3 Credit risk

Within the scope of credit risk management, vital importance is attached to the avoidance of credit risks and the early identification of default risks. In addition to systematic risk / return management at the individual loan level, the LLB Group proactively manages its credit risks at the credit portfolio level. The primary objective is to reduce the overall level of risk through diversification and a stabilization of expected returns.

3.1 Credit risk management

Processes and organizational structures ensure that credit risks are identified, uniformly evaluated, controlled, monitored and included in risk reporting.

The process of granting a loan is based on a thorough evaluation of the borrower’s creditworthiness, the possible impairment and the legal existence of collateral, as well as risk classification in a rating process performed by experienced credit specialists. The granting of loans is subject to a specified assignment of authority. A major characteristic of the credit approval process is the separation between front and back office functions.

3.2 Evaluation of credit risks

The consistent evaluation of credit risks represents an essential prerequisite of successful risk management. The credit risk can be broken down into the components: probability of default, loss given default and the exposure at the time point of the default.

Probability of default

The LLB Group assesses the probability of default of individual counterparties by means of an internal rating system. The different rating procedures are adapted to suit the different characteristics of borrowers. The credit risk management ratings employed for banks and debt instruments are based on external ratings from recognised rating agencies.

The reconciliation of the internal rating with the external rating is carried out in accordance with the following master scale.

(XLS:) Download
Rating categories

LLB-Rating

Description

External Rating (Moody’s) **

*

Non-rated loans are covered and subject to limits.

**

The LLB Group uses the external ratings of Moody’s exclusively in the standard approach for covering credit risks (for the segments: due from banks, finance companies and securities firms, due from companies and due from international organisations).

1 to 4

Investment Grade

AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3

5 to 8, not rated *

Standard Monitoring

Ba1, Ba2, Ba3, B1, B2

9 to 10

Special Monitoring

B3, Caa, Ca, C

11 to 14

Sub-standard

Default

Loss given default

The loss given default is influenced by the amount of collateralisation and the costs of realising the collateral. It is expressed as a percentage of the individual commitment.

The potential loss at portfolio level is broken down as follows at the LLB Group.

Expected loss

Expected loss is a future-related, statistical concept, that permits the LLB Group to estimate the average annual costs that could be incurred if positions in the current portfolio are classified as at risk. It is calculated on the basis of the default probability of a counterparty, the expected credit commitment made to this counterparty at the time of the default, and the magnitude of the loss given default.

Value-at-risk concept

The value-at-risk approach aims at computing the size of fluctuations in credit losses incurred by means of a statistical model and to show the change in the risk status of the credit portfolio.

Scenario analysis

The modelling of external credit losses is performed on the basis of stress scenarios, which enable us to evaluate the effects of fluctuations in the default rates of the assets pledged as collateral taking into consideration the existing risk concentration in every portfolio.

3.3 Controlling credit risk

Credit risk management has the task of actively influencing the risk situation of the LLB Group. This is carried out using a limits system, risk-adjusted pricing, through the possibility of using risk hedging instruments and the specific repayment of credit commitments. Risk management is conducted both at the individual loan and at the portfolio level.

Risk limitation

The LLB Group has in place a comprehensive limits system to restrict credit risk exposure. In addition to the limitation of individual credit risks, to prevent risk concentrations, the LLB Group assigns limits for countries, segments and sectors.

Risk mitigation

To mitigate credit risk exposure, the LLB Group takes security mainly in the form of pledged assets and financial collateral. In the case of financial collateral in the form of marketable securities, we determine their collateral value by applying a schedule of reductions, the size of which is based on the quality,

Derivatives

The LLB Group may employ credit derivatives to reduce risks. This possibility has not been utilised in recent years.

3.4 Monitoring of credit risks

The organizational structure of the LLB Group ensures that the business divisions which cause the risks and those that evaluate, manage and monitor them are completely separated.

Individual credit risks are monitored by means of a comprehensive limits system. Infringements are immediately reported to the senior officer responsible.

3.5 Risk provisioning

Overdue claims

A claim is deemed to be overdue if a substantial liability from a borrower to the bank is outstanding. The overdraft begins on the date when a borrower exceeds an approved limit, has not paid interest or amortisation, or has utilised an unauthorised credit facility.

Default-endangered claims

Claims are regarded as being in danger of default if, on the basis of the client’s creditworthiness, a loan default can no longer be excluded in the near future.

Specific value allowances

Each impaired claim is individually assessed and the restructuring strategy as well as the estimate of future recoverable amounts are determined. An individual value allowance is allocated on the basis of this criteria.

General value allowances

A portfolio is classified as impaired on a collective basis, if there are objective indications that the portfolio contains impaired claims, which cannot however be determined individually.

3.6 Country risks

A country risk arises if specific political or economic conditions in a country affect the value of a foreign position. Country risk is composed of transfer risk (e. g. restrictions on the free movement of money and capital) and other country risks (e. g. country-related liquidity, market and correlation risks).

Country risks are controlled on the basis of a limits system and are continually monitored. Ratings provided by a recognised rating agency are utilised for certain individual countries.

3.7 Maximum credit risk without considering collateral

(XLS:) Download

in CHF thousands

31.12.2014

31.12.2013

Average

Credit risks from balance sheet transactions

 

 

 

Due from banks

5'773'872

6'082'003

5'927'938

Loans

 

 

 

mortgage loans

9'308'830

8'906'012

9'107'421

loans to public authorities

79'880

63'830

71'855

other loans

1'334'645

1'270'246

1'302'446

Trading portfolio

 

 

 

fixed interest securities

553

5'042

2'798

Derivative financial instruments

87'781

86'950

87'366

Financial investments at fair value

 

 

 

fixed interest securities

951'480

690'292

820'886

Total

17'537'041

17'104'375

17'320'710

 

 

 

 

Credit risks from off-balance-sheet transactions

 

 

 

Contingent liabilities

73'219

76'716

74'968

Irrecoverable commitments

255'362

101'878

178'620

Liabilities for calls on share and other equities

8'964

8'964

8'964

Total

337'545

187'558

262'552

The largest credit risk for the LLB Group – without taking into consideration collateral – arises from loans made to banks and loans made to customers. In the case of loans to customers, the majority of loans are secured by mortgages, which are granted to clients having first-class creditworthiness within the scope of the LLB Group’s lending policy. Thanks to the diversified nature of the collateral portfolio, containing properties in the Principality of Liechtenstein and in Switzerland, the risk of losses is reduced to a minimum. The LLB Group undertakes bank investments on both a secured and an unsecured basis. The risk of losses with loans to banks is restricted, on the one hand, through a broad distribution of risks, and on the other, by the strict minimum lending requirements applied to the counterparties. The three general investment principles apply, i.e. safety, liquidity and profitability.

3.8 Due from banks and loans

(XLS:) Download

 

31.12.2014

31.12.2013

in CHF thousands

Due from customers

Due from banks

Due from customers

Due from banks

Neither overdue nor value allowance made

10'448'399

5'773'741

10'004'411

6'081'553

Overdue but no value allowance made

96'199

130

90'994

4

Overdue, value allowance made (specific)

102'544

0

127'249

444

Default-stressed, value allowance made (specific)

184'772

0

161'151

47'688

Value allowance made (general)

1'129

1

1'485

0

Gross

10'833'043

5'773'872

10'385'290

6'129'689

Minus allowances (specific)

−109'688

0

−145'070

−47'686

Minus allowances (general)

0

0

−131

0

Net

10'723'355

5'773'872

10'240'089

6'082'003

(XLS:) Download
Due from banks and loans neither overdue nor allowances made

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total due from customers

Due from banks

31.12.2014

 

 

 

 

 

Investment Grade

4'222'413

0

566'612

4'789'025

4'331'534

Standard Monitoring

4'652'386

79'880

648'501

5'380'767

1'442'207

Special Monitoring

191'099

0

56'491

247'590

0

Sub-Standard

30'923

0

94

31'017

0

Total

9'096'821

79'880

1'271'698

10'448'399

5'773'741

 

 

 

 

 

 

31.12.2013

 

 

 

 

 

Investment Grade

4'361'969

26'851

617'107

5'005'927

4'331'854

Standard Monitoring

4'138'595

36'920

499'258

4'674'773

1'749'699

Special Monitoring

218'595

16

59'721

278'332

0

Sub-standard

41'134

0

4'244

45'378

0

Total

8'760'293

63'787

1'180'330

10'004'410

6'081'553

(XLS:) Download
Loans overdue but no allowances made

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total due from customers

31.12.2014

 

 

 

 

Overdue by up to 30 days

52'737

0

34'256

86'993

Overdue 31 to 60 days

0

0

2'748

2'748

Overdue 61 to 90 days

0

0

6'458

6'458

Total

52'737

0

43'462

96'199

 

 

 

 

 

31.12.2013

 

 

 

 

Overdue by up to 30 days

35'069

43

46'613

81'725

Overdue 31 to 60 days

0

0

8'826

8'826

Overdue 61 to 90 days

0

0

443

443

Total

35'069

43

55'882

90'994

(XLS:) Download
Loans with specific allowances

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total due from customers

Due from banks

31.12.2014

 

 

 

 

 

Overdue Claims

30'816

0

71'728

102'544

0

Default-distressed claims

159'763

0

25'009

184'772

0

Fair value of cover

−159'232

0

−18'396

−177'628

0

Total specific value allowances

31'347

0

78'341

109'688

0

 

 

 

 

 

 

31.12.2013

 

 

 

 

 

Overdue claims

19'803

0

107'446

127'249

444

Default-distressed claims

122'796

0

38'355

161'151

47'688

Fair value of cover

−110'635

0

−32'695

−143'330

−446

Total specific value allowances

31'964

0

113'106

145'070

47'686

Newly agreed loans

Newly agreed loans are not substantial.

3.9 Overdue and default-distressed claims by geographical area

(XLS:) Download

 

31.12.2014

31.12.2013

in CHF thousands

Default- distressed claims

Overdue claims

Specific value allowance

Default- distressed claims

Overdue claims

Specific value allowance

Liechtenstein and Switzerland

178'452

127'166

63'898

144'973

126'924

89'361

Europe ex­cluding FL / CH

32

21'440

10'729

9'628

38'178

27'339

North America

0

1'094

0

0

989

0

Asia

6'288

1'852

6'851

54'238

6'594

54'232

Others

0

47'321

28'210

0

46'006

21'824

Total

184'772

198'873

109'688

208'839

218'691

192'756

3.10 Debt instruments

(XLS:) Download

in CHF thousands

31.12.2014

31.12.2013

+/– %

*

The average interest rate per 31 December 2014 was 0.97 percent and per 31 December 2013 was 1.17 percent.

Medium-term notes *

417'160

428'797

−2.7

Shares in bond issues of the Swiss Regional or Cantonal Banks’ Central Bond Institutions

735'800

698'800

5.3

Total debt issued

1'152'960

1'127'597

2.2

3.11 Taken over collateral

(XLS:) Download

 

2014

2013

in CHF thousands

Financial investments

Real estate / properties

Total

Financial investments

Real estate / properties

Total

As at 1 January

0

0

0

82

0

82

Additions / disposals

0

0

0

0

0

0

Profit / loss

0

0

0

−82

0

−82

As at 31 December

0

0

0

0

0

0

Taken over collateral is disposed of again as soon as possible and recognised in other assets or financial investments or the trading portfolio.

3.12 Risk concentration

(XLS:) Download
Risk concentration by regions

in CHF thousands

Liechtenstein and Switzerland

Europe excluding FL / CH

North America

Asia

Others *

Total

*

None of the categories summarised in the position “Others” exceeds 10 percent of the total volume.

31.12.2014

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

2'024'758

3'658'961

56'259

6'703

27'191

5'773'872

Due from customers

 

 

 

 

 

0

mortgage loans

9'273'733

35'097

0

0

0

9'308'830

loans to public authorities

79'880

0

0

0

0

79'880

other loans

944'904

71'585

2'727

119'855

195'574

1'334'645

Trading portfolio

 

 

 

 

 

0

fixed interest securities

0

0

0

50

503

553

Derivative financial instruments

69'995

16'400

56

647

683

87'781

Financial investments at fair value

 

 

 

 

 

0

fixed interest securities

241'398

518'676

64'159

23'380

103'867

951'480

Total

12'634'668

4'300'719

123'201

150'635

327'818

17'537'041

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

61'588

3'676

0

4'436

3'519

73'219

Irrevocable commitments

255'322

12

0

28

0

255'362

Liabilities from calls on shares and other equities

8'964

0

0

0

0

8'964

Total

325'874

3'688

0

4'464

3'519

337'545

 

 

 

 

 

 

 

31.12.2013

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

2'284'306

3'723'523

70'005

1'275

2'894

6'082'003

Due from customers

 

 

 

 

 

 

mortgage loans

8'950'722

−39'660

0

−5'050

0

8'906'012

loans to public authorities

63'830

0

0

0

0

63'830

other loans

800'511

81'711

2'643

195'189

190'192

1'270'246

Trading portfolio

 

 

 

 

 

 

fixed interest securities

160

3'537

0

583

762

5'042

Derivative financial instruments

65'161

20'107

4

797

881

86'950

Financial investments at fair value

 

 

 

 

 

 

fixed interest securities

198'490

398'027

46'155

13'306

34'314

690'292

Total

12'363'180

4'187'245

118'807

206'100

229'043

17'104'375

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

65'979

3'613

18

3'790

3'316

76'716

Irrevocable commitments

101'028

800

0

0

50

101'878

Liabilities from calls on shares and other equities

8'964

0

0

0

0

8'964

Total

175'971

4'413

18

3'790

3'366

187'558

(XLS:) Download
Risk concentration by sectors

in CHF thousands

Financial services

Real
estate

Private households

Others *

Total

*

None of the categories summarised in the position “Others” exceeds 10 percent of the total volume.

31.12.2014

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

Due from banks

5'773'872

0

0

0

5'773'872

Due from customers

 

 

 

 

 

mortgage loans

97'831

1'239'981

6'828'963

1'142'055

9'308'830

loans to public authorities

4'863

0

0

75'017

79'880

other loans

496'933

28'112

372'075

437'525

1'334'645

Trading portfolio

 

 

 

 

 

fixed interest securities

0

0

0

553

553

Derivative financial instruments

62'179

304

15'072

10'226

87'781

Financial investments at fair value

 

 

 

 

 

fixed interest securities

564'440

10'890

0

376'150

951'480

Total

7'000'118

1'279'287

7'216'110

2'041'526

17'537'041

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

Contingent liabilities

21'768

6'540

13'717

31'194

73'219

Irrevocable commitments

30'746

29'054

167'862

27'700

255'362

Liabilities from calls on shares and other equities

8'964

0

0

0

8'964

Total

61'478

35'594

181'579

58'894

337'545

 

 

 

 

 

 

31.12.2013

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

Due from banks

6'065'735

0

16'268

0

6'082'003

Due from customers

 

 

 

 

 

mortgage loans

106'995

1'048'515

6'672'317

1'078'185

8'906'012

loans to public authorities

4'297

0

0

59'533

63'830

other loans

509'018

52'581

354'077

354'570

1'270'246

Trading portfolio

 

 

 

 

 

fixed interest securities

1'541

0

0

3'501

5'042

Derivative financial instruments

69'294

116

14'170

3'370

86'950

Financial investments at fair value

 

 

 

 

 

fixed interest securities

429'301

11'000

0

249'991

690'292

Total

7'186'181

1'112'212

7'056'832

1'749'150

17'104'375

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

Contingent liabilities

23'378

3'603

13'959

35'776

76'716

Irrevocable commitments

20'672

20'803

38'667

21'735

101'878

Liabilities from calls on shares and other equities

8'964

0

0

0

8'964

Total

53'014

24'406

52'626

57'511

187'558

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