Raphaël Charlier of Deloitte says the professionals of the financial sector (known by its French acronym PSF) showed “a surprising resilience” in 2020. Photo: Deloitte

Raphaël Charlier of Deloitte says the professionals of the financial sector (known by its French acronym PSF) showed “a surprising resilience” in 2020. Photo: Deloitte

Since 2011, the year in which there were the most PSFs active on the Luxembourg market, the number of players has decreased, however, the sector continues to grow and to bring more jobs and added value to the Luxembourg economy. Raphaël Charlier reviews the evolution of the sector.

In 2020, the professionals of the financial (PSF) sector showed “surprising resilience”, says Raphaël Charlier, partner and PSF leader at Deloitte Luxembourg. “Despite a temporary decrease in the number of employees in 2020 compared to 2019, a post-covid trend is clearly emerging, with an increase in the number of employees almost returning to pre-pandemic levels, i.e., more than 16,500 professionals employed by 265 entities by October 2021.”

2020 also saw a decrease in results. The decrease can be attributed to a drop in dividend income at a major player, which was mainly kept in reserve during the crisis. And from this point of view, things are also improving.

What is important to keep in mind is that the sector is still growing in terms of added value.
Raphaël Charlier

Raphaël Charlierpartner, PSF leaderDeloitte

There are three families of PSFs: investment firms, companies that provide investment services to third parties; specialist PSFs, entities active in the financial sector that do not offer investment services, such as domiciliation companies; and support PSFs, companies that provide operational services on behalf of credit institutions, often as contractors.

These three families experienced divergent developments in 2020.

At the end of 2020, there were 267 PSFs. This is 11 fewer than at the end of 2019. Specialised PSFs saw their numbers fall the most, from 105 to 98. Investment firms remained stable, dropping by only one, to 98. Support PSFs fell from 74 to 71.

This development does not worry Charlier. “If, since 2011, a record year in terms of the number of players with 322 players listed, their number has decreased by nearly 20%, at the same time, their headcount has grown by more than 20%. What is important to bear in mind is that the sector continues to grow in terms of added value. The concentration of players can be explained in different ways depending on the family of PSF observed.”

Strong trend towards concentration

Investment firms are “often small companies with an average of 17 to 18 employees. These are small entities which, in terms of profitability, may have more difficulties than others.” Faced with “the pressure of ever-increasing regulatory requirements”, they are constantly looking for economies of scale.

“The search for critical size and a certain level of standardisation is necessary for them to be profitable and sustainable,” notes Adil Sebbar, director in the firm’s audit department.

The entry into force of the IFR/IFD, the new EU prudential regime for investment firms which allows regulatory requirements to be adapted to the size of the players, will reduce the pressure of regulatory costs. “But the strengthening of governance requirements will maintain the trend towards concentration,” adds Charlier.

For specialist PSFs, the trend towards concentration is the same, but for different reasons. Here, the players want to grow “proactively” to be more efficient and profitable. Charlier sees the market becoming more competitive with fewer but more specialised providers. “The big international players are looking to make local acquisitions that allow them to gain a foothold in these markets more quickly by already having an established player, a reputation and a substantial customer base.”

Support PSFs in search of an exportable standard

For support PSFs, the evolutionary scenarios are more uncertain. “The uncertainties stem from the fact that even if there is growth and development to be made--particularly in cybersecurity--the business model of these companies will change. Traditional managed services will fade away in favour of more value-added services with security and development skills.” This will lead to many uncertainties as to the possibility of finding or even training the human resources and the level of activity generated by new services.

“The decline in the number of players is due to competition. But while the sector is concentrating, the number of jobs is remaining stable or even growing slightly.”

Supporting PSFs are also seeking greater recognition of their expertise beyond their borders. Originally, the PFS accreditation was supposed to facilitate the export of services, much like the Ucits label did for the investment fund industry. That scenario did not materialise. “A few years ago, the CSSF issued a regulation that introduced the RAR, the risk assessment report. It was something that was quite Luxembourgish and not really exportable, even if the legislation allowed it to be communicated to clients. I think that in practice, clients did not ask for it and that it was not at all a development and communication tool.”

The association of support PSFs, Finance & Technology Luxembourg, has been mandated by the High Committee of the Financial Centre to work on an exportable label. The idea is to be able to develop an ISO or ISAE standard that is more internationally recognised and that would allow national skills to be exploited internationally. A communication on the progress of this project is expected by the end of the year.

Profitability continues

In terms of financial data, the total balance sheet of all PSFs amounted to €8.6bn, as of 31 December 2020, a decrease of 2.2% compared to 31 December 2019. However, the balance sheet total has risen to €9.1bn as at 30 November 2021, “which represents a significant increase”, says Charlier.

The decrease between 2019 and 2020 is mainly due to specialised PSFs (-€82m, i.e., a decrease of 1%) and support PSFs (-€204m, representing a decline of 11%). These decreases are partially offset by an increase in the total balance sheet of investment firms of €90m (+8%).

In terms of results, covid weighed on the accounts. The net result for 2020 decreased by 48% year-on-year to €233m. 2021 will be a much better year. As of 30 November 2021, the CSSF has estimated the provisional net profit at €254m. That compares with to €223m logged on 30 November 2020.

Charlier says the profitability of this sector is not decreasing. The proof is the multiples for the buyouts of these groups, which are on the rise, “evidence of the growth and profitability potential of this sector in the future”. However, the average net profit of an PSF has fallen from €1.62m in 2019 to €0.88m in 2020.

Finally, employment. At the end of 2020, the PSF sector employed 16,248 people, i.e., 34% of the 48,467 jobs in the financial centre. Compared to 2019, employment fell by 4% over one year, but the trend was reversed in 2021 when the CSSF counted 16,600 jobs at the end of September 2021.

For the months to come, Charlier and Sebbar expect a continuation of the concentration of players, and an increase in overall activity driven in particular by the rise of ESG. In Charlier’s view, “there are more opportunities than worries.”

Originally published in French by and translated for Delano

Corrected: A previous version of this article incorrectly identified the type of PSF whose number declined from 105 to 98 last year.