3 Credit risk

Within the scope of credit risk management, vital importance is attached to the avoidance of credit risks and the early identification of default risks. In addition to systematic risk/return management at the individual loan level, the LLB Group proactively manages its credit risks at the credit portfolio level. The primary objective is to reduce the overall level of risk through diversification and a stabilization of expected returns.

3.1 Credit risk management

Processes and organisational structures ensure that credit risks are identified, uniformly evaluated, controlled, monitored and included in risk reporting.

The process of granting a loan is based on a thorough evaluation of the borrower's creditworthiness, the possible impairment and the legal existence of collateral, as well as risk classification in a rating process performed by experienced credit specialists. Loans are granted within the scope of the individual credit authorisation limits.

3.2 Evaluation of credit risks

The consistent evaluation of credit risks represents an essential prerequisite of successful risk management. The credit risk can be broken down into the components: probability of default, loss given default and the exposure at the time point of the default.

Probability of default

The LLB Group assesses the probability of default of individual counterparties by means of an internal rating system. The different rating procedures are adapted to suit the different characteristics of borrowers. The credit risk management ratings employed for banks and debt instruments are based on external ratings from recognised rating agencies.

The reconciliation of the internal rating with the external rating is carried out in accordance with the following master scale.

Overdue claims

A claim is overdue when a significant payment to be made by a borrower is overdue. The overdraft commences on the day a borrower exceeds an agreed limit, has not paid interest or instalments, or has utilised an unauthorised credit line.

Default-distressed claims

Claims are regarded as being distressed if a loan default can no longer be excluded in the near future due to the creditworthiness of the client.

Loss given default

The loss given default is influenced by the amount of collateralisation and the costs of realising the collateral. It is expressed as a percentage of the individual commitment.

The potential loss at portfolio level is broken down as follows at the LLB Group.

Expected loss

The expected loss is a future-related, statistical concept with which the LLB Group estimates the average annual costs incurred because positions in the current portfolio are classified as impaired. The expected loss is determined on the basis of the probability of default of a counterparty, the expected credit exposure with this counterparty at the time point of the default and the loss given default.

Value-at-risk concept

The value-at-risk approach aims at computing the size of fluctuations in credit losses incurred by means of a statistical model and to show the change in the risk status of the credit portfolio.

Rating categories

(XLS:)

 

 

 

LLB rating

Description

External Rating (Moody's)**

*

Non-rated loans are covered and subject to limits.

**

The LLB Group uses the external ratings of Moody's exclusively in the standard approach for covering credit risks (for the segments: due from banks, finance companies and securities firms, due from companies and due from international organisations).

1 to 4

Investment grade

AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3

5 to 8, not rated*

Standard monitoring

Ba1, Ba2, Ba3, B1, B2

9 to 10

Special monitoring

B3, Caa, Ca, C

11 to 14

Sub-standard

Default

Scenario analysis

The modelling of external credit losses is performed on the basis of stress scenarios, which enable us to evaluate the effects of fluctuations in the default rates of the assets pledged as collateral taking into consideration the existing risk concentration in every portfolio.

3.3 Controlling credit risk

Credit risk management has the task of actively influencing the risk situation of the LLB Group. This is carried out using a limits system, risk-adjusted pricing, through the possibility of using risk hedging instruments and the specific repayment of credit commitments. Risk management is conducted both at the individual loan and at the portfolio level.

Risk limitation

The LLB Group has in place a comprehensive limits system to restrict credit risk exposure. In addition to the limitation of individual credit risks, to prevent risk concentrations, the LLB Group assigns limits for countries, segments and sectors.

Risk mitigation

To mitigate credit risk exposure, the LLB Group takes security mainly in the form of pledged assets and financial collateral. In the case of financial collateral in the form of marketable securities, we determine their collateral value by applying a schedule of reductions, the size of which is based on the quality, liquidity, volatility and complexity of the individual instruments.

Derivatives

To mitigate risks, the LLB Group can also employ credit derivatives. During the last two years, this possibility has not been utilised.

3.4 Monitoring of credit risks

The organisational structure of the LLB Group ensures that the business divisions which cause the risks and those that evaluate, manage and monitor them are completely separated.

Individual credit risks are monitored by means of a comprehensive limits system. Infringements are immediately reported to the senior officer responsible.

3.5 Value allowances for credit risks

Specific value allowances

Each impaired claim is individually assessed and the restructuring strategy as well as the estimate of future recoverable amounts are determined. An individual value allowance is allocated on the basis of this criteria.

General value allowances

A portfolio is classified as impaired on a collective basis, if there are objective indications that the portfolio contains impaired claims, which cannot however be determined individually.

3.6 Country risks

A country risk arises if specific political or economic conditions in a country affect the value of a foreign position. Country risk is composed of transfer risk (e.g. restrictions on the free movement of money and capital) and other country risks (e.g. country-related liquidity, market and correlation risks).

Country risks are controlled on the basis of a limits system and are continually monitored. Ratings provided by a recognised rating agency are utilised for certain individual countries.

3.7 Maximum credit risk without considering collateral

(XLS:)

in CHF thousands

31.12.2011

31.12.2010

Average

Credit risks from balance sheet transactions

 

 

 

Due from banks

6'819'971

6'852'622

6'836'297

Due from customers

 

 

 

mortgage loans

8'647'273

8'020'441

8'333'857

loans to public authorities

60'212

133'505

96'859

other loans

1'619'960

1'720'638

1'670'299

Trading portfolio

 

 

 

fixed interest securities

4'000

7'615

5'808

Derivative financial instruments

125'988

168'796

147'392

Financial investments at fair value through profit and loss

 

 

 

fixed interest securities

547'528

639'056

593'292

Total

17'824'932

17'542'673

17'683'803

 

 

 

 

Credit risks from off-balance-sheet transactions

 

 

 

Contingent liabilities

114'202

127'793

120'998

Irrevocable commitments

139'057

183'791

161'424

Liabilities for calls on shares and other equities

8'852

8'894

8'873

Total

262'111

320'478

291'295

3.8 Due from banks and due from customers

(XLS:)

in CHF thousands

31.12.2011

31.12.2010

 

Due from customers

Due from banks

Due from customers

Due from banks

Neither overdue nor value allowance made

9'927'079

6'807'756

9'426'314

6'841'280

Overdue but no value allowance made

164'988

388

145'902

0

Overdue, value allowance made (specific)

156'718

243

121'100

0

Default-distressed, value allowance made (specific)

258'531

48'687

297'040

47'543

Value allowance made (general)

2'308

0

16'192

0

Gross

10'509'624

6'857'074

10'006'548

6'888'823

Minus allowances (specific)

–182'042

–37'103

–130'599

–36'201

Minus allowances (general)

–137

0

–1'365

0

Net

10'327'445

6'819'971

9'874'584

6'852'622

Due from banks and due from customers neither overdue nor value allowances made

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2011

 

 

 

 

 

Investment grade

2'610'754

16'001

288'406

2'915'161

5'618'181

Standard monitoring

5'613'560

42'656

1'009'957

6'666'173

1'189'575

Special monitoring

197'848

12

102'142

300'002

0

Sub-standard

44'577

0

1'166

45'743

0

Total

8'466'739

58'669

1'401'671

9'927'079

6'807'756

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2010

 

 

 

 

 

Investment grade

1'029'755

1

76'376

1'106'132

5'043'723

Standard monitoring

6'401'008

133'504

1'243'979

7'778'491

1'797'557

Special monitoring

413'270

0

128'421

541'691

0

Sub-standard

0

0

0

0

0

Total

7'844'033

133'505

1'448'776

9'426'314

6'841'280

Due from customers overdue but no value allowances made

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

31.12.2011

 

 

 

 

Overdue by up to 30 days

45'381

1'543

61'635

108'559

Overdue 31 to 60 days

3'280

0

37'904

41'184

Overdue 61 to 90 days

8'000

0

7'245

15'245

Total

56'661

1'543

106'784

164'988

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

31.12.2010

 

 

 

 

Overdue by up to 30 days

50'770

0

72'028

122'798

Overdue 31 to 60 days

0

0

14'911

14'911

Overdue 61 to 90 days

0

0

8'193

8'193

Total

50'770

0

95'132

145'902

Loans with specific value allowances

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2011

 

 

 

 

 

Overdue claims

32'365

0

124'354

156'719

243

Default-distressed claims

119'994

0

138'537

258'531

48'687

Fair value of cover

–123'859

0

–109'349

–233'208

–11'827

Total specific value allowances

28'500

0

153'542

182'042

37'103

(XLS:)

in CHF thousands

Mortgage loans

Loans to public authorities

Other loans

Total due from customers

Due from banks

31.12.2010

 

 

 

 

 

Overdue claims

7'526

0

113'574

121'100

0

Default-distressed claims

148'307

0

148'733

297'040

47'543

Fair value of cover

–125'428

0

–162'113

–287'541

–11'342

Total specific value allowances

30'405

0

100'194

130'599

36'201

Newly agreed due from customers

Newly agreed due from customers are not substantial.

3.9 Overdue and default-distressed claims by geographical area

(XLS:)

in CHF thousands

31.12.2011

31.12.2010

 

Default-distressed claims

Overdue claims

Specific value allowance

Default-distressed claims

Overdue claims

Specific value allowance

Liechtenstein and Switzerland

258'531

224'189

148'497

287'715

178'360

100'528

Europe excluding FL/CH

0

45'207

18'827

9'325

72'390

21'111

North America

0

17

0

0

1'917

0

Asia

48'687

15'952

46'631

47'543

9'407

44'922

Others

0

36'972

5'190

0

4'928

239

Total

307'218

322'337

219'145

344'583

267'002

166'800

3.10 Debt instruments

(XLS:)

in CHF thousands

31.12.2011

31.12.2010

 

Trading portfolio

Designated fair value

Total

Trading portfolio

Designated fair value

Total

AAA

1'957

391'298

393'255

4'762

377'277

382'039

AA1 to AA3

687

67'215

67'902

1'383

126'025

127'408

A1 to A3

1'100

61'378

62'478

166

10'165

10'331

Lower than A3

19

0

19

0

0

0

Without a rating

237

27'637

27'874

1'304

125'589

126'893

Total

4'000

547'528

551'528

7'615

639'056

646'671

3.11 Taken over collateral

(XLS:)

in CHF thousands

2011

2010

 

Financial investments

Real estate/ properties

Total

Financial invest
-ments

Real estate/ properties

Total

As at 1 January

122

0

122

27'742

925

28'667

Additions/disposals

0

0

0

–29'386

–980

–30'366

Profit/loss

13

0

13

1'766

55

1'821

As at 31 December

135

0

135

122

0

122

Taken over collateral is disposed of again as soon as possible and recognised in other assets or financial investments or the trading portfolio.

3.12 Risk concentration

Risk concentration by regions

(XLS:)

in CHF thousands

Liechtenstein/ Switzerland

Europe without FL/CH

North America

Asia

Other

Total

31.12.2011

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

Due from banks

1'174'352

5'343'264

248'955

20'610

32'790

6'819'971

Due from customers

 

 

 

 

 

 

mortgage loans

8'647'273

0

0

0

0

8'647'273

loans to public authorities

60'212

0

0

0

0

60'212

other loans

1'006'697

189'212

10'802

151'457

261'792

1'619'960

Trading portfolio

 

 

 

 

 

 

fixed interest securities

0

3'205

240

0

555

4'000

Derivative financial instruments

104'294

18'095

1'098

1'133

1'368

125'988

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

203'614

289'086

44'721

5'016

5'091

547'528

Total

11'196'442

5'842'862

305'816

178'216

301'596

17'824'932

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

Contingent liabilities

89'454

5'464

67

3'536

15'681

114'202

Irrevocable commitments

138'341

0

30

686

0

139'057

Liabilities from calls on shares and other equities

8'852

0

0

0

0

8'852

Total

236'647

5'464

97

4'222

15'681

262'111

(XLS:)

in CHF thousands

Liechtenstein/ Switzerland

Europe without FL/CH

North America

Asia

Other

Total

31.12.2010

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

Due from banks

1'802'486

4'742'217

268'617

20'183

19'119

6'852'622

Due from customers

 

 

 

 

 

 

mortgage loans

8'020'441

0

0

0

0

8'020'441

loans to public authorities

133'505

0

0

0

0

133'505

other loans

1'171'603

230'991

10'358

104'873

202'813

1'720'638

Trading portfolio

 

 

 

 

 

 

fixed interest securities

0

6'884

166

0

565

7'615

Derivative financial instruments

125'400

39'301

925

115

3'055

168'796

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

253'965

318'927

45'336

0

20'828

639'056

Total

11'507'400

5'338'320

325'402

125'171

246'380

17'542'673

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

Contingent liabilities

99'810

7'294

120

11'812

8'757

127'793

Irrevocable commitments

120'830

8

0

0

62'953

183'791

Liabilities from calls on shares and other equities

8'852

42

0

0

0

8'894

Total

229'492

7'344

120

11'812

71'710

320'478

Risk concentration by sectors

(XLS:)

in CHF thousands

Financial services

Utilities

Real
estate

Private households

Other

Total

31.12.2011

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

Due from banks

6'819'938

0

0

33

0

6'819'971

Due from customers

 

 

 

 

 

 

mortgage loans

118'696

12'736

874'768

6'484'890

1'156'183

8'647'273

loans to public authorities

0

16'001

0

5'518

38'693

60'212

other loans

755'850

79'974

52'867

222'899

508'370

1'619'960

Trading portfolio

 

 

 

 

 

 

fixed interest securities

2'693

0

6

0

1'301

4'000

Derivative financial instruments

77'082

73

257

39'966

8'610

125'988

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

369'581

0

0

0

177'947

547'528

Total

8'143'840

108'784

927'898

6'753'306

1'891'104

17'824'932

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

Contingent liabilities

36'515

1'881

26'130

26'075

23'601

114'202

Irrevocable commitments

25'053

0

2'060

62'021

49'923

139'057

Liabilities from calls on shares and other equities

8'852

0

0

0

0

8'852

Total

70'420

1'881

28'190

88'096

73'524

262'111

(XLS:)

in CHF thousands

Financial services

Utilities

Real
estate

Private households

Other

Total

31.12.2010

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

Due from banks

6'852'622

0

0

0

0

6'852'622

Due from customers

 

 

 

 

 

 

mortgage loans

21'127

5'185

771'499

6'170'330

1'052'300

8'020'441

loans to public authorities

0

25

0

0

133'480

133'505

other loans

224'004

99'402

304'325

691'993

400'914

1'720'638

Trading portfolio

 

 

 

 

 

 

fixed interest securities

7'124

0

0

0

491

7'615

Derivative financial instruments

115'220

0

0

49'192

4'384

168'796

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

462'890

0

0

0

176'166

639'056

Total

7'682'987

104'612

1'075'824

6'911'515

1'767'735

17'542'673

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

Contingent liabilities

36'544

0

25'598

25'078

40'573

127'793

Irrevocable commitments

82'510

0

1'250

84'077

15'954

183'791

Liabilities from calls on shares and other equities

8'894

0

0

0

0

8'894

Total

127'948

0

26'848

109'155

56'527

320'478

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