State of play in 2020

Private banking assets exceed €500bn

For the ABBL, the increase in assets shows that Luxembourg is one of the most reputable European hubs in the world for private banking. (Photo: Shutterstock)

For the ABBL, the increase in assets shows that Luxembourg is one of the most reputable European hubs in the world for private banking. (Photo: Shutterstock)

Private banking in Luxembourg has reached a new milestone. At the end of 2020, the sector had €508bn in assets under management, says a study conducted by KPMG on behalf of the Luxembourg Bankers' Association (ABBL). This indicates a 100% increase since 2008 and an average annual growth rate of 7%.

The figures reported by KPMG and the ABBL in the study "Clarity on performance of Luxembourg private banks" indicate an uninterrupted growth over the last 12 years. Since 2008, the average annual growth of assets under management has been 7% and the trend is accelerating.

After a plateau between 2015 and 2017, when the average annual growth was only 1.7%, the rate of increase has accelerated to 13.4% per year between 2018 and 2020. Brexit is not a factor in this.

Profitability is on the same trajectory, partly thanks to the growth of assets under management. In 2020, €11.6 bn in fresh assets (+3.9%) entered the coffers of private banks despite the pandemic and its effects on the economy. More importantly, operating revenues grew faster than costs, resulting in an overall decline in the industry's cost-to-income ratio by 2.4 basis points to 66.1%. In 2020, two-thirds of banks increased their operating profitability.

The study notes that only 12% of the private banks analysed were unprofitable in 2020. Mostly small banks with less than €5bn in assets under management.

Changing remuneration model

This change in numbers goes hand in hand with another change: the shift from a transaction-based remuneration model--generated by commissions and execution fees--to a fee-based model linked to an investment advisory activity.

Since 2015, when advice was free, the study finds that two types of service offerings have grown significantly and now account for almost half of assets under management. Discretionary portfolio management has increased from 12% of assets under management in 2015 to 17% in 2020, while fee-based advisory services have increased from 17% to 29% of assets.

48% of assets under management, however, remained in treasury or execution-only services, or were managed directly by the trading room. Moving these assets from a transaction-based remuneration model to a fee-based model linked to an investment advisory activity represents a huge potential, according to the study. But behind the numbers there are above all dynamics.

First of all, there has been an increase in the professionalism of the sector, which has been reflected in the evolution of the product range, professional skills and the client experience. Jean-Pascal Nepper, partner, head of banking & insurance at KPMG Luxembourg, explains this dynamic: “Over the years, what is expected of the private banker and more generally of the private banking sector has evolved enormously--new needs, new products and positioning as well as new talents. While the industry is known as a traditional bulwark against frivolous trends, I have been pleased to see bankers embrace new trends and innovation to better serve their existing and new clients. There is a real breath of fresh air in Luxembourg that will certainly support the competitiveness of the market to put the country even more at the centre of the global private banking map.”

An industry in a consolidation phase

In recent years, the sector has also been consolidating.

The net number of private banks in Luxembourg--taking into account mergers, liquidations and new entrants--decreased by 18% between 2015 and 2020, from 66 to 54, notes the study. “While the total number has remained stable over the past two years, this downward trend is likely to continue in the future,” the study said. All the more so as 29 players have assets under management below the “critical” €5bn mark. This category contains the least profitable players and has seen 36% of its workforce disappear since 2015.

“This decrease can be explained by a number of factors, all aligned and associated with the need for private banks to have a larger critical mass in terms of assets under management and a leaner operating model allowing for a more balanced cost/income ratio and, therefore, a healthier financial performance,” the authors of the study believe.

7.7% job losses in seven years

On the employment side, with 6,097 FTEs (full-time equivalents), there has been a 7.7% decrease since 2015. And the trend has been accelerating since 2018, with an average annual decline of 3%. This decline is due to the evolution of the clientele. La Place targets UHNWIs ("ultra high net worth individuals")--defined as individuals evaluated at more than $30m--much more than the so-called "wealthy" client who is just a millionaire. The proportion of UHNWIs has risen from 41% of total assets under management in 2011 to 58% in 2020, while the proportion of high net worth clients has fallen from 24% to 7% over the same period.

As a result, there is less need for relationship managers. Their number has fallen by 15% since 2015.

In the coming years, the ABBL and KPMG expect private banks to further integrate private equity investments into their offering, increase demand for sustainable and ethical investments as well as start-ups, and finally accelerate the digitalisation of processes, while insisting that private banking remains a very people-centric and relationship management business. “While digital can undoubtedly help, human interactions will remain more important than ever in maintaining a high quality customer experience, ensuring strong customer loyalty and advocacy over the long term."

This story was first published in French on Paperjam. It has been translated and edited for Delano.