Category according to IFRS 9 Key financial assets Criteria for classification in the category and accounting treatment for such assets The Bank estimates LGD based on expected future cash flows from defaulted loans. These expected cash flows are based on the Bank’s own records to the extent that this is available as well as estimates from third parties with experience from similar portfolios. The Bank has decided to apply expected repayments for 15 years from the time of default. Given the Bank’s relatively short track history and limited experience data, there will be some degree of uncertainty for the cash flow estimates. The present value of the cash flows is computed by discounting these with the exposures’ effective interest rates. The loss is then computed as the difference between the book value of the asset at the time of defaulting and the discounted value of the future expected cash flows. The Bank has forward flow agreements for sale of defaulted loans Norway. The forward flow agreements are defined as a financial derivative. The bank has reached the conclusion that the value of the derivate is insignificant and the agreements is not capitalized. The assessment is based on the fact that the agreements are on market conditions in addition to a comparison of the LGD that the bank gets with the agreement compared with LGD`s in observable markets for comparable products. When calculating the expected credit losses in stage 1 and 2, the Bank is discounting these losses to the balance sheet date, using the effective interest rate as the discount rate. The Bank is estimating the time for when the expected loss is foreseen to take place in order to determine the duration of the discounting. The Bank’s exposure at the time of default Is in the model restricted to concern the loans that are not past due. The Bank revokes automatically unutilised credit lines once the loan is past due. For loans not being past due, the Bank is estimating expected credit limit utilisation based on historical data. This applies to all products where the client has the possibility to draw on unutilised credit limits. The Bank is also applying forward looking elements for its credit loss model. The Bank’s overall losses are adjusted by considering a certain set of macroeconomic variables. The credit losses are adjusted on a portfolio basis and are based on the expected development of the economies in the countries in which the Bank is offering loans. The macroeconomic variables are not utilised to transfer loans among the various stages. The Bank is applying three sets of indicators from OECD to the expected credit loss models for the respective countries: 1) the expected development in the unemployment rate, 2) the growth in the gross domestic product and 3) the short-term interest rate level. The Bank applies three scenarios when considering the macroeconomic adjustment: a positive outlook, a neutral outlook and a negative outlook. The Bank assigns a probability and weight to these scenarios based on the expectations for the macroeconomic situation. There is uncertainty related to the estimates as they are forward-looking. The Bank assesses that the Norwegian macro variables suggest a generally weaker development due to the geopolitical situation and increased interest rates, and has therefore set an adjustment to the losses equivalent to a factor of 107% (2021: 104%). The Finnish variables are assessed as slightly less positive for the Bank’s loss levels compared to last year and are adjusted by a factor of 107% (2021: 106%). For the Swedish market, the Bank assesses that the future outlook is somewhat weaker, but better than at the end of 2020, and adjusts the loss levels by a factor of 107% (2021: 107%). The Bank does not use the simplification rules for loss impairment for which the IFRS 9 framework allows. This means that the Bank does not use the exemption for low credit risk or simplifications linked to 12-month probability of default (PD). 50 Notes to the financial statements
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