Note 17 - Measurement of fair value of financial instruments

Financial instruments at fair value are classified at various levels.

Level 1: Valuation based on quoted prices in an active market
Fair value of financial instruments that are traded in the active markets is based on market price on the balance sheet date. A market is considered active if market prices are easily and regularly available from a stock exchange, dealer, broker, industry group, price-setting service or regulatory authority, and these prices represent actual and regularly occurring market transactions at an arm’s length. This category also includes quoted shares and Treasury bills.

Level 2: Valuation based on observable market data
Level 2 consists of instruments that are valued by the use of information that does not consist in quoted prices, but where the prices are directly or indirectly observable for the assets or liabilities concerned, and which also include quoted prices in non-active markets.

Level 3: Valuation based on other than observable data
If valuation data are not available for level 1 and 2, valuation methods are applied that are based on non-observable information.

The following table presents the Group's assets and liabilities measured at fair value at 30 June 2021: 
         
Assets (NOKm) Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit/loss        
- Derivatives 2 4,316 - 4,317
- Bonds and money market certificates 2,375 26,001 - 28,376
- Equity instruments 1,458 14 526 1,998
- Fixed interest loans - 43 4,226 4,268
Financial assets through other comprehensive income      
- Loans at fair value through other comprehensive income - - 79.691 79,691
Total assets 3,834 30,373 84,443 118.651
         
Liabilities Level 1 Level 2 Level 3 Total
Financial liabilities through profit/loss        
- Derivatives 1 3,894 - 3,895
- Equity instruments 87 - - 87
Total liabilities 88 3,894 - 3,982

 

The following table presents the Group's assets and liabilities measured at fair value at 30 June 2020: 
         
Assets (NOKm) Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit/loss        
- Derivatives 0 10,069 - 10,069
- Bonds and money market certificates 2,635 26,320 - 28,955
- Equity instruments 1,137 113 422 1,673
- Fixed interest loans - 43 4,214 4,256
Financial assets through other comprehensive income      
- Loans at fair value through other comprehensive income - - 73,516 73,516
Total assets 3,772 36,545 78,152 118,469
         
Liabilities Level 1 Level 2 Level 3 Total
Financial liabilities through profit/loss        
- Derivatives 6 8,638 - 8,644
- Equity instruments 125 - - 125
Total liabilities 131 8,638 - 8,769

 

 

The following table presents the Group's assets and liabilities measured at fair value at 31 December 2020:
         
Assets (NOKm) Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit/loss        
- Derivatives 1 7,225 - 7,226
- Bonds and money market certificates 4,865 21,741 - 26,606
- Equity instruments 1,928 6 432 2,366
- Fixed interest loans - 43 4,242 4,285
Financial assets through other comprehensive income      
- Loans at fair value through other comprehensive income - - 74,761 74,761
Total assets 6,793 29,015 79,435 115,244
         
Liabilities Level 1 Level 2 Level 3 Total
Financial liabilities through profit/loss        
- Derivatives 2 7,177 - 7,179
- Equity instruments - - - -
Total liabilities 2 7,177 - 7,179

 

The following table presents the changes in the instruments classified in level 3 as at 30 June 2021:
         
(NOKm) Equity instruments through profit/loss Fixed interest loans Loans at fair value through OCI Total
Opening balance 1 January 432 4,242 74,761 79,435
Investment in the period 11 555 23,838 24,404
Disposals in the period -2 -523 -18,918 -19,443
Expected credit loss - - 9 9
Gain or loss on financial instruments 85 -48 1 38
Closing balance  526 4,226 79,691 84,443

   

The following table presents the changes in the instruments classified in level 3 as at 30 June 2020:
         
(NOKm) Equity instruments through profit/loss Fixed interest loans Loans at fair value through OCI Total
Opening balance 1 January 405 4,636 71,336 76,377
Investment in the period 13 216 30,795 31,025
Disposals in the period -13 -761 -28,583 -29,357
Expected credit loss - - -37 -37
Gain or loss on financial instruments 17 123 6 145
Closing balance  422 4,214 73,516 78,152

 

The following table presents the changes in the instruments classified in level 3 as at 31 December 2020:
(NOKm) Equity instruments through profit/loss Fixed interest loans Loans at fair value through OCI Total
Opening balance 1 January 405 4,636 71,336 76,377
Investment in period 48 731 47,183 47,962
Disposals in the period -14 -1,206 -43,754 -44,973
Expected credit loss - - -13 -13
Gain or loss on financial instruments -7 81 7 81
Closing balance 31 December 432 4,242 74,761 79,435


 

 

 

The method for valuation of financial instruments in level 2 and 3 is described in the following:

Fixed interest loans to customers (level 3)
The loans consist for the most part of fixed interest loans denominated in Norwegian kroner. The value of the fixed interest loans is determined such that agreed interest flows are discounted over the term of the loan by a discount factor that is adjusted for margin requirements. The discount factor is raised by 10 points when calculating sensitivity.

Loans at fair value through other comprehensive income (level 3)
Property Loans at floating interest classified at  fair value over other comprehensive income is valued based on nominal amount reduced by expected credit loss. Loans with no significant credit risk detoriation since first recognition is assessed at nominal amount. For loans with a significant increase in credit risk since first recognition or objective evidence of loss, the calculation of expected credit losses over the life of the asset is in line with loan losses for loans at amortised cost. Estimated fair value is the nominal amount reduced by expected lifetime credit loss. If the likelihood of the worst case scenario in the model is doubled, fair value is reduced by NOK 6 million.

Short-term paper and bonds (level 2 and 3)
Valuation on level 2 is based for the most part on observable market information in the form of interest rate curves, exchange rates and credit margins for the individual credit and the bond’s or certificate’s characteristics. For paper valued under level 3 the valuation is based on indicative prices from a third party or comparable paper.

Equity instruments (level 3)
Shares that are classified to level 3 include essentially investments in unquoted shares. Among other a total of NOK 437 million in Private Equity investments, property funds, hedge funds and unquoted shares through the company SpareBank SMN 1 Invest. The valuations are in all essentials based on reporting from managers of the funds who utilise cash flow based models or multiples when determining fair value. The Group does not have full access to information on all the elements in these valuations and is therefore unable to determine alternative assumptions.

Financial derivatives (level 2)
Financial derivatives at level 2 include for the most part currency futures and interest rate and exchange rate swaps. Valuation is based on observable interest rate curves. In addition the item includes derivatives related to FRAs. These are valued with a basis in observable prices in the market. Derivatives classified to level 2 also include equity derivatives related to SpareBank 1 Markets’ market-making activities. The bulk of these derivatives refer to the most sold shares on Oslo Børs, and the valuation is based on the price of the actual/underlying share and observable or calculated volatility. 

 

 

Sensitivity analyses, level 3 as at 30 June 2021:    
(NOKm)   Book value Effect from
change in
reasonable
possible
alternative
assumptions
       
Fixed interest loans   4,226 -12
Equity instruments through profit/loss*   526 -
Loans at fair value through other comprehensive income  79,691 -6
* As described above, the information to perform alternative calculations are not available    


 

© SpareBank 1 SMN