“In a severe but plausible scenario, non-performing loans at euro area banks could reach €1.4trn,” said Andrea Enria, chair of the supervisory board of the European Central Bank, told the Financial Times on 26 October.
Although Luxembourg branches of banking groups could be affected from turbulence elsewhere, figures from the Luxembourg Central Bank (BCL) suggest they themselves are well positioned. In June, the average capital ratio in the country was 21.4%: more than five times the minimum required by regulations and twice the figure generally seen as being safe by market players. As for non-performing loans, generally these are “isolated cases, and thanks to the good quality of assets, provisioning and credit risk in Luxembourg this should not be an issue,” noted Roxane Haas, banking leader at PwC Luxembourg.
Indeed, many banks have benefited from the covid turbulence, particularly with fees being generated as clients adjusted their portfolios. The BCL reported a 9.3% increase in profits in the second quarter of this year, compared to the same period of 2019. The private banking industry appears to be in good shape, with the a 17.9% increase in assets under management last year, said the ABBL’s Private Banking Group. Depositary and custodian banks working with the fund industry will have benefited as net assets of Luxembourg funds were 2.8% higher in September 2020 than a year previously.
The life and non-life insurance industries are likely to face the uncertainty from different vantage points. Although the former works as part of the well-performing wealth management sector, the year so far has been somewhat difficult. Clients have been nervous about market fluctuations, so premium income in this sector fell 34% in the first nine months of this year, says the insurance regulator CAA. This compares with the non-life sector. Boosted by the arrival of 11 operations fleeing the consequences of Brexit, premium income rose 7.5% over this period, suggesting it will face next year in good shape.
There appears to be broad cautious optimism for 2021. A Luxembourg for Finance survey of sentiment of all financial sector professionals conducted during the height of lockdown in May found nearly two-thirds being at least “rather confident” of revenue growth in 2021.