It was a year of contrasts for the Raiffeisen Group, which is reflected in its financial results. The Group succeeded in boosting income in its core operating business. At the same time, extraordinary items lowered the operating result and Group profit by around CHF 270 million. The Raiffeisen Group remained on a solid path despite these one-time corrections, as demonstrated by the outstanding operating business performance of the Raiffeisen banks and branches in the 2018 financial year. The sale of Notenstein La Roche Private Bank Ltd affected the balance sheet and income statement, making it difficult to compare 2017 and 2018. To improve comparability in this management report, the items materially affected by the sale of Notenstein La Roche Private Bank Ltd have been adjusted for the effect of the sale. The core business is thriving and Raiffeisen has effectively preserved its long-term earnings strength thanks in no small part to early investments in its future.
Performance of income items
Raiffeisen conducted many successful projects in 2018. For example, the last approximately 50 Raiffeisen banks and Raiffeisen Switzerland migrated to the new Avaloq-based core banking software on schedule at the end of the year. That means the entire Raiffeisen Group will start out the new financial year running the new core banking system and will thus be poised to continue driving the digitalisation of its core processes.
In 2018, the Investment Clients business segment was realigned and Notenstein La Roche Private Bank Ltd was sold to Vontobel. In recent years, Raiffeisen has demonstrated – with Notenstein La Roche Private Bank Ltd serving as a catalyst – that it can successfully develop the investment business on its own. Moreover, the sale of Notenstein La Roche Private Banking Ltd frees up regulatory capital that Raiffeisen can employ to continue growing its core business. The sale represents a further step towards the unbundling and simplification of the Group's structure.
Raiffeisen's operating earnings power is reflected in the significant increase in gross interest income (+1.8% or +CHF 40 million). Margins in interest operations remained tight due to the stubbornly low interest rate level and negative interest rates. That made the strong growth in gross interest income all the more gratifying. It was offset by CHF 63 million in value adjustments from interest operations, mostly attributable to valuation adjustments for companies held in KMU Capital AG's portfolio. The valuation of the portfolio companies was changed from a future-oriented valuation-based approach (DCF valuation) to a present-based approach (multiple approach), which was a significantly cause of the valuation adjustments. The result from commission business and services (-8.8% or -CHF 44 million) and from trading activities (-8.7% or -CHF 20 million) was lower due to the loss of income from Notenstein La Roche Private Bank Ltd after it was sold. After adjusting for this effect (values as at 31 December 2017 and 31 December 2018 without Notenstein La Roche Private Bank Ltd), the result from commission business and services increased CHF 21 million, or +5.4%, while the result from trading activities declined by a low CHF -4 million, or 1.8%. The decrease in other results from ordinary activities (-43.8% or -CHF 148 million) was primarily caused by a decline in the capitalisation of expenses related to the new core banking system compared to the previous year. The one-time income reductions exceeded the positive effects from the operating business in a year-on-year comparison. This reduced CHF 231 million, or 7%, from operating income. When viewed over several years, the income items were on a par with previous years despite the extraordinary items.
Expenses declined slightly year-on-year. Operating expenses, for example, decreased CHF 17 million, or 0.8%, due to the sale of Notenstein La Roche Private Bank Ltd. After adjusting for the Notenstein effect, operating expenses rose around CHF 60 million, or 3.2%. This increase is primarily attributable to higher expenses related to the roll-out of the core banking system and the addition of 136 full-time positions (without the Notenstein La Roche Private Bank Ltd effect).
The extraordinary items mentioned above amounted to around CHF 270 million. Two significant factors should be mentioned in this context. First, Raiffeisen Switzerland's participations were retested for impairment. Second, provisions were set aside in connection with the purchase of ARIZON Sourcing Ltd.
In connection with investments, value adjustments, depreciations and provisions totalled CHF 201 million, of which around CHF 125 million are attributable to KMU Capital. The book value of the participation position in Leonteq Ltd was adjusted by around CHF 57 million because the market value had decreased year-on-year as of the valuation cut-off date. Other value adjustments of around CHF 19 million related to adjustments to the valuations of other participations. 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. Provisions recognised in connection with the purchase of a participation in ARIZON Sourcing Ltd amounted to around CHF 69 million in total.
These extraordinary items had the general effect of reducing the operating result – which declined CHF 409 million, or 36.9%, year-on-year – as well as the Group profit – which decreased CHF 376 million, or 41%, year-on-year. It should be noted that the previous year was an absolute record year as a result of gains on the sale of investments and high capitalisations related to the core banking system. Despite the lower result overall, an additional CHF 120 million were allocated to reserves for general banking risks.
No post-balance sheet date events occurred that would have a significant impact on the operating result.