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6 years ago

VP Bank Verwaltungs- und Privat-Bank AG

VP Bank Verwaltungs- und Privat-Bank AG

Research Update: Outlook

Research Update: Outlook On Liechtenstein-Based VP Bank Revised To Negative On Substandard Performance; Affirmed At 'A-/A-2' Overview • Liechtenstein-based VP Bank's operating performance and net new money generation are suffering from a greater-than-expected impact from the bank's refocused international onshore markets strategy. • We have therefore revised our outlook on VP Bank to negative from stable and have affirmed the long- and short-term issuer credit ratings at 'A-/A-2'. • We have lowered our assessment of the bank's capital and earnings to strong from very strong and raised our assessment of VP Bank's risk position to adequate from moderate. • We consider VP BANK to be of moderate systemic importance to Liechtenstein, and therefore incorporate one notch of sovereign support into our ratings on VP BANK. Rating Action On Aug 22, 2012, Standard & Poor's Ratings Services revised its outlook on Liechtenstein-based VP Bank Verwaltungs- und Privat-Bank AG (VP BANK) to negative from stable and affirmed the long- and short-term issuer credit ratings (ICRs) at 'A-/A-2'. Rationale The outlook revision follows the greater-than-expected impact of the bank's refocused international onshore markets strategy on its operating performance and net new money generation, both of which we expect to remain below our forecasts. We see at least a one-in-three likelihood that VP Bank will remain a poor performer in its peer group, which might lead us to revise our assessment of its business position downward or lower the long-term ICR by one notch. Moreover, in our opinion, VP Bank has not yet achieved the strong brand awareness of its mainly Switzerland-based peers, and is currently suffering from the exit of two members of its senior management, which might impede the transformation process. While our assessment of VP Bank's stand-alone credit profile (SACP) remains at 'bbb+', we have revised two SACP factor scores: • We have revised our assessment of VP Bank's capital and earnings to "strong" from "very strong"; and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2012 2 1002695 | 300025082

Research Update: Outlook On Liechtenstein-Based VP Bank Revised To Negative On Substandard Performance; Affirmed At 'A-/A-2' • We have revised our assessment of VP Bank's risk position to "adequate" from "moderate". Regarding the capital and earnings assessment, we think it highly unlikely that VP Bank will manage to keep its risk-adjusted assets (RAC) ratio in the "very strong" category over the medium term. Although VP BANK enjoys a high quality of capital, the still high amount of nonservicing intangibles and unrecognized deficits under its postretirement benefits weigh negatively on our ratio of total adjusted capital. Clients' continued risk awareness has lowered revenues and net new money generation. VP BANK's investments to expand its international onshore private-banking business in target markets such as Switzerland, Luxembourg, and Asia continue to significantly weigh on its profitability, in our view. These two factors limit potential for retaining earnings. Because of this limited potential and a forecast increase in the bank's customer lending, we do no see VP Bank's net income over the next 12-24 months lifting its RAC ratio above our 15% threshold as our criteria define. We calculated a RAC ratio of 14.2% as of year-end 2011, and project a RAC ratio of about 14% before concentration and diversification effects within our 18-month horizon. Regarding the risk position assessment, we positively view VP Bank's increased risk awareness since 2009, which has led to its achievement of a very high quality securities portfolio. This has helped the bank to get through the European bank and sovereign crisis. We also view positively its conservatively implemented hedging approach of market and foreign exchange risks, which contributed to the losses experienced in 2008. Despite an 18% increase in customer loans in 2011, we perceive the credit risk from VP BANK's small and mainly domestic lending activities as low. In our view, the loan book is highly collateralized and relatively less sensitive to the economic cycle. In addition, exposures to Southern-European sovereigns remain nonexistent or negligible. The ICR is one notch higher than the SACP, reflecting our view of VP BANK's "moderate" systemic importance to Liechtenstein and that the government is "supportive" toward its banking sector. Outlook The negative outlook reflects our view that VP Bank's operating performance and net new money generation will remain below our forecasts. We might lower our assessment of VP Bank's business position or lower the ICRs if VP BANK fails in its ongoing transformational process and does not strengthen its business profile by broadening its international onshore customer base and franchise, thus achieving positive new asset generation over the medium term. We might revise the outlook to stable or raise the ICRs if VP BANK were able WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2012 3 1002695 | 300025082

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