St Galler Kantonalbank : Half year results 2015: Group net profit increased

As expected, the consequences from the SNB decision to discontinue the minimum exchange rate of 1.20 francs per euro and to introduce negative interest rates had direct consequences on the net interest income. On the one hand, the pressure on the interest margin remained high: The savings and account interest rates have decoupled from the money market rates; while the money market interest rates are clearly negative, St.Galler Kantonalbank in principle does everything possible not to charge negative interest rates to its clients. On the other hand, interest expenses for hedging transactions have increased. In addition, due to changes in accounting standards, the credit risk related write-downs and losses are now reported in net interest income and will additionally burden the income statement line item. As for the prior year comparison, prior year's figures have been adjusted accordingly (restated). On balance, net interest income with 139.1 million francs is approximately 4.4 % or 6.4 million francs below the previous year.

The net fee and commission income amounted to 56.7 million francs (-1.4 million francs or -2.3 % on the previous year). The reason for this lies in the still restrained securities business as well as in the discontinuation of the compensation fund commission from Swisscanto. Due to the discontinuation of the minimum exchange rate of the euro, business with foreign exchanges was stimulated; net trading income amounted to 20.2 million francs (+33.7 % or +5.1 million francs).

On the one hand, the acquisition of Vadian Bank led to an inflow of client assets. On the other hand, SGKB recorded outflows due to the strategic realignment of the Group with the sale of the crossborder wealth management business of the former subsidiary banks Hyposwiss Zurich and Geneva as well as the implementation of the strategy of tax compliance. Therefore, the business volume has been gradually reduced by approximately 4.2 billion francs over the past 18 months. This reduction is reflected in correspondingly lower operating income resulting in 220.0 million francs, which is only slightly below the previous year (-0.9 % or -2.0 million francs).

Operative expenses of 127.2 million francs could be kept at approximately last year's level (+0.5 % or +0.6 million francs). General and administrative expenses increased by 1.3 million francs and amounted to 50.2 million francs by mid-year. This increase corresponds to the other operating expenses of Vadian Bank, which had not yet been incorporated into the 2014 financial year. Personnel expenses at 77.0 million francs are slightly lower than last year (-0.8 % or -0.6 million francs).

The proceeds from the sale of the shares of Swisscanto Holding are recorded in extraordinary income. This means that the burden on the operating income was more than compensated and the St.Galler Kantonalbank recorded a higher Group net profit of 84.6 million francs for the first semester (+15.5 % or +11.4 million francs).

Managed assets were reduced due to outflows and weaker exchange rates and stood at 35.6 billion francs respectively 1.3 billion francs below the previous year's figure. Decisive for the negative net new money were the planned outflows in connection with the continued implementation of tax compliance, which St.Galler Kantonalbank will conduct this year for all non-EU clients, and the consistent realignment of the crossborder business with the consequent discharge of clients.

Loans to clients amounted to 24.1 billion Francs. This appealing growth with the healthy increase of 272 million francs or 1.1 % was within last years range.

With the discontinuation of the minimum exchange rate of the euro the framework for much of the economy of Eastern Switzerland has changed significantly in the first half year. The latest economic survey of St.Galler Kantonalbank at regional companies signalled a cautious confidence in the industry and construction sectors, whereas the outlook is clouded in the retail sector. However, the risk exposure of St.Galler Kantonalbank has thus not changed.

In the real estate market in Eastern Switzerland backlog demand was apparent, resulting in rising prices of home ownership in the region compared to the whole of Switzerland. The loan-to-value-ratio (LTV) of mortgages increased accordingly. The average LTV-ratio of 61 % showed that credit growth has not taken place at the expense of quality.

The client business of the subsidiary Vadian Bank AG, acquired by 24 December 2015, has been fully integrated into the St.Galler Kantonalbank by 1 July 2015. As reported on 8 May 2015 via press release, Vadian Bank AG was able to successfully conclude the US program. The payment was contractually borne by the previous owner, Ortsbürgergemeinde St.Gallen. St.Galler Kantonalbank assumes that the conclusion of the US program for the parent company and the former subsidiaries will take place in the second half of 2015.

Subject to extraordinary developments St.Galler Kantonalbank expects a net profit in 2015 slightly below the previous year.

1Due to the change to the new accounting rules FINMA ARB as of 30.6.2015, the previous year's figures have been adjusted where necessary (restatement).

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