Segment reporting

On 1 January 2016, VP Bank Group modified its organisational structure by creating a new organisational unit “Chief Operating Officer”. Following a comprehensive review of the bases of credit-granting policies and related strategy by the Group Executive Management, the functions of the front and middle/back offices were segregated, and the units Middle and Back Office were transferred to the “Chief Operating Officer”. The Front Office domain remains as part of the Client Business unit. As already announced in the 2015 Annual Report of VP Bank Group (page 17), as from this date on, the management structure consists of four organisational units “Chief Executive Officer”, “Client Business”, “Chief Financial Officer” and “Chief Operating Officer”.

In its segment reporting, the organisational unit “Client Business” is split into the two business segments, “Client Business Liechtenstein” and “Client Business International”. The three organisational units “Chief Executive Officer”, “Chief Financial Officer” and “Chief Operating Officer” are regrouped into the business segment “Corporate Center” for segment reporting purposes.

The prior-year segment reporting figures were restated to reflect the segregation of the front and middle/back office units. 

1. Calculation in accordance with Table P of the Guidelines to the Liechtenstein Banking Ordinance issued by the Government of Liechtenstein (FL-BankO).
2. Acquired client relationships (note 17) of CHF 6.7 billion are included in this position.

The recharging of costs and revenues between the business units takes place on the basis of internal transfer prices, actual recharges or on prevailing market conditions. Recharged costs within the segments are subject to an annual review and, where necessary, are amended to reflect new economic conditions. 

1. The non-recurring positive effect of the «bargain purchase» (badwill arising on acquisition) is disclosed in the Corporate Center.
2. Calculation in accordance with Table P of the Guidelines to the Liechtenstein Banking Ordinance issued by the Government of Liechtenstein (FL-BankO).
3. Acquired client relationships (note 17) of CHF 6.7 billion are included in this position.
4. Centralisation of the investment management operations of VP Bank (Switzerland) Ltd in Liechtenstein as of 1 July 2015 (net CHF 2.7 billion).
5. Shift of organisational unit «Credit Processing» as of 1 January 2016 from Client Business Liechtenstein to Corporate Center (7 FTE; operating expenses CHF 0.1 billion).

The recharging of costs and revenues between the business units takes place on the basis of internal transfer prices, actual recharges or prevailing market conditions. Recharged costs within the segments are subject to an annual review and, where necessary, are amended to reflect new economic conditions. 

Client Business Liechtenstein

The business segment “Client Business Liechtenstein” encompasses the international private banking business and the business with intermediaries located in Liechtenstein as well as the local universal banking and credit-granting businesses. It includes the units of VP Bank Ltd, Vaduz, which are in direct client contact. In addition, Group Investment, Product & Market Management and VP Fund Solutions (Liechtenstein) AG are allocated to this business segment. 

Client Business International

The business segment “Client Business International” encompasses the private banking business in international locations. VP Bank (Switzerland) Ltd, VP Bank (Luxembourg) SA, VP Bank (BVI) Ltd, VP Bank (Singapore) Ltd, VP Wealth Management (Hong Kong) Ltd and VP Fund Solutions (Luxembourg) SA are allocated to this business segment.

Corporate Center

The business segment “Corporate Center” is of great importance for banking operations and the processing of business transactions. It encompasses the areas Group Operations, Group Information Technology, Group Credit, Group Treasury & Execution, Group Finance, Group Risk, Group Legal, Compliance & Tax, Group Human Resources Management, Group Communications & Marketing und Group Business Development. In addition, those revenues and expenses of VP Bank Ltd having no direct relationship to client-­focussed operating divisions, as well as consolidation adjustments are reported under the Corporate Center. Revenue-generating business activities of the segment Corporate Center arise in connection with the Group Treasury Function. The results of the Group's own financial investments, the structural contribution and the changes in the value of interest-rate hedges are reported in this segment. In the prior year, the non-­recurring positive effect of the “bargain purchase” arising from the merger with Centrum Bank (gain from the acquisition of Centrum Bank) as well as charges for restructuring costs (including social plan) and project costs were reported in the Corporate Center business segment. 

1. Annualised, average values.
2. Operating expenses / gross income less other income and income from financial instruments.

The pre-tax segment results for the first semester of 2016 rose by CHF 10.1 million (27.2 per cent) over the comparable prior-year period. In the first half-year of 2016, total operating income grew, period-on-period, by CHF 7.1 million (8.8 per cent). This increase results from interest income from clients (+36.3 per cent). Interest-rate developments primarily in USD and EUR as well as increased margins on credit-granting activities contributed to this positive result. Operating expenses could be reduced by CHF 3.6 million (8.7 per cent) to CHF 38.2 million (prior-year period: CHF 41.8 million). This decline results primarily from lower recharges from other segments. The lower recharges reflect the synergy effects resulting from the Centrum Bank merger. Inter-segmental recharges in Client Business Liechtenstein are based upon fixed internal transfer prices. Indirect costs for internal services are reported in the business segment under the caption “services to/from other segment(s)”. In the first semester of 2016, the charges for valuation allowances, provisions and losses rose by CHF 0.6 million to CHF 0.8 million (prior-year period: CHF 0.2 million). The gross margin could be maintained at 73.6 basis points (prior-year period: 73.8 basis points). The cost/income ratio improved from 51.6 per cent to 43.3 per cent. 

The segment reported a minor outflow of net new money adding up to CHF 0.3 billion during the reporting period. New net money inflows resulting from market development activities were not able to fully offset money outflows resulting from the regulatory environment and tax-related issues. Client assets under management at 30 June 2016 added up to CHF 23.6 billion (31 December 2015: CHF 24.3 billion). The employee headcount increased from 164 positions (30 June 2015) to 171 positions.

1. Annualised, average values.
2. Operating expenses / gross income less other income and income from financial instruments.

Compared to the results of the first half-year of 2015, the pre-tax results in the first six months of 2016 improved by CHF 3.2 million. Total operating income fell by 7.5 per cent from CHF 37.0 million to CHF 34.2 million as a result of declining commission and service income as well as lower trading income. For the most part, this is due to the centralisation of investment management activities of VP Bank (Switzerland) Ltd within Liechtenstein which was implemented in the prior year. Interest income and gains/losses from financial investments developed positively and could be increased by CHF 1.5 million respectively CHF 0.3 million. Operating expenses could be reduced by CHF 0.7 million or 2.5 per cent to CHF 28.2 million. This decline results from personnel and general and administrative expenses due, in part, to the centralisation of investment management. In the business segment “Client Business International”, the recharging ­ of services is based on actual invoices and recorded under general and administrative expenses. Charges for valuation allowances, provisions and losses could be reduced significantly by CHF 4.6 million. 

The gross margin fell to 65.5 basis points (prior-year period: 68.5 basis points). The cost/income ratio improved from 79.1 per cent to 85.8 per cent. Net new money in the first half-year of 2016 developed positively with CHF 0.1 billion. Net new money inflows could again be achieved in Asian markets. Other markets reported client money outflows triggered by the regulatory environment and tax-related issues. As at 30 June 2016, client assets under management aggregated CHF 10.4 billion (31 December 2015: CHF 10.5 billion). The employee headcount of 239 is comparable to that of the prior year (–1 position in comparison to 30 June 2015).

In the first half-year of 2016, the pre-tax segment result amounted to minus CHF 23.3 million as opposed to CHF 1.0 million in the prior-year period. 

Total operating income in the first half of 2016 declined period-on-period by CHF 47.1 million. This decline ­ is largely a result of the non-recurring impact of the “bargain purchase” which was recognised last year under other income. 

Interest income fell period-on-period by CHF 3.5 million, partially as a result of the negative interest- rate levels and, as a consequence, of the decline in interest revenues from maturity transformation (negative interest charged by the SNB). Income from commissions and services reflects a drop in income. This also includes third-party bank commissions which were invoiced to front business units by the service units through internal recharges. 

Trading income includes the revenues of Group Treasury & Execution, inter alia. This relates to income generated from the execution of client trades. This caption also includes the results of deri­vatives employed to minimize risks as well as gains/losses from balance-sheet management activities. 

Income from financial investments in the first half of 2016 totalled CHF 0.7 million. This improvement of CHF 6.6 million reflects principally the one-off prior-year impact of the decision by the SNB to dis­continue the policy of maintaining the minimum exchange-rate of the Swiss franc to the euro which led to revaluation losses. Interest and dividend income disclose a minor increase. 

The gain from the acquisition of Centrum Bank (“bargain purchase”) was recognised in income last year in the caption other income.

Operating expenses in the reporting period could be reduced by CHF 3.0 million from CHF 26.0 million to CHF 23.0 million. On the one hand, this is due to synergy effects in personnel expense and general and administrative expenses resulting from the Centrum Bank merger. On the other hand, no inte­gration costs were incurred during the current period. Because of lower operating expenses in the Corporate Center, a lower level of internal costs (CHF 20.0 million) were recharged than in the comparable prior-year period of 2015 (CHF 23.7 million). Depreciation and amortisation fell by CHF 7.2 million to CHF 7.8 million. auf CHF 7.8 million. The reason for this decrease is the fact that depreciation and amortisation is no longer charged on the Avaloq banking platform as well as one-time merger-related amortisation charges in the prior year. 

The charges for valuation allowances, provisions and losses during the reporting period showed a merger-related decrease of CHF 12.7 million. The employee headcount could be reduced from 342 (30 June 2015) to 326 positions principally as a result of merger-related synergy effects.