Consolidated semi-annual report of VP Bank Group
In a challenging stock-market and interest-rate environment, VP Bank Group generated good business results for the first semester of 2016. In accordance with International Financial Reporting Standards (IFRS), VP Bank Group realised a consolidated net income of CHF 24.4 million for the first half of 2016. In the comparative prior-year period, a net income of CHF 40.9 million was realised due to a positive one-time item arising from the Centrum Bank merger. Excluding the effect of this one-time item (CHF 25 million), the 2016 half-year net income exceeds that of the prior period by CHF 8.5 million or 53.2 per cent.
Medium-term goals 2020
The Board of Directors of VP Bank Group has defined the following target values for 2020:
- assets under management of CHF 50 billion
- annual consolidated net income of CHF 80 million
- cost/income ratio under 70 per cent
Following the successful acquisition of the private banking activities of HSBC Trinkaus & Burkhardt (International) SA and that part of the investment-fund business of HSBC Trinkaus Investment Managers SA relating to private banking in Luxembourg in 2013 as well as the merger with Centrum Bank in the prior year, VP Bank Group markedly increased its client assets under management and strengthened its earnings performance. VP Bank plans further acquisitions of banks or whole teams in its target markets, which, in line with its business model, ideally complement VP Bank Group with comparable core competencies, target markets and client structures. In order to promote organic growth, it is planned to hire an additional 25 senior client relationship officers per annum during the next three years as part of a recruitment offensive. In addition, VP Bank is working at high pressure on developing new innovative services as part of a digitalisation strategy and makes targeted investments in digital tools.
The cost/income ratio as of 30 June 2016 was 68.9 per cent. Through the selective exploitation of its growth and synergy potential as well as a strict cost control, VP Bank Group is convinced that it will attain the defined targets in 2020. The solid level of equity of VP Bank Group supports the achievement of its targets.
As of 30 June 2016, VP Bank Group had a tier 1 ratio of 25.7 per cent and therefore has sufficient capital available for an acquisition. On 25 July 2016, Standard & Poor’s confirmed the exellent rating of A– and raised the outlook from “negative” to “stable”. The strong equity base as well as the solid and successful business model of VP Bank forms an excellent basis to enable it to assume an active role in the process of bank consolidation.
Assets under management
At 30 June 2016, client assets under management of VP Bank Group aggregated CHF 34.0 billion. In comparison to the position as of 31 December 2015 of CHF 34.8 billion, this represents a reduction of 2.1 per cent (CHF –0.7 billion). CHF 0.5 billion of this amount relates to the performance-related decline in assets.
In the first half-year of 2016, the development of net new money could be improved compared to prior-year period. In the prior year, net outflows (excluding acquisitions) added up to CHF 0.5 billion, in the first half-year of 2016 the net outflow of client assets fell to CHF 0.2 billion. As a result of market development activities, appreciable inflows of client money could be achieved, primarily in Asia and in the area of investment funds. In Europe, against the backdrop of the regulatory environment, outflows of client money continued unabated. In addition, VP Bank Group actively managed on-balance-sheet client monies which led to a decline in customer deposits. This decline in part adversely impacted inflows of net new money.
Custody assets as at 30 June 2016 totalled CHF 5.7 billion. As of 30 June 2016, client assets including custody assets aggregated CHF 39.8 billion (31 December 2015: CHF 41.4 billion).
Profit and loss account
Total operating income
Compared to the first half-year results of 2015, total operating income fell by CHF 42.7 million to CHF 129.8 million (prior-year period: CHF 172.5 million). Ignoring the one-time prior-year item (bargain purchase from the merger with Centrum Bank), total operating income increased in the reporting period by CHF 7.3 million.
Interest income rose by CHF 7.1 million or 16.8 per cent to CHF 49.5 million in comparison to the prior-year period. This increase is to be ascribed to the active management of the balance sheet, adjustments to margins and volume increases. Foreign-currency-denominated client deposits in part were no longer invested in the inter-bank market based upon risk/return considerations. VP Bank swapped these monies into Swiss francs using foreign-currency swaps and deposited them with the Swiss National Bank (SNB).
The income from the interest component of the foreign-currency swap and the offsetting of negative interest exceeded the expense of SNB negative interest and lower bank interest income. The application of IFRS hedge accounting also positively impacted interest income in comparison to the prior-year period. The increase in interest income on client-related activities is due to margin adjustments and volume increases. Interest income from financial instruments also increased because of higher volumes.
As regards income from commissions and services, a fall of 8.0 per cent to CHF 60.7 million (prior-year period: CHF 65.9 million) was recorded in the first half-year of 2016. The volatile market environment in the first six months of 2016 reduced the risk appetite of clients which in turn led to lower levels of client activities in securities’ trading. This is particularly evident with brokerage income of CHF 14.7 million, net (minus 14.5 per cent). The retreat in prices on equity markets occurring in the first half-year of 2016 led to a reduction in portfolio-based income such as in asset management and investment activities as well as custodian fee income of VP Bank Group by 10.5 per cent from CHF 33.5 million in the prior year to CHF 30.0 million in the current period. Investment-fund management fees developed positively. These grew by 7.0 per cent to CHF 29.5 million (prior year: CHF 27.6 million). In line with this trend, other commission and service expense rose by CHF 1.4 million to CHF 23.2 million.
Income from trading activities of CHF 17.7 million was CHF 1.3 million lower (minus 7.0 per cent) than that of the comparative half-year period of 2015. Income from trading for clients rose by 5.5 per cent to CHF 21.0 million. Realised and unrealised revaluation differences from hedging operations in respect of financial investments are recorded under securities’ trading. Because of the negative market environment, the results were hit by a negative result of minus CHF 3.4 million (prior year: minus 0.9 million).
A gain of CHF 1.2 million was recognised on financial investments in the first half-year of 2016 (prior-year period: minus CHF 5.7 million). This positive development compared with the prior-year period resulted primarily from revaluation losses on foreign-currency positions triggered by the decision of the SNB on 15 January 2015 to discontinue the policy of maintaining a minimum exchange rate of the euro to the Swiss Franc. The decline in other income is due to the one-time item in the prior period in connection with the Centrum Bank merger. In this connection, a gain (“bargain purchase”) of CHF 50.0 million was recognised resulting from the “purchase price allocation”.
In the first half of 2016, operating expenses could be reduced by CHF 7.3 million from CHF 96.8 million to CHF 89.4 million (minus 7.6 per cent).
This reduction reflects very much the expectations surrounding the Centrum Bank merger and the related one-off costs in the prior year. The integration of Centrum Bank was consummated successfully and realised synergies are already visible in lower operating expenses.
Compared to 30 June 2015, the employee headcount was reduced by 11 employees (reduction of 1.5 per cent) due to the elimination of duplications realised in the wake of the Centrum Bank merger. At the end of June 2016, VP Bank Group employed 735 individuals, expressed in terms of full-time equivalents. Personnel expenses could be reduced by 3.3 per cent (minus CHF 2.2 million) from CHF 67.2 million to CHF 65.0 million thanks to cost discipline.
General and administrative expenses fell by 17.3 per cent to CHF 24.4 million (prior-year period: CHF 29.5 million) which is also a result of the Centrum Bank merger and the running of parallel operations in the prior year for a limited time. Synergies were successively exploited with the integration into the existing infrastructure and process landscape and accompanying costs reduced in 2016. In particular, external advisory costs in the income-statement caption “professional fees” could be reduced by CHF 2.8 million or 44.6 per cent to CHF 3.5 million during 2016.
Depreciation and amortisation, valuation allowances, provisions and losses
Depreciation and amortisation was CHF 7.7 million (40.6 per cent) lower than the prior year and amounted to CHF 11.3 million as of 30 June 2016. This decline is related principally to the one-time amortisation of intangible assets in the prior year arising in connection with the Centrum Ban k merger. In addition, no amortisation for the initial investment costs of the Avaloq banking platform is charged any longer as from 2016 onwards as they are fully amortised.
Charges for “valuation allowances, provisions and losses” in the first half-year of 2016 totalled CHF 0.7 million (prior-year period: CHF 17.4 million). This decrease of CHF 16.7 million is to be explained by two one-time items in the prior year. Firstly, a valuation allowance was established in the prior year on one client loan, and secondly, restructuring provisions of CHF 12.3 million were raised in connection with the Centrum Bank merger.
Taxes on income
Taxes on income in the first half-year of 2016 totalled CHF 3.9 million and were thus CHF 5.6 million higher than in the prior-year period in which a minus expense of CHF 1.7 million had been recorded. This latter arises in connection with movements in deferred taxes as well as tax-exempt gains arising from the Centrum Bank merger.
Consolidated net income
Consolidated net income for the first six months of 2016 amounted to CHF 24.4 million (prior-year period: CHF 40.9 million, excluding one-time items: CHF 15.9 million). Consolidated net income per registered share A was CHF 4.04 (30 June 2015: CHF 6.37).
Compared to 31 December 2015, total assets fell by CHF 0.8 billion to CHF 11.5 billion as of 30 June 2016. This reduction in total assets is the result of the active management of client deposits under “other liabilities due to customers”.
With CHF 3.0 billion of cash and cash equivalents, VP Bank Group possesses a very comfortable liquidity situation. As indicated under interest income and as a result of the active management of risks and returns, increased amounts of client monies were deposited with the SNB in order to optimise interest-bearing activities with the consequence that amounts due from banks and thus their counterparty risks could be reduced from CHF 2.1 billion to CHF 1.2 billion since 1 January 2016.
Since the beginning of the year, client loans have increased marginally by CHF 73.6 million (1.5 per cent) to CHF 5.1 billion as at 30 June 2016. This increase results primarily from lombard loans. In this respect, VP Bank continues to maintain a high level of discipline and control in credit-granting activities which is in line with the current situation on the real estate market and on financial markets.
On the liabilities’ side, client deposits and medium-term notes fell since the beginning of 2016 by CHF 1.0 billion (9.6 per cent) to CHF 9.0 billion at 30 June 2016. As a result of the repayment of a maturing debenture bond, the balance-sheet caption “Bonds” declined since 31 December 2015 by CHF 149.2 million to CHF 200.8 million as of 30 June 2016.
Within the scope of the authorisation granted at the shareholders’ meeting of 24 April 2015, VP Bank Ltd has launched a further equity-share buyback programme, thus continuing the two successful programmes from 2015. Repurchases of registered shares A will be made during the period from 7 June 2016 through 31 May 2017, at the latest, and will take place over the regular trading line of the SIX Swiss Exchange. Within the framework of the public equity-share buyback programme, VP Bank Ltd is ready to repurchase up to 120,000 registered shares A. This matter was recognised by establishing a corresponding liability in the full amount which is deducted from equity. The registered shares A so repurchased are designed to be used for future acquisitions or for treasury-management purposes.
As of the end of June 2016, the balance-sheet equity totalled CHF 890 million (31 December 2015: CHF 918.1 million).
The tier 1 ratio, computed in accordance with the new Basel III rules, amounted to 25.7 per cent at 30 June 2016 which, compared to other banks, may be described as outstanding (31 December 2015: 24.4 per cent). This represents a solid equity base and constitutes an excellent strategic starting point in order to be able to assume an active future role in the process of bank consolidation.
We anticipate a continuing volatile market environment in the second half of the year which may impact the business operations and results of VP Bank Group. Developments in the field of tax transparency and exchange of information will continue to forge ahead and will directly impact clients and the business areas of VP Bank Group as well as the Liechtenstein financial marketplace. With digitalisation, the financial sector is confronted with great challenges but also with promising opportunities. VP Bank is well equipped to take on these challenges, has launched projects in reaction thereto and continues to pursue its sustainable growth strategy. VP Bank Group’s high level of equity resources constitutes a healthy basis for a successful future.