Letter to shareholders
«Focus2015» on course
For the LLB Group the key priority in 2013 is the implementation of the «Focus2015» strategy. Our goal is to ensure the successful positioning of our bank in a changed environment over the long term. We have taken several key decisions and have prepared ourselves to deal with a volatile business environment, sharper competition and additional regulatory requirements. As a universal bank with a strong private banking and institutional business, we are focusing on selected client segments and markets. The implementation of our strategic initiatives is progressing as planned. Our cost-cutting and efficiency improvement programme is taking effect. The Groups operative performance is within the expected range. However, the persisting low level of interest rates continued to weigh on business development. The financial markets in Europe displayed a fragile stability. The uncertainty among clients and capital market participants has decreased somewhat.
Stronger operative performance
Client assets managed by the LLB Group once again surpassed the 50-billion level in the first half of 2013. They rose to CHF 50.5 billion on the back of strong market performance. In the onshore and growth markets we recorded new money inflows. Outflows of assets from our traditional cross-border markets continued. On account of the restructuring measures implemented, a net new money outflow of CHF 210 million was registered per 30 June 2013. Loans to clients rose slightly by 0.8 percent to CHF 10.7 billion. Mortgage loans remained virtually unchanged at CHF 9.1 billion.
The LLB Group reported a net profit of CHF 13.6 million per 30 June 2013, corresponding to a fall of 77.7 percent compared with the previous year. Adjusted for one-off effects, the LLB Group would have reported a net profit of CHF 72.0 million for the first half year. Our stronger operative performance is demonstrated above all by the fact that, adjusted for one-off effects, we increased operating income by 8.2 percent and reduced operating expenses by 6.9 percent. If the one-off effects are included, operating income rose by 35.2 percent to CHF 279.9 million, and operating expenses stood at CHF 261.2 million. The Cost-Income-Ratio amounted to 70.2 percent. During the first half year of 2013, the total headcount was reduced by 5.4 percent to 1'031.
Our interim financial result was impacted by four one-off effects: we have allocated further provisions amounting to CHF 31.2 million for a possible outflow of assets in connection with payments to the US authorities. In addition, the changed basic conditions in international wealth management business made an impairment necessary for the goodwill of our subsidiary, swisspartners Investment Network AG, which resulted in a net charge to the interim financial statement of CHF 14.3 million. Thirdly, the closure of LLB (Switzerland) Ltd. caused extraordinary write-downs of CHF 9.6 million on our business real estate in Lugano and Zurich. Finally, we have set aside provisions of CHF 3.3 million for restructuring measures within the scope of «Focus2015».
Solid capital base
Our bank represents a cornerstone of the Liechtenstein economy. For us therefore it is self-evident that we must have an adequate, high-quality capital base. We are convinced that a strong capital base will be a significant competitive advantage in future.
The LLB Group operates a circumspect capital management system. At 30 June 2013, it was supported by a solid equity capital base of CHF 1.7 billion, corresponding to a tier 1 ratio of 17.4 percent. For many years, our hard core capital has been consistently well in excess of the level specified by Basel III, the international capital adequacy standard. We strive to ensure a continued high degree of security for our clients.
Market divisions on course
The LLB Groups business model is based on three market divisions, namely Retail & Corporate Banking, Private Banking and Institutional Clients. During the first six months of 2013, we have reduced complexity in all core areas, cut costs, increased productivity, sharpened our target group focus and intensified our activities in the target markets. In spite of formidable challenges such as increased pressure on margins, volatile financial markets, uncertainties in the Eurozone, stricter regulatory provisions and internal restructuring measures, our market divisions achieved considerable success.
Retail & Corporate Banking
We were able to maintain our position as a universal bank for the people and the business communities in Liechtenstein and north-eastern Switzerland. We have optimised our branch network and intensified our cooperation with the Liechtenstein Post for the benefit of our clients. In addition, we have set up Customer Service Centers for the LLB Vaduz and Bank Linth. At the end of 2013, we shall offer a comprehensive mobile phone banking service. Our strategic initiatives are on course. This also applies to the optimisation of the segmentation process for our retail, corporate and private banking clients.
During the first half of 2013, the Retail & Corporate Banking Division of the LLB Group posted a net new money outflow of CHF 51 million. Client assets under management rose by 4.5 percent to CHF 7.7 billion. In mortgage lending business the rate of growth slowed, a sign that the LLB Group is continuing to act responsibly with its conservative lending policy in the dynamic real estate market.
In our private banking business we gained ground in the onshore markets of Liechtenstein, Austria and Switzerland, as well as in the growth markets. In the markets of Central and Eastern Europe, as well as the Near and Middle East, we intensified our market activities and launched new tailor-made products for our clients.
Within the scope of the «Focus2015» strategy, we decided to close LLB (Switzerland) Ltd. By closing the company, we cut costs and reduce complexity while at the same time safeguarding the advantages of sales and marketing activities in the growth markets of Central and Eastern Europe, as well as the Near and Middle East.
The planned sale of the branch office in Lugano is associated with the closure of our Swiss subsidiary. The closure of LLB (Switzerland) Ltd. will be completed by the end of 2013.
In the first six months of 2013, the Private Banking Market Division attained a net new money inflow from the growth markets. In total, however, the restructuring of the division caused an outflow of CHF 230 million. Client assets under management decreased by 2.4 percent to CHF 16.8 billion.
The Institutional Clients Market Division succeeded in expanding the LLB Groups services in the areas of asset management and fund services in the Liechtenstein and Swiss markets. We strengthened our position as a leading investment fund vendor in Liechtenstein by expanding and diversifying our activities. We also succeeded in gaining large asset management mandates. Our risk management and customer relationship management systems were further refined during the period. In November 2013, we shall launch a portal for multidimensional communication and provide external asset managers and intermediaries with access to a network of key specialists and experts.
The selling process of our subsidiary Jura Trust AG is progressing as planned. The sale with this company is also an expression of the focus on our core business. After careful deliberation, we reached the conclusion that Jura Trust AG would be better able to reach its potential with a new partner. In January 2012, the LLB Group announced that it intended to sell its equity stake in swisspartners Investment Network AG. At the present time, the sales negotiations have been put on hold and will recommence as soon as the situation of swisspartners Investment Network AG in relation to the US taxation issue has been clarified. In line with the new strategic focus on our core business, we still intend to sell the company.
During the first half year of 2013, the Institutional Clients Market Division registered a net new money inflow of CHF 76 million. Client assets under management rose by 4.2 percent to CHF25.9 billion.
LLB Vaduz – Resolution of the US taxation dispute
In the meantime, the LLB Vaduz has resolved the US taxation dispute that has continued since 2011, whereas other banks are still at an early stage in dealing with the issue. On 30 July 2013, Liechtensteinische Landesbank AG, Vaduz, reached agreement with the US authorities in finding a definitive solution. The LLB Vaduz, the US Department of Justice and the District Attorney for the Southern District of New York signed a «Non-Prosecution Agreement». This agreement marks the end of the US investigation of the LLB Vaduz. In return the latter undertakes to make a payment of USD 23.8 million.
The LLB Vaduz undertakes to pay the gross profit of USD 16.3 million earned from 2001 to 2012 on transactions with undeclared assets held by US clients. Of that amount, USD 15.9 million will be paid to the US authorities and USD 0.4 million to the Liechtenstein tax authorities for their costs in connection with the US request for administrative assistance. In addition, the LLB Vaduz will compensate the US with a payment of USD 7.5 million for lost tax revenue during the same period.
Under the terms of the Non-Prosecution Agreement the US authorities explicitly undertake not to impose a fine or penalty on the LLB Vaduz. In this manner they acknowledge the banks willingness to cooperate and the fact that, even before the investigation commenced, the bank had voluntarily implemented measures to terminate US client relationships that did not have the appropriate documentation.
The LLB Group set aside provisions totalling CHF 47.4 million in its 2012 annual financial results and 2013 interim results for the US taxation issue. That proportion of the provisions allocated for LLB Vaduz will now be released. The definitive solution now reached with the Non-Prosecution Agreement means that no further charge will be imposed on the income statement in the future. Furthermore, the agreement provides legal certainty for the LLB Vaduz, clients and shareholders.
The LLB Group will now continue negotiations with the US authorities to find a definitive solution for LLB (Switzerland) Ltd. and swisspartners Investment Network AG. Corresponding provisions for both companies were allocated by the LLB Group in the 2012 annual financial results and 2013 interim results.
New members of the Board of Directors
Since 3 May 2013, the Board of Directors of the LLB Group has again comprised seven members. Thanks to the election by the General Meeting of Dr. Patrizia Holenstein, an eminent Swiss lawyer in the field of banking law, and the entrepreneur Peter Fanconi, who has great experience in private banking, all the relevant profiles are again represented in the composition of the board. The independence of the board members and their professional expertise ensures the smooth functioning of the Board of Directors as the supreme strategic body.
LLB bearer share stable
On 30 June 2013, the LLB bearer share closed at CHF 35.40 (30 June 2012: CHF 34.00). Since the beginning of the year, the LLB bearer share has risen by 21.9 percent (30 June 2013). Following the announcement of the «Focus2015» strategy, the Zurich Cantonal Bank adjusted its rating of the share to «overweight» , thus rewarding the new strategic direction, the cost-cutting programme, the solid capital base and the long-term dividend policy for the benefit of shareholders.
Going forward with confidence
The banking industry is changing dramatically and the business and regulatory environments continue to be challenging. At the same time, our values stand for change and stability. As a bank with a great tradition, we generate trust, accept responsibility, convince through performance and actively shape the future. Even though one-off effects have impacted our interim financial result, on balance we have made significant progress in achieving our objectives with the «Focus2015» strategy by the end of 2015, i. e. a Cost-Income-Ratio of under 60 percent, a tier 1 ratio exceeding 16 percent and a cumulated net profit for the Group of more than CHF 300 million. In the first half year 2013, we improved our operative performance and the implementation of our new «Focus2015» strategy is beginning to bear fruit. We have modified our distribution network, cut costs and improved efficiency. Moreover, the closure of LLB (Switzerland) Ltd. and the sale of Jura Trust AG are progressing according to plan.
This progress reinforces our confidence. The LLB Group possesses all the essentials to consolidate and strengthen its competitive position, i. e. loyal clients, professional competence, dedicated employees and financial soundness. We would like to thank you, our valued shareholders, for your trust and commitment in supporting the further development of the LLB.
Dr. Hans-Werner Gassner