The Luxembourg private banking industry is flourishing. According to a recent survey by Ernst and Young, the total assets under management by the private banking centre of Luxembourg has increased by 60% since 2003, and by 37% between 2005 and 2007. “The world private wealth management remains also in strong shape: 9.5 million people who globally own more than 1 million dollars in financial assets, an HNWI wealth that totals 37.2 trillion dollars and is expected to grow by a 6.8% yearly rate”, the study says.

“Two thousand and seven was an exciting year with surprises,” says Geert De Bruyne, CEO of Banque Degroof Luxembourg, a Belgian private bank, which celebrated its 20th year of presence in the Grand Duchy. “It was a good year for the two banks’ core businesses, asset and mutual funds management,” he adds.

An exciting year that was, however, shaded by the subprime crisis. “The year 2007 will be the best year for Kaupthing Bank Luxembourg since its inception, in spite of a slowdown during the second half of the year, due to the drop in the equity markets following the subprime and credit crises,” Björn Jonsson – head of private banking at Kaupthing Bank Luxembourg – explains.

If most of the private bankers in Luxembourg claim no major impacts from the turmoil on their own activities, as well as on their customers’ business and managed portfolios, Marc Hoffmann, CEO of Compagnie de Banque Privée, a new Luxembourg private bank, is more skeptical: “Even the private banking activities will not remain unhurt from this situation. The coming year promises to be very demanding in terms of revenue, although the impact will be less strong than on other banking business.”

Hence, 2007 will surely remain paradoxical: “If you look at the Q4 results in private banking in general, there has never been as much new money collected as there was this year. This gives banks the opportunity and the capacity to continue acquiring and developing their clientele,” J. F. Sierdo, UBS Luxembourg’s new CEO comments.

However, all experts expect further volatility risks for the coming semester. This shall incite further prudence, as the absence of a clear trend in the financial markets may affect the majority of the banks.

“In 2008, we must remain exceedingly disciplined in our asset management approach and continue an intense dialogue with our customers. In moments of crisis, we would rather talk three times with our customers in order to avoid risky investments,” Geert De Bruyne explains.

The differentiation strategy

“Lack of visibility and continued volatility in capital markets during 2008 will put pressure on revenues for all the banks and will increase the importance of cost control,” Björn Jonsson predicts.

New regulatory and legal issues may also raise the costs. So did the implementation of the MIFID Directive. For more transparency indeed. François-Régis Montazel, CEO of EFG Bank Luxembourg – a Swiss private bank – agrees. “Regarding MIFID it is important and valuable that associations such as the ABBL help us to promote the place of Luxembourg. If this implementation required a lot of effort and work from banks, one now sees the results: everything is in place, with more transparency and a better client protection. Everything that leads to transparency is positive for the banks and is therefore good for Luxembourg”.

But being compliant with new regulations shall not occult the other major challenges the private banking industry may face.

Such as wealth servicing: client profiles have changed, private banking is no longer just for inherited money, experts say. It is all about servicing wealth-generating entrepreneurs, acquired through stock markets, M&As, Internet and tech companies or IPOs.

The service to clients follows the evolution. “It is about looking after their private wealth but also helping them through the different cycles of their business life (from start-up to retirement). With a holistic solution versus a product-selling approach. It is also about planning ahead and understanding clients’ current and future needs. That will be challenging for many banks which have not implemented the strategy of becoming truly client-centric,” Björn Jonsson comments.

J. F. Sierdo adds, “The old-fashioned private banker is over. We must be more proactive towards the new generations of wealthy investors, who are more active, strategic and innovative as customers. We have to meet the new expectations in terms of products and services.”

“Fundamentally today, the onshore market growth has become stronger than the offshore one, François-Régis Montazel says. And this assumes that you must choose very clearly the place where you go to develop your presence. This requires an expertise and local presence, a long-term commitment.”

Differentiation also means product performance: absolute performance and hedge funds will play an important role in the appropriateness of asset allocation and performance for private investors in the coming years, the specialists predict. Risk diversification and open architecture as well as private equity funds and property investments may be significant for the overall asset allocation for the private investor of the future.

These will impact the private banks’ human resource strategy. “It is another important area where the banks have to put focus: retaining CRMs and other key staff as well as focusing on the recruitment process itself, differentiating it from that of other banks. Retaining talents as well as recruitment are of great importance to us,” Björn Jonsson asserts.

The Luxembourgish brand

“A particular challenge for the development of a high-level private bank in Luxembourg will be the attraction of talents at the experienced client relationship manager level. We believe that private clients advisor is an essential function in the value chain of services,” Marc Hoffmann explains.

How do Luxembourg’s financial centre and the authorities support these challenges?

The development of a financial centre has been one of the most important contributions of the authorities. This has led to the establishment of big European banks, which have also increased their activities in Luxembourg, experts agree.

The country also proved its flexibility, adaptability and its clear understanding of the financial sector’s needs. The availability of educated and experienced employees is also considered as a main building block for the continued growth of the financial sector and the attractiveness of Luxembourg for foreign employees moving to the Grand Duchy.

“This is mainly due to the regulatory framework and the way the authorities have demonstrated that they have been quick, professional and efficient in the way that they formulate and implement strategy”, Björn Jonsson tells us.

This closeness and correlation between the political actors and the financial sector undoubtedly forms one of Luxembourg’s great strengths, and is similar to the one developed within global growth poles such as Silicon Valley, Shanghai or Ireland.

Filling the gap

“We are grateful to have a legal framework innovator, which gives us very valuable tools for the development of the bank clientele within the financial centre. This, combined with a multilingual and multi-cultural staff located in the heart of Europe, is a major asset for the country,” Geert De Bruyne says.

“The Grand Duchy of Luxembourg has not only regained its place in terms of legislative innovations, but this capacity for renewal is again recognised and welcomed by the international markets. That said, one must recognise that there remains a substantial gap with Switzerland. However, it is vital for Luxembourg not to allow Switzerland to detain the offshore monopoly as the market experiences the fastest growth. Not to mention that, apart from Switzerland, Luxembourg is in direct competition with all the countries of origin of our customers. Accentuating the onshore strategy in Luxembourg also puts us in a competitive situation with the various domestic markets,” Marc Hoffmann tells us.

Luxembourg still has a long way to go to achieve the status that Switzerland has in private banking, where HNWIs have about 10% of their assets in Luxembourg but close to 40% in Switzerland.

According to Björn Jonsson, “Kaupthing Bank Luxembourg will operate a branch in Brussels and Geneva, as of January 2008, where the bank will leverage on the experience from building the business in Luxembourg and place the same focus on onshore assets.”

The strategy for the branch in Geneva is to establish private banking services for geographic areas such as Eastern Europe and the Middle East, which are not currently covered by the Luxembourg-based private banking arm.

“The financial centre of Luxembourg is, however, making strong progress in attracting banks to Luxembourg, as well as encouraging banks to increase their activities in the Grand Duchy and currently Luxembourg ranks among the ten largest financial centres in the world,” Björn Jonsson notes.

François-Régis Montazel confirms, “Great efforts are made to promote the country. This contributes to highlight Luxembourg’s finance flag and the Luxembourgish brand.”

Nevertheless, Luxembourg’s private banking prospects may remain excellent in 2008, but the country will need to focus on its infrastructure development (real estate, transportation, education) and on its branding.

Indeed, the current challenge of Luxembourg, it seems, is to determine what its trademark is. “If we want to be a big player, we should be able to attract the best talents. For this we have to continue promoting the brand of Luxembourg as financial centre,” J. F. Sierdo explains. “The fund industry is the Grand Duchy’s trademark. Therefore, the country must develop this distinctive image of a financial centre dedicated to the fund industry. If we think of Switzerland, we automatically think private banking”.

“This will surely give the perception to the world that the financial centre of Luxembourg is there for the very long term,” Geert De Bruyne adds.