Statement by the Chairman of the Board and Chief Executive Officer

Dear Shareholders,
Ladies and Gentlemen

At the outset of the year, international financial-market analysts were generally optimistic about the prospects for 2015. However, it rapidly became clear that daunting economic hurdles still had to be overcome. Once again, the central banks – especially the European Central Bank (ECB) with its massive bond purchase programme, and the Swiss National Bank (SNB) with its abandonment of the 1.20 euro/franc floor – caused quite a stir and major market fluctuations. VP Bank Group was also faced with the challenges posed by this changed environment and the resulting consequences.

For the first semester of 2015, VP Bank Group earned a con­solidated net income of CHF 40.9 million, a CHF 29.8 million increase over the comparable prior-year period (CHF 11.1 million). This first-half result was influenced by VP Bank’s merger with Centrum Bank and the related boost in revenues, but also by the added expenditures incurred in connection with the transaction. Another very significant factor was the SNB’s abandonment of the euro price floor versus the Swiss franc on 15 January 2015 as well as the shift of the central bank’s three-month LIBOR target range into negative territory.

In comparison to the first half of 2014, VP Bank recorded a CHF 62.0 million increase in net operating income to a total of CHF 172.5 million (prior-year period: CHF 110.5 million), which is equivalent to a 56.1 per cent gain. Factor­- ing out the effects of the merger with Centrum Bank (incl. effects of the “purchase price allocation”), our net operat­- ing income amounted to CHF 105.5 million, this de­s­pite the negative impact of the eliminated EUR/CHF floor.

Client assets under management at VP Bank Group on 30 June 2015 totalled CHF 34.6 billion, an 11.8 per cent increase compared to the CHF 30.9 billion reported at year-end 2014. In the first semester of 2015, VP Bank Group achieved a net new money inflow of CHF 6.2 billion, whereas CHF 6.7 billion relates to the merger with Centrum Bank.

Operating expenses for the first half of 2015 rose versus the prior-year period by CHF 12.3 million from CHF 84.5 million to CHF 96.8 million (+14.6 per cent). This increase is consistent with VP Bank Group’s strategic orientation and its merger with Centrum Bank. Excluding the effects of this merger, we were able to reduce operating expenses by CHF 3.8 million or 4.5 per cent versus the prior-year period.

Rendering cross-border banking services is one of the main pillars of VP Bank Group’s commercial activities. For fiscal but also for public policy reasons, numerous countries have adopted stricter regulatory provisions for doing business in their financial centres.

In August 2013, Liechtenstein’s banks formulated a tax-conformity directive which defines for the entire financial centre a uniform due diligence obligation regarding the tax compliance of their clients. This directive has now been expanded: the revised version dated 21 January 2015 embraces the principle that it is primarily the duty of clients themselves to uphold their tax obligations. However, the banks are now obliged, in addition to their previously implemented measures for existing clients, to take further steps by applying a risk-based approach for clarifying and ensuring tax-compliant conduct. This means that the banks will re-examine their existing clients and, under certain circumstances, demand confir­mation of tax conformity. If necessary, they will continue to help their clients achieve tax compliance within a reason­able period of time. In addition, the banks will adopt measures aimed at preventing business relationships from circumventing the scope of applicability of the automatic exchange of information (AEOI). Moreover, the restrictions on cash deposits and withdrawals have been tightened further.

On 2 February 2015, Liechtenstein and Switzerland concluded negotiations on a new double-taxation agreement (DTA). The treaty was signed in July 2015 and is scheduled to take effect as of 1 January 2017. One of the key elements of the agreement is the avoidance of double taxation in the area of withholding tax.

On 18 March 2015, the EU Commission proposed to the Council of the European Union that the EU Savings Directive be abrogated. As a result of the transition to the EU-wide automatic exchange of information, the corresponding revised directive provides for the complete elimination of the present Savings Directive for effect as of 1 January 2016.

On 28 May 2015, Switzerland concluded a treaty with the EU on the automatic exchange of information (AEOI) regarding tax matters. Once the requisite legal foundations have been established, Switzerland and the 28 EU member states intend to begin compiling bank account data as of 2017, and to exchange this data as of 2018. This new AEOI will then replace the currently applicable savings tax agreement with the EU that has been in force since 2005. By implementing this global standard, Switzerland and the EU are making a major contribution towards the prevention of tax evasion.

On 15 January 2015, the Swiss National Bank announced that it would no longer defend the 1.20 minimum exchange rate for Swiss francs versus the euro. Simultaneously, the central bank shifted its three-month LIBOR target range and introduced a negative interest charge of 0.75 per cent on the deposits it holds for banks in amounts exceeding a certain exemption limit. These announcements led to major up­heavals in the financial markets. Within minutes, the Swiss franc appreciated significantly, and since then Swiss franc fixed-income yields have hovered at record lows – in certain instances, even in negative territory.

This has had and will continue to have a direct influence on the course of business at VP Bank. A considerable proportion of our client assets is committed to investments denominated in foreign currencies. Therefore, when expressed in Swiss francs, our client assets under management declined in value as a result of the SNB’s decision. A glance at VP Bank’s cost and revenue structure reveals that our outlays are higher than our revenues when both readings are calculated in Swiss francs.

To cushion these negative effects on the Bank’s profitability, we initiated immediate countermeasures: appropriate inter­- est adjustments have been made, margins were widened on newly granted as well as prolonged mortgages and, for certain client segments, negative interest charges on deposits are now in effect. We have also taken immediate steps on the expense side; further cost reductions are an ongoing topic.

The first half of 2015 was marked by the integration of Centrum Bank into VP Bank. This merger represents a significant growth driver for VP Bank Group. Client assets totalling CHF 7.1 billion were taken over in connection with the deal.

The merger agreement was signed on 1 December 2014 and the transaction was finalised on 7 January 2015. At the extraordinary general meeting of shareholders held on 10 April 2015, the merger plans were approved as was the proposal for a capital increase. The formal merger took legal effect on 30 April. All employees of Centrum Bank were relocated to the VP Bank offices by 30 June and the full migration of data is to be completed by the end of this year.

The related integration project is running on schedule and will also be largely concluded by the end of the year. Through this merger in the name of VP Bank Ltd, we have garnered a considerably stronger position in the Liechtenstein financial centre and can now respond in a more agile manner abroad as well thanks to the complementary target markets and client segments of our combined organisation. The clients of Centrum Bank can count on a comprehensive range of financial products and services, and they now have access to an international network of banking locations as well as an expanded offering of credit solutions.

Also internally, meaningful synergies – especially in terms of market cultivation – can be exploited as a result of the merger.

The Marxer Foundation for Bank Values, until 7 January 2015 the sole owner of Centrum Bank, is now a new anchor shareholder of VP Bank in an amount equivalent to the acquisition price for Centrum Bank.

At the Bank’s 52nd ordinary annual general meeting of shareholders, which was held on 24 April 2015, Fredy Vogt was re-elected to the Board of Directors of VP Bank for a further three-year term of office.

Dr Florian Marxer was newly elected to the Board of Direct­ors. Dr Marxer is a trustee of the Marxer Foundation for Bank Values and from 2011 until 2014 was Chairman of the Board of Centrum Bank. He is a partner at Marxer & Partner Attorneys-at-Law as well as a board member of Confida Holding AG in Vaduz and Belvédère Asset Management AG in Zurich.

On 1 January 2015, Eduard von Kymmel took over responsi­bility for VP Bank’s entire fund management business in Luxembourg and Liechtenstein. In his new function, Eduard von Kymmel is in charge from Luxembourg for the group-wide leadership of this strategically important business segment.

As of 1 February 2015, the Executive Management team at VP Bank (Switzerland) Ltd was reinforced through the addition of Roberto Vogt. As Head of Private Banking Central & Eastern Europe as well as Russia, he bears res­ponsibility for these important target markets and will contribute significantly to the development of VP Bank’s international client base.

Antoine Baronnet, as Head of Client Business at VP Bank (Luxembourg) SA, has been a member of Executive Management at that subsidiary company since 9 March 2015. In this function, he is in charge of all local client-oriented units. Executive Management at VP Bank (Luxembourg) SA today comprises three members: Thomas Steiger, Romain Moebus and Antoine Baronnet.

Jürg Mühlethaler took over as VP Bank’s new Head of Group Operations on 1 May 2015 after having held various posts at Centrum Bank since 1999, the most recent of which were Chief Operating Officer (since 2012) and Member of Exe­cutive Management at that company. In this capacity, he was responsible until the end of April 2015 for the entire back-office operations of Centrum Bank.

At the annual general meeting on 24 April 2015, shareholders authorised the Board of Directors until 22 April 2020 to purchase VP Bank bearer and registered shares in a maximum amount equivalent to 10 per cent of the Bank’s outstanding share capital. The Board resolved to make use of this author­isation and, for a fixed bid of CHF 84.00 per bearer share and CHF 8.40 per registered share, acquire a maximum of 5 per cent of the share capital. This public share buyback was successfully completed on 3 July 2015. In total, 300,750 bearer shares and 114,080 registered shares were tendered.

After completion of the fixed-price share buyback, VP Bank now holds 303,058 of its own bearer shares and 115,712 of its own registered shares. This corresponds to a 4.76 per cent proportion of VP Bank’s outstanding share capital and 3.48 per cent of the voting rights.

Subsequent to the capital increase, there are now 6,004,167 registered shares and 6,015,000 bearer shares of VP Bank outstanding.

The shares repurchased in connection with the buyback are to be used for future acquisitions or treasury management purposes. As none of the shares will be cancelled, the equity capital and voting proportions remain unchanged.

We continue to pursue our growth objectives with great resolve. The Asian locations of VP Bank Group recorded pleasing growth rates in the first half of 2015. The client- acquisition results of VP Bank (Switzerland) Ltd also improved. The Luxembourg and Liechtenstein locations were significantly affected once again by regulation-related outflows. We are making every effort by means of targeted client care to counteract this trend on a sustainable basis.

As the result of a rigorous rationalisation programme, VP Bank’s total headcount declined from 831 at 7 January 2015 (i.e. including employees of Centrum Bank) to 810 as of 30 June 2015.

Our “Insieme” project is pursuing the goal of simplifying the business processes at the Luxembourg location and aligning them with Group standards. This should result in better utilisation of synergies within the Group and the avoidance of redundancies. The project is running according to plan.

On 6 March 2015, VP Bank successfully placed a public issue of bonds in the amount of CHF 200 million. The offering was made in two tranches, one maturing in six years and the other in nine years. Through the issuance of these bonds, VP Bank now has a means for refinancing its long-term loan portfolio.

The bonds also serve as a hedge against a potential increase in long-term interest rates. Given that no new interest rate swaps were concluded since last year, and hedge accounting under IFRS is partially applied, VP Bank has managed to reduce significantly the volatility of its interest-income result.

On Wednesday, 20 May 2015, VP Bank’s second Investor Day was held with approximately 30 shareholders, investors and analysts in attendance. The keynote speaker at the event was Adrian Hasler, Prime Minister of the Principality of Liechtenstein.

VP Bank maintains an active dialogue with the public and is present on social media channels such as XING, LinkedIn and Twitter. Its social media activities are being expanded continuously: for instance, we have initiated a new Facebook profile that focuses mainly on the topic of trainee education at VP Bank.

VP Bank Group is tremendously adept in the investment fund business. The related activities span the entire palette of services in the fund realm – from the planning, to the founding and ultimate operative administration of investments funds – and have been successfully rendered for decades now at the Bank’s Liechtenstein and Luxembourg locations.

We are especially pleased that IFOS Internationale Fonds Service Aktiengesellschaft has received the “World Finance Award” as the Best Investment Management Company in Liechtenstein. Also, Morningstar has awarded 5 stars to our “VP Bank Fund Selection Equities Natural Resources” fund, the rating agency’s highest possible ranking.

This is evidence that our efforts in recent years to improve our service quality are being recognised by VP Bank’s clients and the professional community alike.

To benefit from synergies within VP Bank Group, we consolidated the company’s entire fund know-how under one roof – “VP Fund Solutions” – as of August 2015. With this label, we have created a uniform face to the public for VP Bank Group’s fund business.

Also as of August 2015, VPB Finance S.A. – which was founded in 1998 as a subsidiary of VP Bank (Luxembourg) SA – was renamed VP Fund Solutions (Luxembourg) SA. More­over, IFOS Internationale Fonds Service Aktiengesellschaft in Vaduz, since 1999 a subsidiary of VP Bank Ltd based at the Liechtenstein location, will now be known as VP Fund Solutions (Liechtenstein) AG. Collectively, these two entities employ approximately 55 individuals.

Overarching all of our other business themes and measures is VP Bank Group’s primary strategic goal as a global enterprise to grow both in terms of profitability and quality through its activities in predefined target markets and target seg­- ments and in so doing preserve the company’s independence. A stable group of long-term-oriented anchor shareholders, combined with a solid equity capital base, continue to represent the fundament of those aspirations.

To achieve our goal of sustained profitable growth, comprehensive measures are being planned with the aim of driving our international business and continuing the expansion of our fund business. In terms of our defined European and Asian target markets, we view South East Asia (Singapore, Hong Kong, Thailand, Malaysia and Indonesia) as well as the CIS states (Russia, Kazakhstan and Ukraine) as offering the greatest potential for growth. Apart from making even better use of our international Group structure, we plan to invest larger amounts in “digital private banking” and further increase our capital efficiency under Basel III. Consistent with these measures is the reinforcement of an entrepreneurial culture within the Group, as well as the heightened skills and resulting quality of our employees.

Until mid-2015, our previously expressed medium-term goals were a tier 1 ratio of at least 16 per cent, a cost/income ratio of 65 per cent and an average annual increase in net new money of 5 per cent.

A re-examination of these goals revealed the necessity for adjustments. At year end 2014, the legally specified minimum core capital ratio stood at 8 per cent; our tier 1 target ratio was at least twice that amount. As VP Bank is now designated as “system relevant”, the corresponding new minimum capital requirement under Basel III (CRD IV) increased as of February 2015 to 13 per cent. Thus a minimum medium-term goal of 16 per cent no longer represents significant added value for our investors and clients; on the other hand, any increase of our current target level would severely crimp VP Bank Group’s financial leeway – for example, to conduct acquisitions.

For that reason, the Board of Directors has revised the medium-term goals and defined the following targets for the end of 2020:

• Assets under management of CHF 50 billion;Group net income of CHF 80 million;
• Cost/income ratio under 70 per cent.At the end of June 2015, VP Bank Group had a tier 1 ratio of 21.9 per cent (previous year: 20.7 per cent) and our cost/income ratio stood at 56.1 per cent (previous year: 76.4 per cent). Excluding the effects of the merger with Centrum Bank, the cost/income ratio would be 76.5 per cent. Through the exploitation of available infrastructure and potential syn­ergies, together with strict cost controls, we are convinced of our ability to achieve the defined goals for 2020.

VP Bank Group is well equipped to meet the challenges of the future. Among others, this is also attested to by Standard & Poor’s, which in August 2015 confirmed its excellent “A–“ rating for VP Bank (A–/Negative/A–2). VP Bank’s substantial equity capital base enables us to invest in growth by means of targeted acquisitions. Also in the years ahead, we will take advantage of market opportunities that arise, provided they are strategically suitable and fit culturally with VP Bank Group.

The intermediaries business is gaining increased importance, both at our international locations and as a result of the merger with Centrum Bank. Against this backdrop, we have decided to restructure the Intermediaries organisational unit as of 1 November 2015 and simultaneously expand the function of divisional management to include specialist responsibility for the entire intermediaries-related business of VP Bank Group.

In the remaining months of 2015, we shall continue with the integration of Centrum Bank into VP Bank Group. The resolute pursuit of Group-wide cost containment will also occupy VP Bank during the second half of the year. We are convinced that, with the relevant measures as well as the qualitative and quanti­tative expansion of our client advisory capabilities, we will cement a sustainable foundation for the successful future of VP Bank Group.

We sincerely thank our valued shareholders and clients for the trust they place in VP Bank Group. We should also like to thank our employees for their dedicated efforts, and we look forward to a successful, jointly mastered second half of 2015.