Drawing on data from the 2022 financial year, KPMG Luxembourg and the Private Banking Cluster of the Luxembourg Bankers’ Association (ABBL) have again joined forces to produce a new edition of the KPMG-ABBL Private Banking Report, which aims to identify significant trends as well as raising awareness of the sector’s different business models and their relative performances and weight.
From post-pandemic recovery to the new dynamics of global trade, against a backdrop of fears of escalating war, we examine in depth the current state, strategies and performance of the private banking sector. Many participants had hoped for brighter days in 2022, but the year brought its share of hardship and surprises, as well as demonstrating the industry’s resilience. While rising interest rates stemming from the high-inflation environment had a significant positive impact on banks’ profitability, they also squeezed the total value of assets, regardless of allocations to equities, bonds or real estate.
Despite a decrease of 2.3% in total assets under management, there was positive evidence of the attractiveness of Luxembourg with total net new money of EUR 31.7 billion, compared with EUR 45 billion for Swiss private banks. As the figures presented in this survey show, 2022 proved to be a solidly profitable year for the Luxembourg private banking sector, with net income up by 24%, mainly due to increased net interest margin.
In terms of M&A activity, the wave of consolidation we have seen in previous years remained in evidence throughout 2022 and into 2023. This phenomenon is driven by a variety of objectives, from strengthening market position and expanding operational scale to the recalibration of business models. Transactions in the sector remain driven by various key factors. For buyers, these include economies of scale, acquisition of new capabilities and access to new markets; for sellers, notably the recalibration of business models toward core activities, involving the strategic divestment of non-core assets.
In this volatile, uncertain, complex and ambiguous environment, we are convinced the third edition of this study is more important than ever, to shine additional light on the development, challenges and ambitions of the private banking sector in Luxembourg. Similarly to last year, we believe it makes sense to examine the development of our private banking neighbors — so we have also included the main findings from the annual private banking study Clarity on Swiss Private Banks, produced by KPMG Switzerland in collaboration with the University of St. Gallen, which was published in July 2023. We would also like to offer warm thanks to all the members of the Private Banking Cluster for their contributions and openness, and we hope the information in this report will provide you, the reader, with useful insights.
Luxembourg private bank assets under management prove resilient
AuM dipped slightly in 2022, but new client money increased
Annual growth in assets under management was uninterrupted until recently, growing almost threefold from EUR 225 billion in 2008 to EUR 599 billion by 2021.
AuM dipped last year by just under EUR 14 billion to EUR 585 billion, as geopolitical turbulence, supply chain constraints, fears of recession and tightening of monetary policy led to market volatility.
Markets down, inflows up
In context, the drop of 2.3% in 2022 is minor compared with how markets performed; total asset values were resilient, as were inflows of new client money. By comparison, the Euro Stoxx 50 equity index lost 9% and the S&P 500 dropped by 15%. Bond markets suffered from the effects of higher interest rates too, with the S&P Eurozone Sovereign Bond down 15%.
We estimate the overall market effect on client assets amounted to a drop of 8%, or EUR 45.6 billion. That was partially offset by net inflows (new money less withdrawals) of EUR 33.4 billion, up slightly from the previous year.
Longer term, the compound annual growth rate was an impressive 12% over the period from 2008 to 2022. The figure drops to 9.67% once last year’s AuM is taken into account.1
Pan-European clientele with a Brexit bonus
Rebooking activity confirms Luxembourg is springboard for expansion
The bulk of Luxembourg private banking clients, just over 60%, come from Belgium, France, Germany and the rest of Europe. The focus on Europe has been reinforced by some banks deciding to switch assets previous booked in France and the UK to their Luxembourg hubs in the wake of Brexit. This is confirmation, if required, that industry members continue to see Luxembourg as a key location to expand their European presence.
So far emerging economies have been less of a priority. Latin America makes up just 3.45% of the customer base, a slight increase on 2021.
An ever-increasing choice of investment options
Third-party funds and new alternative products offer greater opportunities
In turbulent markets, one might expect a higher degree of product turnover in client portfolios. Last year investors increased their cash exposure by one-tenth to 20%, with a corresponding cut in direct equities.
Overall fund investment exposure dipped from 37% to 34% – more likely a market value effect than actual withdrawals, based on our analysis. Third-party funds from other providers still outnumber in-house fund offerings by two to one. That reflects the open architecture approach common throughout the sector, providing more choice and value-for-money investment options for individual clients.
‘Other’ – alternative – products increased their share from 6% to 8%. Although still a relatively small component, increased demand for options including derivatives, structured products and commodity investments indicates a structural shift that will likely encompass a wider range of private assets, including private equity and debt but also collectibles such as artworks and fine wines.
The Private Banking Cluster and KPMG Luxembourg joined forces for the third time to carry out a study assessing the development of the private banking industry in Luxembourg and the performance of Luxembourg-based private banks.
Data collection in May-August 2023
Anonymized questionnaires via the CSSF/PBGL
140 data items related to FY22
46 private banks, 100% of Luxembourg PB AuM
Understanding industry performance
Luxembourg private bank profitability faces multiple pressures.