Net interest income at Luxembourg banks should stabilise this year, but come under increased pressure in 2024, Jerry Grbic, CEO of the Luxembourg Bankers’ Association (ABBL), told Delano during an interview. Photo: Romain Gamba/Maison Moderne

Net interest income at Luxembourg banks should stabilise this year, but come under increased pressure in 2024, Jerry Grbic, CEO of the Luxembourg Bankers’ Association (ABBL), told Delano during an interview. Photo: Romain Gamba/Maison Moderne

Delano spoke with Jerry Grbic at the Luxembourg Bankers’ Association (ABBL) about the 2022 aggregated profit and loss accounts of credit institutions recently released by the Luxembourg Financial Sector Supervisory Commission (CSSF).

Net earnings increased by only 2.0% in 2022 compared to +30.8% in 2021. Net interest margin improved by 39.0% following the decision by the European Central Bank to raise its key interest rates in the second half of 2022. Offsetting this positive development, the level of provisions also rose (details not reported) whereas “other net income” declined by 26.3% to a more normalized level of €1.4bn after the large one-off positive impacts of two large transactions in 2021 as per the ABBL. The higher provisions reflected the lower valuation of Russian assets and the expected losses related to a weakening economy as per the IFRS9 requirements.

For , CEO at the ABBL, it is important to maintain a robust banking sector and his organisation is working at defending their profitability through a favourable regulatory framework. Contrary to the US, where capital markets are a major source of credit, the European economies are mainly financed through the banking system. He explains that profitable banks will more easily “provide credits, invest in its IT systems and their digitalisation and green transformations”. Moreover, Luxembourg banks are run conservatively with a capitalisation “of around 24% compared to 18-19% elsewhere in Europe, which is an additional pillar to maintaining the trust of their clients,” said Grbic.

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The ABBL is pointing to the increasing number of regulations since 2012, with the publication of the circular on governance and the reporting requirements that have multiplied by a factor of 10, as a source of additional cost for the banking system. On the other hand, Grbic admits that these efforts have proven their worth as the banks have continued to operate normally despite the recent market turbulences. Yet, the ABBL is aiming at finding a good balance between regulations and profitability. A fair equilibrium has been difficult to achieve in the last 10 years given the implementation of multiple regulations and the low or even negative rates over that period. Therefore, Grbic sees positively the rise of interest rate as it enables banks to operate in a “more normal rate environment” to support their profitability which are still weaker compared to their US and Asian counterparts due to their “lower capitalisation, on average”.

Net interest income

“The rise of interest rates has particularly benefited the banks active in providing credit to the economy and have tightly managed their interest rate risks”, Grbic said. “Having increased credit exposure, they also had to push up provisions on the back of a complicated economic environment with Ukraine, higher price of energy and the supply chain disruptions”. Grbic expects net interest income (the difference between interest income and the amount of interest paid out) and provisions to stabilise in 2023 despite a lower volume of loan origination, for which he sees a delayed negative impact on profitability to become more observable in 2024.

Assessing the financial strength of a financial institution is a multi-dimensional exercise which includes, among other aspects, reviewing the size and the quality of its capitalisation, the liquidity and funding profile and the asset quality in addition to profitability. Given the unease of the markets on some mid-sized banks in the US and in Europe in recent weeks, Delano plans to report in upcoming articles on how domestic and European financial institutions compare and perform as a result of more demanding prudential regulations against its peers elsewhere in the world.