Annual Financial Statements
Notes to the Consolidated
Annual Financial Statements
Trading name, legal form, registered office
The Raiffeisen Group is a banking group without legal personality. It comprises 220 independent Raiffeisen banks in the legal form of a cooperative, as well as Raiffeisen Switzerland as cooperative association – domiciled in St. Gallen – and the associated Group companies.
Risk management
The Raiffeisen banks and Raiffeisen Switzerland form a risk-sharing group through their solidarity-based and joint liability scheme.
Risk policy
Risk management systems are based on regulatory provisions, regulations governing risk policy for the Raiffeisen Group (“risk policy” for short) and the framework and framework concepts for institution-wide risk management. The risk policy, the framework and the framework concepts are reviewed and updated annually. The Raiffeisen Group views entering into risks as one of its core competencies. Risks are only entered into with full knowledge of their extent and dynamics, and only when the requirements in terms of systems and staff resources are met. The objectives of the risk policy are to limit the negative impact of risks on earnings and protect the Raiffeisen Group against high, exceptional losses, as well as to preserve and enhance its reputation. The Raiffeisen Group’s risk management is based on the three-lines-of-defence principle: risks are managed by the line units responsible (first line). The Risk & Compliance department ensures that the risk policy and regulatory provisions are complied with and enforced (second line). Internal Auditing ensures the independent review of the risk management framework (third line).
Risk control
The Raiffeisen Group limits and monitors the main risk categories via risk guidelines. Appropriate limits are used for quantifiable risks. Risks that are difficult to quantify are limited by qualitative stipulations.
The Risk & Compliance department of Raiffeisen Switzerland is responsible for the independent monitoring of risk in the Raiffeisen Group. This primarily involves monitoring compliance with the limits and warning thresholds stipulated by the Board of Directors and the Executive Board. The Risk & Compliance department also assesses the risk situation on a regular basis as part of the reporting process.
Monitoring of the subsidiaries is tailored to the relevant risk profiles. These are periodically reviewed. Raiffeisen Switzerland monitors the minimum risk management requirements. There is a periodic exchange with the risk control owners.
Raiffeisen conducts various regular stress tests to analyse the impact of adverse scenarios on the resilience of the Bank. This involves examining the influence on important target values, such as profit, capital requirements and liquidity. The stress test analyses are carried out at the overall Bank level or at the level of certain sub-portfolios or risk categories. Moreover, as a systemically important Bank, Raiffeisen carries out reverse stress tests for the Raiffeisen Group as part of its stabilisation and emergency planning.
Conducting stress tests is an integral part of risk monitoring at Raiffeisen. The Board of Directors of Raiffeisen Switzerland determines the risk appetite on the basis of the stress test at Group level.
Risk management process
The risk management process applies to all risk categories, i.e. credit, market, liquidity and operational risks. It includes the following elements:
- Risk identification
- Risk measurement and assessment
- Risk management
- Risk monitoring and reporting
Raiffeisen Group’s risk management systems aim to:
- ensure that effective controls are in place at all levels and to ensure that any entering into risks is in line with the risk appetite;
- create the conditions for entering into and systematically managing risks in a deliberate, targeted and controlled manner;
- make the best possible use of risk tolerance, i.e. ensure that risks are only entered into if they offer suitable return potential.
Credit risks
The business units of the Raiffeisen banks and of Raiffeisen Switzerland manage their credit risk autonomously, although still in accordance with Group-wide standards.
Credit risks are defined in the risk policy as the risk of losses that arise if clients or other counterparties fail to make contractually agreed payments to the extent expected. Credit risks are inherent in loans, irrevocable credit commitments, contingent liabilities and trading products such as OTC derivative contracts. Risks also arise from taking on long-term equity exposures.
The Raiffeisen Group identifies, assesses, manages and monitors the following risks in its lending activities:
- Counterparty risk
- Collateral risk
- Concentration risk
- Country risk
Counterparty risks result when a debtor or counterparty defaults. A debtor or counterparty is considered to be in default when receivables are overdue or at risk.
Collateral risks refer to impairments in the value of collateral.
Concentration risks in credit portfolios arise from the unfavourable distribution of credit receivables originating from individual borrowers, sectors, regions, rating classes and collateral.
Country risk is the risk of losses resulting from country-specific events.
Retail banking in Switzerland is the Raiffeisen Group’s core business. The main component of this is financing for loans secured by mortgages.
For the individual Raiffeisen banks, the main risks are counterparty, collateral and concentration risk. The majority of these risks result from loans granted to private and corporate clients and public-sector entities. Corporate clients are mainly small and medium-sized companies that operate within the business areas of Raiffeisen banks. Credit risks are limited primarily by securing the underlying claims. This notwithstanding, creditworthiness and solvency are key prerequisites for the granting of loans. Raiffeisen banks are limited in the acceptance of credit risks arising from uncovered transactions for corporate clients; Uncovered loans to corporate clients exceeding a defined amount must be approved and hedged by Raiffeisen Switzerland. The maximum unsecured loan amount is limited and depends on the level of the bank’s capital. Uncovered loans to private clients are generally not possible, or only in exceptional cases with the prior approval of Raiffeisen Switzerland.
Larger loans to corporate clients and public-sector entities are primarily managed by Raiffeisen Switzerland’s Corporate Clients, Treasury & Markets department. Unsecured loans exceeding a defined amount are additionally checked by the Raiffeisen Switzerland Credit Office. Concentration risks as part of the credit process are reviewed and acknowledged.
The Group-wide responsibilities of the Corporate Clients, Treasury & Markets department involve managing both domestic and international counterparty risks. These risks occur in transactions such as wholesale funding in the money and capital markets, as well as the hedging of currency, fluctuating interest rate and proprietary trading risks. In principle, international transactions may only be conducted when country-specific limits have been approved and established.
Pursuant to the Articles of Association, Raiffeisen Switzerland’s commitments abroad may not exceed 5% of the consolidated Raiffeisen Group balance sheet total on a risk-weighted basis.
Internal and external ratings are used as a basis for approving and monitoring business with commercial banks. Off-balance-sheet transactions and derivative financial instruments are converted to their respective credit equivalent. The standard SA-CCR approach is applied when calculating the credit equivalents of derivative financial instruments. Raiffeisen Switzerland has entered into framework agreements for OTC derivative transactions (the Swiss or ISDA master agreement) with the counterparties of the Corporate Clients, Treasury & Markets department with whom OTC derivative transactions are executed and, depending on the counterparty, a credit support annex for variation margin. Collateral is exchanged by transferring the margin requirement, which is calculated daily. These OTC exposures are monitored, taking into account the collateral exchanged.
Raiffeisen Switzerland has invested in other companies as part of strategic cooperation partnerships. Details are provided in the information on the balance sheet contained in Note 7.
Creditworthiness and solvency are assessed on the basis of binding Group-wide standards. Sufficient creditworthiness and the ability to maintain payments must be proved before any loan is approved. Loans to private and corporate clients, as well as investment property financing, are classified according to rating models and subject to risk monitoring based on the resulting classification. Clients’ creditworthiness is split into 11 risk categories and two default categories.
This system has proved its worth as a means of dealing with the main elements of credit risk management, i.e. risk-adjusted pricing, portfolio management, identification and recognition of individual value adjustments. Specialist teams are available at Raiffeisen Switzerland for complex financing arrangements and the management of recovery positions.
Comprehensive internal sets of rules exist for valuing collateral for loans, especially for determining the loan-to-value ratios; they prescribe the corresponding methods, procedure and competencies. The sets of rules are constantly reviewed and adjusted to regulatory requirements and market changes. The Bank employs recognised estimation methods, tailored to the type of property, to value property loans secured by security interests in land. Hedonic models, the gross rental method and expert estimates are used, among other things. Both the models used and the individual valuations are reviewed regularly. The maximum lending amount for any property loan secured by security interests in land varies depending on the realisability of the collateral and is affected by the type and form of use.
Raiffeisen analyses loan positions for default risk at regular intervals and/or in response to certain events and recognises value adjustments and/or loan loss provisions as needed. The Bank considers loans to be impaired when it becomes unlikely that debtors will be able to meet their future obligations or the loan is no longer covered by the intrinsic value of any collateral, but at the very latest when the contractual principal, interest or commission payments are more than 90 days overdue. Provisions are recognised for the full amount of the interest and commission payments.
Raiffeisen Switzerland monitors, controls and manages risk concentrations within the Group, in particular for individual counterparties and for groups of affiliated counterparties, as well as for sectors. The process of identifying and consolidating affiliated counterparties is largely automated across the entire Raiffeisen Group. Raiffeisen Switzerland monitors the credit portfolio on a Group-wide basis and evaluates the portfolio structure. A periodic credit portfolio report provides the decision-makers responsible with information on the economic environment, the structure of the credit portfolio, the risk situation and developments in the period under review.
Monitoring the portfolio structure involves analysing the distribution of the portfolio according to a range of structural characteristics, including, without limitation, category of borrower, type of loan, size of loan, rating, sector, collateral, geographical features and value adjustments. The Executive Board and the Board of Directors of Raiffeisen Switzerland receive a quarterly risk report detailing the risk situation, risk exposure, limit utilisation and changes in exception-to-policy loans. In addition to standard credit portfolio reporting, Raiffeisen Switzerland’s Risk & Compliance department also conducts ad hoc risk analyses where required. Monitoring and reporting form the basis for portfolio controlling measures, with the main focus being on controlling new business via lending policy.
For the regulatory reporting of the 20 largest overall exposures of the Raiffeisen Group, two counterparties with cumulative overall exposure (after risk mitigation and risk weighting) totalling CHF 1.3 billion were reportable owing to the prescribed threshold (2% of the capital valuation basis).
Market risks
Banking book
Risk associated with fluctuating interest rates: since interest rates for assets and liabilities are locked in for different periods, fluctuations in market interest rates can have a considerable impact on the interest income and annual results of the Raiffeisen Group. Value at risk is calculated along with interest rate sensitivity in various interest rate shock scenarios in order to assess the assumed interest rate risk to the net present value of the equity capital. The impact on profitability is assessed using dynamic income simulations. To measure mark-to-market risk, a gap analysis is performed using all on-balance-sheet and off-balance-sheet items along with their maturities. Loans and deposits with non-fixed maturities and capital commitment periods are modelled on the basis of historical data and forward-looking scenarios. These models are backtested at least once a year and undergo regular independent validation. No specific assumptions are made for early loan repayments because early repayment penalties are normally levied.
Risk associated with fluctuating interest rates is managed on a decentralised basis in the business units responsible, with the persons responsible in each case being required to strictly adhere to the limits set by the Board of Directors and the Executive Board. Interest rate risks are hedged using established instruments. The Corporate Clients, Treasury & Markets department is the binding counterparty concerning wholesale funding and hedging transactions for the entire Group. The Risk & Compliance department monitors compliance with interest risk limits and prepares the associated quarterly reports, while also assessing the Raiffeisen Group’s risk situation. Monitoring and reporting are conducted more frequently for individual units.
Other market risks: since assets in a foreign currency are generally refinanced in the same currency, foreign currency risks can largely be avoided by the Raiffeisen banks.
The financial investment portfolio is managed by the Corporate Clients, Treasury & Markets department. Financial investments are part of the liquidity reserve of the Raiffeisen Group and contain largely high-grade fixed-income securities that meet statutory liquidity requirements for high-quality liquid assets (HQLA). The Risk & Compliance department monitors the market risk of financial investments.
Trading book
The Corporate Clients, Treasury & Markets department is responsible for managing Raiffeisen Switzerland’s trading book. Neither the Raiffeisen banks nor the branches of Raiffeisen Switzerland keep trading books. Trading activities comprise interest rates, currencies, equities and banknotes/precious metals. In addition, the Structured Products business of Raiffeisen Switzerland B.V. Amsterdam is being allocated to the trading book. There must be strict adherence to the value-at-risk, scenario, position and loss limits set by the Board of Directors and the Executive Board, which the Risk & Compliance department monitors on a daily basis. In addition, the Risk & Compliance department conducts daily plausibility checks of the valuation parameters used to produce profit and loss figures for trading.
Reporting on compliance with value-at-risk, scenario, position and loss limits and the assessment of the risk situation by the Risk & Compliance department is conducted at a frequency ranging from daily to quarterly and sent to the members of the Executive Board responsible, the Executive Board and the Board of Directors of Raiffeisen Switzerland.
The Risk & Compliance department communicates breaches of market risk limits set by the Board of Directors and the Executive Board on an ad hoc basis within the scope of the respective risk reports.
Liquidity risks
Liquidity risks are managed centrally for the Raiffeisen Group by the Corporate Clients, Treasury & Markets department in accordance with applicable laws, regulations and commercial criteria and are monitored by Risk & Compliance. Risk management involves, in particular, simulating liquidity inflows and outflows over different time horizons using Group-wide scenarios. These scenarios cover the impact of liquidity shocks that are specific to Raiffeisen or affect the market as a whole.
Monitoring is based on statutory minimum requirements and the limits and internal stress scenarios stipulated by the Board of Directors.
Operational risks
Raiffeisen takes operational risks to mean the danger of losses arising as a result of the unsuitability or failure of internal procedures, people or systems, or as a result of external events. They also include risks relating to cyber attacks and information security, as well as risks in investment activity in general. Consequences for compliance and Raiffeisen’s reputation are also considered in addition to the financial impact.
Operational risk appetite and tolerance is defined at Group level using value-at-risk limits or stop-loss limits and frequencies of occurrence. Risk appetite and tolerance is approved annually by the Board of Directors of Raiffeisen Switzerland. The Risk & Compliance department monitors compliance with risk tolerance. If one of the defined limits or a threshold is exceeded, measures are defined and implemented.
Each role within the Raiffeisen Group includes identifying, assessing, managing and monitoring operational risk arising from its own activities. The Risk & Compliance department is responsible for maintaining the Group-wide inventory of operational risks and for analysing and evaluating operational risk data. Risk identification and assessment are supported by capturing and analysing operational events. Risk & Compliance is also in charge of the concepts, methods and instruments used to manage operational risks, and monitors the risk situation. In specific risk assessments, operational risks are identified, categorised by cause and impact, and evaluated according to the probability of occurrence and the extent of losses. The risk register is updated dynamically. Risk reduction measures are defined and their implementation is monitored by the line units. Emergency and catastrophe planning precautions are taken for business-critical processes.
The results of the risk assessments, key risk indicators, significant internal operational risk events and relevant external events are reported quarterly to Raiffeisen Switzerland’s Executive Board and Board of Directors. Value-at-risk limit violations are escalated to the Board of Directors of Raiffeisen Switzerland.
In addition to the standard risk management process, Risk & Compliance conducts ad hoc risk analyses where required, analyses any loss events that arise and maintains close links with other organisational units that, as a result of their function, come into contact with information on operational risks within the Raiffeisen Group.
The Raiffeisen banks conduct an analysis of the operational risk situation via assessments at least once a year. These analyses are approved by the Board of Directors of each bank and forwarded to Risk & Compliance.
In the context of operational risks in investment activity, compliance with the investment guidelines for asset management mandates, model portfolios used in investment advice as well as index-tracking funds is monitored independently in the Risk & Compliance department. The relevant key risk indicators are reported to the Raiffeisen Switzerland Board of Directors on a quarterly basis.
Each year the Risk & Compliance department prepares a risk profile of the legal and compliance risks (including an assessment of market conduct risks and a risk analysis for the prevention of money laundering). It then derives a plan of action on risk from this, which is approved by the Executive Board with information passed to the Board of Directors, and is subsequently implemented.
The Risk & Compliance department reports on significant changes in legal and compliance risks to the Executive Board and the Risk Committee of Raiffeisen Switzerland’s Board of Directors on a quarterly basis. In addition, twice a year the activities of the Compliance function are reported to the Executive Board, the Risk Committee of the Board of Directors and, once a year, to the full Board of Directors.
Environmental risks
Raiffeisen collects the appropriate risk indicators at Group level to monitor risks arising from ESG factors. Scenario calculations are also carried out specifically for climate-related risks. Both the risk indicators and the results of the scenario calculations for climate-related risks are reported annually to the Board of Directors.
Disclosure of climate-related financial risks
FINMA requires banks and insurance companies to disclose information on the management of climate-related financial risks in the context of Circular 2016/1. Climate-related financial risks refer to the consequences of climate change that may pose significant financial risks for financial institutions in the longer term.
Raiffeisen publishes climate-related information, including any climate-related financial risks, comprehensively in the separate supplement to the annual report entitled “Disclosure of climate-related information according to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)”.
Regulatory provisions
According to a FINMA ruling, the Raiffeisen banks are exempt from complying with the rules regarding capital adequacy, risk diversification and liquidity on an individual basis. The relevant legal provisions must be complied with on a consolidated basis.
The Swiss National Bank (SNB) classified the Raiffeisen Group as systemically important for the purposes of the Swiss Banking Act in a ruling issued on 16 June 2014.
The Raiffeisen Group has opted for the following approaches when calculating capital requirements:
Credit risks
The Raiffeisen Group has been applying the model approach based on internal ratings (Foundation IRB approach, “F-IRB”) to calculate its capital requirements for credit risks. In the case of positions for which a model-based approach is not possible, the calculation of the required capital for credit risks continues to be carried out according to the standardised approach (SA-BIS). External issuer/issue ratings from three FINMA-recognised rating agencies are used for the following client categories: sovereigns and central banks, public-sector entities, banks and securities traders, as well as corporates. Issuer/issue ratings from an export insurance agency are also taken into consideration for central governments; however, rating agency ratings take precedence over ratings issued by the export insurance agency. No changes were made to the rating or export insurance agencies used in the year under review.
Positions for which external ratings are used are found chiefly under the following balance sheet items:
- Amounts due from banks
- Amounts due from clients
- Financial investments
- Positive replacement value
FINMA gave Raiffeisen permission to use the F-IRB approach to calculate its capital requirements for credit risks as of 30 September 2019. As so often with these kinds of rollouts, the changeover has to meet certain transitional floor requirements. Essentially, the risk-weighted assets calculated using the IRB model approach must not fall below a specified floor (calculated relative to the standardised approach, or SA-BIS). The IRB floor of 80% as determined by national rules has applied since 30 September 2022.
Market risks
The capital requirements for market risk are calculated using the standard approach under supervisory law. Within this framework, the duration method is applied for general market risk with regard to interest rate instruments, while the delta-plus approach is applied for capital requirements for options.
Operational risks
The Raiffeisen Group applies the basic indicator approach to calculate capital requirements for operational risks.
Methods applied to identify default risks and to establish the required value adjustment
Mortgage-secured loans
Loans against securities
The Bank monitors the commitments and value of the pledged securities on a daily basis. If the collateral value of the pledged securities falls below the loan commitment amount, the Bank will consider reducing the loan amount or request additional collateral. If the shortfall widens or if market conditions are unusual, the collateral will be realised and the loan settled. If the realisation proceeds are not sufficient to meet the amount outstanding, value adjustments are recognised accordingly.
Unsecured loans
Unsecured loans are generally business loans to corporate clients, loans to public-sector entities or unsecured account overdrafts of private clients amounting to a maximum of one month’s income. For corporate clients and loans to public-sector entities, the volume of unsecured financing is limited by corresponding requirements and limits.
For unsecured operating loans, the Bank asks the client to provide information that can be used to assess the state of the company’s finances. This information is requested annually or more frequently if necessary. This information is assessed and any increased risks are identified. If the risks are higher, the Bank will conduct a detailed assessment and work with the client to define appropriate measures. If the loan commitment is determined to be at risk in this phase, a value adjustment will be recognised.
The steps described under “Mortgage loans”, “Loans against securities” and “Unsecured loans” are used to identify the need to recognise a value adjustment and/or provision on impaired positions. Furthermore, assets previously identified as being at risk are reassessed quarterly. The value adjustment is updated if needed.
Value adjustments and provisions for expected losses on unimpaired positions are also recognised in accordance with the FINMA Accounting Ordinance.
Expected losses are calculated based on the probabilities of default and loss estimates from the internal risk models used. For methods, data and more information, please refer to the Regulatory Disclosure under FINMA Circular 2016/1 (in particular, to the table entitled “CRE: IRB – disclosures related to models”). When determining expected losses under the FINMA Accounting Ordinance, the following differences apply in comparison to the regulatory calculations (IRB approach):
- no regulatory floors (e.g. on PD or LGD) are used;
- instead of the one-year probability of default (including conservatism and stress allowances), a residual term approach and hence a lifetime probability of default is taken into consideration. For fixed-term products, the residual term in the individual product agreements is used. For products without a fixed term, a minimum term of one year is used.
- Not all stress premiums are taken into consideration when determining the lifetime probability of default.
- For positions not measured with internal risk models, provisioning is determined by means of expert estimates.
The Board of Directors of Raiffeisen Switzerland has set the parameters for using value adjustments and provisions for expected losses without immediately replenishing them in the event of a crisis. Any use of existing value adjustments and provisions for expected losses is reviewed and submitted to the relevant bodies for approval if new individual value adjustments for impaired positions recognised in a reporting period exceed half of the balance of value adjustments and provisions for expected losses as at 31 December of the previous year. Impairments and provisions for expected losses used should be replenished as soon as possible and no more than five years after the end of the crisis.
In the period under review, no value adjustments or provisions for expected losses were applied without replenishing them immediately. Value adjustments and provisions for expected losses are not underfunded.
Value of collateral
Mortgage-secured loans
An up-to-date valuation of the underlying collateral is available for every mortgage-secured loan. The valuation method varies depending on property type and use.
The Bank values single-family homes, two-family homes, three-family homes, owner-occupied apartments, holiday homes and holiday apartments using the real value method and a hedonic pricing model. The hedonic regression model compares the price with similar property transactions based on detailed characteristics of the property in question. The Bank relies on region-specific property price information supplied by an external provider. The Bank uses the valuations to update the property value periodically or on an ad hoc basis.
For multi-family units, public/private properties, commercial/industrial properties and special-purpose properties, the value of the property is calculated based on the income capitalisation method, which is based on long-term rental income. This model also takes into account market data, location information and vacancy rates. Rental income is reviewed periodically and on an ad hoc basis when there are indications of significant changes in the level of rental income or vacancies. The Bank updates valuations periodically or as required by events.
For agricultural properties, the maximum loan-to-value ratio under the Swiss Rural Land Rights Act applies.
In addition, Raiffeisen Switzerland’s appraisal unit or external accredited assessors must be involved if a property’s collateral value exceeds a certain amount or if a property has specific risk features. The liquidation value is also calculated in the event of impaired loans/receivables.
When financing property purchases or financing properties following a change of ownership, the lower of cost or market value principle generally applies. The lower of collateral value or purchase price is taken as the collateral value. This principle applies to all types of property for at least 24 months from the change of ownership. It does not apply for increases in loans where the amount of the increase to invest in adding to the value of the collateral property is taken into account. Derogation from the lower of cost or market value principle is possible in instances where ownership changes hands at preferential prices between economically and/or legally related individuals or legal entities.
Loans against securities
The Bank primarily accepts transferable, liquid and actively traded financial instruments (such as bonds and equities) as collateral for Lombard loans and other loans against securities. The Bank also accepts transferable structured products for which there is regular share price information and a market maker.
The Bank discounts market values to account for the market risk associated with marketable securities and to determine the collateral value. The settlement period for structured products and products with a long remaining term may be considerably longer, so they are discounted more heavily than liquid instruments. Discounts on life insurance policies or guarantees are dictated by the product.
Business policy on the use of derivative financial instruments and hedge accounting
Business policy on the use of derivative financial instruments
Derivative financial instruments are used for trading and hedging purposes.
Derivative financial instruments are only traded by specially authenticated traders. Raiffeisen trades standardised and OTC instruments for its own and clients’ accounts, particularly interest and currency instruments, equity/index securities and commodities.
Hedges in the banking book are created by means of internal deposits and loans with the trading book; the Treasury and Structured Products & FX Advisory units do not take out hedges directly in the market. Hedges in the trading book are largely executed through offsetting trades with external counterparties.
The Raiffeisen banks trade or hedge derivative financial instruments as a commission agent solely to meet clients’ needs.
Use of hedge accounting
The Raiffeisen banks do not use hedge accounting in the meaning of the financial reporting regulations.
Types of hedged items and hedging instruments
Raiffeisen Switzerland uses hedge accounting predominantly for the following types of transactions:
| Underlying transaction | Hedged using | ||
| Risks associated with fluctuating interest rates from interest rate- sensitive receivables and liabilities in the banking book | Interest rate and currency swaps | ||
| Price risk of foreign currency positions | Currency future contracts | ||
Composition of the groups of financial instruments
Interest-rate-sensitive positions in the banking book are grouped into various time bands by currency and hedged accordingly using macro hedges. Macro hedges are risk-minimising hedging transactions across the entire portfolio. The Bank also uses micro hedges.
Economic connection between hedged items and hedging instruments
At the time a financial instrument is classified as an item, Raiffeisen Switzerland documents the relationship between the hedging instrument and the hedged item. The documentation covers things such as the risk management goals and strategy for the hedging instrument and the methods used to assess the effectiveness of the hedge. Effectiveness testing constantly and prospectively assesses the economic relationship between the hedged item and the hedging instrument by actions such as measuring offsetting changes in the value of the hedged item and the hedging instrument and determining the correlation between these changes.
Effectiveness testing
A hedge is deemed to be highly effective if the following criteria are essentially met:
- The hedge is determined to be highly effective both at inception and on an ongoing basis (micro hedges).
- There is a close economic connection between the hedged item and the hedging instrument.
- The changes in the value of the hedged item offset changes in the value of the hedging instrument with respect to the hedged risk.
Ineffectiveness
When entered into, hedging transactions are effective over the entire term. If a hedge no longer meets the effectiveness criteria over time, it is treated as a trading portfolio asset and any gain or loss from the ineffective part is recognised in the income statement.
Consolidation, accounting and valuation principles
General principles
Accounting, valuation and reporting conform to the requirements of the Swiss Code of Obligations, the Swiss Federal Act on Banks and Savings Banks (plus the related ordinance) and the FINMA Accounting Ordinance (FINMA AO) as well as FINMA Circular 2020/1 “Accounting – banks”. The detailed positions shown for a balance sheet item are valued individually. The consolidated annual financial statements represent a true and fair view of the Raiffeisen Group’s assets, finances and earnings.
Consolidation principles
General
The consolidation of the banking institutions that make up the Raiffeisen Group, Raiffeisen Switzerland and the Group companies associated with it differs fundamentally from conventional consolidation based on a holding company structure. The individual Raiffeisen banks, as owners of Raiffeisen Switzerland, function as parent companies. Raiffeisen Switzerland is legally a subsidiary even though it acts as the central coordinator, liquidity pool and safety net. The management and regulatory powers of Raiffeisen Switzerland are governed by its Articles of Association and the regulations based on the latter. Consolidation is not based on Raiffeisen Switzerland as a parent company, but represents an aggregation of the annual financial statements of the Raiffeisen banks and the participations held in the Raiffeisen Group. The equity capital in the Consolidated Annual Financial Statements is thus the total of the cooperative capital of the individual Raiffeisen banks.
Scope of consolidation and consolidation method
The consolidated accounts of the Raiffeisen Group comprise the annual financial statements of the individual Raiffeisen banks, Raiffeisen Switzerland and major Group companies in which the Group directly or indirectly holds more than 50% of the voting shares. Consolidation may be waived for Group companies that are immaterial for the purposes of financial reporting and the risk situation. We refer in this respect to the section entitled “Non-consolidated participations”. The fully consolidated Group companies and the shareholdings valued according to the equity method are listed in note “Companies in which the Bank holds a permanent direct or indirect significant participation”.
Under the full consolidation method, the assets and liabilities, off-balance-sheet transactions, and income and expenses are all recorded in full. Consolidation is carried out using the purchase method. All material amounts receivable and payable, off-balance-sheet transactions, and income and expenses between consolidated companies are offset. Any material intercompany profits that are generated are eliminated in the consolidation.
Minority participations of 20–50% are included in the Consolidated Financial Statements using the equity method. Participations of less than 20%, those with little materiality in terms of capital or income, and those of a non-strategic nature are not consolidated but are instead accounted for at acquisition cost less any operationally required value adjustments.
Consolidation cut-off date
The closing date for the annual financial statements of all consolidated companies is 31 December.
Accounting and valuation principles
Recording of business events
All business transactions that have been concluded by the balance sheet cut-off date are recorded on a same-day basis in the balance sheet and the income statement in accordance with the relevant valuation principles. Spot transactions that have been concluded but not yet settled are posted to the balance sheet on the trade date.
Foreign currencies
Assets and liabilities, as well as cash positions in foreign currencies, are converted at the exchange rate prevailing on the balance sheet cut-off date. Exchange rate gains and losses arising from this valuation are reported under the “Result from trading activities and the fair value option” item. Foreign currency transactions during the year are converted at the rate prevailing at the time the transaction was carried out.
If the annual financial statements of Group companies abroad are denominated in foreign currencies, the balance sheet and off-balance sheet are converted at the rates prevailing on the balance sheet cut-off date, while the income statement is converted at the average rate for the year. The conversion difference is recognised directly in equity capital as a currency translation difference with no impact on profit and loss.
| 31.12.2021 | 31.12.2022 | |||
| EUR | 1.037 | 0.988 | ||
| USD | 0.912 | 0.925 |
Liquid assets and borrowed funds
These are reported at nominal value. Precious metal liabilities on metal accounts are valued at fair value if the relevant metal is traded on a price-efficient and liquid market.
Discounts and premiums on the Group’s own bond issues and central mortgage institution loans are accrued over the period to maturity.
These are reported at nominal value less any value adjustment required. Precious metal assets on metal accounts are valued at fair value if the relevant metal is traded on a price-efficient and liquid market. Interest income is reported on an accruals basis.
Receivables are deemed to be impaired where the Bank believes it improbable that the borrower will be able to completely fulfil their contractual obligations. Impaired loans – and any collateral that may exist – are valued on the basis of the liquidation value.
All leased objects are reported in the balance sheet as “Amounts due from clients” in line with the present-value method.
Individual value adjustments for impaired loans
Impaired loans are subject to provisions based on regular analyses of individual loan commitments, while taking into account the creditworthiness of the borrower, the counterparty risk and the estimated net realisable sale value of the collateral. If recovery of the amount receivable depends solely on the collateral being realised, full provision is made for the unsecured portion.
If a loan is impaired, it may be possible to maintain an available credit limit as part of a continuation strategy. If necessary, provisions for off-balance-sheet transactions are recognised for these kinds of unused credit limits. For current account overdrafts, which typically show high, frequent volatility over time, initial and subsequent provisions are recognised for the total amount (i.e. individual value adjustments for effective drawdowns and provisions for available limits) under “Changes in value adjustments for default risks and losses from interest operations”. If drawdowns change, a corresponding amount is transferred between individual value adjustments and provisions in equity. Reversals of individual value adjustments or provisions are also recognised under “Changes in value adjustments for default risks and losses from interest operations”.
Interest and related commissions that have been due for more than 90 days but have not been paid are deemed to be non-performing. In the case of current account overdrafts, interest and commissions are deemed to be non-performing if the specified overdraft limit has been exceeded for more than 90 days. Non-performing and impaired interest (including accrued interest) and commissions are no longer recognised as income but reported directly under value adjustments for default risks.
A receivable is written off at the latest when completion of the realisation process has been confirmed by legal title.
However, impaired loans are written back up in full, i.e. the value adjustment is reversed, if payments of outstanding principal and interest are resumed on schedule in accordance with contractual provisions and additional creditworthiness criteria are fulfilled.
Individual value adjustments for credit items are calculated per item on a prudential basis and deducted from the appropriate receivable.
Value adjustments for expected losses on unimpaired loans
Receivables and liabilities from securities financing transactions
Securities lending and borrowing
Securities lending and borrowing transactions are reported at the value of the cash collateral received or issued, including accrued interest. Securities which are borrowed or received as collateral are only reported in the balance sheet if the Raiffeisen Group takes control of the rights associated with them. Securities which are loaned or provided as collateral are only removed from the balance sheet if the Raiffeisen Group forfeits the rights associated with them. The market values of the borrowed and loaned out securities are monitored daily to enable any additional collateral to be provided or requested as necessary. Fees received or paid under securities lending and repurchase transactions are booked to commission income or commission expenditure on an accruals basis.
Repurchase and reverse repurchase transactions
Securities purchased with an agreement to resell (reverse repurchase transactions) and securities sold with an agreement to buy back (repurchase transactions) are regarded as secured financing transactions and are recorded at the value of the cash collateral received or provided, including accrued interest.
Securities received and delivered are only recorded in/removed from the balance sheet if control of the rights which these securities include is acquired or transferred. The market values of the securities received or delivered are monitored daily so that any additional collateral can be provided or requested as necessary.
Interest income from reverse repurchase transactions and interest expense from repurchase transactions are accrued over the term of the underlying transaction.
Trading portfolio assets and trading portfolio liabilities
The trading portfolio assets and trading portfolio liabilities are valued and recognised at fair value. Positions for which there is no representative market are valued according to the lower of cost or market value principle. Both the gains and losses arising from this valuation and the gains and losses realised during the period in question are reported under “Result from trading activities and the fair value option”. This also applies to interest and dividend income on trading positions. The funding costs for holding trading positions are charged to trading profits and credited to interest income. Income from firm commitments to securities issues is also reported under trading profits.
Positive and negative replacement values of derivative financial instruments
Reporting
The replacement values of all contracts concluded on the Bank’s own account are recognised in the balance sheet regardless of their income statement treatment. The replacement values of exchange-traded contracts concluded on a commission basis are reported only to the extent that they are not covered by margin deposits. The replacement values of over-the-counter contracts concluded on a commission basis are always reported.
All hedging transactions of the Treasury and Structured Products & FX Advisory units are executed via the trading book, i.e. the Treasury and Structured Products & FX Advisory units do not participate in the market themselves. Only the replacement values of contracts with external counterparties are reported. Note 4, “Derivative financial instruments”, shows the replacement values and contract volume with external counterparties under “Hedging instruments”, calculated using the replacement values and contract volume of the internal hedging transactions by Treasury and Structured Products & FX Advisory.
In the case of structured products issued by Raiffeisen Switzerland that include a debt security, the derivative is split from the underlying contract and valued separately. The debt securities (underlying contracts) are reported at nominal value under “Bond issues and central mortgage institution loans”. Discounts and premiums are reported under the item “Accrued expenses and deferred income” or “Accrued income and prepaid expenses”, as the case may be, and realised against the interest income over the remaining life. Issued structured products that do not include a debt security and the derivative portions of the structured products that include a debt security are recognised at fair value under “Positive replacement values of derivative financial instruments” and “Negative replacement values of derivative financial instruments”.
The structured products issued by Raiffeisen Switzerland B.V. Amsterdam are valued at fair value. These products are recognised at market value under “Liabilities from other financial instruments at fair value”.
Treatment in the income statement
The derivative financial instruments recorded in the trading book are valued on a fair-value basis.
Derivative financial instruments used to hedge risk associated with fluctuating interest rates as part of managing balance sheet structure are valued in accordance with the accrual method. Interest-related gains and losses arising from the early realisation of contracts are accrued over their remaining lives.
The net income from self-issued structured products and the net income from the commission-based issue of structured products by other issuers are booked under “Commission income from securities trading and investment activity”.
Financial investments
Fixed-income debt instruments and warrant bonds are valued according to the lower of cost or market value principle if there is no intention to hold them to maturity. Debt securities acquired with the intention of holding them to maturity are valued according to the accrual method with the discount or premium accrued over the remaining life. Equity securities are valued according to the lower of cost or market value principle. Properties and equity securities acquired through lending activities and other properties and equities intended for disposal are reported under “Financial investments” and valued at the lower of cost or market value. The lower of cost or market value principle refers to the lower of the acquisition cost or the liquidation value. Precious metals held to cover liabilities from precious metals accounts are carried at market value as at the balance sheet cut-off date. In cases where fair value cannot be determined, they are valued according to the lower of cost or market value principle.
Value adjustments for expected losses
Non-consolidated participations
This balance sheet item also includes holdings of less than 20% and all holdings of an infrastructural nature. These are valued in accordance with the principle of initial value, i.e. initial value less operationally required value adjustments. They are tested for impairment as at each balance sheet cut-off date.
Tangible fixed assets
Tangible fixed assets are reported at their purchase cost plus value-enhancing investments and depreciated on a straight-line basis over their estimated useful life, as follows:
| Estimated useful life of tangible fixed assets | years | |
| Real estate | 66 years | |
| Alterations and fixtures in rented premises | full rental term, maximum 15 years | |
| Furniture and fixtures | 8 years | |
| Other tangible fixed assets | 5 years | |
| Internally developed or purchased core banking software | 10 years | |
| IT systems and remaining software | 3 years |
Immaterial investments are booked directly to operating expenses. Large-scale, value-enhancing renovations are capitalised, while repairs and maintenance are recorded as expenses. Expenditure incurred in connection with the implementation and continued development of the new core banking systems is recognised as an asset through “Other ordinary income”. Properties, buildings under construction and core banking systems are not depreciated until they come into use. Undeveloped building land is not depreciated.
The value of tangible fixed assets is reviewed as at every balance sheet cut-off date whenever events or circumstances give reason to suspect that the book value is impaired. Any impairment is recognised in profit or loss under “Value adjustments on participations and depreciation and amortisation of tangible fixed assets and intangible assets”. If the useful life of a tangible fixed asset changes as a result of the review, the residual book value is depreciated over the new duration.
Intangible assets
Goodwill: If the cost of acquiring a company is higher than the value of the net assets acquired based on standard Group accounting guidelines, the difference is reported as goodwill. Goodwill is amortised on a straight-line basis over its estimated useful life. The amortisation period is usually five years. In justifiable cases, it may be as high as 10 years.
Other intangible assets: Acquired intangible assets are recognised where they provide the Group with a measurable benefit over several years. Intangible assets created by the Group itself are not capitalised. Intangible assets are recognised at acquisition cost and amortised on a straight-line basis over their estimated useful life within a maximum of five years.
Impairment testing: The value of intangible assets is reviewed as at every balance sheet cut-off date whenever events or circumstances give reason to suspect that the book value is impaired. Any impairment is recognised in profit or loss under “Value adjustments on participations and depreciation and amortisation of tangible fixed assets and intangible assets”. If the useful life of an intangible asset changes as a result of the review, the residual book value is amortised over the new duration.
Provisions
Provisions are recognised on a prudential basis for all risks identified at the balance sheet cut-off date that are based on a past event and will probably result in an obligation. With regard to provisions for available overdraft limits, we refer to the chapter “Amounts due from banks and clients, mortgage loans, value adjustments”.
Reserves for general banking risks
Reserves may be allocated for general banking risks. These are reserves created as a precautionary measure in accordance with accounting standards to hedge against latent risks in the business activities of the Raiffeisen Group.
Taxes
Taxes are calculated and booked on the basis of the profit for the year under review. Deferred tax of 16.1% (previous year: 16.2%) was calculated on untaxed reserves and reported as a provision for deferred taxes.
Contingent liabilities, irrevocable commitments, obligations to make payments and additional contributions
These are reported at their nominal value under “Off-balance-sheet transactions”. Provisions are created for foreseeable risks.
Changes as against previous year
Events after the balance sheet cut-off date
No events with a measurable effect on the operating result occurred after the balance sheet date.