Consolidated annual report of VP Bank Group
In 2017, the Group net income could be increased markedly over that of the preceding year and a very high level of net new money inflows was recorded. The interest-rate environment was characterised by on-going low to negative interest rates. A positive sentiment prevailed on stock markets and as a result, the most important stock-market indices gained appreciably during the past year. At the same time, the introduction of new regulatory provisions at home and abroad weighed on resources in the banking segment. VP Bank held its ground very well in this demanding environment.
The 2017 consolidated financial statements of VP Bank Group prepared in accordance with International Financial Reporting Standards (IFRS) reported a Group net income of CHF 65.8 million. In the prior year, an income of CHF 58.0 million had been achieved. The 2017 Group net income could thus be clearly increased by CHF 7.8 million or 13.4 per cent over that of the prior year. This result in 2017 was impacted in particular by two non-recurring items: in the first half year of 2017, a provision amounting to CHF 10.9 million was recognised for the settlement with the authorities of North Rhine-Westphalia. In the second half of the year, the earnings benefited from the lowering of the rate of conversion of the pension fund leading to a reduction of personnel expense of CHF 10.1 million. Ignoring these two non-recurring items, the 2017 Group net income was CHF 66.6 million and thus CHF 8.6 million clearly more than the prior year’s Group net income (plus 14.8 per cent).
A very high level of net new client money totalling CHF 1.9 billion (prior year: CHF 0.0 billion) could be achieved for 2017, and the heartening trend of the first half year could be continued in the second half of the year. This resulted from reinforced market-development activities and implemented growth initiatives as well as the recruitment offensive of new senior client advisors.
Having regard to the annual results and the balanced long-term dividend policy, the Board of Directors will propose to the Annual General Meeting to be held on 27 April 2018, an increase of the dividend to CHF 5.50 (prior year CHF 4.50) per registered share A and to CHF 0.55 (prior year CHF 0.45) per registered share B.
The Board of Directors of VP Bank Group has defined the following target values for 2020:
- CHF 50 billion of assets under management
- Group net income of CHF 80 million
- a cost/income ratio of under 70 per cent
VP Bank Group continued to pursue its growth strategy in 2017. Market-development activities could be further reinforced as a result of which assets under management could grow noticeably and profitability strengthened in a sustainable manner.
VP Bank intends to make further acquisitions of banks or whole teams which ideally complement VP Bank Group on the basis of their business model with comparable core competencies, corporate cultures, target markets and client structures. In order to advance organic growth, it is planned, as part of a recruitment offensive, to hire some 25 new senior client advisors per annum with the transfer of the assets managed by them to VP Bank. As part of this recruitment offensive, 24 new client advisors were engaged during the current financial year. In addition, as part of the digitalisation strategy, new innovative services are being developed with urgency and targeted investments made in digital tools in order to render internal processes more efficient and to further optimise the benefit for the client.
Assets under management at 31 December 2017 totalled CHF 40.4 billion (prior year: CHF 35.8 billion). Group net income for the year ending 31.12.2017 amounted to CHF 65.8 million (prior year: CHF 58.0 million) and the cost/income ratio was 64.2 per cent (prior year: 68.4 per cent).
The Management of VP Bank is convinced of achieving the defined goals in 2020 through the targeted exploitation of its organic and acquisition-related growth potential whilst maintaining strict management of costs at the same time. The achievement of the goals is underpinned by the robust level of VP Bank Group’s equity resources which are above average compared to the norm in the industry.
As of 31.12.2017, VP Bank Group had a tier 1 ratio of 25.7 per cent (prior year: 27.1 per cent) and thus adequate equity to support further acquisitions. At the end of August 2017, the rating agency, Standard & Poor’s confirmed the very good rating of “A–” and the outlook as “positive”. The high level of equity resources, the successful business model of VP Bank and the tested ability to make and integrate corporate acquisitions constitute an outstanding starting point to be able to assume an active role in future in the process of consolidation in the banking sector.
During the financial year, the cost/income ratio could be reduced by a gratifying 4.2 per cent to 64.2 per cent. The ratio of operating expenses expressed as a percentage of operating income also declined to 76.6 per cent (prior year: 77.7 per cent).
Client assets under management
As of the end of 2017, client assets under management of VP Bank Group aggregated CHF 40.4 billion. Compared with the prior year’s amount of CHF 35.8 billion, this represents an increase of 13.0 per cent.
Compared to the organic development of net new client money in 2016, net new client money inflows during the year showed a marked improvement. In aggregate, VP Bank Group recorded a very high level of new client monies of CHF 1,894 million in 2017 (prior year: organic net new client assets of plus CHF 7 million). All locations contributed to this welcome result. The inflows of client money were achieved as a result of intensive market-development activities, net new money from existing clients and the recruitment of new client advisers, in particular at international locations.
The performance-related increase in assets under management was CHF 2.7 billion in 2017 (prior year: increase of CHF 1.0 billion). This increase is essentially to be ascribed to rising stock-market prices and the rise in the euro and the related upward revaluation of foreign-currency denominated assets under management.
Custody assets rose by CHF 0.3 billion (4.7 per cent) to CHF 6.1 billion (prior year: CHF 5.8 billion).
As of 31 December 2017, client assets including custody assets totalled CHF 46.4 billion (prior year: CHF 41.5 billion).
Year-on-year, operating income rose by CHF 26.9 million (plus 9.8 per cent) from CHF 273.2 million to CHF 300.1 million in 2017.
In spite of the negative interest-rate environment, interest income could be increased by CHF 2.1 million or 2.0 per cent to CHF 104.4 million through the active balance-sheet management, margin adjustments, increase in volumes and higher US dollar interest rates in comparison to the previous year. Based upon risk/return considerations, client deposits denominated in foreign currencies were, in part, no longer placed on the interbank market but were swapped into Swiss francs using currency swaps and deposited with the Swiss National Bank (SNB). The income from the interest component of these foreign-currency swaps (CHF 26.9 million) exceeded the expense for the SNB negative interest (CHF 15.3 million) and the reduced earnings from banks. The increase in interest income from client activities by CHF 8.7 million to CHF 87.2 million is the result of margin adjustments and volume increases; by contrast, interest expense during the year from client-related activities rose by CHF 10.4 million to CHF 14.4 million as a result of the higher USD interest rates. Interest income on financial instruments valued at amortised cost rose by CHF 1.8 million to CHF 20.4 million principally because of higher balance-sheet positions. Interest income includes also changes in the value of interest-rate hedging transactions (interest-rate derivatives) in the amount of minus CHF 1.1 million (prior year: minus CHF 2.0 million).
The income from commissions and services in the year grew by CHF 5.1 million to CHF 123.9 million (plus 4.3 per cent). The good sentiment on equity markets during the year impacted commission income positively. Brokerage fees rose in 2017 over the comparable prior-year period by CHF 1.1 million, or 3.3 per cent from CHF 32.3 million to CHF 33.3 million.
Both the positive performance of existing client assets as well as the gratifying inflow of new client money also positively impacted portfolio-based income: as a result, commission income from portfolio management and the investment business reported a rise of plus 6.6 per cent from CHF 41.2 million in 2016 to CHF 43.9 million in 2017. Custodian fees also increased in 2017 from CHF 19.7 million to CHF 20.8 million.
Fund-management fees could be increased from CHF 59.4 million to CHF 64.1 million (plus 7.9 per cent).
Trading income grew by 12.9 per cent from CHF 44.5 million in 2016 to CHF 50.2 million in 2017. The income from (foreign-currency) trading on behalf of clients could be increased by a welcome 8.2 per cent to CHF 51.6 million. Realised and unrealised revaluation differences arising from hedging transactions for financial investments are recognised in securities trading. A loss of minus CHF 1.4 million (prior year: minus CHF 3.2 million) had to be recorded as a result of the market environment.
Financial investments ended the year with an income of CHF 19.2 million (prior year: CHF 7.6 million). This increase in income from financial investments of CHF 11.6 million can be ascribed principally to realised and unrealised revaluation gains on financial investments, valued at fair value (FVTPL), of CHF 11.8 million (prior year: minus CHF 0.7 million).
The increase in other income/expense is to be explained by the non-recurring impact of CHF 0.7 million arising on the disposal of an associated company in the first half of 2017.
Operating expenses in the current financial year rose year-on-year by CHF 17.6 million from CHF 212.2 million to CHF 229.8 million (increase of 8.3 per cent).
As a result of the settlement reached with the authorities of North Rhine-Westphalia in connection with the untaxed assets of German clients, a non-recurring provision of CHF 10.9 million was recognised and communicated in the first half year of 2017. This settlement is a comprehensive solution and is valid for all German Federal states. A further non-recurring item led to a reduction in personnel expense of CHF 10.1 million resulting from the adjustment to the rate of conversion of the pension fund which positively impacted the 2017 annual results.
Personnel expense year-on-year declined marginally by CHF 0.5 million or 0.4 per cent to CHF 134.8 million. Excluding the one-off item of CHF 10.1 million in the second half of year, the adjusted personnel expense in the current financial year increased by CHF 9.6 million (plus 7.1 per cent). In line with the strategic growth initiatives, this adjusted increase in personnel expense resulted, inter alia, from the recruitment offensive of new senior client advisors. At the end of December 2017, VP Bank Group had 800 employees, expressed as full-time equivalents, representing an increase in employee headcount of 61 employees over the level at the end of 2016 (plus 8.3 per cent).
General and administrative expense in 2017 rose by CHF 6.1 million (plus 11.8 per cent) from CHF 51.7 million to CHF 57.8 million. This increase was recorded primarily under professional fees (plus CHF 4.3 million) due primarily to external advisory costs incurred in order to support VP Bank Group in various projects (particularly regulatory requirements, growth initiatives, digitalisation etc.).
Depreciation and amortisation as of 31.12.2017 was CHF 1.2 million or 5.1 per cent higher, year-on-year, amounting to CHF 23.6 million. This increase principally reflects the amortisation charged on investments in intangible assets (software).
Charges for valuation allowance, provisions and losses in 2017 totalled CHF 13.6 million (prior year: CHF 2.8 million). The increase is to be explained by the aforementioned settlement with the North Rhine-Westphalia authorities and the related provision of CHF 10.9 million.
Taxes on income
Taxes on income in 2017 amounted to CHF 4.6 million which is CHF 1.5 million more than in the prior year. In spite of higher pre-tax income, total current taxes, year-on-year, were lower, as higher tax-exempt income on financial investments was realised in the financial year.
Consolidated net income
Group net income in 2017 amounted to CHF 65.8 million and rose by 13.4 per cent over that of the prior year (prior year: CHF 58.0 million). Group net earnings per registered share A were CHF 10.89 (prior year: CHF 9.61).
Comprehensive income comprises all revenues and expenses recognised in the income statement and in equity. Items recorded directly in equity principally concern actuarial adjustments relating to pension funds and changes in the value of financial instruments (FVTOCI). VP Bank Group generated comprehensive income in 2017 of CHF 79.5 million as against CHF 46.1 million in the preceding year.
Total assets grew, in comparison to 31.12.2016, by CHF 1.0 billion to CHF 12.8 billion as of 31.12.2017. The increase in total assets is to be explained by the client deposits under “other amounts due to clients”. These increased by CHF 0.8 billion to CHF 9.9 billion. On the assets’ side, cash and cash equivalents remained constant at CHF 3.6 billion (31.12.2016: CHF 3.5 billion). The share of cash and cash equivalents in the balance sheet thus amounts to 28.3 per cent pointing to a very comfortable level of liquidity in VP Bank. As noted under interest income, increased amounts of client monies were deposited with the SNB in order to optimise interest income through the active management of risk and returns. The consequence of this was that amounts due to banks and the related counterparty risks could be reduced since 31 December 2015 from CHF 2.1 billion to CHF 0.9 billion as of 31.12.2017.
Client loans in the caption “receivables from clients” increased during the year by CHF 0.4 billion (7.6 per cent) to CHF 5.6 billion, in particular, as a result of lombard loans. In this respect, VP Bank continues its conservative credit-granting policies unchanged focusing on qualitative growth in client loans as well as a high level of discipline and control in credit-granting activities.
At the same time, financial instruments valued at amortised cost of CHF 1.8 billion in the prior year increased by CHF 0.4 billion to CHF 2.2 billion in 2017 (plus 19.1 per cent).
On the liabilities’ side, client deposits (amounts due to clients), savings accounts and medium-term notes rose by CHF 0.8 billion since the beginning of 2017 to CHF 10.8 billion as at 31.12.2017 (plus 7.5 per cent).
On 6 June 2016, VP Bank Ltd announced a share repurchase programme involving a maximum of 120,000 registered shares A of a nominal value of CHF 10. In total, 88,835 registered shares A were repurchased during the period from 7 June 2016 through 31 May 2017, which corresponds to 1.34 per cent of the capital inscribed in the Commercial Register and 0.74 per cent of the voting rights. The registered shares A so repurchased are to be used for future acquisitions or treasury management purposes.
Consolidated equity of VP Bank Ltd at the end of 2017 totalled CHF 994.2 million (end of 2016: CHF 936.9 million). This represents an increase of CHF 57.2 million.
The risk-weighted assets rose by CHF 0.3 billion (plus 9.7 per cent) to CHF 3.8 billion in the financial year and the tier 1 ratio at 31 December 2017 thus amounted to 25.7 per cent (31 December 2016: 27.1 per cent). In comparison with other banks, this is an outstanding value and permits VP Bank to continue to pursue an organic and acquisition-based growth strategy.
Financial markets started the year 2018 in a very friendly and confident manner, but subsequently fell sharply. The good investor sentiment should be put to the test on several occasions during the course of the year. The market environment, the development of interest rates as well as the global political landscape will also impact business operations and the results of VP Bank Group in 2018.
With digitalisation, the financial segment faces major challenges but also very promising opportunities. VP Bank is optimally equipped to meet the challenges of the future and has launched related projects, thus continuing to pursue its sustained growth strategy. The high level of equity resources and stable shareholder base form an excellent basis for a successful future in order to be able to assume an active role in future in the process of consolidation of the finance industry.