Banks not only have an important role in helping to finance the real economy during the pandemic - but they can also help the real world create a better future by advancing the cause of sustainable finance, claims Pierre Ahlborn, Administrateur Délégué, in an interview given to the magazine Paperjam.
Interview with Jean-Michel Lalieu published in Paperjam - November 2020
Six months after lockdown, how do you see the economic situation in Luxembourg?
The finance industry, which is the country's most important sector, has stood up very well overall. It is a service industry which was easily able to switch to working from home. Work has continued, and clients – especially companies who may have had greater need for advice or financing – have been supported. Luxembourg is fortunate that all its financial establishments have been able to maintain their operations. The level of activity has been very robust during the past few months, which should enable the Luxembourg economy to hold up better than its neighbours, as so many sectors depend on the finance industry. Moreover, between May and August, Luxembourg posted net job creation, which is really remarkable. But the general picture is obviously more nuanced. Some sectors have been very heavily affected and this will have an impact on the banks' balance sheets over the next few years. Some companies won’t survive, while others will find it difficult to service their debt. This will inevitably lead to increases in provisions and losses.
Is there nevertheless a risk that this crisis will affect the financial sector?
Banks are more resilient, better prepared and better capitalised than they were during the 2008 financial crisis. There is therefore no reason to fear that the crisis will be excessively severe. They will be able to absorb a very significant portion of the real losses related to this crisis. In Luxembourg, only half a dozen banks, including ours, are active in business loans and credit. My colleagues and I agree that the impacts are not very apparent yet, as companies are still being subsidised. Defaults will only start materialising at the end of 2021. Spreading the effects out over time will help cushion the shock.
Banks are more resilient, better prepared and better capitalised than they were during the financial crisis of 2008.Pierre Ahlborn, Administrateur-Délégué, Banque de Luxembourg
In your interview with us last May, you were rather pessimistic, suggesting that a healthy part of the economic fabric would be destroyed because of the health crisis...
That has in fact happened. I don't have statistics for Europe, but in the United States, for example, they show that a quarter of restaurants are bankrupt and won’t reopen. In the travel sector, the figures are even more dramatic. There’s no denying that Covid is having a very real impact, although, in Luxembourg, we are fortunate to be extremely resilient thanks to the dominance of the service sector.
Have you experienced many difficult cases among your clients?
No. As far as we are concerned, our promise has always been to be by their side, throughout their life. So we have been ready to listen and quick to respond. We have done our utmost to help them quickly by freezing loan repayments or providing lines of credit. The fact that we are mainly focused on family businesses which, from an asset management perspective, behave more prudently, has undoubtedly helped to avoid serious cases.
Has there been strong demand for state-guaranteed loans?
The set of measures introduced by the government has been well used, much appreciated and partly consumed. So far, the amounts paid out in support are lower than the available budget. To my mind, this is a good thing: it means the government has apportioned a sufficiently large envelope, not knowing how long the crisis would last. There may still be difficult times ahead and further support can be drawn on.
Given the current situation, should new tools be put in place?
It is difficult to say at the moment, but the existing arsenal already covers quite a lot of needs to help companies get through the crisis.
You began your career at Banque de Luxembourg more than 30 years ago. What explains this loyalty?
From the outset, I felt in tune with the bank’s ethos. And this sense has only grown stronger over the years. It is a bank with a very human approach. Our employees are looked after really well. We believe this is essential. When employees are well regarded, well treated and well supported, they work well together and the client senses this and benefits. Commercial success is strengthened and ultimately the shareholder benefits. This virtuous circle was already well established at Banque de Luxembourg long before my arrival.
Looking back a hundred years, what was the bank's core business?
First of all, it is interesting to note that the bank was established in Luxembourg in 1920 when Spanish flu was rampant. At that time, the bank was based in Lorraine and was looking to expand. So it set up a subsidiary with branches in Luxembourg. CIAL, its shareholder based in Strasbourg, then developed a network of bank branches in the country, especially in the South. This bank did not have any particular specialisation. However, after the Second World War, the shareholder wanted to focus on clients in Luxembourg City and not have branches throughout the country.
Was this a change of strategy?
The aim was to minimise risk after two wars that had been fought in quick succession. The bank had to find other growth opportunities and crossed the borders to attract new clients. Our bank was therefore well placed to grow with the developing financial market: we were active in Belgium very early on, then in Germany and the rest of Europe. We also took a very early interest in investment funds, the other major strand of Luxembourg’s finance industry. The history of our bank and the financial centre are closely linked. But whereas, when the war ended, losing your whole network was a big stumbling block, in today's world, the internet and modern technologies have changed everything. Not having a network is not really seen as a problem nowadays.
You are present in Luxembourg and in Belgium, at two sites. Have you thought of going further afield to seek new clients?
In Belgium, we are in Brussels and Ghent, to connect with our French and Flemish speaking clients. But we have no plans to expand into other countries. The reason why we became firmly established in Belgium is that Marcel Reckinger – CEO of the bank from 1945 – developed good relations with stockbrokers in Brussels. They particularly liked the fact that we were not controlled by a Belgian shareholder and were present in Luxembourg, so we became the partner of Belgian stockbrokers during the 1950s and 1960s. As a result, the bank gradually built its reputation in Belgium. When I arrived at the end of the 1980s, almost half the business came from Belgium. Then, with the disappearance of tax secrecy, we decided to set up an establishment closer to our clients. In the ten years that we have been established in Belgium, we have seen strong growth and attracted many new clients.
But you do not envisage a similar expansion in other countries?
No, our priority is to develop in our cultural arena, in Luxembourg and Belgium. We also have a large German** client base but we have no plans to set up in Germany. First, because with modern means of communication, we can keep in touch with clients from a distance; and secondly, because it is much too vast a market to cover in its entirety. More recently, we have developed an attractive business base in France, alongside our shareholder, Crédit Mutuel, which calls on us when clients want to expand internationally and have cross-border issues.
Is being part of a French banking group an advantage for a Luxembourg bank? What is your relationship with your shareholder?
Our shareholder has two special attributes: it is a mutual bank that is owned by its customers and respects the individuality of its local regional banks. It therefore operates a decentralised model. The second aspect is that in France, Crédit Mutuel is rooted in the regions, not Paris. The shareholder fully appreciates the specific characteristics of the different geographic regions. It has always respected Luxembourg’s unique qualities, and our clients have always been able to trust us. We are a bank in our own right, having developed independently of our shareholder's history. We are virtually autonomous, but we maintain very fruitful cooperation with our shareholder whenever appropriate.
Did Luxembourg's aim to develop a financial centre in the 1970s have a strong impact on Banque de Luxembourg’s development?
Our bank remained relatively small until private banking developed and, later, the fund industry. Our strong growth began in the 1980s and 1990s.
Was this when UCITS started?
UCITS represented a small source of growth, but we never positioned ourselves as a major player in this segment. We did not have the volumes brought in by a shareholder. We couldn't compete with the Americans, the British or the Swiss, but we are still a recognised niche player today. Our clients are asset managers and promoters of innovative funds with budding projects. We are often the partner in the start-up phase and, with fortune favouring the brave, our clients have developed strongly over the decades.
How do you see the evolution of banking in general over this decade?
First of all, I think that Luxembourg has all the ingredients for success so I am totally optimistic about the future of banking in the Grand Duchy. I think that the turn we have started to take by giving up tax secrecy and making banks more compliant with international standards has been fundamental to repositioning banks in Luxembourg. Today, they play a very useful role in helping to combat money laundering, identifying suspicious transfers and collecting the right tax. They have taken on new responsibilities that are helping governments to function better. Which makes perfect sense: the banks are intermediaries, money flows through them. This makes us a valuable observer of financial and economic activity.
Do you envisage a new role for banks?
We have the foundations to overhaul the Luxembourg banking sector. Banks not only have an important role in helping to finance the real economy – as they have done during the pandemic – but they can also help the real world create a better future by advancing the cause of sustainable finance. To my mind, the justification for the existence of agents depends on their practical value. Obviously, the financial sector as a whole saw excesses in the 2000s, being more concerned with itself than with the real world. But the role of the banks has changed, which was a necessary condition for them to develop over the years.
We have the foundations to overhaul the Luxembourg banking sector.Pierre Ahlborn, Administrateur-Délégué, Banque de Luxembourg
Ongoing very low interest rates have also forced the banks to adapt. They have to look for profit beyond the loans and savings ratio...
So yes, I do envisage a new role for banks. Interest rates, which are sometimes negative, remain the real challenge of our era. But the profitability of the players in the financial industry has held up, especially in Luxembourg, because alongside income from interest, fees for services provide a substantial revenue stream. In recent years, we have seen a decrease of more than 50% in interest income but an equivalent increase in fees.
Nowadays, people are increasingly talking about open banking, sharing data with other banks. Does that frighten you?
Not at all. We were one of the first banks in Luxembourg to offer account and portfolio consolidation. Open banking offers the prospect of supporting our clients even better. So I see it more as a tremendous opportunity. Our clients are often multi-bank families. If we want to support them at the level of the family and wealth, the fact of having an overview of all their assets helps us to respond to their needs more effectively.
The Covid-19 crisis is likely to last for several more months. What legacy will it leave to society?
As I said at the beginning of our interview, a hundred years ago the world was confronted with the Spanish flu epidemic. Since then, the world has not experienced a health crisis of this magnitude, or at least it has been able to avoid it. We had forgotten how fragile our health and the planet on which we live are. This is the greatest lesson: humility. Within a few months, the whole planet realised that we can't just run roughshod over our environment, our resources and our health. I hope this will make us aware that many other issues are important, such as the fair distribution of resources and social responsibility. Today, while every country must obviously think about paying off its pandemic-related debts, we must keep in mind that global warming is an even greater threat. If global warming continues at the current rate, the people of this planet will be in great danger. The main lesson to be drawn from this health crisis therefore concerns the fragility of the human species and biodiversity. We must do everything we can to counteract what is happening.
Does that mean we must prioritise sustainable investments more than ever?
At Banque de Luxembourg, we have decided to make responsible investment and sustainable behaviour a core element of our strategy for the future. Everything we undertake from now on will be measured against the United Nations' Sustainable Development Goals (SDGs). Is our bank achieving a better energy audit, is it improving its greenhouse gas emissions output every year, is it taking good care of its employees, etc.? All our funds are labelled UNPRI - United Nations Principles for Responsible Investing - and we are aiming for a suite of SRI labels. But the two main levers on which a bank has the most impact are savings and loans. We can steer clients who want to invest their capital towards more responsible projects, and we can also refuse financing from the perspective of sustainability criteria. Through these two levers, we are positioning ourselves as a bank that prioritises CSR criteria.