The 2024 Luxembourg Banking Insights study by KPMG Luxembourg has revealed a surge in net interest income, driven primarily by the European Central Bank’s interest rate hikes. This increase has led to a significant boost in bank profits, reaching 8.9 billion euro, marking a considerable improvement from previous years, according to KPMG.
The study also highlights a concerning trend of decreasing bank numbers in Luxembourg. This reduction is attributed to a wave of mergers, transformations into branches, and complete business closures, reflecting the sector’s consolidation and evolving landscape.
Biggest banks in Luxembourg
The banking sector meanwhile is facing substantial challenges in attracting skilled talent to Luxembourg. This difficulty is compounded by the complex regulatory requirements such as the Digital Operational Resilience Act (Dora), Pillar II directives, and ESG compliance mandates, which add layers of administrative and operational complexities for banks.
Benedikt Barz, director KPMG Luxembourg, and Reem Olleik Gharib, manager KPMG Luxembourg, answered a number of questions about the insights that were obtained.
Q: What are the key findings of the Luxembourg Banking Insights 2024 study?
A: “We witnessed a remarkable trend in 2023 - Banking net profits hit record highs. Now this surge was largely driven by a substantial increase in net interest income. However, we also identified that the number of banks is decreasing due to consolidation (including mergers), transformation into branches, or full business closures.
Even with these changes, banks are grappling with several challenges: attracting top talent to Luxembourg remains a key difficulty, as well as complex regulatory requirements such as Dora, Pillar II, and ESG compliance and reporting.
Q: How has the performance of Luxembourg banks changed compared to the previous year?
A: “Net interest income increased tremendously - over 50 percent compared to 2022, but this increase was mainly due to interest rate hikes implemented by the European Central Bank. Along with liquidity replacements, bank profits greatly improved to 8.9 billion euro, which is an 85 percent increase compared to 2019, and a 43 percent change from 2022.”
Q: What factors have contributed most significantly to the performance trends observed in the e study?
A: “Our insights show that the record highs in net profits were thanks to the ECB’s decision to increase key interest rates. This action played a pivotal role in boosting the banking sector’s financial performance. The other key figures were stable compared to previous years, and the same with staff numbers.”
Q. Can you elaborate on the impact of regulatory changes on the banking sector in Luxembourg?
A: Regulatory changes are having a significant impact on Luxembourg’s banking sector.
- Digital Operational Resilience Act (Dora; Regulation (EU) 2022/2554): This act aims to establish a unified framework at the European level for managing risks associated with information and communication technology (ICT) suppliers.
- EU Directive 2022/2523 (Pillar II): Issued on 14 December 2022, this directive seeks to ensure a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups within the European Union.
- Environmental, Social, and Governance (ESG): This framework is based on the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy, and the reporting requirements outlined in the Corporate Sustainability Reporting Directive (CSRD).
Q: How have macroeconomic conditions in Luxembourg and the broader Eurozone influenced banking performance?
A: “As mentioned earlier, the record highs in net profits were mostly caused by ECB decisions on key interest rates. On the other hand, the high costs from complying with regulatory requirements are putting pressure on administrative costs, negatively impacting Luxembourg’s banks. Inflation has slowed down compared to last year, which has positively affected banks. So while macroeconomic conditions have generally benefited banks in Luxembourg, these rising requirements may lead to higher costs and negative effects on their profit and loss statements.”
Q: What challenges and opportunities are Luxembourg banks facing in the current economic environment?
A: “Our studies identified challenges that are divided between regulatory and “other” challenges.
As outlined previously, new regulations – DORA, Pillar II, ESG – will require banking institutions to put more effort into creating or maintaining sustainability in their operations and reporting. For non-regulatory challenges, we noticed a shortage of skilled personnel across the sector. We’re also seeing fierce competition from other financial centres, especially London, Milan, Paris, and Frankfurt. Lastly, we’ve observed a decline in the number of banks, with some who closed their retail business entirely.
On the other hand, there are several opportunities on the horizon. Luxembourg remains a vital hub of European business operations for non-EU institutions. Recently, we’ve seen a couple of newly set-up branches in Luxembourg of major international banks that are already demonstrating substantial business activity.”
Q: How is the adoption of digital technologies affecting the banking sector in Luxembourg?
A: “Our studies reveal that banks are turning more and more to new technology and AI, especially for managing huge data sets like credit scoring. Retail banks will offer their services to users via apps, which can transcend national borders. New banks, in particular, will need to carefully cultivate their digital image and expand their online presence by regularly introducing new features to retain their customers.”
Q: What role does sustainable finance play in the strategies of Luxembourg banks according to the study?
A: “We need to differentiate between the few banks which are already under the CSRD scope and those for which it will become applicable in the future. Currently, most banks are actively analysing their situations, but all have the clear intention to significantly adapt their budget based on the requirements going forward.”
Q: How are Luxembourg banks managing risks associated with geopolitical uncertainties and market volatility?
A: “Thanks to strong regulations, Luxembourg’s banks are analysing and managing their risks closely. The financial system boasts higher capital ratios than other EU countries by ensuring high liquidity buffers.
With these measures, banks can feel more confident in dealing with potential crises.”
Q: What predictions does the study make for the future of banking in Luxembourg over the next few years?
A: “The banks need to continue strengthening Luxembourg to act as an anchor for European financial institutions outside of the EU. Even though the number of banks has decreased, Luxembourg continues to attract new entrants, especially large branches from non-EU countries. As the Grand Duchy maintains its excellent reputation and stability both politically and economically, we believe that this influx of new and significant players highlights the country’s appeal and strategic importance in the global financial landscape.”
KPMG conducted its Banking Insights study in collaboration with the Luxemburger Wort newspaper. The views expressed in these answers are those of KPMG Luxembourg, and do not necessarily reflect the views of the Luxemburger Wort. The Luxemburger Wort cannot be held responsible for the opinions expressed by KPMG Luxembourg.
The full 2024 Banking Insights survey is available at: http://kpmginfo.lu/4fl6y7f