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

Report on the audit of the financial statements

Opinion

As statutory auditor, we have audited the financial statements (balance sheet, income statement and notes to the financial statements (pages 199 to 221) and the annual report (page 198) of Liechtensteinische Landesbank Aktiengesellschaft (LLB AG) for the year ending as at 31 December 2016.

In our opinion, the accompanying financial statements give a true and fair view of the consolidated financial position in accordance with Liechtenstein law. Further, the financial statements comply with Liechtenstein law and the company’s articles of association.

Basis for opinion

We conducted our audit in accordance with the standards promulgated by the profession in Liechtenstein and the International Standards on Auditing (ISAs), which require an audit to be planned and conducted so as to obtain reasonable assurance whether the financial statements and the annual report are free from material misstatement.

We audited the items and disclosures in the financial statements by means of analyses and surveys on a sample basis. Further, we assessed the application of the relevant accounting standards, significant decisions concerning the valuations and the presentation of the financial statements as a whole. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Our audit approach

Overview

As key audit matter, the following area of focus has been identified:

• Valuation of customer loans
• Completeness and adequacy of provisions for legal and litigation risks

Audit scope

We designed our audit by determining materiality and assessing the risks of material misstatement in the 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.

Materiality

The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the 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 financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the 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 financial statements as a whole.

We agreed with the Board of Directors that we would report to them misstatements above CHF 0.2 million identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.

Reporting on key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the 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 AG grants loans to private individuals, corporates and public entities, primarily located in Liechtenstein and Switzerland.

Loans amount to CHF 6.2 billion (previous year: CHF 5.9 billion) and thus represent the largest asset category. Mortgage-based loans form the majority of the loan portfolio (73.3 % of total loans). In addition, the bank grants corporate loans and Lombard loans.

Any impairments are recognised by means of individual value adjustments. To this end, judgement has to be applied to calculate the amount of the individual value adjustment. We focussed on the two following points:

• The method used by the bank to identify loans that may need adjusting, including loans that show indications of impairment according to the definition of LLB.
• The appropriate and consistent application of the policies and instructions issued by management relating to the calculation of the amount of the individual value adjustment.

The accounting and valuation principles applied to loans, the method used to identify the default risk and to determine the need for impairment as well as the evaluation of the coverage are taken from the management report.

Please refer to page 204 (accounting and valuation principles) and page 207 (comments on the balance sheet).

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:

• Credit processing and authorisation: Sample testing of the requirements and processes set out in the Bank’s internal policies and working instructions in relation to credit processing. We also tested that authorisation is performed at the proper level in accordance with the system of authorities.
• Credit monitoring (periodic re-approval): Sample testing of identified bad debts and identifying the potential need for impairment.

Where significant judgement is required, we also put forward our own critical opinion as part of the substantive tests of detail on the authority to grant loans. Our tests of detail covered the following:

• Sample-based testing of new business and risk positions (including positions with individual value adjustments or indications of impairment) to evaluate whether additional value adjustments are needed.
• Sample-based testing of the method used to calculate value adjustments in terms of its appropriateness and compliance with the policies and working methods issued by the bank.

The combination of the audit of key controls and the tests of detail gives us sufficient assurance to assess the valuation of customer loans as adequate.

The assumptions used by LLB AG are in line with our expectations.

Completeness and adequacy of the provisions for legal and litigation risks

Key audit matter

In the course of normal business, LLB AG is involved in various legal proceedings. The amount of the provisions for legal and litigation risks as of 31 December 2016 is CHF 27.5 million (previous year: CHF 1.4 million).

We identified the completeness and adequacy of the provisions for legal and litigation risks as a key audit matter, as significant judgement exists in the assessment of the probability and the amount of the provisions for any financial obligations.

This includes processes to identify, evaluate and monitor client complaints as well as potential and actual legal proceedings. LLB AG creates provisions for actual and impending proceedings if, in the opinion of the specialists responsible, a cash outflow or a loss is probable and the amount can be reliably estimated.

Please refer to page 205 (accounting principles) and page 212 (comments on the balance sheet).

How our audit addressed the key audit matter

We based our audit on the analyses performed by management. Further, we have referred to external lawyers’ letters. We compared the analyses with our own estimates and our understanding of the legal and litigation risks. We performed the following audit procedures:

• Inquiries of the Head of Group Legal and specific members of management.
• Review and inspection of the list of client complaints, correspondence with the regulatory authority as well as the minutes of the meetings of the Board of Directors and the management for indications of potential lawsuits.
• Review of the central inventory of current legal proceedings and testing of lawsuits with regard to the potential need for provisions.
• Obtaining external lawyers’ letters and expert opinions on selected ongoing lawsuits with regard to the probability and amount of the provisions, and comparing this with the provisions created by LLB AG as per the financial statements.

The assumptions used by LLB AG are in line with our expectations.

Responsibilities of the Board of Directors for the financial statements

The Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Liechtenstein law and the company’s articles of incorporation that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors is responsible for assessing the entity’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 the entity or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance that the 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 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 financial statements.

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

• Identify and assess the risks of material misstatement of the 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 controls.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made.
• 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 the entity’s internal control.
• 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 the entity’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 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 the entity to cease to continue as a going concern.

We communicate with the Board of Directors or 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 or the Group Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with 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 or the Group Audit Committee, we determine those matters that were of most significance in the audit of the 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

We confirm that the proposal for the appropriation of retained earnings complies with Liechtenstein law and the company’s articles of incorporation.

The management report is in accordance with the financial statements.

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

PricewaterhouseCoopers AG

St. Gallen, 27 February 2017