Statutory auditor’s report on the audit of the consolidated financial statements

We have audited the consolidated financial statements of VP Bank Ltd and its subsidiaries (the Group) – which comprise the consolidated income statement, consolidated statement of com­prehensive income, consolidated balance sheet, consolidated changes in shareholders equity, consolidated statement of cash flow and notes for the year ended 31 December 2016, including a summary of significant accounting policies (pages 107 to 172) – and the consolidated annual report.

In our opinion the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and comply with Liechtenstein law.

The consolidated annual report is in accordance with the consolidated financial statements.

We conducted our audit in accordance with Liechtenstein law and International Standards on Auditing (ISAs). Our responsibilities under those provisions and standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We are independent of the Group in accordance with the provisions of Liechtenstein law and the requirements of the audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the consolidated financial statements.

As of 31 December 2016 the amount Due from customers was CHF 5.2 billion or 44.5% of the Group‘s balance sheet, of which CHF 3.3 billion relate to Mortgages and CHF 1.9 billion to Other loans.

Due from customers are valued at amortized cost, which equates to the fair value at the time the loans were granted. An allowance for credit losses is considered in case of a credit deterioration of the counterparty or country. An allowance for credit losses is reported as a decrease in carrying value of a loan on the balance sheet. Collective allowances and provisions are recorded to cover potential, yet unidentified credit risks. All impaired loans are reviewed at least annually. Any sub­sequent changes to the amounts and timing of the expected future cash flows compared with prior estimates result in a change in the allowance for credit losses. Judgment is used in making assumptions about timing and amount of impairment losses. 

We focused on this area due to the judgmental nature and the magnitude of the mentioned balance sheet items.

The Group describes its accounting policies for the item Due from customers on page 116 and notes 15 and 16 to the consolidated financial statements.

We tested the design and operating effectiveness of the key controls over the process for granting and monitoring loans. We also assessed the process and controls over the identification of non- performing loans.

We selected a sample of individual loans and independently performed impairment testing and evaluated the assumptions used for the calculation of allowances for credit losses. In addition, we evaluated the appropriateness of the accounting principles used and examined the disclosures in the notes to the consolidated financial statements.

The Group recognizes financial instruments at fair value, particularly in the balance sheet items Trading portfolio, Derivative financial instruments and Financial instruments at fair value. 

Fair values are based on quoted market prices if an active market exists. If no active market exists, fair values are determined by reference to listed quotes or external pricing models (level 2). The use of valuation models is highly dependent on the assumptions applied, including interest rates, forward rates, swap rates, spread curves, volatilities and estimates of future cash flows. The determination of these assumptions involves the exercise of significant judgment.

We focused on this area due to the judgmental nature and the magnitude of the mentioned balance sheet items.

The Group describes its  accounting policies and notes 17 to 19 and note 38 to the consolidated financial statements.

We assessed the selection process for the key assumptions used for valuation and tested them on a sample basis with the assistance of our valuation specialists. In addition, we performed combined model and parameter tests, i.e., we validated the Group‘s measurements using independent valuation models and inputs. We also tested the fair values available in an active market on a sample basis, including comparing values to available market data.

The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements and our auditor’s reports thereon. 

Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Liechtenstein law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Liechtenstein law and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of
EXPERTsuisse: www.expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report.

We recommend that the consolidated financial statements submitted to you be approved.

Ernst & Young Ltd

Bruno Patusi
Swiss Cer­ti­fied Ac­coun­tant
(Au­di­tor in charge)

Moreno Halter
Cer­ti­fied Ac­coun­tant

Berne, 28 February 2017