Letter to shareholders
Dear ladies and gentlemen
The turbulent financial markets present the banks with great challenges. At the beginning of 2012, the economic basic conditions had become substantially more stable. Unfortunately, the quiet phase on the financial markets did not last long. By early summer, the international economic situation presented a picture characterized by significant risks. The EU debt crisis flared up again on the financial markets. International monetary policy remained expansive. Investors continued to practice restraint. However, this market environment also provides opportunities for all those who know how to implement the process of change rapidly and consistently. This is the path that the LLB Group is determined to follow. In the first half of 2012, we took several important steps along the path.
Good mortgage lending business
By mid 2012, client assets had attained a total of CHF 48.7 billion (31 December 2011: CHF 48.1 billion). The increase of 1.2 percent is attributable to the positive market performance. During the first half of 2012, the LLB Group posted a net new money inflow of CHF 2 million (30 June 2011: CHF 529 million).
In a difficult market environment, the LLB Group successfully consolidated its traditionally strong position in lending business. Loans to clients rose by 3.2 percent to CHF 10.7 billion (31 December 2011: CHF 10.3 billion). The ongoing dynamic real estate market in Liechtenstein and in eastern Switzerland prompted a further rise in mortgage loans of 1.6 percent to CHF 8.8 billion (31 December 2011: CHF 8.7 billion).
The increase in interest differential business of 7.0 percent to CHF 98.5 million (30 June 2011: CHF 92.1 million) was gratifying. On account of lower investment volumes and fewer securities transactions net fee and commission income fell by 4.1 percent to CHF 103.1 million (30 June 2011: CHF 107.6 million). Net trading income was up by 3.3 percent to CHF 5.1 million (30 June 2011: CHF 4.9 million). Net income from financial investments at fair value through profit and loss climbed substantially to CHF 22.1 million (30 June 2011: minus CHF 6.3 million).
Operating expenses decreased by 2.0 percent to CHF 164.1 million (30 June 2011: CHF 167.4 million). Personnel expenses fell by 19.9 percent to CHF 75.0 million (30 June 2011: CHF 93.6 million). This was attributable to a one-time reduction in pension funding costs of CHF 19.8 million as a result of the change over to a defined contribution plan by the Personnel Pension Fund Foundation of LLB AG.
At the end of June 2012, the LLB Group’s general and administrative expenses stood at CHF 42.5 million, 0.3 percent lower than in the first six months of 2011 (30 June 2011: CHF 42.7 million). Allowances, provisions and losses amounted to CHF 28.8 million (30 June 2011: CHF 12.7 million). The Cost-Income-Ratio stood at 57.8 percent (30 June 2011: 75.3 %).
Group net profit totalled CHF 61.6 million (30 June 2011: CHF 34.3 million), corresponding to an increase of 79.9 percent.
Solid equity capital base
The bank’s equity capital base represents an essential cornerstone for its business activity. During the first half year this expanded by 0.6 percent to CHF 1.7 billion (31 December 2011: CHF 1.6 billion). With a tier 1 ratio of 13.6 percent, the LLB Group has a high level of financial stability in a cross-industry comparison. The bank’s equity capital consists solely of hard core capital. With its solid equity capital base, the LLB is already above the level specified for 2013 by Basel III, the international capital adequacy standard.
Development of the LLB bearer share
The Principality of Liechtenstein continues to hold 57.5 percent of the LLB share capital. The share price closed on 30 June 2012 at CHF 34.00 (30 June 2011: CHF 75.40; 31 December 2011: CHF 41.50). This represents a loss of 54.7 percent (dividend reinvested) compared with the previous year. In comparison, the Stoxx Europe 600 Bank Index (Total Return) in CHF fell by 27.6 percent and the SWX Banking Index fell by 29.4 Percent.
The development of the LLB share listed on the SIX Swiss Exchange corresponds with the general situation. Bank shares had already come under heavy pressure in 2011, and during the first half of 2012, the prospects for the banking sector remained difficult. Moreover, the LLB share fell sharply as a result of the publication of the 2011 interim financial statement, the information about the specific allowance of a Lombard loan at the end of September 2011 as well as the unsatisfactory 2011 business result.
Consistent realization of three-pillar strategy
Our three-pillar strategy targets growth in Liechtenstein and Switzerland, as well as the opening up of new markets. In view of the structural changes, which the banking industry is currently undergoing, having several pillars of business also provided us with a sound foundation in the first half of 2012.
In the Domestic Market Business Segment, which encompasses the universal banking and asset management business in our home markets of Liechtenstein and Switzerland, the LLB Group posted a net new money inflow of CHF 140 million (30 June 2011: CHF 262 million). At the same time, mortgage loans attained a new record level. The real estate market in Liechtenstein and eastern Switzerland has developed on the basis of the stable economic situation. However, since the beginning of the year, there are increasing signs of higher risks in some regions of Switzerland. We are very carefully monitoring the development on the mortgage market and are adhering to our well-proven lending policy principles.
Interest rates for mortgage loans are stalled at an historically low level while at the same time the interest margin remains under strong pressure due to intense competition.
Our International Market Business Segment is responsible for the international private banking of the LLB Group. The market environment in international private banking continued to be demanding in the first half year of 2012. Investors were uncertain and cautious, which was reflected in the lower level of client activity. Furthermore, sharply increased regulatory costs squeezed profitability. At the same time, wealthy private clients were considerably more cautious and cost-conscious as a result of the unclear trends on the financial markets. The focus now is on asset protection. The net new money inflow amounted to CHF 26 million (30 June 2011: CHF 86 million). The major proportion of allowances was made in this segment, which led to a loss being incurred.
In the Institutional Market Business Segment, which encompasses the classical intermediary and investment fund business as well as asset management, we posted a net new money outflow of CHF 50 million in the first six months of 2012. This was dallowancesue to the withdrawal of assets by individual public institutions. As per 30 June 2012, we managed 246 custodian bank mandates (30 June 2011: 234) with a total volume of CHF 9.0 billion (30 June 2011: CHF 9.2 billion). We are constantly expanding our private labelling services in order to enhance our competitiveness within the fund industry. In a parallel step we are also optimizing our processes in order to offer our clients state-of-the-art solutions in a rapidly changing regulatory environment.
The Liechtenstein investment fund center is well on the way to becoming an attractive location for alternative investment funds such as private equity funds and hedge funds. Consequently, Liechtenstein is rapidly implementing the EU directive for alternative investment fund managers (AIFM).
The LLB is adapting to the changes in the competitive environment. During the first half year, we started implementing our cost-saving and efficiency improvement program, which encompasses around 50 measures. Among other steps, since 4 June 2012, we have concentrated payment systems, securities trading and administration for the LLB Group in a shared service center at the Group headquarters in Vaduz. We are also optimizing IT operations and setting up competence centers to exploit synergy effects. The realization of our cost-saving and efficiency improvement program went according to plan in the first half of 2012. This will enable us to gradually reduce our cost base by a total of CHF 30 million by the end of 2014.
At the same time, we have optimized our organizational structure with effect from 1 July 2012. The Group Executive Management is now structured into three market divisions: Retail & Corporate Banking, Private Banking as well as Institutional Clients. Besides the Group Chief Executive Officer, the Group Chief Financial Officer and the Group Chief Operating Officer are positioned on this level. Since 1 July 2012, our subsidiaries have been more closely involved in the Group’s management processes. This leads to faster and more efficient operative management at the Group level.
Furthermore, we are reducing the complexity of the LLB Group. In future we will assign a higher priority to concentrating on our core competences. In mid January 2012, we announced that we intended to sell our participation in the asset management company, swisspartners Investment Network AG. The sales process has not yet been concluded.
Election of members of the Board of Directors
The 20th annual general meeting of the shareholders of Liechtensteinische Landesbank AG held on 4 May 2012, elected Board of Directors Chairman, Dr. Hans-Werner Gassner, for a third term of office and confirmed Markus Foser, Markus Büchel and Roland Oehri as members of the Board of Directors for a further three years.
Changes to the Group Executive and Management Boards
For personal reasons, Dr. Josef Fehr stood down as Chairman of the Group Executive and Management Board of the LLB from 16 January 2012. The Board of Directors appointed his former deputy, Roland Matt, as Group Chief Executive Officer and promoted Christoph Reich to Group Chief Financial Officer and member of the Group Executive and Management Board. Within the context of the new organizational structure, the Group Executive and Management Boards comprise six members. The Retail & Corpo rate Banking Market Division is headed by Dr. Heinz Knecht, the Private Banking Market Division will be headed by Dr. Gabriel Brenna from 1 October 2012, and the Institutional Clients Market Division is managed by lic.iur. Urs Müller, who has also been appointed as Deputy Group CEO by the Board of Directors. As Group Chief Operating Officer, Dr. Kurt Mäder is responsible for infrastructure and services functions of the LLB Group.
US taxations issues
An application for administrative assistance submitted by the USA formed a central issue during the first half of 2012. On 1 May 2012, the revised administrative assistance law with the USA came into force. On the basis of this law, in mid May 2012, the U.S. Department of Justice submitted an application for administrative assistance to the Liechtenstein Tax Administration. In turn, the Liechtenstein tax authorities notified LLB AG and requested LLB AG to disclose US client data. LLB AG delivered the required data to the Liechtenstein Tax Administration.
These data concern US clients of Liechtensteinische Landesbank AG, Vaduz. The data of other banks of the LLB Group are not affected. The United States is not and never has been a strategic target market of the LLB Group; the proportion of US clients never accounted for more than about one percent of all client relationships.
The LLB is maintaining close cooperation with the authorities in Liechtenstein, Switzerland and the USA, and is striving to achieve an efficient and conclusive resolution of the matter while complying with the prevailing legal provisions.
At the beginning of 2012, the Liechtenstein Financial Market Authority (FMA) commenced an investigation into the US client business of the Liechtensteinische Landesbank. In mid August 2012, the FMA issued a decree to the LLB and then closed its investigation. In the decree the FMA instructed the LLB to make organizational adjustments to its groupwide risk management. The FMA did not impose any further sanctions or penalties.
Focus on clients and markets
The business environment remains challenging. The LLB Group is a long-established financial services company, whose future development is supported by a solid capital base. It adopts an active and focused approach to shaping its future. Thanks to the measures implemented in the first half of 2012, it is aligning its structure and services even more resolutely on the requirements of its clients and the changes in the markets. We are certain that our new organizational structure as well as the cost-saving and efficiency improvement program will contribute to a sustained strengthening of our competitiveness.
We would like to express our sincere thanks to you, our shareholders, for the trust you place in us. What the LLB has achieved was made possible by the loyalty of our shareholders and clients, as well as our staff, who give their best every day.
Dr. Hans-Werner Gassner