Luxembourg banks have recorded beefier profits since 2022, but changes in inflation and interest rates and rising costs will shrink margins in the next couple of years, an industry study has concluded.
“Profitability now relies on cost transformations rather than temporary measures,” according to a report released by the consultancy Deloitte on Tuesday. “Banks must adjust their operating models to remain competitive, and invest in technology, robustness and client service.”
Across Luxembourg’s banking sector, net revenue, including both net commission income and net interest income, increased by 58% to €18.2 billion between 2020 and 2024. That is a compound annual growth rate of 12%, the Deloitte report said.
Over the same period, costs rose at a compound annual growth rate of 5%, while net income before tax increased by 21%.
The report noted that the cost-to-income ratio, which indicates how much banks spent to generate revenue, decreased from 60% to 46%, and return on equity, a key measure of profitability, grew from 5% to 11%.
While bank managers would view the trend lines of all five of these metrics positively, one figure went in a negative direction. The ratio of non-performing loans, when a borrower is significantly late with repayments or risks defaulting on a loan, more than doubled from 1% to 2.3% of total loan books between 2020 and 2024. While the rate in 2024 is more or less in line with European averages, the figure proportion had been shrinking across Europe over the previous five years.
The 117 banks in Luxembourg collectively posted a profit before provisions and taxes of €9.8 billion last year and had 26,150 full-time employees.
Luxembourg bank profitability will come under pressure in the two coming years, the Deloitte report predicted.
Total revenue is expected to fall by 8% between 2025 and 2027, with costs forecast to rise by 11%.
The report stated: “With 59% of revenue tied to net interest income, banks are highly exposed as lower interest rates compress margins and amplify dependence on traditional lending.”
“At the same time, rising costs from inflation, compliance, cybersecurity, fraud prevention and anti-money laundering (AML) obligations, alongside outdated IT systems and talent pressures, are undermining resilience,” the authors wrote.
Corporate banks in Luxembourg had the lowest cost-to-income ratio compared to other segments in 2024, although they recorded the biggest year-on-year increases in total costs.
Private banks spent the most per euro earned, but had the slowest expense growth rate.
Depositary banks returned the highest proportion of profits to shareholders’ capital.
Staff costs represented an average of 42.9% of operating expenditures across all Luxembourg banks in 2024, the report said.
Corporate banking – which includes investment banking services like issuing shares and bonds and advising on mergers and acquisitions – had the highest average revenue and the highest average staff cost per full-time equivalent employee (FTE).
Collective headcount in the depositary banking sector shrank by 6% in 2024, but total staff costs still rose 7%.
Methodology
The study is based on Deloitte’s analysis of publicly available financial statements released by 67 banks authorised in Luxembourg through the 2024 financial year and data published by the European Central Bank (ECB), Luxembourg Central Bank (BCL) and Luxembourg Financial Sector Supervisory Commission (CSSF).
The sample consisted of 30 private banks, six universal banks, 17 corporate banks and 14 depositary banks.
Private banks cater to wealthier clientele, universal banks offer both high street retail and business banking services, corporate banks handle the needs of large companies and institutions, and depositary banks service investment funds.