19 Goodwill and other intangible assets

(XLS:)

in CHF thousands

Goodwill

Other
intangible
assets

Software

Total

As at 1 January 2011

 

 

 

 

Cost

170'421

112'374

112'399

395'194

Accumulated amortisation

–26'261

–38'621

–23'986

–88'868

Net book amount

144'160

73'753

88'413

306'326

 

 

 

 

 

Year ended December 2011

 

 

 

 

Opening net book amount

144'160

73'753

88'413

306'326

Additions

0

0

13'961

13'961

Disposals

0

0

–10

–10

Amortisation

0

–8'084

–12'238

–20'322

Reclassification as non-current assets held for sale

–76'897

–22'280

–1'156

–100'333

Closing net book amount

67'263

43'389

88'970

199'622

 

 

 

 

 

As at 31 December 2011

 

 

 

 

Cost

93'524

71'050

119'192

283'766

Accumulated amortisation

–26'261

–27'661

–30'222

–84'144

Net book amount

67'263

43'389

88'970

199'622

 

 

 

 

 

Year ended December 2012

 

 

 

 

Opening net book amount

67'263

43'389

88'970

199'622

Additions

0

0

3'979

3'979

Disposals

0

0

0

0

Amortisation

0

–8'002

–11'659

–19'661

Closing net book amount

67'263

35'387

81'290

183'940

 

 

 

 

 

As at 31 December 2012

 

 

 

 

Cost

93'524

71'050

123'171

287'745

Accumulated amortisation

–26'261

–35'663

–41'881

–103'805

Net book amount

67'263

35'387

81'290

183'940

Goodwill

At 31 December 1012, the LLB Group carried goodwill for the following two segments:

(XLS:)

in CHF thousands

31.12.2012

31.12.2011

Retail & Corporate Banking segment

55'620

55'620

Institutional Clients segment

11'643

11'643

Total

67'263

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 value 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.

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, which is described below, management reached the conclusion that for the 2012 business year the balances of goodwill allocated to the cash generating units remain recoverable and no impairment needs to be recognised because the recoverable amount exceeds the balance sheet value in each case.

Recoverable amount

For determining the value in use, which corresponds to the recoverable amount of the respective cash generating units, the LLB Group employs a discounted cash flow (DCF) valuation model. The DCF model used by the LLB Group takes into consideration the special features of the banking business and financial service sector, as well as the regulatory environment. With the aid of the model, and on the basis of the financial planning approved by management, the cash value of estimated free cash flow is calculated. If regulatory capital requirements exist for the cash generating unit, these capital requirements are deducted from the estimated free cash flows for the respective period and are available to the cash generating unit for distribution. This amount then corresponds to the theoretical sum that could be paid out to the shareholder. For the assessment of the forecasted earnings, management employs approved financial plans covering a period of five years. The results for all periods after the fifth year are extrapolated from the forecasted result or the free cash flow of the fifth year together with a long-term growth rate corresponding to the long-term inflation rate, in Switzerland and Liechtenstein. Under certain circumstances, the growth rates may vary for the individual cash generating units because the probable developments and conditions in the respective markets are taken into account.

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 impairments tests in the 2012 and 2011 business years were based and which were used for extrapolation purposes, as well as the discount rates for the individual cash generating units are shown in the following table:

(XLS:)

 

Growth rates

Discount rates

in percent

2012

2011

2012

2011

Segment Retail & Corporate Banking

1.0 %

1.5 %

6.0 %

6.0 %

Segment Institutional Clients

1.0 %

1.0 %

8.5 %

8.5 %

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 is 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 correspondingly 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 rises, basically the discount rate, and interest income, will also increase. The cash generating units are exposed to only a limited level of risk because they operate in a local market and only in retail and institutional banking with a limited risk profile.

Sensitivities

During the periodic preparation and execution of impairment tests all the parameters and assumptions, on which the testing of the individual cash generating units is based, are reviewed and, if necessary, adjusted. 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 check these effects on the value in use of 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 100 bp and the long-term growth rates by 50 bp. Management is of the opinion that a change in the assumptions and parameters would lead to a value impairment only in the case of the Retail & Corporate Banking segment. With the Institutional Clients segment, none of the changes to assumptions mentioned would lead to a value impairment because the recoverable amount is well above the carrying amount. According to the results of the impairment tests and based on the described assumptions, an amount of CHF 55.6 million in excess of the balance sheet value is obtained for the Retail & Corporate Banking segment. A change in the discount rate of 100 bp and the long-term growth rate of 100 bp would not result in an impairment of the goodwill value of the Retail & Corporate Banking segment. However, a 10% change in the free cash flow would lead to an impairment in the Retail & Corporate Banking cash generating unit of CHF 30.2 million. The free cash flow could be changed by 2.7 % 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 value of goodwill in the Retail & Private Banking segment 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 to the planned and already implemented cost-saving and efficiency improvement measures made in the mentioned segment.

If the estimated earnings and other assumptions in future business years 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 our goodwill in future. This would lead to a reduction in the income statement of the LLB Group and a decrease in the equity attributable to shareholders and net profit. Such an impairment would not, however, have an impact on cash flows or on the tier 1 ratio because, in accordance with Liechtenstein equity capital ordinance, goodwill must be deducted from capital.

Other intangible assets

Customer relationships and brand values are reported as assets under other intangible assets. These are amortised over a period of 10 to 15 years on a straight-line basis. Estimated aggregated amortisation on intangible assets amounts to:

(XLS:)

in CHF thousands

 

2013

5'117

2014

5'117

2015

5'117

2016

3'719

2017

3'718

2018 and thereafter

15'485

Total

38'273

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