Principles underlying financial statement reporting and comments
The unaudited interim financial statements were drawn up in accordance with the International Financial Reporting Standards (IAS 34). The semi-annual financial statements are prepared applying the same accounting and valuation principles as were applied for the 2020 financial statements.
New and revised International Financial Reporting Standards
Since 1 January 2021, the following new and revised standards and interpretations have taken effect:
Interest Rate Benchmark Reform – Phase II (amendments to IFRS 9, IAS 39 and IFRS 7)
In August 2020, the IASB published amendments to the Interest Rate Benchmark Reform – Phase 2 (amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16). In relation to changes to the financial instruments directly required by the reform, the amendments of phase 2 contain:
- A practical expedient when considering changes in the basis for determining the contractual cash flows of financial assets and liabilities to allow for an adjustment to the effective interest rate
- Facilitation of the discontinuation of hedging relationships
- Temporary exemption from the need to meet the separately identifiable requirement when a risk-free rate (RFR) instrument is designated as a hedge of a risk component
- Additional disclosures on IFRS 7
In its phase 2 amendments, the IASB has lined out four ways in which changes can be made to the basis for determining the contractual cash flows of a financial instrument in order to achieve interbank offered rate (IBOR) reform:
- By amending the terms of the contract (e.g. to replace a reference to an IBOR with a reference to an RFR)
- By activating an existing fallback clause in the contract
- Without changing the terms of the contract to change the way an interest rate benchmark is calculated
- A hedging instrument may alternatively be modified in accordance with the requirements of the reform by not changing the basis for calculating its contractual cash flows but by closing out an existing IBOR-related derivative and replacing it with a new derivative with the same counterparty, on similar terms, except by reference to an RFR
A project team has been working on the implementation of the reform since 2019. The project is at an advanced stage. The IBOR reform is not expected to have a material impact on the consolidated annual report of VP Bank Group. CHF LIBOR is expected to cease to be available as a reference rate at the end of 31 December 2021. Credit products with LIBOR as the reference rate are no longer offered. Existing loans with LIBOR reference expire in the next few months and are not affected by the discontinuation of LIBOR from 2022. The Bank holds interest rate swaps with contract specifications related to CHF LIBOR. It is planned to convert the relevant contracts to the SARON reference rate in the second half of 2021. The conversion will be value-neutral. The contract volume of the interest rate swaps concerned amounted to CHF 125 million as at the cut-off date.
With regard to hedge accounting, effects of the IBOR reform may be expected for cash flow hedges. VP Bank Group currently has no cash flow hedges but fair value hedges in place. The existing underlying transactions are neither currently nor in the future dependent on IBOR interest rates, as their interest rate remains fixed over the term. The hedging transactions are part of the interest rate swaps described in the last paragraph (volume: CHF 90 million). The adjustment of these transactions is expected to take place in the second half of 2021, is value-neutral and does not affect the achievement of the hedging objective (fair value hedge).
VP Bank Group does not avail itself of the possibility of early adoption thereof.
The Board of Directors reviewed and approved the semi-annual report and authorised it for publication in its meeting of 12 August 2021.
As part of its ordinary banking activities, VP Bank Group is involved in various legal and regulatory proceedings. The legal and regulatory environment in which VP Bank Group operates involves significant litigation, compliance, reputational and other risks in connection with legal disputes and regulatory proceedings. The impact of these proceedings on the financial strength and/or profitability of VP Bank Group is dependent on the status of the proceedings and their outcome. VP Bank Group employs the relevant processes, reports and committees to monitor and manage these risks. It also establishes provisions for ongoing and threatened proceedings if the probability that such proceedings will entail a financial loss is judged to be greater than the probability of this not being the case. In isolated cases in which the amount cannot be reliably estimated, for instance because of the early stage or the complexity of the proceedings or other factors, no provision is established but a contingent liability may be created.
The risks described below are not necessarily the only ones to which VP Bank Group is exposed. Additional risks which are presently unknown or risks and proceedings which are currently considered insignificant may equally impact the future course of business, operating results and the outlook of VP Bank Group.
The Deposit Insurance Agency of Russia (DIA), as part of the bankruptcy proceedings of two Russian banks, asserts that third-party pledges created in connection with the granting of loans to foreign companies shortly prior to the revocation of the banking licence and commencement of bankruptcy proceedings should not have been realised on the open market by VP Bank Group. Both proceedings are at different stages of development.
In the first proceedings against VP Bank (Switzerland) Ltd involving a disputed amount of USD 10 million, the Ninth Arbitration Court of Appeal on 24 May 2017 upheld the nullity of the realisation pursuant to Russian bankruptcy law. The court obligated VP Bank (Switzerland) Ltd pay an amount of approximately USD 10 million. The judgement became res judicata on 19 September 2017. All extraordinary legal remedies without suspensive effect were dismissed. The debt collection procedure opened on 7 June 2018 in Moscow has so far gone nowhere. In a letter dated 31 July 2019, the DIA, in its capacity as insolvency administrator, issued the first call for payment to VP Bank (Switzerland) Ltd. VP Bank Group has not complied with this request as it contests this ruling.
Further developments will be monitored by local lawyers in Moscow.
The second proceedings against VP Bank Ltd, and VP Bank (Switzerland) Ltd, in an amount in dispute of USD 15 million, are of a similar nature, but are not yet closed. On 16 March 2018, the Supreme Court confirmed the jurisdiction of the Russian courts and dismissed the case to the Arbitration Court for substantive judgement.
On 22 May 2019, the Arbitration Court ruled in favour of VP Bank Ltd and VP Bank (Switzerland) Ltd. This judgement was confirmed by the Court of Appeal on 12 August 2019. On 19 November 2019, the Court of Cassation overturned the judgements of the lower-instance courts and dismissed the case to the court of first instance (Arbitration Court) for a new ruling. VP Bank Ltd and VP Bank (Switzerland) Ltd appealed to the Judicial Chamber of the Supreme Court against the ruling on 17 January 2020, which had not yet heard the appeal by 16 March 2020. The case, therefore, had to be heard again at the first instance. On 3 August 2020, the judge ordered the submission of various documents and requested the DIA to explain its claim in detail, which had been amended several times in the meantime. In the hearing of 13 November 2020, the relevant submissions were made and the litigation continued throughout several hearings in 2021.
On 8 July 2021, the first-instance ruling was issued in which the action against VP Bank (Switzerland) Ltd was dismissed in its entirety and/or, with respect to VP Bank Ltd, upheld to a limited extent (20 per cent). As a result, the Bank was ordered to repay an amount of USD 2.9 million. The DIA immediately appealed this decision to the next higher instance.
In both cases, VP Bank Ltd considers the risk of outflow of funds to be small, which is why no provision has been formed.
In another case, the High Court of Justice in London served a civil suit on VP Bank (Switzerland) Ltd at the beginning of 2020. VP Bank Ltd is also named as a defendant and was notified of the action in March 2020. The main defendant is a former governing body of a foreign pension fund. The latter is said to have acted unlawfully in its role by accepting distribution remunerations for investment funds. The action names 38 defendants, among them various other banks and individuals that processed payments or paid distribution remunerations.
VP Bank Ltd and VP Bank (Switzerland) Ltd are accused of a violation of due diligence obligations. They are also accused of involvement in the processing of questionable third-party fees and commissions of at least USD 46 million, meaning they would have to assume non-contractual collective liability for the damages incurred. VP Bank Group is disputing the accusations and the place of jurisdiction. Two defendant banks successfully challenged the UK jurisdiction in the first instance. In both cases, VP Bank Group considers the risk of outflow of funds to be small, which is why no provision has been formed.
Most important foreign-currency exchange rates
The exchange rates for the most important foreign currencies are as follows: