Jerry Grbic, Guy Hoffmann and Yves Maas of the Luxembourg Bankers’ Association (ABBL) pointed to the “fragile” situation of the Luxembourg banking sector during a press conference on 27 April 2022. That description is not necessarily reflected in the figures. Photo: Romain Gamba/Maison Moderne

Jerry Grbic, Guy Hoffmann and Yves Maas of the Luxembourg Bankers’ Association (ABBL) pointed to the “fragile” situation of the Luxembourg banking sector during a press conference on 27 April 2022. That description is not necessarily reflected in the figures. Photo: Romain Gamba/Maison Moderne

While the figures for 2021 are good for the banking sector, with profitability returning to its pre-pandemic level, a recurring problem is becoming increasingly pressing: that of bank profitability. 3,000 jobs are reportedly at risk.

The Luxembourg Bankers’ Association (ABBL) revisited the 2021 results of the banking sector, which had been earlier in the month by the Financial Sector Supervisory Commission (CSSF), with a key message: although the net result reached €4.404trn--up 30.8% compared to the pre-pandemic level--the situation remains “fragile”, according to , the chairman of the board of directors of the ABBL, and , former CEO of the association.

The figures that worry Hoffmann are those for the evolution of profitability. For him, “nearly 20% of banks are not profitable, an alarming finding for the Luxembourg economy”. The banks employ nearly 3,000 people.

Return on assets has been falling steadily since 2016. From 0.62% then, it has fallen to 0.36%. Pre-tax earnings have risen from €4.6bn to €5.1bn. However, this figure should be compared with the change in provisions, which have fallen from €922m in 2020 to €254 m in 2021. In other words, if provisions had remained at the same level, 2021 pre-tax earnings would have been €175m lower.

However, provisions could rise sharply again with the Ukrainian crisis, with a more lasting impact. “The main difference between the current war situation and the pandemic is that in the case of the pandemic, we knew that when it stopped, the business would go back to the way it was before from an operational point of view,” , the of the ABBL, said during a press conference on Wednesday. The Russian war in Ukraine will have a much deeper and more lasting impact on the economy, he stated. The and the  agree with this analysis. Between the likelihood of a massive increase in provisions, a decline in activity and the volatility on the markets that will affect banks, the ABBL expects 2022 results to be much lower than 2021.

In 2021, 23 banks will have posted losses. This is a risk for the whole market.
Guy Hoffmann

Guy HoffmannchairLuxembourg Bankers’ Association (ABBL)

“In 2021, 23 banks will have posted losses. This is a risk for the entire financial centre,” said Hoffmann.

The banks most at risk are those operating in the custodian and private banking sectors. In the latter business, , operating costs are soaring. "29 of the 54 private banks active on the market have less than €5bn in assets under management,” noted Hoffmann. “At this level, it is almost impossible to break even. You need volume to make money. And this is also the case for custodian banks. These are two businesses that are more sensitive than others in terms of volumes and where margins are moving down significantly.”

Hoffmann and Maas expect logical consolidations and potential instability. “Luxembourg is not the driving force behind this consolidation, but is dependent on what is happening at international level,” said Maas. He cited the example of the : “This will have repercussions in any country where these two players have operations. At some point, there will be a merger of activities, which will certainly also have repercussions in Luxembourg.”

Hoffmann added: “There is a real risk of ‘branching’ or relocation. Let’s not forget that banking activities relocate more easily than industry.”

In this context, the ABBL intends to work to ensure that the environment in Luxembourg--whether financial or social--continues to remain “business friendly” so that profitability can be achieved. “For the benefit of the Luxembourg economy.”

We represent a fundamental sector for the Luxembourg economy. A sector that the majority of our fellow citizens do not like very much.
Yves Maas

Yves MaasadvisorABBL

This will not be easy. Maas recognises this: “We represent a sector that is fundamental to the Luxembourg economy. A sector that I think the majority of our fellow citizens do not like very much. This is a fact. A fact that we are aware of and that is very disturbing for us. There may have been reasons for this fifteen years ago, but not any more. The sector has changed and the citizens should be proud of that. There are no criminals working in the sector.”

He cited figures for the sector’s contribution to the country’s economic wellbeing. In 2021, the 123 banks operating in Luxembourg’s financial sector employed 25,964 people--a figure that was stable compared to 2020--and accounted for 30% of GDP and 77% of direct taxes, according to data from the Economic and Social Council. The state coffers will have earned €803m in 2021, compared to €595m in 2020.

Following the ABBL’s general assembly on 27 April, Hoffmann’s mandate as board chair was renewed. He will be assisted by , who was elected vice chairman, and Grbic, the new CEO. Maas, whom Grbic succeeded, will remain with the ABBL for a few more weeks as a special advisor to ensure the transition.

Originally published in French by and translated for Delano