Consolidated annual report of VP Bank Group
During the past financial year, VP Bank reported a very satisfying amount of net new client money totalling CHF 3.2 billion. The on-going low interest-rate environment as well as developments on interest-rate and equity markets led to a 16.8 per cent lower Group net income of CHF 54.7 million over that achieved in the prior year (2017: CHF 65.8 million).
The interest-rate environment continued to be characterised by on-going low to negative interest rates. An overcast sentiment predominated on stock markets with the result that the SMI lost more than 10 per cent in the financial year. At the same time, the introduction of new regulatory provisions at home and abroad weighed heavily on resources in the banking sector. VP Bank held its ground well in this demanding environment.
The 2018 consolidated financial statements of VP Bank Group drawn up in accordance with International Financial Reporting Standards (IFRS) reported a Group net income of CHF 54.7 million. In the prior year, an income of CHF 65.8 million had been achieved. As a result of the negative market backdrop, Group net income of 2018 registered, year-on-year, a drop of CHF 11.1 million or 16.8 per cent.
The positive development of net new money carried forward into 2018. With some CHF 3.2 billion (2017: CHF 1.9 billion), VP Bank Group achieved the highest organic net new money inflow for over ten years. The Bank thus continues to view itself as being on target with its growth strategy. This outstanding growth in new client money is a result of reinforced market-development activities and implemented growth initiatives as well as the recruitment offensive for 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 26 April 2019, an unchanged dividend of CHF 5.50 (prior year CHF 5.50) per registered share A and to CHF 0.55 (prior year CHF 0.55) 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 the financial year. Market-development activities were further intensified, as a result of which assets under management could be increased and the basis established for the future growth in profitability.
VP Bank intends to make further acquisitions of banks or whole teams in its target markets and which ideally complement VP Bank Group on the basis of their business model with comparable core competencies, corporate cultures, target markets and client structures. 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. 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. As part of this recruitment offensive, 24 new client advisors were engaged during the current financial year (2017: 24). 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 2018 totalled CHF 41.5 billion (prior year: CHF 40.4 billion). Group net income for the year ending 31.12.2018 amounted to CHF 54.7 million (prior year: CHF 65.8 million) and the cost/income ratio was 75.8 per cent (prior year: 64.2 per cent).
As of 31.12.2018, VP Bank Group had a tier-1 ratio of 20.9 per cent (prior year: 25.7 per cent) and thus adequate equity to support further acquisitions.
In May 2018, the rating agency Standard & Poor’s raised its already very good rating of „A–“ for VP Bank to „A“ and graded the outlook as stable. This increase in the rating takes account particularly of the substantial new client money inflows in 2017, the operational progress as well as the on-going very strong equity basis. In addition, Standard & Poor’s emphasises the financial leeway enjoyed by VP Bank in order to invest in its operating business and to be able to assume an active role in future in the process of consolidation in the banking sector. VP Bank is one of the few private banks in Liechtenstein and Switzerland to be rated by an international rating agency. The rating and outlook was confirmed by Standard & Poor’s on 9.8.2018.
During the financial year, the cost/income ratio increased to 75.8 per cent (2017: 64.2 per cent) as a result of the negative market conditions and investments in future growth. The ratio “operating expenses expressed as a percentage of operating income“ registered a slight increase to 79.9 per cent (prior year: 76.6 per cent).
Client assets under management
As of the end of 2018, client assets under management of VP Bank Group aggregated CHF 41.5 billion. Compared with the prior year’s amount of CHF 40.4 billion, this represents an increase of CHF 1.1 billion (plus 2.8 per cent).
Compared to the organic development of net new money in 2017, net new client money inflows during the current year showed a marked improvement. In aggregate, VP Bank Group recorded a very high level of new client money inflows of CHF 3,197 million (prior year: plus CHF 1,894 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 in international locations.
Custody assets rose by CHF 0.9 billion (15.3 per cent) to CHF 7.0 billion (prior year: CHF 6.1 billion).
As of 31 December 2018, client assets under management including custody assets totalled CHF 48.5 billion (prior year: CHF 46.4 billion).
Year-on-year, operating income declined in 2018 by CHF 9.3 million (minus 3.1 per cent) from CHF 300.1 million to CHF 290.8 million.
In spite of the negative interest-rate environment, interest income increased by CHF 6.5 million or 6.3 per cent to CHF 111.0 million through 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 could again be increased by CHF 4.2 million, or 15.6 per cent to CHF 31.1 million (prior year: CHF 26.9 million) and exceeded the expense for the SNB negative interest of CHF 16.1 million (prior year: CHF 15.3 million) and the reduced interest income from banks.
The increase in interest income from client activities of CHF 12.4 million to CHF 99.5 million is the result of margin adjustments and volume increases; by contrast, interest expense during the year from client-related activities rose by CHF 19.1 million to CHF 33.5 million as a result of the higher USD interest rates. Interest income on financial instruments valued at amortised cost rose by CHF 6.0 million to CHF 26.4 million mainly 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 1.4 million (prior year: CHF minus 1.1 million).
The income from commissions and services in the year grew by CHF 0.4 million to CHF 124.3 million (plus 0.3 per cent). The troubled sentiment on equity markets during the year negatively impacted commission income. Brokerage fees in 2018 fell, year-on-year, by CHF 3.9 million, or 11.6 per cent from CHF 33.3 million to CHF 29.5 million. The welcome 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 11.5 per cent from CHF 43.9 million in 2017 to CHF 48.9 million in 2018. The level of custodian fees in 2018 changed negligibly from that of the prior year.
Trading income grew by 9.4 per cent from CHF 50.2 million in 2017 to CHF 55.0 million in 2018. The income from (foreign-currency) trading on behalf of clients could be increased by a welcome 6.3 per cent to CHF 54.9 million. Realised and unrealised revaluation differences arising from hedging transactions for financial investments are recognised in securities trading. Income of CHF 0.1 million (prior year: minus CHF 1.4 million) could be realised as a result of the market environment.
Financial investments ended the year with an loss of CHF 1.6 million (prior year: gain of CHF 19.2 million). This decrease of CHF 20.9 million can be ascribed principally to realised and unrealised revaluation losses on financial investments valued at fair value (FVTPL), of minus CHF 8.8 million (prior year: plus CHF 11.8 million).
Operating expenses in the current financial year rose year-on-year by CHF 2.6 million from CHF 229.8 million to CHF 232.3 million (increase of 1.1 per cent).
Excluding the non-recurring impact from IAS 19 resulting in the lowering of the rate of conversion in the pension fund which led to a reduction in personnel expense of CHF 10.1 million in 2017, personnel expenses, year-on-year, rose by CHF 12.8 million, or 8.8 per cent to CHF 157.7 million. This increase results principally from the 8.6 per cent higher employee headcount of 868 FTEs as at the end of 2018. In line with the strategic growth initiatives, the adjusted increase in personnel expense results, inter alia, from the recruitment offensive for new senior client advisors.
General and administrative expense in 2018 grew by CHF 5.1 million (plus 8.8 per cent) from CHF 57.8 million to CHF 62.9 million, primarily under information-procurement and IT system costs (plus CHF 2.4 million) for the most part as a result of the increase in personnel resources with corresponding higher maintenance and licence charges. In addition, occupancy costs rose by CHF 1.2 million relating primarily to new buildings and installations. Marketing expense, year-on-year, was CHF 0.8 million lower. In the previous year, non-recurring costs for our new market image were incurred. Other general and administrative expense rose by CHF 1.9 million to CHF 9.1 million as a result of increased regulatory levies and relocation costs.
Depreciation and amortisation as of 31 December 2018 was CHF 1.6 million or 6.6 per cent higher, year-on-year, amounting to CHF 25.1 million. This increase principally relates to the amortisation charged on investments in intangible assets (software) for regulatory projects and growth initiatives which are amortised systematically over several years following completion.
In 2018, a net amount of CHF 13.4 million in the caption valuation allowance, provisions and losses was released to income. The impact of the hurrican Irma on the default risk of the credit portfolio of VP Bank (BVI) Ltd could be reduced, triggering a corresponding release of valuation allowances.
Furthermore, further individual valuation allowances were released during the financial year. The change of plus CHF 27.0 million in the caption „valuation allowances, provisions and losses“ in comparison to the CHF 13.6 million charged last year in the Group financial statements is based on the valuation allowances and provisions established in 2017 of a net amount of CHF 13.6 million. Of this amount, a non-recurring amount of CHF 10.9 million relates to the settlement with the North Rhine-Westphalia authorities in connection with untaxed assets of German clients and the related provision raised.
Taxes on income
Taxes on income in 2018 amounted to CHF 3.8 million which is CHF 0.8 million less than in the prior year.
Consolidated net income
Group net income in 2018 amounted to CHF 54.7 million which is 16.8 per cent less in the prior year (prior year: CHF 65.8 million). Group net earnings per registered share A were CHF 9.04 (prior year: CHF 10.89).
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 2018 of CHF 38.7 million as against CHF 79.5 million in the preceding year.
Total assets declined, in comparison to 31 December 2017, by CHF 0.3 billion to CHF 12.4 billion as of 31 December 2018. The decrease in total assets is to be explained primarily by the client deposits under „other amounts due to clients“ which declined in the financial year to CHF 9.7 billion (minus CHF 0.2 billion) and „amounts due to banks“ (minus CHF 0.1 billion). On the assets’ side, cash and cash equivalents fell by CHF 1.1 billion to CHF 2.5 billion (31.12.2017: CHF 3.6 billion). The main reason for the decline in cash and cash equivalents is the growth in loans, the increase in financial investments and the decrease in on-balance-sheet client deposits.
The share of cash and cash equivalents in the balance sheet thus amounts to 20.3 per cent (prior year: CHF 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 fell since 31 December 2015 from CHF 2.1 billion to CHF 0.8 billion as of 31 December 2018 (31 December 2017: CHF 0.9 billion).
Client loans in the caption „receivables from clients“ increased during the year by CHF 0.5 billion (9.7 per cent) to CHF 6.2 billion, in particular as a result of lombard loans (prior year: CHF 5.6 billion). In this process, VP Bank continues unchanged its conservative credit-granting policies focusing on qualitative growth in client loans as well as a high level of discipline and control in credit-granting activities.
Within the scope of its ALM strategy (Asset and Liability Management), the volume of financial instruments valued at amortised cost of CHF 2.2 billion in the previous year was expanded to CHF 2.4 billion in 2018 as planned (plus 10.0 per cent).
On the liabilities’ side, client deposits (amounts due to clients), savings accounts and medium-term notes fell by CHF 0.2 billion since the beginning of 2018 to CHF 10.6 billion as at 31.12.2018 (minus 2.2 per cent).
On 26 June 2018, VP Bank announced, within the framework of an authorisation granted by the Annual General Meeting of 24 April 2015, that it will increase the number of treasury shares it holds through a further share buyback programme of up to 10 per cent of the share capital. In this manner, VP Bank builds on the three successful programmes of 2015 and 2016. The registered shares A so repurchased are to be used for future acquisitions or treasury management purposes.
As part of a public share buyback programme, VP Bank is ready to repurchase a maximum of 180,000 registered shares A. The buyback period for registered shares A lasts from 27 June 2018 until 28 June 2019 at the latest and will be undertaken over the regular trading line on the SIX Swiss Exchange. At no time will VP Bank hold more of its own registered shares A than it is permitted to within the framework of afore-mentioned authorisation granted to it by the Annual General Meeting (maximum of 601,500 shares equating to 10 per cent of all registered shares A). As of the end of 2018, VP Bank held a total of 599,442 registered shares A in the treasury.
The share buyback offer for the unquoted registered shares B was set at a price of CHF 21.30. This repurchase was completed successfully in August 2018. Until the expiry of the offer period, 173.067 registered shares B with a nominal value of CHF 1.00 were tendered to VP Bank. At 31 December 2018, after completion of the buyback offer, VP Bank holds a total of 324,929 registered shares B in the treasury. As no cancellation of the repurchased shares takes place, the structure of capital and voting rights remains unchanged. In computing the tier 1 ratio, the entire repurchase programme, i.e. 10 per cent of the share capital must be deducted.
Consolidated equity of VP Bank Ltd at the end of 2018 totalled CHF 981.6 million (end of 2017: CHF 990.1 million). This represents an insignificant decrease of 0.9 per cent.
The risk-weighted assets rose by CHF 0.7 billion (plus 18.7 per cent) to CHF 4.5 billion in the financial year and the tier 1 ratio at 31 December 2018 thus amounted to 20.9 per cent (31 December 2017: 25.7 per cent). In comparison with other banks, this is an outstanding value thus enabling VP Bank to continue to pursue an organic and acquisition-based growth strategy.
With digitalisation, the financial sector is confronted with major challenges but also very promising opportunities. VP Bank is optimally equipped to meet these future challenges 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 future role in the process of consolidation of the finance industry.