[Annual Report 2009 ]

PhotosFC St. Gallen kicked off in the 2009–2010 Super League with the Cantonal Bank of St.Gallen as its main sponsor. Football is an exciting sport at both amateur and professional levels, making it an ideal theme to accompany this year’s Annual Report and Letter to Shareholders.

The Cantonal Bank of St.Gallen Group 4 Group Key Figures 6

[ 1 ] Strategy

Strategic positioning 7 Brands and markets 8 Market watch 9 Fields of strategic action 9 Future challenges 10

[ 2 ] Financial Year 2009

CantonalBankofSt.GallenGroup 11 RetailandCommercialClients 17 PrivateBanking 20

[ 3 ] Corporate Governance

Groupstructureandshareholders 23 Capital structure 23 Compensation, shareholdings and loans 24 Shareholders’ participation, changes of control and auditors 25 Information policy 25

[ 4 ] Risk Situation

Creditrisks 26 Market risks 27 Operational risks 28

[ 5 ] Financial Information

Group Balance Sheet 32 Group Income Statement 33 Notes to the Balance Sheet 34 Notes to the Income Statement 42 Divisional Accounts 46

[ 6 ] Testat PricewaterhouseCoopers 47

[ 7 ] SGKB Share

Contact 49 Organisation 50

The full annual report in German is available at www.sgkb.ch

[Annual Report 2009 ]

The Cantonal Bank of St.Gallen Group

Retail and Commercial Clients

Private Banking Service Center

100%-owned subsidiariesParent Company

Finance and Risk Management

Zurich Geneva

SGKBDeutschland

p Finance (loans and mortgages)

p Investment advice and asset management

p Clients: private individuals; industry and commerce

p Region: EasternSwitzerland

p 35 branches in Canton of St. Gallen

p 2 branches in Canton of Appenzell AR

p Investment advice and asset management

p Clients: private individuals, institutional investors

p Region: Eastern Switzerland

p 6 branches in Canton of St. Gallen

p Central finance and credit processing and payment transactions

p Foreign exchange, money market and securities transactions

p Information technology

p Project and process management

p Central servicesp Construction and

maintenance of bank properties

p Investment advice and asset management

p Clients: private individuals, national and international

p Region: Switzerland and strongly growing key markets

p Investment advice and asset management

p Clients: private individuals, national and international

p Region: Switzerland and strongly growing key markets

p Investment advice and asset management

p Clients: private investors and financial intermediaries

p Region: Germany

p Risk managementp Controlling and

accountingp Legal affairs and

compliancep Personnelp Business

developmentp Corporate

communications

Operating Income Client Assets

Retail and Commercial Clients Private Banking (parent company)

Private Banking (subsidiaries) Corporate Center*

31%26%

43%

18%

41.0 bn

43%

16%

23%

Headcount

523.9 m

0

50

150

100

200

950

1000

900

ZürichStammhaus Genf München

Holding

* Comprises Service Center, Finance and Risk Management

as of Dec. 31, 2009

as of Jan. 1, 2010

Head Office Zurich Geneva Munich

Milestones

Wil Uzwil

Flawil

Degersheim Herisau

Gossau

Wattwil

Nesslau

Ebnat-Kappel

Schänis

Uznach

EschenbachRapperswil

Bruggen

Kronbühl/Wittenbach Rheineck

St.MargrethenAu

HeerbruggDiepoldsau

Altstätten

Oberriet

Buchs

Gams

Mels

Bad Ragaz

Sevelen

Azmoos

St. Gallen

ARAI

FL

A

GRSG

GL

SZ

ZH

TG

D

Bazenheid

Flums

Sargans

Walenstadt

Rorschach

Neudorf

Zurich St. Gallen

Teufen

Goldach

Retail and Commercial ClientsPrivate BankingHyposwissSGKB Deutschland

Germany/Munich

Geneva

Portugal

Locations

For information about the branches, visit www.sgkb.ch

(k Your SGKB k Branches)

1868 The Cantonal Bank of St.Gallen is founded

1996 New Cantonal Law concerning the Cantonal Bank

2001 IPO (Initial Public Offering)

2002 Acquisition of Hyposwiss Private Bank Ltd., Zurich

2008 Acquisition of Hyposwiss Private Bank Geneva Ltd., Geneva

formerly Anglo Irish Bank (Suisse) SA, Geneva

2009 SGKB Deutschland AG is founded in Munich

Facts

p Over 290 000 clientsp Rated Aa1 by Moody‘sp State guarantee Under the Law concerning the Cantonal Bank, the Canton of St. Gallen is

answerable for the liabilities of the SGKB parent company if the Bank‘s own funds are not sufficient. The Bank makes an annual payment to the state for this guarantee (2009: CHF 6.3 million).

SGKB Group

The Cantonal Bank of St.Gallen Group

was founded in 1868 to offer savings

and credit services to the population

and small businesses within their own

canton, and thereby promote the

development of the regional economy.

The new Cantonal Law of 1996 con­

cerning the Cantonal Bank created the

conditions for partial privatization,

which took place in 2001. A central

element of this was the refocusing of

business strategy, especially by ex­

panding investment as a second core

business, alongside lending.

Group Key Figures

Income Statement inCHF000s 2009 2008 2007

Operatingincome 523928 524933 555586

Administrativeexpenses 272889 275777 265903

Operatingprofit(interimresult) 196894 183932 246089

Groupnetprofit 168143 171135 226682

Balance Sheet inCHF000s Dec. 31, 2009 Dec.31,2008 Dec.31,2007

Loanstoclients 18504562 17944796 17102122

Clientfunds 16584666 14885373 12292293

Balancesheettotal 23504195 22577338 20235796

Shareholders’equity 1796372 1744273 1739533

Client assets inCHF000s

Clientassets 40979634 37672912 37883264

Headcount

Full-timeequivalents(inaccordancewithFINMA;apprenticescalculatedat50%) 1124 1098 1007

Numberofemployees:

–Individuals 1273 1235 1132

–ofwhichtrainees 117 115 111

Key Figures 2009 2008 2007

SGKB share in CHF

Earningspershare 30.39 30.86 40.91

Dividendpershare 20.00 20.00 26.00

Marketprice

–asofDecember31 463.25 384.00 498.00

–Highestprice 489.00 516.00 642.00

–Lowestprice 330.00 363.25 445.00

MarketcapitalizationasofDecember31(inCHFmillion) 2581.90 2140.20 2775.60

Return on equity

Returnonequity,pre-tax(basis:operatingprofit) 11.9% 11.4% 15.7%

Returnonequity,aftertax(basis:groupnetprofit) 10.1% 10.6% 14.5%

Cost / income ratio

Cost/incomeratioincludingdepreciationonfixedassetsandlicences 55.2% 55.6% 50.8%

Equity key figures2

BISratiotier1 13.0% 12.5% 13.9%

BISratiotier2 13.2% 12.9% 14.5%

Excesscapitalratio(CHstandard) 80.6% 72.2% 83.0%

Shareholders’equityas%ofbalancesheettotal 7.6% 7.7% 8.6%

1 Recommendation of the Board of Directors for the financial year ended on Dec. 31, 20092 BIS ratios 2008 and 2009 according to FINMA-Circ. 08/22, Appendix 2 (Restatement 2008). Up to 2007 according to Basel I. The closing as of December 31, 2009, includes SGKB Deutschland AG in Munich for the first time. This subsidiary became operative in the financial year 2009. Furthermore, Hyposwiss Private Bank Geneva Ltd. in Geneva is consolidated for 12 months in the financial year 2009. In the prior year, it was consolidated for 10 months starting from the date of acquisition. Both facts make the comparison with the prior year more challenging.

Moody’s Rating 2009 2008 2007

Seniorunsecureddomesticcurrency Aa1 Aa1 Aa1

Bankdeposits Aa1/ P-1 Aa1/ P-1 Aa1/ P-1

Bankfinancialstrength B– B– B–

6

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Strategic positioning

Balanced business model   The Cantonal Bank

of St.Gallen Group applies a balanced business

model. This broadens the base of growth and in-

come, while reducing risk exposure.

pp Income sources: the aim is to strike a balance

between interest and other income sources.

pp Client segments: it is intended that contribu-

tions to profit from the Retail and Commercial

Clients Division, on the one hand, and Private

Banking, on the other hand, should be

balanced in relation to each other.

pp Geographical markets: the home market has

been, and still is, the stable foundation of the

Bank‘s income. Additional growth is achieved

on the other markets through the investment

advice.

Success factors  SGKB Group‘s overriding objec-

tive is to increase value sustainably, in which the

critical success factors are as follows:

pp Growth: the Cantonal Bank of St.Gallen seeks

to outperform the average growth rates of its

competitors. Given the limited possibilities in

retail and corporate banking, the main impetus

for growth comes from Private Banking. Thus,

among our fields of business, the relative

importance is shifting towards the investment

advice in the longer term. As this shift takes

place, SGKB relies on its core competences of

client service and asset management.

This growth is primarily organic, i.e. achieved

through greater market penetration or

the development of new markets, though

acquisitions do form a secondary source of

growth.

pp Productivity: a modern IT platform enables

the Cantonal Bank of St.Gallen to offer com -

petitive banking services. Systematic process

management enhances the efficiency of

internal operating procedures. Opportunities

for external cooperation are kept under review

and implemented where appropriate.

pp Risk optimization: SGKB Group limits itself to

its core competences and its core business. It

is engaged especially in business areas in which

it possesses the necessary experience and

knowledge. Central to its strategy is the ma n -

agement of credit risks, of its balance sheet

structure and of risks to its reputation.

pp Employees: well-educated, experienced and

motivated employees are the critical factor in

SGKB Group‘s success. Employee surveys are

conducted periodically, and yield consistently

good results. This underlines the attractiveness

of the Cantonal Bank of St.Gallen Group as an

employer.

[ 1 ] Strategy

The Cantonal Bank of St.Gallen Group applies a balanced business model,

seeking to be a balanced portfolio with regard to income sources, client

segments and geographical markets. This model ensures steady income

development and makes sustainable growth possible.

7

Brands and markets

The Cantonal Bank of St.Gallen Group bases its

market prospecting and positioning on a “two-

brand strategy”. One brand is the Cantonal Bank

of St.Gallen itself. The other is Hyposwiss, its sub-

sidiaries in Zurich and Geneva. SGKB and Hypo-

swiss are positioned separately, as independent

brands, each with its own service features and

target markets.

Cantonal Bank of St.Gallen  The “Cantonal Bank

of St.Gallen” brand has two emphases. First, it

incorporates the umbrella brand “Cantonal

Bank”, which underlines the Bank‘s regional roots

and its geographical, emotional and personal

closeness to its clients. Secondly, it expresses the

Bank‘s specific branding in Eastern Switzerland.

SGKB is actively engaged as a full-service bank in

its home market (the Cantons of St. Gallen and

Appenzell Ausserrhoden), and selectively in the

border areas of the adjacent cantons.

The Cantonal Bank of St.Gallen wants to be its

clients‘ bank of first choice on its home market.

Security, reliability, credibility, firm foundations

and closeness to the client are powerful brand

values here. The dependability of sincerely held

traditional values and financial security are of most

special importance, especially at a time of crisis of

confidence in the financial markets and banks.

Dynamism, open-mindedness and fast agility

ensure successful development in the long term.

Through its market position, SGKB deliberately

seeks to combine the advantages of the regional

and Raiffeisen banks, with their local presence,

and the major banks, with their international ac-

tivities. SGKB offers an ideal blend of closeness to

the client, professionalism and quality advice. This

secures a market position for SGKB with a promi-

sing future. The Cantonal Bank of St.Gallen holds

a state guarantee with statutory backing, though

it is under no obligation to implement any public

policy.

Zurich St. Gallen

SGKB

Hyposwiss

SGKB Deutschland

Germany/Munich

Geneva

Portugal

SGKB Group brands and markets

Hyposwiss Zurich

p Zurichp Latin Americap Eastern Europe

Hyposwiss Geneva

p Genevap Portugalp Latin Americap Eastern Europe

p St. Gallenp Appenzell AR

p Germany

Zürich St.Gallen

SGKB

Hyposwiss

SGKB Deutschland

München

Genf

Portugal

Zürich St.Gallen

SGKB

Hyposwiss

SGKB Deutschland

München

Genf

Portugal

8

CantonalBankofSt.Gallen [ Annual Report 2009 ]

[ 1 ] Strategy Brands and markets

The Cantonal Bank of St.Gallen holds a market

share of around one-third in its core business. The

aim is to increase this share continuously, above all

in the traditional core business of mortgages and

loans, but also through expansion of the invest-

ment advice. Systematic cooperation between the

Retail and Commercial Clients and Private Banking

divisions plays a significant role in this.

The home market is served by 37 branches in the

Retail and Commercial Clients division, and 6

branches in Private Banking. This is the ideal size

of distribu tion network for the market activities.

The subsidiary, St.Galler Kantonalbank Deutsch-

land AG, was founded in 2009 and concentrates

on the asset management business for private in-

vestors and financial intermediaries in Germany.

This has traditionally been a very important market

for the Cantonal Bank of St.Gallen, because of its

border location. SGKB‘s physical presence in Ger-

many meets the German statutory requirements

and enables it actively to prospect and serve the

German market and its existing German clientele.

Hyposwiss subsidiaries  Hyposwiss Private Bank

Ltd. in Zurich and Hyposwiss Private Bank Geneva

Ltd. are engaged in the investment advice in

the business centres of Zurich and Geneva and

abroad.

pp Onshore: Switzerland (excluding the cantons of

St. Gallen and Appenzell Ausserrhoden)

pp Offshore: focus on strongly growing key

markets, especially in Eastern Europe and Latin

America.

Both banks position themselves on their markets

as high-quality, flexible, clearly defined boutique

private banks. This enables them to offer their cli-

ents distinctive individual service, enterprising so-

lutions, excellent investment know-how and solid

performance.

Market watch

Quality of advice and service   SGKB regularly

commissions an independent institution to review

the quality of advice and service given by its client

advisers. Since 2003, this has taken the form of

periodic “mystery shopping” visits or telephone

calls.

Client satisfaction    Clients are regularly asked

about their satisfaction with services and advisers.

This is handled both by an external institu tion and

by the Association of Swiss Cantonal Banks

(ASCB).

Complaints handling    SGKB has established

processes for complaints handling. Each employee

is required to answer complaints within two days.

The handling of complaints is reported to man-

agement. Service check calls also serve to check

the handling of complaints and to promote con-

stant improvement.

Cantonal Bank brand    The ASCB compiles an

annual index, measuring the brand “Cantonal

Bank” in itself and in relation to relevant compet-

ing brands. The ASCB market research also offers

SGKB evidence of its own public image.

The results of the surveys executed in the year

under review, have proved uniformely good.

Fields of strategic action

The Cantonal Bank of St.Gallen has set the fol-

lowing main focuses:

Market performance    The Cantonal Bank of

St.Gallen seeks to position itself in segments of

strong growth and returns, by means of its su-

perior performance. Special attention is paid to

strong professional technical and social compe-

tence, close interaction with clients and attractive

investment performance

Operational excellence  Rising pressure on costs

and margins is forcing the finance sector to im-

prove and simplify its operational procedures fur-

ther. The sharp fall in income in the investment

activities is a particularly compelling reason for

this. Under the heading of Operational excellence,

the Cantonal Bank of St.Gallen is pursuing various

initiatives to increase efficiency and produc-

tivity (e.g. the Six-Sigma approach to process

9

ma nagement). Operational excellence also inclu-

des permanent review and strengthening of risk

management processes. With the background of

increasing regulatory pressure and generally

higher risk exposure in the banking industry, an

increas ingly important role is being attributed to

this aspect.

Growth initiatives in the investment advice  In

addition to its positioning as leading bank for

investment advice and pension funds in Eastern

Switzerland, the parent company is pursuing a re-

alignment and intensification of its business with

institutional in vestors and external asset managers.

The subsidiary banks Hyposwiss Zurich and Hypos-

wiss Geneva continue to concentrate on expan-

ding their prospecting of the strategic key markets

of Latin America and Eastern Europe. Finally, the

opening of the Munich-based subsidiary bank for

the on shore business in Germany constitutes a

strategic focus.

Future challenges

pp Offshore banking compliance Pressure is

mounting on the traditional cross-border

business in Switzerland. One source of this

pressure are increasing foreign tax measures

(e.g. banking secrecy). Another are the tight

restrictions of supervisory law in the local

foreign markets (e.g. market access to

Germany and the USA). Our business maxim

is unlimited compliance.

pp Erosion of margins In the medium to long

term, the continuing erosion of margins

presents a challenge to the banks‘ traditional

business model.

pp New business models Sustained pressure on

costs is challenging the banks to devise more

efficient internal operational sequences and

explore opportunities of service outsourcing. It

also means they must consider new business

models and channels of distribution. For

example, the Internet will become established

as a channel of distribution in the long term,

with the traditional model of bank.

Investments and objectives

Investments in 2010    The total volume for in-

vestment in strategic projects during 2010 is CHF

13 million. Around half of this lies in the area of

Operational excellence. The biggest project under

this heading is the merger of payment transaction

and securities handling for the parent company

and Hyposwiss Zurich. Around one-third is being

invested in growth initiatives in Private Banking.

The balance of 20 % of the project budget is being

invested in further improvement of market per-

formance.

Strategic objectives  By implementing its stra t-

egy, SGKB is aiming at the following financial key

figures in the medium term:

Target figures (per annum) 2006 2007 2008 2009 2010 – 2012

Actual Actual Actual Target Actual Target

Growth of loans to clients 4.7% – 0.6% 4.9% 3% 3.1% 3%

Net new money 10.8% – 4.6% 10.2% 5% 1.2% 5%

Cost/ income ratio 48.4% 50.8% 55.6% 50% 55.2% 50%

Return on equity (pre-tax) 16.7% 15.7% 11.4% 15% 11.9% 15%

10

CantonalBankofSt.Gallen [ Annual Report 2009 ]

[ 1 ] Strategy Brands and markets

2009 was the year of government and corporate

bonds. Initially, the great uncertainty among in-

vestors ensured that government papers were

much sought-after. Accordingly, 10-year bond

yields stood at record low levels. In the case of

corporate bonds, there was a very great fear of

payment failures, and prices were correspondingly

low. This imbalance has corrected itself in the

course of this year, and corporate bond prices

have risen significantly.

Foreign currencies In 2009 the US dollar was a

good indicator of mood on the global finance

markets. It came off best from the financial crisis,

being perceived as a flight currency. Investors

sought it as a safe haven in phases of turbulence

on the markets. With the reversal of the trend on

the equity markets, there was increasing pressure

to sell US dollars. The trend of the euro was stable,

after the Swiss National Bank announced inter-

vention to strengthen the euro against the Swiss

franc.

Regional economy At the beginning of 2009,

there were many uncertainties in the development

of the economy of Eastern Switzerland. The de-

gree and duration of the downturn were un-

known, with scenarios ranging from deflation to

inflation. The economic horizon only brightened

in the last months of 2009, and positive signals

suggested that we were past the low-point.

The current market

The global economy made a very weak start to

2009. However, during the third quarter, the in-

dustrialized nations were able to record the fact

that the recession was over. State intervention

and the stock cycle stimulated growth. There was

also an upturn in global trade during the past

year. However, personal consumption was detri-

mental to economic growth. The stimulus pro-

grammes and rescues of various banks have left

gaping holes in the treasuries of many industrial

countries.

Financial markets At the beginning of the year,

progress on the world‘s equity markets was frus-

trated by the serious collapse in world economic

growth and fears of a recurrence of the financial

crisis. By March 2009, the equity markets had lost

around 30%, taking them to around 50 to 60 %

of their highs of 2007–08. However, two events in

March reversed the trend on the markets. First,

advance economic indicators moved away from

their low levels, and there were the first signs of

light at the end of the tunnel. Secondly, initial

positive reports from the financial sector cheered

up the mood of investors. By the end of the year,

the main markets had added at least by 20 %.

With a rise of over 50 % in share prices, emerging

markets delivered the strongest performance.

[ 2 ] Financial Year 2009

Cantonal Bank of St.Gallen Group – In 2009, SGKB Group earned a net profit

of CHF 168 million. In line with expectations, it thus achieved a result level

with last year, despite tough conditions. Special mention should be made of

the new record highs achieved in client assets and loans to clients, and the

pleasant net interest income.

11

Exporting industry, disproportionately present in

Eastern Switzerland, suffered hardest. Falling de-

mand from abroad, especially from the EU, forced

companies to act quickly. Immediate cutbacks in

production capacity and cost saving measures

gained time while effective and sustainable meas-

ures were planned and implemented. These ef-

forts centred on securing liquidity and structural

adjustment. Thus, it was possible to slow the pace

of decline considerably. Hopes are rising that the

growing recovery in the world economy will re-

store exports as the driver of the Eastern Swiss

economy.

The internal economy of Eastern Switzerland

was largely sheltered from this negative trend. It

proved robust and a mainstay of business activity.

First of all, the building industry has so far avoided

recession. Low interest rates, in particular, have

buoyed up private demand for residential pro p-

erty, while state economic programmes have fur-

ther bolstered the construction sector.

2009 results

The Cantonal Bank of St.Gallen (SGKB) has

achieved a very good result in 2009 – given the

challenging economic conditions and increased

international pressure on Switzerland as a finan-

cial centre. The new highs in client assets and

loans are especially pleasing, and reflect high

client confidence. At the same time, the excellent

net interest income underpins the market leader-

ship of the Cantonal Bank of St.Gallen in its home

market.

Proven business model  The results of the core

business segments both confirmed SGKB Group‘s

sustainable earnings power and endorse its bal-

anced business model. That model is based on

two revenue sources of equal importance: lending

and investment business. At December 31, 2009,

SGKB Group had earned a gross profit of

CHF 251.0 million, up 0.8% on the previous year.

Net interest income amounted to CHF 317.9 million,

representing a rise of 4.3% on the previous year,

and taking this item to a new high. Higher loans

to clients and steep and low interest yield curve

contributed to this result. Due to risk considera-

tions SGKB has increased its protection against

rising interest rates by additional hedges in the

second half of 2009. Without this measure, net

interest income would have been higher.

The net interest income offset the net fee and

commission income which decreased alon expec-

tations by CHF 34.6 million or 18.4%, to CHF

153.4 million. Despite strong recovery on the

stock markets starting in the second quarter,

investment clients remained cautious. Therefore

transaction-related income (commissions, income

securities, foreign currencies) decreased by 11.7%.

Because of the cautious investor behaviour (keep-

ing of liquidity and re-balancing) portfolio-related

income (custody fees, asset management fees,

fund revenues) experienced a 21.6% decline.

Net trading income was CHF 11.1 million higher,

representing an improvement of 38.9% on the

previous year. The rise derived from the nostro

portfolio and dealings in foreign notes and coins,

and reflected the improved market conditions.

Due to risk considerations, SGKB‘s trading activity

concentrates on business with clients, and only

accounts for 7.5% of total operating income. The

other operating income rose by CHF 9.6 million,

re flecting disposals and higher valuations of

investments.

Lower administrative expenses    With 272.9

million francs, administrative expenses in the

SGKB group were slightly lower than in the previ-

ous year (–2.9 million Swiss francs, or – 1.0%) -

despite the start in 2009 of the newly formed

subsidiary St.Galler Kantonalbank Deutschland

AG in Munich and Hyposwiss Private Bank Geneva

Ltd., which was consolidated for the the first time

for a whole year. Mainly these two investments led

to the last years’ increase in personnel expenses of

6.8 million francs, or 4.2% to a total of 169.6 mil-

lion Swiss francs. However, the other operating

expenses fell to 103.3 million francs, by approxi-

mately 9.7 million francs, or 8.6%. Savings were

made after completion of the information tech-

nology (IT) migration project by lower IT costs on

the one hand and further achieved through a strict

cost management.

Other favourable factors were the completion of

the information technology migration project,

leading to lower IT costs, while strict cost manage-

ment achieved further savings.

The valuation adjustments, provisions and losses

rose by CHF 2.6 million to CHF 12.6 million. The

rise is solely attributable to valuation adjustments

and provisions relating to the financial crisis.

12

CantonalBankofSt.Gallen [ Annual Report 2009 ]

[ 2 ] 2009 Financial Year Cantonal Bank of St.Gallen Group

Steady result  The collapse of the financial mar-

kets in the first quarter of 2009, the subsequent

recovery as well as the influence of the build-up of

the subsidiary in Munich have shaped the financial

year of St.Galler Kantonalbank. Group net profit

of 168.1 million francs stands as expected in previ-

ous years’ range (–1.7%).

Client bases on record levels  Particularly strong

was the development of the client base. By the

end of 2009 the client assets (customer funds and

assets under management) reached a new high of

41.0 billion francs. Compared with the previous

year it rose by 3.3 billion francs or around 8.8%.

Similarly, loans to clients registered a pleasing

growth as well. Over the previous year they

climbed by 559.8 million francs, or about 3.1% to

18.5 billion francs. Fixed-rate mortgages, which

rose by 21.9%, reported the highest growth rates

and accounted for about 90% of the total loan

portfolio of SGKB group. The continuing high

quality of the loan portfolio and the positive result

of net interest income demonstrate, that the vol-

ume growth was achieved without taking any risk

or price concessions. Therefore, SGKB continues

to hold firmly to its long-term and reasonable

credit policy.

The balance sheet total at the end of the year

stood at CHF 23.5 billion, representing a rise of

CHF 0.9 billion, or 4.1%, on the previous year.

Group net profit since 2005(CHFmillion)

2005

2006

2007

2008

2009

Group cost/income ratio since 2005 (in%)

2005

2006

2007

2008

2009

0 50 100 150 200 250

20 30 40 50 60

Group operating income since 2005 (CHFmillion)

2005

2006

2007

2008

2009

0 100 200 300 400 500

RetailandCommercialClients

PrivateBanking

CorporateCenter

13

Solid equity position The equity of SGKB group

amounted to 1.796 billion francs (+ 3.0% includ-

ing current profit). It exceeded the regulatory

requirements by 80.6%. The share of equity to the

consolidated balance sheet results in 7.6%, the

tier 1 ratio to 13.0%, which shows the extremely

solid financial situation of SGKB.

Major events

Change of company name   With effect from

January 1, 2010, the Swiss Code of Obligations

requires the trade name to state the company’s

legal form. The 2009 annual general meeting

resolved to implement the new rule, by changing

the trade name to “St.Galler Kantonalbank AG”,

and amending the Articles of Association accord-

ingly.

Changes in management structure  With effect

from November 17, 2009, both subsidiaries,

Hyposwiss Zurich and Hyposwiss Geneva were

integrated into a holding structure. Firstly, this

simplifies the management structure. The mem-

bership of the Boards of Directors of all three enti-

ties (the holding company, Zurich and Geneva) is

now identical. Secondly, cooperation between

them is now closer, especially on strategic issues.

The two legally separate subsidiaries remain inde-

pendent in operational terms. Their cooperation

extends in particular to the fields of corporate

development, marketing and communications,

investment management, controlling and risk

management.

The establishment of the holding structure com-

pletes the integration of Hyposwiss Geneva into

the Group. The holding company itself has no

human resources.

kk For further information, see Corporate Governance, p. 22

Changes in the Board of Directors  The 2009

annual general meeting elected Kurt Rüegg, a

senior partner of Swiss Capital Group AG, as a

new member of the Board. It re-elected the three

serving members for a further three-year term of

office. Dr. Franz Peter Oesch, Chairman, and

Hans-Peter Härtsch, Director, were confirmed in

office. Both have been members of the Board

of Directors since the part-privatization of the

Cantonal Bank of St.Gallen in 2000. Thomas A.

Gutzwiller, who has been a member of the Board

of Directors since 2006, was also re-elected.

kk For further information, see Corporate Governance, p. 22

Subsidiary opened in Germany On April 24,

2009, a social event was held at the subsidiary in

Munich to launch the new subsidiary, St.Galler

Kantonalbank Deutschland AG, with the general

public. Business operations commenced on May

18, 2009. With this new corporate entity, the

Cantonal Bank of St.Gallen is pursuing the inter-

national trend towards onshore banking, as part

of its strategy.

Roland Ledergerber (Chief Executive Officer),

Daniel Lipp, Siegfried Peyer and Stefan Klinger

were elected to the Board of Directors. They were

followed, on January 29, 2010, by German

market-based personalities, Professor Wolfgang

Gerke and Günter T. Schlösser.

Group net new money (CHFmillion)

ClientassetsGroup,Dec.31,2008

Netnewmoney

Marketperformance,includinginterestanddividends2009

ClientassetsGroup,Dec.31,2009

25 000 30 000 35 000 40 000

+ 458(1.2%)

37 673

+ 2848(7.6%)

40 980

14

CantonalBankofSt.Gallen [ Annual Report 2009 ]

[ 2 ] 2009 Financial Year Cantonal Bank of St.Gallen Group

Renewal of management posts in Client

Service   A total of seven new executive positions

were filled in the Retail and Commercial Clients

Division, and a further five in Private Banking. Six

of these positions were filled internally, from the

own Management Development Pool.

Private and Retail Clients

pp Urs Cavelti, new Head of Western Market

Region (previously Manager, Wil Branch)

pp Giuseppe Antoniolli, new Head of Key

Accounts (previously Manager, Uzwil Branch)

pp Bruno Colle, new Manager, Uzwil Branch (new)

pp Daniel Geiser, new Manager of Retail Clients,

St. Gallen Branch (new)

pp Manfred Seebacher, new Manager,

St. Margrethen Branch (previously Manager

Retail Clients, St. Margrethen Branch)

pp Markus Rusch, new Manager, Wil Branch

(previously Deputy Branch Manager,

St. Gallen Branch )

pp Raphael Wenk, new Manager, Rheineck

Branch (previously Team Leader Finance,

St. Gallen Branch)

Private Banking

pp Bruno Holenstein, new Head of Eastern

Switzerland Market Region (previously Head of

Western Market Region, Private and Retail

Clients)

pp Tobias Wehrli, new Head of External Asset

Managers Team (new)

pp Martin Künzler, new Head of Institutional

Investors Team (new)

pp Pius H. Seitz, new Head of Key Clients and

Prospecting (previously Head of Market)

pp Bruno Bollhalder, new Manager,

St. Margrethen Branch (new)

Positioning as an investment advisory bank  To

focus on its clientele in a more targeted fashion,

while becoming Eastern Switzerland’s leading

investment bank, the parent company’s Private

Banking Division reorganized in 2009. A new,

specialized Key Clients Team provides services in

the upper private banking segment and to family

offices. The External Asset Managers Service Desk

was moved to St. Gallen from Zurich (joint desk

with Hyposwiss Zurich) at the end of the year, with

enhanced professional resources. Market pros-

pecting for business with institutional clients was

also intensified.

Back­office centralization  As part of the ongo-

ing review of potential for synergy in organisation

and structure, and in the light of the lower mar-

gins in the investment advice, the Board of

Directors of the Cantonal Bank of St.Gallen re-

solved, on November 13, 2009, to centralize vari-

ous back-office departments of the Hyposwiss

Zurich subsidiary. With effect from the third

quarter of 2010, this has involved moving three

departments (foreign exchange and securities

trading, securities processing and payment trans-

actions) to the head office in St. Gallen.

Rising shareholder numbers    The Cantonal

Bank of St.Gallen enjoys the trust not only of its

clients, but of an ever-growing number of share-

holders. At December 31, 2009, 30 866 people

held SGKB shares (+2760 since December 31,

2008). Almost 60% hold less than 25 shares,

documenting a wide spread of shareholders. At

the same time, around 80% are from the Can-

tons of St. Gallen and Appenzell Ausserrhoden,

reflecting the Bank’s strong regional roots.

Unaltered dividend  The good course of its busi-

ness and strong equity base enable the Cantonal

Bank of St.Gallen to offer its shareholders another

attractive dividend of CHF 20, at the ordinary

general meeting on April 28, 2010. By distributing

around two-thirds of Group net profit to share-

holders, the SGKB is pursuing its shareholder-

friendly dividend policy.

Sargans Branch renovated    After 231 days

of conversion work, the completely renovated

Cantonal Bank of St.Gallen at Zürcherstrasse 1,

Sargans, reopened its doors on January 19. At the

same time Claudia Spadacini took over the branch

management from Werner Wüst, who has man-

aged the bank for 30 years and is retiring. In June,

the refurbished Sargans Branch became the first

building of the Cantonal Bank of St.Gallen to

receive a Minergie certificate (certificate for min-

imal energy consumption).

Market presence

The “Cantonal Bank” brand “Proximity to the

client and lifelong advice” was the focus of the

national brand management by the Associ ation of

Swiss Cantonal Banks (ASCB) in 2009.

The well-known TV advertisements (test of cour-

age, bottles, dogs, tip, flowers, concert, and

fashion show) ran on Swiss television and in the

regional media (Tele Ostschweiz and cinema ad-

15

vertising) for a total of 12 weeks. Regular surveys

proved convincingly that the adverts were mem-

orable and achieved a high degree of acceptance.

During the financial crisis, the “Cantonal Bank”

brand gained a much higher profile than in the

previous year (+10%). According to the brand

index, it remains attractive through its strong na-

ture and positive attitudes and emotions. Client

loyalty has remained stable. The brand is widely

liked and trusted in Switzerland.

Profiling as an investment advisory bank Based

on the adoption of its market presence in 2008,

the Private Banking Division again held a series of

specialist events and platforms for direct client

contact (Stock Exchange aperitifs, Stock Exchange

breakfasts, Investor’s Lunches, and Investor Day).

A particular highlight was the information series

“investing in turbulent times”, held at 13 venues

in the market region, which attracted 1300

guests, and which was very well received.

Focus on living in old age SGKB offers clients in

the 50+ age bracket a comprehensive package of

pension services under the name “Vivanti”. In 2009

the central theme was “living life’s second half”.

The core of the promotion were 10 regional infor-

mation events, attended by a total of 900 people.

Reconfiguration of Investment Center The

tasks and processes in the SGKB Group Invest-

ment Center, based at Hyposwiss Zurich, have

been clarified and redesigned as part of a project.

This included learning lessons from the financial

crisis on the provision of products and services,

and the internal processes for developing and im-

plementing investment policy, in the context of

asset management mandates.

16

CantonalBankofSt.Gallen [ Annual Report 2009 ]

[ 2 ] 2009 Financial Year Cantonal Bank of St.Gallen Group

2009 results

Lending activities intact Loans to retail, indus-

trial and corporate clients (the core business,

excluding corporations in public law and special

credit facilities) rose by CHF 798.6 million, or 5.4%.

In addition to excellent growth in business with

retail clients, of 5.2%, the growth in business with

industrial and corporate clients far exceeded

ex pectations, at 5.6%. On the one hand, the

historic low levels of interest rates have sustained

demand for loans. On the other hand, the excellent

market performance is attributable to successful

prospecting for custom. Low interest rates and ac-

tive market prospecting also contributed to in-

creased switching by clients from variable to

fixed-interest mortgages. This has given clients a

medium-term hedge against rising interest rates.

Trust of investors confirmed Client assets also

recorded pleasing progress, with CHF 522.8 mil-

lion of net new money, or 4.3%. SGKB was de-

lighted to retain the many clients and client assets

won primarily from the major banks, in the wake

of last year’s financial crisis. Clients remained

appreciative of the values of security, reliability,

accountability and regional roots, which the

Cantonal Bank of St.Gallen embodies. Including

other client business and market performance,

client assets rose. At times of uncertain trends on

the stock market, and low interest rates, demand

for the Unica shareholder savings account, with its

preferential and bonus interest, was extremely

strong. This product has provided an attractive in-

vestment alternative for all shareholders.

Retail and Commercial Clients – The Retail and Commercial Clients Division

has built on last year‘s successes. Excellent growth in business volume is

confirmation of good market positioning and client proximity, despite condi-

tions of extreme competitive pressure. Net interest income continued to rise

strongly. Low valuation adjustments, provisions and losses also reflect the

sound situation of risk exposure.

Group loans to clients (CHFmillion)

LoanstoclientsGrouptotal,Dec.31,2008

RetailandCommercialClients

SGKBPrivateBanking

Hyposwiss /SGKBGermany

LoanstoclientsGrouptotal,Dec.31,2009

17 000 17 500 18 000 18 500

682(3.8%)

17 945

61(0.3%)

– 183(–1.0%)

18 505

17

Higher net interest income If the net interest

income earned in the Corporate Center is distrib-

uted proportionately across the respective seg-

ments, net interest income from Retail and

Commercial Clients rose by 8.9% compared with

the previous year. Major contributing factors to

this clear rise were the higher lending volume and

the favourable low interest rates. Besides, the de-

clining interest margin on mortgage business in

past years was stabilized. By contrast, net fee and

commission income declined by CHF 5.1 million or

12.4%. This development is largely determined by

the cautious behaviour of investment clients. It led

to lower stock market turnover and correspond-

ingly low income from securities.

Strict cost control Administrative expenses stand

at CHF 126.7 million, exactly the level of the previ-

ous year. Sustainable cost savings have been

achieved in other operating expenses. On the

other hand, personnel expenses rose by 4.7%,

reflecting an increase in branch staffing.

Credit risk (CHFmillion)

1000

900

800

700

600

500

400

300

200

100

0 2007 2008 2009

2.0%

1.8%

1.6%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

Impaired loans

Non-performing loans

Provisions for credit risks

Provisions for credit risks in % of loans to clients (right-hand scale)

k Details, p. 36

Geographical spread

CantonsofSt.Gallenand AppenzellAR

Adjacentcantons (GR,TG,ZH,AI,SZandGL)

Othercantons

Foreignclients(Lombardloans)

Cover

Mortgagecover

Othercover

Nocover

Client segment

Industrialandcorporate

Naturalpersons

Corporationsinpubliclaw

Parent Company loan portfolio 2009 (in%)

17.9 bnCHF

17.9 bnCHF

4

63

33

90

28

77

12

74

17.9 bnCHF

18

CantonalBankofSt.Gallen [ Annual Report 2009 ]

[ 2 ] 2009 Financial Year Retail and Commercial Clients

Lending policy

The lending policy of the Cantonal Bank of St.Gallen is oriented towards the principles

of the market economy. Even if there is no statutory requirement to implement public

policy, we accept that we have a responsibility for the cantonal economy, through our

lending policy. Whenever we agree to a loan, key factors in our assessment are credit-

worthiness and sustainability. Our business is oriented primarily towards the cantons of

St. Gallen and Appenzell Ausserrhoden (including the adjacent municipalities outside

those cantons). The Bank is very restrained and selective in its credit relations outside the

cantons (extra-cantonal finance to extra-cantonal clients). The Bank only grants loans to

foreign debtors against provision of collateral security at the Cantonal Bank of St.Gallen

(Lombard loans). The assessment of creditworthiness of every credit transaction also

examines ecological risks.

Top­quality loan portfolio Our risk exposure situ -

ation still appears highly satisfactory. Indicators of

the top quality of our loan portfolio are the very

low level of provisions for credit risks and losses

(CHF 0.8 million) and the positive trend in pay-

ments of outstanding interest and capital.

19

11

Results 2009

The Private Banking Division (parent company

St.Galler Kantonalbank, subsidiaries Hyposwiss

Zurich and Geneva, and the newly founded bank-

ing subsid iary in Munich) can again look back on

a very eventful year in 2009. Because the invest-

ment advice was especially hard hit by the finan-

cial crisis, there were repercussions in particular

for the results of the private banking business.

Operating profit amounted to CHF 38.4 million,

signifying a fall of 62.1% in comparison with the

previous year. The actual core business of the Pri-

vate Banking Division, namely fee and commis-

sion income, recorded a decline of CHF 30.5

million, or 20.4%. This is largely attributable to

the portfolio-based income components (mainly

fund and asset management business). Transac-

tion-dependent income was down 11.7%. Net

interest income fell by CHF 8.8 million, or 15.5%,

Private Banking – Financial conditions remained tough for the Private Banking

Division during 2009, and a new banking subsidiary was also opened in

Munich. Favourable trends on the financial markets led to positive growth in

our clients‘ assets.

Currencies

PrivateBanking

Institutionalinvestors

Investment categories

Bonds

Equities

Structuredproducts

Fundunits

Fiduciarytransactions

Savings

Otherassets

Origin

Switzerland

Germany

RestofWesternEurope

EasternEurope

CentralandSouthAmerica

USAandCanada

Restofworld

Private Banking Client Assets 2009 (in%)

337

8

10 58

9

18

620

9

18 20

69

31

28.1 bnCHF

28.1 bnCHF

28.1 bnCHF

[ 2 ] 2009 Financial Year Private Banking 20

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Proportion of managed assets (CHFmillion)

30 000

27 000

24 000

21 000

18 000

15 000

12 000

9 000

6 000

3000

0 2007 2008 2009

200

180

160

140

120

100

80

60

40

20

Client assets in Private Banking

Managed proportion of client assets

Top line spread (right-hand scale) overall

Top line spread: income margin (= operating income / average client assets)

bps

with due allowance for the net interest income of

the Corporate Center. Investors temporarily held

very high levels of liquidity which, for reasons

of risk, the Bank placed mainly in investments

with matching maturities.

The year 2009 in Private Banking was also influ-

enced by the foundation of the new banking

subsidiary in Munich. For this reason, especially,

administrative expenses rose by 18.5%, to CHF

120.1 million. The first full-year consolidation of

Hyposwiss Geneva also contributed to this rise.

The previous year, the consolidation had only in-

cluded 10 months of expenses of the Geneva

banking subsidiary.

Client assets recorded a pleasing rise, due to the

market recovery which began in the second quar-

ter. Market performance amounted to 10.3%, or

CHF 2.6 billion. By contrast, the trend in net new

money was sluggish. Successes in winning new

business were offset by the partial disposal of a

major position of Hyposwiss Zurich, the continued

decline in Lombard loans, and international pres-

sure on Switzerland as a financial centre. Net

new money in the Private Banking Division totalled

CHF –64.5 million.

The rise in the proportion of asset management

mandates, from 13.5% to 15.1%, must be con-

sidered pleasing.

Net new money in Private Banking (PB) (CHFmillion)

ClientassetsPBDec.31,2008

NetnewmoneyPrivateBanking

NetnewmoneyInstitutionalinvestors

Marketperformance,incl.interestanddividends

ClientassetsPBDec.31,2009

20 000 22 000 24 000 26 000 28 000

– 292(–1.1%)

25 571

227(0.9%)

2631(10.3%)

28 138

21

[ 3 ] Corporate Governance

As a stock corporation listed on the stock market, the Cantonal Bank of

St.Gallen is bound to provide information on its corporate governance in

accordance with the SIX Swiss Exchange Directive. The comlete report is

included in the German version of the Annual Report, starting on page 72.

The following chapters are an excerpt.

Group structure

Retail and Commercial Clients

Private Banking Service Center

Subsidiary Companies (100 %)Parent Company

Finance and Risk Management

Zurich Geneva

SGKBDeutschland

Holding Company

as of Jan. 1, 2010

22

CantonalBankofSt.Gallen [ Annual Report 2009 ]

1.8%

7.5%

9.8%

25.5%

54.8%

Group structure and shareholders

The Cantonal Bank of St.Gallen is a stock corpo -

ration listed on the SIX Swiss Exchange and has its

head office in St. Gallen. Detailed information on

the consolidation appears in the financial section

of the German version on p. 99. In the divisional

accounts the Finance and Risk Management Divi-

sion and the Service Center are summarized under

the heading “Corporate Center” in that section.

Holding 54.8% of the share capital, the Canton of

St. Gallen is the only shareholder registered with a

stake of 3% or more in the entire share capital.

The cantonal legislation prescribes that the can-

ton‘s share must be at least 51%. There are no

cross-holdings with other organisations.

Capital structure

The share capital of the Cantonal Bank of

St.Gallen is CHF 390.1 million, divided into 5.573

million registered shares of nominal value CHF 70

each. The conditional capital amounted to CHF

8.8 million on December 31, 2009, and is reserved

for the employee share ownership programme,

approved by the Board of Directors, in accordance

with Article 3b of the Articles of Association of

the Cantonal Bank of St.Gallen. The Board of

Dir ectors passes the resolution to issue the rele-

vant shares or option rights and stipulates the

issue and option conditions. The current share-

holders are not entitled to a subscription right

and pre-emptive right. The financial section con-

tains detailed infor mation on changes to capital

during the last three years on p. 34.

Ordinary share capital CHF 390 139 820

Authorised share capital –

Conditional share capital CHF 8 806 000

Registered shares 5 573 426 units

(nominal value CHF 70.00)

Outstanding employee options 16 868 units

Ticker symbol/security SGKB/1148406

identification number

As of Dec. 31, 2009

The shares of the Cantonal Bank of St.Gallen are

not subject to any statutory limitations on trans-

ferability. Each share carries one vote. The voting

right may, however, only be exercised if the bearer

expressly states that he has purchased the shares

in his own name and for his own account.

The Board of Directors may enter nominees with

voting rights in the register of shareholders up to

3% of the share capital entered in the commercial

register. An entry may be made above this limit,

provided the names, addresses and shareholdings

of the persons with 0.5% or more of the share

capital are disclosed. When new shares are issued,

each shareholder is entitled to the percentage that

is proportionate to his current investment. The

general meeting of shareholders may abolish this

subscription right if there are important reasons

for doing so.

The only outstanding options were 16 868 em-

ployee options, which are described on p. 35. For

the exercise of these options, shares are taken

from the conditional share capital created for this

purpose or from the Bank’s own portfolios. This

would increase the share capital by a maximum of

CHF 1.2 million.

CantonofSt.Gallen Individuals

SGKBemployees Registrationpending

Corporates Ownportfolio

Shareholder structure

0.6%

5.6 mshares

23

options per share are allocated free of charge.

Members of the Management Board are provided

with a company car. The Cantonal Bank of St.Gallen

also allows all of its employees, including mem-

bers of the Management Board, staff terms for

the banking ser vices they use. There is no con-

tractual provision for severance pay.

The Board of Directors sets the level of variable

remuneration each year. For the financial year

2009, it did so at its meeting of February 8, 2010.

The amount is based on profit and performance,

in line with individual target figures. These, in

turn, are based on the course of business and

strategic development of the Cantonal Bank of

St.Gallen. Account is also taken of individual

quantitative and qualitative requirements from

the areas managed by the Management Board

members. At Group level, the decisive factors are

net profit, net growth in client loans and assets,

and cost-income ratio. Around two-thirds of the

variable remuneration level is determined by

achievement of Group targets, while around one-

third depends on the degree of fulfilment of indi-

vidual targets. The Board of Directors sets the

Group targets and the individual annual targets

for the CEO at the beginning of the financial year.

The CEO sets the individual targets for the mem-

bers of the Management Board.

Details of the remuneration paid to the Manage-

ment Board for the financial year 2009 are shown

in the financial section on page 39. The basis of

calculation of the purchase price of the allocated

shares and the exercise price of the options is the

qualifying stock market price (average volume-

weighted price on the trading days in January

2010: CHF 486.05). The VRA-P determines the

purchase price of the shares annually. For the

2009 variable remuneration, the purchase price

amounts to 80% of the qualifying stock market

price. The exercise price of the options corre-

sponds to the qualifying stock market price. Time

to maturity is four years from allocation. The exer-

cise period begins on expiry of a three-year hold-

ing period. The options are transferred to the

ownership of beneficiaries annually, in a propor-

tion of one-third of the total number of options

allocated. This occurs for the first time one year

after allocation. An option confers entitlement to

buy one share. The outstanding options thus con-

fer entitlement to subscribe to a total of 16 868

shares, of nominal value CHF 1.2 million. Cashless

exercise is possible. Details of the outstanding

options appear in the financial section on page 35.

Compensation, shareholdings and loans

The Board of Directors specifies the criteria for

determining the remuneration payable to the

members of the Board of Directors and the Man-

agement Board, and its actual amount. The

Human Resources and Organisation Committee of

the Board of Directors (VRA-P) establishes the rele-

vant decision-making principles. It also regularly

reviews the remuneration system and the levels of

remuneration of the Board of Directors and the

Management Board. The Management Board is

not present when agenda items relating to

remuner ation of the Board of Directors and the

Management Board are dealt with, though the

CEO is involved, in a consultative role, in the

discussion of remuneration of the members of the

Management Board.

Board of Directors  In 2009 the principles of re-

muneration to the Board of Directors were revised.

This involved abolition of the variable remuner-

ation. At the same time, the link to long term

success was strengthened. The Board of Directors

now receives a fixed fee, 70% of which is paid in

cash and 30% in the form of shares with a three-

year holding period. In setting the amount, the

Board of Direct ors was guided by the average total

remuneration package in the years 2005 – 2008.

The Board of Directors’ remuneration consists of a

basic fee for all members of the Board, plus addi-

tional payments to the Vice-Chairman, for chair-

manship or committee membership, and to the

Chairman of the Pension Scheme. An attendance

allowance of CHF 500 is paid per meeting. Details

of the remuneration paid to the Board of Directors

for financial year 2009 appear in the financial sec-

tion on page 38. The purchase price of the allo-

cated shares is determined annually by the VRA-P.

In the 2009 remuneration package, it amounts to

80% of the qualifying stock market price (average

volume-weighted price on the trading days in

January 2010: CHF 486.05). The terms of all busi-

ness relations with the members of the Board of

Directors are equal to those applied to outsiders.

Directors in particular do not benefit from staff

terms for banking services.

Management Board  The remuneration paid to

the Management Board consists of fixed salary,

agreed by contract, and variable remuneration

elements. The variable remuneration is paid in

equal proportions in cash and in the form of

shares of the Cantonal Bank of St.Gallen, with

a three-year holding period. In addition, four

[ 3 ] Corporate Governance Compensation, shareholdings and loans 24

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Staff loans    The general conditions of employ-

ment of the Cantonal Bank of St.Gallen stipulate

special terms for credit lines, mortgages and loans

for all employees, apprentices and pensioners.

These special terms are limited to a preferential

interest rate that is customary in banking. Mem-

bers of the Board of Directors are expressly ex-

cluded. More details of the loans and credit lines

available to members of the Board of Directors,

the Management Board and related persons are to

be found in the financial section on page 38.

Shareholders’ participation, changes of control and auditors

There are no restrictions on shareholders’ voting

rights within the Cantonal Bank of St.Gallen. The

statutory provisions concerning the exercise of

these rights, the majorities required for share-

holder resolutions, convening the general meeting

of shareholders, the obligation to make an offer in

cases of intended acquisition and the register of

shareholders are governed by the Swiss Code of

Obligations and the Stock Exchange Act. Share-

holders who represent shares with a nominal value

of CHF 350 000 may request that items for dis-

cussion be placed on the agenda for submission

to the annual general meeting. The deadline for

submitting such requests is published in the Swiss

Official Gazette of Commerce (SOGC) and at least

one daily newspaper with cantonal circulation.

There are no Articles of Association within the

Group concerning an obligation to make an offer

or change of control clauses in favour of the mem-

bers of the Board of Directors and the Manage-

ment Board.

External auditor  PricewaterhouseCoopers AG,

of St. Gallen, have acted as the external auditors

of the Cantonal Bank of St.Gallen since the finan-

cial year 1995. The firm is elected for one year

respect ively and is a recognized auditor of banks.

The Lead Auditor may execute the commission

for seven years. The Lead Auditor has been Beat

Rütsche since financial year 2009. The external

auditor charged the Cantonal Bank of St.Gallen a

total of CHF 1 573 000 for the year under review,

of which CHF 1 257 000 was for due auditing of

the whole Group and CHF 149 000 for audit-

related services, especially GIPS (Global Investment

Performance Standards) and QI (Qualified Inter-

mediary) and CHF 167 000 for tax advice and

other services.

All audit reports are examined by the Audit Com-

mittee of the Board of Directors and usually

discussed on the Board of Directors or Audit Com-

mittee in the presence of the Lead Auditor. The

Audit Committee also appraises the risk assess-

ment and the resultant audit planning, as well as

the auditor’s performance and independence.

Information policy

The latest information and the complete Articles

of Association of the Cantonal Bank of St.Gallen

are available on the Internet at www.sgkb.ch.

Anyone with an interest may register on this site

to receive ad hoc notices from the Cantonal Bank

of St.Gallen. Public announcements are published

in the SOGC and at least one daily newspaper

with cantonal circulation. If the law does not

stipulate personal notification, the prescribed

notifications to the shareholders are effective

upon publication in the SOGC.

The Cantonal Bank of St.Gallen publishes its

company results every six months. All registered

shareholders receive a short report (letter to

shareholders) which provides an overview of the

course of business and activities. The annual re-

port and the letters to shareholders are available

on the homepage of the Cantonal Bank of

St.Gallen or may be ordered from the addresses

mentioned on page 49 of this report.

25

[ 3 ] Risk Situation Credit risks

Like other banks or financial institutions, the

Cantonal Bank of St.Gallen Group also faces vari-

ous risks. Managing credit and market risks as well

as operational risks is considered to be one of the

most important tasks of the Management Board.

Risk management is based on the risk policy

issued by the Board of Directors, which was also

reviewed during the year of this report. General

information on the risk management process

appears in the Risk Management section of the

Annexe to the Group Financial Statements. The fol-

lowing is a description of the Group‘s current risk

exposure, broken down into the various risk types.

Credit risks

Credit assessment    Controls were applied to

lending activities in the form of comprehensive

credit assessments by both the internal and exter-

nal audit functions. Large individual exposures and

a targeted selection of positions underwent more

detailed assessment. The main working processes

were also appraised. In summer 2009, the assess-

ment covered 9% of all loans to clients (previous

year 9%) and 16% of impaired loans (previous

year 25%). This confirmed adequate coverage of

risk exposure by valuation adjustments. Thus, the

Group shows CHF 12.6 million under valuation

adjustments, provisions and losses for the year

under review (previous year: CHF 10.1 million).

Breakdown of rating categories  General infor-

mation on the rating system appears in the Risk

Management section of the Annexe to the Group

Financial Statements.

The chart below shows the distribution of credit

lines across the rating categories, for clients sub-

ject to account-keeping obligations.

Rating 1 represents the best risk, and ratings 8 to

10 the highest risks. In view of the very large pro-

portion of client volume in rating category 6, this

has been subdivided into sub-categories a to c, to

present a more detailed picture. Ratings 9 and 10

normally represent impaired loans, which are

handed by the Special Finance Department. The

chart below does not show these (see next sec-

tion).

Credit lines in rating category 6 (a, b and c) total

35.8% (or CHF 3.2 billion). These represent the

largest proportion, as last year (33.7%). A slight

downward trend is apparent in the rating levels.

This indicates a slow rise in the concentration in

rating categories 5 to 7, to the detriment of the

better rating categories.

Private individuals are assigned to risk categories

1 to 6, where 6 represents the lowest risk and 1

the highest.

[ 4 ] Risk Situation

Rating1

0

250 000 000

750 000 000

1250 000 000

1 750 000 000

500 000 000

1000 000 000

1 500 000 000

Rating2 Rating3 Rating4 Rating5 Rating6a Rating6b Rating6c Rating7 Rating8

Dec.31,2009

Dec.31,2008

Distribution of credit limits for clients subject to account-keeping obligations (parent company) (CHF)

26

CantonalBankofSt.Gallen [ Annual Report 2009 ]

The largest proportion (CHF 9.7 billion or 77.3%)

of credit lines for individuals falls into the second-

best risk level of 5 (previous year CHF 8.9 billion or

77.8%). CHF 2.4 billion (19.4%) was allocated to

risk level 4 (previous year CHF 2.1 billion or

18.2%). The breakdown into the various risk levels

has remained constant compared with the previ-

ous year.

Overall, the credit portfolio of the parent company

and of the Group is stable and of good quality.

Impaired loans   The Special Finance Department

manages loans, recover of which is thought to be

critical. The volume of these impaired loans

amounted to CHF 631.0 million (previous year

CHF 691.7 million), spread across 561 positions

(previous year 542). In the year under review, 102

positions at risk were settled (previous year 144),

though there were 121 new cases (previous year

87), especially of minor exposures. The average

exposure level has fallen further.

Non­performing loans    The total amount of

loans for which interest payments are considered

to be at risk (usually amounts outstanding more

than 90 days) or for which interest is no longer

charged was CHF 81.1 million at the end of

the year, or 0.4% of client loans (previous year

CHF 65.2 million or 0.4%). The corresponding

interest provisions amounted to CHF 2.4 million

or 0.4% of interest and discount income (previ-

ous year CHF 3.9 million or 0.6%). The actual

interest losses in 2009 amounted to CHF 1.0 mil-

lion or 0.2% of interest and discount income

(previous year CHF 1.2 million or 0.2%).

Risk diversification rules  As of December 31,

2009, there were no reportable concentration

risks, and the credit volume of the ten biggest

commercial borrowers amounted to CHF 984.8

million as of December 31, 2009, or 5.3% of

loans to clients (previous year CHF 990.2

million or 5.5%).

Country risks   As of the balance sheet cut-off

date, non-Swiss exposures amounted to CHF 2.9

billion or 12.4% of the balance sheet total (previ-

ous year CHF 2.8 billion or 12.6%). According to

the risk domicile principle, the need for valuation

adjustment at the end of 2009 was insignificant.

Market risks

The Group has a strategic risk limit for all market

risks. This limit is based on the method value-

at-risk (VAR) and is in reasonable proportion to the

Group’s available funds. Modern standard soft-

ware is used to measure the risk.

Market VAR for all positions at the end of 2009,

compared with 2008, was as follows:

(in 1000 CHF) Dec. 31, 2009 Dec. 31, 2008

Interest-rate risk 98 791 76 569

Currency risk 860 5 552

Share price risk 7 503 6 977

Precious metal risk 17 120

Diversification effect – 13 954 – 9 502

Total risk 93 217 79 716

The market value-at-risk was higher than the pre-

vious year, mainly due to the shift from variable to

fixed interest-rate mortgages which occurred in

2009 and led to a higher interest-rate risk. A his-

toric VAR is calculated.

Trading positions  The market risk of trading posi-

tions is measured by the same method and is also

monitored with a limit. Trading portfolio VAR, as of

December 31, 2009, amounted to CHF 1.5 million,

roughly equal to the previous year (CHF 1.8 million).

Balance­sheet interest­rate risks  Interest rate

risks on the balance sheet structure are also

monitored with a value-at-risk limit. Before allow-

ance for diversification, VAR in 2009 ranged from

CHF 93.6 million to CHF 132.7 million (previous

year CHF 76.6 million to CHF 114.4 million). Thus,

exposure to interest-rate risks remained low in

comparison to the book shareholders’ equity of

CHF 1796.4 million at December 31, 2009 (previ-

ous year CHF 1744.3 million). The sensitivity of

shareholders’ equity (modified duration) ranged

from 8.3% to 11.7% (previous year 7.6% and

10.3%). As of December 31, 2009, the modified

duration was 8.6% (previous year 8.8%).

Currency risks  The net foreign currency position

of the Group, including precious metals, was CHF

49.8 million at the end of 2009 (previous year CHF

4.5 million). The higher net foreign currency pos-

ition is primarily attributable to the shareholders’

equity of SGKB Deutschland AG, which is invested

in euro-denominated debt obligations to banks.

The positions in foreign currencies are mainly in

EUR and USD.

27

Securities price and liquidity risks  The secur-

ities shown on the balance sheet under financial

investments totalling CHF 1690.4 million (previ-

ous year CHF 1013.2 million) mostly consist of

good-quality listed securities or securities traded

on representative markets, most of which are

fixed-interest papers. These securities are usually

held until maturity and serve only to guarantee

the liquidity required by banking law. The hold-

ings are monitored as part of the control of bal-

ance-sheet interest-rate risks.

Other market risks  The Group held no positions

in commodities. As of December 31, 2009, the

Group held CHF 2.2 million in real estate intended

for resale (previous year CHF 2.4 million). The

number of properties rose from 7 to 8 during the

year under review.

Liquidity and refinancing risks    The liquidity

regulations were constantly adhered to. Liabilities

regarded as concentrated within the meaning of

Article 18 of the Implementing Ordinance of the

Federal Banking Law are duly reported to the

auditors. Three positions exceeded the reporting

limit as of December 31, 2009.

Due to its good rating, the Cantonal Bank of

St.Gallen can always meet its finance needs in the

inter-bank or capital markets. The upheavals and

strains on the international finance markets had

no negative impact on the Group’s liquidity situ-

ation. Like last year, net new money continued to

flow into the Cantonal Bank of St.Gallen. To

bridge any liquidity shortages, the Group also has

a bridge financing facility with the Swiss National

Bank. The Cantonal Bank of St.Gallen also has

securities eligible for repurchase, amounting to

CHF 1.4 billion, at its disposal. These are in the

form of long-term investments, and allow refi-

nancing by the Swiss National Bank at any time.

Operational risks

Internal control system  The Group maintains

an effective separation of functions and a well-

established internal control system and performs

sufficient management controls. Management is

of the opinion that the conditions required to

ensure the orderly conduct of business and for

prompt discovery of any major errors have been

established. Auditing the system of internal con-

trols is an important part of the work of the Intern-

al Audit Department. The quality of the central

transaction processes is monitored continuously

and reported.

Outsourcing risks  For a financial services pro-

vider, one of the main operational risks lies in the

security and reliability of its data processing op-

erations. All Group companies have outsourced

their information technology operations. Further

information can be found in the explanatory

notes on business activity, in the Annexe to the

Group Financial Statements. The outsourcing is

governed by contract. SGKB also has a security

plan which meets modern requirements and is

constantly updated.

In accordance with the audit reports, the FINMA

requirements on outsourcing are met.

Legal and compliance risks    The Legal and

Compliance Department closely monitors the re-

quirements of the laws and regulations and im-

plements them internally. It makes every effort to

prevent breaches of the law or infringements of

the rules by the Bank, its organs or employees.

This involves chiefly, though not only, the Agree-

ment on the Swiss Banks’ Code of Conduct with

regard to the Exercise of Due Diligence (VSB 08)

and the relevant statutory provisions and ordin-

ances in the field of combating money launder-

ing. It is also responsible for ongoing further

vocational training of the staff in the Department

itself, and for training all client relationship man-

agers and executives in the tasks of the Legal and

Compliance Department. Client relationships are

treated differently according to risk estimation.

Where applicable, a graduated due diligence ob-

ligation must be met. Regular reporting also as-

sures the flow of information from the subsidiaries

to the department of the parent company with

specific responsibility for handling the subject. In

add ition to twelve threatened legal proceedings,

four court cases are currently pending against the

SGKB or its subsidiaries. The appropriate provi-

sions for lawsuits have already been made where

this was considered necessary.

Our Geneva subsidiary faces claims relating to the

Bernard Madoff fraud case, for which appropriate

provisions have been made.

[ 4 ] Risk Situation Market risks 28

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Group Balance Sheet

Assets inCHF000s Dec. 31, 2009 in% Dec.31,2008 in% Change in%

Liquidfunds 191701 0.8 187087 0.8 4614 2.5

Receivablesfrommoneymarketinstruments 17983 0.1 22111 0.1 (4128) (18.7)

Duefrombanks 2491912 10.6 2728647 12.1 (236735) (8.7)

Duefromclients 2596269 11.0 2886156 12.8 (289887) (10.0)

Mortgageloans 15908293 67.7 15058640 66.7 849653 5.6

Total loans to clients 18 504 562 78.7 17 944 796 79.5 559 766 3.1

Securitiesandpreciousmetalstradingportfolios 9897 0.0 11117 0.0 (1220) (11.0)

Financialinvestments 1692654 7.2 1015645 4.5 677009 66.7

Non-consolidatedparticipations 21255 0.1 19236 0.1 2019 10.5

Fixedassets 167735 0.7 172995 0.8 (5260) (3.0)

Intangibles 106791 0.5 135027 0.6 (28236) (20.9)

Accruedincomeandprepaidexpenses 95461 0.4 105910 0.5 (10449) (9.9)

Otherassets 204246 0.9 234767 1.0 (30521) (13.0)

Total assets 23 504 195 100.0 22 577 338 100.0 926 857 4.1

Ofwhich:

–Totalsubordinatedamountsreceivable 190 0 190 –

–Totalduefromnon-consolidatedparticipations 72971 73697 (726) (1.0)

Liabilities inCHF000s Duetomoneymarketinstruments 1317 0.0 360 0.0 957 –

Duetobanks 168754 0.7 561239 2.5 (392485) (69.9)

Duetoclientsinsavingsanddeposits 8840269 37.6 6817498 30.2 2022771 29.7

Otherduetoclients 6813818 29.0 6944182 30.8 (130364) (1.9)

Medium-termnotes 930578 4.0 1123693 5.0 (193115) (17.2)

Total client funds 16 584 666 70.6 14 885 373 65.9 1 699 293 11.4

Debtandloanssecuredbymortgages 4363307 18.6 4754203 21.1 (390896) (8.2)

Accruedexpensesanddeferredincome 148930 0.6 173698 0.8 (24768) (14.3)

Otherliabilities 257584 1.1 277492 1.2 (19908) (7.2)

Valuationadjustmentsandprovisions 183264 0.8 180700 0.8 2564 1.4

Reservesforgeneralbankingrisks 0 0.0 3152 0.0 (3152) (100.0)

Sharecapital 390140 1.7 390140 1.7 0 0.0

Capitalreserve 86808 0.4 83204 0.4 3604 4.3

Profitreserve 1167664 5.0 1109002 4.9 58662 5.3

lesstreasuryshares (16383) (0.1) (12360) (0.1) (4022) 32.5

Groupnetprofit 168143 0.7 171135 0.8 (2992) (1.7)

Total shareholders’ equity 1 796 372 7.6 1 744 273 7.7 52 099 3.0

Total liabilities 23 504 195 100.0 22 577 338 100.0 926 857 4.1

Ofwhich:

–Totalsubordinatedamountspayable 99780 99980 (200) (0.2)

–Totalduetonon-consolidatedparticipations 1144905 1217454 (72550) (6.0)

–TotalduetotheCantonofSt.Gallen 715728 792873 (77145) (9.7)

Off-Balance-Sheet Transactions inCHF000s Contingentliabilities 275707 358293 (82586) (23.0)

Irrevocablecommitments 264196 147300 116896 79.4

Liabilitiesforcallsonsharesandotherequities 57427 60390 (2963) (4.9)

Derivativefinancialinstruments:

–Contractvolume 12977176 9488240 3488936 36.8

–Positivereplacementvalues 175302 203283 (27981) (13.8)

–Negativereplacementvalues 173170 172405 765 0.4

Fiduciarytransactions 2476935 4224098 (1747163) (41.4)

[ 5 ] Financial InformationFigures shown in the financial section have been rounded up or down. Hence the respective totals may not add up exactly.

32

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Group Income Statement

inCHF000s 2009 2008 Change in%

Interestanddiscountincome 547090 665690 (118599) (17.8)

Interestanddividendincomeontradingportfolios 192 394 (202) (51.3)

Interestanddividendincomeonfinancialinvestments 32431 22359 10072 45.0

Interestexpenses 261763 383486 (121723) (31.7)

Net interest income 317 950 304 956 12 993 4.3

Commissionincomefromlendingactivities 2963 2326 637 27.4

Commissionincomefromsecuritiesandinvestmentactivities 146447 184316 (37869) (20.5)

Commissionincomefromotherservicefeeactivities 18522 18002 519 2.9

Commissionexpenses 14556 16633 (2076) (12.5)

Net fee and commission income 153 375 188 011 (34 636) (18.4)

Net trading income 39 496 28 427 11 069 38.9

Resultsfromthesaleoffinancialinvestments 5567 3949 1618 41.0

Incomefromparticipationsaccountedbyequitymethod 524 118 406 –

Incomefromnon-consolidatedparticipations 3966 2148 1818 84.6

Resultsfromrealestate 1699 1371 328 23.9

Otherordinaryincome 1536 1766 (230) (13.0)

Otherordinaryexpenses 185 5814 (5629) (96.8)

Net other income 13 107 3 538 9 569 –

Operating income 523 928 524 933 (1 005) (0.2)

Personnelexpenses 169554 162708 6846 4.2

Otheroperatingexpenses 103336 113069 (9733) (8.6)

Administrative expenses 272 889 275 777 (2 888) (1.0)

Gross profit 251 039 249 156 1 883 0.8

Depreciationandwrite-offsonfixedassetsandparticipations 10189 10758 (569) (5.3)

Depreciationofintangibles 31323 44392 (13069) (29.4)

Valuationadjustments,provisionsandlosses 12633 10074 2559 25.4

Operating profit (interim result) 196 894 183 932 12 962 7.0

Extraordinaryincome 9547 26702 (17155) (64.2)

of which dissolution of reserves for general banking risks 3 152 22 278 (19 126) (85.9)

Extraordinaryexpenses 565 744 (179) (24.1)

Group profit before taxes 205 876 209 890 (4 014) (1.9)

Taxes 37733 38755 (1022) (2.6)

Group net profit 168 143 171 135 (2 992) (1.7)

33

Notes to the Balance Sheet

Statement of Equity inCHF000s

Sharecapital

Capitalreserve

Profitreserve

Lesstreasury

shares

Reservesforgeneral

bankingrisks

Groupnetprofitoftheyear Total

Total equity at January 1, 2007 557 343 83 615 798 672 (10 909) 48 400 228 555 1 705 676

Parvaluerepayment (167203) 560 (166643)

Dividend 0

Allocationtoreserves 228555 (228555) 0

Acquisitionoftreasuryshares (89641) (89641)

Disposaloftreasuryshares 85065 85065

Valuationgainsontreasuryshares 1362 2 1364

Usage (22970) (22970)

Groupnetprofit 226682 226682

Total equity at December 31, 2007 390 140 84 977 1 027 229 (14 925) 25 430 226 682 1 739 533

Dividend 577 (144909) (144333)

Allocationtoreserves 81773 (81773) (0)

Acquisitionoftreasuryshares (44605) (44605)

Disposaloftreasuryshares 47170 47170

Valuationlossesontreasuryshares (2350) (2350)

Usage (22278) (22278)

Groupnetprofit 171135 171135

Total equity at December 31, 2008 390 140 83 204 1 109 002 (12 360) 3 152 171 135 1 744 273

Dividend 769 (111469) (110700)

Allocationtoreserves 59666 (59666) 0

Acquisitionoftreasuryshares (46321) (46321)

Disposaloftreasuryshares 42299 42299

Valuationgainsontreasuryshares 2835 2835

Usage (3152) (3152)

Groupnetprofit 168143 168143

Exchangeratedifferences (1003) (1003)

Total equity at December 31, 2009 390 140 86 808 1 167 664 (16 383) 0 168 143 1 796 372

Reserves not subject to profit distribution (Swiss GAAP FER 24) Dec. 31, 2009 Dec.31,2008 Dec.31,2007

Statutoryorlegalreservesnotsubjecttoprofitdistribution 211453 240717 223116

Article 5 of the Banking Act was repealed on January 1, 2009, without replacement. Since then, allocations and uses of reserves have been governed only by the provisions of the Code of Obligations.

Dec. 31, 2009 Dec.31,2008

Share Capital inCHF000s

Nominalvalue

Numberofshares

Capitalsubjecttodividends

Nominalvalue

Numberofshares

Capitalsubjecttodividends

Share capital

Registeredshares(nominalCHF70pershare) 390140 5573426 390140 390140 5573426 390140

Total share capital 390 140 5 573 426 390 140 390 140 5 573 426 390 140

Authorized share capital 0 0

–ofwhichrealizedcapitalincreases 0 0

Conditional share capital

–January1 8806 125800 8806 125800

–increase 0 0 0 0

–decrease 0 0 0 0

–December31 8806 125800 8806 125800

Significant Shareholders and Groups Dec. 31, 2009 Dec.31,2008

of Shareholders with Pooled Voting Rights inCHF000s Nominal in% Nominal in%

Withvotingrights:CantonofSt.Gallen 213913 54.8 213909 54.8

34

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Own shares and options on registered shares 2009 2008

Registered shares in own portfolio NumberAverage

transactionprice NumberAverage

transactionprice

OwnsharesatJanuary1 31142 396.90 29912 498.97

+Purchases 108478 411.90 99643 419.45

–Sales (104359) 416.78 (98413) 426.34

Optionexercisetransactions:

+Purchases 4680 350.08 6176 454.99

–Sales (4680) 390.83 (6176) 293.99

Portfolio at December 31 35 261 464.61 31 142 396.90

includingreservedforemployeeshareownershipprogrammes 19931 465.65 21364 402.80

Options on registered shares held by related persons NumberAverage

exerciseprice NumberAverage

exerciseprice

Allocated options

PortfolioatJanuary1 16030 435.08 30852 409.00

Allocation 7308 379.80 2668 468.85

Exercise (4680) 331.14 (6176) 293.99

Expired (1790) (11314)

Portfolio at December 31 16 868 443.17 16 030 435.08

of which options transferred to ownership

PortfolioatJanuary1 9078 391.04 11395 319.97

Allocation 4422 491.69 3859 431.95

Exercise (4680) 331.14 (6176) 293.99

Expired (1790)

Portfolio at December 31 7 030 490.73 9 078 391.04

ofwhichexercisableonDec.31 2468 404.85 3136 294.85

Registered shares held by related persons Number Number

MembersoftheBoardofDirectors 6523 5771

MembersoftheManagementBoard 7784 5964

Total at December 31 14 307 11 735

ThesectiononCorporateGovernancecontainsexplanatoryinformationontheshareownershipandoptionprogrammes.

Option portfolio at Dec. 31, 2009 – members of the Management Board1

Year of allocation 2009 2008 2007 2006 2005 Total

Exercisableat 20.03.12 20.03.11 22.03.10 22.03.09

Optionexpirydate 20.03.13 20.03.12 22.03.11 22.03.10

Subscriptionratio 1:1 1:1 1:1 1:1

Exerciseprice(CHF) 379.80 468.85 553.75 404.85

Total option portfolio (allocated) 7 308 2 668 4 424 2 468 16 868

Previousyear 2 668 4 424 5802 3136 16 030

1 Includingformermembersoforgans

35

Summary of Collaterals inCHF000s Mortgagecollateral

Othercollateral

Withoutcollateral 1 Total

Loans to clients

Duefromclients 526391 736760 1333118 2596269

Mortgageloans: –residentialrealestate 12890315 0 37571 12927886

–officeandbusinessbuildings 1525160 0 15206 1540366

–tradeandindustry 980984 0 10646 991630

–other 373435 36552 38424 448411

Total loans to clients Dec. 31, 2009 16 296 285 773 312 1 434 965 18 504 562

Dec.31,2008 15385577 1042615 1516604 17944796

Off-balance sheet transactions

Contingentliabilities 48399 55444 171864 275707

Irrevocablecommitments 28604 6102 229490 264196

Liabilitiesforcallsonsharesandotherequities 0 0 57427 57427

Total off-balance sheet Dec. 31, 2009 77 003 61 546 458 781 597 330

Dec.31,2008 38864 133738 393381 565983

1 Including loans to clients with provisions

Impaired Loans inCHF000s Dec. 31, 2009 Dec.31,2008 Change in%

Totalimpairedloans,gross 630985 691661 (60676) (8.8)

Estimatedproceedsfromliquidation (451217) (508325) 57108 (11.2)

Total impaired loans, net 179 768 183 336 (3 568) (1.9)

Individualprovisions 166807 173927 (7120) (4.1)

Provisionsforcreditriskin%ofimpairedloans,net 92.8% 94.9%

Impairedloansin%ofloanstoclients 1.0% 1.0%

Non-Performing Loans inCHF000s Dec. 31, 2009 Dec.31,2008 Change in%

Total non-performing loans 81 102 65 171 15 931 24.4

Non-performing loans are a component of impaired loans.

Valuation Adjustments andProvisions for Credit Risk inCHF000s Dec. 31, 2009 Dec.31,2008 Change in%

Valuationadjustmentsandprovisionsforcreditrisk(capital) 164400 170003 (5603) (3.3)

Valuationadjustmentsandprovisionsforcreditrisk(interest) 2408 3925 (1517) (38.7)

Total provisions for credit risk 166 807 173 927 (7 120) (4.1)

Valuationadjustmentsandprovisionsforcreditrisk(capital)in%ofloanstoclients 0.90% 0.97%

Non-performingloansin%ofloanstoclients 0.44% 0.36%

Rateofcapitalprovisions1 (0.02%) 0.03%

1 New valuation adjustments and provisions for credit risk (capital) in % of average loans to clients

36

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Valuation Adjustments and Provisions / Reserves for General Banking Risks inCHF000s Dec.31,2008 Usage

Doubtfulinterest,

recoveries

Creationtothedebit

oftheincomestatement

Redemptiontothecredit

oftheincomestatement Dec.31,2009

Valuationadjustmentsandprovisionsforcreditrisk 173927 (4509) 919 72077 (75606) 166807

Valuationadjustmentsandprovisionsforotherbusinessrisks 5375 (3644) 0 12965 (2057) 12638

Total 179 302 (8 153) 919 85 042 (77 664) 179 445

Provisionfordeferredtaxes 1398 0 0 2693 (272) 3819

Total valuation adjustments and provisions 180 700 (8 153) 919 87 735 (77 936) 183 264

Total reserves for general banking risks 3 152 0 0 0 (3 152) 0

Maturity Structure of Current Assets, Financial Investments and Liabilities to Third Parties inCHF000s Ondemand Redeemable

Duewithin3months

Duewithin3to12months

Duewithin12monthsto5years

Dueafter5years Immobilized Total

Current assets

Liquidfunds 191701 0 0 0 0 0 0 191701

Receivablesfrommoneymarketinstruments 524 0 6500 10959 0 0 0 17983

Duefrombanks 473454 27503 1787719 203236 0 0 0 2491912

Duefromclients 66338 213966 873363 419429 777936 245236 0 2596269

Mortgageloans 172923 1354719 656403 1597120 9394298 2732830 0 15908293

Securitiesandpreciousmetalstradingportfolios 6016 0 500 117 1187 2076 0 9897

Financialinvestments 18796 0 117985 292804 1107728 153108 2233 1692654

Total Dec. 31, 2009 929 753 1 596 188 3 442 470 2 523 665 11 281 149 3 133 250 2 233 22 908 708

Dec.31,2008 860217 3691563 3488805 2543854 8826268 2496341 2355 21909403

Liabilities

Duetomoneymarketinstruments 1317 0 0 0 0 0 0 1317

Duetobanks 57557 0 69783 41413 0 0 0 168754

Duetoclientsinsavingsanddeposits 0 7868224 6009 20893 112785 832358 0 8840269

Otherduetoclients 4522439 681858 980604 184917 218000 226000 0 6813818

Medium-termnotes 0 0 82407 346633 465358 36180 0 930578

Debtandloanssecuredbymortgages 0 0 444070 370495 1906127 1642615 0 4363307

Total Dec. 31, 2009 4 581 314 8 550 082 1 582 873 964 351 2 702 270 2 737 153 0 21 118 043

Dec.31,2008 3678100 7050306 2714659 1230497 3495244 2032369 0 20201175

37

Remuneration payable to the members of the Board of Directors inCHF000

FromJanuary1,2009,theremunerationpayabletotheBoardofDirectorsconsistsoffixedfees,afixedportioninshares,meetingattendanceallowancesandsocialsecuritycontributions.FurtherinformationontheremunerationappearsintheCorporateGovernancesectiononpp.22–25.ThetotalamountintheyearunderreviewwasCHF1.129million.Thebreakdownbetweentheindividualmembers(CHF000)appearsinthetablesbelow.Thenotesonpositionandsocialsecuritycontributionsapplyaccordinglytoalltablesinthissection.

Position1

Fixedfee

Fixedshareportion

Attendanceallowances

Totalremuneration

Socialsecurity5

Totalexpenditure

FranzPeterOesch2 ChairmanSGKBBoardofDirectors,HyposwissZurichBoardofDirectors 219 85 24 328 16 344

Hans-PeterHärtsch Vice-ChairmanBoardofDirectors,ChairmanVRA-P 81 36 8 124 8 132

Hans-JürgBernet 81 36 10 127 8 134

NiklausFäh3 ChairmanPensionScheme 74 33 11 118 7 125

MartinGehrer4 67 0 8 75 5 79

ThomasA.Gutzwiller ChairmanVRA-F 74 33 8 114 7 121

KurtRüegg(sinceApril29,2009) 45 20 5 69 4 73

ClaudiaZogg-Wetter ChairmanVRA-AC 74 33 8 115 7 121

Total 2009 712 275 81 1 068 61 1 129

1 Committees of the Board of Directors: Human Resources and Organization Committee (VRA-P); Finance and External Relations Committee (VRA-F); Audit Committee (VRA-AC).

2 Including a fixed fee for Board of Directors of Hyposwiss Private Bank Ltd., Zurich: CHF 30 0003 Including CHF 10 000 fees for services rendered to the SGKB Pension Scheme and CHF 3500 for attendance at meetings.4 73 shares of countervalue CHF 30 000 were allocated to the Canton of St. Gallen.5 The social security contributions include employer‘s contributions to the statutory old-age and survivors‘ pension and unemployment insurance schemes.

TheCorporateGovernancesectionexplainsthedirectors‘independenceinthetermsofFINMACircular2008/24.

ThesharevaluationisbasedontheaverageSGKBsharepriceinJanuary2010.Thiswasdulydiscountedbecauseofthethree-yearholdingperiod,likethecalculationfortaxpurposes.ThediscountedvaluepershareatDecember31,2009,wasCHF408.10.

Previous year inCHF000s

BeforeJanuary1,2009,theremunerationpayabletotheBoardofDirectorsconsistedoffixedfees,variableremuneration,meetingattendanceallowancesandsocialsecuritycontributions.Thevariableremunerationconsistedofacashportionandashareportion.Thetotalamount,includingoneretiringmember,wasCHF893000inthepreviousyear,andwasbrokendownbetweentheindividualmembersaccordingtothetablesbelow.

Variableremuneration Attendance Total Social Total Position Fixedfee Cash Shares allowances remuneration security expenditure

FranzPeterOesch1 ChairmanBoardofDirectors 180 35 37 18 269 13 282

Hans-PeterHärtsch Vice-ChairmanBoardofDirectors,ChairmanVRA-P 60 17 18 7 103 6 109

Hans-JürgBernet

(sinceApril25,2007) 45 17 18 10 90 5 96

NiklausFäh2 ChairmanPensionScheme 60 17 18 13 109 7 115

MartinGehrer(sinceJune1,2008)3 26 10 0 4 40 2 42

ThomasA.Gutzwiller ChairmanVRA-F 60 17 18 7 103 6 109

ClaudiaZogg-Wetter ChairmanVRA-AC 60 17 18 8 103 6 110

PeterSchönenbergerretiredfromtheBoardofDirectorslastyear: PeterSchönenberger(uptoMay31,2008) 4 19 7 0 2 28 2 30

Total 2008 510 139 129 67 845 48 893

1 Including a fixed fee for Board of Directors of Hyposwiss Private Bank Ltd., Zurich: CHF 30 0002 Including CHF 15 000 fees for services rendered to the SGKB Pension Scheme and CHF 5000 for attendance at meetings.3 33 shares of countervalue CHF 10 000 were allocated to the Canton of St. Gallen.4 25 shares of countervalue CHF 8 000 were allocated to the Canton of St. Gallen.

ThesharevaluationwasbasedontheaverageSGKBsharepriceinJanuary2009.Thiswasdulydiscountedbecauseofthethree-yearholdingperiod,likethecalculationfortaxpurposes.ThediscountedvaluepershareatDecember31,2008,wasCHF318.90.

38

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Remuneration payable to the members of the Management Board inCHF000s

TheremunerationpayabletotheManagementBoardconsistsoffixedsalaries,variableremuneration,paymentsinkindandsocialsecuritycontributions.Thevariableremunerationconsistsofacashportion,ashareportionandallocatedoptions.Thesocialsecuritycontributionsconsistofemployer‘scontributionstothestatutoryold-ageandsurvivors‘pensioninsuranceandtothepensionscheme.FurtherinformationontheremunerationappearsintheCorporateGovernancesectiononp.24.ThetotalamountpaidtothefivemembersintheyearunderreviewwasCHF4.345million.

Variableremuneration

TotalOtherexpenses

including Fixedsalary Cash Shares Options remuneration socialsecurity Totalexpenditure

RolandLedergerberChiefExecutiveOfficer 450 250 262 130 1092 151 1243

OtherfourmembersoftheManagementBoard 1320 550 577 286 2733 369 3102

Total 2009 1 770 800 839 416 3 826 520 4 345

ThevaluationofthesharesisbasedontheaveragepriceoftheSGKBshareinJanuary2010,whichwasdiscountedforthethree-yearholdingperiod,inlinewiththecalculationfortaxpurposes.ThediscountedvaluepersharewasCHF408.10.

ThecalculatedvalueoftheoptionsisalsobasedontheaveragepriceoftheSGKBshareinJanuary2010.Theoptionswerediscountedsimilarlytothecalculationsofthevalueofeachshare,duetothethree-yearholdingperiod.ThediscountedvalueperoptionasofDecember31,2009,wasCHF50.60.Thevaluationwasbasedonthenormalmarkettrinomialmodel,asmentionedintheaccountingandvaluationprinciples.

Variableremuneration

TotalOtherexpenses

includingPrevious year inCHF000s Fixedsalary Cash Shares Options remuneration socialsecurity3 Totalexpenditure

RolandLedergerberChiefExecutiveOfficer 450 200 210 120 979 164 1143

OtherfourmembersoftheManagementBoard1 789 305 320 182 1596 645 2241

RetiringmembersoftheManagementBoard2 469 300 0 0 769 128 897

Total 2008 1 708 805 530 302 3 344 936 4 281

1 A. Koller (from February 1, 2008); F. Buschor (from April 1, 2008); C. Schmid (from August 1, 2008) and D. Lipp (from December 1, 2008).2 U. Rüegsegger (until January 31, 2008); M. Zoller (until March 31, 2008) and M. Schmid (until December 31, 2008).3 The other expenses for the four other members of the Management Board include a performance bonus to one member for successfully introducing the new IT platform, and compensation to one member for loss of variable remuneration from his previous employer.

ThevaluationoftheshareswasbasedontheaveragepriceoftheSGKBshareinJanuary2009,whichwasdiscountedforthethree-yearholdingperiod,inlinewiththecalculationfortaxpurposes.ThediscountedvaluepersharewasCHF318.90.

ThecalculatedvalueoftheoptionswasalsobasedontheaveragepriceoftheSGKBshareinJanuary2009.Theoptionswerediscountedsimilarlytothecalculationsofthevalueofeachshare,duetothethree-yearholdingperiod.ThediscountedvalueperoptionasofDecember31,2009,wasCHF45.41.Thevaluationwasbasedonthenormalmarkettrinomialmodel,asmentionedintheaccountingandvaluationprinciples.

39

Participating interests of the members of the Board of Directors and Management Board

AsofDecember31,2009,themembersoftheorgansandpersonsrelatedtothemheldthefollowingparticipatinginterests(quotedinunits).TheunlistedoptionsareallocatedtotheManagementBoardinthecontextoftheshareownershipprogramme.

Dec. 31, 2009 Dec.31,2008

SharesOptions

notlisted1

Listedoptions Shares

Optionsnotlisted

Listedoptions

Board of Directors

FranzPeterOesch,Chairman 2257 2142

Hans-PeterHärtsch,Vice-Chairman 1459 1391

Hans-JürgBernet 367 209

NiklausFäh 774 716

MartinGehrer 40 40

ThomasA.Gutzwiller 457 399

KurtRüegg 250

ClaudiaZogg-Wetter 919 874

Management Board

RolandLedergerber,Chairman 4489 10024 3801 10528

AlbertKoller,HeadRetailandCommercialClients 1231 1844 735 0

FelixBuschor,HeadServiceCenter 1662 1644 1188 0

DanielLipp,HeadPrivateBanking 10 0 0 0

ChristianSchmid,HeadFinanceandRiskManagement 392 528 240 0

Total 14 307 14 040 0 11 735 10 528 0

1 The difference of 2828 options (prior year: 5502 options) between the total holding and the table of holding of allocated options derives from options which are held by members who have resigned from the Management Board and who no longer appear in the above listing.

Loans and credit lines to members of the Board of Directors and Management Board inCHF000s

AsofDecember31,2009,SGKBgrantedHans-PeterHärtsch,Vice-ChairmanoftheBoardofDirectors,amortgage-backedcreditfacilityofCHF500000(previousyearCHF500000).ItgrantedHans-JürgBernetamortgage-backedcreditfacilityofCHF300000andKurtRüeggamortgage-backedcreditfacilityofCHF2.575million.TherewerenoothercreditfacilitiesformembersoftheBoardofDirectorsonDecember31,2009.

ThemembersoftheBoardofDirectorsdidnotbenefitfromstaffterms.

FourmembersoftheManagementBoard(previousyear:three)weregrantedloansorborrowinglimitstotallingCHF4.055million(previousyearCHF2.469million),thevastmajorityofwhichhavemortgagebacking.Ofthis,CHF1.4millionwasgrantedtotheCEO,RolandLedergerber(previousyear:CHF1.414million).TheconcessionarytermsallowedtostaffalsoapplytolinesofcredittomembersoftheManagementBoard.

Current special benefits

OrdinarymarkettermsapplytorelationswithpersonsrelatedtomembersoftheBoardofDirectors.

TheCantonalBankofSt.GallenprovidespersonsrelatedtomembersoftheManagementBoardwithbankingservicesonthesamestaffconditionsastopersonsrelatedtootherCantonalBankofSt.Gallenstaff.Therelevantbusinessvolumewassosmallduringthepastfinancialyearthatastatementiswaivedforreasonsofmateriality.

40

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Amounts owed by and to Group undertakings

and lines of credit granted to members of

executive bodies inCHF000s Dec. 31, 2009 Dec.31,2008 Change in%

Amounts owed by and to Group undertakings

–AmountsowedbyGroupundertakings 0 0 0 0.0

–AmountsowedtoGroupundertakings 55050 59638 (4588) (7.7)

Amounts owed by members of organs, including related persons (lines of credit):

–Non-executivemembers(BoardofDirectors) 12895 8755 4140 47.3

–Executivemembers(ManagementBoard) 4055 2469 1586 64.2

Total 16 950 11 224 5 726 51.0

Client assets inCHF000s Dec. 31, 2009 Dec.31,2008 Change in%

Valuesininvestmentvehiclesmanagedbythegroup 407875 544372 (136497) (25.1)

Valuesunderdiscretionarymandate 4345426 3522219 823207 23.4

Otherclientfunds 37546870 35312375 2234495 6.3

Total client assets (incl. double countings) 42 300 171 39 378 966 2 921 205 7.4

thereof:doublecountings (1320537) (1706054) 385517 (22.6)

Total client assets (excl. double countings) 40 979 634 37 672 912 3 306 722 8.8

thereof:changeofbasisofconsolidation 1570135

Net new money (excl. double countings) 458 333 3 859 266 (3 400 933) (88.1)

Clientassetsinclude:–Assetsincustody,includingtrustfunds–Duetoclientsinsavingsanddeposits–Otherduetoclients–Medium-termnotes

Clientassetsdonotincludecustody-onlyvalues.

41

Notes to the Income Statement

Net Interest Income inCHF000s 2009 2008 Change in%

Interest and discount income

Interestincomeduefrombanks 23326 47460 (24134) (50.9)

Interestincomeduefromloanstoclients 521242 599446 (78204) (13.0)

Otherinterest,net 2522 18784 (16262) (86.6)

Total interest and discount income 547 090 665 690 (118 599) (17.8)

Interest expenses

Interestexpensesduetobanks 3301 16392 (13091) (79.9)

Interestexpensesduetoclientfunds 124738 215434 (90696) (42.1)

Interestexpensesondebtandloanssecuredbymortgages 132758 150195 (17437) (11.6)

Otherinterestexpenses 966 1465 (499) (34.0)

Total interest expenses 261 763 383 486 (121 723) (31.7)

Net Fee and

Commission Income inCHF000s 2009 2008 Change in%

Commissionincomefromlendingactivities 2963 2326 637 27.4

Commissionincomefromsecuritiesandinvestmentactivities 146447 184316 (37869) (20.5)

–investmentfunds 26109 46792 (20683) (44.2)

–depositoperations 27251 29205 (1954) (6.7)

–brokerage 47252 51067 (3815) (7.5)

–assetadministrationmandates 37438 43869 (6431) (14.7)

–other 8397 13384 (4987) (37.3)

Commissionincomefromotherservicefeeactivities 18522 18002 519 2.9

–paymenttransfer 6776 6318 458 7.3

–safecustody 813 793 20 2.6

–accountkeeping 7652 7798 (146) (1.9)

–other 3281 3094 187 6.0

Total commission income 167 931 204 644 (36 713) (17.9)

Total commission expenses 14 556 16 633 (2 077) (12.5)

Total 153 375 188 011 (34 636) (18.4)

Net Trading Income inCHF000s 2009 2008 Change in%

Foreignexchangeanddealingsinforeignnotesandcoins 35403 33068 2335 7.1

Preciousmetaltrading 546 199 347 –

Securitiestrading 3547 (4840) 8387 –

Total 39 496 28 427 11 069 38.9

Personnel Expenses inCHF000s 2009 2008 Change in%

Salariesandbonuses 138069 131725 6345 4.8

Contributionstopensionfund 12228 11534 694 6.0

Othersocialsecuritybenefits 9857 9020 838 9.3

Otherpersonnelexpenses 9399 10430 (1030) (9.9)

Total 169 554 162 708 6 846 4.2

42

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Other Operating Expenses inCHF000s 2009 2008 Change in%

Rentandoccupancy 13060 11307 1752 15.5

ExpensesforIT 46574 62125 (15551) (25.0)

Expensesforequipment,furniture,vehiclesandotherinstallations 2019 2712 (693) (25.6)

Servicesofthirdparties(lendingbusiness,investmentadvice,cardsandpaymenttransactions) 7074 6351 723 11.4

Compensationofgovernmentguarantee 6304 6290 14 0.2

Postage,transportandremovals 3664 3161 503 15.9

Marketing 9155 9177 (22) (0.2)

Otheroperatingexpenses 15486 11946 3540 29.6

Total 103 336 113 069 (9 733) (8.6)

Depreciation and Write-Offs on Fixed Assets inCHF000s 2009 2008 Change in%

Depreciationonbankbuildings 6217 6374 (157) (2.5)

Depreciationonotherrealestate 296 317 (21) (6.6)

Depreciationonotherequipment 3676 4067 (391) (9.6)

Total depreciation on fixed assets 10 189 10 758 (569) (5.3)

Depreciationonnon-consolidatedparticipations 0 0 0 –

Depreciationonintangibles 31323 44392 (13069) (29.4)

Total 41 512 55 150 (13 638) (24.7)

Valuation Adjustments, Provisions

and Losses inCHF000s 2009 2008 Change in%

Provisionsforcreditrisk 0 5721 (5721) (100.0)

Provisionsforotherbusinessrisks 10907 1893 9014 –

Losses 1725 2460 (735) (29.9)

Total 12 633 10 074 2 559 25.4

Extraordinary Income and Expenses inCHF000s 2009 2008 Change in%

Extraordinary income

Releaseofreservesforgeneralbankingrisks 3152 22278 (19126) (85.9)

Releaseofprovisionsnolongerrequired 3528 0 3528 –

Gainonsaleofnon-consolidatedparticipations 1159 847 312 36.8

Gainonsaleoffixedassets 0 177 (177) (100.0)

correctionofmaturedpositions 163 2506 (2343) (93.5)

Otherextraordinaryincome 1546 894 652 72.9

Total 9 547 26 702 (17 155) (64.2)

Extraordinary expenses

Lossesonsaleoffixedassets 16 0 16 –

Otherextraordinaryexpenses 549 744 (195) (26.2)

Total 565 744 (179) (24.1)

Taxes inCHF000s 2009 2008 Change in%

Federaltaxes 16708 14327 2381 16.6

Stateandcommunaltaxes: –Incantonswherethegroupislocated

(Saint-Gall,Zurich,GenevaandAppenzellAusserrhoden) 24988 26772 (1784) (6.7)

–Other 31 84 (53) (63.3)

Deferredtaxes (3994) (2428) (1566) 64.5

Total 37 733 38 755 (1 022) (2.6)

43

Income from ordinary banking business, broken down into domestic and foreign (principle: place of establishment)

TheSGKBGrouphashadasubsidiaryinMunichsincethefoundationofSGKBDeutschlandAGin2009.HyposwissPrivateBankGenevaSAhasalsohadabranchinLisbon,Portugal,since2007.

ThesetwoestablishmentsabroadgeneratedtotaloperatingincomeofCHF1.0millionintheyearunderreview(previousyearCHF0.4million).TheirtotaladministrativeexpensesamountedtoCHF10.5million(previousyear:CHF0.1million).

GrossprofitamountstoCHF–9.5million(previousyearCHF0.3million).TheseestablishmentsplayasubordinateroleinrelationtotheGroup.Hencenofurtherinformationisgiven.

Earnings per Share and Number of Shares Outstanding inCHF000s 2009 2008 Change in%

Net profit

Groupnetprofit 168143 171135 (2992) (1.7)

Weighted average number of shares outstanding

Weightedaveragenumberofsharesoutstanding 5532361 5545752 (13391) (0.2)

Dilutedsharesduetooptionsoutstanding 17966 18524 (558) (3.0)

Weighted average number of sharesoutstanding for the diluted earnings per share 5 550 327 5 564 276 (13 949) (0.3)

Earnings per share inCHF

Earningspershare 30.39 30.86 (0.47) (1.5)

Dilutedearningspershare 30.29 30.76 (0.47) (1.5)

Calculation of Return on Equity (ROE) inCHF000s 2009 2008 Change in%

Operatingprofit(interimresult) 196894 183932 12962 7.0

Groupnetprofit 168143 171135 (2992) (1.7)

Equityafterdividendpaymentresp.appropriationofretainedearnings 1684903 1632804 52100 3.2

AverageequityforthecalculationoftheROE1 1658854 1613714 45140 2.8

Returnonequity,pre-tax(basis:operatingprofit) 11.9% 11.4% 0.5 4.4

Returnonequity,aftertax(basis:groupnetprofit) 10.1% 10.6% (0.5) (4.7)

1 The average is calculated from the beginning and ending balance after appropriation of retained earnings.

44

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Eligible Capital inCHF000s Dec. 31, 2009 Dec.31,2008 Change

Grosscorecapital(aftertakingintoaccounttreasuryshareswhicharetobededucted) 1692005 1636559 55446

ofwhichminorityshareholdinginterests 0 0 0

ofwhich“innovative”instruments 0 0 0

–Regulatorydeduction 0 0 0

–Othercomponentstobedeductedfromcorecapital (109714) (131439) 21725

Eligible core capital 1 582 291 1 505 121 77 171

+Supplementarycapitalandadditionalcapital 40000 60000 (20000)

–Otherdeductionsfromsupplementarycapital,fromadditionalcapitalandfromtotalcapital (10142) (9130) (1013)

Eligible capital 1 612 149 1 555 991 56 158

Required Capital inCHF000s Dec. 31, 2009 Dec.31,2008 Change

Credit risk 849 748 838 669 11 079

ofwhichpriceriskrelatingtoequity-typesecuritiesinthebankingbook 3112 6018 (2906)

Non-counterparty-related risks 41 143 44 518 (3 375)

Market risk 9 412 4 795 4 618

ofwhichoninterest-rateinstruments(generalandspecificmarketrisk) 453 269 184

ofwhichonequity-typesecurities 1965 1053 912

ofwhichoncurrenciesandpreciousmetals 5667 2540 3127

ofwhichoncommodities 1327 932 395

Operational risk 74 165 75 729 (1 564)

Total 974 468 963 711 10 757

Deduction (81 808) (60 464) (21 344)

ofwhichoverallvaluationadjustments 0 0 0

ofwhichdiscountforcantonalbanks (81808) (60464) (21344)

Total 892 660 903 248 (10 588)

Surplus of eligible capital over required capital 719 489 652 743 66 746

Surplus in % 80.6% 72.3%

Relation of eligible/required capital according to SA-CH regulations 1.81 1.72

BIS ratios

Tier1 13.0% 12.5%

Tier2 13.2% 12.9%

1 Restatement of previous year as per FINMA-Circ. 08/22, Annexe 2.

45

Divisional Accounts

Retailand

CommercialBanking PrivateBanking CorporateCenter Group

Income Statement inCHF000s 2009 2008 2009 2008 2009 2008 2009 2008

Netinterestincome1 178020 210145 34844 53204 105086 41607 317950 304956

Netfeeandcommissionincome 36193 41308 119204 149703 (2022) (3000) 153375 188011

Nettradingincome 13075 14355 22732 19210 3689 (5138) 39496 28427

Netotherincome 284 3425 28 1552 12795 (1439) 13107 3538

Operating income 227 572 269 233 176 809 223 670 119 547 32 030 523 928 524 933

Personnelexpenses 60588 57885 67821 59446 41145 45377 169554 162708

Otheroperatingexpenses 66086 68954 52316 41945 (15066) 2171 103336 113069

Administrative expenses 126 674 126 839 120 137 101 390 26 079 47 548 272 889 275 777

Gross profit 100 898 142 394 56 672 122 280 93 469 (15 518) 251 039 249 156

Depreciationandwrite-offsonfixedassetsandintangibles 0 0 3053 2200 38459 52951 41512 55150

Valuationadjustments,provisionsandlosses 793 (10777) 15246 18886 (3407) 1966 12633 10074

Operating profit (interim result) 100 105 153 171 38 373 101 195 58 416 (70 434) 196 894 183 932

Extraordinaryincome,net 625 0 6442 475 1915 25483 8982 25958

Taxes 14707 20161 8891 16692 14135 1901 37733 38755

Group net profit 86 022 133 010 35 924 84 977 46 196 (46 852) 168 143 171 135

Other data inCHF000s

Dec.

31, 2009

Dec.

31,2008

Dec.

31, 2009

Dec.

31,2008

Dec.

31, 2009

Dec.

31,2008

Dec.

31, 2009

Dec.

31,2008

Loanstoclients 16978614 16296250 1525948 1648546 0 0 18504562 17944796

Clientfunds 9705129 9156469 6879536 5728904 0 0 16584666 14885373

Clientassets 12842024 12101987 28137610 25570925 0 0 40979634 37672912

Headcount

Full-timeequivalents 497 488 361 339 266 271 1124 1098

Key Figures

Cost/incomeratio(includingdepreciationonfixedassetsandlicences) 55.7% 47.1% 69.3% 46.1% n/a n/a 55.2% 55.6%

1 Financial statements based on funds transfer pricing method: Term transformation and result from interest rate hedging reported in the Corporate Center.

46

CantonalBankofSt.Gallen [ Annual Report 2009 ]

Report of the auditor

to the Board of Directors of

Cantonal Bank of St.Gallen Ltd.

St. Gallen

The accompanying summarised consolidated financial statements have been derived from the consolidated

financial statements of the Cantonal Bank of St.Gallen Ltd., for the year ended 31 December 2009.

These summarised consolidated financial statements are the responsibility of the company‘s Board of Directors.

Our responsibility is to express an opinion on whether these summarised consolidated financial statements

(pages 32 to 46) are consistent, in all material respects, with the consolidated financial statements from which

they were derived.

We have audited the consolidated financial statements of the Cantonal Bank of St.Gallen Ltd. for the year ended

31 December 2009, from which these summarised consolidated financial statements were derived, in ac-

cordance with Swiss Auditing Standards. In our report dated 25 February 2010 we expressed an unqualified

opinion on the consolidated financial statements from which the summarised consolidated financial statements

were derived.

In our opinion, the accompanying summarised consolidated financial statements are consistent, in all material

respects, with the consolidated financial statements from which they were derived.

For a better understanding of the company‘s financial position and the results of its operations for the period

and of the scope of our audit, the summarised consolidated financial statements should be read in conjunction

with the consolidated financial statements from which the summarised consolidated financial statements were

derived and our audit report thereon.

PricewaterhouseCoopers AG

Beat Rütsche Claudio Tettamanti

Audit expert Audit expert

Auditor in charge

St. Gallen, 25. February 2010

[ 6 ] Audit opinion PricewaterhouseCoopers

47

Vol

31.01.09 31.03.09 30.04.09 31.05.09 30.06.09 31.07.09 31.08.09 30.09.09 31.10.09 30.11.09 31.12.0928.02.09

400

300

500

550

600

450

350

250

0

5

10

15

Since December 31, 2008, the price of SGKB shares has risen by 20.64% from CHF 384 to CHF 463.25.

inCHFandtradingvolume(in1000s)

in CHF

SGKB

SPI

SPIbanks

Figures and Data Dec. 31, 2009

Earningspershare CHF30.39

Proposeddividendpershare CHF20.001

Totalsharesissued 5 573 426

Time-weightednumberofdividend-bearingshares 5 532361

NumberofsharesheldbySGKB(average) 37 536

Shareholders 30866

Issueprice(IPO) CHF160.00

Marketprice CHF463.25

Marketcapitalization CHF2 581.9million

Ratioofmarketcapitalization/shareholders‘equity 143.7%

Reportedshareholders‘equity CHF1796.4million

Returnonequity(basis:operatingprofit) 11.9%

Dividendyield 4.3%

Price-earningsratio 15.2

1 RecommendationoftheBoardofDirectorsforthefinancialyearendedonDec.31,2009.

Tickersymbol:SGKB,Swisssecurityno.:1148406,listedon:SIXSwissExchange,issued:April2,2001

Jan Feb2009 Mar Apr May Jun Jul Aug Sep Oct Nov Dec

[ 7 ] SGKB Share

48

CantonalBankofSt.Gallen [ Annual Report 2009 ]

The Cantonal Bank of St.Gallen Group comprises the parent company, the Cantonal Bank of St.Gallen (SGKB), founded

in 1868, and its subsidiaries: Hyposwiss Private Bank Ltd. in Zurich, Hyposwiss Private Bank Geneva Ltd. in Geneva,

and St.Galler Kantonalbank Deutschland AG in Munich. SGKB has been listed on the SIX Swiss Exchange since 2001. The

Canton of St. Gallen is the majority shareholder, with 54.8% of the share capital. The parent company, SGKB, offers a

comprehensive range of financial services to its clients in the cantons of St. Gallen and Appenzell Ausser rhoden. In

addition, the Cantonal Bank of St.Gallen meets its responsibility for the economic, social and cultural devel opment of the

region as an employer, taxpayer and sponsorship partner. On December 31, 2009, the Group employed a total of 1124

full-time staff. The parent company operates with a state guarantee and has an Aa1 credit rating from Moody’s.

[Media]

St.Galler Kantonalbank AG

Media Spokesman

Simon Netzle

St.Leonhardstrasse 25

CH-9001 St. Gallen

Telephone +41 (0)71 231 32 18

Fax +41 (0)71 231 37 94

E-mail: simon.netzle@sgkb.ch

[Frequency]

Annual conference for media/analysts annual

Annual report (German) annual

Annual report (English) annual

Shareholders’ Meeting annual

Interim report (newsletter to shareholders) annual

Interim conference for media/analysts annual

Newsletter to shareholders in German and English semi-annual

Press releases as required

www.sgkb.ch ongoing

Important Information Sources

Brief Profile

Board of Directors and Group Management

Board of Directors

Dr. FranzPeterOesch,Chairman Dr. Hans-JürgBernet MartinGehrer KurtRüegg

Hans-PeterHärtsch,Vice-Chairman Dr. NiklausFäh Prof.Dr. ThomasA.Gutzwiller Dr.ClaudiaZogg-Wetter

Group Management

RolandLedergerber AlbertKoller DanielLipp Dr.FelixBuschor Dr. ChristianSchmidChiefExecutiveOfficer RetailandCommercialClients PrivateBanking ServiceCenter FinanceandRiskManagement

[Shareholders]

St.Galler Kantonalbank AG

Investor Relations

Dr. Cornelia Gut-Villa

St.Leonhardstrasse 25

CH-9001 St. Gallen

Telephone +41 (0)71 231 36 92

Fax +41 (0)71 231 37 94

E-mail : cornelia.gut@sgkb.ch

Contact

Current publication and event dates are available at

www.sgkb.ch (p Engl. site: Financial calendar)

49

1ThedivisionsFinanceandRiskManagementandtheServiceCenteraresummarizedunderCorporateCenterinthedivisionalaccounting.2TheBoardsofDirectorsofHyposwissHolding,HyposwissPrivateBankLtd.,ZurichandHyposwissPrivateBankGenevaLtd.,Genevahaveidenticalmemberships.

Updated:January2010

Organisation

Board of DirectorsDr. FranzPeterOesch,Chairman

Hans-PeterHärtsch,Vice-Chairman

Dr. Hans-JürgBernet

Dr. NiklausFäh

MartinGehrer

Prof. Dr. ThomasA.Gutzwiller

KurtRüegg

Dr. ClaudiaZogg-Wetter

Internal AuditRaphaelSidler

[Holding Company]

Board of Directors2

RolandLedergerber,Chairman

YvesBurrus,Vice-Chairman

Jean-LucdeBuman

TheodorHorat

Dr. RicoJenny

StefanKlinger

Management BoardRolandLedergerber,Chairman

Dr. FelixBuschor

AlbertKoller

DanielLipp

Dr. ChristianSchmid

General SecretariatAdrianKunz

Management Board SiegfriedPeyerChairman

DeclanMcAdamsVice-Chairman

Dr. ThomasStucki

[Retail and Commercial Clients]

AlbertKoller

Sales Region St. GallenCharlesLehmann

Sales Region WestUrsCavelti

Sales Region EastRenéWalser

Divisional DevelopmentMarcelCamiu

Credit OfficeBrunoKatheder

Competence Center Advice and SalesGuidoSchindler

MarketingThomasRüegg

MultichannelPaulEggenschwiler

Product ManagementRetoFischer

Special FinancingAlexSpillmann

[Zurich]

CEO SiegfriedPeyer

Private BankingAlexanderIten

Investment CenterDr. ThomasStucki

ProductsAntonSchaad

Services/LogisticsStefanBetschart

Compliance, Legal and PersonnelDanielSchibli

Business Development & FinanceHansjürgChristen

[Private Banking]

DanielLipp

Private Banking MarketBrunoHolenstein

Key Clients & ProspectingPiusH. Seitz

Institutional InvestorsMartinKünzler

Foreign ClientsHans-PeterTritschler

External Asset ManagersTobiasWehrli

Divisional ManagementNicoloPaganini

[Geneva]

CEO DeclanMcAdams

Chief Financial OfficerSimonCole

Investment PolicyStephenRufino

Trading Desk/ AdvisoryChristophePasche

ServicesJean-DenisBraillard

[Munich]

Board of DirectorsRolandLedergerberChairman

DanielLippVice-Chairman

Prof. Dr. WolfgangGerke

StefanKlinger

SiegfriedPeyer

GünterT. Schlösser

Management Board Hans-JürgenRöwekampChairman

KurtSoentgerathVice-Chairman

ChristophLieberDirector

[Service Center ] 1

Dr. FelixBuschor

Financial ProcessingAndreasBarattiero

TradeJosefGeel

IT and OrganisationUrsHalter

InfrastructureHelmutCapol

Loan ProcessingMichaelKnöpfel

Payment Transactions and Client DataJürgHofmann

Management SupportMarkusPlüss

[Finance and Risk Management] 1

Dr. ChristianSchmid

Controlling & FinanceStefanKlinger

Legal & ComplianceDr. RogerDornier

PersonnelRolfFuhrer

Business DevelopmentDr. CorneliaGut-Villa

VermögensmanagementDeutschland

Subsidiary companies Subsidiary companies