The CSSF has published the half-yearly profit and loss account of the Luxembourg banking sector, excluding their foreign branches and subsidiaries. The result, before provisions and taxes, amounts to €3.04bn, an increase of 9.8% compared to the same period for the previous year. As the previous figures published by the CSSF on 31 March were quarterly, the result for the period from 1 April to 30 June amounts to €1.75bn, which transposes to an increase of 35.6% in only three months.

The net result, i.e., the profit made by the banking sector, amounts to €1.63bn, which is a substantial decrease of 27.8% compared to the previous year “taking into account provisions for developments related to the war in Ukraine,” says the CSSF.

The effect of the dollar on fees

In the first half of 2022, the sector's interest margin increased by 27.8% compared to the same period in 2021. The increase in this item was shared by 71% of Luxembourg banks. Net commission income, which in fact corresponds to custody fees on assets, rose by 7%. “It is explained by the growth in the activity of Luxembourg banks as measured by the 7% annual increase in balance sheets and by the rise in interest rates, particularly in US dollars.”

The increase in the volume of assets linked to the wealth management business (and associated fees) may explain this rise. But another reason is probably the strengthening of the US dollar. Indeed, most stock market transactions are made in dollars (considered by investors as a stable currency), which has strengthened over the last three months and will continue to do so as long as the FED raises its key rates to fight inflation.

Other net income, including volatile and non-recurring items, decreased by 15.9%.

Increased expenses and overheads

Overheads, which include staff costs, are still on the rise (+9.4%) for 79% of banks. However, this is not due to massive hiring in the sector. “This increase is mainly due to the continued strong rise in other general expenses (+11.1%) which include investment expenses, in particular in the field of information technology,” says the CSSF. Traditional banks would use 50 to 60% of their investment capacity to update their technologies, such as the improvement of customer service interfaces, or the integration of blockchain in payment processes.

Geopolitical events have led to an average cost/income ratio of 57%. This average hides significant disparities between banks. As of 30 June 2022, 28 out of 121 banks had an expense/income ratio of more than 100%. The high volatility of the financial markets and the energy crisis could accentuate this trend in the months to come, as banks may have to use their financial “cushion” to deal with possible non-payments (corporate and private customers).