luxembourg banking insights 2019 · 2020-03-30 · luxembourg banking insights 2019 4 evolution of...

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Luxembourg Banking Insights 2019


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Contents

Degree of internationalization within Luxembourg’s banking industry

Banking performance indicators

Evolution of the Luxembourg banking industry

10 Countries of origin: Worldwide

11 Countries of origin: Europe

13 New entries and leavers in Luxembourg in 2018

14 Brexit: impact on Luxembourg

15 Brexit: relocation types

17 Banking industry segmentation

18 Regulatory classification

19 Universal banks

22 Depositary banks

25 Private banks

28 Commercial banks

31 Performance indicators

4 Size of the Luxembourg banking industry: 2015 to 2018

5 Assets

6 Liabilities

7 Banking performance outlook

9

16

3


4

Evolution of the Luxembourg banking industry

Size of the Luxembourg banking industry: 2015 to 2018Total assets

Banking income

Cost-income ratio

Number of banks

Number of staff

€ billion743€ billion770 € billion752 € billion774

€ billion11.5€ billion12.4 € billion11.6 € billion11.7

52%

22%

49%

25%

54%

26%

57%

25%

143 141139

135

25,942 26,060 26,149 26,317

€ billion5.5€ billion6.3 € billion5.5

€ billion5.0

Profit before tax and net provision

Total capitalratio

2015 2016 2017 2018


3

Source: CSSF & BCL

Luxembourg Banking Insights 2019Luxembourg Banking Insights 2019

5 6

The banking market’s asset structure has remained relatively consistent in recent years. Its overall amount has increased by EUR 22.5 billion to reach EUR 774.4 billion, while the asset breakdown has remained stable compared to the last two years.

Structure of banking assets (total in EUR billion and asset components in %)

Assets

Deposits from customers and credit institutions remain the main source of funding for the Luxembourg banking market.

Luxembourg has a cash-rich economy that ensures the banking sector is well funded. This has led to a funding surplus that banks cannot dissipate through lending. Deposits continue to grow despite negative interest rates being applied by some banks, increasing the central bank’s cash over the past 3 years.

LiabilitiesStructure of banking liabilities (total in EUR billion and liabilities components in %)

Source: CSSF

2016 2017

Loans and advances to credit institutions

Loans and advances to customers

Loans and advances to central banks and administrations

Fixed-income securities

Real estate assets and other assets

2018

35.47%34.81%

29.67%27.99%

15.49%14.88%

15.89%17.81%

1.53%1.02%

0.93%

2.03%1.27%1.21%

35.40%

29.72%

15.82%

15.29%

1.98%

0.95%

0.84%

Variable-yield securities

Financial assets held for trading

770752

774

Source: CSSF

2016 2017

Amounts owed to customers

Amounts owed to credit institutions

Debts evidenced by certificates

Capital and reserves

Other liabilities

Amounts owed to central banks

Liablilties (other than deposits) heldfor trading

Subordinated liabilities

Provisions

2018

770752

774

48.84%48.15%45.82%

31.10%30.97%

32.94%

8.52%8.25%

7.70%

7.34%8.05%

7.96%2.00%

1.41%

1.14%

0.57%0.46%

1.78%

1.14%

0.66%

0.55%

0.45%

1.60%

0.91%

0.79%0.51%

0.39%


7 8

2018 banking income and expenses

Income trend (total in EUR billion and components in %) Expenses trend (total in EUR billion and components in %)

Banking performance outlook Banking performance outlook

10.46

13% 21% 20% 25% 18%

38%

49%

40% 41%

39%

37%

38%

40%

42%

10.3811.48

12.3611.76

2013 2014 2015 2016 2017

15%

42%

43%

11.69

2018

Other net revenues Fees & commision Interest margin

Source: CSSF

39%

The total banking income decreased slightly in 2018. The main sources of income remain commissions and interest-rate margin despite the negative interest-rate environment.

Total expenses have trended upwards over the last five years. The reason for this increase varies according to the financial institution type and its respective business model. The banking performance indicators section gives a more detailed breakdown of how and why total operating costs have changed for each respective banks’ category.

It’s worth noting that the wage indexation mechanism did not have a big impact on the overall total expenses trend.

5.20

47% 48% 48% 49% 49%

53% 52% 52% 51% 51%

5.01 5.94 6.04 6.25

2013 2014 2015 2016 2017

51%

49%

6.63

2018

Other administrative expenses Employee costs

Source: CSSF

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Degree of internationalization within Luxembourg’s banking industry

Below are the number and geographical origin of financial institutions from non-European countries.

Countries of origin: Worldwide

United States

5

Brazil

4

Canada

1China

14

Israel

2Japan

6Qatar

2

Russia

2

Source: CSSF (December 2018)

73%

America16%

Middle East

8%

Asia & Pacific

3%

Europe

Area of origin of credit institutions in Luxembourg


9

11 12


Below are the number and geographical origin of financial institutions from European countries.

Countries of origin: Europe Countries of origin: Europe

Source: CSSF (December 2018) Source: CSSF (June 2019)

Norway

2Sweden

6

Greece

1

Denmark

1

Italy

6

Ireland

2

Portugal

2

United Kingdom

7

Jersey

1

Andorra

2Spain

3Cyprus

1

France

14

Germany

25

Netherlands

2

Belgium

4

Luxembourg

6

Switzerland

11

Finland

1

Latvia

1

99 banks in Luxembourg are from Europe and 43% are from cross border countries.

EU segmentation of legal entities in Luxembourg

Non-EU segmentation of legal entities in Luxembourg

34% Branch

5%

Head office61%

Subsidiary

31%

3%

66%

Branch

Head office

Subsidiary

13 14


New entries and leavers in Luxembourg in 2018

European banks have always strongly influenced the evolution of Luxembourg’s banking market. However, the number of Chinese banks has more than doubled in five years, reaching 14 institutions by the end of 2018.

Number of credit institutions

Source: CSSF(2018)

1

0

2

-3

-2

-1

Germany France Spain United Kindgom

Italy Brazil

Brexit: impact on LuxembourgThe graphs below show the number of banks and asset management companies that announced that they would relocate part of their business out of the UK following the Brexit decision. The map also highlights the target nation of the respective financial institutions.

30 7

2342

21

Source: STATEC, KPMG, press (as of Apr 2019)

Breakdown of relocations by target nation

Luxembourg

Luxembourg

34%

Ireland

Ireland

24%

Germany

Germany

19%

France

France

17%

Netherlands

Netherlands

6%

Number of credit institutions

Entries 2 6Exits

15


Type of relocation in LuxembourgBank

# of institutionsAsset Management

# of institutionsTotal

Opening new officeHeadquarters 1 7 8

Subsidiary 4 12 16

Extension of current business in Luxembourg

Staff relocation 0 3 3

Booking center 1 0 1

European retail business

1 0 1

Fund management license

2 7 9

Private equity and infrastructure investment licenses

0 1 1

Depositary license 0 1 1

Not yet disclosed 0 2 2

Brexit: relocation typesThe below table shows the relocation methods that the 42 financial institutions would choose if they moved their main business activities to Luxembourg and/or reinforced their current activities in/from the Grand Duchy.

The uncertainty caused by Brexit drove these financial institutions to seek out a sustainable market infrastructure with a robust financial ecosystem. This transition creates new opportunities and challenges for Luxembourg, ultimately strengthening its position as one of the main European financial centers.

The analysis and classification of the relocation announcements are not set in stone as the public is still waiting for the result of the Brexit deal. However, the below picture will not change as the financial institutions’ decisions were largely made on the assumption of a hard Brexit, and all are already implementing their plans.

Type of relocations in Luxembourg

Source: STATEC, KPMG, press (as of Apr 2019)


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Banking performance indicators

Banking industry segmentationOur study is based on 93 banks* located in Luxembourg covering 70% of the total amount of assets in the market. We have divided them into four different segments based on their business type:

— Commercial banks, that focus on deposits, business loans, payments and basic investment products.

— Private banks, that manage the personal finance of high-net-worth individuals (HNWIs) by providing a wide range of financial services.

— Depositary banks, that focus on custody services for their own groups and institutional clients around the world.

— Universal banks, that provide combined services offered by the three other banking segments described above.

Three banks specialized in issuing covered bonds were not included in the four segments given their specific business

This categorization aims to provide you with more detailed findings driven by business model. In identifying balance sheet and P&L components together with performance indicators, we were able to report market trends and highlight the main differences within banking segments.

We gathered financial data as of December 2018 from the banks’ annual accounts, which were drafted using LuxGAAP methodology in 75% of the cases and IFRS in the remaining 25%. The two methodologies imply different account measurement types and a diverse level of granularity in the notes section. However, we have standardized all indicators for both accounting schemes to provide accurate and consistent results.

Commercial banks29%

14%

Depository banks

48%

Private banks

9%

Universal banks


16

* Branches are excluded from the analysis


18 19

Regulatory classification** of the 93 banks included in our analysis

31

56

6

Other SI = Banks/groups designated as Significant Institutions (SIs) in other Banking Union states. Four of these banks were also identified as Domestic Systemically Important Banks (D-SIBs)

LSI = Less significant institutions. One of these banks was also identified as a Domestic Systemically Important Bank (D-SIB)

LU SI = Banks/groups designated as Significant Institutions (SIs) in Luxembourg by the ECB. Four of these banks were also identified as

Domestic Systemically Important Banks (D-SIBs)

* *“Regulatory Consistency Assessment Programme (RCAP) Assessment of Basel III G-SIB framework and review of D-SIB frameworks – European Union” June 2016 Bank for International Settlements. Recital 38 of SSM Regulation.

Universal banks

Profit & Loss overview

Operating income

Average 2018 Total operating income

Median 2018 Total operating income

EUR 387.06 million

EUR 357.65 million

Total operating income (average in EUR million)

399.30

61% 59% 57% 58% 45%

19%

20%

20% 19%

24%

17%

25%

14%

41%410.36 407.89

391.44

494.50

2012 2013

Other income

2014 2015 2016

55%

20%

25%

385.85

2017

54%

20%

26%

387.06

2018

21%

Net fee and commission incomeNet interest income

Total operating income variation (2017-18) +0.3%


20 21

2012 2013 2014 2015 2016

146.57139.46

147.11 151.51

228.72

110.48 114.85

2017 2018

Net profit (average in EUR million)

Operating costs Balance sheet (in EUR billion)

Loan-to-deposit (customer) ratio

Average 2018 Total operating cost

Median 2018 Total operating cost

EUR 220.02 million

EUR 182.68 million

Total operating cost (average in EUR million)

208.85

51% 51% 53% 54% 57%

49% 49% 47% 46% 43% 47% 45%

217.44 214.23 214.18202.77

2012 2013 2014 2015 2016

53%

223.68

2017

55%

220.02

2018

Other expensesEmployee costs

Total operating costs variation (2017-18) -1.6%

Despite banking regulators implementing several new regulatory requirements, the average operating cost amount decreased by 1.6%, leading to a 4% net profit increase in 2018.

Please note that if the 2016 sale of part of a universal bank’s business hadn’t been factored in, the net profit trend would have been fairly stable over the reporting period for universal banks.

Universal banksUniversal banksBalance sheet overview

Balance sheet

24.20

19.53

AverageMedian

2016

23.66

20.86 2017

24.03

21.92 2018

The average amount of assets in 2018 grew by 1.57% compared to 2017, reversing the negative trend of the last two years.

After a decreasing trend from 2014 to 2017, the customer loan-to-deposit ratio increased slightly in 2018.

(average per banking segment) 1.5%€2.22billion

Equity

Loan-to-deposits (customers) ratios

Customer deposits (average)Loans to customers (average) Loans/Deposits

2012 2013 2014 2015 2016 2017 2018

4.00

0

6.00

8.00

10.00

12.00

14.00

16.00

2.00

72%

68%

74%

76%

78%

80%

82%

84%

70%

EUR billion


22 23

Depositary banks



EUR 255.14 million

EUR 109.57 million


191.20

26% 21% 20% 20% 16%

61%

13%

60% 58%

22%

64%

16%

65%

19%

209.59 217.71 212.66 203.89

2012 2013

Other income

2014 2015 2016

16%

65%

19%

213.56

2017

16%

63%

21%

255.14

2018

19%




EUR 144.16 million

EUR 61.33 million


96.57

42% 39% 41% 35% 36%

61%58%

59% 65% 64% 64%65%

112.44107.02

118.08 119.62

2012 2013 2014 2015 2016

36%

120.33

2017

35%

144.16

2018


Total operating costs variation (2017-18) +19.8%

2012 2013 2014 2015 2016

74.37

63.69

94.20

69.2966.67

72.32

87.96

2017 2018

Net profit (in EUR million)


Operating income

Total operating income variation (2017-18) +19.5%

Operating costs

Depositary banks’ net profit has increased on average by over 30% since 2016. In 2014, net profit peaked due to an extraordinary income earned by a depository bank selling off part of its business.


Depositary banks


24

Depositary banks

Balance sheet

7.58

1.01

AverageMedian

2016

7.48

1.08 2017

9.44

1.34 2018

The average total balance sheet amount grew by 26% in 2018 compared to the previous year.

Furthermore, the average equity amount rose by more than 30% thanks to an important growth in the share premium of one depositary bank.

Loans-to-deposits ratio slightly decreases after it has been slashed by nearly a half in 2013.

(average per banking segment) 34.1%€0.76 billion

Equity

2012 2013 2014 2015 2016 2017 2018

1.00

0

1.50

2.00

2.50

3.00

3.50

4.50

4.00

5.00

0.50

20%

0%

30%

40%

50%

60%

70%

10%

EUR billion


Balance sheet (in EUR billion)


Balance sheet overview


25 26

Private banks Private banks



EUR 63.53 million

EUR 36.78 million


58.37

33% 29% 30% 26% 27%

48%

19%

50% 53%

17%

51%

23%

50%

23%

61.57 60.41

70.89

62.63

2012 2013

Other income

2014 2015 2016

28%

50%

22%

65.20

2017

27%

50%

23%

63.53

2018

21%




EUR 49.22 million

EUR 33.30 million

36.24

58% 58% 58% 55% 54%

42% 42% 42%45% 46% 45%

46%36.04 36.45

40.86 41.39

2012 2013 2014 2015 2016

55%

43.95

2017

54%

49.22

2018



Total operating income variation (2017-18)

Total operating costs variation (2017-18)-2.6% +12.0%

After implementation of MiFID II regulation, the average operating income has remained stable. On the other hand average operating costs have shot up since 2015 due to intense regulatory pressure and increased IT investment in order to adapt to the digital and automation trends of the industry causing a negative trend in Luxembourg private banks’ average net profit.

2012 2013 2014 2015 2016

12.29

19.77 19.16

22.8119.78

18.02

10.64

2017 2018

Net profit


Operating income Operating costs



27

Balance sheet

3.22

1.43

AverageMedian

2016

3.29

1.67 2017

3.35

1.71 2018

The average balance sheet amount has slightly increased over the past three years.

A +80% boost in loan business from 2012 to 2018 is the main driver of the positive trend of the loans-to-deposits ratio.

(average per banking segment) 3.4%€0.27 billion

Equity


2012 2013 2014 2015 2016 2017 2018

1.00

0

1.50

2.00

2.50

0.50

20%

0%

30%

40%

50%

60%

10%

EUR billion


Private banks





28 29

Commercial banks Commercial banks



EUR 67.21 million

EUR 12.66 million

48.32

67% 64% 65%69%

74%

20%

13%

20% 24%

11% 18%

13%16%

10%49.54

44.44

56.3658.85

2012 2013

Other income

2014 2015 2016

79%

14%

7%

63.76

2017

76%

18%

6%67.21

2018

16%





EUR 24.14 million

EUR 8.41 million

13.88

43% 43% 43% 45%49%

57% 57% 57% 55%

51% 57%

60%13.84

14.7315.76

20.17

2012 2013 2014 2015 2016

43%

19.42

2017

40%

24.14

2018



Total operating income variation (2017-18)

Total operating costs variation (2017-18)+5.4% +24.3%

Over the past five years, the total operating income has steadily increased largely due to net interest income. However, it’s worth pointing out that in 2018, net commission income increased by 36% compared to the previous year.

Had we not considered two commercial banks’ other operating expenses, 2018’s total operating costs would have been in line with the previous year’s variations.

2012 2013 2014 2015 2016

22.60

18.7517.70

19.2618.01

21.8719.78

2017 2018

Net profit


Operating income Operating costs



30

Balance sheet

2.50

0.82

AverageMedian

2016

2.55

1.002017

2.18

0.982018

The average equity amount plunged by 39% due to a big commercial bank undertaking a strong capital reduction.

The loan-to-deposit ratio dropped at 121%. This trend demonstrates that on the one hand, banks are increasingly relying on customer deposits for funding. While on the other, the application of NPL guidelines might have negatively affected the total amount of loans.

(average per banking segment) -39.2%€0.25 billion

Equity


2012 2013 2014 2015 2016 2017 2018

0.40

0

0.60

0.80

1.00

1.20

1.40

1.60

1.80

0.20

100%

0%

150%

200%

250%

300%

350%

50%

EUR billion


Commercial banks





31 32

Performance indicators

Operating costs / Operating income

ROE

ROA

2018 average interest margin

2018 average commission margin

Depositary banks

Private banks

Commercial banks

Net profits / FTEs (EUR)

Employee costs / FTEs (EUR)

Assets / FTEs (EUR)

Number of FTEs variation

Commercial banks

Depositary banks

Private banks

Universal banks

Overall average

2016-2017 9% -1% 1% -1% 1%

2017-2018 10% 7% 2% 1% 5%

Average number of employees per institution and respective banking segment

Performance indicators

58

426

174

1107

2016

64

423176

1101

2017

70

454

180

1111

2018

Commercial banks Depository banks Private banks Universal banks

Universal banks

56.84% 56.50% 77.47% 35.92%

4.86% 10.52% 3.81% 7.93%

0.48% 0.93% 0.32% 0.91%

0.86% 0.43% 0.50% 2.34%

0.33% 1.70% 0.95% 0.55%

100,000 190,000 60,000 280,000

110,000 110,000 150,000 140,000

21,630,000 20,800,000 18,660,000 31,330,000

Key performance indicators Development of staff numbers

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© 2019 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG Luxembourg, Société coopérative

39, Avenue John F. KennedyL-1855 LuxembourgT : +352 22 51 51 1

ContactStanislas Chambourdon Head of Banking

KPMG LuxembourgT: +352 22 51 51 - [email protected]

Sonia Dribek Pfleger Financial Services CFO advisory leader


Marco Weber Partner


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luxembourg banking insights 2019 · 2020-03-30 · luxembourg banking insights 2019 4 evolution of...

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