Market trends and opportunities in the private banking industry
Over the past few years, the private banking industry in Luxembourg has been sculpted by major trends.
Pascal Martino - Partner - Consulting Banking, Insurance & Non-FSI - Deloitte
Mathilde Bruno - Manager - Consulting Banking, Insurance & Non-FSI - Deloitte
Maxime Gaborieau - Manager - Consulting Banking, Insurance & Non-FSI - Deloitte
Sarah Mauprivez - Analyst - Consulting Banking, Insurance & Non-FSI - Deloitte
Published on 15 July 2021
The current Luxembourg private banking market, compared to 10 years ago, is an attractive industry that faces a rising variety of challenges.
Assets under management (AuM) of private banking actors in Luxembourg have more than doubled since 2008, reaching EUR466 billion in 20191, with a revenue pool of EUR2.2 billion2 and a return on AuM of 47 basis points (bps)3. In 2019, this sector represented 62 actors with private banking activities in Luxembourg4, and is relatively concentrated with the top 10 actors holding 65% of AuM5.
Let’s take a deep dive into this market’s challenges and potential opportunities.
The private banking sector’s profitability has decreased in the past few years, as highlighted by the rising cost-to-income ratio reaching 86% in 20198. Operating expenses are growing faster than revenue, mainly due to increasing compliance costs from new regulations, fee pressures from required transparency towards clients, investments in digital solutions, and the low-interest-rate environment.
Luxembourg is recognized as one of the leading European private banking hubs, boasting a growing share of ultra-high net-worth clients over the past few years. Clients with a total wealth of above EUR5 million represented 76% of total AuM in 20199. The client base is undergoing a generational shift, with the millennial segment gaining in importance.
Millennials tend to harness new technologies in their daily activities, demand better and more innovative services, and are less attached to the traditional approach of private banks. Private banking actors will need to change their value proposition and the ways they interact with clients to answer these changing needs.
The service offering mix is shifting towards discretionary portfolio management and advisory mandates, as value-added services are more profitable and have a higher revenue potential.
Luxembourg is an attractive location for most private banking actors; many UK players have chosen the Luxembourg market to mitigate the impact of Brexit, boosting its market activity.
Growing regulatory requirements have left their mark on the market, leading to rising compliance costs and profit margin pressure. Some key topics covered by new regulations include investor protection, privacy (e.g., GDPR), cloud migration and COVID-19 reporting requirements. New sustainability regulations are also expected.
In terms of competition, the number of actors that offer private banking activities has dropped over the past few years, mainly due to profitability pressures driving market consolidation. In parallel, some large international private banks have reinforced their presence in Luxembourg to gain access to the European market.
Regarding innovation, new FinTechs, startups, and big tech companies are shaking up the market. Some traditional players have started to wake up to the innovative capabilities of these newcomers and are exploring collaboration opportunities.
Given these challenges and the current pandemic crisis, private banking actors should strongly consider changing their traditional business models and adapting to current demand to reverse the profitability curve.
One way is by developing a holistic approach to enhance benefits for customers. Complex investors value holistic advice—it is more modern, resolves multiple objectives into different investment strategies (from cash flow needs to wealth transition), and is flexible enough to meet their clients’ needs.
To set themselves up for future success, private banks will also need to invest in an adequate IT infrastructure. Several actors are seeking collaborations with FinTechs to differentiate themselves, develop new products and services (e.g., investment strategy solutions), and enhance their operational efficiency through digitalization.
Another focus point is modernizing the client relationship. Front-office staff must adapt the way they interact with clients. Digital channels, a clever use of analytics, and full personalization of service offerings will enable organizations to unlock additional revenue potential.
To cope with ever-evolving client needs and profitability pressure, Luxembourg private banking actors are pursuing key strategic initiatives, including:
Why is Luxembourg an attractive market?
Luxembourg GDP is growing faster than the European Union average, supported by the financial sector’s strong contributions of 25% of the total GDP10. With an AAA rating, a debt level below 30% of GDP11, and an average bank solvency ratio above 22%12, the Luxembourg economy is renowned for its macroeconomic stability as well as its high quality of life, which attracts highly skilled, multilingual, and international talents.
The Luxembourg government supports the financial sector ecosystem and is aiming to further boost its development by promoting digital innovation, FinTech and green investments. Luxembourg is well-positioned to address the
sophisticated needs of ultra-high net-worth individuals through its comprehensive wealth management toolbox13, which includes:
- A complete wealth management ecosystem covering the entire value chain;
- A business-friendly legal and regulatory framework with numerous structuring options; and
- The EU passport, which allows Luxembourg actors to provide services across the European Single Market.
This toolbox is one of the unique features that allows Luxembourg actors to offer a broad range of all-inclusive services for international private banking clients.
1 Source: CSSF/ABBL - Private Banking Survey 2 Source: Deloitte analysis 3 Source: CSSF/ABBL - Private Banking Survey 4 Source: Deloitte analysis 5 Source: CSSF/ABBL - Private Banking Survey; Deloitte analysis 6 Source: CSSF/ABBL - Private Banking Survey
7 Source: Deloitte analysis 8 Source: Deloitte analysis 9 Source: CSSF/ABBL - Private Banking Survey 10 Source: The Economist Intelligence Unit (March 2021), Statec, Deloitte analysis 11 Source: European Commission, January 2021 12 Source: BCL, Luxembourg for Finance (LFF) website 13 Source: LFF Wealth management report (2020)
Over the past 10 years, the Luxembourgish market has evolved and adapted to remain attractive to international ultra-high net-worth clients with complex structuring needs.
However, the market is consolidating due to profitability pressures, with players’ key strategic priorities including digitalization, operational efficiency, and operating model optimization.
The current evolution of the private banking sector highlights the need to evolve current business and operating models. The time is now to invest in reshaping this industry, adopt a unique value proposition that resonates with clients’ shifting demands, and tackle the profitability trend.
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