Written by Yasuko Nayamura and published on Friday, the Banking System report forecast that profitability would remain higher than the euro-area average but could be impeded by low interest rates. The report said:

“Net interest income is declining despite growth in business volumes because ow interest rates constrain yields on securities portfolios,”

Nayamura wrote:

“In parallel, operating expenses have risen due to wage indexation, higher regulatory costs and IT and digital investments. Substantial customer deposits result in very low reliance on confidence-sensitive market funding.”

Luxembourg economy

The author forecast GDP growth of 3.7% in 2018 and 3% in 2019 and 2020, saying it was fuelled by demographic growth from foreign workers. While this phenomenon places a strain on housing supply and pushes up house prices, Nayamura said that household debt risks were mitigated by “substantial household wealth”.

Furthermore, macro-prudential measures introduced by the government to “contain rising risks associated with housing loans and tightening underwriting standards”, meant the expectation was bank credit risk would remain stable.

“The average cost of risk of the three largest banks (BCEE, BGL BNP Paribas and BIL) is among the lowest in the euro area,” Nayamura wrote.