Moving up the value chain
Major banking institutions from 25 different countries have established 142 banks, subsidiaries or branches in Luxembourg to concentrate their activities on the international markets. The German banking group is the largest with 42 banks. According to the latest PwC report on German banks, the consolidation trend and the focus on private banking business continue to gain ground.
The consolidation trend in the banking industry is not specific to German banks; it is a global trend. If you look at the German banks, the concentration process is not a surprise because the number of financial institutions is significantly higher than that of other countries with important domestic markets such as Spain, the UK and the US, where the consolidation trend began earlier. This development has had an impact on the subsidiaries based in Luxembourg.
In the PwC report on German banks Auswertung der Jahresabschlüsse 2011 der deutschen Eurobanken in Luxemburg (an overview of the results of German banks in Luxembourg), all of the mergers and liquidations of 2011 and 2012 are listed. You have the merger between DZ PRIVATBANK and WGZ Bank Luxemburg, as well as DekaBank purchasing the asset management structure from LBBW Luxembourg and taking over VM Bank International.
Holger von Keutz, partner at PwC Luxembourg, notes that the concentration process in the wealth management business was one of three trends in 2011, with DZ PRIVATBANK and DekaBank being very active in this area and Commerzbank International transforming into a wealth management hub in Luxembourg. He spoke about two other major trends that took place in 2011 and that are likely to continue.
“The second trend is clearly a focus on investment fund related business and custodian bank services. Deleveraging is another ongoing trend we observed in 2011; except for Deutsche Bank, which concentrates group credit risks in Luxembourg to optimise its portfolio structure.”
According to the Luxembourg supervisory authority CSSF, financial results of 2011 of all banks declined by more than 25%. Holger von Keutz admits that it is difficult to compare the results of German banks with the figures of the CSSF because the CSSF figures are based on FINREP reporting while the published results are a mix of IFRS and LUXGAAP; also, the branches’ results are not included in the report, and some of them did perform well. Overall, Mr von Keutz concludes that the results of the German banks are in line with those of the other financial institutions in Luxembourg.
Attracting wealthy clients
The PwC experts underline that the survey results are not surprising, because it has been known for years that the Luxembourg banks and hence the German banks had to rethink their business model - a logical step due to the switch to an onshore model. With that in mind, Holger von Keutz quoted Ernst Wilhelm Contzen, the chairman of the local Bankers’ Association (ABBL), who said that ABBL strongly insists on the fact that Luxembourg cannot accept a black money model.
This also implies that we see a shift in focus from the mass affluent client to the high net worth individual, but this process takes some time. Jörg Ackermann, partner at PwC Luxembourg, highlights the trends in wealth management and Luxembourg’s excellence in that area.
“In private banking, we see a whole range of products in wealth structuring, this means different structures that could be used either for family offices or for wealthy individuals. This is clearly one of Luxembourg’s strengths, along with the ease of use of these structures plus the professional know-how and experience we have in that field”.
However, Mr Ackermann added nuance by pointing out that it is not enough to just have these structures available; it is also about positioning the local bank entity within the group, and convincing the head office abroad that Luxembourg has unique expertise and can provide certain products to the group that are not available elsewhere. In any case, Mr Ackermann believes that there are encouraging signs for turning Luxembourg into an international private banking hub.
“DZ PRIVATBANK for example agreed within its group to serve private banking for the entire cooperative banking sector in Germany out of Luxembourg, which provides the opportunity to hundreds of regional cooperative banks to enrich their private banking offering to their clients through the Grand Duchy".
"That is one example of a local bank that has successfully positioned itself within the group. In addition there are examples of big banking institutions that either consider or have already decided to use Luxembourg either as a hub or as a competence centre for their private wealth management activities.”
Survival of the fittest
When talking about challenges, Mr Ackermann thinks that more than ever, banks are under scrutiny to follow the rules, both from a legal and ethical perspective. Reputational challenges are linked to that issue. “Banks need to make sure that their clients are tax compliant and they need to do that much more actively than in the past. This brings about operational challenges because tax reporting in the various countries will become more complex".
"Also, since banks are competing with onshore centres, they need to make sure that they can serve the client even better than the bank in their country of residence. To have tax reporting for the various countries in place is a must, not an advantage”, he warns.
Aside from that, both PwC partners see general challenges to follow the upcoming wave of regulation: bank capital rules like Basel 3/CRD 4 or UCITS 5 for the fund industry. Regulation will affect all of the players in the finance industry, but this regulation tsunami is particularly challenging for smaller players who are asking themselves whether they will be able to weather the storm. The fact is that you need a critical mass and a certain level of infrastructure to survive the coming wave of regulations. CW