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 stabilisation of expected returns.

3.1 Credit risk management

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

Basically, the LLB Group conducts its lending business for private and corporate clients on a secured basis. 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.

In addition, the LLB Group conducts lending business with banks on a secured and unsecured basis, whereby individual risk limits are approved for every counterparty.

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.

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.

(XLS:) Download
Rating classes (master scale)

LLB rating

 

Description

 

External rating (Moody’s) **

*

Non-rated loans are covered and subject to limits.

**

For the securitisation of credit risks in the standard approach, the LLB Group employs solely the external ratings of a recognised rating agency (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

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 restriction

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, liquidity, volatility, and complexity of the separate instruments.

Derivatives

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

3.4 Monitoring and reporting of credit risks

The organisational structure of the LLB Group ensures that departments 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.

Specific valuation allowances are made for claims that are overdue by more than 90 days.

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 these criteria.

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

 

31.12.2016

 

31.12.2015

 

Average

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

 

3'114'861

 

4'254'074

 

3'684'468

Loans

 

 

 

 

 

 

Mortgage loans

 

9'956'289

 

9'548'989

 

9'752'639

Loans to public authorities

 

82'441

 

82'975

 

82'708

Other loans

 

1'500'145

 

1'359'526

 

1'429'836

Trading portfolio assets

 

 

 

 

 

 

Fixed-interest securities

 

3'772

 

2'440

 

3'106

Derivative financial instruments

 

82'607

 

62'012

 

72'310

Financial investments at fair value

 

 

 

 

 

 

Fixed-interest securities

 

1'053'057

 

1'072'579

 

1'062'818

Total

 

15'793'172

 

16'382'595

 

16'087'885

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

 

62'839

 

60'106

 

61'473

Irrecoverable commitments

 

254'805

 

275'134

 

264'969

Liabilities from calls on share and other equities

 

9'104

 

8'964

 

9'034

Total

 

326'748

 

344'204

 

335'476

The largest credit risk for the LLB Group 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.

3.8 Due from banks and loans

(XLS:) Download

 

 

31.12.2016

 

31.12.2015

in CHF thousands

 

Loans

 

Due from banks

 

Loans

 

Due from banks

Neither overdue nor value allowance made

 

11'297'277

 

3'114'861

 

10'698'117

 

4'254'074

Overdue but no value allowance made

 

98'411

 

0

 

112'226

 

0

Overdue, value allowance made (specific)

 

85'781

 

0

 

90'591

 

0

Default-stressed, value allowance made (specific)

 

164'405

 

0

 

201'601

 

0

Value allowance made (general)

 

0

 

0

 

903

 

0

Gross

 

11'645'874

 

3'114'861

 

11'103'438

 

4'254'074

Minus allowances (specific)

 

–106'999

 

0

 

–111'948

 

0

Net

 

11'538'875

 

3'114'861

 

10'991'490

 

4'254'074

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

in CHF thousands

 

Mortgage loans

 

Loans to public authorities

 

Other loans

 

Total loans

 

Due from banks

31.12.2015

 

 

 

 

 

 

 

 

 

 

Investment grade

 

4'139'807

 

3'003

 

855'958

 

4'998'768

 

2'644'682

Standard monitoring

 

4'894'123

 

79'972

 

384'037

 

5'358'132

 

1'609'392

Special monitoring

 

244'598

 

0

 

56'778

 

301'376

 

0

Sub-standard

 

39'464

 

0

 

377

 

39'841

 

0

Total

 

9'317'992

 

82'975

 

1'297'150

 

10'698'117

 

4'254'074

 

 

 

 

 

 

 

 

 

 

 

31.12.2016

 

 

 

 

 

 

 

 

 

 

Investment grade

 

4'187'107

 

1'002

 

1'308'453

 

5'496'562

 

1'918'105

Standard monitoring

 

5'267'718

 

81'439

 

81'318

 

5'430'475

 

1'196'756

Special monitoring

 

296'036

 

0

 

33'451

 

329'487

 

0

Sub-standard

 

40'582

 

0

 

171

 

40'753

 

0

Total

 

9'791'443

 

82'441

 

1'423'393

 

11'297'277

 

3'114'861

(XLS:) Download
Loans overdue but no allowances made

in CHF thousands

 

Mortgage loans

 

Loans to public authorities

 

Other loans

 

Total loans

31.12.2015

 

 

 

 

 

 

 

 

Overdue by up to 30 days

 

53'073

 

0

 

52'366

 

105'440

Overdue 31 to 60 days

 

0

 

0

 

6'504

 

6'504

Overdue 61 to 90 days

 

0

 

0

 

283

 

283

Total

 

53'073

 

0

 

59'153

 

112'226

 

 

 

 

 

 

 

 

 

31.12.2016

 

 

 

 

 

 

 

 

Overdue by up to 30 days

 

27'206

 

0

 

63'233

 

90'439

Overdue 31 to 60 days

 

380

 

0

 

7'234

 

7'614

Overdue 61 to 90 days

 

50

 

0

 

308

 

358

Total

 

27'636

 

0

 

70'775

 

98'411

(XLS:) Download
Loans with specific allowances

in CHF thousands

 

Mortgage loans

 

Loans to public authorities

 

Other loans

 

Total loans

 

Due from banks

31.12.2015

 

 

 

 

 

 

 

 

 

 

Overdue Claims

 

35'453

 

0

 

55'138

 

90'591

 

0

Default-distressed claims

 

173'600

 

0

 

28'001

 

201'601

 

0

Fair value of cover

 

–177'915

 

0

 

–2'329

 

–180'244

 

0

Total specific value allowances

 

31'138

 

0

 

80'810

 

111'948

 

0

 

 

 

 

 

 

 

 

 

 

 

31.12.2016

 

 

 

 

 

 

 

 

 

 

Overdue claims

 

30'361

 

0

 

55'420

 

85'781

 

0

Default-distressed claims

 

137'279

 

0

 

27'126

 

164'405

 

0

Fair value of cover

 

–137'792

 

0

 

–5'395

 

–143'187

 

0

Total specific value allowances

 

29'848

 

0

 

77'151

 

106'999

 

0

Newly agreed loans

Newly agreed loans are not substantial.

3.9 Overdue and default-distressed claims by geographical area

(XLS:) Download

 

 

31.12.2016

 

31.12.2015

in CHF thousands

 

Default distressed claims

 

Overdue claims

 

Specific value allowance

 

Default distressed claims

 

Overdue claims

 

Specific value allowance

Liechtenstein and Switzerland

 

164'405

 

94'109

 

69'604

 

201'601

 

121'002

 

67'866

Europe excluding FL / CH

 

0

 

1'496

 

0

 

0

 

19'784

 

6'769

North America

 

0

 

1'632

 

0

 

0

 

2'399

 

0

Asia

 

0

 

49'238

 

562

 

0

 

15'437

 

539

Others

 

0

 

37'718

 

36'833

 

0

 

44'195

 

36'774

Total

 

164'405

 

184'193

 

106'999

 

201'601

 

202'817

 

111'948

3.10 Debt instruments

(XLS:) Download

 

 

31.12.2016

 

31.12.2015

in CHF thousands

 

Trading portfolio

 

Designation fair value

 

Total

 

Trading portfolio

 

Designation fair value

 

Total

AAA

 

0

 

615'806

 

615'806

 

698

 

569'577

 

570'275

AA1 to AA3

 

99

 

263'547

 

263'646

 

0

 

238'719

 

238'719

A1 to A3

 

2'205

 

149'956

 

152'161

 

728

 

156'883

 

157'611

Lower than A3

 

957

 

7'303

 

8'260

 

519

 

13'645

 

14'164

Without a rating

 

512

 

16'445

 

16'957

 

495

 

93'755

 

94'249

Total

 

3'772

 

1'053'057

 

1'056'830

 

2'440

 

1'072'579

 

1'075'019

3.11 Taken-over collateral

(XLS:) Download

 

 

2016

 

2015

in CHF thousands

 

Financial investments

 

Real estate / Properties

 

Total

 

Financial investments

 

Real estate / Properties

 

Total

As at 1 January

 

0

 

1'018

 

1'018

 

0

 

0

 

0

Additions / (Disposals)

 

0

 

0

 

0

 

0

 

1'018

 

1'018

Profit / (Loss)

 

0

 

0

 

0

 

0

 

0

 

0

As at 31 December

 

0

 

1'018

 

1'018

 

0

 

1'018

 

1'018

Taken-over collateral is resold as soon as possible and is reported under financial investments, trading portfolio assets or investment property.

3.12 Risk concentration

(XLS:) Download
Risk concentration by regions

in CHF thousands

 

Liechtenstein / Switzerland

 

Europe excl. FL / CH

 

North America

 

Asia

 

Others *

 

Total

*

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

31.12.2015

 

 

 

 

 

 

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

 

 

 

 

 

 

Due from banks

 

2'365'632

 

1'866'858

 

12'094

 

5'730

 

3'760

 

4'254'074

Loans

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

9'532'756

 

16'233

 

0

 

0

 

0

 

9'548'989

Loans to public authorities

 

82'975

 

0

 

0

 

0

 

0

 

82'975

Other loans

 

875'534

 

109'191

 

7'890

 

142'806

 

224'105

 

1'359'526

Trading portfolio

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

761

 

703

 

248

 

0

 

728

 

2'440

Derivative financial instruments

 

46'167

 

15'178

 

21

 

40

 

606

 

62'012

Financial investments at fair value

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

219'778

 

632'954

 

111'223

 

20'276

 

88'348

 

1'072'579

Total

 

13'123'603

 

2'641'117

 

131'476

 

168'852

 

317'547

 

16'382'595

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

 

 

 

 

 

 

Contingent liabilities

 

50'429

 

2'570

 

0

 

4'057

 

3'050

 

60'106

Irrevocable commitments

 

225'548

 

18'383

 

0

 

9'459

 

21'744

 

275'134

Liabilities from calls on shares and other equities

 

8'964

 

0

 

0

 

0

 

0

 

8'964

Total

 

284'941

 

20'953

 

0

 

13'516

 

24'794

 

344'204

 

 

 

 

 

 

 

 

 

 

 

 

 

31.12.2016

 

 

 

 

 

 

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

 

 

 

 

 

 

Due from banks

 

1'745'874

 

1'293'140

 

14'169

 

50'638

 

11'040

 

3'114'861

Loans

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

9'931'047

 

25'242

 

0

 

0

 

0

 

9'956'289

Loans to public authorities

 

82'441

 

0

 

0

 

0

 

0

 

82'441

Other loans

 

890'463

 

158'702

 

1'658

 

272'570

 

176'752

 

1'500'145

Trading portfolio

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

1'266

 

2'015

 

0

 

0

 

491

 

3'772

Derivative financial instruments

 

52'204

 

25'262

 

88

 

152

 

4'901

 

82'607

Financial investments at fair value

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

321'773

 

544'532

 

122'405

 

32'248

 

32'099

 

1'053'057

Total

 

13'025'068

 

2'048'893

 

138'320

 

355'608

 

225'283

 

15'793'172

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

 

 

 

 

 

 

Contingent liabilities

 

53'688

 

2'231

 

0

 

4'556

 

2'364

 

62'839

Irrevocable commitments

 

214'057

 

6'662

 

0

 

4'829

 

29'257

 

254'805

Liabilities from calls on shares and other equities

 

9'104

 

0

 

0

 

0

 

0

 

9'104

Total

 

276'849

 

8'893

 

0

 

9'385

 

31'621

 

326'748

(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.

31.12.2015

 

 

 

 

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

 

 

 

 

Due from banks

 

4'254'074

 

0

 

0

 

0

 

4'254'074

Loans

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

94'376

 

1'334'613

 

6'951'031

 

1'168'969

 

9'548'989

Loans to public authorities

 

0

 

0

 

0

 

82'975

 

82'975

Other loans

 

529'230

 

34'331

 

369'292

 

426'673

 

1'359'526

Trading portfolio

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

605

 

0

 

0

 

1'835

 

2'440

Derivative financial instruments

 

48'161

 

222

 

5'601

 

8'028

 

62'012

Financial investments at fair value

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

599'151

 

10'650

 

0

 

462'778

 

1'072'579

Total

 

5'525'597

 

1'379'816

 

7'325'924

 

2'151'258

 

16'382'595

 

 

 

 

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

 

 

 

 

Contingent liabilities

 

9'161

 

3'323

 

12'139

 

35'483

 

60'106

Irrevocable commitments

 

49'494

 

53'124

 

111'181

 

61'335

 

275'134

Liabilities from calls on shares and other equities

 

8'964

 

0

 

0

 

0

 

8'964

Total

 

67'619

 

56'447

 

123'320

 

96'818

 

344'204

 

 

 

 

 

 

 

 

 

 

 

31.12.2016

 

 

 

 

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

 

 

 

 

Due from banks

 

3'114'861

 

0

 

0

 

0

 

3'114'861

Loans

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

121'424

 

1'495'041

 

7'144'906

 

1'194'918

 

9'956'289

Loans to public authorities

 

0

 

0

 

0

 

82'441

 

82'441

Other loans

 

240'799

 

34'357

 

530'319

 

694'670

 

1'500'145

Trading portfolio

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

3

 

0

 

0

 

3'769

 

3'772

Derivative financial instruments

 

70'310

 

87

 

4'657

 

7'553

 

82'607

Financial investments at fair value

 

 

 

 

 

 

 

 

 

 

Fixed-interest securities

 

448'910

 

10'294

 

0

 

593'853

 

1'053'057

Total

 

3'996'307

 

1'539'779

 

7'679'882

 

2'577'204

 

15'793'172

 

 

 

 

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

 

 

 

 

Contingent liabilities

 

6'280

 

3'562

 

10'836

 

42'161

 

62'839

Irrevocable commitments

 

54'101

 

31'978

 

72'275

 

96'451

 

254'805

Liabilities from calls on shares and other equities

 

9'104

 

0

 

0

 

0

 

9'104

Total

 

69'485

 

35'540

 

83'111

 

138'612

 

326'748