Year end results 2015: Good operational result – strategic transformation completed

St. Gallen, 17. February 2016

In a challenging and intensive year, SGKB performs well. Despite negative interest rates and the strong Swiss franc, operating income remains on the level of the prior year. Also, the completion of the Swiss Bank Program of the U.S. Department of Justice as well as the expenses associated with the strategic realignment burden the financial statements. At year-end, the 2013 announced and since then gradually implemented strategic transformation has been completed: The implementation of tax compliance for clients domiciled in foreign countries as well as the streamlining and rationalization of the remaining cross-border asset management business after the sale of the former Hyposwiss subsidiaries.

St.Galler Kantonalbank generates an operating income of CHF 450.9 million and thus can keep the previous’ year level (-0.4 %, CHF -1.8 million). Responsible for this balanced result are two effects, which compensate each other: On the one hand, the gross result from interest operations and the result from commission business and services decreases primarily due to the negative interest rates and the performance of the stock markets. On the other hand, the result from trading activities is developing well because of the much more active foreign exchange business.

The result from interest operations amounts to CHF 293.2 million, which is only slightly below the level of the previous year (-0.9 %, CHF -2.7 million). This is mainly due to higher hedging costs, which can not be compensated completely by adjusting the client conditions. Nevertheless, at current interest rates SGKB charges its clients no negative interest on the traditional savings and private accounts.

The result from commission business and services decreases significantly and amounts to CHF 109.8 million (-7.3 %, CHF -8.7 million). Decisive for the decline are lower portfolio assets and the reduction of the fund distribution fees due to the sale of the Swisscanto shares. Securities business is also affected by the ongoing restraint and the high liquidity held by investors. Therefore, the traded volumes are continuingly weak.

The result from trading activities is CHF 37.3 million (+13.7 %, CHF +4.5 million). The increase is due to the lively foreign exchange business since the expiry of the minimum exchange rate of the Euro.

Contribution to pension fund increases personnel expenses

General and administrative expenses amount to CHF 96.9 million and can – despite the integration of Vadian Bank – be reduced slightly (-0.3 %, CHF -0.3 million). Personnel expenses amount to CHF 161.0 million. The increase of 2.3 % or CHF 3.6 million is relating to a contribution to the pension fund of St.Galler Kantonalbank of CHF 5.0 million. Due to the low interest rates and the weak performance outlook, the actuarial interest rate was reduced to 2.25 %. A part of the associated costs is carried by SGKB. In total, operating expenses amount to CHF 257.9 million, which is slightly higher than last year (+1.3 %, CHF +3.3 million). Gross profit of CHF 193.0 million is therefore slightly lower
(-2.6 % CHF -5.1 million).

Special factors affect consolidated profit

The sale of the Swisscanto shares in spring 2015 results in an extraordinary income of CHF 18.1 million. Against that, the integration of Vadian Bank, the completion of the strategic transformation, the contribution to the pension fund and the termination of the Swiss bank program for the parent company and the former subsidiaries Hyposwiss Zurich (today HSZH Verwaltungs AG) and Hyposwiss Geneva reduced earnings significantly.
Consolidated profit amounting to CHF 133.4 million is CHF 12.9 million or 8.8 % below last years result. Without the aforementioned special factors higher earnings would result.

Business volume: Lower asset base, higher loans

Managed assets amounting to CHF 36.2 billion are below the previous year's level of CHF 36.8 billion. The difference is mainly due to the assets under management, which decrease by CHF 0.6 billion. Especially the reduction in the course of the strategic realignment in the cross-border wealth management business and the abolition of the minimum exchange rate of the Euro lead to a lower asset bases. This burdens the development of net new money in Private Banking and accordingly leads to an outflow of CHF 638 million. On the other hand, net new money in the Retail and Commercial Banking is very well with CHF 734 million (+ 5.1 %). Also, within the assets under management, deposit volumes under discretionary mandate recorded a pleasing growth (+ CHF 0.6 billion).

Loans to clients increase by 1.5 % or CHF 0.4 billion and amount to CHF 24.2 billion per 31 December 2015. Despite a slight weakening, mortgage loans record a growth (+ 3.2 %) at a stable level. Volume of fixed-rate mortgages account for approximately 81 % of the total mortgage portfolio. Due to the weakness of the euro and the current economic environment, there is a low propensity to invest, and the demand for corporate loans is correspondingly low. St.Galler Kantonalbank has continuously adhered to its risk-conscious lending policy. The loan portfolio of SGKB still presents itself in a very good condition. Due to its high quality, there are only CHF 0.9 million of new provisions for credit losses.

Good development of subsidiary in Germany

Due to the geographical location and the historical development, the German market has always been of particular importance for SGKB. To continue to actively advise their German clients in the light of changed regulatory framework and to successfully develop business in Germany, SGKB has established a subsidiary in 2009. It has two locations in Munich and Frankfurt and employs around 50 people per 31 December 2015. The company owns a full banking license and meets all regulatory requirements in Germany. This enables clients to choose freely, according to their personal needs, between both the location of advisory as well as the location of booking either in Germany or Switzerland.
Currently, the operating performance of the subsidiary is exceeding the business case. The SGKB group covers a business volume of clients domiciled in Germany totalling CHF 3.1 billion. Therein, CHF 0.8 billion are booked in the subsidiary in Germany per 31 December 2015.

Unchanged dividend of CHF 15 per share

The Board of directors proposes to the shareholders at the Annual General Meeting on 27 April 2016 an unchanged dividend of CHF 15 per share. This corresponds to the long-term and stable dividend policy with a payout ratio between 50 and 70 % of the reported consolidated profit. The proposed dividend of CHF 15 represents a payout ratio of 62.7 %, based on the consolidated profit of 2015, and an attractive dividend yield of 4.2 %, based on the year-end price of CHF 361.

68.9 million Swiss francs for the canton of St.Gallen

With the proposed dividend, the compensation for the state guarantee as well as the cantonal and municipal taxes the Canton of St.Gallen and the municipalities will be receiving CHF 68.9 million for the fiscal year 2015. In addition, there will be the taxincome, which is generated on the salaries of the employees of St.Galler Kantonalbank, who are mainly resident in the canton of St. Gallen.

Solid capitalization, good Rating

Per 31 December 2015, St.Galler Kantonalbank records a shareholders' equity of CHF 2.1 billion or an eligible capital of CHF 2.2 billion. The total ratio to regulatory capital is 15.4%. With these values, St.Galler Kantonalbank comfortably meets the capital adequacy requirements under Basel III. The rating agency Moody's ranks SGKB unchanged by Aa1.

Strategic transformation completed

Announcing the strategic realignment in June 2013, St.Galler Kantonalbank dedicated itself to complete the transformation process by the end of 2015. This goal has been achieved: The largely withdrawal from the cross-border wealth management business has been completed, the relevant business units of the former Hyposwiss subsidiaries in Zurich and Geneva have been sold, the strategy compliant business of Hyposwiss Zurich was integrated as a branch into the parent company, the remaining cross-border business was adjusted and streamlined and for clients living in foreign countries, a comprehensive tax transparency strategy has been implemented. As part of the strategic transformation, the business volume was reduced by a total of CHF 6.4 billion. However, as intended, the bank can maintain the level of operating profit.

As final element of the strategic transformation, St.Galler Kantonalbank will sell its branch in Lisbon later this year. This growing business unit originates from the former subsidiary Hyposwiss Geneva and is working profitable. It will be taken over by the general manager in a management buyout. To ensure continuity, St.Galler Kantonalbank will retain a minority share of 40 % at the beginning.

Adjusted medium-term Goals

The Board of Directors and the Management Board have evaluated and partially adjusted the medium-term goals as part of its ongoing strategic review. After completion of the strategic transformation, the earnings base in particular in the asset management business has changed significantly. The proportion of new business to the assets under management in the next five years should amount to 3 % instead of the previous 4 %. In addition, the target value for the cost/income ratio of 50 % is raised to 55 %. The reasons for this adjustment are the revised FINMA accounting rules of banks, securities dealers, financial groups and conglomerates (ARB), especially the accounting for credit risk related write-downs now as reduction of the interest balance and thus reducing operating income, as well as the evaluation of the development of interest rates expecting to begin the increase cycle by the Swiss National Bank not earlier than 2017.

Future initiatives in the Customer Focus

The strategic transformation process in the asset management business has tied extensive resources in the past three years. In the future, the Bank will focus its attention again on future initiatives with a clear client focus.

First, SGKB aims to expand its market position in the domestic market in both the retail clients as well as in the commercial clients. To this end, the bank is launching appropriate development initiatives and provides additional personnel resources.

Second, the bank will raise its market power in the asset management business and strengthen its position as an integral advisor for assets, strategy and risk. This includes a clearly structured and comprehensible range for discretionary mandate-, consulting- and self-consulting-clients as well as proposing different investment styles.

A third focus will be digitization. As part of its digital strategy, SGKB has planned a total investment of CHF 30 million in the next five years. For example, a completely renovated, powerful e-banking platform and the two payment applications for cashless transactions, Paymit and TWINT, will be introduced in 2016. Other ongoing projects include a mobile app with a digital bank account statement and a budget tool, the online extension of mortgages, the digital client onboarding or the expansion of Social Media activities.

Higher consolidated profit expected in 2016

For the economic situation in the current year, St.Galler Kantonalbank is basically expecting a continuation of 2015. The economy in Switzerland is still challenged with the strong Swiss franc, the negative interest rates and the political uncertainty in relation to the EU. The franc will remain strong and interest rates will remain low. Nevertheless, SGKB expects moderate growth in Switzerland. This means that the course of business is running solidly as in 2015 and the level of profit will develop positively despite the difficult conditions and will be slightly higher than 2015.

SGKB Group key figures

(in CHF Mio.) 2015
(31.12.2015)
2014
(31.12.2014)
change
Operating income 450.9 452.6 - 0.4 %
Gross profit 193.0 198.0 - 2.6 %
Operating result 141.5 177.9 - 20.4 %
Consolidated profit 133.4 146.3 - 8.8 %
Balance sheet 31'189 30'317 + 2.9 %
Loans to clients 24'243 23'886 + 1.5 %
Managed assets1 36'176 36'844 - 1.8 %
Shareholders' equity 2'075 2'027 + 2.4 %
Employees (average balance)
FTE, apprentices calculated at 50 % (average balance)
1'234
1'065
1'273
1'102
- 3.1 %
- 3.4 %

1 Managed assets = Client funds (Due to clients in savings and deposits, other due to clients, medium-term notes) and assets under management. Not included are custody assets (= assets that are held solely for transaction and storage purposes and for which the Bank offers no advice to the clients).

This text is a translation from the German language, which represents the relevant Version.