Information checkedInformation unaudited Information geprüft Information ungeprüft Notes to the consolidated balance sheet

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

Interest rate swaps are concluded to hedge against interest rate fluctuation risks. In addition, derivative financial instruments are employed primarily within the scope of client business. In this case, both standardised and OTC derivatives are traded. International banks having a high creditworthiness serve as counterparties. LLB does not assume a market-maker role on the interbank market. The tables in this note contain information about the nominal value (contract volume), about the replacement values and about the hedge accounting positions.

Within the scope of fair value hedge accounting, the LLB Group employs interest rate swaps for interest rate risks on fixed-rate instruments. Ineffectiveness in highly effective hedge accounting positions occurs as a result of small mismatches in the risk profile, for example, differing payment dates or divergences in the term of the instruments amounting to a few days. Furthermore, different sensitivities in the underlying transactions and hedging instruments play a role, for example, major changes in the value of the front leg of the swap, for which there is no corresponding sensitivity in the underlying transaction. There are basic risks, which could have an influence on the effectiveness, such as different benchmark curves for the underlying and hedging transactions. In general, the LLB Group uses identical benchmark curves, however special situations such as the IBOR changeover could mean that a different approach is taken. Since the LLB Group utilises a macro hedge accounting concept, mortgage loans and medium-term notes represent the whole population of possible hedge accounting transactions. The population corresponds to the carrying amounts of the balance sheet items of the hedged items. Of these, only a portion is designated in the hedge accounting relationship. The designation between underlying transaction and hedging instrument is carried out with the aid of an optimisation algorithm, which determines the interest risk profile of the sub-portfolios in order to attain an optimal hedge allocation.

The equity instruments recognised at fair value through other comprehensive income consist of strategic investments of an infrastructure nature, which are not exchange-listed (see note 33), as well as various equities of the Swiss Market Index (SMI). Short-term profit-taking is not the focus with equity instruments recognised at fair value through other comprehensive income, rather they represent a long-term position which pursues the collection of dividends and a long-term appreciation in value.

During the reporting period, adjustments were made in the portfolio of SMI equities because the weighting of individual SMI securities had changed. The disposals resulted in a loss of CHF thousands 141 (previous year: minus CHF thousands 80). The fair value of the transactions amounted to CHF thousands 6'955 (previous year: CHF thousands 752). The loss was recognised directly in retained earnings.

The LLB Group as lessee

Further details regarding leases, besides this note, are provided for the repayment of leasing liabilities (see Statement of cash flows and note 23) as well as their amounts (note 26), maturities (see Risk management, chapter 2) and interest expenses (see note 1).

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 business locations are relevant in its target markets, and whether properties should be purchased or rented at these locations. If the LLB Group decides against the purchase of properties, leasing contracts are concluded. These frequently contain termination and extension options. The assessment of these options is considered at the time of initial recognition. They are reassessed only if a significant event occurs.

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

Income from operating leases is a part of other income and amounted to CHF thousands 1'676 (2021: CHF thousands 1'687). Properties are only leased.

Goodwill

With the introduction of ACT-26, from 1 January 2022, the goodwill reported in earlier years of cash generating units was reallocated to the newly created segment structure. The reallocation was necessary in order for impairment testing to be carried out at the lowest level at which goodwill is now monitored by management following the adjustment of the segment structure. The reallocation was made in accordance with IAS 36 “Impairment of Assets”, according to which the new cash generating units are to correspond to the lowest level at which impairment testing can be performed. The following table shows the reallocation of existing goodwill to the new cash generating units, as well as the amount of individual goodwill on the relevant reporting dates.

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.

Following the reallocation of goodwill to the new cash generating units, an impairment test was performed on the reporting date 1 January 2022. This confirmed the intrisic value of the goodwill.

On the basis of the impairment testing carried out, management reached the conclusion that for the year ended on 31 December 2022, the total goodwill of CHF 154.8 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. These are the inflation rates of Switzerland and Liechtenstein. 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, and when available, 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 reacts in the most sensitive manner to changes in the forecasted earnings, changes to the discount rate and changes in the long-term growth rate. The forecasted earnings are based on an economic scenario, whose input factors are the projected interest rate, currency and stock market developments, as well as the sales planning of the individual market divisions. 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 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 2022 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.

Sensitivities

All the parameters and assumptions, on which the testing of the individual cash generating units are based, are reviewed and, if necessary, adjusted during the periodic preparation and conducting of impairment tests. In order to check the effects of parameter adjustments on the value in use of the individual cash generating units, the parameters and assumptions used with the valuation model are subjected to an individual sensitivity analysis. For this purpose, the forecasted free cash flow 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 performed, and based on the assumptions described, an amount of between CHF 379.1 million and CHF 630.6 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. 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 are regarded as reasonable.

In view of the uncertain economic situation, 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

Client relationships 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 repurchase agreements, stock exchange deposits, lombard limits at national and central banks and to secure other business activities.

The following table contains further information on the bonds issued:

As per 31 December 2022, 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).

Estimates and assumptions are made to assess the amount of provisions required. However, such estimates and assumptions can mean that substantial uncertainties could exist in relation to the occurrence of the events for which provisions were allocated.

Provisions for legal and litigation risks

In the 2022 business year, the LLB Group utilised provisions for legal and litigation risks totalling CHF 2.0 million and released CHF 0.7 milllion for the purpose of settling two legal disputes. As a result of two new legal cases in Liechtenstein and Austria, the LLB Group allocated new provisions for legal and litigation risks totalling CHF 5.2 million.

Provisions for other risks and restructuring measures

In the 2022 business year, the LLB Group utilised provisions amounting to CHF 0.5 million and released a net CHF 0.3 million for the purpose of restructuring measures. At 31 December 2022, the total amount of these provisions stood at CHF 3.7 million.

There were no contingent liabilities in connection with legal and litigation risks.

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.

In 2022, share entitlements of CHF 2.5 million (45'534 shares at an average price of CHF 54.99) were earned and recognised in personnel expenses. In the previous year, it was CHF 2.4 million (44'810 shares at an average price of CHF 52.47).

Within the scope of the acquisition of non-controlling interests in Bank Linth LLB AG, Liechtensteinische Landesbank AG purchased its own shares because a portion of the purchase price was to be compensated with treasury shares. Details can be seen in the accounting principles in chapter 2.1.1 and in the consolidated statement of changes to equity.

The remaining portion of disposals of around 53'000 shares relates to the transfer of acquired share entitlements to the eligible employees of the LLB Group following the blocking period of three years. Only earned shares were transferred, no cash funds were paid out. The average price per share amounted to CHF 64.71 (previous year: CHF 64.71). The proportion of share capital transferred to employees was 0.2 per cent (previous year: 0.2 %).