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 credit and loan facilities is subject to clearly defined authorization procedures. The clear separation of market and back office processing and control departments is an important feature of the approval procedure for granting credit and loan facilities.

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

(XLS:)

 

 

 

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

The expected loss is a future-related, statistical concept with which the LLB Group estimates the average annual costs incurred because positions in the current portfolio are classified as impaired. The expected loss is determined on the basis of the probability of default of a counterparty, the expected credit exposure with this counterparty at the time point of the default and 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, liquidity, volatility and complexity of the individual instruments.

Derivatives

To mitigate risks, the LLB Group can also employ credit derivatives. During the last two years, this possibility has not been utilised.

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 overdue when a significant payment to be made by a borrower is overdue. The overdraft commences on the day a borrower exceeds an agreed limit, has not paid interest or instalments, or has utilised an unauthorized credit line.

Default-distressed claims

Claims are regarded as being distressed if a loan default can no longer be excluded in the near future due to the creditworthiness of the client.

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

(XLS:)

in CHF thousands

31.12.2012

31.12.2011

Average

Credit risks from balance sheet transactions

 

 

 

Due from banks

5'732'925

6'819'971

6'276'448

Loans

 

 

 

mortgage loans

9'023'728

8'647'273

8'835'501

loans to public authorities

63'538

60'212

61'875

other loans

1'527'724

1'619'960

1'573'842

Trading portfolio

 

 

 

fixed interest securities

3'817

4'000

3'909

Derivative financial instruments

73'009

125'988

99'499

Financial investments at fair value through profit and loss

 

 

 

fixed interest securities

605'372

547'528

576'450

Total

17'030'113

17'824'932

17'427'524

 

 

 

 

Credit risks from off-balance-sheet transactions

 

 

 

Contingent liabilities

89'411

114'202

101'807

Irrevocable commitments

147'771

139'057

143'414

Liabilities for calls on shares and other equities

8'964

8'852

8'908

Total

246'146

262'111

254'129

3.8 Due from banks and loans

(XLS:)

 

31.12.2012

31.12.2011

in CHF thousands

Loans

Due from banks

Loans

Due from banks

Neither overdue nor allowance made

10'287'655

5'732'025

9'927'079

6'807'756

Overdue but no allowance made

147'770

96

164'988

388

Overdue, allowance made (specific)

215'708

804

156'718

243

Default-distressed, allowance made (specific)

177'697

48'265

258'531

48'687

Allowance made (general)

1'512

0

2'308

0

Gross

10'830'342

5'781'190

10'509'624

6'857'074

Minus allowances (specific)

–214'446

–48'265

–182'042

–37'103

Minus allowances (general)

–906

0

–137

0

Net

10'614'990

5'732'925

10'327'445

6'819'971

Due from banks and loans neither overdue nor allowances made

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total
loans

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

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total
loans

Due from banks

31.12.2011

 

 

 

 

 

Investment grade

2'610'754

16'001

288'406

2'915'161

5'618'181

Standard monitoring

5'613'560

42'656

1'009'957

6'666'173

1'189'575

Special monitoring

197'848

12

102'142

300'002

0

Sub-standard

44'577

0

1'166

45'743

0

Total

8'466'739

58'669

1'401'671

9'927'079

6'807'756

Loans overdue but no allowances made

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total
loans

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

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total
loans

31.12.2011

 

 

 

 

Overdue by up to 30 days

45'381

1'543

61'635

108'559

Overdue 31 to 60 days

3'280

0

37'904

41'184

Overdue 61 to 90 days

8'000

0

7'245

15'245

Total

56'661

1'543

106'784

164'988

Loans with specific allowances

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total
loans

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 allowances

29'725

0

184'721

214'446

48'265

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other
loans

Total
loans

Due from banks

31.12.2011

 

 

 

 

 

Overdue claims

32'365

0

124'354

156'719

243

Default-distressed claims

119'994

0

138'537

258'531

48'687

Fair value of cover

–123'859

0

–109'349

–233'208

–11'827

Total specific allowances

28'500

0

153'542

182'042

37'103

Newly agreed loans

Newly agreed loans are not substantial.

3.9 Overdue and default-distressed claims by geographical area

(XLS:)

 

31.12.2012

31.12.2011

in CHF thousands

Default-distressed claims

Overdue claims

Specific allowance

Default-distressed claims

Overdue claims

Specific allowance

Liechtenstein and Switzerland

154'493

282'793

169'938

258'531

224'189

148'497

Europe excluding FL / CH

14'822

10'975

15'473

0

45'207

18'827

North America

0

4

0

0

17

0

Asia

56'424

8'365

57'437

48'687

15'952

46'631

Others

223

62'241

19'863

0

36'972

5'190

Total

225'962

364'378

262'711

307'218

322'337

219'145

3.10 Debt instruments

(XLS:)

 

31.12.2012

31.12.2011

in CHF thousands

Trading portfolio

Designated fair value

Total

Trading portfolio

Designated fair value

Total

AAA

601

417'803

418'404

1'957

391'298

393'255

AA1 to AA3

653

67'389

68'042

687

67'215

67'902

A1 to A3

1'305

88'615

89'920

1'100

61'378

62'478

Lower than A3

786

9'453

10'239

19

0

19

Without a rating

472

22'112

22'584

237

27'637

27'874

Total

3'817

605'372

609'189

4'000

547'528

551'528

3.11 Taken over collateral

(XLS:)

 

2012

2011

in CHF thousands

Financial investments

Real estate / properties

Total

Financial investments

Real estate / properties

Total

As at 1 January

135

0

135

122

0

122

Additions/disposals

0

0

0

0

0

0

Profit/loss

–53

0

–53

13

0

13

As at 31 December

82

0

82

135

0

135

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

(XLS:)

in CHF thousands

Liechtenstein / Switzerland

Europe without FL/CH

North America

Asia

Other

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

Loans

 

 

 

 

 

 

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

(XLS:)

in CHF thousands

Liechtenstein / Switzerland

Europe without FL/CH

North America

Asia

Other

Total

31.12.2011

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

1'174'352

5'343'264

248'955

20'610

32'790

6'819'971

Loans

 

 

 

 

 

 

mortgage loans

8'647'273

0

0

0

0

8'647'273

loans to public authorities

60'212

0

0

0

0

60'212

other loans

1'006'697

189'212

10'802

151'457

261'792

1'619'960

Trading portfolio

 

 

 

 

 

 

fixed interest securities

0

3'205

240

0

555

4'000

Derivative financial instruments

104'294

18'095

1'098

1'133

1'368

125'988

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

203'614

289'086

44'721

5'016

5'091

547'528

Total

11'196'442

5'842'862

305'816

178'216

301'596

17'824'932

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

89'454

5'464

67

3'536

15'681

114'202

Irrevocable commitments

138'341

0

30

686

0

139'057

Liabilities from calls on shares and other equities

8'852

0

0

0

0

8'852

Total

236'647

5'464

97

4'222

15'681

262'111

Risk concentration by sectors

(XLS:)

in CHF thousands

Financial services

Utilities

Private households

Other*

Total

*

None of the business sectors summarized under the item «other» exceeds 10 percent of the volume.

31.12.2012

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

Due from banks

5'732'925

0

0

0

5'732'925

Loans

 

 

 

 

 

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

(XLS:)

in CHF thousands

Financial services

Utilities

Private households

Other*

Total

*

None of the business sectors summarized under the item «other» exceeds 10 percent of the volume.

31.12.2011

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

Due from banks

6'819'938

0

33

0

6'819'971

Loans

 

 

 

 

 

mortgage loans

118'696

874'768

6'484'890

1'168'919

8'647'273

loans to public authorities

0

0

5'518

54'694

60'212

other loans

755'850

52'867

222'899

588'344

1'619'960

Trading portfolio

 

 

 

 

 

fixed interest securities

2'693

6

0

1'301

4'000

Derivative financial instruments

77'082

257

39'966

8'683

125'988

Financial investments at fair value through profit and loss

 

 

 

 

 

fixed interest securities

369'581

0

0

177'947

547'528

Total

8'143'840

927'898

6'753'306

1'999'888

17'824'932

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

Contingent liabilities

36'515

26'130

26'075

25'482

114'202

Irrevocable commitments

25'053

2'060

62'021

49'923

139'057

Liabilities from calls on shares and other equities

8'852

0

0

0

8'852

 Total

70'420

28'190

88'096

75'405

262'111

top of page