejecenter Langgadehus (Chairman)
I/S Vestforbrænding
Den almene boligorganisation KAB-Bolig
Realdania (council)
Realdania, Fagkomité for Byudviklingsforum
Year of birth: 1958
Lars Krarup, Mayor, Herning, Vice chairman
Year of birth: 1972
Joined the Board of Directors: 1 January 2007
Kaj V. Holm, Deputy CEO, Øresundsbro Konsortiet
Directorships:
Director of Finance at Sund & Bælt Holding
Sport Event Danmark (Chairman)
Year of birth: 1955
KL
KOMBIT A/S
Realdania
Year of birth: 1954
Year of birth: 1947
Directorships:
Dronninglund Slot
Directorships:
VisitNordjylland
I/S Vestforbrænding (Vice chairman)
Business Region North
HMN I/S (Vice chairman)
Movia
Anne V. Kristensen, Region council Vice Chairman,
Copenhagen Capacity
Central Denmark Region
Wonderful Copenhagen
Year of birth: 1969
Gentofte Idrætsfond (Chairman)
Svenske Villa Fonden (Chairman)
Directorships:
Danske Regioner
Year of birth: 1950
Directorships:
I/S Amager Ressourcecenter (Vice chairman)
CTR – Centralkommunernes Transmissionsselskab I/S
ANNUAL REPORT 2014
57
MANAGEMENT
Management
Søren Høgenhaven
Year of birth: 1949
Joined Management: 1 February 1992
Johnny Munk
Year of birth: 1951
Joined Management: 1 June 2000
58
ANNUAL REPORT 2014
KommuneKredit
Kultorvet 16
DK-1175 Copenhagen K
Telephone +45 33 11 15 12
[email protected]
www.kommunekredit.dk
CVR no. 22 12 86 12

annual report 2014

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