Report of the statutory auditor to the General Meeting of Liechtensteinische Landesbank Aktiengesellschaft Vaduz

Report on the audit of the consolidated financial statements

Opinion

We have audited the consolidated financial statements of Liechtensteinische Landesbank Aktiengesellschaft and its subsidiaries (“LLB Group”) which comprise the consolidated income statement and the consolidated statement of comprehensive income for the year ended 31 December 2019, the consolidated balance sheet as at 31 December 2019, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated financial statements (pages 116 to 209) give a true and fair view of the consolidated financial position of LLB Group as at 31 December 2019 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and comply with Liechtenstein law.

Basis for opinion

We conducted our audit in accordance with Liechtenstein law and International Standards on Auditing (ISA). Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report.

We are independent of LLB Group in accordance with the provisions of Liechtenstein law and the requirements of the Liechtenstein audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Our audit approach

Materiality

The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole.

We agreed with the Group Audit Committee that we would report to them misstatements above CHF 0.35 million identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.

Audit scope

We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated financial statements. In particular, we considered where subjective judgements were made; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of LLB Group, the accounting processes and controls, and the industry in which LLB Group operates.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of loans

Key audit matter

LLB Group grants loans to private individuals, corporates and public entities located mainly in Liechtenstein and Switzerland.

Loans as at 31 December 2019 amount to CHF 13.0 billion (2018: CHF 12.9 billion) and thus represent the largest asset category of LLB Group. Mortgage-based loans form the majority of the loan portfolio (87% of total loans by value). In addition, LLB Group grants corporate loans and Lombard loans.

Loans are measured by applying the effective interest rate method and by calculating an expected credit loss (ECL). The expected credit loss is calculated as the product of the probability of default, the loan amount at default and the loss given default. The expected credit loss is calculated over the remaining term of the loan. Any impairments are recognised by means of individual loss allowances. Calculating the expected credit loss and the amount of individual loss allowances requires judgement. We focussed on the following two audit matters:

• The method used by LLB Group to identify loans in the loan portfolio that may need a valuation adjustment, including loans that according to the LLB Group’s definition show indications of impairment.
• The appropriateness and consistent application of the policies and instructions issued by Group management relating to the calculation of the expected credit loss and the amount of individual loss allowances.

The accounting principles applied to loans and the method used to identify the default risk, to determine the need for impairment and to evaluate collateral are described in the annual report.

Please refer to page 126 (Accounting principles: Financial assets measured at amortised cost), page 128 (Accounting policies: Impairments), page 141 (Notes to the consolidated balance sheet: 13 Loans) and pages 190 to 205 (Risk management: Credit risk).

How our audit addressed the key audit matter

We tested the adequacy and effectiveness of the following key controls relating to the valuation of loans in the loan portfolio:

• Credit processing and authorisation: Sample testing of the requirements and processes set out in the Group's internal policies and working instructions in relation to credit processing. We also tested that approvals were granted at the appropriate level of authority.
• Credit monitoring (periodic reviews): Sample testing of identified loans at risk and of the calculation of the potential amount of impairment.
• Credit evaluation (ECL): Sample testing of the performance of key controls in the ECL calculation and accounting process.

Where significant judgement was required, we also challenged the decisions of those authorised to approve loans with our own critical opinion as part of our substantive tests of detail. Our tests of detail covered the following:

• Sample-based testing of new business and loans at risk in the loan portfolio (including loans with individual loss allowances or indications of impairment) to evaluate whether additional loss allowances were needed.
• Sample-based testing of the method used to calculate loss allowances on the loan portfolio in terms of its appropriateness and compliance with the policies and working instructions issued by the Group.
• Sample testing of the calculated ECL value with regard to the correctness of the model input data, the plausibility check of the assumptions and the consistency with the Bank’s methods and process, the calculation of the ECL value and its correct entry in the system.

The audit of key controls and the tests of detail gives us sufficient assurance to assess the valuation of loans as adequate. The valuation estimates made by LLB Group are in line with our expectations.

Impairment of goodwill

Key audit matter

LLB Group disclosed goodwill as at 31 December 2019 in the amount of CHF 163.8 million (2018: CHF 169.3 million). The goodwill stems from acquisitions of subsidiaries and it has been allocated to the four cash-generating units (CGUs) Liechtensteinische Landesbank AG, Bank Linth LLB AG, Liechtensteinische Landesbank (Österreich) AG and LLB Swiss Investment AG.

LLB Group tests this goodwill for impairment at least once every year. For the test, the value in use must be higher than the carrying amount, otherwise there is a need for impairment. LLB Group uses a discounted cash flow (DCF) valuation method. The DCF method calculates the value in use based on the expected future cash flows. The method involves the following key assumptions and scope for judgement:

• Assumptions regarding expected cash flows.
• Assumptions regarding discount rates and long-term growth rates.

Please refer to page 131 (Accounting principles: Goodwill and other intangible assets) and pages 150 to 152 (Notes to the consolidated balance sheet: 19 Goodwill and other intangible assets).

How our audit addressed the key audit matter

We based our audit on the analyses and calculations performed by Group management. With the involvement of a valuation expert, we performed the following audit procedures:

• Plausibility check of the analyses performed by LLB Group relating to impairment indicators.
• Assessment of the appropriateness of the DCF method and its implementation.
• Examination of management’s medium-term planning processes.
• Plausibility check of the medium-term planning of the subsidiaries (CGUs) and an assessment of the expected cash flows by means of budget vs. actual comparisons.
• Plausibility check of the assumed growth rates and discount rates based on external market information.
• Tests of the sensitivity analysis of the parameters and assumptions used.

The valuation estimates made by LLB Group are in line with our expectations.

Other information in the annual report

The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the financial statements of Liechtensteinische Landesbank Aktiengesellschaft and our auditor’s reports thereon.

Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Board of Directors for the consolidated financial statements

The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the LLB Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate LLB Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Liechtenstein law and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Liechtenstein law and ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of LLB Group’s internal control system.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made.
• Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on LLB Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause LLB Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within LLB Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the Board of Directors and the Group Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Board of Directors and the Group Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and communicate to them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards.

From the matters communicated with the Board of Directors and the Group Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirements

The consolidated management report (pages 114 to 115) as at 31 December 2019 comply with Liechtenstein law and the articles of incorporation. Further, the consolidated management report accords with the consolidated financial statements and, in our opinion, does not contain any material inaccurate information.

We recommend that the consolidated financial statements submitted to you be approved.

PricewaterhouseCoopers AG

St. Gallen, 9 March 2020