Consolidated management report

Group financial statement

The consolidated interim financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).

In the first half year of 2014, the LLB Group earned a net profit of CHF 40.4 million (first half 2013: CHF 13.6 million). In comparison with the equivalent period in the previous year, the interim result has improved substantially.

In the first half of 2013, the LLB Group reported several one-off effects in connection with its new strategic focus as well as the US taxation dispute totalling CHF 58.4 million (in this respect see the 2013 Annual Report). In addition, the Group result for the first half of 2013 contained operating income and operating expenses for the Jura Trust Group, which was sold in the second half of 2013, and for LLB (Switzerland) Ltd., which ceased its banking activities at the end of 2013. The previous year’s figures, adjusted to consider the one-off effects and the sold and discontinued Group companies, are provided as a comparison basis for the previous year.

Net interest income and net fee and commission income remained stable relative to a comparison basis for the previous year. Regarded from the perspective of the reporting date, the lower medium and long-term market interest rates prompted higher costs for interest rate hedges. These interest rate hedging costs were primarily responsible for the reduction in operating income relative to a comparison basis for the previous year. Operating expenses were again reduced relative to the comparison basis for the previous year, reflecting the consistent implementation of our Focus2015 strategy.

The net profit for the first half year attributable to the shareholders of LLB amounted to CHF 39.0 million (first half 2013: CHF 11.7 million). Earnings per share stood at CHF 1.35 (first half 2013: CHF 0.41).

Assets under management

As per 30 June 2014, client assets under management stood at CHF 49.1 billion. Thanks to the positive performance on the financial markets, client assets under management remained stable at a high level in comparison with the figure at 31 December 2013 of CHF 49.1 billion. Assets in own-managed funds rose by 1.8 percent to CHF 4.3 billion (31.12. 2013: CHF 4.2 billion). Assets with discretionary mandates stood at CHF 8.2 billion (31.12. 2013: CHF 8.3 billion). Other client assets under management climbed slightly to CHF 36.7 billion (31.12. 2013: CHF 36.6 billion).

Net new money inflows of CHF 0.2 billion were booked in the growth markets. As was expected, money outflows were registered in the traditional cross-border markets. Moreover, isolated larger outflows with custodian bank funds and public institutions in the onshore markets weighed on good acquisition performance. Overall, the LLB Group posted net new money outflows of CHF 0.7 billion (first half 2013: minus CHF 0.2 billion).

Assets under management

CHF 49.1 billion

Assets under management (bar chart)

Income statement

Operating income fell by 39.2 percent to CHF 170.1 million (first half 2013: 279.9 million). On a comparable basis with the previous year, operating income would have been 18.1 percent lower than in the previous year. The lower medium and long-term interest rates in the first half year were almost exclusively responsible for this reduction. Regarded from the perspective of the reporting date, the lower medium and long-term market interest rates led to valuation losses and therefore to higher interest rate hedging costs of CHF 34.2 million (first half 2013: plus CHF 28.2 million).

Interest income before credit loss expense was down for the first half year of 2014 by 6.1 percent to CHF 68.8 million (first half 2013: CHF 73.3 million). On a comparable basis with the previous year, interest differential business rose by a total of 1.3 percent.

On a comparable basis with the previous year, interest business with clients increased by 8.2 percent. This was largely attributable to lower interest paid to clients. As expected, interest income due from banks declined due to historically low interest rates and the lack of alternative investments on the interbank market. Credit risk recovery of CHF 5.4 million were recognised in the income statement in the first half of 2014. This is a reflection of the success of the measures implemented to strengthen the credit organisation. In the previous year credit loss expenses of CHF 4.6 million were charged to the income statement.

Net fee and commission income decreased by 13.0 percent to CHF 92.8 million (first half 2013: CHF 106.7 million). On a comparable basis with the previous year, net fee and commission income would only have fallen slightly in 2014. Brokerage earnings declined on account of the continued restraint in investment activity by clients. An increase of CHF 0.6 million was attained in income from fund management.

Net trading income fell significantly to minus CHF 19.3 million (first half 2013: plus CHF 42.8 million). Whereas in the previous year income from interest rate swaps of CHF 28.2 million was posted, in the first half of 2014 interest rate hedging costs of CHF 34.2 million were incurred. This was due to the drastic fall in medium and long-term interest rates which led to a valuation loss on interest rate hedging instruments on the reporting date. Client trading with foreign exchange, foreign notes and precious metals remained unchanged compared with the previous year and totalled CHF 14.6 million.

Net income from financial investments at fair value through profit and loss amounted to CHF 20.1 million (first half 2013: CHF 4.1 million). As a result of the fall in medium and long-term market interest rates, unrealised price gains were attained with interest-bearing investments. In addition, price gains were recorded on the back of the positive price development on the stock markets. In total, the price gains amounted to CHF 12.7 million compared with minus CHF 1.8 million in the previous year. Income from interest and dividend payments stood at CHF 7.4 million, 25.3 percent above the previous year.

Other income totalled CHF 2.2 million (first half 2013: CHF 57.6 million). In the previous year a value adjustment of CHF 55.8 million from a purchase price obligation was recorded in other income.

Operating expenses stood at CHF 129.4 million and were therefore CHF 131.8 million below the previous year’s figure of CHF 261.2 million. In the previous year one-off expenses were recognised in the accounts. On a comparable basis with the previous year, operating expenses would have totalled CHF 132.1 million in the first half of 2013. The figure for the first half of 2014 therefore corresponds to a reduction of CHF 2.7 million, or 2.0 percent. These savings are a reflection of the consistent implementation of our Focus2015 strategy and the continuing effectiveness of our cost-cutting and efficiency improvement programme.

At CHF 80.0 million, personnel expenses were 11.2 percent lower than in the previous year (first half 2013: CHF 90.1 million). On a comparable basis with the previous year, personnel expenses would have been 1.8 percent under the figure for the previous year. The decrease in personnel expenses was attributable to the lower total headcount in line with Group strategy. As per 30 June 2014, the LLB Group had 886 full-time positions (31.12. 2013: 925).

General and administrative expenses at the LLB Group stood at CHF 33.7 million for the first half year of 2014 (first half 2013: CHF 137.6 million) and were therefore CHF 103.9 million lower than in the previous year. This is due to the one-off effects in the previous year. On a comparable basis with the previous year, general and administrative expenses in the first half of 2014 would be CHF 1.5 million higher than in the previous year.

Depreciation and amortisation decreased in comparison with the previous year by CHF 17.7 million to CHF 15.8 million (first half 2013: CHF 33.5 million). One-off effects influenced this position in the previous year. On a comparable basis with the previous year, depreciation and amortisation fell by 14.6 percent.

In the first half year of 2014, the Cost-Income-Ratio stood at 78.2 percent (first half 2013: 70.2 %). The increase was largely attributable to the higher interest rate hedging costs caused by the drastic fall in medium and long-term market interest rates.

Balance sheet

In comparison with 31 December 2013, the consolidated balance sheet total rose by CHF 0.4 billion, or 1.8 percent, to CHF 20.5 billion (31.12. 2013: CHF 20.9 billion). Mortgage loans granted by the LLB Group increased by 1.1 percent to CHF 9.0 billion compared with 31 December 2013.

Equity attributable to the shareholders of LLB stood at CHF 1.6 billion per 30 June 2014. The total is practically unchanged in comparison with 31 December 2013. The tier 1 ratio amounted to 18.7 percent (31.12. 2013: 18.8 %). The return on equity attributable to the shareholders of LLB stood at 4.7 percent (first half 2013: 1.5 %).

Outlook

For the second half of 2014, the LLB Group sees risks and uncertainties in relation to the business result due to the development of market interest rates. The lower medium and long-term market interest rates had an adverse influence on the LLB Group’s result in the first half of 2014. There is therefore uncertainty regarding the development of the market interest rates in the second half of 2014, which could have a significant influence on the full-year business result. The LLB Group also sees further latent risks in the development of the stock markets, which have a major influence on the valuation of financial investments and client assets under management.

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