12 Impairments on goodwill and other intangible assets

At 30 June 2013, the LLB Group carried goodwill for the following segment:

(XLS:)

in CHF thousands

30.06.2013

31.12.2012

Retail & Corporate Banking segment

55'620

55'620

Total

55'620

67'263

Goodwill impairment testing

Goodwill is tested twice a year for impairment – in the first quarter as a basis for the interim financial reporting at 30 June and in the third quarter as a basis for the annual financial reporting at 31 December. In order to determine a possible impairment, the recoverable amount of each cash generating unit, which carries goodwill, is compared with its balance sheet value. According to the calculations made, the recoverable amount of a cash generating unit always corresponds to the value in use. The balance sheet value or carrying value comprises equity before goodwill and intangible assets, as well as goodwill and intangible assets from the underlying purchase price allocation of this cash generating unit. For further information regarding goodwill impairment testing, please see note 19 of the 2012 annual report.

Since the goodwill in the individual cash generating units was shown in the balance sheet, the recoverable amount has always exceeded the balance sheet value, so that so far no impairment has had to be recognised. On the basis of the impairment testing carried out, management reached the conclusion that for the half year ended on 30 June 2013, the total of CHF 55.6 million allocated to the cash generating unit remains recoverable, and no impairment needs to be recognised because the recoverable amount exceeds the balance sheet value. However, management is of the opinion that the goodwill of the cash generating unit, which has been recognised since 31 December 2011 in accordance with IFRS 5 as non-current assets held for sale, and which since 30 June 2013 has again been fully consolidated, is to be regarded as no longer recoverable. Consequently, the goodwill totalling CHF 70.1 million has been completely written off and has been recognised as an impairment of goodwill in general and administrative expenses. Due to the balancing of accounts in accordance with IFRS 5 per 30 June 2013, the goodwill of the Institutional Clients Business Segment reported at 31 December 2012, is recognised as «Non-current assets held for sale».

Assumptions

As far as possible, the parameters, on which the valuation model is based, are coordinated with external market information. In this context the value in use of a cash generating unit is most sensitive to changes in the forecasted earnings, changes to the discount rate and changes in the long-term growth rate. The discount rate is determined on the basis of the capital asset pricing model (CAPM), which contains a risk-free interest rate, a market risk premium, a small cap premium, as well as a factor for the systematic market risk, i.e. the beta factor.

The long-term growth rates outside the five-year planning period (terminal value), on which the impairment tests for the interim financial reporting per 30 June 2013 were based and which were used for extrapolation purposes, as well as the discount rates for the individual cash generating units were unchanged from parameters used at 31 December 2012.

The discount rate is directly influenced by the fluctuation of interest rates. On account of the currently historically low interest rate levels in the market, the discount rate of the cash generating units has not changed in comparison with the previous year. In a longer-term comparison, the present interest rate environment is also reflected in substantially lower interest income as well as corresponding lower annual earnings and free cash flows distributable to shareholders. On account of the fact that the discount rate is linked to current interest rate levels, when the latter rise, basically the discount rate, and interest income, will also increase. The cash generation units are exposed to only a limited level of risk because they operate in a local market, and only in retail and private banking with a limited risk profile.

Sensitivities

A change in the risk-free interest rate has an influence on the discount rate, whereby a change in the economic situation, especially in the financial services industry, also has an impact on the expected or estimated results. In order to test these effects on the value in use on the individual cash generating units, the parameters and assumptions employed with the valuation model are subjected to a sensitivity analysis. For this purpose the forecasted free cash flow attributable to shareholders is changed by 10 %, the discount rate by 10 % and the long-term growth rates by 10 %. Management is of the opinion that a change in the assumptions and parameters would lead to an impairment in the case of the Retail & Corporate Banking segment. According to the results of the impairment tests and based on the described assumptions, an amount of CHF 11.9 million in excess of the balance sheet value is obtained for the Retail & Corporate Banking segment. A change in the long-term growth rate of 10 % would not result in an impairment of the goodwill of the Retail & Corporate Banking segment. However a 10 % change in the discount rate or a 10 % change in the free cash flow would lead to an impairment in the goodwill of the Retail & Corporate Banking cash generating unit of CHF 33.1 million or CHF 29.4 million respectively. The discount rate could be changed by 2.4 % and the free cash flow by 2.8 % until the recoverable amount would equal the carrying value. In view of the challenging situation in the financial services industry, which is expected to persist in the future, management estimates that an impairment of the goodwill in the Retail & Private Banking segment in the coming business years is not improbable. However, management believes that in the medium to long term the segment will enjoy a positive development thanks to its relative strength in comparison with competitors, as well as the planned and already implemented cost-saving and efficiency improvement measures made in the said segment.

If the estimated earnings and other assumptions in future business years were to deviate from the current outlook due to political or global risks in the banking industry – such as for example due to uncertainty in connection with the implementation of regulatory provisions and the introduction of certain legislation, or a decline in general economic performance – this could result in an impairment of goodwill in the future. This would lead to an expense in the income statement of the LLB Group, and would reduce the equity attributable to shareholders as well as net profit. Such an impairment would not, however, have an impact on cash flow or on the tier 1 ratio because, in accordance with the Liechtenstein capital adequacy ordinance, goodwill must be deducted from capital.

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