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A new study by the Luxembourg Banker's Association (ABBL) has revealed an increasing return to term deposits among clients, as well as a drop in loan applications since the start of 2023.

According to the study, Luxembourg's retail banks continued to support their customers amid rising interest rates in 2022 by adapting to changes in their behaviour.

The study showed a return to favour for term deposits and, since the beginning of 2023, a drop in loan applications. The trend towards digital solutions was also confirmed.

Rising interest rates

ABBL noted the context of war in Ukraine, inflation and rising interest rates. It recalled the decision of the European Central Bank (ECB) to progressively increase interest rates to curb inflation. Claude Hirtzig, Vice-Chair of the Retail Banking Cluster and Head of the Retail & Professional Banking Department at Spuerkeess, noted that "while this rapid and spectacular increase has taken many customers by surprise, we must also remember that we are returning to a situation that is closer to normal, even if it will take some time for all stakeholders to adapt."

Renewed interest in term deposits

In a market that remained stable overall (deposits on the books of Luxembourg retail banks rose slightly by 1%), the most significant changes in customer behaviour, according to the study, were the renewed interest in term deposits and the fall in demand for credit. Term deposits rose by 300%, a figure attributed to the appeal of these low-risk products against a backdrop of rising interest rates.

Michael Burch, Chair of the ABBL's Retail Banking Cluster and CEO of ING Luxembourg, noted: "This situation contrasts with the behaviour of savers on other continents, where customers are investing more of their capital." He added: "The Luxembourg economy, like the rest of the European economy, remains primarily financed by credit rather than investment."

Decline in credit demand

Lending activity remained buoyant in 2022, with a 5% increase in volume. The contraction in demand for loans, particularly property loans, which began in the third quarter of 2022, accelerated at the start of 2023. Loan applications fell in the first quarter of 2023, down 38% in terms of volume and 26% in terms of number of loans compared with the first quarter of 2022.

"It is very clear that, in a climate of uncertainty and rising interest rates, many households are postponing their investment plans. So, we are in a market where there is less demand," pointed out Claude Hirtzig. "Every bank wants to lend. But no banker wants to put their customer in a situation where they can't repay it," added Michael Burch.

"However, we must also note that we are encountering cases where customers do not anymore meet the legal criteria that banks are required to comply with in order to grant a loan," explained Claude Hirtzig.

Trend towards digital solutions

The ABBL noted that the number of cash withdrawals in bank branches fell sharply in 2022 compared with 2019, the pre-COVID-19 year, as did money transfers carried out in branches (down 60% and 56%, respectively).

Furthermore, cards were found to be the preferred means of payment for in-store purchases (52%), well above the European average (34%). Contactless payments have seen a very strong increase at points of sale, with 69% of residents using it for card payments. While cash remained the main means of payment between individuals both in Europe and in Luxembourg, with 25%, Luxembourg ranked third in Europe for P2P payments made via mobile applications. Only Finland (26%) and the Netherlands (43%) had higher percentages.

The same trend can be seen in instant payments, where Luxembourg residents were the most active in Europe in considering access to this new functionality.

"While banks are keeping pace with these new behaviours by continually investing in solutions that are more personalised, secure and offer a first-class customer experience, the coverage of Luxembourg's territory in terms of branches and ATMs remains good," noted Michael Burch. With 34 branches and 80 ATMs per 100,000 inhabitants, the Grand Duchy was found to be much better served than its neighbouring countries. Employment in retail banking, particularly at branch level, remained stable.


ABBL noted that the world of finance is in permanent evolution. Among the changes set to impact the habits of bank customers, the association highlighted the environment, social and governance (ESG) aspects, which pose new challenges but also offer new opportunities. "ESG is a fantastic opportunity for banks to broaden the scope of discussions with their retail and business customers and to demonstrate their ability to support customers' sustainability aspirations and projects," said Claude Hirtzig.

Since August 2022, under the MIFID II directive, banks have been obliged to take account of their customers' sustainability aspirations in every investment decision. ABBL also noted that the regulatory framework for sustainable finance, which is still incomplete, is in the process of clarifying and broadening, which should enable banks to better develop their offering.

"I also think that all stakeholders still need to make a major effort in terms of education. The economic landscape is often reduced to companies that are either green or brown. However, most companies are somewhere in between and need financing to undertake their virtuous transformation. That's what transition finance is all about," stated Michael Burch. 

ABBL highlighted one last challenge in terms of sustainability: private individuals and businesses will have to meet the requirements set by public authorities in terms of energy performance. This will also require the development of dedicated green credit offerings.