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 2018, including a summary of significant accounting policies (pages 101 to 172), and the con­solidated annual report (pages 97 to 100).

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 2018, 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.

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 our 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.

Effective on 1 January 2018, the Group applied the first-time adoption of the impairment of financial instruments in accordance with IFRS 9. The first-time adoption resulted in a CHF 2.3m (pre-taxes) in credit risk impairment, which was reversed to equity as of 1 January 2018.

In implementing the revised standard, the Group introduced the model of expected credit loss (“ECL”), which records all expected losses from credit risks for the next twelve months (stage 1) or the entire lifetime (stage 2 and 3) of the financial instruments concerned. The calculation of the ECL depends on model assumptions for default probability, loss rate and discount rate as well as the ­allo­cation to the stage 1 to 3. IFRS 9 also requires that information about past events, current and future economic conditions that are available at the balance sheet date without excessive effort shall be taken into account when measuring the ECL.

The new impairment provisions affect assets and off-­balance sheet items that are subject to potential credit risk and are not already recognised at fair value through profit or loss. As of 1 January 2018, this includes cash and cash equivalents (CHF 3.6b), amounts due from banks and customers (CHF 6.5b), financial instruments measured at amortized cost (CHF 2.2b) and other assets and off-­balance sheet items (CHF 0.2b). 

Due to the inherent uncertainties about future events, estimates and judgments made by Group Executive Management have a material impact on the results of the ECL model. Due to the discretionary scope and the complexity of the initial application, this is of particular importance from an audit perspective. With regard to the valuation of due from customers, we refer to the following particularly important audit matter. 

The Group describes its accounting policies for impairment of financial instruments in accordance with IFRS 9 on page 110 to 111 of this annual report. We also refer to disclosure on page 137 of the notes to the consolidated financial statements.

As part of the implementation of the revised provisions on the recognition of impairment of financial assets in accordance with IFRS 9, we assessed whether the ECL model used to ­calculate expected credit losses is appropriate to reflect the Group's credit risk under the Standard. We also analysed the initial calculation of the ECL model and the reconciliations and disclosures in the notes to the consolidated financial statements. 

We also assessed the processes and controls associated with the regular reviews of the model parameters. We also analyzed the Group Executive Management's assumptions regarding economic scenarios and their probability weighting. 

Our procedures did not give rise to any exceptions with regard to the first-time adoption of impairment in accordance with IFRS 9 “Financial Instruments”.

As at 31 December 2018, the amount due from customers is CHF 6.2b or 50% of the Group's balance sheet, of which CHF 3.2b related to mortgages receivables and CHF 3.0b to other receivables.

Due from customers are initially recognised at actual cost, which corresponds to the fair value at the time the loans were granted. Subsequent measurement is at amortised cost less any recognised impairment. 

The Group uses the expected credit loss (ECL) model to determine impairment, as explained in the previous area of focus. Due from customers are allocated to stage 1 of the ECL model at the time of initial recognition. If due from customers bear a significant increase in credit risk compared with the date of initial recognition, these are transferred to stage 2. If there is objective evidence of impairment, due from customers are transferred to stage 3. 

When allocating to the different stages and determining the impairment, estimates must be made, that involve significant judgment and may vary depending on the assessment.

Due to the magnitude and the involvement of significant judgment of the mentioned balance sheet items, this is of particular importance from an audit perspective.

The Group describes its accounting policies for the item due from customers on pages 110 to 111 of this annual report. In addition, we refer to the notes on credit risks in the section “Risk management” (pages 133 to 136) and note 16 in the consolidated financial statements (pages 148 to 150).

We assessed the process and controls relating to the granting and monitoring of loans. We selected a sample of individual loans and independently performed impairment testing and evaluated the assumptions used for the calculation of impairment for credit losses. Other audit proce­dures included analyzing the allocation of individual loan exposures to the different stages in the ECL model, assessing the accounting policies used and examined the dis­closures in the notes to the consolidated financial statements.

Our procedures did not give rise to any exceptions with regard to the valuation of due from customers.

As part of its ordinary banking activities, the Group is ­involved in various legal, regulatory and administrative proceedings that could have a material effect on the Group due to the nominal amount in dispute.

The Group establishes provisions for pending and threa­tened legal proceedings if it judges that such proceedings are more likely than not to result in a financial obligation or loss. In isolated cases, where the amount cannot be estimated reliably, for example because of the early stage or complexity of the proceedings or other factors, no provision is recognised, but a contingent liability is disclosed.

The recognition and measurement of provisions and the determination and disclosure of contingent liabilities in respect of legal proceedings requires significant judgment.

The Group describes its accounting policies for legal proceedings on page 113. We also are refer to the notes 9 (page 144) and 33 (pages 156 and 157) to the consolidated financial statements.

We assessed the processes and the controls related to the identification, evaluation and measurement of provisions for legal proceedings. Where significant judgements and legal interpretations exist, we evaluated the legal analyses and opinions of external lawyers in order to substantiate the analyses made by the Group. We also examined the disclosure of provisions and contingent liabilities. 

Our procedures did not give rise to any exceptions with regard to the completeness and measurement of provi­sions for legal proceedings.

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.

As part of an audit in accordance with Liechtenstein law and ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made.
• Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business acti­vities within the Group to express an opinion on the conso­lidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the Board of Directors or Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Board of Directors or Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Board of Directors or Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare ­circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The consolidated annual report corresponds to the con­solidated financial statements and contains no significant incorrect information according to our assessment.

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

Ernst & Young Ltd

Philipp de Boer
Certi ed Accountant
(Auditor in charge)

Bruno Patusi
Swiss Certi ed Accountant

Berne, 28 February 2019