“In 2018, 21 banks active [in Luxemburg] for more than three years had a cost to income ratio in excess of 100%, and there could be more this year,” CSSF director general Claude Marx said recently. As in the rest of Europe, Luxembourg’s B2C banks in particular are under diverse pressures. Some tough strategic choices are required.
“There are still too many banks in Luxembourg and Europe”, added Marx, speaking at the Luxembourg Director’s Association (ILA) annual conference last month. Although the remarks are somewhat shocking, Marx was simply amplifying remarks he had made previously.
Negative interest rates, slow growing economies, tough regulation, more demanding clients, and new competition are just some of the factors that are squeezing bank profitability across the continent, and Luxembourg is no exception. Almost all of the Grand Duchy’s 130 banks are part of international groups, so they will already be feeling this pressure. Moreover, bank consolidation is not a new trend, as 25 years ago there were 222 banks in this country.
B2B OK, B2C challenged
That said, most of Luxembourg’s banks are doing well. Those offering corporate services such trade finance, treasury, and lending are booming, with value added in this sector up 15% per year on average between 2011 and 2018, says the Luxembourg for Finance trade promotion body*. Banks offering fund administration services are also in good shape, with average 2% per year value added growth.
However there has been stagnation for private banks and high street lenders. Some have not fully adapted to the abolition of banking secrecy in 2015. Mifid II has been another test since 2018, forcing banks to be up-front with the commission they charge. The risk and costs around anti-money laundering have risen. Also, industry sources believe that corporates and UHNWIs have started to charge negative interest on their cash holdings in Luxembourg, following the example seen more widely in Switzerland. This practice is expected to grow. As well, the Luxembourg Central Bank has warned in its official budget opinion statement that the double-digit growth in domestic real estate prices could be an existential worry for mortgage lenders.
Growing competition
Competition is growing too. Family offices have taken a substantial slice of wealth management business from banks. More long term, the second payment services directive could see FinTechs adding value as banks are reduced to the status of commoditised utilities. Clients now expect instant, digital services and banks might struggle to compete with tech-native businesses.
Nevertheless the fundamentals are good in the wealth management sector, with substantial global asset growth. Luxembourg’s experienced, multicultural, cross-border finance experts are benefiting, with private banking assets under management reaching €395bn in 2018–up 1.8% on the previous year and 27.8.% higher since 2011. The focus is increasingly on serving the very wealthy. UHNWIs with more than 20m assets now account for 55% of Luxembourg private banking assets, up from 41% in 2011. For context, banking represents about a half of the country’s output of financial services, with private banks and high street banks accounting for 11% and 4% of the total respectively.
Action required
Change is underway. Personnel moves on the board of Luxembourg’s largest bank (BGL BNP Paribas) and the departure of the head of the Luxembourg Bankers Association ABBL Serge de Cillia are symptoms of a new outlook. The public-private financial sector think-tank, the Haut Comité de la Place Financière, is currently reflecting on how regulations could be redesigned to open the way for new digital disrupters. As well, Luxembourg for Finance signalled its awareness of the changing mood when it entitled a recent publication “Amazonisation is the future of European Financial Services.” Strategic recalibration is coming, and embracing digitalisation is the only option.
- The State of the Financial Sector in Luxembourg – Key Figures, Luxembourg for Finance