Letter to shareholders

Dear shareholders

The key priority for the LLB Group in 2014 is the consistent implementation of the Focus2015 strategy. Our strategy has a clear goal, namely, to put in place the essentials to ensure sustainable success beyond the year 2015 at a time of fundamental change in the banking industry. At the halfway point in our new strategic positioning we are well on the way to achieving our goal.

Successful repositioning

For the LLB Group, 2014 is the year for implementing market-oriented strategic initiatives, following our success in substantially reducing costs and complexity in 2013. In the first half of 2014, all our measures have progressed according to plan. We have further improved cost efficiency but also made targeted investments in innovations and in the future. Digitalisation has opened up new possibilities for us in customer service. We are exploiting these opportunities to open up new distribution channels and to adapt existing ones to changed client requirements. Furthermore, the development and expansion of our international target markets in Central and Eastern Europe as well as the Middle East are progressing well in accordance with our strategy.

As a universal bank with a strong private banking and institutional business, we are focusing on consistently satisfying the needs of our customers in our onshore markets of Liechtenstein, Switzerland and Austria. We have also further enhanced our excellent investment competence. On 1 July 2014, Liechtensteinische Landesbank and Bank Linth set themselves apart from the rest of the market by introducing a new pricing model in investment business. By waiving distribution remunerations for our own and external investment funds we have been able to increase cost transparency. As one of the first banks in Europe, the LLB offers a performance linked tariff with certain strategy funds. Accordingly, our clients benefit from transparent, performance dependent conditions with LLB fund products that regularly receive rewards for good performance.

Solid operative result

The business environment continued to be challenging in the first half of 2014. The LLB Group felt the consequences of the persisting low level of interest rates. In spite of rising prices on the stock markets, many clients continued to show restraint in making investments.

Despite this headwind, the LLB Group reported a solid result for the first half of the year. Group net profit rose to CHF 40.4 million compared with CHF 13.6 million for the first half of 2013.

Operating income totalled CHF 170.1 million. In the first half of 2013 – adjusted for one-off effects as well as sold and discontinued Group companies – this stood at CHF 207.8 million. The negative result from trading income was largely responsible for the reduction of CHF 37.7 million, or 18.1 percent. Regarded from the perspective of the balance sheet date, lower market interest rates caused higher interest rate hedging costs. In contrast, the market valuation as per the balance sheet date had a positive impact on net income from financial investments. Operating expenses amounted to CHF 129.4 million. In comparison with the previous year, and also adjusted to consider the effects mentioned above, cost savings again reached CHF 2.7 million, or 2.0 percent.

Assets under management remained stable at CHF 49.1 billion. In the growth markets net new money inflows of CHF 0.2 billion were achieved. As expected, money outflows were registered in the traditional, cross-border markets. Isolated, larger outflows had an adverse impact on the otherwise good acquisition performance in the onshore markets. In total, the LLB Group posted net new money outflows of CHF 0.7 billion.

Mortgage loans increased by 1.1 percent to CHF 9.0 billion. This shows that we are continuing to monitor the developments on the real estate market very carefully while also remaining committed to our well-proven lending policy. In the current market situation, we are growing selectively and in a risk-conscious manner.

Strong capital base

The Liechtensteinische Landesbank is a cornerstone of the Liechtenstein national economy. For us therefore it is self-evident that we must have an adequate, high-quality capital base. The LLB Group’s equity capital covers the capital requirements in our target markets. At 30 June 2014, the tier 1 ratio stood at 18.7 percent. With equity capital of CHF 1.8 billion, we possess a high level of financial stability and security.

Market divisions on course

The LLB Group’s business model is based on three market divisions, namely Retail & Corporate Banking, Private Banking and Institutional Clients. During the course of 2013, the divisions reduced complexity and cut costs, increased productivity, sharpened the target group focus and intensified activities in the target markets. All the divisions have defined further strategic initiatives for 2014 and forged ahead with the realisation of the Focus2015 strategy in the first six months of 2014.

Retail & Corporate Banking

The Retail & Corporate Banking Market Division combines tradition with innovation and accompanies each client through the various phases of their lives. In its home markets of Liechtenstein and Switzerland, the LLB Group has successively expanded its leading position as a partner for business and the community.

Various measures implemented in 2014 demonstrate the division’s innovative power. For example, for us closeness to customers and a financial culture commence in the classroom. Thanks to its service offers “young Liechtenstein” and “young Linth”, known as “youli” for short, the LLB and Bank Linth have been able to further strengthen their strong market position in the youth segment.

Moreover, by continuing to develop its digital channels, the LLB Group is adapting to the changed behaviour of its clients. Since June 2014, for example, another innovative mobile banking app for Android smartphones and tablets has been available for customers.

Private Banking

With its investments, the Private Banking Market Division has also underscored its dedication and unique closeness to clients.

Accordingly, during the first half of 2014, we again strengthened our teams of client advisors in the growth markets of Central and Eastern Europe as well as the Middle East and will continue the process in the second six months. Furthermore, we are expanding our market-specific product offering and have recently provided our clients with access to the stock markets in Dubai and Abu Dhabi.

The LLB Group believes that over the long term the quality of its services, the performance of its investment products and the growing trust of its clients in a long-standing private banking tradition will be major success factors.

Institutional Clients

Both the transfer of knowledge and the exchange of information with external partners are of great importance for the LLB Group. The Institutional Clients Market Division provides structured, tried and tested knowhow to its clients and partners via the innovative “LLB Xpert views” online platform. During the first half of 2014 it successfully strengthened its market presence. Maintaining a continual dialogue with our partners to find solutions is one of our primary strong points.

By setting up the information portal and arranging individual round-table discussions, the LLB Group creates a competitive lead for its clients. Institutional clients receive an in-depth insight into the latest developments in the areas of investments, legal issues and taxation. In addition, we supply our partners with information regarding the implementation of complex international rules and regulations such as the US “Foreign Account Tax Compliance Act” (FATCA) or the EU “Markets in Financial Instruments Directive” (MiFID II).

Increased efficiency in the Corporate Center

The Corporate Center Divisions ensure the Group’s corporate development and have again significantly enhanced the efficiency of the LLB Group by optimising procedures and processes. The Group COO Division has pushed ahead the automation of banking operations and further expanded and refined the operations of the shared service center. Moreover the cost structures of the IT and administrative functions are regularly compared with those of other banks. With its modern IT infrastructure, the Corporate Center serves as the LLB Group’s partner for innovation, for example in continuing the development of the mobile banking app to supply 24 x 7 banking services via mobile and web-based channels.

Innovative pricing model and investment competence

In living up to its mission statement, the LLB is fulfilling the need of its clients for more transparency, a clear fee structure and an attractive price/performance ratio. The combination of an innovative pricing model with prize-winning investment competence has created a very strong competitive position for the LLB Group. Recently we announced the introduction of a new innovative pricing model that will comply with regulatory requirements. The initialisation of the MiFID II financial market directive was one of the EU’s most important regulatory reactions to the financial crisis. In strengthening investor protection, the EU wants more transparency in relation to commissions in investment advisory services.

The Liechtensteinische Landesbank, as the first bank in Liechtenstein, and Bank Linth, as one of the first banks in Switzerland, introduced an innovative pricing model in investment business on 1 July 2014. In both asset management and investment advisory business, the LLB and Bank Linth have decided to forego portfolio maintenance commissions (trailer fees) for LLB investment funds, and pay retrocessions for external funds fully to their clients without being requested to do so. Furthermore, they are among the first banks in Europe to make the fees for specific strategy funds dependent on performance, and for bond funds dependent on the interest level.

Investment competence is one of the great strengths of the LLB Group. Hence, our Asset Management Division was once again among the winners at the 24th Lipper Fund Awards 2014 in Switzerland. The “LLB Equities Regio Bodensee” fund received the Lipper Award in the category “Equity Switzerland Small and Mid Caps” for its performance over three years.

US taxation dispute

A year ago, the LLB Vaduz resolved its US taxation dispute. In the meantime, swisspartners Investment Network AG, a subsidiary of Liechtensteinische Landesbank AG, has also reached agreement with the US authorities to finally resolve its US taxation dispute. On 9 May 2014, the two parties signed a “Non-Prosecution Agreement”. As part of the agreement, a payment of USD 4.4 million was made to the US authorities. Provisions had been set aside to cover this amount so that it will not have an adverse effect on the 2014 financial statement.

The LLB Group is continuing negotiations with the US authorities to find a solution for LLB (Switzerland) Ltd. The same applies to our Bank Linth subsidiary. In conformance with the principle of prudence and on the basis of a recommendation from the Swiss Financial Market Supervisory Authority, it has decided to participate in the US/Swiss programme and has registered in category 2.

Tax cooperation

At a time of fundamental change in the banking industry, our competitiveness is of particular importance. This includes the question of taxation. The LLB Group supports the tax compliance strategy of the Liechtenstein financial center, it employs a risk-based approach and actively embraces the transformation process.

On 1 January 2014, a withholding tax agreement between Liechtenstein and Austria to regularise previously untaxed deposits came into force. At the same time, the existing double taxation agreement was revised and adapted to conform to international standards. Accordingly, the Austrian clients of a Liechtenstein bank now have the possibility of regularising an unlimited amount of assets. On the one hand, the taxation agreement sets up a mechanism for the subsequent taxation of previously undeclared assets, and on the other, it establishes a withholding tax for future capital gains. The LLB completed the disclosure process at the end of June 2014.

The LLB Group has implemented the stipulations of the FATCA agreement. These requirements focus on the identification of clients, a possible withholding tax on US-based payments and a US taxation reporting system. By signing up to the FATCA agreement of 16 May 2014, which specifies an automatic exchange of information with the US tax authorities, Liechtenstein has safeguarded access to the US capital market for its financial services providers.

New members of the Board of Directors

Since 9 May 2014, the Board of Directors of the LLB has again been composed of seven members. The General Meeting of Shareholders elected Prof. Dr. Gabriela Nagel-Jungo and Urs Leinhäuser to the Board of Directors for a term of office of three years.

Gabriela Nagel-Jungo is a professor and lecturer at the Zurich University of Applied Science and is head of the Accounting & Controlling Center as well as head of the university’s Banking, Finance and Insurance Department. Urs Leinhäuser is a business economist (HWV) with extensive experience as the chief financial officer of various listed industrial companies. With these elections, all the relevant profiles are now represented in the composition of the Board of Directors. The independence of the board members and their professional expertise guarantee the smooth functioning of the Board of Directors as the supreme strategic body.

Stable LLB bearer share

During the first half of 2014, the LLB bearer share continued to gain ground. On 30 June 2014, it closed at CHF 38.25. Its overall performance stood at 7.1 percent, thus exceeding the European banking sector.

Going forward with strength

The LLB Group’s strategic repositioning is progressing according to plan. We have implemented important milestones of the Focus2015 strategy and established the foundation for sustainable success beyond 2015 .

We want to express our thanks to you, our esteemed shareholders, for your trust and support in the development of our bank. What the LLB has achieved was made possible by the loyalty of our shareholders and clients, as well as our staff, who give their best every day.

Yours sincerely

Roland Matt, Group CEO (signature)

Roland Matt
Group CEO

Dr. Hans-Werner Gassner, Chairman of the Board of Directors (signature)

Dr. Hans-Werner Gassner
Chairman of the Board of Directors

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