Income from operating activities
Income items moved in disparate directions in 2018, reflecting the multifaceted nature of the financial year: The operational business did well, but its strong performance was somewhat overshadowed by the negative effects of the extraordinary items.
In its core business, the Group achieved further relevant growth in the mortgage portfolio, which raised the gross result from interest operations by CHF 40 million. Declines in individual income items were attributable, at least in part, to the retesting of participations for impairment and to the disentangling and simplification of the shareholding structure. The high value adjustments on positions at KMU Capital Group led to a CHF 20 million decline in net interest income compared with the previous year. However, this decline does not reflect the strong performance of the core operating business.
The sale of Notenstein La Roche Private Bank Ltd significantly decreased the result from commission business and services as well as the result from trading activities. The mid-year sale of the private bank caused a year-on-year decline of CHF 64 million in net income from commission business and services, with most of the drop concentrated in securities trading and investment activity. This also meant on the other hand that the operating business of the Raiffeisen banks and branches reported an increase of nearly CHF 21 million in net income from commission business and services. Trading activities performed similarly well. On balance, there was a year-on-year decline of CHF 20 million, which included CHF 16 million in income lost after the sale of the private bank. Without this effect, however, the result from trading activities would still have been down somewhat, but closer to the previous year's result.
The other result from ordinary activities fell in the year under review as well, posting a drop of CHF 148 million. This decrease was largely due to steep declines in the capitalisation of expenses incurred in the project to launch the new core banking system. The biggest expenses for implementing the new banking software were capitalised in 2017. However, capitalisable costs have decreased steadily since the first Raiffeisen banks migrated to the new system on 1 January 2018. CHF 199 million in project expenses were capitalised in 2017, but capitalisable project expenses dropped to CHF 108 million in 2018, which corresponds to a CHF 91 million reduction in income. This income item also contained CHF 36 million in write-downs on financial investments at KMU Capital AG (KMU Capital AG’s participations are reported as financial investments in the consolidated financial statements). In terms of this item, this means that the total decrease of CHF 148 million is largely attributable to extraordinary items (CHF 127 million).
All told, the Group's total operating income of CHF 3.1 billion was CHF 231 million below the previous year's figure of CHF 3.3 billion. This decline is due in particular to the following factors: The reassessment of the recoverability of investments and financial assets at KMU Capital Group (-CHF 84 million), the lack of income from commission and trading activities as a result of the sale of Notenstein La Roche Privatbank AG as at mid-year (-CHF 80 million) and the sharp fall in capitalisation in connection with the new core banking system (-CHF 91 million) totalling CHF 252 million.
The operating business of the Raiffeisen banks and branches is doing well, it even generated more income in 2018 than the year before. Income from interest, commission and service fee activities was higher than in the previous year.
Interest operations achieved a good performance despite the persistently difficult circumstances. The gross result from interest operations rose CHF 40 million (+1.8%), which was much more than in 2017 (+CHF 21 million). This is a positive result given the ongoing low-interest phase. The shrinking of the interest margin began to slow in the current year. In fact, it had returned to the previous year's level of 1.02% by the end of the year. Competitive pressure remained high as new financial service providers emerged. The Raiffeisen banks and branches could nonetheless expand their market position.
Changes in value adjustments for default risks and losses from interest operations increased CHF 60 million to CHF 63 million. In addition to the aforementioned value adjustments on positions of KMU Capital Group in the amount of CHF 48 million, this increase was due in particular to a larger need for value adjustments on a credit position of Raiffeisen Switzerland. The Raiffeisen banks continued to have a reasonable risk profile. The Raiffeisen banks and branches successfully absorbed the risk posed by mortgage growth and posted more releases than newly created adjustments overall. Losses recognised directly in income amounted to CHF 0.8 million (previous year: CHF 6.6 million). At Group level, the net result from interest operations decreased CHF 20 million to CHF 2.2 billion as a result of value adjustments affected by the extraordinary items.
The result from commission business and services (note 22) was highly affected by the mid-year sale of Notenstein La Roche Private Bank Ltd. The result declined CHF 44 million to CHF 451 million. The absence of Notenstein La Roche Private Bank Ltd translated into an earnings shortfall of CHF 64 million in the year under review. By the same token, this also meant that the core business of the Raiffeisen banks and branches posted a year-on-year gain of CHF 21 million. The CHF 14 million in additional income from securities trading and investment activity is particularly noteworthy. Income from other services continued to grow due to an increase in volume, particularly in the payments business.
The result from trading activities decreased CHF 20 million to CHF 210 million (note 23.1/23.2). The decrease was largely due to the loss of income from Notenstein La Roche Privatbank AG (-CHF 16 million). There was a slight decline of CHF 4 million overall. This decline was caused by trading in interest products, which was adversely affected by difficult market conditions in the current year. Equities trading recorded an increase, albeit at a modest level overall. The result from foreign exchange and notes trading was similar to that achieved in the previous year.
While many factors came together in the previous year to produce a very high other result from ordinary activities of CHF 337 million, the underlying situation changed completely in 2018. Most of the sub-items showed significant income decreases or expense increases that totalled CHF 148 million and produced a result of CHF 189 million, which represented a large year-on-year decline. The disposal of financial investments generated a result of CHF 5 million (-CHF 23 million). This is attributable to the fact that the previous year included the sale of a fairly large portfolio of financial investments in a favourable market environment. Income from participations reached CHF 76 million (-CHF 13 million). The decline came about partly because valuations of equity-method participations did not increase as much as in the previous year. Also, the CHF 8 million in income from participations for Helvetia Holding Ltd was not included in 2018 since this participation was already sold in 2017 to simplify the shareholding structure. Other ordinary income shrank, chiefly because the capitalisation of development costs for the new core banking system dropped CHF 80 million to CHF 129 million. Other ordinary expenses rose a considerable CHF 32 million to CHF 42 million, almost entirely as a result of a more cautious valuation of financial assets held by KMU Capital AG (CHF 36 million). Participations held by KMU Capital AG are reported as financial investments in the consolidated financial statements, since they are intended to be resold and not held for an extended period.
Operating expenses dropped slightly by CHF 17 million and fell back below the CHF 2 billion mark in the current year, as they were expected to do. The sale of Notenstein La Roche Private Bank Ltd had a positive impact on operating expenses. However, the roll-out of the new core banking system fell behind the original project schedule, which resulted in continued high project, supervision and training expenses in 2018. The cost/income ratio rose significantly from 60.8% to 64.9% as operating income fell precipitously while operating expenses only dropped slightly year-on-year.
Cost/income ratio trend
Personnel expenses (note 26) decreased a slight CHF 5 million to CHF 1.4 billion. The mid-year sale of Notenstein La Roche Private Bank Ltd reduced the headcount by more than 330, lowering costs accordingly. At the same time, 136 employees were added to the Raiffeisen Group's core business, including 107 new employees at the Raiffeisen banks. The number of full-time positions at the Group amounted to 9,215 (previous year: 9,411 full-time positions). Expenses for salaries and social insurance contributions remained unchanged overall while ancillary personnel expenses declined. Expenses for temporary staff to support the project for the new core banking system decreased significantly for the first time in the year under review. Per capita personnel expenses remained essentially unchanged from the previous year at CHF 149,300.
Change in personnel expenses and personnel expenses per full-time equivalent
General and administrative expenses
General and administrative expenses (note 27) followed a similar trajectory to personnel expenses. They shrank slightly by CHF 12 million to CHF 606 million and benefited from the elimination of Notenstein La Roche Private Bank Ltd's costs as of mid-year. At the same time, approximately CHF 14 million in additional costs were incurred for extensive investigation and preparation work related to corporate governance issues in the current year. The new core banking system was rolled out in several tranches over the financial year. The last group of Raiffeisen banks migrated to the new system as of 1 January 2019. Due to the one-year timeframe of the roll-out, considerable costs were incurred to operate the core banking systems side-by-side during this period.
Raiffeisen Group capital investment 2014–2018, by category
Raiffeisen Group capital investment 2014–2018, by region
Value adjustments on participations and depreciation and amortisation of tangible fixed assets and intangible assets
This item increased sharply in the current year due to higher amortisation of intangible assets, rising CHF 70 million, or 37.3%. The goodwill for Group companies KMU Capital Holding AG and Business Broker Ltd was written down completely on prudential grounds. In addition, the goodwill for the equity investment Leonteq AG was valued CHF 69 million lower due to an additional value adjustment. In 2018, the goodwill write-down was CHF 108 million, CHF 66 million higher than in the previous year. Write-downs of participations were slightly lower than those of the previous year. Write-downs of the new core banking system will only be performed in 2019.
Changes to provisions and other value adjustments, and losses
This item was particularly affected by extraordinary items. After reporting a CHF 0.5 million reduction in expenses in the previous year, net new provisions, other value adjustments and losses totalled CHF 124 million in 2018. Three factors are responsible for this increase. First, provisions exceeding CHF 19 million were recognised to cover reorganisation costs associated with the sale of Notenstein La Roche Private Bank Ltd. With regard to other provisions, the imponderables in the legal disputes with "Investnet" in particular resulted in an increase of CHF 25 million in the income statement. In addition, provisions of CHF 69 million were recognised for other business risks due to the purchase of the Avaloq stake in ARIZON Sourcing AG by Raiffeisen Switzerland agreed in 2018. The purchase was completed in January 2019.
Extraordinary income and expenses
Raiffeisen benefited from sales of participations, albeit less than in the previous year. It received CHF 104 million in net income from selling the participations in Helvetia Holding Ltd and Avaloq Group AG in 2017. In the current year, the sale of Notenstein La Roche Private Bank Ltd generated net income of CHF 68 million. This transaction raised extraordinary income (note 28) to CHF 82 million (previous year: CHF 119 million). Extraordinary expenses rose CHF 5 million to nearly CHF 9 million because of greater losses on sales of tangible fixed assets.
Taxes (note 29) decreased CHF 77 million to CHF 156 million. Current taxes incurred by the individual companies amounted to CHF 170 million, slightly below the previous year's level (CHF 177 million). Provisions for deferred taxes were also released, however, mainly as a consequence of the sale of Notenstein La Roche Private Bank Ltd.