“Banks are increasingly outsourcing critical functions such as risk management, compliance and regulatory reporting to boost efficiency and maintain regulatory flexibility,” said Stanislas Chambourdon, member of the executive committee and head of sales and markets at KPMG in Luxembourg, in an interview with Paperjam. Photo: KPMG Luxembourg

“Banks are increasingly outsourcing critical functions such as risk management, compliance and regulatory reporting to boost efficiency and maintain regulatory flexibility,” said Stanislas Chambourdon, member of the executive committee and head of sales and markets at KPMG in Luxembourg, in an interview with Paperjam. Photo: KPMG Luxembourg

In 2023, Luxembourg’s private banking sector reported growth in operating income and gross operating profit, benefiting from interest rate rises, while facing the challenges of increased outsourcing and regulatory complexity.

Luxembourg’s private banking sector experienced a strong performance in 2023, driven by increased profitability and cost efficiency. However, future success hinges on embracing digital transformation, expanding outsourcing and navigating regulatory challenges, according to , member of the executive committee and head of sales and markets at KPMG Luxembourg, in an interview with Paperjam.

Referring to the latest KPMG-ABBL , Chambourdon noted significant improvements in profitability within the sector. Operating income for private banks surged by 13.7%, largely due to a 37% increase in net interest income, which more than compensated for a 1.2% dip in net commission income. Even with a 13.2% rise in staff expenses, banks posted an impressive 24.8% growth in gross operating profit, reflecting their capacity to maintain robust financial performance amid rising costs.

The sector also improved its median cost-to-income ratio, which now stands at 63%, largely due to the elevated interest rates throughout 2023. “2023 was a positive year for Luxembourg’s private banking sector, marked by improved median profitability and better cost-income ratios,” stated Stanislas.

Digital transformation

Private banks in Luxembourg have increasingly focused on digital platforms to enhance client engagement, streamline services and improve operational efficiency. However, the KPMG-ABBL survey highlighted some challenges, including a shortage of in-house digital expertise and limited budgets for staff training in digital areas, which may impede further progress.

To address these challenges, Chambourdon noted, many banks have turned to partnerships with fintech firms, integrating innovative solutions to meet evolving client expectations and stay competitive. Additionally, the sector is exploring cutting-edge technologies such as artificial intelligence and blockchain to automate processes, enhance security and deliver more personalised services to clients.

Outsourcing

Chambourdon acknowledged a growing trend of outsourcing among Luxembourg’s private banks, extending beyond traditional IT and back-office functions, and added, “outsourcing is expected to gain momentum due to the increasing complexity of regulations, the pressure to optimize costs, and the growing demand for specialized expertise.” He argued, “banks are increasingly outsourcing critical functions such as risk management, compliance and regulatory reporting to boost efficiency and maintain regulatory flexibility.”

“The emergence of managed service models and strategic partnerships with fintechs is transforming how institutions approach digital transformation and operational resilience,” Chambourdon commented. However, this expansion of outsourcing faces increasing regulatory scrutiny, especially concerning critical functions. New regulations require stricter due diligence and risk assessments for third-party partnerships. Frameworks such as the digital operational resilience act (Dora) are expected to introduce tighter requirements for operational resilience, compelling banks to strengthen their risk management practices.

Looking ahead, Luxembourg’s private banking sector is poised to continue its investment in digital transformation, including further adoption of automation, artificial intelligence and blockchain technologies to enhance efficiency and ensure compliance. As regulatory frameworks evolve, banks will need to strike a balance between innovation and strong governance to remain competitive within a more tightly regulated environment.

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