Equities – down. Fixed income – down. Precious metals – down. Commodities – down. These have been a strange, potentially frightening few weeks for all investors, including private bankers.
Already before the current coronacrisis, Luxembourg’s private banking sector was feeling the strain. There was a 59% decline in value added (a proxy for profitability) created by Luxembourg private banks over the 2015-2018 period, said a recent report by the national statistics office Statec. This contrasts with the 49% increase enjoyed by the country’s retail banks which serve households and local businesses.
More than 20 of Luxembourg’s 140 banks were even “effectively insolvent”, CSSF CEO Claude Marx warned at the end of last year. Putting much of the global economy into mothballs, as is happening as we speak due to the coronavirus outbreak, is going to exacerbate this. The pressure will increase for global groups with operations in Luxembourg to sell or close these outposts. But Luxembourg’s under-pressure private bankers could now prove their value offering advice and reassurance to nervous clients. Might this help turn the tide for the sector?
Regulatory blows
On top of these structural and cyclical headwinds, private banks have been hit by a double regulatory blow. Since 2015, global rules require banks to report on their client’s tax affairs to relevant administrations around the world. At a stroke, this made the once lucrative business of facilitating cross-border tax evasion impossible. Then since 2018, financial advisors have been required by the EU’s Mifid II directive to be up-front about all fees they charge clients. Previously banks would earn hidden commission fees when selling financial products such as funds, pensions or life insurance policies, but this is no longer possible. Not every client is willing to pay general fees or commission, preferring to run their own financial affairs.
On top of this, there is the competition from the rise of family offices which provide independent advice to high net worth individuals. Then then there are the costs of digitalisation, which are hard for smaller operations to meet.
Building a relationship
However, could the unique nature of the recent slump in global market serve to highlight the value of private banking services? Many private bankers in Luxembourg have taken a proactive approach to the Covid-19 crash, contacting clients as markets fell. They were keen to show their willingness to listen and to offer advice.
“Most of my clients understand that this is not like a traditional crash based on market imbalances,” one relationship manager for a major local player, who wished not to be named, told Investment Officer. “We have seen a few wanting to move completely into the US dollar, because they are nervous about further falls, but more often my colleagues report clients waiting to seize opportunities to buy,” said another industry professional.
Offering reassurance
Consensus amongst economists is that we are likely to see a “Nike Tick” or “V-shaped” recovery. Many see the current crash as not having been caused by underlying economic imbalances, but by the dislocation of markets and supply chains. Once the lock-down is lifted the economy should be able to move up through the gears, goes the theory.
Potential for the future
The local sector still has potential, as globally the wealth management industry faces a growing market. For example, the number of ultra-high net worth individuals (UHNWI) around the world with at least €30m in assets increased by 6.4% last year to 513,244, according to a study by real estate consultancy Knight Frank. About 61,500 of these live in Germany with 23,000 in France, two of Luxembourg’s core markets. The authors forecast that UHNWI numbers will grow by 27% over the next five years. However, the current coronacrisis probably means this prediction needs revisiting.