Luxembourg banks’ balance sheets are expected to grow by nearly 10% in 2023, after modestly shrinking last year, an EU oversight body has forecast.

In its annual funding plans report, the European Banking Authority reviewed the funding strategies of 159 banks for the forecast period spanning from 2023 to 2025, revealing a notable shift in banks’ intentions towards market-based funding during that time.

The banks participating in the collectively account for more than 80% of the EU/EEA banking sector’s total assets. The sample included four from Luxembourg--RBC Investor Services Bank, Banque Internationale à Luxembourg, Quintet Private Bank and Banque et Caisse d’Epargne de l’Etat (Spuerkeess).

Asset portfolio

In 2022, European banks experienced a modest increase of 1.3% in total assets, a slower pace compared to the previous year’s growth of 3%. The decrease in cash balances at central banks by 6% was driven by repayments of targeted longer-term refinancing operations (TLTRO) funds, though they still represented 13% of total assets by December 2022 (down from 14% in 2021).

Notably, loans to households and loans to non-financial corporations grew by 1.5% and 6.1% respectively in the same year.

Growth forecast

The report anticipates a 2.4% surge in total assets for banks in 2023.

As part of this, the forecast predicts growth in debt securities by nearly 8% and an almost 10% uptick in derivatives. Moreover, an expected increase of 2.7% in loans to households, and a 3.7% rise in loans to non-financial corporations are also outlined.

However, a fall of nearly 20% in central banks’ cash balances, expected to constitute 10.4% of total assets by the end of 2023, would counterbalance this growth, according to the report.

After a decrease of 3.8% in actual assets in 2022, Luxembourg banks are set to witness a notable turnaround with a projected substantial growth of 9.9% in 2023. Further, an average annual growth rate of 5.5% is forecasted for the period of 2023 through 2025.

Client deposits

In 2022, deposits experienced a notable 4.4% growth, according to EBA data.

Nevertheless, the proportion of deposits in overall funding fell to 74.6% that same year, a drop triggered by a decline in central bank deposits.

This reduction came on the heels of a considerable surge from 68.4% in 2019 to 74.8% in 2021.

Looking ahead, the percentage of deposits in overall funding is projected to gradually decrease, reaching 72.8% by 2025.

The growth rate of deposits, particularly those from households and non-financial corporations, is expected to decelerate to 2.8% in 2023.

New issuances

As banks prepare for long-term central bank funding maturity and the implementation of the minimum requirement for own funds and eligible liabilities (MREL) targets, they are reassessing their funding strategies, reveals the report.

Based on the responses from banks, their strategies for the coming years include issuing more debt securities to facilitate their balance sheet expansion stemming from anticipated loan growth, and to reduce their reliance on central bank deposits.

According to projections, banks are targeting a 5.5% growth in market-based funding in 2023, chiefly focusing on senior unsecured instruments and covered bonds. Interestingly, the report anticipates that the issuance volume of these instruments will substantially outpace the volume of maturing bonds over the forecast period.

However, the strategy deviates slightly for Luxembourg banks. They intend to increase their net issuance in both short-term and long-term debt securities, forecasting a rise of €2.3bn in 2023, followed by smaller issuances of €0.8bn in 2024 and €0.4bn in 2025.