Business performance of Raiffeisen Switzerland
For Raiffeisen Switzerland, 2018 was a year of reappraisal and new beginnings. Raiffeisen Switzerland has laid the foundation for further development with an independent investigation and personnel changes to the Board of Directors and Executive Board. The introduction of the new core banking system has greatly simplified the Group's IT landscape and created an important basis for efficiency gains and future digitisation projects. With the sale of Notenstein La Roche Private Bank Ltd to Bank Vontobel Ltd, Raiffeisen Switzerland has almost concluded the disentangling of the corporate structures. The sale generated CHF 35.2 million in profit all told. However, above all the criminal proceedings against the former Chairman of the Executive Board of Raiffeisen Switzerland, Dr Pierin Vincenz, and the FINMA enforcement proceedings against Raiffeisen Switzerland attracted attention in 2018.
Raiffeisen Switzerland posted a net profit of CHF 42.5 million in the year under review . Profits were on a par with the previous year's level. However, CHF 250.2 million had to be released from the reserves for general banking risks in the current year. Numerous value adjustments and provisions were recognised in connection with retesting of participations for impairment and the planned purchase of ARIZON Sourcing Ltd. These extraordinary items totalling CHF 292 million were reflected in various income statement items. The switch to a more conservative valuation method at the KMU Capital Group led to value adjustments and provisions of around CHF 149 million. Of these, CHF 117.8 million are included in credit loss expense, CHF 6 million in equity participations and CHF 25 million in other provisions. An adjustment in value of CHF 54.1 million was posted in connection with the participation position in Leonteq Ltd. The book value of this participation was adjusted because the market value was lower on the valuation cut-off date than in the previous year. Other value adjustments and provisions of around CHF 27.1 million relate to adjustments to the valuations of diverse participations in particular because the consequent switch-over to a net asset value method was made. Provisions recognised in connection with the purchase of ARIZON Sourcing Ltd amount to around CHF 69 million.
Total assets decreased CHF 6 billion to CHF 47.6 billion, mainly due to the migration to the new banking system. With regard to the conversion, interbank positions were closed out as much as possible over the end of the year in order to simplify the migration. There were other substantial shifts within the balance sheet, largely due to changes in liquidity.
Income from ordinary banking activity
The gross result from interest operations increased CHF 29.3 million (+23.2%) to CHF 155.4 million. Net interest income in the corporate clients, leasing and retail business increased. Treasury generated CHF 43.2 million in net income, an increase over the previous year due to lower liquidity maintenance costs. Changes in value adjustments for default risks and losses from interest operations increased CHF 124.7 million to CHF 126.5 million (note 14). The value adjustments were primarily caused by the above-mentioned extraordinary items related to participations. Value adjustments related to KMU Capital Group AG in particular added up to CHF 117.8 million. A large value adjustment for the capital goods leasing business was also recognised. The net result from interest operations was CHF 28.9 million, or CHF 95.4 million less than the previous year.
The result from commission business and services (note 23) rose CHF 8 million year-on-year to CHF 110.5 million. Much of the increase was attributable to improvements in income from securities trading and investment activities (+CHF 3.9 million), income from payment transfers (+CHF 4.2 million) and commission income from lending activities (+CHF 2.9 million). Income went up as a result of higher volumes in collective investments and new pricing arrangements with business partners. In contrast, commission expense rose CHF 2.1 million to CHF 46.4 million due to the higher volumes.
The result from trading activities stood at CHF 78.1 million, or CHF 1.4 million less than the year before (note 24). Trading activities continued to be dominated by low-interest policies at European central banks (ECB, BoE, SNB) in 2018. The 2018 trading year will go down in the history books as a prime example of investors “acting on their emotions”. It will also stand out as a highly unusual year in which essentially all liquid asset classes decreased in value. Growth prospects and world politics started out the year in good shape. Global equity markets responded by posting significant gains. However, sentiment reversed completely in the fourth quarter. The unresolved trade war between the US and China slowed down the real economy and adversely affected corporate profits.
The other result from ordinary activities decreased slightly year-on-year, shedding CHF 9.5 million (-2.1%) to CHF 436.3 million. Significant changes included a CHF 9.9 million decline in income from ARIZON Sourcing Ltd to CHF 62.7 million. As a consequence of the sale of Notenstein La Roche Ltd, income from services reduced from CHF 9.3 to CHF 17.7 million. The income for collective and strategic services that Raiffeisen Switzerland provided to the Raiffeisen banks decreased nearly 30% from the previous year to CHF 41.7 million. The focus on the RAINBOW programme led to a reduction in the costs for project activities of Raiffeisen Switzerland that could be billed to the Raiffeisen banks. Other income, in contrast, rose CHF 31.3 million to CHF 87 million.
Other ordinary expenses of CHF 42.9 million mainly include costs for producing printed material for the Raiffeisen banks as well as expenditure on purchasing IT infrastructure for the Raiffeisen banks. The increase of CHF 8.7 million (+25.3%) is primarily attributable to the development of the core banking system.
Personnel expenses (note 26) amounted to CHF 383.8 million (+0.7%), or essentially the same as the previous financial year. The number of people employed by Raiffeisen Switzerland stood at 2,123 full-time positions at the end of the current year. This represents an increase of 11 positions over the previous year.
General and administrative expenses rose CHF 39.6 million year-on-year (+15.6%) to CHF 294.3 million. One of the largest drivers of this rise was the increase of CHF 37.2 million in IT costs to CHF 124.5 million, which was directly related to the migration to the new core banking system Advertising expenses remained stable year-on-year while legal costs and consulting fees declined CHF 3.1 million to CHF 48.6 million. The consulting fees in connection with projects decreased whereas the amount for legal advice rose. Other general and administrative expenses remained unchanged from the year before.
Value adjustments on fixed assets
Depreciation of tangible fixed assets declined CHF 4.2 million to CHF 23.3 million. In the current year, extraordinary write-downs on tangible fixed assets remained low at CHF 2.3 million.
Changes in provisions and other value adjustments, and losses
This item was affected particularly strongly by extraordinary factors. After reporting a CHF 0.1 million reduction in expenses in the previous year, net new provisions, other value adjustments and losses totalled CHF 112 million in 2018. Three factors are responsible for this enormous increase. First, provisions exceeding CHF 21 million were recognised to cover reorganisation costs associated with the sale of Notenstein La Roche Private Bank Ltd. In the case of other provisions, in particular the uncertainties in the legal disputes in the context of "Investnet" resulted in an increase of CHF 25 million affecting net income. Furthermore, provisions for other business risks of CHF 69 million and CHF 3.7 million for restructuring were recognised due to the approved purchase of ARIZON Sourcing Ltd in the 2018 financial year.
Extraordinary income, changes in reserves for general banking risks and taxes
The extraordinary income of CHF 46.2 million (note 28) was partly the result of the sale of Notenstein La Roche Private Bank Ltd. It also included liquidation gains from the sale of tangible fixed assets amounting to CHF 11 million. CHF 250.2 million was released from the reserves for general banking risks. Tax expenses in the reporting year stood at CHF 2.5 million.
Net profit amounted to CHF 42.5 million, which, as mentioned earlier, was on par with the previous year's level despite the extraordinary items. This was due to the release of reserves for general banking risks.
Raiffeisen Switzerland's total assets decreased CHF 6 billion. Part of this decrease stemmed from an actively managed reduction in total assets due to the migration to the new core banking system. Another part related to the adoption of book balance accounting for amounts due to and from other banks in accordance with financial reporting rules. Amounts due to and from other banks per se (i.e. on a current balance basis) have hardly changed at all.
Amounts due to/from Raiffeisen banks
The Raiffeisen banks hold assets at Raiffeisen Switzerland in order to comply with statutory liquidity requirements. At the end of 2018, Raiffeisen Switzerland's net amounts due to Raiffeisen banks stood at CHF 12.3 billion (previous year: CHF 12.9 billion). This total decreased due to the Raiffeisen banks' greater demand for funds for their mortgage business
Amounts due to/from other banks
Amounts due from other banks decreased CHF 6.4 billion year-on-year to CHF 1.8 billion. Amounts due to other banks declined CHF 7.3 billion to CHF 6.4 billion. This drop was due to the application of book balance accounting. On a current balance basis, amounts due and liabilities from other banks changed very little year-on-year.
Amounts due/liabilities from securities financing transactions
Liabilities from securities financing transactions increased CHF 1.2 billion to CHF 2.9 billion. These are repo transactions in which money is borrowed against collateral. The purpose of these transactions is to manage sight deposits held with the SNB. Amounts due from securities financing transactions were CHF 5 million.
Loans to clients
Loans to clients rose by a total of CHF 1.9 billion (+15.4%) to CHF 14.2 billion in the current year. Raiffeisen Switzerland's branches increased their lending volume CHF 505.6 million (+4.9%) to CHF 10.8 billion. These loans also included short-term Central Bank loans to institutional clients, loans to larger corporate clients, as well as the capital goods leasing business.
Trading portfolio assets
Trading portfolio net assets shrank CHF 234 million to CHF 1 billion (note 3).
Securities holdings in financial investments, mainly investment-grade bonds, were managed in accordance with statutory liquidity requirements and internal liquidity targets. The book value rose CHF 252 million to CHF 6.6 billion.
The value of participations (note 6) decreased CHF 632 million to CHF 423.8 million in the current year. The most significant change of CHF 622.5 million stemmed from the sale of Notenstein La Roche Private Bank to Bank Vontobel. An adjustment in value of around CHF 54.1 million was posted in connection with the participation position in Leonteq Ltd. This is a book value adjustment as a result of a lower market value compared with the previous year. Further value adjustments of around CHF 27.1 million are attributable to valuation adjustments on other investments. All the other participations that did not already use the net asset value method for their valuations switched over to the net asset value method. There was an increase in the investment holdings because Raiffeisen Switzerland participated in the capital increase of Leonteq Ltd and acquired an equity stake in Leonteq Ltd previously held by Notenstein La Roche Privat Bank Ltd. The 100% stake in Business Broker Ltd previously held by RUZ was transferred to Raiffeisen Switzerland in order to simplify shareholding structures.
Tangible fixed assets
The changes in tangible fixed assets are shown in note 7.1. The book value rose CHF 37.5 million to CHF 232.8 million. The increase was attributable to the newly renovated bank building in St.Gallen and the capitalisation of the licence fee of Avaloq Group AG.
The changes in intangible assets are shown in note 8.
Client deposits rose CHF 379 million to CHF 11.4 billion. Branches reported an increase of CHF 37.2 million. At the same time, deposits from corporate clients went up CHF 317.7 million.
Bond issues and central mortgage institution loans
Bond issues and central mortgage institution loans increased CHF 0.2 billion to CHF 7 billion in the current year. Raiffeisen Switzerland bonds remained unchanged at CHF 3.3 billion. Raiffeisen Switzerland's subordinated bonds accounted for CHF 1.5 billion of this total. Bond components of structured products issued by Raiffeisen Switzerland amounted to CHF 1.7 billion. Holdings of central mortgage institution loans increased CHF 0.1 billion to CHF 2 billion in the current year.
The demerger strategy and the extraordinary items associated with it had a large impact on provisions (note 14). Reorganisation provisions went up CHF 21.2 million, chiefly due to the sale of Notenstein La Roche Private Bank Ltd. Other provisions increased by CHF 25 million, in particular due to the uncertainties regarding legal disputes in the “Investnet” context. In addition, provisions for other business risks amounting to CHF 69 million were recognised as a result of the purchase of Arizon Sourcing AG agreed in 2018.
Reserves for general banking risks
CHF 250.2 million was released from the reserves for general banking risks in the current year. The release of reserves for general banking risks is related to the special factors mentioned above. The remaining balance of CHF 9.3 million is taxed (note 14).
Cooperative capital stood unchanged at CHF 1.7 billion at the end of December 2018. Equity capital fell from CHF 2.2 billion to CHF 1.9 billion due to the release of reserves for general banking risks.
Total contingent liabilities (note 20) declined CHF 182 million to CHF 3 billion in the current year. The contract volume for derivative financial instruments (note 4) decreased CHF 34.8 billion to CHF 113.5 billion. Hedging transactions for the banking book decreased CHF 0.9 billion to CHF 38.2 billion. The positive replacement values amounted to CHF 1.3 billion (previous year: CHF 1.6 billion), while the negative replacement values amounted to CHF 1.5 billion (previous year: CHF 1.6 billion).
The remuneration report is included in the annual report for the Raiffeisen Group.