5. Financial risks

While engaged in complying with the relevant statutory and regulatory provisions, the monitoring and management of financial risks is based on internal bank objectives and limits relating to volumes, sensitivities and risk metrics. Scenario analyses and stress tests also demonstrate the effect of events which can not or not sufficiently be taken into consideration within the scope of ordinary risk evaluation. In this respect, the Board of Directors sets strategic guard rails within which risk management is undertaken.

Group Executive Management is responsible for the implementation and observance of the risk strategy for financial risks as approved by the Board of Directors. At the operational level, the identification, assessment and monitoring of all relevant risks is carried out by functions of the area of the Chief Risk Officer, which are independent of the risk management units. The risk management units are responsible for risk management and first-instance compliance with the targets and limits relevant to them.

Market risks

Market risks arise from taking positions in financial assets (debt instruments, equities and other securities), foreign currencies, precious metals and corresponding derivatives, as well as from client business, interbank business and from consolidated subsidiary companies whose functional currency is a foreign currency.

Interest rate risk is a significant component of market risk. It arises mainly due to divergent maturities between positions on the asset and liability sides of the balance sheet. The table on the maturity structure shows the assets and liabilities of VP Bank broken down into positions at sight, callable positions and positions with specific maturities (→ cf. note 35).

Asset and liability positions of VP Bank denominated in foreign currencies are of importance to determine the currency risk. An overview, analysed by currency, is to be found in the balance sheet by currencies (→ cf. note 34).

The bank employs a comprehensive set of methods and key figures for the monitoring and management of market risks. In this respect, the value-at-risk (VaR) approach has established itself as the standard method to measure market risk. The VaR for market risks quantifies the potential loss in market value of all market risk positions on the evaluation date, expressed in CHF. The value-at-risk is computed on a Group-wide basis with the methodology of historic simulation. In this process, the historical movements in market data over a period of at least five years are used in order to evaluate all positions subject to market risk.

The projected loss refers to an investment horizon of 250 trading days and will not be exceeded with a probability of 99 per cent. The calculation of interest rate risk generally takes into account the contractual fixing period of interest-bearing positions. For non-maturing positions, an internal replication model is applied.

The market value at risk (99 per cent / 250 days) of VP Bank Group amounted to CHF 107 million on 31 December 2025 (previous year: CHF 118 million). This figure includes interest rate, currency and equity risks as well as credit spread risks of the bond portfolio. During 2025, the market VaR fluctuated between CHF 102 million and CHF 122 million, mainly due to fluctuations in interest rate positioning. The observable decline in market VaR over the course of 2025 is mainly determined by interest rate risk and results from the ageing and volume reduction of fixed-income asset positions. The increase in foreign currency and equity risks, on the other hand, is hardly reflected in the combined market VaR. The increase was due to the expansion of exposures and the good equity performance in 2025. No material changes were recorded in credit spread risks.

The following table shows the VaR analysed by types of risk and the total market VaR.

Market value-at-risk (end-of-month values)

As the maximum losses arising from extreme market situations cannot be determined with the VaR approach, the market risk analysis is supplemented by stress tests that allow an assessment of the effects of extreme market fluctuations on the present value of equity and on net interest income. In this manner, the fluctuations in net present value of all balance sheet items and derivatives in the area of market risks are computed with the aid of sensitivity indicators based on simulated market movements (parallel shift, rotation or inclination of interest rate curves, exchange rate fluctuations by a multiple of their implicit volatility, slump in stock prices). In addition, the development of interest income is simulated for selected market scenarios (rising interest rates, falling interest rates, falling exchange rates).

The following table exemplifies the results of the key rate duration. For this, first of all, the present values of all asset and liability items as well as derivative financial instruments are calculated. Then, the interest rates of the relevant interest rate curves are increased by 1 basis point and the resulting change of present value is scaled to 1 per cent (100 basis points) in each maturity band and per currency. The respective movements represent the gain or loss of the net present value resulting from the shift in the interest rate curve. Negative values point to an excess of assets, while positive values indicate an excess of liabilities over the relevant term.

Key rate duration profile per 100 basis points increase

The following table sets out the effects of a negative movement in the principal foreign currencies on group net income and shareholders’ equity. The variance applied to determine this effect represents the implicit volatility of the respective exchange rates as of 31 December 2025 and 31 December 2024.

Movement in significant foreign currencies

The following table illustrates the impact of a possible downturn in equity markets of 10, 20 and 30 per cent, respectively, on group net income and equity capital.

Movement in relevant equity share markets

For risk management purposes, derivative financial instruments are entered into exclusively in the banking book and serve to hedge equity, interest rate and currency risks as well as to manage the banking book. The risk strategy for financial risks defines the derivatives approved for this purpose.

VP Bank refinances its medium- and long-term client loans and its nostro positions in interest-bearing debt securities primarily with short-term client deposits and is therefore subject to interest rate risk. Rising interest rates have an adverse impact on the net present value of fixed income business activities, and they also increase refinancing costs. As part of asset and liability management, interest rate swaps can be used to hedge this risk and are recognised at fair value. VP Bank applies fair-value hedge accounting under IFRS in order to record the offsetting effect of changes in the value of the hedged item on the balance sheet. For this purpose, a portion of the underlying transactions (fixed interest loans) are linked to the hedging transactions (payer swaps) through hedging relationships. In the event of fair-value changes caused by interest rate changes, the carrying values of the underlying transactions concerned are adjusted and the gains/losses taken to income.

Fixed rate positions are transformed into variable interest rate positions through the conclusion of payer swaps, thus establishing a close economic relationship between the hedge item (loan) and the hedge instrument (swap). Therefore, the hedge ratio between the designated amount of the hedge item and the designated amount of the hedge instruments is one. A hedge relationship is efficient and/or effective whenever the movements in the value of the hedge item and the hedging transactions induced by interest rate changes offset each other. Ineffectiveness mainly results from variations in duration, such as those which arise from different maturities, interest payment dates or different interest rates.

The initial efficiency of a hedge relationship is proven by a prospective effectiveness test. For this purpose, future changes in the fair value of the hedge item and hedge instrument are simulated on the basis of scenarios and are subject to a regression analysis. Effectiveness is assessed on the basis of the results of the analysis. Repeated reviews take place during the duration of the hedge relationship.

By entering into foreign exchange transactions, VP Bank has hedged its own financial investments against exchange rate fluctuations in the principal currencies. Currency risks from the client business generally may not arise, and currency positions that remain open are closed via the foreign exchange market. Group Treasury & Execution is responsible for the management of foreign currency risks from the client business.

Liquidity risks

Liquidity risks may arise through contractual mismatches between the inflows and outflows of liquidity in the individual maturity bands. Any differences arising demonstrate how much liquidity the bank must eventually procure in each maturity band in the event of an outflow of all volumes at the earliest possible time. Furthermore, there may be refinancing concentrations that are so significant that a withdrawal of the corresponding funds may cause liquidity problems.

Liquidity risks are monitored and managed using internal targets and limits for the interbank and lending business and other balance-sheet-related key figures – while also complying with statutory liquidity norms and provisions.

The decline in exchange rates against the CHF, particularly the USD, led to a decline in client deposits in 2025. On the assets side, this resulted in a decline in interbank deposits and the financial investment portfolio, while at the same time the cash and cash equivalents position was significantly higher at the end of the year.

With a liquidity coverage ratio (LCR) of 180 per cent and a net stable funding ratio (NSFR) of 154 per cent at the end of 2025, VP Bank continues to enjoy a comfortable liquidity situation.

In the short-term maturity range, the Bank refinances itself primarily through sight, call and term deposits. The following table shows the maturity structure of liabilities by maturity bands. At the end of the year, cash flows (undiscounted capital and interest payments) were broken down as follows:

Cash flows on the liabilities' side

VP Bank can obtain liquidity on a covered basis if necessary via access to the Eurex Repo market. Stress tests are used to assess the risk of unusual but plausible events, enabling VP Bank to take any necessary countermeasures in good time.

Credit risks

Credit risks arise from all transactions for which payment obligations of third parties in favour of VP Bank exist or can arise. Credit risks accrue to VP Bank from client lending activities, the money market business including bank guarantees, correspondent and metals accounts, the reverse repo business, the bank’s own portfolio of securities, securities lending and borrowing, collateral management and OTC derivative trades.

Risk concentrations can arise through large exposures (cluster risks) or inadequate diversification of the loan or collateral portfolio. Such concentrations can constitute exposures from borrowers which are domiciled in the same countries or regions, are active in the same industry segment or possess the same collateral. Concentrations can lead to the creditworthiness of borrowers or the recoverability of collateral being impacted by the same economic, political or other factors. Risk concentrations are closely monitored by VP Bank as well as being controlled with corresponding limits and operational checks.

On 31 December 2025, total credit exposure, excluding collateral, amounted to CHF 8.9 billion (as at 31 December 2024: CHF 9.3 billion). The following table shows the composition of on-balance sheet and off-balance sheet items.

Credit exposures

Compared with the previous year, the total volume of credit commitments decreased by CHF 395 million. This decline is mainly attributable to the bank's own bond portfolio (financial instruments measured at amortised cost: CHF –200 million), interbank investments (claims against banks: CHF –104 million) and derivative financial instruments (CHF –62 million). The lending business (claims against customers) remained relatively stable with a volume of CHF 5.9 billion, representing a very moderate decline of CHF 15 million.

Loans to clients are granted on a secured basis as standard. This area primarily includes mortgage business in Switzerland and Liechtenstein as well as in other selected countries, Lombard lending and a small number of special loans.

In the mortgage business, collateral is primarily provided by residential properties, mixed-use or commercial properties in Switzerland and Liechtenstein, as well as in other selected countries. The guidelines and procedures for the valuation and management of mortgage collateral are governed by the provisions of the Capital Adequacy Ordinance in Liechtenstein. Lombard loans are generally granted against the pledging of predominantly liquid and diversified securities portfolios. Life insurance policies may also be used as collateral. Predefined minimum requirements apply to the issuers of the relevant policies. Each issuer must be approved in advance.

The qualitative requirements for eligible collateral and permissible loan-to-value ratios are defined internally. In 2025, further methodological improvements for the quantitative derivation of loan-to-value ratios in margin lending transactions were developed and successfully introduced. Risk concentrations within the collateral are to be avoided through a prudent credit policy.

Within the scope of the client loan business, loans are granted on a regional and international basis to private and commercial clients. The focus remains on the private client business with a volume of CHF 3.7 billion of mortgage credits (31 December 2024: CHF 3.7 billion). From a regional perspective, VP Bank conducts the lion’s share of this business in the Principality of Liechtenstein and in the eastern part of Switzerland.

The ten largest single exposures encompass 13 per cent of total credit exposures (31 December 2024: 12.5 per cent).

The credit regulations form the binding framework for credit risk management and client lending business. In addition to the general guidelines and framework conditions for lending business, they also define the decision-making powers and related ranges for the approval of loans (rules on powers of authority).

In principle, exposures in both private and commercial lending must be covered by the mortgage lending value of the collateral (collateral after hair cut). Counterparty risks are regulated by limits that restrict the amount of an exposure depending on the credit rating, industry, coverage and risk domicile of the clients. VP Bank uses an internal risk classification procedure to assess creditworthiness. Deviations from credit principles (exceptions to policy) are treated in the credit risk management process in accordance with their risk content.

VP Bank enters into both secured and unsecured positions in the interbank business. Unsecured positions result from money market activities (including bank guarantees, correspondent and precious metals accounts), secured positions arising from reverse repo transactions, securities lending and borrowing, collateral management and OTC derivative transactions. Repo deposits are fully secured, and the collateral received serves as a reliable source of liquidity in a crisis. Hence, counterparty risk and liquidity risk can be reduced with reverse repo transactions.

Counterparty risks in the interbank business may only be entered into in approved countries and with approved counterparties. Exposures to banks relate to institutions with a good credit rating (investment grade rating) and registered office in an OECD country. A comprehensive system of limits contains the level of exposure depending on the term, rating, risk domicile and collateral of the counterparty. In this regard, VP Bank relies on the rating by the two rating agencies Standard & Poor’s and Moody’s. OTC derivative transactions may be concluded exclusively with counterparties with whom a netting agreement has been signed.

Credit risks are managed and monitored not only on an individual transaction level but also on a portfolio level. On the portfolio level, VP Bank uses expected and unexpected credit loss estimates to monitor and measure credit risk. The expected credit loss represents the average loss that can be expected within one year. Unexpected credit loss represents a scenario-based unexpected loss from a stressed loss framework that is the difference between the potential loss in a stressed scenario (stressed loss) and the loss to be expected in a normal market environment (expected loss) over one year. In particular, the stressed loss framework takes account of idiosyncratic credit risks. The unexpected loss is limited and monitored by a corresponding credit risk limit, both overall and per loan portfolio.

Credit derivatives (contract volume)

No transactions in credit derivatives were carried out in the past financial year.

Country risk

Country risks arise whenever political or economic conditions specific to a country impinge on the value of an exposure abroad. The monitoring and management of country risk is undertaken using volume limits which restrict the respective aggregate exposures per country rating (Standard & Poor’s and Moody’s). All receivables on the balance sheet are considered in this process; positions in the Principality of Liechtenstein and Switzerland do not fall under this country limit rule.

The risk domicile of an exposure is the basis for recognising country risk. With secured exposures, consideration is usually given to the country in which the collateral is located.

The following table shows the distribution of credit exposures by country rating. Non-rated country exposures are mostly exposures from local business activities (receivables secured by mortgage) of VP Bank (BVI) Ltd.

Country exposure by rating

IFRS 9 Impairment

The additional tables to be disclosed from IFRS 9 Impairment can be seen below.

Credit exposures by rating classes

Expected credit losses according to IFRS 9 Impairment

The following table shows the biggest changes in valuation adjustments by stage.

The following table provides disclosures on assets which were modified and at the same time have a stage 2 and 3 valuation adjustment.