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 stabilization of expected returns.

3.1 Credit risk management

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

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.

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 de fault, 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.

Rating categories

LLB-Rating

Description

External Rating (Moody's)**

*

Non-rated loans are covered and subject to limits.

**

The LLB Group uses the external ratings of Moody's exclusively in the standard approach for covering credit risks (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

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.

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 limitation

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,

Derivatives

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

3.4 Monitoring of credit risks

The organizational structure of the LLB Group ensures that the business divisions 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.

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 this criteria.

General value allowances

A portfolio is classified as impaired on a collective basis, if there are objective indications that the portfolio contains impaired claims, which cannot however be determined individually.

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

in CHF thousands

31.12.2013

31.12.2012

Average

Credit risks from balance sheet transactions

 

 

 

Due from banks

6'082'003

5'732'925

5'907'464

Loans

 

 

 

mortgage loans

8'906'012

9'023'728

8'964'870

loans to public authorities

63'830

63'538

63'684

other loans

1'270'246

1'527'724

1'398'985

Trading portfolio

 

 

 

fixed interest securities

5'042

3'817

4'430

Derivative financial instruments

86'950

73'009

79'980

Financial investments at fair value through profit and loss

 

 

 

fixed interest securities

690'292

605'372

647'832

Total

17'104'375

17'030'113

17'067'245

 

 

 

 

Credit risks from off-balance-sheet transactions

 

 

 

Contingent liabilites

76'716

89'411

83'064

Irrecovable commitments

101'878

147'771

124'825

Liabilites for calls on share and other equities

8'964

8'964

8'964

Total

187'558

246'146

216'852

3.8 Due from banks and loans

 

31.12.2013

31.12.2012

in CHF thousands

Due from
customers

Due from banks

Due from
customers

Due from banks

Neither overdue nor value allowance made

10'004'411

6'081'553

10'287'655

5'732'025

Overdue but no value allowance made

90'994

4

147'770

96

Overdue, value allowance made (specific)

127'249

444

215'708

804

Default-stressed, value allowance made (specific)

161'151

47'688

177'697

48'265

Value allowance made (general)

1'485

0

1'512

0

Gross

10'385'290

6'129'689

10'830'342

5'781'190

Minus allowances (specific)

–145'070

–47'686

–214'446

–48'265

Minus allowances (general)

–131

0

–906

0

Net

10'240'089

6'082'003

10'614'990

5'732'925

Due from banks and loans neither overdue nor allowances made

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2013

 

 

 

 

 

Investment Grade

4'361'969

26'851

617'107

5'005'927

4'331'854

Standard Monitoring

4'138'595

36'920

499'258

4'674'773

1'749'699

Special Monitoring

218'595

16

59'721

278'332

0

Sub-standard

41'134

0

4'244

45'378

0

Total

8'760'293

63'787

1'180'330

10'004'410

6'081'553

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2012

 

 

 

 

 

Investment Grade

4'936'441

25'516

940'827

5'902'784

4'585'018

Standard Monitoring

3'669'289

35'205

387'470

4'091'964

1'147'007

Special Monitoring

201'563

42

60'942

262'547

0

Sub-standard

27'184

0

3'176

30'360

0

Total

8'834'477

60'763

1'392'415

10'287'655

5'732'025

Loans overdue but no allowances made

in CHF thousands

Mortgage loans

Loans to public
authorities

Other loans

Total due from
customers

31.12.2013

 

 

 

 

Overdue by up to 30 days

35'069

43

46'613

81'725

Overdue 31 to 60 days

0

0

8'826

8'826

Overdue 61 to 90 days

0

0

443

443

Total

35'069

43

55'882

90'994

in CHF thousands

Mortgage loans

Loans to public
authorities

Other loans

Total due from
customers

31.12.2012

 

 

 

 

Overdue by up to 30 days

43'290

2'591

71'362

117'243

Overdue 31 to 60 days

5'000

0

4'109

9'109

Overdue 61 to 90 days

491

184

20'743

21'418

Total

48'781

2'775

96'214

147'770

Loans with specific allowances

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2013

 

 

 

 

 

Overdue Claims

19'803

0

107'446

127'249

444

Default-distressed claims

122'796

0

38'355

161'151

47'688

Fair value of cover

–110'635

0

–32'695

–143'330

–446

Total specific value allowances

31'964

0

113'106

145'070

47'686

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2012

 

 

 

 

 

Overdue Claims

53'360

0

162'348

215'708

804

Default-distressed claims

116'835

0

60'862

177'697

48'265

Fair value of cover

–140'470

0

–38'489

–178'959

–804

Total specific value allowances

29'725

0

184'721

214'446

48'265

Newly agreed loans

Newly agreed loans are not substantial.

3.9 Overdue and default-distressed claims by geographical area

 

31.12.2013

31.12.2012

in CHF thousands

Default- distressed claims

Overdue claims

Specific value allowance

Default- distressed claims

Overdue claims

Specific value allowance

Liechtenstein and Switzerland

144'973

126'924

89'361

154'493

282'793

169'938

Europe excluding FL/CH

9'628

38'178

27'339

14'822

10'975

15'473

North America

0

989

0

0

4

0

Asia

54'238

6'594

54'232

56'424

8'365

57'437

Others

0

46'006

21'824

223

62'241

19'863

Total

208'839

218'691

192'756

225'962

364'378

262'711

3.10 Debt instruments

 

31.12.2013

31.12.2012

in CHF thousands

Trading portfolio

Designation fair value

Total

Trading portfolio

Designation fair value

Total

AAA

2'379

457'938

460'316

601

417'803

418'404

AA1 to AA3

920

85'041

85'961

653

67'389

68'042

A1 to A3

1'584

113'334

114'918

1'305

88'615

89'920

Lower than A3

 

10'295

10'295

786

9'453

10'239

without a rating

160

23'683

23'843

472

22'112

22'584

Total

5'042

690'292

695'334

3'817

605'372

609'189

3.11 Taken over collateral

 

2013

2012

in CHF thousands

Financial invest-
ments

Real estate / pro-
perties

Total

Financial invest-
ments

Real estate / pro-
perties

Total

As at 1 January

82

0

82

135

0

135

Additions / disposals

0

0

0

0

0

0

Profit / loss

–82

0

–82

–53

0

–53

As at 31 December

0

0

0

82

0

82

Taken over collateral is disposed of again as soon as possible and recognised in other assets or financial investments or the trading portfolio.

3.12 Risk concentration

Risk concentration by regions

in CHF thousands

Liechten-
stein and Switzer-
land

Europe excluding FL/CH

North America

Asia

Others

Total

31.12.2013

 

 

 

 

 

 

Credit risks from balance sheet transactions

Due from banks

2'284'306

3'723'523

70'005

1'275

2'894

6'082'003

Due from customers

 

 

 

 

 

 

mortgage loans

8'950'722

–39'660

0

–5'050

0

8'906'012

loans to public authorities

63'830

0

0

0

0

63'830

other loans

800'511

81'711

2'643

195'189

190'192

1'270'246

Trading portfolio

 

 

 

 

 

 

fixed interest securities

160

3'537

0

583

762

5'042

Derivative financial instruments

65'161

20'107

4

797

881

86'950

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

198'490

398'027

46'155

13'306

34'314

690'292

Total

12'363'180

4'187'245

118'807

206'100

229'043

17'104'375

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

Contingent liabilities

65'979

3'613

18

3'790

3'316

76'716

Irrevocable commitments

101'028

800

0

0

50

101'878

Liabilities from calls on shares and other equities

8'964

0

0

0

0

8'964

Total

175'971

4'413

18

3'790

3'366

187'558

in CHF thousands

Liechten-
stein and Switzer-
land

Europe excluding FL/CH

North America

Asia

Others

Total

31.12.2012

 

 

 

 

 

 

Credit risks from balance sheet transactions

Due from banks

1'795'838

3'822'671

85'659

22'413

6'344

5'732'925

Due from customers

 

 

 

 

 

 

mortgage loans

9'023'728

0

0

0

0

9'023'728

loans to public authorities

63'538

0

0

0

0

63'538

other loans

883'714

175'960

1'543

261'375

205'132

1'527'724

Trading portfolio

 

 

 

 

 

 

fixed interest securities

0

1'887

1'159

171

600

3'817

Derivative financial instruments

60'520

11'053

0

810

626

73'009

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

202'338

330'770

47'058

0

25'206

605'372

Total

12'029'676

4'342'341

135'419

284'769

237'908

17'030'113

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

Contingent liabilities

72'555

6'884

348

4'311

5'313

89'411

Irrevocable commitments

147'741

0

30

0

0

147'771

Liabilities from calls on shares and other equities

8'964

0

0

0

0

8'964

Total

229'260

6'884

378

4'311

5'313

246'146

Risk concentration by sectors

in CHF thousands

Financial
services

Real estate

Private
house-
holds

Others*

Total

31.12.2013

 

 

 

 

 

Credit risks from balance sheet transactions

*

None of the categories summarised in the position «Others» exceeds 10% of the total volume.

Due from banks

6'065'735

0

16'268

0

6'082'003

Due from customers

 

 

 

 

 

mortgage loans

106'995

1'048'515

6'672'317

1'078'185

8'906'012

loans to public authorities

4'297

0

0

59'533

63'830

other loans

509'018

52'581

354'077

354'570

1'270'246

Trading portfolio

 

 

 

 

 

fixed interest securities

1'541

0

0

3'501

5'042

Derivative financial instruments

69'294

116

14'170

3'370

86'950

Financial investments at fair value through profit and loss

 

 

 

 

 

fixed interest securities

429'301

11'000

0

249'991

690'292

Total

7'186'181

1'112'212

7'056'832

1'749'150

17'104'375

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

Contingent liabilities

23'378

3'603

13'959

35'776

76'716

Irrevocable commitments

20'672

20'803

38'667

21'735

101'878

Liabilities from calls on shares and other equities

8'964

0

0

0

8'964

Total

53'014

24'406

52'626

57'511

187'558

in CHF thousands

Financial
services

Real estate

Private
house-
holds

Others*

Total

31.12.2012

 

 

 

 

 

Credit risks from balance sheet transactions

*

None of the categories summarised in the position «Others» exceeds 10% of the total volume.

Due from banks

5'732'925

0

0

0

5'732'925

Due from customers

 

 

 

 

 

mortgage loans

143'913

963'987

6'784'394

1'131'434

9'023'728

loans to public authorities

6'052

0

0

57'486

63'538

other loans

542'807

36'216

553'986

394'715

1'527'724

Trading portfolio

 

 

 

 

 

fixed interest securities

2'023

0

0

1'794

3'817

Derivative financial instruments

55'016

27

16'575

1'391

73'009

Financial investments at fair value through profit and loss

 

 

 

 

 

fixed interest securities

425'298

0

0

180'074

605'372

Total

6'908'034

1'000'230

7'354'955

1'766'894

17'030'113

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

Contingent liabilities

21'284

4'581

24'052

39'494

89'411

Irrevocable commitments

47'262

11'179

65'550

23'780

147'771

Liabilities from calls on shares and other equities

8'964

0

0

0

8'964

Total

77'510

15'760

89'602

63'274

246'146

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