Banking is a game with high stakes: one mistake can have grave consequences. Liechtenstein’s VP Bank found out to its detriment when a loan went bust during the corona-crisis.
VP Bank, the private bank based in Vaduz, Liechtenstein, in March sent out a release to report on a value adjustment which had left an indent in its portfolio. The bank had to write off 20 million Swiss francs ($22 million).
The sober statement acted as camouflage for the far-reaching consequences of the one error committed by the risk department of the bank. VP Bank subsequently submitted the client and credit portfolio a stress test. CEO Paul Arni restructured the loans business and finance chief Siegbert Naescher and head of risk Monika Vicandi were forced to hand over their duties.
The share price of VP Bank also took a dive and rating agency Standard & Poor’s cut the bank to «negative» from «stable». The share price has since recovered slightly.
Carrying On as Normal Wasn't an Option
Arni, who had taken over at the helm of the bank in October 2019, launched a program called «Robusto» aimed at preventing such mistakes from happening again and thus improve the resilience of the firm.
Thomas Meier, chairman of the bank, didn’t mince his words when he spoke of the problem at the presentation of the half-year figures on Tuesday: «You can’t simply carry on as normal if one such incident wipes off a full third of your annual profit.»
With this, Meier showed that the bank may not have been put off its course by the corona-crisis – which became evident through the soundness of its half-year result. But, if a mistake has such far-reaching consequences for the bank and its shareholders, the management must give account. After all, the dividend for 2020 will be significantly smaller as a consequence of the drop in profit, Meier said.
Lombard Loan and the Underlying Securities
CEO Arni didn’t say what exactly had happened during those heady days in March. The case for sure involved a lombard loan of a client booked in Luxembourg and the underlying product supporting the loan was to be blamed – that at least was how far he ventured.
Which suggests that the product that acted as security had blown up during the crash and presumably had been leveraged. And that would indeed cast a shadow over the risk management of the bank: one mistake and half of its first-half profit is gone.
Strategic Goal Got Delayed
While Arni and Meier did their best to treat this case as a unique occurrence, which didn’t alter the strategic outlook of the bank, it still became plain that the profit target of 100 million francs by 2025 was moved back by a year.
The corona-crisis had weighed on earnings and profitability, Arni said. The bank aimed to generate 50 million francs in extra revenue through a number of measures, including an effort to increase its efficiency, new services in crypto- and private-market segments as well as IT services.
Much of this will still have to be implemented and put to work. But the bank in any case must work hard to make good for what went wrong earlier this year.
