Information checkedInformation geprüft Notes to the consolidated balance sheet

Further information, especially regarding the expected credit loss, is provided in chapter 3 “Credit risk” in Risk management.

Within the scope of balance sheet management, interest rate swaps are concluded to hedge interest rate fluctuation risks. Financial instruments are employed primarily within the scope of client business. Here both standardised and OTC derivatives are traded. International banks having a high creditworthiness act as counterparties. LLB does not assume a market-maker function on the interbank market.

The LLB Group employs fair value hedge accounting for interest rate risks on fixed-rate instruments. For this purpose, it uses interest rate swaps. The following tables show information on the nominal value (contract volumes), the replacement values and the ineffectiveness of the positions in hedge accounting.

The equity instruments recognised at fair value through other comprehensive income consist of strategic investments of an infrastructure nature, which are not exchange-listed, as well as various instruments of the Swiss Market Index (SMI), which replicate them in the same weighting. Short-term profit-taking is not the focus with the equity instruments recognised at fair value through other comprehensive income, rather they represent a long-term position, which pursues the collection of dividends and long-term capital appreciation.

In the accounting period, the securities that replicate the SMI were rebalanced because the weighting of the individual securities within the SMI had shifted. The sale of the securities resulted in a loss of CHF thousands 215; the fair value of the transactions amounted to CHF thousands 6'645. The loss of CHF thousands 215 was recognised in retained earnings.

The LLB Group as lessee

Details of leases are provided in various notes. Further details about leases, apart from in this note, can be found for the repayment of leasing liabilities (see Statement of cash flows and note 24) as well as their amounts (note 27), maturities (see Risk management, chapter 2), interest expenses (see note 1) and depreciation (see note 8).

Leasing relationships not recognised in the balance sheet

Expenses from unrecognised leases are included in general and administrative expenses.

Further information

Within the scope of its strategy, the LLB Group evaluates which locations have relevance in its target markets and whether properties should be bought or leased at these locations. If it decides against the purchase of properties, leasing contracts are concluded. These often contain termination and extension options. The assessment of these options is taken into consideration at the time of initial recognition; they are reassessed annually.

The recognised liabilities from leasing contracts and the corresponding rights of use contain extension options. These reflect the current assumptions relating to durations. The off-balance sheet leasing contracts encompass office premises with short contract periods, as well as parking places, which contain reciprocal short-term termination options. These are basically classified as short-term leases provided there is substitutability for them.

The LLB Group as lessor

Future claims from operating leases

For the 2020 business year CHF thousands 1’799 and for the 2019 business year CHF thousands 1’819 from operating leases are reported in other income. Only properties are leased.

The investment property is held solely for the purpose of capital appreciation.

Goodwill

The LLB Group carried goodwill for the following cash generating units:

Goodwill impairment testing

Goodwill is tested for impairment annually in the third quarter as a basis for the annual financial reporting at 31 December, and also as required. In order to determine a possible impairment, the recoverable amount of each cash generating unit which carries goodwill is compared with its balance sheet value. According to the calculations made, the recoverable amount of a cash generating unit always corresponds to the value in use. The balance sheet value or carrying value comprises equity before goodwill and intangible assets, as well as goodwill and intangible assets from the underlying purchase price allocation of this cash generating unit.

On the basis of the impairment testing carried out, management reached the conclusion that for the year ended on 31 December 2020, the total goodwill of CHF 163.3 million allocated to the cash generating units remains recoverable. No impairment of goodwill has to be recognised because the recoverable amount exceeds the carrying value.

Recoverable amount

For determining the value in use, which corresponds to the recoverable amount of the respective cash generating units, the LLB Group employs a discounted cash flow (DCF) valuation model. It takes into consideration the special characteristics of the banking business and the financial services sector, as well as the regulatory environment. With the aid of the model, and on the basis of the financial planning approved by management, the cash value of estimated free cash flow is calculated. If regulatory capital requirements exist for the cash generating unit, these capital requirements are deducted from the estimated free cash flows for the respective period. This amount, adjusted for regulatory capital requirements, then corresponds to the theoretical sum that could be paid out to the shareholders. For the assessment of the forecasted earnings, management employs approved financial plans covering a period of five years. The results for all periods after the fifth year are extrapolated from the forecasted result and the free cash flows of the fifth year with a long-term growth rate, which corresponds to the long-term inflation rate of the functional currency of the tested cash generating unit. These are the inflation rates of Switzerland, Liechtenstein and Austria. Under certain circumstances, the growth rates may vary for the individual cash generating units because the probable developments and conditions in the respective markets are taken into account.

Assumptions

As far as possible, the parameters on which the valuation model is based are coordinated with external market information. In this context, the value in use of a cash generating unit is most sensitive to changes in the forecasted earnings, changes to the discount rate and changes in the long-term growth rate. The discount rate is determined on the basis of the capital asset pricing model (CAPM), which contains a risk-free interest rate, a market risk premium, a small cap premium, as well as a factor for the systematic market risk, i.e. the beta factor.

The long-term growth rate outside the five-year planning period (terminal value), on which the impairment tests for the annual report as at 31 December 2020 were based and which were used for extrapolation purposes, as well as the discount rate for the cash generating units are shown in the table below.

The discount rate is directly influenced by the movement of interest rates. On account of the unchanged, historically low interest rate levels on the market, the discount rate of the cash generating unit has not changed substantially in comparison with the previous year. In a longer-term comparison, the present interest rate environment is also reflected in substantially lower interest income as well as corresponding lower annual earnings and free cash flows distributable to shareholders. On account of the fact that the discount rate is linked to current interest rate levels, when the latter rise, the discount rate, and interest income, will also rise. The cash generating units are exposed to only a limited level of risk because they operate in a local market, and in retail and private banking as well as in the institutional business with a limited risk profile.

Sensitivities

During the periodic preparation and carrying out of impairment tests, all the parameters and assumptions, on which the testing of the individual cash generating units are based, are reviewed and, if necessary, adjusted. A change in the risk-free interest rate in essence has an influence on the discount rate, whereby a change in the economic situation, especially in the financial services industry, also has an impact on the expected or estimated results. In order to check these effects on the value in use of the individual cash generating units, the parameters and assumptions employed with the valuation model are subjected to an individual sensitivity analysis. For this purpose, the forecasted free cash flow attributable to shareholders is changed by 10 per cent, the discount rate by 10 per cent and the long-term growth rates also by 10 per cent. According to the results of the impairment tests carried out and, based on the assumptions described, an amount of between CHF 27 million and CHF 222 million in excess of the balance sheet value is obtained for all cash generating units. A reduction of the free cash flow by 10 per cent, or an increase in the discount rate of 10 per cent, or a reduction in the long-term growth rate of 10 per cent would not result in any impairment of the goodwill.

Over the last five years, the parameters have remained very constant. In the 2020 business year, adjustments were made for the discount interest rate and also for the growth rates of Liechtensteinische Landesbank (Österreich) AG. Since a constant development of the parameters is also expected in the future, the sensitivities of 10 per cent for each of the three parameters is regarded as reasonable.

In view of the challenging situation in the financial industry, which is expected to persist in the future, an impairment of goodwill in the coming financial years can not be ruled out. However, thanks to measures to increase earnings, improve efficiency and cut costs as well as the further planned growth, a positive development is expected over the medium to long term.

If the estimated earnings and other assumptions in future financial years deviate from the current outlook due to political or global risks in the banking industry (for example, due to uncertainty in connection with the implementation of regulatory provisions and the introduction of certain legislation, or a decline in general economic performance) this could result in an impairment of goodwill in the future. This would lead to a reduction in the income statement of the LLB Group and a decrease in the equity attributable to shareholders and net profit. Such an impairment would not, however, have an impact on cash flows or on the tier 1 ratio because, in accordance with the Liechtenstein Capital Adequacy Ordinance, goodwill must be deducted from capital.

Client relationships and brand values

Client relationships and brand values are assets, which are acquired and capitalised within the scope of an acquisition. These are amortised over a period of 15 years on a straight-line basis. Estimated aggregated amortisation amounts to:

The mortgage loans are pledged as collateral for shares in bond issues of the Swiss Regional or Cantonal Banks' Central Bond Institutions.

The financial assets are pledged for Lombard limits at national and central banks, for stock exchange deposits and to secure other business activities.

The bridging loans granted in the course of the corona pandemic and guaranteed by the Swiss Confederation were pledged to the Swiss National Bank as loans and advances to customers for refinancing purposes.

As per 31 December 2020, there were no temporary differences which were not reported as deferred taxes and which in future could be offset with potential tax allowances (previous year: CHF thousands 0). As per 31 December 2020, there were tax losses carried forward of CHF 98 million, which were not recognised as deferred tax assets (previous year: CHF 125 million). They expire within the next five years. In general, tax losses in Switzerland can be carried forward for seven years; in the Principality of Liechtenstein and Austria they can be carried forward for an unlimited period.

Provisions for legal and litigation risks

In a case against LLB Verwaltung (Switzerland) AG, formerly Liechtensteinische Landesbank (Switzerland) AG, a settlement was reached with the claimants in May 2020. As a result of this settlement, LLB Verwaltung (Switzerland) AG was able to write back provisions amounting to CHF 3.7 million as at 31 December 2020. It will assert its claims against the insurance company.

Provisions for other risks and restructuring measures

In the 2020 business year, the LLB Group had allocated provisions for restructuring measures. These relate to various strategic initiatives, and in particular, to the StepUp2020 strategy of the LLB Group announced in October 2015. Provisions were set aside for the estimated costs of the corresponding social plans for employees.

In addition, there are provisions for a service agreement for the use of the Tambas banking software, which will be used for the intended purpose until the end of 2021. The banking software is no longer being used, but the service contract remains in place until the end of 2021.

Share entitlements at the LLB

Risk takers whose decisions have a significant impact on the bank's risk profile and other employees in selected salary models receive part of their variable salary component paid out in share entitlements. The variable component of compensation depends on individual target achievement and the relative equity performance of the LLB. The share component of the variable compensation of risk takers is at least 50 per cent, of the other employees at least 40 per cent. The number of shares for the share-based remuneration is calculated from the average market price of the 4th quarter of the business year.

The shares are granted in March or April of the following year. At the grant date, the number of shares is recognised in equity at the current market value as an entitlement. After granting, the shares are blocked for 3 years and are then transferred to the employees.

In 2020, share entitlements of CHF 2.0 million (37'270 shares at an average price of CHF 53.80) were earned and recognised in personnel expenses. In the previous year, it was CHF 2.8 million (43'427 shares at an average price of CHF 63.50).

30 Treasury shares

From the Group’s perspective, the minorities are considered immaterial, so that no further disclosures are made in the annual report. From an individual company perspective, the minority interests of Bank Linth are of a certain relevance. For further information, see the annual report of Bank Linth.

Measurement guidelines

The fair value represents a market-based measurement and not an entity-specific valuation. It is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date on the principal market or the most advantageous market.

As far as possible, the fair value is determined on the basis of the quoted market prices in active markets accessible to the company on the measurement date. An active, accessible market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The fair value is determined using significant and observable inputs. These are basically available in the case of quoted assets or liabilities. If a market for financial or non-financial assets or liabilities is inactive, or if no observable inputs, or insufficient observable inputs, are available, the LLB Group must employ techniques or processes (valuation methods or models) to determine the fair value. The valuation techniques contain assumptions, including estimates, to enable an exit price on the measurement date from the perspective of the market participant to be determined. However, such assumptions and estimates contain uncertainties, which at a later date can lead to substantial changes in the fair value of financial and non-financial assets and liabilities. In the case of financial and non-financial assets and liabilities for which a valuation technique involving non-observable market data is used to determine the fair value, these are measured at the transaction price. This fair value can differ from the fair value calculated on the basis of valuation techniques.

All financial and non-financial assets and liabilities, which possess a fair value and qualify, are assigned to one of the following three levels of the fair values hierarchy:

Level 1

The fair value of listed debt instruments and equity instruments in the financial assets is determined on the basis of market price quotes on an active market.

Level 2

If no market price quotes are available, the fair value is determined by means of valuation methods or models which are based on assumptions made on the basis of observable market prices and other market quotes.

Level 3

For the remaining financial instruments, neither market price quotes nor valuation methods or models based on market prices are available. Valuation models or methods with non-observable input factors are employed for these instruments.

Valuation methods

Valuation methods and techniques are employed to determine the fair value of financial and non-financial assets and liabilities for which no observable market prices on an active market are available. These include, in particular, illiquid financial investments. If available, the LLB Group uses market-based assumptions and inputs as the basis for valuation techniques. If such information is not available, assumptions and inputs from comparable assets and liabilities are employed. In the case of complex and very illiquid financial and non-financial assets and liabilities, the fair value is calculated using a combination of observable transaction prices and market information.

The LLB Group employs standardised and accepted valuation techniques or takes over the fair values evaluated by third parties to determine the fair value of financial and non-financial assets and liabilities which are not actively traded or listed. It essentially uses the following valuation methods or techniques and input factors: