Since 2015, the grand duchy has lost almost a third of its private banks. France and Germany are no longer among the key markets. Private banks in Luxembourg, especially the smaller ones, are struggling as their margins are squeezed while weak financial markets have not made business any easier this year, it became clear at a press presentation on Friday afternoon, held at the offices of Luxembourg’s bankers’ association ABBL, where the results of a new survey were presented. “The important thing is critical mass.”
Private banking, like many other economic activities, has felt the downward pull of this year’s economic circumstances, but looking back to last year, it was growing very rapidly, reaching 600 billion euro at the year end for Luxembourg. Still, the private banking market is changing. There is less room for smaller private banks who face rising operational costs and face consolidation.
“In my opinion, there will still be consolidation amongst small actors here in Luxembourg from time to time, driven by the headquarters, which will see that the local implementation, finally, is not profitable, not profitable enough,” said Pierre Etienne, managing director of Pictet & Cie (Europe), and head of ABBL’s private banking cluster at a presentation.
France, Germany no longer top markets
From about 270 billion euros in assets held 10 years ago, the private banking business has reached, by the end of 2021, 600 billion euros, according to the new KPMG/ABBL report. Etienne pointed out that this has happened despite the loss of tax secrecy a decade ago, which led many at the time to say that it meant the end of the private banking profession in Luxembourg. “The banking profession has on the contrary greatly evolved on an infinitely more sustainable basis,” said Etienne.
Europe remains the core market of the Luxembourg private banking sector, accounting for 86 percent of total assets under management, with the remaining 14 percent allocated to the “rest of the world”. A fifth of assets are from Luxembourg, with the UK, Belgium, Italy and Switzerland completing the top five. France and Germany no longer are among the top five clients of Luxembourg’s private banks. In 2007, Belgium, France and Germany accounted for half of client assets, the survey showed.
Emilie Serrurier-Hoel, head of wealth management at BIL and the PBGL vice-chair, explained that the private banking landscape is changing, with more and more big groups really wanting to have their assets booked in Luxembourg.
The wish to have assets booked remains even if the bank is not profitable. “It’s really a strategic choice to still be present in Luxembourg,” she said. “So for some groups, they cannot, they really do not want to move out of Luxembourg.”
The importance of AAA
This may have something to do with Luxembourg’s sterling reputation, bolstered by its triple A rating. “It is absolutely key for Luxembourg to keep its triple A,” offered Etienne as a “general conclusion”.
During 2021, the consolidation process that started happening a few years has continued, with “another six private banks acquired, merged or wound down during the year,” according to the “Clarity on performance of Luxembourg private banks” report published by KPMG and the ABBL’s private banking cluster.
The report emerged from a detailed survey for 2021 among senior executives of the financial institution members of the private banking cluster, including 48 banks and nine investment firms.
30% of private banks disappeared
Fabio Mandorino of ABBL pointed out that looking as far back as 2015, Luxembourg has lost 30 percent of its private banks, or some 20 banks in total. The majority of these private banks did not go under or fail, but merged or were taken over by larger structures.
Mandorinoexplained that these banks were all under five billion in assets. “So that means the important thing is critical mass,” he said.
Etienne declared that private banking’s clientele “remains overwhelmingly European”, with 85 percent of customers being European. However, the sector’s clients are getting wealthier, with the proportion of clients with a portfolio of under one million euros dropping from a quarter of private banking assets to only 6 percent.
But the clientele has changed, explained Serrurier-Hoël. “Today, what we see is that we have a clientele that is increasingly entrepreneurial, and therefore combines personal management needs and management on the corporate part.”
Need for skills drives costs
The changing financial world has sparked an increase in complexity, in terms of products and services delivered, as well as in terms of local regulations. All of this requires an increase in competencies, Etienne explained, which leads to the search for people with the right skills to allow private banks to face future challenges.
The search for qualified staff can even lead to “recruiting locally”, which Etienne explained as recruiting from your neighbours, which implies an increase of labour costs. Nearly 70 percent of private banking’s costs are staff costs, he explained. “This means that we have an overall increase in costs and a decrease in productivity in our business.”
Taking as his point of departure the 600 billion euro figure, Etienne gave his views on what 2022 holds in store. “These assets are obviously in the process of contracting,” he said. By year’s end? “It’s not very good, but it’s no doubt a 7-10 percent contraction,” which will have the same order of impact on commissions.
Counterbalance impacts
He explained that the decline in the stock market linked to the Russia-Ukraine war and the consequent rise in interest banks from central banks may have “somewhat counterbalanced impacts on our business.”
Etienne explained that rising interest rates make the cash pool that the banks and their clients have more profitable. So while the figure of 600 billion may end up around 540 billion – minus 10 percent, “it is possible, even probable that revenues from the private banking business in Luxembourg will not fall by 10 percent” because of the higher returns due to interest rates.
“However, we don’t know, we don’t have a crystal ball and things could get much more out of hand. And so we have to be extremely careful going forward,” said Etienne.
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