3 Credit risk
audited information

Within the scope of credit risk management, vital importance is attached to the avoidance of credit risks and the early identification of default risks. In addition to systematic risk/return management at the individual loan level, the LLB Group proactively manages its credit risks at the credit portfolio level. The primary objective is to reduce the overall level of risk through diversification and a stabilisation of expected returns.

3.1 Credit risk management

Processes and organisational structures ensure that credit risks are identified, uniformly evaluated, controlled, monitored and included in risk reporting.

The process of granting a loan is based on a thorough evaluation of the borrower's creditworthiness, the possible impairment and the legal existence of collateral, as well as risk classification in a rating process performed by experienced credit specialists. Loans are granted within the scope of the individual credit authorisation limits.

3.2 Evaluation of credit risks

The consistent evaluation of credit risks represents an essential prerequisite of successful risk management. The credit risk can be broken down into the components: probability of default, loss given default and the exposure at the time point of the default.

Probability of default

The LLB Group assesses the probability of default of individual counterparties by means of an internal rating system. The different rating procedures are adapted to suit the different characteristics of borrowers. The credit risk management ratings employed for banks and debt instruments are based on external ratings from recognised rating agencies.The reconciliation of the internal rating with the external rating is carried out in accordance with the following master scale.

Rating categories

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LLB rating

Description

External Rating (Moody's) **

*

Non-rated loans are covered and subject to limits.

**

The LLB Group uses the external ratings of Moody's exclusively in the standard approach for covering credit risks (for the segments: due from banks, finance companies and securities firms, due from companies and due from international organisations).

1 to 4

Investment grade

AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3

5 to 8, not rated *

Standard monitoring

Ba1, Ba2, Ba3, B1, B2

9 to 10

Special monitoring

B3, Caa, Ca, C

11 to 14

Sub-standard

Default

Overdue claims

A claim is overdue when a significant payment to be made by a borrower is overdue. The overdraft commences on the day a borrower exceeds an agreed limit, has not paid interest or instalments, or has utilised an unauthorised credit line.

Default-distressed claims

Claims are regarded as being distressed if a loan default can no longer be excluded in the near future due to the creditworthiness of the client.

Loss given default

The loss given default is influenced by the amount of collateralisation and the costs of realising the collateral. It is expressed as a percentage of the individual commitment.

The potential loss at portfolio level is broken down as follows at the LLB Group.

Expected loss

The expected loss is a future-related, statistical concept with which the LLB Group estimates the average annual costs incurred because positions in the current portfolio are classified as impaired. The expected loss is determined on the basis of the probability of default of a counterparty, the expected credit exposure with this counterparty at the time point of the default and the loss given default.

Value-at-risk concept

The value-at-risk approach aims at computing the size of fluctuations in credit losses incurred by means of a statistical model and to show the change in the risk status of the credit portfolio.

Scenario analysis

The modelling of external credit losses is performed on the basis of stress scenarios, which enable us to evaluate the effects of fluctuations in the default rates of the assets pledged as collateral taking into consideration the existing risk concentration in every portfolio.

3.3 Controlling credit risk

Credit risk management has the task of actively influencing the risk situation of the LLB Group. This is carried out using a limits system, risk-adjusted pricing, through the possibility of using risk hedging instruments and the specific repayment of credit commitments. Risk management is conducted both at the individual loan and at the portfolio level.

Risk limitation

The LLB Group has in place a comprehensive limits system to restrict credit risk exposure. In addition to the limitation of individual credit risks, to prevent risk concentrations, the LLB Group assigns limits for countries, segments and sectors.

Risk mitigation

To mitigate credit risk exposure, the LLB Group takes security mainly in the form of pledged assets and financial collateral. In the case of financial collateral in the form of marketable securities, we determine their collateral value by applying a schedule of reductions, the size of which is based on the quality, liquidity, volatility and complexity of the individual instruments.

Derivatives

To mitigate risks, the LLB Group can also employ credit derivatives. During the last two years, this possibility has not been utilised.

3.4 Monitoring of credit risks

The organisational structure of the LLB Group ensures that the business divisions which cause the risks and those that evaluate, manage and monitor them are completely separated.

Individual credit risks are monitored by means of a comprehensive limits system. Infringements are immediately reported to the senior officer responsible.

3.5 Value allowances for credit risks

Specific value allowances

Each impaired claim is individually assessed and the restructuring strategy as well as the estimate of future recoverable amounts are determined. An individual value allowance is allocated on the basis of this criteria.

General value allowances

A portfolio is classified as impaired on a collective basis, if there are objective indications that the portfolio contains impaired claims, which cannot however be determined individually.

3.6 Country risks

A country risk arises if specific political or economic conditions in a country affect the value of a foreign position. Country risk is composed of transfer risk (e.g. restrictions on the free movement of money and capital) and other country risks (e.g. country-related liquidity, market and correlation risks).

Country risks are controlled on the basis of a limits systems and are continually monitored. Ratings provided by a recognised rating agency are utilised for certain individual countries.

3.7 Maximum credit risk without considering collateral

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in CHF thousands

31.12.2009

31.12.2008

Average

Credit risks from balance sheet transactions

 

 

 

Due from banks

8'139'863

9'439'130

8'789'496

Loans to customers

 

 

 

mortgage loans

7'509'612

6'931'845

7'220'729

loans to public authorities

114'523

215'250

164'886

other loans

1'700'307

2'020'920

1'860'614

Trading portfolio

 

 

 

fixed interest securities

3'491

2'752

3'122

Derivative financial instruments

128'925

212'874

170'899

Financial investments at fair value
through profit and loss

 

 

 

fixed interest securities

617'343

490'974

554'159

Total

18'214'064

19'313'745

18'763'905

 

 

 

 

Credit risks from off-balance-sheet transactions

 

 

Contingent liabilities

200'173

252'282

226'228

Irrevocable commitments

195'184

97'850

146'517

Liabilities for calls on shares and other equities

8'898

5'360

7'129

Total

404'255

355'492

379'874

3.8 Due from banks and loans to customers

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in CHF thousands

31.12.2009

31.12.2008

 

Loans to
customers

Due from
banks

Loans to
customers

Due from
banks

Neither overdue nor value allowance made

8'888'202

8'123'729

8'717'224

9'439'130

Overdue but no value allowance made

59'699

0

106'100

0

Overdue, value allowance made (specific)

136'291

0

133'174

0

Default-distressed, value allowance made (specific)

348'315

50'134

307'209

0

Value allowance made (general)

1'990

0

1'955

0

Gross

9'434'497

8'173'863

9'265'662

9'439'130

Minus allowances (specific)

–109'916

–34'000

–97'504

0

Minus allowances (general)

–139

0

–143

0

Net

9'324'442

8'139'863

9'168'015

9'439'130

Due from banks and loans to customers neither overdue nor value allowances made

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in CHF thousands

Mortgage
loans

Loans to
public
authorities

Other
loans

Total
loans to
customers

Due from
banks

31.12.2009

 

 

 

 

 

Investment grade

920'759

1

108'608

1'029'368

6'017'406

Standard monitoring

6'090'957

114'522

1'367'218

7'572'697

2'106'323

Special monitoring

239'007

0

47'130

286'137

0

Sub-standard

0

0

0

0

0

Total

7'250'723

114'523

1'522'956

8'888'202

8'123'729

 

 

 

 

 

 

31.12.2008

 

 

 

 

 

Investment grade

706'554

3'630

110'777

820'961

7'779'276

Standard monitoring

5'728'854

211'620

1'634'972

7'575'446

1'659'854

Special monitoring

264'019

0

56'798

320'817

0

Sub-standard

0

0

0

0

0

Total

6'699'427

215'250

1'802'547

8'717'224

9'439'130

Loans to customers overdue but no value allowances made

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in CHF thousands

Mortgage
loans

Loans to
public
authorities

Other
loans

Total
loans to
customers

31.12.2009

 

 

 

 

Overdue by up to 30 days

2'100

0

42'057

44'157

Overdue 31 to 60 days

335

0

7'215

7'550

Overdue 61 to 90 days

0

0

7'992

7'992

Total

2'435

0

57'264

59'699

 

 

 

 

 

31.12.2008

 

 

 

 

Overdue by up to 30 days

601

0

85'363

85'964

Overdue 31 to 60 days

17

0

8'912

8'929

Overdue 61 to 90 days

4

0

11'203

11'207

Total

622

0

105'478

106'100

Loans with specific value allowances

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in CHF thousands

Mortgage
loans

Loans to
public
authorities

Other
loans

Total
loans to
customers

Due from
banks

31.12.2009

 

 

 

 

 

Overdue claims

15'622

0

120'669

136'291

0

Default-distressed claims

274'517

0

73'798

348'315

50'134

Fair value of cover

–256'454

0

–118'236

–374'690

–16'134

Total specific value allowances

33'685

0

76'231

109'916

34'000

 

 

 

 

 

 

31.12.2008

 

 

 

 

 

Overdue claims

13'174

0

120'000

133'174

0

Default-distressed claims

247'665

0

59'544

307'209

0

Fair value of cover

–231'796

0

–111'083

–342'879

0

Total specific value allowances

29'043

0

68'461

97'504

0

Newly agreed loans to customers

Newly agreed loans to customers are not substantial.

3.9 Overdue and default-distressed claims by geographical area

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in CHF thousands

31.12.2009

31.12.2008

 

Default-
distressed
claims

Overdue
claims

Specific
value
allowance

Default-
distressed
claims

Overdue
claims

Specific
value
allowance

Liechtenstein
and Switzerland

335'449

120'273

80'674

306'199

172'443

84'527

Europe
excluding FL/CH

12'866

53'762

15'765

900

41'675

8'069

North America

0

2'167

2'000

110

3'341

2'110

Asia

50'134

12'332

45'231

0

8'928

2'719

Others

0

7'456

246

0

12'887

79

Total

398'449

195'990

143'916

307'209

239'274

97'504

3.10 Debt instruments

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in CHF thousands

31.12.2009

31.12.2008

 

Trading
portfolio

Designated
fair value

Total

Trading
portfolio

Designated
fair value

Total

AAA

1'495

361'786

363'281

1'444

381'082

382'526

AA1 to AA3

1'060

87'514

88'574

1'308

65'665

66'973

A1 to A3

0

0

0

0

64

64

Lower than A3

148

0

148

0

166

166

Without a rating

788

168'043

168'831

0

43'997

43'997

Total

3'491

617'343

620'834

2'752

490'974

493'726

3.11 Taken over collateral

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in CHF thousands

2009

2008

 

Financial
investments

Real estate/
properties

Total

Financial
investments

Real estate/
properties

Total

As at 1 January

20'481

2'515

22'996

0

3'267

3'267

Additions/disposals

–1'871

–2'712

–4'583

14'873

–922

13'951

Profit/loss

9'132

1'122

10'254

5'608

170

5'778

As at 31 December

27'742

925

28'667

20'481

2'515

22'996

Taken over collateral is disposed of again as soon as possible and recognised in other assets or financial investments or the trading portfolio.

3.12 Risk concentration

Risk concentration by regions

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in CHF thousands

Liechten-
stein
Switzerland

Europe
without
FL/CH

North
America

Asia

Other

Total

31.12.2009

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

2'260'080

5'597'981

238'328

17'686

25'788

8'139'863

Due from customers

 

 

 

 

 

 

mortgage loans

7'509'612

0

0

0

0

7'509'612

loans to public authorities

114'523

0

0

0

0

114'523

other loans

1'165'450

297'847

6'729

126'173

104'108

1'700'307

Trading portfolio

 

 

 

 

 

 

fixed interest securities

81

2'194

0

0

1'216

3'491

Derivative financial instruments

90'101

36'254

714

474

1'382

128'925

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

241'734

294'643

55'084

5'168

20'714

617'343

Total

11'381'581

6'228'919

300'855

149'501

153'208

18'214'064

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

142'845

3'634

156

45'699

7'839

200'173

Irrevocable commitments

130'340

0

0

0

64'844

195'184

Liabilities from calls on shares and other equities

8'850

48

0

0

0

8'898

Total

282'035

3'682

156

45'699

72'683

404'255

 

 

 

 

 

 

 

31.12.2008

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

2'220'311

6'707'180

254'700

10'837

246'102

9'439'130

Due from customers

 

 

 

 

 

 

mortgage loans

6'931'845

0

0

0

0

6'931'845

loans to public authorities

215'250

0

0

0

0

215'250

other loans

1'203'315

246'355

13'552

280'764

276'934

2'020'920

Trading portfolio

 

 

 

 

 

 

fixed interest securities

0

2'752

0

0

0

2'752

Derivative financial instruments

169'050

38'559

797

3'198

1'270

212'874

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

196'688

215'456

59'856

4'940

14'034

490'974

Total

10'936'459

7'210'302

328'905

299'739

538'340

19'313'745

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

119'765

10'395

653

105'856

15'613

252'282

Irrevocable commitments

96'510

1'340

0

0

0

97'850

Liabilities from calls on shares and other equities

5'312

0

48

0

0

5'360

Total

221'587

11'735

701

105'856

15'613

355'492

Risk concentration by sectors

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in CHF thousands

Financial
services

Utilities

Real estate

Private
households

Other

Total

31.12.2009

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

8'139'863

0

0

0

0

8'139'863

Due from customers

 

 

 

 

 

 

mortgage loans

94'693

8'938

718'538

5'724'513

962'930

7'509'612

loans to public authorities

0

1

0

0

114'522

114'523

other loans

386'719

96'467

218'177

576'643

422'301

1'700'307

Trading portfolio

 

 

 

 

 

 

fixed interest securities

3'125

148

0

0

218

3'491

Derivative financial instruments

72'107

0

0

55'093

1'725

128'925

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

417'389

0

0

0

199'954

617'343

Total

9'113'896

105'554

936'715

6'356'249

1'701'650

18'214'064

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

93'718

27

17'955

59'568

28'905

200'173

Irrevocable commitments

97'596

0

4'223

68'928

24'437

195'184

Liabilities from calls on shares and other equities

8'898

0

0

0

0

8'898

Total

200'212

27

22'178

128'496

53'342

404'255

 

 

 

 

 

 

 

31.12.2008

 

 

 

 

 

 

Credit risks from balance sheet transactions

 

 

 

 

 

 

Due from banks

9'439'130

0

0

0

0

9'439'130

Due from customers

 

 

 

 

 

 

mortgage loans

70'649

6'345

550'357

5'422'771

881'723

6'931'845

loans to public authorities

0

3'630

0

0

211'620

215'250

other loans

540'440

107'906

249'386

626'377

496'811

2'020'920

Trading portfolio

 

 

 

 

 

 

fixed interest securities

2'344

408

0

0

0

2'752

Derivative financial instruments

154'411

0

0

54'270

4'193

212'874

Financial investments at fair value through profit and loss

 

 

 

 

 

 

fixed interest securities

298'460

0

17'357

0

175'157

490'974

Total

10'505'434

118'289

817'100

6'103'418

1'769'504

19'313'745

 

 

 

 

 

 

 

Credit risks from off-balance sheet transactions

 

 

 

 

 

 

Contingent liabilities

167'784

450

12'069

3'843

68'136

252'282

Irrevocable commitments

50'015

0

3'608

19'092

25'135

97'850

Liabilities from calls on shares and other equities

5'360

0

0

0

0

5'360

Total

223'159

450

15'677

22'935

93'271

355'492

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