In its latest study, STATEC has deemed the risks associated with the COVID-19 health crisis limited for Luxembourg's financial sector.
This study assesses how financial companies in the euro area have been impacted by and reacted to the health crisis. According to STATEC, support measures from national governments and the European Central Bank (ECB) have made it possible to ensure the granting of loans to cash-strapped companies and to preserve favourable financial conditions in the euro zone. Faced with the increase in default risks, however, European banks have started to tighten the criteria and conditions for granting new loans since the third quarter of 2020.
The end of moratoria and government aid will reveal the real financial situation of companies and their (in)ability to repay their loans. The swelling in the volume of non-performing loans could weigh heavily on banks in the more fragile southern European countries, while banks in Luxembourg are deemed more solvent and less exposed to risky business sectors. Low interest income, stock market volatility and the costs of risk are still expected to weigh on financial sector results this year
The development of financial companies differed across the euro zone in the first half of 2020. In Luxembourg, the gross added value of the sector remained stable (up 1.4% over one year in value and up 0.4% in volume) and employment increased by 2% (compared to a 2% drop in gross added value and 0.4% drop in employment in the euro zone).
The increase in employment in Luxembourg in 2020 was driven by financial auxiliaries specialising in investment and pension fund management (up 5.2% over one year) and insurance companies (up 2.2%), while banks recorded a decline of 1.6% (i.e. 430 people fewer, compared to an increase of 1.3% in 2019).
Luxembourg, as the European investment fund leader, has been able to retain its market share of 27% of assets held in Europe (33% in the euro zone). After the 2020 stock market crash (February-March), the recovery in stock market values and the net issues in funds helped it bounce back. At the end of the third quarter, the assets of undertakings for collective investment (UCIs) in Luxembourg and in the euro zone outside Luxembourg had increased by 3% over one year.
Banks in Luxembourg were able to benefit from the high volatility of the stock markets in the first quarter of 2020, because the increase in transactions in financial assets inflated the volume of commissions they received (up 23% over one year in the first quarter, compared to an increase of 7% in the euro zone). According to STATEC, Luxembourg benefited more from this commission gain because there are relatively more custodian and private banks focussed on financial asset management than retail banks. On the other hand, interest income was restricted by low rates and moratoriums which has delayed loan repayments for several months (six months in Luxembourg). Similarly, the costs of risk have increased with the crisis.
In Luxembourg, cumulative net income only decreased by 2% thanks to the good performance of commissions received on asset management in the first quarter. The interest margin and other non-commission income, on the other hand, contracted sharply during the third quarter (down 10% and 53% respectively over one year), while expenses fell by just 2%.
The full study can be downloaded (in French) from statistiques.public.lu/fr/actualites/economie-finances/conjoncture/2021/02/20210126/index.html.
