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.
Download |
LLB rating |
Description |
External rating (Moody’s) ** |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
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
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
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 |
Download |
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 |
Download |
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 |
Download |
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
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
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
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
Download |
in CHF thousands |
Liechtenstein / Switzerland |
Europe excl. FL / CH |
North America |
Asia |
Others * |
Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||
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 |
Download |
in CHF thousands |
Financial services |
Real estate |
Private households |
Others * |
Total |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||
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 |