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Banking in Luxembourg Trends & Figures 2017

All information used and presented in this publication relates to the data provided in the CSSF’s 2016 annual report and in the individual annual accounts of legally independent banking companies (e.g. S.A.s and S.C.A.s). As there is no publication requirement, it was not possible for us to carry out an analysis of the data in the annual reports of legally dependent branches that are not recognised separately. In case banks have changed country segment, the previous year figures are adapted accordingly in both country segments. Therefore, previous year figures may vary from the figures disclosed in the previous year version of this brochure. The values used and calculated have been rounded up or down as appropriate.

Annual accounts reported in a different currency (USD/CHF) were converted at the exchange rate on the relevant closing date.

To accommodate the differences between Lux GAAP and IFRS, we have depicted these banks’ balance sheet and income-statement data in a schematic representation that we use with Lux GAAP, and have therefore presented a number of assumptions in a simplified manner. The main assumptions are the following:

• The unused risk provisioning presented pursuant to IFRS has been deducted on a pro rata basis from loans and advances to customers and credit institutions;

• Financial instruments valued at fair value through profit or loss (transferable securities and derivatives) have been assigned to the “bonds and other transferable securities or other assets/liabilities items” item in accordance with the notes to the accounts available to us;

• Derivative fair values from hedge accounting have been assigned to the “Other assets/liabilities” item;

• The revaluation reserve has been added to “own funds”;

• The profit or loss from financial instruments valued at fair value through profit or loss, as well as the profit or loss from hedge accounting, have been assigned to “Net profit/(loss) on financial operations” by virtue of their financial character;

• The profit or loss from financial fixed assets has been assigned to the “risk provisioning” item insofar as it relates to unrealised profit or loss components. Realised components, where identifiable, have been assigned to “Net profit/(loss) on financial operations”. The figures presented have been established on the basis of internal calculation methods and may vary from the calculations shown in the individual annual accounts. The choice and classification of companies and the determination of the total number of banks per country segment were made based on internal data and on statistics published by the CSSF.

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Table of contents

Foreword ................................................................................................................................................................................ 5

Overview of the market’s evolution ............................................................................................... 9

Comparative analysis of the six country segments ................................................. 19

Overview of developments in each segment .................................................................... 27

• German segment ......................................................................... 28 • French segment ............................................................................ 38• UK/US segment ........................................................................... 48• Luxembourg segment ................................................................... 58• Swiss segment .............................................................................. 68• Chinese segment .......................................................................... 78

Contacts ................................................................................................................................................................................... 86

www.pwc.lu/banking

PwC Luxembourg 4

5Banking in Luxembourg - Trends & Figures 2017

Foreword

The Luxembourg financial centre has established its reputation as an international banking place, being home to 141 banking institutions from different countries and with various business models. In our first edition of “Banking in Luxembourg – Trends and Figures”, in 2016, we have illustrated the diversity and the dynamics of the banking community. This edition provides further insights into the international structure and highlights the latest developments in the selected country segments of banks operating in Luxembourg. It also gives an outline on the overall market.

To give our readers a long-term view of the evolution of the financial centre and to better understand future developments, we look at how the landscape has changed in the past six years. We have also kept the six major country segments, as identified last year, to ensure comparability and continuity.

Alongside Luxembourg banks as the “home segment”, our analysis covers German, French, Swiss, UK/US and Chinese banks operating in Luxembourg. We highlight changes compared to the previous year and discuss current trends.

Luxembourg banks show a relatively diversified business model in their home market, with various focal points in private, retail and corporate banking, as well as asset servicing. The other country segments however are strongly focused on one or two main business areas, such as investment fund servicing and depositary banking for the UK and US banks. The UK and US segment shows the highest growth in its aggregated balance sheet totals in 2016 compared to 2015. This group will continue to expand with the recent announcement of Northern Trust Bank which will set up its EU-banking hub in Luxembourg. Brexit considerations of UK based financial institutions are likely to trigger even further growth for this country segment in the year(s) to come.

The Swiss banks group in Luxembourg has also a major focus on asset servicing, as well as a tradition of private banking. Additionally, the advantage of the EU passport for the cross-border distribution of financial services is a key factor in making Luxembourg a location of choice for all non-EU banks. During the past years, this group undertook several M&A transactions and restructuring measures.

The French and German banks are characterised by their universal banking model in their respective home countries. In Luxembourg, they have a highly diversified business model, which includes private banking and asset servicing, but above all the lending business and mortgage bonds. The German segment counts the largest number of banks in Luxembourg, followed by the French segment.

Foreword

Roxane HaasBanking [email protected]+352 49 48 48 2451

6 PwC Luxembourg

Foreword

The Chinese banks have shown again an overall high growth and will soon count twelve institutions. They are primarily active in corporate banking (trade and project financing and syndicated loans). Furthermore, they are exercising and currently expanding a European hub function for their respective parent companies. At the time when we were finalising this report, the Banque Internationale à Luxembourg S.A. announced its acquisition by a Chinese investment group. This confirms the trend observed over the last few years, with more and more non-EU players investing in the local market.

The analysis of the 2016 annual accounts of Luxembourg banks gives us a better understanding of developments in the individual country segments compared to the overall market. It confirms the high diversity and international reach of players in Luxembourg, and it shows the ability of the financial centre to change and adapt.


PwC Luxembourg 8


Overview of the market’s evolution

10 PwC Luxembourg

Key takeaways – Overall market 2015-2016

Subsidiaries 102 97Branches 41 44

Total 143 141

2015 2016

2015

2016

Germany France Switzerland China Italy UK Sweden USA Japan Luxembourg Belgium Brazil Other

17.0%

18.3%

11.3%

10.6%

7.8%

7.1%

7.1%

7.1%

5.0%

4.9%

7.8%

7.8%

5.0%

4.9%

4.3%

4.2%

3.5%

3.5%

4.3%

4.2%

2.8%

3.5%

3.5%

3.5%

20.6%

20.4%

• With 141 authorised banks at year-end 2016, the number has slightly decreased by two.

• 137 of the 141 authorised banks have a universal banking licence, whereas four banks (three of them belonging to the German segment) have a mortgage-bond banking licence.

• Regarding the legal status, 97 banks are under Luxembourg law, 32 are branches of banks from EU Member States or a country considered on equal terms and 12 are branches of banks from non-EU Member States.

• The headcount has slightly increased by 118, to 26,060.

• In terms of geographical representation in the Luxembourg financial centre, German banks still make up the largest group at 17.0%, followed by French banks at 11.3% and Swiss banks as well as Chinese banks, both at 7.8%.

• The following banks have ceased operations during the 2016 financial year:- Bank Leumi (Luxembourg) S.A. (ceased operations).- BHF-Bank International S.A. (ceased operations).- CACEIS Bank Luxembourg S.A. (merger with CACEIS Bank France

and transfer of activities to Luxembourg branch).- Citibank International Limited, Luxembourg Branch (transfer of

activities to Citibank Europe Plc, Luxembourg Branch).

- Cornèr Banque (Luxembourg) S.A. (ceased operations).

- Europäische Genossenschaftsbank S.A. (absorption by DZ PRIVATBANK S.A.).

- UBS (Luxembourg) S.A. (merger with UBS Deutschland AG and transfer of activities to UBS Europe SE, Luxembourg Branch).

• The following banks have started operations in 2016:

- Bank of Communications Co. Ltd., Luxembourg Branch.

- CACEIS Bank France, Luxembourg Branch.

- Citibank Europe plc, Luxembourg Branch.

- Rakuten Europe Bank S.A.

- UBS Europe SE, Luxembourg Branch.

• Annual net profit has increased by 18.4% which is largely due to the sale of the participation in the HuaXia Bank Company Ltd. by Deutsche Bank Luxembourg S.A., resulting in a net gain of EUR 741.0 million. Without this one-off effect, annual net profit would have increased by 0.2%.

• In 2016, the balance sheet total increased by EUR 26.9 billion (+3.6%) to EUR 770.1 billion.

• The overall increase is largely due to the changed perimeter of FINREP figures, which now includes subsidiaries of Luxembourgish banks abroad (as per CSSF circular 15/621). The CSSF estimates the perimeter effect to be about 1.7% and the net growth to be thus around 2.0%.

• There has been a major shift from loans to credit institutions (EUR -59.2 billion) to loans to central banks and governments (EUR +66.7 billion), thus resulting in loans to credit institutions reaching the lowest level since 13 years. This shift is due to large banks reducing their intragroup loans to comply with the Liquidity Coverage Requirement (LCR) applicable since 1 October 2015.

• The overall growth has been driven by the increase of EUR 27.3 billion (+14.4%) in loans to customers, with loans to retail clients up by 5.1% to reach EUR 53.8 billion and loans to business customers up by 17.9% to reach EUR 162.2 billion. This growth is financed by an increase of EUR 28.0 billion (+8.6%) in amounts owed to customers.

Balance sheet total (in EUR million)

2016

770,076.0

2015

743,154.0

Countries of origin of banks established in Luxembourg

Number of banks



20.7%

2015

• The further improving total equity ratio of 24.8% represents a high capitalisation rate. At the same time, Luxembourg-based banks increasingly use high-quality equity instruments.

• According to the 2016 CSSF annual report, 94 out of 98 banks have a total equity ratio of at least 12.0%.

24.8%

2016

Total equity ratio (weighted)

• Net interest income has increased by 5.3% over the previous year. 53.0% of banks representing 57.0% of banking income have experienced positive growth, despite the negative interest regime. Some banks have passed on negative interest charges to their institutional clients.

• Net commission income has decreased by 2.3% over the previous year, due to a less favourable stock market climate.4,720.0

4,4962015

4,613.0

4,7342016

Net interest result Net commission result

Net interest and commission result (in EUR million)

• Annual net profit has increased by 18.4% (EUR +749.0 million).

• This is largely due to the sale of the participation in Hua Xia Bank Company Ltd. by Deutsche Bank Luxembourg S.A., resulting in a net gain of EUR 741.0 million.

• Without this effect, annual net profit would have increased by just 0.2% (EUR +8.0 million).

Annual net profit and loss(in EUR million)

2015

4,070.0

• Taking into account the one-off effect at Deutsche Bank Luxembourg S.A., return on equity has decreased from 7.07% in 2015 to 6.64%* in 2016, as own funds increased by 6.6% year-on-year.

• The increase from 0.55% to 0.63% is mainly due to the increase in net profit driven by the above mentioned one-off gain from Deutsche Bank Luxembourg S.A.

• The adjusted figure shows that, without this effect, return on assets has slightly decreased.

2015

0.55% 0.63% 0.53%*

2016 20162016

Return on assets Return on equity

2016

7.07%

2015

7.85% 6.64%*

* without the one-off effect

2016

4,819.0

2016

4,079.0*


12 PwC Luxembourg

25,942

26,060

110.9

113.0

0 20 40 60 80 100 120

2016

2015 118.1

117.7

0 20 40 60 80 100 120

2016

2015

0 50 100 150 200

2016

2016

2015

156.5*

184.9

156.9

2016

2015

• The headcount has remained steady.

• Staff costs per member of staff have decreased slightly by 0.3%.

• Administrative costs per member of staff have risen by 1.9%, largely due to continuing IT investments and the cost of compliance with regulations.

• Annual net profit per member of staff has increased by 17.9%. However, without the one-off effect at Deutsche Bank Luxembourg S.A., the annual net profit per member of staff decreased slightly by 0.3%.

Annual net profit and loss per member of staff (in KEUR)

Headcount

Administrative costs per member of staff (in KEUR)

Staff costs per member of staff (in KEUR)


* without the one-off effect0 10 20 30 40 50 60

2015

2016

2016 55.16*

51.65

54.52

• The cost-income-ratio has improved due to the increase in revenue of EUR 0.9 billion (+7.8%) being larger than the increase of operating costs of EUR 0.1 billion (+1.2%). However, the picture is inversed without the one-off effect at Deutsche Bank Luxembourg S.A., as without the sharp increase in other income, the ratio climbs slightly to 55.16%*.

Cost-income ratio (in %)


14 PwC Luxembourg

Key takeaways – Overall market 2010 - 2016


Total 147 141

2010 2016

2010

2016

Germany France Switzerland China Italy UK Sweden USA Japan Luxembourg Belgium Brazil Other

17.0%

29.9%

11.3%

8.8%

7.8%

2.7%

7.1%

6.1%

5.0%

5.4%

7.8%

7.5%

5.0%

4.8%

4.3%

4.8%

3.5%

3.4%

4.3%

3.4%

2.8%

6.8%

3.5%

1.4%

20.6%

15.0%

• With 141 authorised banks at 2016 year-end, the number of banks has decreased by six since 2010.

• Subsidiaries have decreased by a total of twelve over the past six years, whereas the number of branches has increased by six.

• The number of banks with a universal banking licence has decreased from 142 to 137, while five banks had a mortgage-bond banking licence in 2010 (four German banks and one Belgian bank), compared to four banks in 2016 (three German banks and one French bank).

• Regarding the legal status, 97 banks were under Luxembourg law at year-end 2016 (109 banks in 2010), 32 were branches of banks from EU Member States (31 banks in 2010) and 12 were branches of banks from non-EU Member States (seven banks in 2010).

• The headcount has slightly decreased by 194 to 26,060 (-0.7%).

• In terms of geographical representation in Luxembourg, the most notable change has been the decrease of German banks from 29.9% down to 17.0%. At the same time, there has been a large increase in Chinese banks up from 2.7% to 7.8% in 2016, making it the third largest segment, together with Swiss banks.

• The balance sheet total has increased by EUR 3.7 billion since 2010 (+0.5%).

• Despite this seemingly low growth, there have been several shifts among the balance sheet items:- Bonds and other transferable securities have decreased by

EUR 40.4 billion (-21.5%), whereas loans and advances to customers have increased by EUR 41.7 billion (+23.9%).

- On the liability side, there has been a shift from amounts owed to credit institutions (EUR -82.8 billion; -23.9%) towards amounts owed to customers (EUR 96.9 billion; +37.9%).


2016

770,076.0

2010

766,422.0

Countries of origin of banks established in Luxembourg

Number of banks



17.6%

2010

• The total equity ratio has notably increased since 2010, sustained by the increase in own funds from EUR 45.6 billion, in 2010, to EUR 61.4 billion in 2016 (+34.5%) driven by increased own funds requirements.24.8%

2016

Total equity ratio (weighted)

• Despite a difficult market environment and stable balance sheet value the Luxembourgish market was able to keep the net interest result stable (-0.6%; EUR -27.0 million) since 2010.

• Net commission result has strongly grown by 28.6% (EUR +1.0 billion).

3,587.0

4,761.02010

4,613.0

4,734.02016



• Without the 2016 one-off effect at Deutsche Bank Luxembourg S.A. (EUR 741.0 million gain on sale of its participation in Hua Xia Bank Company Ltd.), annual net profit increased by 6.9% (EUR +262.0 million).

Annual net profit and loss (in EUR million)

2016

4,079.0*

2010

3,817.0

2016

4,819.0

• The decrease in return on equity is largely due to the increase in own funds (+34.5%) outweighing the increase in net profits (+6.9%).

• Own funds have steadily increased from EUR 45.6 billion in 2010 to EUR 61.4 billion in 2016. Whereas it represented 6.0% of the total balance sheet in 2010, it now represents 8.0%.

• The 0.13% increase is mainly due to the increase in net profit driven by the above mentioned one-off gain from Deutsche Bank Luxembourg S.A.

• The adjusted figure shows that, without this effect, return on assets remains at a rather stable level.

2010

0.50% 0.63% 0.53%*

2016 20162016


2016

8.36%

2010

7.85% 6.64%*

* without the one-off effect * without the one-off effect


16 PwC Luxembourg

0 10 20 30 40 50 60

2010

2016

2016 55.16*

51.65

50.92

• The ratio has deteriorated. Without the one-off effect at Deutsche Bank Luxembourg S.A., banking income has increased by EUR 2.1 billion (+21.8%), outweighed by the increase in costs of EUR 1.4 billion (+30.5%).


0 20 40 60 80 100 120

2016

2010 95.1

117.7

0 20 40 60 80 100 120

2016

2010 80.4

113.0

0 50 100 150 200

2016

2016

2010

156.5*

184.9

145.426,254

2016 26,060

2010

• The headcount has remained relatively steady over the past six years, decreasing by 194 (-0.7%).

• Staff costs per member of staff have risen by 23.8%, not least due to the indexation of salaries.

• Administrative costs per member of staff have risen by 40.5%, largely due to continuing IT investments, the cost of compliance with regulations, and the increased cost of the outsourced services to external parties or group entities.

• Annual net profit per member of staff has increased by 27.2%. However, without the one-off effect at Deutsche Bank Luxembourg S.A., the increase would have been at 7.6%.


Headcount






PwC Luxembourg 18


Comparative analysis of the six country segments

20 PwC Luxembourg

Key takeaways – comparison of the sixcountry segments


Total 88 88

2015 2016

Private banking Lending Custody Treasury Retail Mortgage bonds Service centre

Investment fund servicing

21.1%

16.8%

16.8%7.5%

8.1%

2.5%

9.9%

17.4%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Germansegment

Frenchsegment

UK/USsegment

MarketLuxembourgsegment

Chinesesegment

Swisssegment

-20.1%9.3% 3.7% 20.2%

-5.2%

14.0% 3.6%

0

60

120

180

Germansegment

Frenchsegment

Swisssegment

Luxembourgsegment

Chinesesegment

UK/USsegment

2015 2016

162,

824.

7

130,

149.

7

98,5

06.7

107,

629.

9

82,0

52.1

85,1

05.7

30,9

22.9

37,1

80.5

29,4

00.8

27,8

59.1

10,8

89.1

12,4

15.5

• To varying extents, the banks in the country segments analysed are primarily active in the fields of depositary banking, investment fund servicing, as well as private, retail and corporate banking.

• The Swiss segment focuses on private banking and in parts fund services, while the UK/US segment (with the exception of PayPal (Europe) S.à r.l.) does more depositary banking and investment fund servicing.

• Private and corporate banking is mainly carried out in the Luxembourg and Chinese segments, and to a certain extent in the French and German segments.

• The number of banks we examined as part of our analysis of the six country segments remained stable at 88; the number of subsidiaries decreased by three whereas the number of branches increased from 31 to 34 in 2016.

• With 25 institutions, the German segment has the most representatives, followed by the French and UK/US segments (15 institutions each) and the Swiss segment (13 institutions).

• The Chinese segment grew from ten to 11 institutions after the setup of the Bank of Communications Co., Ltd. Luxembourg Branch during 2016. In addition, China Everbright Bank will establish a subsidiary and a branch, and the board of Shanghai Pudong Development Bank voted to establish a European division and branch office in Luxembourg in the future.

• The UK/US (+20.2%), China (+14.0%), French (+9.3%) and Luxembourg (+3.7%) segments grew their on-balance sheet business. The German (-20.1%) and Swiss (-5.2%) segments saw a decrease.

• The UK/US segment growth is driven by a EUR 4.4 billion increase in loans and advances to credit institutions (mainly HSBC Private Bank (Luxembourg) S.A.) and by an increase of EUR 1.2 billion loans to customers (mainly PayPal (Europe) S.à r.l.).

• The increase in the Chinese segment is primarily due to a growth in loans and advances to customers (+31.2%) as well as in bonds and other transferable securities (+43.4%), driven by Bank of China (Luxembourg) S.A., China Construction Bank (Europe) S.A. and Bank of Communications (Luxembourg) S.A.; the latter two have more than doubled their assets.

• The growth in the French segment was driven by the Société Générale-Group (EUR +6.8 billion), BGL BNP Paribas S.A. (EUR +1.0 billion) and CA Indosuez Wealth (Europe) S.A. (EUR +0.7 billion). The Luxembourg segment saw a growth in all three main asset balance sheet positions in equal parts.

• A major part of the German segment’s drop was played by the development at Deutsche Bank Luxembourg S.A., whose assets decreased by EUR 28.2 billion (-35.3%), driven by a repayment of intercompany receivables and liabilities of EUR 25.0 billion. The Swiss segment saw a drop at Bank Julius Baer Luxembourg S.A. due to the exit out of the Commerzbank Group (EUR -1.4 billion) as well as a large increase at Pictet & Cie (Europe) S.A. (EUR +1.5 billion).

Number of banks

Business areas

Change in the aggregated balance sheet total from 2015 to 2016

Aggregated balance sheet total (in EUR million)



-30%

0%

30%

60%

90%

120%

150%

Germansegment

Frenchsegment

Swisssegment


Chinesesegment

UK/USsegment

10.5%*-11.1% -12.2% 4.2%

14.4%123.9% 0.2%*

0

100

200

300

400

500

600

700

800

Germansegment

Frenchsegment

Swisssegment

Luxembourgsegment

Chinesesegment

UK/USsegment

2015 2016

500.

7

553.

1* 687.

4

611.

0

137.

3

120.

4

454.

7

473.

8

449.

8

514.

5

7.1

15.9

• The German segment’s increase of the annual net result by 158.5% is strongly influenced by Deutsche Bank Luxembourg S.A. (EUR +0.8 billion; +269.4%), which sold its interest in Hua Xia Bank Company Limited, thus generating a net gain of EUR 741 million. Excluding this one-off effect, the increase of the net annual result is 10.5%.

• The UK/US segment benefited from increases in both net interest and commission income (38.2% and 5.6% respectively) while allocation for risk provisioning was increased (EUR +168.9 million), primarily in relation to PayPal (Europe) S.à r.l. et Cie, S.C.A.

• The Swiss segment could not sustain its excellent annual net profit in 2015 (+88.2%) and showed a decrease of 12.2% in 2016, mainly driven by a decrease in net commission result by EUR 71.6 million (-12.9%).

• The lower annual net profit and loss in the French segment is mainly due to the decrease at Société Générale Bank & Trust S.A. (EUR -95.7 million; due to decrease in the net interest result of EUR 165.2 million resulting from difficult market conditions).

• The significant increase in the Chinese segment (+123.9%) is due to positive net commission results coming from investments made in staff, infrastructure and new branches in the recent years; as well as to the Industrial and Commercial Bank of China (Europe) S.A. incurring a net result on financial operations of EUR 14.8 million.

Change in the annual net profit and loss from 2015 to 2016


-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Swisssegment

Frenchsegment

Germansegment


Chinesesegment

UK/USsegment

3.1%-9.5% 14.2% 0.2% 38.2% 0.7% 5.3%

0

450

900

1350

1800

Frenchsegment

Germansegment

Swisssegment

Luxembourgsegment

Chinesesegment

UK/USsegment

2015 2016

771.

2

795.

0

1,54

1.4

1,39

5.0

120.

3

137.

4

522.

70

722.

5

112.

2

113.

0

• Only the UK/US and the Swiss segment recorded a double digit growth in net interest result (38.2% respectively 14.2%). The German, Luxembourg and Chinese segments remained stable; the French segment recorded a decrease of 9.5%.

• The growth in the UK/US segment is principally attributable to PayPal (Europe) S.à r.l. et Cie, S.C.A. (growth by EUR 233.3 million or 60.8%), which recorded a significant increase of EUR 178.0 million (or 47.2%) in interest on loans to retail customers.

• In the Swiss segment seven out of ten banks have increased their net interest result; of which Edmond de Rothschild (Europe) S.A. by 119.6%, Lombard Odier (Europe) S.A. by 38.5% and Pictet & Cie (Europe) S.A. by 36.5%.

Change in net interest income from 2015 to 2016

Net interest income (in EUR million)

963.

5

965.

9* without the one-off effect

22 PwC Luxembourg

2015 2016

902.

7

953.

6

37.3

44.4

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Germansegment

Frenchsegment

Swisssegment

MarketLuxembourg

segment

Chinesesegment

UK/USsegment

-20.1% -9.4% -12.9%

-1.2% 5.6% 19.0%-2.3%

0

200

400

600

800

1000

Luxembourgsegment

Germansegment

Frenchsegment

Swisssegment

Chinesesegment

UK/USsegment

149.

7

119.

6

507.

9

460.

4 555.

0

483.

4

365.

1

360.

6

• Only the Chinese and UK/US segments recorded a growth in the net commission result (19.0% respectively 5.6%). All the other segments recorded a drop between 20.1% (German segment) and 1.2% (Luxembourg segment).

• The net commission income in the UK/US segment is primarily attributable to the two largest depositary banks in the financial centre: J.P. Morgan Bank Luxembourg S.A. (EUR 268.7 million; assets in custody: USD 780.0 billion, assets under administration: USD 528.0 billion) and State Street Bank Luxembourg S.C.A. (EUR 358.1 million; assets in custody and administration: EUR 781.7 billion).

• The drop in net commission result in the German segment is due to a decrease in nine out of 11 banks.

• Nine out of ten banks recorded a decrease of their net comission result, which led to an overall decrease of 12.9% in the Swiss segment. This is mainly due to less customer transactions and decreasing commissions in wealth management.

• The trend in the change in net commission result in the French segment reveals a clear picture, as all but two banks (Natixis Bank S.A., +14.9%, and Banque Transatlantique Luxembourg S.A., +5.3%) recorded a drop.

Change in net commission income from 2015 to 2016

Net commission income (in EUR million)

Comparison of the six country segments

902.

7

953.

6


1.38%

1.45%

UK/US segment

UK/US segment

UK/US segment

UK/US segment

0.43%

0.47%

Swiss segment

Swiss segment

Swiss segment

Swiss segment

0.56%

0.55%

Luxembourg segment

Luxembourg segment

Luxembourg segment

Luxembourg segment

0.57%

0.70%

French segment

French segment

French segment

French segment

0.42%*

0.31%

German segment

German segment

German segment

German segment

0.13%

0.07%

Chinese segment

Chinese segment

Chinese segment

Chinese segment

0.53%*

0.55%

Market

Market

Market

Market

9.05%

8.19%

7.10%

7.55%

5.76%

6.64%

6.05%

6.20%

5.09%*

5.20%

1.23%

0.66%

6.64%*

7.07%

• The UK/US segment ranks by far highest for return on assets, since its business models are characterised by off-balance sheet business (such as depositary banking and central administration service), and their balance sheet totals are consequently lower than country segments that are primarily active in lending (on-balance sheet business).

• The French and Luxembourg segment, which both have a balanced business model characterised by private and retail banking, private and corporate loans and asset servicing, could maintain their position above the market average.

• The Swiss and UK/US segments maintained their above market average equity ratio on a year-on-year basis. This is due to a business model that has low capital intensity and lower default risks (with the exception of PayPal (Europe) S.à r.l. et Cie, S.C.A.). On top of that, the UK/US segment has seen a strong income increase thanks to positive growth in the investment fund sector.

• Country segments active in the lending business have to deal with a capital-intensive business model in a period of continuously low interest rates.

Return on equity 2016

Return on equity 2015

Return on assets 2016

Return on assets 2015



24 PwC Luxembourg

0%

10%

20%

30%

40%

50%

60%

70%

80%

Swisssegment

Frenchsegment

Germansegment


Chinesesegment

UK/USsegment

2015 2016

43.6

6%

44.0

3%* 55.2

1%54

.88%

76.7

4%77

.72%

61.9

0%61

.84%

54.2

7%

51.7

5%

79.8

8%

76.9

8%

54.5

2%

55.1

6%*

• All segments have cost-income ratios comparable to previous year. The highest ratios are still in the Swiss (77.72%) and Chinese (76.98%) segments.

• The cost-income ratio in the Chinese segment is far above average due to investments by banks in expanding their network; staff expenses increased by 37.7% (with 18.6% increase in headcount) and current operating expenses by 13.1% year-on-year.

• Staff costs and current operating expenses on a high level made the Swiss segment have a cost-income ratio above the market average.


0

50

100

150

200

250

Swisssegment

Frenchsegment

Germansegment


Chinesesegment

UK/USsegment

2015 2016

217.

0 238.

1*

135.

011

5.4

66.2

57.1

90.5

92.7

210.

3 238.

1

12.8

24.2

156.

915

6.5*

• A stable headcount and an improved income situation led to a 13.2% increase in the UK/US segment. Altogether, the segment is significantly above the market average. This is partially due to good margins for certain services and partially due to economies of scale.

• The increase in the German segment from KEUR 217.0 to KEUR 238.1 (without the one-off effect) is driven by two banks (Commerzbank Finance & Covered Bond S.A. and DEPFA Pfandbrief Bank International S.A.).






Headcount

Segment 2015 2016

German 2,307 2,324

French 5,091 5,295

Luxembourg 5,025 5,112

Swiss 2,071 2,108

UK/US 2,139 2,161

Chinese 553 656

Market 25,942 26,060

• It is remarkable that all segments recorded an increase in headcounts.

• The headcount in the Chinese segment grew considerably by 18.6%, due to new banks being established and the expansion of the European branch network.

0

50

100

150

200

Swisssegment

Frenchsegment

Germansegment


Chinesesegment

UK/USsegment

2015 2016

109.

910

3.1

104.

972

.0

125.

4

124.

1

69.5 76

.5

183.

3

183.

7

71.6

68.3

110.

911

3.0

• In the UK/US segment, administrative costs per member of staff are significantly above the market average due to high maintenance and investment costs in operational infrastructure, as well as the expenses associated with outsourced internal services.

• In the Luxembourg segment, administrative costs per member of staff are significantly below the market average. This is because, unlike other country segments, Luxembourg banks’ back-office services are fully provided in Luxembourg (with staff located in Luxemboug) and not outsourced to group companies outside of Luxembourg (which would qualify as administrative costs).


0

50

100

150

200

Swisssegment

Frenchsegment

Germansegment


Chinesesegment

UK/USsegment

2015 2016

105.

5 125.

3

103.

010

0.9

173.

216

3.1

110.

1

108.

7

108.

4

113.

6

115.

0 133.

5

118.

111

7.7

• The cost of the salary structure in the Swiss segment is significantly above the market average. The French, Luxembourg and UK/US segments were able to stabilise their salary costs per staff member on a year-on-year basis.

• In the Chinese segment, salary costs per staff member has significantly increased by 16.1% and went above the level we saw in 2014 (KEUR 122.4). This development is due to the expansion of the branch network starting end of 2015 which is reflected in the 2016 figures.

• The German segment’s staff costs per staff member have increased by 18.8% mainly due to increased staff costs at UniCredit Luxembourg S.A. (EUR +45.9 million), due to a EUR 52.0 million provision for future staff reductions as the bank aims to cease all business activities by the end of 2018 due to a group wide restructuring plan. Excluding this one-off item, the average staff costs per staff member have slightly decreased to KEUR 102.9 and are below the market average.


PwC Luxembourg 26


Overview of developments in each segment

28 PwC Luxembourg

Key takeaways – German segment

2016

130,149.7

2015

162,824.7

• The balance sheet total decreased by EUR 32.7 billion or 20.1% (compared to a 3.6% increase for the market as a whole), primarily due to a drop in interbank business and the further reduction in bonds and other transferable securities. Six out of eleven German subsidiaries have decreased their balance sheet total between 4.3% and 70.3%.

• Deutsche Bank Luxembourg S.A. played a major role in this trend. Its total assets decreased by EUR 28.2 billion (-35.3%), driven by a repayment of intercompany receivables and liabilities of EUR 25.0 billion.

• The banks whose balance sheet total has increased are: Freie Internationale Sparkasse S.A. (+22.8%), UniCredit Luxembourg S.A. (+2.8%), DZ PRIVATBANK S.A. (+1.0%) and Nord/LB Luxembourg S.A. Covered Bond Bank (+0.7%).


* not including M.M. Warburg & CO Luxembourg S.A.

• Own funds once again increased year-on-year, by EUR 1.2 billion (12.9%) to EUR 10.9 billion. The key driver here was Deutsche Bank Luxembourg S.A., which increased its own funds by EUR 0.9 billion (+18.1%), largely due to its strong net profits of EUR 1.1 billion (+269.4%). Beside Sal. Oppenheim jr. & Cie. Luxembourg S.A., which recorded a decrease of own funds by 42.7% due to net losses, all other banks showed increased or stable own funds.

• The total equity ratio of 22.1% shows that the German banks have very good capitalisation and high-quality equity instruments.

• The regulatory requirements of either 8.0% or 10.5% (minimum plus conservation buffer) have been comfortably met across all banks. The leading banks are DEPFA Pfandbrief Bank International S.A. (158.1%), whose exceptional ratio is mainly due to the strong decrease in assets, Sal. Oppenheim jr. & Cie. Luxembourg S.A. (35.5%) and HSH Nordbank Securities S.A. (33.8%).

22.1%

2016

17.1%

2015

Total equity ratio (weighted)*

German segment


Total 27 25

2015 2016

16.7%

16.7%

16.7%10.0%

10.0%

3.3%

6.7%

20.0%

• The business activities in the German segment are diverse. Developments in the last few years have involved business models being realigned and specialised.

• The increase of the 2016 net result by 158.5% is strongly influenced by Deutsche Bank Luxembourg S.A. (EUR +0.8 billion; +269.4%), which sold its interest in Hua Xia Bank Company Limited, thus generating a net gain of EUR 741 million. Excluding this one-off effect, the increase of the net annual result is 10.5%.

• In 2016 the market saw the exit of the following three subsidiaries:- Commerzbank International S.A. has been acquired by Julius

Baer Group and renamed Bank Julius Baer Luxembourg S.A. and is now part of the Swiss segment. To better compare data, we have decided to eliminate Commerzbank International S.A. from the previous year’s figures.

- BHF-Bank International S.A. ceased its activities.- Europäische Genossenschaftsbank S.A. ceased its activities

(merged with DZ PRIVATBANK S.A.).• In December 2016, Deutsche Bank AG and Hauck & Aufhäuser

have agreed upon the acquisition of Sal. Oppenheim jr. & Cie. Luxembourg S.A. by Hauck & Aufhäuser in 2017.

• The strategic plan of the UniCredit Group includes the restructuring of activities in Luxembourg with the aim to transfer all Luxembourg business activities to other group entities by the end of December 2018.

Business areas

Number of banks

Private banking Lending Custody Treasury Retail banking Mortgage bonds

Service centre Investment fund servicing


• The net interest result increased slightly by 3.1% (compared to a market-average increase of 5.3%). This increase is largely due to negative interests charged on deposits of credit institutions at Deutsche Bank Luxembourg S.A.

• The German segment’s reliance on the net interest result is higher than that of the market as a whole (86.9% relative share for the German segment compared to 39.2% relative share for the market as a whole), since the lending business is a key component of its business models.

• The 20.1% drop in net commission result is due to a decrease at nine out of eleven banks, totalling EUR -32.8 million. A major part of this was recorded by NORD/LB Luxembourg S.A. Covered Bond Bank (EUR -17.9 million) mainly due to increased commission payables to group entities based on increased credit volumes. Only Commerzbank Finance & Covered Bond S.A. was able to increase its net commission result (EUR +5.0 million) due to the new agency business.

149.7

771.22015

119.6

795.02016



• Overall, 2016 yielded excellent annual net profit for the German segment (+158.5%, compared to a market average of +18.4%). Excluding the one-off effect recorded at Deutsche Bank Luxembourg S.A. (generating a gain of EUR 0.7 billion by selling its interest in Hua Xia Bank Company Limited), the annual net profit increased by 10.5% (compared to a market average of +0.2% net of this one-off effect).

• The annual net profit/loss increased at three other banks (DEPFA Pfandbrief Bank International S.A. (EUR +46.0 million), Sal. Oppenheim jr. & Cie. Luxembourg S.A. (EUR +14.4 million) and DekaBank Deutsche Girozentrale Luxembourg S.A. (EUR +10.9 million), while seven banks recorded a decrease.

2016

1,294.1

2016

553.1*

2015

500.7



5.20%

2015

0.99% 0.42%*0.31%

2016 2016

11.91% 5.09%*

• The return on equity is stable (5.09% without one-off effect).• The German banking sector’s return on equity is below the

market average due to its capital-intensive business model at a time of low interest rates.

• At 0.42% (without one-off effect) the German segment is below the market average as it is more strongly characterised by on-balance sheet business (such as lending) than the market as a whole, which carries out a large amount of off-balance sheet business (e.g. asset management, depositary banking and fund services).

• The 0.42% increase is due to stable overall annual results combined with shrinking balance sheet volumes especially at Deutsche Bank Luxembourg S.A., Commerzbank Finance & Covered Bond S.A. and DEPFA Pfandbrief Bank International S.A.

2016 20162015



30 PwC Luxembourg

2016

2015

0 30 60 90 120 150

125.3

105.3

Market

117.7

118.1

0 100 200 300 400 500 600

2016

2015

2016

238.1*

557.0

217.0

Market

156.9

156.5*

0 20 40 60 80 100 120

2016

2015 109.9

103.1

Market

110.9

113.0

2,3072015

2,3242016

• The annual net profit per staff member increased due to the improved income situation in conjunction with a stable headcount.• The German segment’s staff costs per staff member have increased by 18.8% mainly due to increased staff costs at UniCredit

Luxembourg S.A. (EUR +45.9 million), due to a EUR 52.0 million provision due to a group-wide restructuring plan. Excluding this exceptional effect, the average staff costs per staff member have slightly decreased to KEUR 102.9 and are below the market average.

• Six out of 11 banks recorded a decrease in administrative costs per staff member (e.g. NORD/LB Luxembourg S.A. Covered Bond Bank by 30.9% and DZ PRIVATBANK S.A. by 14.8%). The average administrative costs per staff member in the German segment have decreased by 6.2% in total.

0 10 20 30 40 50 60

2016

2015

2016

43.66

44.03*

27.26

Market

55.16*

54.52

• The cost-income ratio decreased to 44.03% (without the one-off effect) due to a slightly higher increase of cost than increase of income.



Headcount



German segment




Ranking of balance sheet totals

Bank Balance sheet total (EUR million) Shift Change in rank

Deutsche Bank Luxembourg S.A. 51,787.4 -35.3% =

UniCredit Luxembourg S.A. 20,271.7 2.8% =

Commerzbank Finance & Covered Bond S.A. 17,598.6 -10.6% =

NORD/LB Luxembourg S.A. Covered Bond Bank 15,936.2 0.7% =

DZ PRIVATBANK S.A. 15,913.7 1.0% =

DekaBank Deutsche Girozentrale Luxembourg S.A. 4,921.8 -14.0% =

M.M. Warburg & CO Luxembourg S.A. 1,286.5 -4.3% +2

HSH Nordbank Securities S.A. 909.2 0.8% +2

Sal. Oppenheim jr. & Cie. Luxembourg S.A. 751.7 -9.1% +2

DEPFA Pfandbrief Bank International S.A. 720.6 -70.3% -3

Freie Internationale Sparkasse S.A. 52.3 22.8% +3

1

2

3

4

5

6

7

8

9

10

11

32 PwC Luxembourg

Assets

2016

54,589.2

2015

80,937.3

• Five banks recorded a drop totalling EUR 27.4 billion, while six banks recorded an increase totalling EUR 1.4 billion.

• By far the most significant decrease was experienced by Deutsche Bank Luxembourg S.A. (EUR -26.7 billion), driven by a repayment of intercompany receivables of EUR 25.0 billion.

• Material increases can be seen at DekaBank Deutsche Girozentrale Luxembourg S.A. (EUR +0.6 billion mainly from money market transactions with institutions located in Germany) and DZ PRIVATBANK S.A. (EUR +0.5 billion mainly due to increased deposits at central banks).

Loans and advances to credit institutions (in EUR million)

• Aggregate amount of loans to customers slightly increased in comparison to previous year. Five banks saw their loans and advances to customers increased by a total of EUR 2.1 billion, while six banks saw a decrease totalling EUR 1.9 billion.

• The main reasons were increases in the volume of amounts owed to corporate clients of UniCredit Luxembourg S.A. (EUR +0.6 billion) and NORD/LB Luxembourg S.A. Covered Bond Bank (EUR +1.5 billion due to expanded corporate loan business (EUR +1.1 billion) and reverse repo transactions (EUR +0.4 billion)), as well as the decreases at Deutsche Bank Luxembourg S.A. (EUR -1.7 billion) and DZ PRIVATBANK S.A. (EUR -0.2 billion).

2016

47,281.3

2015

47,145.8

Loans and advances to customers (in EUR million)

• The decrease in bonds and other transferable securities by EUR 5.6 billion (-19.0%) is mainly driven by the three “letter de gage” banks with a decrease of EUR 4.2 billion. While NORD/LB Luxembourg S.A. Covered Bond Bank recorded a shift from bonds and other transferable securities (EUR -1.1 billion) to loans and advances to customers (EUR +1.5 billion), DEPFA Pfandbrief Bank International S.A. recorded a decrease of the bonds and other transferable securities by EUR 1.5 billion, to pay back the covered bonds bought by FMS Wertmanagement AöR. Commerzbank Finance & Covered Bond S.A. also recorded a decrease in balance sheet volume by EUR 2.1 billion primarily driven as well by the decrease of bonds and other transferable securities by EUR 1.6 billion due to maturities with no reinvestment being made.

• Finally DekaBank Deutsche Girozentrale Luxembourg S.A. recorded a decrease of EUR 0.8 billion mainly due to a decrease in fair values.

2015

29,628.5

2016

24,006.5

Bonds and other transferable securities (in EUR million)

German segment

German segment

49.7%

18.4%

36.3%

2.8%0.3%

41.9%

29.0%

18.2%

2.4%0.7%20162015

• Loans and advances to credit institutions decreased by 41.9%, mainly influenced by Deutsche Bank Luxembourg S.A. (EUR -26.7 billion). Without the Deutsche Bank Luxembourg S.A. one-off effect, loans and advances to credit institutions remain stable.

• Loans and advances to customers increased slightly by 0.3% in total (compared to an increase of 14.4% for the market as a whole), while the relative share increased to 36.3%.

• Bonds and other transferable securities have been declining for years in the German segment. Because of the decrease of loans to credit institutions the influence of this revenue pillar is stable compared to previous year.

Breakdown of assets 2015-2016 (% relative share of balance sheet total)

Loans and advances to credit institutions

Loans and advances to customers

Bonds and other transferable securities

Fixed assets Other assets

Market1.2%2.0%

19.1%

28.1%

49.6%

20162015

21.0%

1.3%1.9%

50.4%

25.4%


Liabilities

• Excluding the one-off effect at Deutsche Bank Luxembourg S.A., which reduced its balance by EUR 26.5 billion mainly due to the repayment of EUR 25 billion of cash deposits held by other credit institutions of Deutsche Bank Group at Deutsche Bank Luxembourg S.A., other notable decreases happened for Commerzbank Finance & Covered Bond S.A. (EUR -1.2 billion; -13.8%), NORD/LB Luxembourg S.A. Covered Bond Bank (EUR -1.0 billion; -13.3%), DZ PRIVATBANK S.A. (EUR -0.5 billion; -21.0%), DEPFA Pfandbrief Bank International S.A. (EUR -0,5 billion; -99.0%), and DekaBank Deutsche Girozentrale Luxembourg S.A. (EUR -410.5 million; -70.8%).

• Overall eight banks showed a decrease of EUR -30.2 billion, while two banks showed a slight increase (EUR +25.4 million) and one bank shows stable amounts.

2016

65,420.3

2015

95,841.0

Amounts owed to credit institutions (in EUR million)

2016

34,258.7

2015

35,632.3

• Amounts owed to customers slightly decreased by 3.9%. Significant decreases happened for Deutsche Bank Luxembourg S.A. (EUR -1.5 billion; -12.6%) and DEPFA Pfandbrief Bank International S.A. (EUR -508.0 million; -70.6%).

• On the other hand, five banks recorded an increase (EUR +1.1 billion), including UniCredit Luxembourg S.A. (EUR +0.6 billion, mainly due to increased deposits from institutional clients), NORD/LB Luxembourg S.A. Covered Bond Bank (EUR +0.2 billion), DZ PRIVATBANK S.A. (EUR 0.1 billion, mainly due to an increase of term deposits from corporates) and DekaBank Deutsche Girozentrale Luxembourg S.A. (EUR +0.1 billion, mainly driven by increased deposits from corporates and investment funds).

Amounts owed to customers (in EUR million)

58.9%

9.1%

26.3%

5.7%

50.3%

21.9%

7.3%

5.4%20162015

0.2%0.7%

8.3%

5.9%

German segment• Although there was a large decline

in interbank borrowing (due to repayment of intercompany receivables and liabilities of EUR 25.0 billion at Deutsche Bank Luxembourg S.A.), it remains the highest source of refinancing in the German segment.

• Amounts owed to customers (e.g. deposits by companies, retail clients, private clients, accounts balances of investment funds) are clearly still below the market average although they now represent 26.3% of total balance sheet.

Breakdown of liabilities 2015-2016 (% relative share of balance sheet total)

Amounts owed to credit institutions Amounts owed to customers Debt securities Subordinated debts Own funds Other liabilities

Market

7.7%

45.8%

3.6%

34.3%

20162015

0.6%

8.0%

37.1%

43.7%

7.3%

3.5%0.7%

7.7%

34 PwC Luxembourg

German segment

2016

10,866.2

2015

9,628.8

• Own funds are an increasingly important source of financing, as they increased by 12.9% and now represent the fourth largest source of financing with 8.3% of total balance sheet.

• Nine out of eleven banks recorded an increase of their own funds, by a total of EUR 1.3 billion. The largest increase was at Deutsche Bank Luxembourg S.A. (EUR +0.9 billion; +18.1%), driven by its strong net profits in 2016, and at Commerzbank Finance & Covered Bond S.A. (EUR +0.3 billion; +43.9%), mainly due to a capital increase by the sole shareholder.

• Only Sal. Oppenheim jr. & Cie. Luxembourg S.A. recorded a decrease of its own funds by EUR -47.6 million (-42.7%) due to consecutive losses in 2015 and 2016.

Own funds (in EUR million)

Liabilities

Ranking of annual net profit or loss

Bank Annual net profit or loss (EUR million) Shift Change in rank

Deutsche Bank Luxembourg S.A. 1,067.3 > 100% =

DekaBank Deutsche Girozentrale Luxembourg S.A. 78.8 16.1% +1

Commerzbank Finance & Covered Bond S.A. 58.8 -25.9% -1

UniCredit Luxembourg S.A. 35.7 -44.4% =

NORD/LB Luxembourg S.A. Covered Bond Bank 31.2 -2.8% =

DEPFA Pfandbrief Bank International S.A. 22.6 >100% +7

DZ PRIVATBANK S.A. 11.3 -0.9% -1

M.M. Warburg & CO Luxembourg S.A. 3.5 -30.0% =

HSH Nordbank Securities S.A. 2.3 -70.1% -2

Freie Internationale Sparkasse S.A. 0.8 -11.1% -1

Sal. Oppenheim jr. & Cie. Luxembourg S.A. -18.2 44.2% +3

1

2

3

4

5

6

7

8

9

10

11

• Securitised liabilities – which are a significant refinancing component for the three German banks that issue mortgage bonds – remained overall stable in 2016.

• Two banks recorded an increase, NORD/LB Luxembourg S.A. Covered Bond Bank (EUR +1.2 billion, mainly due to new issuance of EMTNs and other own securities) and DZ PRIVATBANK S.A. (EUR +0.8 billion), whereas four banks recorded a decrease, most notably Commerzbank Finance & Covered Bond S.A. (EUR -1.2 billion) and DEPFA Pfandbrief Bank International S.A. (EUR -0.7 billion) due to buy-back transactions and matured debts.

2016

11,823.0

2015

11,866.1

Debt securities (in EUR million)


Overview of change in aggregated income statements from 2015 to 2016 (in EUR million)

0

500

1000

1500

2000

2500

-800

-600

-400

-200

0

2015

2016

771.2

149.776.3212.9

-72.3

-499.9

-137.2

795.0

119.6

1,335.6

-288.7

-118.7-15.4

-533.3

500.

7 1,294.1

+3.1%

-20.1%

>100.0%

Net interest result

Net commission result

Net profit/(loss) on financial operations

Other operating income and expenditures

Income taxes

Risk provisioning

Current operating expenses

Annual net profit and loss

• The net interest result (including dividend income from shares and participating interests) increased by EUR 23.8 million (+3.1%) and remains the most important income source for the German segment.

• Five out of eleven banks were able to increase their net interest result by a total of EUR 186.8 million, with the lion’s share going to Deutsche Bank Luxembourg S.A. (EUR +174.5 million or +79.2%; main driver of this growth was negative interest charged to other credit institutions).

• Commerzbank Finance & Covered Bond S.A.’s net interest result decreased by EUR -130.4 million (-82.1%) due to a one-off item recorded in 2015 (realised gains from securitised bearer shares).

2016

795.0

Bank EUR million Shift Change in rank

Deutsche Bank Luxembourg S.A. 394.7 79.2% =

UniCredit Luxembourg S.A. 105.5 -20.0% +1

NORD/LB Luxembourg S.A. Covered Bond Bank 90.3 -3.2% +1

DZ PRIVATBANK S.A. 88.9 14.0% +1

DekaBank Deutsche Girozentrale Luxembourg S.A. 76.7 0.3% +1

1

2

3

4

5

2015

771.2

Net interest result (in EUR million)

36 PwC Luxembourg

• The net commission result in the German segment decreased by EUR 30.1 million (-20.1%). This was largely due to the decrease at NORD/LB Luxembourg S.A. Covered Bond Bank (EUR -17.9 million), as commission payables to group entities, acting as intermediaries arranging credit volumes, increased.

• Despite the market situation, DekaBank Deutsche Girozentrale Luxembourg S.A. and DZ PRIVATBANK S.A. recorded a stable net commission result, with EUR 66.1 million and EUR 124.8 million, respectively.

• Only Commerzbank Finance & Covered Bond S.A. could increase its net commission result by EUR 5.0 million due to the takeover of former Commerzbank International S.A.’s agency business as accessory business.

2016

119.6


DZ PRIVATBANK S.A. 124,8 -1,5% =

DekaBank Deutsche Girozentrale Luxembourg S.A. 66,1 -7,3% =

UniCredit Luxembourg S.A. 20,5 -6,0% +1

M.M. Warburg & CO Luxembourg S.A. 17,5 -9,3% +1

Sal. Oppenheim jr. & Cie. Luxembourg S.A. 14,2 -11,3% +1

1

2

3

4

5

2015

149.7

Net commission result (in EUR million)

• The strong increase in other operating income and expenses is mainly due to the one-off effect at Deutsche Bank Luxembourg S.A. who sold its interest in Hua Xia Bank Company Limited, thus generating a net gain of EUR 741.0 million.

2016

1,335.6

2015

212.9

Other operating income and expenses (in EUR million)

Staff costs Overheads

48.7%

45.4%

54.6%

51.3%

20162015

German segment

49.0%

51.0%

20162015

Market• The current operating expenses

increased by a total of 6.7% due to increased staff costs (+19.6%, compared to a market average of +0.1%). The increase in staff costs is mainly driven by UniCredit Luxembourg S.A. (EUR +45.9 million) due to restructuring costs.

• Overheads decreased by a total of 5.5%. While five out of eleven banks recorded decreased overheads, six banks showed an increase.

Breakdown of current operating expenses 2015-2016 (in EUR million)

German segment

51.6%

48.4%


• Four banks recorded gains from the release of loan loss provisions: Commerzbank Finance & Covered Bond S.A. (EUR 28.3 million) mainly due to remeasurement of financial instruments (LaR); DEPFA Pfandbrief Bank International S.A. which realised net gains on disposals of about EUR 26.4 million; Deutsche Bank Luxembourg S.A. (EUR 4.8 million) and HSH Nordbank Securities S.A. (EUR 0.3 million).

• Five out of 11 banks increased their risk provisions by a total of EUR 75.0 million, most notably DZ PRIVATBANK S.A. with EUR -35.7 million (of which additions to general value adjustment (“Sammelwertberichtigung”) about EUR -32.2 million), followed by Sal. Oppenheim JR. & CIE. Luxembourg S.A. with an impairment on shares in their participation at Oppenheim Asset Management Services S.à r.l. about EUR -22.7 million and DekaBank Deutsche Girozentrale Luxembourg S.A. with EUR -16.5 million (of which EUR -15.2 million loan loss provision allocated to the shipping finance portfolio).

2016

-15.4

2015

-72.3

2016

-288.7

2015

76.3

• The large drop from a net profit in 2015 to a net loss in 2016 mainly derived from DEPFA Pfandbrief Bank International S.A. which contributed with EUR -380.2 million to the aggregated result (therein one-off effects about EUR -331.9 million due to the repurchase of covered bonds and corresponding asset sales).

• The highest gains on financial operations are shown by NORD/LB Luxembourg S.A. Covered Bond Bank (EUR 34.3 million) and Commerzbank Finance & Covered Bond S.A. (EUR 33.1 million) which both improved by a total of EUR 41.1 million in comparison to 2015; results at NORD/LB Luxembourg S.A. Covered Bond Bank are mainly driven by net gains from measurement of financial instruments at fair value.

• Furthermore DZ PRIVATBANK S.A. contributed with EUR 11.7 million, coming mainly from income generated by FX brokerage and realised gains from the sale of financial instruments.

Net profit/(loss) on financial operations (in EUR million)

Risk provisioning (in EUR million)

38 PwC Luxembourg

Key takeaways – French segment


Total 15 15

2015 2016

Private banking Lending Custody Treasury Retail banking Mortgage bonds

Service centre Investment fund servicing

22.2%

19.4%

13.9%5.6%

13.9%

2.8%

8.3%

13.9%

• The overall French segment has a balanced business model characterised by private banking, asset servicing (depositary banking and investment fund servicing) and lending.

• The French segment is dominated by three banks – Société Générale Bank & Trust S.A., BGL BNP Paribas S.A. and Banque de Luxembourg S.A. – which together make up 83.2% of the balance sheet total, 91.4% of the annual net profit and 85.6% of the headcount.

• The revenue situation reflects the diversified business model, which is made up of a mix of net interest result (50% relative share) as well as dividend and commission result (each with a 25% relative share).

• In 2016, CACEIS Bank Luxembourg S.A. has been absorbed by CACEIS Bank France through a cross-border merger. CACEIS Bank France continues to operate in Luxembourg through CACEIS Bank, Luxembourg Branch. Due to the magnitude of this event (31.9% of balance sheet total in 2015), 2015 figures have been restated to exclude CACEIS Bank Luxembourg S.A. for better comparability of the figures.

2016

107,629.9


Business areas

Number of banks

2015

98,506.7

• The balance sheet total increased by 9.3% (compared to a 3.6% increase for the overall market). The overall increase is primarily due to an expansion in loans and advances to credit institutions (+16.5%) and to customers (+7.6%), which was financed by interbank borrowing (+19.9%) and customer deposits (+8.2%).

• The largest growth could be seen at Société Générale Bank & Trust S.A. (EUR +5.8 billion), Société Général Capital Market Finance S.A. (EUR +1.0 billion), BGL BNP Paribas S.A. (EUR +1.0 billion) and CA Indosuez Wealth (Europe) S.A. (EUR +0.7 billion).

• In order to adhere to the liquidity coverage ratio (70%) as from 1 January 2016, cash assets were deposited as high-quality liquid assets (HQLAs) with the Central Bank of Luxembourg. Thus, cash on hand and deposits with central banks increased from EUR 5.1 billion to EUR 8.4 billion.

French segment


• The 9.5% decrease (compared to a market-average increase of 1.4%.) is attributable in equal parts to a decrease in net interest result (-9.5%) and net commission result (-9.4%). Part of the net interest result is generated by the dividend income, which has been stable at EUR 529.9 million (2015: EUR 542.7 million).

• Only four out of 11 banks were able to increase their net interest result by a total of EUR 102.7 million (of which EUR 92.6 million related to BGL BNP Paribas S.A.), whereas the remaining seven dropped by EUR 249.1 million (of which EUR -165.2 million and EUR -57.4 million related to Société Générale Bank & Trust S.A. and Banque de Luxembourg S.A., respectively).

• All but two banks (Natixis Bank S.A., +14.9%, and Banque Transatlantique Luxembourg S.A., +5.3%) recorded a drop in their net commission result.

507.9

1,541.42015

460.4

1,395.02016



• Only two out of 11 banks could improve their 2015 performance.• Société Générale Bank & Trust S.A. showed a decrease of

EUR -95.7 million, mainly due to the decrease in the net interest result of EUR -165.2 million resulting from difficult market conditions. BGL BNP Paribas S.A. recorded an increase (EUR +32.9 million; +21.6%: mainly thanks to the increase of the dividend income from EUR 47.1 million to EUR 158.3 million received from BNP Paribas Leasing Solutions S.A. and BIP Investment Partners. Natixis Bank S.A. recorded an increase of EUR +3.1 million (+172.2%).


2015

687.4

2016

611.0

5.76%

20162015

0.70% 0.57%

2016 2015

6.64%

• Return on equity is below the market average. The decline is primarily attributed to the decrease in the revenue situation, especially interest and commission net result, and the increase of own funds compared to the previous year.

• At 0.57%, the French market’s return on assets is slightly above the market trend of 0.53%*. It still represents a very good cross-section of the market, while also showing a fairly equal measure of on- and off-balance sheet transactions.



40 PwC Luxembourg

0 20 40 60 80 100 120

2016

2015 103.0

100.9

Market

118.1

117.7

0 20 40 60 80 100 120

2016

2015 104.9

72.0

Market

110.9

113.0

0 50 100 150 200

2016

2015

115.4

135.0

Market

156.9

156.3*

5,2952016

5,0912015

• The decrease in the annual net profit per staff member of 14.5% was due to the drop in annual net profit (EUR -76.4 million; -11.1%) in conjunction with a 4.0% increase in the headcount. The main contributor to the headcount increase was Société Générale Bank & Trust S.A. with 200 additional staff members.

• Administrative costs per member of staff decreased by 31.4%. This change is due to a remarkable drop in administrative costs in total of EUR 152.9 (-28.6%). The lion’s share of this movement belongs to BGL BNP Paribas S.A., which decreased its costs by EUR 129.6 million. This decrease is due to high one-off depreciation charges of EUR 134.0 million in 2015, compared to EUR 18.1 million in 2016, related to the final amortisation of goodwill resulting from the merger by absorption of BNP Paribas Luxembourg S.A.

0 10 20 30 40 50 60

2016

2015

54.88

55.21

Market

54.52

55.16*

• The cost-income ratio remains stable and is still in line with the market average (55.16%*). The slight decrease could be explained by a reduction of 28.6% in the overhead costs at BGL BNP Paribas S.A.



Headcount



French segment






Société Générale Bank & Trust S.A. 42,187.9 15.9% =

BGL BNP Paribas S.A. 33,933.3 2.9% =

Banque de Luxembourg S.A. 13,414.8 3.8% =

Société Générale Capital Market Finance S.A. 6,891.7 16.9% =

CA Indosuez Wealth (Europe) S.A. 6,152.4 13.8% =

Natixis Bank S.A. 3,498.4 -1.5% =

Banque BCP S.A. 593.4 5.1% =

Banque Transatlantique Luxembourg S.A. 431.6 67.0% +1

La Française Bank S.A. 348.8 -1.3% -1

Société Générale LDG S.A. 153.8 -1.2% =

Société Générale Financing and Distribution S.A. 23.8 -18.2% =

1

2

3

4

5

6

7

8

9

10

11

42 PwC Luxembourg

Assets

2015

34,622.3

2016

40,327.9

• Loans and advances to credit institutions increased by 16.5%.• Seven banks recorded an increase totalling EUR 6.8 billion,

while the other four banks recorded a decrease totalling EUR 1.1 billion.

• For the banks concerned, the increase is, on one hand mainly due to the deposit made at the Central Bank of Luxembourg. This deposit allows a “high quality” asset structure to be maintained within the framework of the LCR (Liquidity Coverage Ratio) and to respect the amount required under the mandatory reserve. Société Générale Bank & Trust S.A. showed the largest growth by EUR 4.2 billion (+30.4%), especially with a growth of the deposit at the Central Bank of EUR 1.6 billion. On the other hand, for most of the banks, loans and advances to credit institution are related to loans granted to group entities.


• All banks increased their loans and advances to customers by a total of EUR 3.1 billion.

• The largest increases were at BGL BNP Paribas S.A. (EUR +1.5 billion) and at Natixis Bank S.A. (EUR +1.0 billion).

• The increase at BGL BNP Paribas S.A. is mainly due to loans granted to entities of the BNP Paribas Group (EUR +0.9 billion).

• Natixis Bank S.A. has recorded an increase of 211.8% from EUR 0.4 billion in 2015 to EUR 1.4 billion, which corresponds mainly to a loan of EUR 800.0 million granted to Natixis US Holding Inc.; we saw a shift from loans and advances to credit institutions (EUR -1.1 billion) to loans and advances to customers (EUR +1.0 billion).

2016

43,333.5

2015

40,254.8


• The development is stable at +0.7%.• Société Générale Bank and Trust S.A. showed the largest growth

of EUR 1.4 billion (+17.9%), whereas BGL BNP Paribas S.A. and Banque de Luxembourg S.A. decreased by EUR 1.0 billion and EUR 0.4 billion respectively due to the maturity of bonds that have not been reinvested.

2015

18,829.0

2016

18,954.1


French segment

35.1%

17.6%

40.3%

1.5%3.1%

37.5%

40.9%

19.1%

1.7%3.2%20162015

• Interbank business represents 37.5%, significantly below the market average of 49.6%. Loans and advances to customers make up 40.3%, considerably above the market average of 28.1%. Bonds and other transferable securities are in line with the market average. These led to a net interest result remaining consistently high and its relative share being considerably higher than the market average.






French segment

Market

1.2%2.0%

19.1%

28.1%

49.6%

20162015

21.0%

1.3%1.9%

50.4%

25.4%


Liabilities

• The French segment increased its amounts owed to credit institutions in total by EUR 5.0 billion (+19.9%).

• Five banks increased their amounts owed to credit institutions by a total of EUR 6.2 billion, especially Société Générale Bank & Trust S.A. by EUR 4.4 billion (+22.1%).

• The other six banks either remained flat or decreased by a total of EUR 1.2 billion. The most notable decrease was at BGL BNP Paribas S.A. with EUR 1.1 billion due to a decrease in deposits made by other entities of the BNP Paribas Group.

2015

25,059.4

2016

30,057.1


2015

10,355.3

2016

10,607.4

• Eight banks increased their own funds for a total of EUR 275.0 million and two banks remained stable. The only drop was recorded by CA Indosuez Wealth (Europe) S.A., with EUR 22.9 million due to an interim dividend payment of EUR 33.0 million.

• BGL BNP Paribas S.A., with EUR 5.7 billion, and Société Générale Bank & Trust S.A., with EUR 2.6 billion, continue to account for 78.5% of the own funds in the French segment.


2015

55,790.9

• French banks increased the amounts owed to customers in total by EUR 4.6 billion (+8.2%).

• Natixis Bank S.A. and Banque de Luxembourg S.A. recorded a decrease in customer deposits of EUR 1.0 billion (mainly due to less deposits from Natixis Luxembourg Investment) and EUR 0.3 billion respectively.

• Six banks increased their amounts owed to customers in total by EUR 5.9 billion, most notably BGL BNP Paribas S.A. (EUR +2.2 billion; mainly due to increased deposits of corporate clients), Société Générale Bank & Trust S.A. (EUR +1.6 billion), Société Générale Capital Market Finance S.A. (EUR +1.0 billion) and CA Indosuez Wealth (Europe) S.A. (EUR +0.9 billion).

• The increase at Société Générale Bank & Trust S.A. is due to the commercial development, with an increase of 8% in the number of accounts opened and 25% of the collection of deposits.


2016

60,365.5

2.2%

25.4%

56.1%

3.5%

27.9%

56.6%

3.0%

4.0%20162015

0.4%

0.5%

9.9%

10.5%

French segment• Interbank transactions among French

banks remain below the market trend (34.3%).

• Borrowing by companies, private and retail clients, as well as account balances of investment funds, remain by far the largest source of refinancing in the French segment.

• At 10.5%, own funds are slightly above the market average of 8.0%.


Own funds Other liabilities

Amounts owed to credit institutions Amounts owed to customers Debt securities

Subordinated debts

Market

7.7%

45.8%

3.6%

34.3%

20162015

0.6%

8.0%

37.1%

43.7%

7.3%

3.5%0.7%

7.7%

44 PwC Luxembourg


Overview of change in aggregated income statements from 2015 to 2016 (in EUR million)

31.8

507.9

1,541.4

-28.3

-1,061.2

-136.0-78.8

-168.2

460.4

0.5

1,395.0

-65.9

-920.0

-43.1-137.1

Bank Annual net profit or loss (EUR million) Shift

Change in

rank

Société Générale Bank & Trust S.A. 310.1 -23.6% =

BGL BNP Paribas S.A. 185.4 21.6% =

Banque de Luxembourg S.A. 63.1 -8.3% =

CA Indosuez Wealth (Europe) S.A. 42.6 -4.9% =

Natixis Bank S.A. 4.9 > 100.0% +2

Société Générale Financing and Distribution S.A. 1.8 -78.0% -1

Société Générale LDG S.A. 1.7 -37.0% -1

Banque Transatlantique Luxembourg S.A. 1.0 -23.1% =

Banque BCP S.A. 0.4 -50.0% =

Société Générale Capital Market Finance S.A. 0.0 -100.0% +1

La Française Bank S.A. 0.0 -100.0% -1

1

2

3

4

5

6

7

8

9

10

11

687.

4

611.0

-9.5%

-9.4%

-13.3%

French segment

Net interest result




Income taxes

Risk provisioning



20152016


• In total, the commission result decreased by EUR 47.5 million (-9.4%).

• Within the Top five banks only Natixis Bank S.A. was able to generate a growth of their net commission result.

• Seven banks recorded a decrease in 2016. The highest drop was at Banque de Luxembourg S.A. (EUR -14.2 million; -9.1%) due to a decrease in securities commissions, which had recorded in 2015 the largest growth in this section.

• Only three banks recorded a growth in net commission result, mainly Natixis Bank S.A. (by EUR 1.4 million or 14.9%) and Banque Transatlantique Luxembourg S.A. (by EUR 0.3 million or 5.3%). These two banks have a strategic position on wealth management for High Net Worth Individuals (“HNWI”) clients and have both gained new customers in 2016.

2016

460.4



Société Générale Bank & Trust S.A. 139.2 -5.2% =

BGL BNP Paribas S.A. 120.9 -6.3% =


Natixis Bank S.A. 10.8 14.9% =

1

2

3

4

5

2015

508.1

• On one hand, four banks saw their net interest result rising, like Société Générale Capital Market Finance S.A. by EUR 9.0 million (or 45.5%). This increase is attributable to reduced funding costs in 2016 by EUR 9.5 million (-26.0%). BGL BNP Paribas S.A. increased its interest result by EUR 92.6 million thanks to rising dividend income (EUR +111.2 million) from BNP Paribas Leasing Solutions S.A. and BIP Investment Partners.

• On the other hand, seven banks showed a decrease in net interest result. The total drop was mainly caused by Société Générale Bank & Trust S.A., which lost EUR 165.2 million because of the difficult interest environment and the reduced interest income from a related party (EUR 44.5 million to EUR 6.8 million). Banque de Luxembourg S.A.’s net interest result decreased by EUR 57.4 million, due to a decrease of EUR 55.7 million in securities income.

2016

1,395.0


BGL BNP Paribas S.A. 644.7 16.8% +1

Société Générale Bank & Trust S.A. 466.8 -26.1% -1



Société Générale Capital Market Finance S.A. 28.8 45.5% +1

1

2

3

4

5

2015

1,541.4



• The net interest result (including EUR 529.9 million in dividend income from shares and participating interests, previous year: EUR 542.7 million) dropped by 9.5%.

• The Top three in terms of dividend income remain Société Générale Bank & Trust S.A. (EUR 290.4 million), BGL BNP Paribas S.A. (EUR 158.3 million) and Banque de Luxembourg S.A. (EUR 78.9 million).

46 PwC Luxembourg

• Other operating income and expenses decreased by EUR 37.6 million.

• On one hand, Banque de Luxembourg S.A. showed a remarkable growth, by EUR 95.9 million (+97.3%), due to an increase in other operating income by EUR 31.9 million mostly linked to a reversal of a portion of the AGDL* provision and a drop in other operating expenses by EUR 64.0 million.

• On the other hand, BGL BNP Paribas S.A. showed a significant drop by EUR 139.7 million, which was due to a high increase in other operating expenses of EUR 195.1 million. This is explained by a contribution of EUR 223.0 million to the FRBG (“Fonds pour risques bancaires généraux”) in 2016, and a relatively low increase in other operating income (EUR +55.5 million).

* AGDL (“Association pour la Garantie des Dépôts Luxembourgeois”, Luxembourg Deposit Guarantee Association)


49.4%

42.0%

50.6%

20162015

French segment

• Current operating expenses fell by EUR 141.2 million (-13.3%). This includes a 1.9% increase in staff costs and a 28.6% drop in administrative costs.

• The French segment has been developing a higher share in staff costs (58.0%) than in administrative expenses (42.0%).

• Administrative costs decreased by EUR 152.9 million (-28.6%) primarily related to BGL BNP Paribas (down by EUR -129.6 million). This was due to high one-off depreciation charges of EUR 134.0 million in 2015 compared to EUR 18.1 million in 2016 relating to the final amortisation of goodwill resulting from the merger by absorption of BNP Paribas Luxembourg S.A.


Other operating income and expenses (in EUR million)

2016

-65.9

2015

-28.3

French segment

Market

51.6%

49.0%

51.0%

48.4%

20162015

58.0%


• Risk provisioning increased by EUR 74.9 million. The following significant allocations to risk provisions were made in 2016:

- BGL BNP Paribas S.A. recorded an impairment provision of EUR 17.0 million on its investment in BIP Investment Partners S.A. and its fixed bond portfolio, a lump sum provision of EUR 12.0 million and a credit impairment provision of EUR 10.9 million.

- Banque de Luxembourg S.A. recorded an expense of EUR 6.2 million primarily due to credit impairment provisions (in the previous year EUR 28.0 million have been released).

2016

-78.8

2015

-136.0

• Société Générale Bank & Trust S.A. and Banque de Luxembourg S.A. remain the main contributors (by EUR -71.3 million respectively EUR -34.7 million) to the net loss on financial operations in the French segment. In 2016, the recorded loss at Société Générale Bank & Trust S.A. resulted mainly from the impairment of the participation “Societe General Private Banking Switzerland” (EUR -124.6 million).

• La Française Bank S.A. contributed with EUR 15.8 million due to a positive development of the fair value of the swaps at their branch in Paris.



2015

31.8

2016

-43.1

48 PwC Luxembourg

Key takeaways – UK/US segment

Number of banks


Total 15 15

2015 2016

Private banking Lending Custody Treasury Retail banking Service centre


Business areas

6.7%

13.3%

26.7%

6.7%13.3%

6.7%

26.7%

• The main business model of the UK/US segment is asset servicing for investment funds, i.e. rendering custody banking, fund administration and transfer agent services.

• The UK/US segment gained from the positive growth in the Luxembourg investment fund industry (assets under management grew by 5.6% in 2016 to EUR 3,741.3 billion), which was reflected in a 5.6% increase in net commission result (compared to the market-average decrease by 2.3%).

• The revenue structure in the UK/US segment depends heavily on the net commission result (56.9% relative share, in comparison to the market average of 49.4% relative share), since asset servicing is a key component of the business model. With the exception of PayPal (Europe) S.à r.l. et Cie, S.C.A., net interest income is negligible.

• Despite higher administrative costs per member of staff than the market average (due to economies of scale in asset servicing for investment funds), the UK/US segment’s business model is high-yielding, as reflected in its 7.1% return on equity (compared to the market average of 6.64%*).

• The activities undertaken by The Bank of New York Mellon (Luxembourg) S.A. have been transferred to the The Bank of New York Mellon AS/NV, Luxembourg Branch upon completion of the cross-border merger, which occurred on 1 April 2017.

• The balance sheet total increased by 20.2% (compared to a 3.6% increase for the market as a whole). This is primarily due to an increase in loans and advances to credit institutions by EUR 4.4 billion (of which EUR 3.2 billion cash and cash balances at central banks) mainly driven by HSBC Private Bank (Luxembourg) S.A. and an increase of loans and advances to customers by EUR 1.2 billion mainly driven by PayPal (Europe) S.à r.l. et Cie, S.C.A.

• On the liability side HSBC Private Bank (Luxembourg) S.A. recorded a EUR 3.6 billion increase in deposits from the bank’s mother company, HSBC Private Bank (Suisse) S.A.; J.P. Morgan Bank S.A. recorded a EUR 1.2 billion increase in fund deposits and PayPal (Europe) S.à r.l. et Cie, S.C.A. recorded an increase by EUR 0.7 billion.

• PayPal (Europe) S.à r.l. et Cie, S.C.A., HSBC Private Bank (Luxembourg) S.A. and The Bank of New York Mellon (Luxembourg) S.A. have increased their own funds by EUR 840.8 million, EUR 229.2 million and EUR 166.9 million respectively, due to share capital increases and profit retention.


2016

37,180.5

2015

30,922.9

UK/US segment



• The 38.2% growth in the net interest result (compared to a market-average increase of 5.3%) is principally attributable to PayPal (Europe) S.à r.l. et Cie, S.C.A. (growth by EUR 233.3 million or 60.8%). PayPal (Europe) S.à r.l. et Cie, S.C.A. recorded a significant increase of EUR 178.0 million (+47.2%) in interest on loans to retail customers.

• The net commission income for the segment is largely stemming from J.P. Morgan Bank Luxembourg S.A. (EUR 268.7 million; assets under custody USD 780 billion, assets under administration USD 528 billion) and State Street Bank Luxembourg S.C.A. (EUR 358.1 million; assets under custody and administration: EUR 781.7 billion), being the two largest fund administrators and custody banks in Luxembourg.

902.7

522.7

2015

953.6

722.52016



Return on equity

7.10%

20162015

7.55%

• The return on equity decreased from 7.55% to 7.10%. • The UK/US segment was higher-yielding than the market

average due to economies of scale in depositary banking and fund administration. In addition, the segment is unaffected by the low interest rate thanks to its business model.

Return on assets

• The UK/US segment’s above-average return on assets of 1.38% has noted a slight decrease since 2015 and is characterised by off-balance sheet business (e.g. acting as custodian bank) compared to the market as a whole.

2015

1.45% 1.38%

2016

• The UK/US segment experienced a strong annual profit increase (14.4%, compared to a market-average profit increase of 0.2%*), due to an increase in net interest result of 38.2% or EUR 199.8 million (market increase of 5.3%) and an increase in net commission result of 5.6% or EUR 50.9 million (market decrease of 2.3%).

2016

514.5

2015

449.8



50 PwC Luxembourg


0 10 20 30 40 50 60

2016

2015

51.75

54.27

Market

54.52

55.16*

• The year-on-year decrease in cost-income ratio was driven by the significant growth in net interest and commission result (up by 17.6%), which prevailed the increase in expenses (up by 2.7%).

• Staff expenses increased by 5.9% (with 1.0% increase in headcount) and overheads rose by 1.3% for the segment year-on-year.



0 20 40 60 80 100 120

2016

2015 108.4

113.6

Market

118.1

117.7

0 50 100 150 200 250

2016

2015

238.1

210.3

Market

156.9

156.5*


0 50 100 150 200

2016

2015 183.3

183.7

Market

110.9

113.0

Headcount

• The annual profit per staff member has improved significantly due to overall significant increase in net profit (+14.4%) and an almost unchanged headcount.

• Salary costs are below market average. State Street Bank Luxembourg S.C.A., J.P. Morgan Bank Luxembourg S.A. and Brown Brothers Harriman (Luxembourg) S.C.A. have the highest headcounts (743, 467 and 382 respectively).

• Administrative costs per member of staff are significantly above the market average due to high maintenance and investment costs in operational infrastructure, as well as to the expenses of services purchased from external and internal service centres.

2,161

2015 2,139

2016

UK/US segment






J.P. Morgan Bank Luxembourg S.A. 12,899.0 12.1% =

HSBC Private Bank (Luxembourg) S.A. 9,242.5 73.7% +1

PayPal (Europe) S.à r.l. et Cie, S.C.A. 8,932.3 21.2% -1

The Bank of New York Mellon (Luxembourg) S.A. 3,458.8 -16.0% =

John Deere Bank S.A. 1,839.6 -4.5% =

State Street Bank Luxembourg S.C.A. 710.6 21.7% =

Brown Brothers Harriman (Luxembourg) S.C.A. 97.7 7.4% =

1

2

3

4

5

6

7

52 PwC Luxembourg

Assets

2016

25,092.9

2015

20,696.3

• The increase of EUR 4.4 billion (+21.2%) is primarily attributable to HSBC Private Bank (Luxembourg) S.A. (increase of EUR 4.0 billion) and J.P. Morgan Bank Luxembourg S.A. (increase of EUR 1.4 billion).


2015

5,952.0

• The increase in loans and advances to customers by EUR 1.2 billion (+19.4%) is mainly due to PayPal (Europe) S.à r.l. et Cie, S.C.A. which recorded a growth of EUR 1.2 billion (+32.1%).

2016

7,107.9


• 2016 saw an increase of EUR 0.4 billion (+12.7%) to EUR 3.6 billion.

• Only HSBC Private Bank (Luxembourg) S.A. and PayPal (Europe) S.à r.l. et Cie, S.C.A. held bonds and other transferable securities as at 31 December 2016.

• PayPal (Europe) S.à r.l. et Cie, S.C.A. increased its holdings by EUR 447.8 million, whereas the position at HSBC Private Bank (Luxembourg) S.A. declined by EUR 37.9 million year-on-year.

2015

3,224.8

2016

3,634.7






UK/US segment

66.9%

9.8%

19.1%

3.0%0.5%

67.5%19.2%

2.7%10.5%

0.7%20162015

• The UK/US banks’ assets are dominated by interbank business (67.5% of total assets). The balance is principally attributable to J.P. Morgan Bank Luxembourg S.A. and HSBC Private Bank (Luxembourg) S.A., totalling EUR 12.9 billion and EUR 9.2 billion respectively.

• PayPal (Europe) S.à r.l. et Cie, S.C.A. and John Deere Bank S.A. have significant loans and advances to customers (EUR 5.1 billion and EUR 1.7 billion respectively).

• Bonds and other transferable securities are below the market average due to the UK/US banks’ business model.


Market

UK/US segment

1.2%2.0%

19.1%

21.0%

1.3%1.9%

50.4%

28.1%

49.6%

25.4%

20162015


Liabilities

• Amounts owed to credit institutions have increased by EUR 3.8 billion (+87.4%) year-on-year to EUR 8.1 billion.

• The increase is primarily attributable to HSBC Private Bank (Luxembourg) S.A., which recorded an increase of EUR 3.6 billion, mainly resulting from intra-group transactions.

2016

8,113.2

2015

4,329.2


2016

20,800.0

2015

19,760.1

• The deposits from customers have increased by EUR 1.0 billion (+5.3%) year-on-year.

• J.P. Morgan Bank Luxembourg S.A. recorded an increase of EUR 1.2 billion (+11.9%) related to growth in fund deposits. PayPal (Europe) S.à r.l. et Cie, S.C.A. recorded an increase of EUR 0.7 billion (+23.7%), due to strong consumer acquisition, adding globally 18 million active accounts in 2016, and reaching a total of 197 million active customer accounts.

• The Bank of New York Mellon (Luxembourg) S.A. recorded a reduction of EUR 1.0 billion (-28.5%).


• Own funds increased by EUR 1.3 billion (+21.7%) year-on-year to EUR 7.3 billion, with EUR 0.8 billion attributable to PayPal (Europe) S.à r.l. et Cie, S.C.A., due to its share capital increase and profit retention.

• PayPal (Europe) S.à r.l. et Cie, S.C.A., HSBC Private Bank (Luxembourg) S.A. and The Bank of New York Mellon (Luxembourg) S.A. have increased their share capital by USD 500.0 million, EUR 230.0 million and EUR 140.0 million, respectively.

• State Street Bank Luxembourg S.C.A. approved a distribution of a dividend of EUR 114.4 million. Brown Brothers Harriman (Luxembourg) S.C.A. paid an interim dividend of USD 39.0 million to its shareholders in December 2016 and accounted for a total dividend of USD 51 million. John Deere Bank S.A. paid a dividend of EUR 27.0 million in February 2016.

2016

7,245.7

2015

5,954.9



14.0%

0.1%

21.8%

55.9%63.9%

0.1%

2016

2015

19.5%

19.3%

2.6%

2.7%

UK/US segment• Deposits by companies, private

and retail clients as well as account balances of investment funds are the biggest source of refinancing in the UK/US segment.

• Interbank business is below market average.


Market

37.1%

7.7%

45.8%

3.6%

34.3%

43.7%

7.3%

3.5%20162015

0.6%

0.7%

8.0%

7.7%

54 PwC Luxembourg


Bank Annual net profit or loss (in EUR million) Shift Change in

rank

PayPal (Europe) S.à r.l. et Cie, S.C.A. 229.4 44.7% =

State Street Bank Luxembourg S.C.A. 114.4 -12.9% =

J.P. Morgan Bank Luxembourg S.A. 63.4 -8.2% =


John Deere Bank S.A. 31.7 -1.2% =

The Bank of New York Mellon (Luxembourg) S.A. 26.9 18.5% =

HSBC Private Bank (Luxembourg) S.A. 0.2 -89.5% =

1

2

3

4

5

6

7

Overview of change in aggregated income statements from 2015 to 2016

449.

8

514.5

+38.2%

+5.6%

-82.7%

902.7

522.7

-637.2

-226.0

-62.4

29.0-79.0

41.0

953.6

722.5

-62.8

-654.5

-412.9

-72.4

UK/US segment

Net interest result




Income taxes

Risk provisioning



2015

2016


• The increase in the net commission result of the UK/US segment (EUR +50.9 million; +5.6%) is mainly attributable to Brown Brothers Harriman (Luxembourg) S.C.A. (EUR +24.0 million), which has significantly increased its assets under custody and administration. State Street Bank Luxembourg S.C.A noted an increase of EUR 22.7 million due to the implementation of new business, new products and organic growth. PayPal (Europe) S.à r.l. et Cie, S.C.A. improved its net commission result by EUR 10.2 million, with income coming principally from customer transaction fees, driven by strong customer acquisition, adding globally 18 million active accounts.

• The increase in the net interest result was mainly driven by PayPal (Europe) S.à r.l. et Cie, S.C.A., which recorded a EUR 233.3 million (+60.8%) growth since 2015, mainly due to the interests on loans and advances to retail customers.

• The result of PayPal (Europe) S.à r.l. et Cie, S.C.A. accounts for 85.4% (EUR 616.8 million) of the net interest income of the UK/US segment as a whole.

• John Deere Bank S.A. showed a stable net interest result of EUR 64.4 million (EUR +0.2 million).

• J.P. Morgan Bank Luxembourg S.A. recorded an increase of EUR 21.6 million (+171.4%) to EUR 34.2 million due to the introduction of treasury management capabilities and change in the currency mix.

2016

722.5

2016

953.6



John Deere Bank S.A. 64.4 0.3% =

J.P. Morgan Bank Luxembourg S.A. 34.2 171.4% +2

The Bank of New York Mellon (Luxembourg) S.A. 6.2 -487.5% +3

HSBC Private Bank (Luxembourg) S.A. 1.6 -87.4% -1

Brown Brothers Harriman (Luxembourg) S.C.A. - =

State Street Bank Luxembourg S.C.A. -0.7 -101.4% -4


State Street Bank Luxembourg S.C.A. 358.1 6.8% =

J.P. Morgan Bank Luxembourg S.A. 268.7 -0.7% =



The Bank of New York Mellon (Luxembourg) S.A. 36.7 -3.4% =

HSBC Private Bank (Luxembourg) S.A. 7.2 -24.2% =

John Deere Bank S.A. 1.0 -33.3% =

1

1

2

2

3

3

4

4

5

5

2015

522.7

2015

902.7



6

6

7

7

56 PwC Luxembourg

• The decrease is primarily due to State Street Bank Luxembourg S.C.A., whose other operating income and expenditures decreased by EUR 27.8 million (-22.5%).

• J.P. Morgan Bank Luxembourg S.A. showed a restructuring provision of USD 19.0 million in the other operating charges.


36.4%

62.5%

37.5%

63.6%

20162015

UK/US segment• Total current operating market expenses are up by 2.7% (compared to a 10.2% increase for the market as a whole). Staff costs increased by 5.9% and overheads went up by 1.3% partly driven by increased sales costs at PayPal (Europe) S.à r.l. et Cie, S.C.A.


Other operating income and expenditures (in EUR million)

2016

-62.8

2015

-79.0

UK/US segment

Market

51.6%

49.0%

51.0%

48.4%

20162015


• The risk-provisioning costs for the segment are dominated by the EUR 418.8 million recorded by PayPal (Europe) S.à r.l. et Cie, S.C.A.; a year-on-year increase of EUR 155.3 million, due to its collective impairment allowances on credit business since loans and advances to customers increased by EUR 1.2 billion (+32.1%) in 2016.

• The net profit/(loss) on financial operations is primarily attributable to The Bank of New York Mellon (Luxembourg) S.A. (EUR 23.3 million) and HSBC Private Bank (Luxembourg) S.A. (EUR 22.0 million).

• The Bank of New York Mellon (Luxembourg) S.A.’s profit results from currency-related instruments and foreign exchange translation result. HSBC Private Bank (Luxembourg) S.A.’s profit is almost entirely a trading result from currency swaps and options transactions.

• Three banks recorded a loss on financial operations in 2016: J.P. Morgan Bank Luxembourg S.A. (EUR -2.4 million), Brown Brothers Harriman (Luxembourg) S.C.A. and John Deere Bank S.A. (EUR -1.7 million and EUR -1.9 million, respectively).

2016

41.0

2015

29.0



2016

-412.9

2015

-226.0

58 PwC Luxembourg

Key takeaways – Luxembourg segment

Number of banks


Total 9 10

2015 2016

Private banking Lending Custody Treasury Retail Service centre


Business areas

23.1%

17.9%

17.9%7.7%

10.3%

7.7%

15.4%

• The Luxembourg segment as a whole has a balanced business model characterised by private and retail banking, private and corporate loans and asset servicing (depositary banking and investment fund servicing).

• The Luxembourg segment is dominated by three banks – Banque et Caisse d’Epargne de l’Etat, Luxembourg, Banque Internationale à Luxembourg S.A. and KBL European Private Bankers S.A. – which together make up 88.1% of the balance sheet total, 84.3% of the annual net profit or loss and 85.6% of the headcount.

• The revenue allocation reflects the business model, made up of a mix of net interest result (59.6% relative share), net commission result (27.2% relative share) and dividends from participating interests (13.2% relative share).

• In 2016, Banque Havilland Institutional Services S.A. entered the Luxembourgish market with an annual net profit of EUR 2.3 million (or 0.49% of the market share in terms of annual net profit).

• The moderate EUR 3.1 billion (+3.7%) year-on-year increase is due to growth in both loans and advances to credit institutions and to customers of EUR 0.5 billion (+3.2%), respectively EUR 0.7 billion (+1.8%), increases in bonds and other transferable securities of EUR 1.1 billion (3.9%), as well as increased fixed assets of EUR 0.5 billion (+21.7%) and other assets of EUR 0.4 billion (+26.0%).

• The key factors behind the balance sheet growth continue to be private and corporate banking – especially the demand for property loans, collateral loans and investment loans – followed by the expansion of the deposit business and the resulting increase in clients’ demand for savings deposits and fixed-term deposits.

• Own funds increased by EUR 0.5 billion year-on-year to EUR 7.8 billion.

• The total equity ratio of 18.0% shows that the Luxembourgish banks have a very good capitalisation and high-quality equity instruments. The regulatory requirements of either 8.0% or 10.5% have been comfortably met.

• The top three are KBL European Private Bankers S.A. (32.5%), Banque et Caisse d’Epargne de l’Etat, Luxembourg (18.3%) and Banque Internationale à Luxembourg S.A. (18.0%).

• The increased ratio for KBL European Private Bankers S.A. (up from 28.0%) is partially due to its capital increase by EUR 200.0 million.


2015

82,052.1

2016

85,105.7

17.1%

* Five of the ten banks

2015

18.0%

2016

Total equity ratio (weighted)*

Luxembourg segment


Annual net profit and loss (in EUR million)• The annual net profit slightly increased by 4.2%.• On one hand, Banque Internationale à Luxembourg S.A.

increased their annual net profit by EUR 46.2 million (+55.3%) as a result of the growth of net profit on financial operations (EUR +32.1 million) and Banque Havilland S.A. recorded an increase of EUR 11.1 million (+284.6%). On the other hand KBL European Private Bankers S.A. showed a remarkable decrease in annual net profit of EUR 58.1 million (-66.9%) due to dropping net profit on financial operations (EUR -35.5 million) as well as lower net interest result (EUR -38.8 million) and a lower net commission result (EUR -7.8 million).

• The stable interest and commission result shows no continuous trend across all compared banks. Banque Havilland S.A. and Banque Internationale à Luxembourg S.A. increased their net interest result by EUR 9.7 million (+55.1%) and EUR 35.3 million (+12.7%) respectively. KBL European Private Bankers S.A. recorded a drop in net interest result by EUR 38.8 million (-29.9%).

• The net commission result has decreased by EUR 4.5 million, as growth at Banque Havilland S.A. (up 4.2% or EUR 0.4 million) and Banque Internationale à Luxembourg S.A. (up 2.7% or EUR 4.0 million) was counteracted by a drop at KBL European Private Bankers S.A. (EUR -7.8 million; -11.4%).

• The revenue situation in the Luxembourg segment is more dependent on the net interest result (72.8% relative share) than the market average (50.6% relative share) since private and corporate banking and public-sector financing are key components of the business model.

365.1

963.5

2015

360.6

965.9

2016



2016

473.8

2015

454.7

Return on equity

6.19%

2015 2016

6.05%

• Return on equity is slightly below the market average of 6.64%* because the increase in equity was larger than the increase in net profits.

• Banque Internationale à Luxembourg S.A. recorded the highest return on equity with 11.1% in 2016 (7.5% in 2015) due to its annual net profit being 55.3% higher than in 2015.

Return on assets

• Return on assets is stable and in line with the market average, as assets are characterised by diversification in loans and advances to customers (42.9% share) and bonds and other transferable securities portfolio (34.1% share), while the interbank business is under-represented, recording low or negative margins.

• The Société Nationale de Crédit et d’Investissement has the largest ratio (3.42%), followed by Banque Havilland S.A. with 1.05%.

2015

0.55% 0.56%

2016


60 PwC Luxembourg


0 10 20 30 40 50 60 70 80

2016

2015

61.84

61.90

Market

54.52

55.16%*

• The cost-income ratio is above the market average (55.16%*), as certain Luxembourg banks have highly staff-intensive business models, such as retail banking with a large agence network. The Luxembourg banks employed 19.6% of the total headcount but only represent 11.1% of the market’s balance sheet total.



0 20 40 60 80 100 120

2016

2015 110.1

108.7

Market

118.1

117.7

0 50 100 150 200

2016

2015

92.7

90.5

Market

156.9

156.5*


Headcount

• Staff costs per member of staff (18.4% share of the market) are in line with the market trend.• The Luxembourg segment’s annual net income constitutes 9.8% of the market total for a headcount that makes up almost

20% of it.• Total administrative costs increased by 12.0%, whereby two out of ten banks decreased their administrative costs

(Banque Havilland S.A. (-6.5%) and Banque Raiffeisen S.C.(-2.0%)).• Administrative costs per member of staff are significantly below the market average due the fact that back-office

services, unlike in other country segments, are fully provided in Luxembourg (with staff located in Luxemboug) and not outsourced to group companies outside the country (which qualify as administrative costs).

5,1122016

5,0252015

0 20 40 60 80 100 120

2016

2015 69.5

76.5

Market

110.9

113.0

Luxembourg segment






Banque et Caisse d'Epargne de l'Etat, Luxembourg 43,444.7 1.5% =

Banque Internationale à Luxembourg S.A. 22,579.8 7.9% =

KBL European Private Bankers S.A. 8,952.0 -0.3% =

Banque Raiffeisen S.C. 4,639.0 3.7% =

Compagnie de Banque Privée Quilvest S.A. 1,902.5 0.0% =

Banque Havilland S.A. 1,425.4 24.3% +1

Société Nationale de Crédit et d'Investissement 1,419.2 3.6% -1

Banque Havilland Institutional Services S.A. 305.0 NEW NEW

Fortuna Banque S.C. 244.8 -1.7% -1

Bemo Europe - Banque Privée S.A. 193.3 -1.1% -1

1

2

3

4

5

6

7

8

9

10

62 PwC Luxembourg

Assets

• Loans and advances to credit institutions remain stable, slightly increasing by 3.2% (EUR +0.5 billion).

• Seven out of ten banks recorded a drop, especially Compagnie de Banque Privée Quilvest S.A. by EUR 220.2 million (-30.8%) and Banque et Caisse d’Epargne de l’Etat, Luxembourg by EUR 117.7 million (-1.7%).

• Banque Internationale à Luxembourg S.A. was up EUR 903.2 million (+47.5%), due to excess liquidity being placed with the Central Bank of Luxembourg (EUR 893.0 million).


• Eight of the ten banks saw this asset item increase by a total of EUR 1.6 billion. This was counteracted by the large drop in loans and advances to customers of KBL European Private Bankers S.A. by EUR 0.9 billion (-56.3%).

• Banque Internationale à Luxembourg S.A. and Banque et Caisse d’Epargne de l’Etat, Luxembourg could increase their assets by EUR 0.7 billion (+5.7%) and by EUR 0.6 billion (+3.1%) respectively.

• In percentage terms, Banque Havilland S.A. recorded the largest increase (+39.9%; EUR +0.1 billion) thanks to its private-banking activities (focused on primary residence mortgages and Lombard loans).


• Eight out of ten banks could increase their portfolio of bonds and other transferable securities by EUR 1.3 billion, resulting in an overall increase of 3.9%.

• This growth is primarily attributable to KBL European Private Bankers S.A. (up EUR 0.7 billion). The bank strengthened its bond portfolio and reduced the volume of its interbank transactions.

• Compagnie de Banque Privée Quilvest S.A. also significantly increased its portfolio by EUR 144.7 million (+31.9%) having invested EUR 100.0 million in UCITS.

• The largest increase in percentage terms was at Société Nationale de Crédit et d’Investissement (EUR +0.1 billion; +98.5%), due to its participation in the capital increase of ArcelorMittal S.A. amounting to EUR 95.0 million in order to maintain the percentage held.


• The Luxembourg banks’ main focus is on providing loans to the Luxembourg market. Therefore, loans and advances to customers represent a substantially higher proportion of the balance sheet total (42.9%) than the market average, due to the overall large amount of private and corporate banking, as well as the public-sector financing provided by the Luxembourg segment.

• Bonds and other transferable securities are significantly above the market average because income from bonds and other transferable securities represents an important source of the Luxembourg segment’s overall balanced mixture of earnings.

• Interbank business is below the market average, since more of the Luxembourg banks act as the headquarters for their respective banking groups than in any other segment, and consequently no deposits are placed at the parent company.

Breakdown of assets 2015-2016

2016

15,162.3

2016

29,039.3

2016

36,490.3

2015

14,691.6

2015

27,952.0

2015

35,833.3





Luxembourg segment

Luxembourg segment

17.9%34.1%

43.7%

2.1%3.0%

17.8%

42.9%

1.8%

34.1%

2.6%20162015

Market1.2%2.0%

19.1%

21.0%

1.3%1.9%

50.4%

28.1%

49.6%

25.4%

20162015


Liabilities

• Amounts owed to credit institutions increased by EUR 1.1 billion (+9.8%) to EUR 12.0 billion.

• With the exception of BEMO Europe - Banque Privée S.A. (down 42.0% to EUR 8.7 billion), which reduced its short term deposits of less than three months to zero, all banks increased their amounts owed to credit institutions.

• KBL European Private Bankers S.A. saw by far the largest increase, at EUR 412.0 million, thus reaching EUR 3.1 billion. In exchange the amounts owed to customers and securitised liabilities decreased by EUR 411.0 million and EUR 215.0 million, respectively.


• Customer deposits remain the largest source of refinancing (+4.6%).• Seven of the ten banks recorded a growth in customer deposits.• In 2016, as well as in the previous year, Banque et Caisse d’Epargne

de l’Etat, Luxembourg and Banque Internationale à Luxembourg S.A., recorded the strongest increases of EUR 1.2 billion and EUR 1.1 billion respectively, while KBL European Private Bankers S.A. recorded a decrease of EUR 0.4 billion.

• In an uncertain market environment characterised by high volatility, private and corporate clients prefer to keep a part of their assets as liquidity reserves available at short notice on current, savings and term accounts.


• Debt securities fell remarkably by 12.0%.

• Two of the ten banks (Banque et Caisse d’Epargne de l’Etat, Luxembourg and Banque Internationale à Luxembourg S.A.) account for 97.7% of all securitised liabilities in the segment.

• As in 2015, Banque et Caisse d’Epargne de l’Etat, Luxembourg recorded the largest absolute decrease by far (EUR -1.0 billion) in 2016, due to maturities and redemptions. However, Banque Internationale à Luxembourg S.A. increased their debt securities by EUR 0.4 billion (+34.0%), due to increasing non-convertible bonds and certificates of deposit.

2016

6,448.9

2015

7,329.5

Debt securities (in EUR million)

13.3%

63.1%

14.1%

7.6%8.9%

62.6%

2016

2015

9.2%0,5%

8.9%0.7%

5.5%

5.6%

Luxembourg segment

• Amounts owed to customers recorded a constant year-on-year increase (63.1% relative share), representing by far the largest source of refinancing in the Luxembourg segment. It is therefore significantly above the market average (45.8% relative share). This is due, on one hand, to their local presence (for example, Banque et Caisse d’Epargne de l’Etat, Luxembourg has Luxembourg’s largest agence and ATM network) and on the other hand it’s due to the fact that through their business model, they generate considerably more customer deposits in Luxembourg and no parent company is available for the purpose of refinancing, as in other segments. Moreover, uncertainty of financial markets encourages customers to seek safety through deposits on saving accounts.

• Refinancing through deposits by banks (14.1%) is correspondingly below the 34.3% market average.

• The Luxembourg segment’s securitised debt and remaining balance sheet items are in line with the market trend.

Breakdown of liabilities 2015-2016

2016

11,990.1

2016

53,661.6

2015

10,921.0

2015

51,324.4


Market

37.1%

7.7%

45.8%

3.6%

34.3%

43.7%

7.3%

3.5%20162015

0.6%

0.7%

8.0%

7.7%

64 PwC Luxembourg



175.670.8155.7

360.6

965.9

-951.2

-21.3-106.7

365.1

963.5

-23.8

-905.5

-98.1-22.1

454.

7 473.8

+0.2%

-1.2%

-11.3%

Luxembourg segment

• Own funds increased by a total of EUR 485.6 million (+6.6%).

• This is largely due to the capital increase of KBL European Private Bankers S.A. by EUR 200 million in order to finance the acquisition of Insinger de Beaufort, a Dutch private bank, which became a wholly-owned subsidiary on 1 January 2017.

2016

7,825.1

2015

7,339.5



Banque et Caisse d'Epargne de l'Etat S.A. 240.6 4.7% =

Banque Internationale à Luxembourg S.A. 129.8 55.3% +1

Société Nationale de Crédit et d'Investissement S.A. 48.5 28.0% +1

KBL European Private Bankers S.A. 28.8 -66.9% -2

Banque Havilland S.A. 15.0 >100% +2

Banque Raiffeisen S.C. 7.5 -6.2% -1

Compagnie de Banque Privée Quilvest S.A. 2.8 -48.1% -1

Banque Havilland Institutional Services S.A. 2.3 NEW NEW

Fortuna Banque S.A. 0.6 >100% -1

Bemo Europe - Banque Privée S.A. -2.1 >-100% -1

1

2

3

4

5

6

7

8

9

10

Net interest result




Income taxes

Risk provisioning



20152016


• Although the total dropped by EUR 4.5 million (-1.2%), five banks could improve their net commission result in total by EUR 5.8 million. By entering the market, Banque Havilland Institutional Services S.A. contributed EUR 3.7 million.

• The strongest percentage increase was recorded by Fortuna Banque S.A., at 166.7%. In absolute terms, Banque Internationale à Luxembourg S.A. showed the highest increase with EUR 4.0 million.

• KBL European Private Bankers S.A.’s net commission result fell by EUR 7.8 million (-11.4%), mainly due to less stock market and fund custody commissions.


Banque Internationale à Luxembourg S.A. 152,9 2,7% =

Banque et Caisse d’Epargne de l’Etat, Luxembourg 93,5 -3,7% =

KBL European Private Bankers S.A. 60,9 -11,4% =

Compagnie de Banque Privée Quilvest S.A. 24,1 -9,7% =

Banque Raiffeisen S.C. 13,0 2,4% =

1

2

3

4

5

• The net interest result (including EUR 175.8 million in dividend income from shares and participating interests, 2015: EUR 168.1 million) remained stable at +0.2%.

• Overall five banks increased their net interest result, while four banks decreased and one stagnated.

• Banque Havilland S.A. recorded the highest percentage increase, at 55.1%, due to fixed-rate debenture loans with low coupons being reallocated to customer loans. It is followed by Fortuna Banque S.C. with an increase of 18.5%. In absolute terms, Banque Internationale à Luxembourg S.A. noted the highest increase in its net interest result by EUR 35.3 million (+12.7%), primarily through a decrease in interest expenses which is above the level of decrease in interest income as well as rising dividend income.

• Due to dropping interest income by EUR 16.3 million as well as dropping dividend income from participating interests by EUR 27.2 million, KBL European Private Bankers S.A. saw a drop of 29.9% (EUR +38.8 million).

2016

965.9

2016

360.6


Banque et Caisse d’Epargne de l’Etat, Luxembourg 426,9 -2,2% =

Banque Internationale à Luxembourg S.A. 313,5 12,7% =

KBL European Private Bankers S.A. 90,8 -29,9% =

Société Nationale de Crédit et d'Investissement 47,5 13,1% +1

Banque Raiffeisen S.C. 44,7 -0,4% -1

1

2

3

4

5

2015

963.5

2015

365.1



66 PwC Luxembourg

• The operating loss of the last year was turned around into a profit of EUR 70.8 million (up by EUR 94.6 million (+397.5%).

• Seven banks improved their results, like Banque et Caisse d’Epargne de l’Etat, Luxembourg, which contributed EUR 73.1 million (+234.3%), due to a provision for AGDL of 40.7 million in 2015 and a reversal of the same provision of EUR 33.0 million in 2016.

2016

70.8

2015

-23.8


61.1%

41.6%

58.4%

38.9%

20162015

Luxembourg segment • Current operating expenses increased by

a total of 5.0% due to increased overheads (up 12.3%, compared to a market-average increase of 2.4%).

• There are several reasons for this increase. KBL European Private Bankers S.A. incurred increasing administrative costs (EUR +22.7 million) linked to transformation projects. In addition, KBL European Private Bankers S.A. has launched a new IT platform in partnership with Lombard Odier Europe S.A.; Banque et Caisse d’Epargne de l’Etat, Luxembourg recorded an increase in administrative costs (EUR +10.0 million) partly due for implementing new regulatory requirements and also due to putting a new building in use.

• The relative share of staff costs (58.4%) is higher than the market average (51.0%). This is because, in contrast to other market participants, none of the services from the group are recorded as administrative costs.

Breakdown of current operating expenses 2015-2016


Luxembourg segment

Market

51.6%

49.0%

51.0%

48.4%

20162015


• Risk provisioning is stable year-on-year. The following significant allocations to risk provisioning were made in 2016:

- EUR 16.5 million at Banque Internationale à Luxembourg S.A. (impairment of loans and advances to customers); and

- EUR 10.2 million at Banque Havilland S.A. due to value adjustment in shares in affiliated undertakings of EUR 6.5 million (of which EUR 6.0 million for Banque Havilland (Bahamas) Ltd) and increased value adjustments on loans to customers as well as a lump sum provision of EUR 1.6 million.

2016

-21.3

2015

-22.1


• Net profit on financial operations fell by 11.3%.

• Banque Internationale à Luxembourg S.A.’s net profit from financial transactions increased by EUR 32.1 million (or 97.3%) year-on-year, primarily due to an increase in gains on financial assets available for sale as well as gains on loans and advances.

• However, KBL European Private Bankers S.A.’s profit from financial transactions fell by EUR 35.5 million, due to the lower net gains on available-for-sale financial assets, and Banque et Caisse d’Epargne de l’Etat, Luxembourg’s profit fell by EUR 15.9 million, mainly driven by the EUR 11.0 million lower gain on the fair value on available-for-sale financial instruments.


2016

155.7

2015

175.6

68 PwC Luxembourg

Key takeaways – Swiss segment

Number of banks


Total 12 12

2015 2016

Austria Portugal Belgium Italy Spain France

England Other

Business areas

35.7%

3.6%

7.1%

7.1%

14.3%

21.4%

3.6%

17.9%

3.6%

10.7%

25.0%

10.7%

14.3%

25.0%

• The key business areas for the Swiss segment are depositary banking, private banking and investment fund servicing.

• The Swiss banks in Luxembourg make intensive use of the possibility given by the EU passport to distribute their services through branches in Europe. The banks currently have 28 branches in 16 different countries. 27 of the branches are in Europe and one is in Asia. This means Swiss banks have on average 2.8 branches, with the actual numbers per bank ranging from none (Bank Julius Baer Luxembourg S.A.) to six (Lombard Odier (Europe) S.A. and Pictet & Cie (Europe) S.A.). Furthermore, Credit Suisse (Luxembourg) S.A. will diversify its service by opening a new branch in Ireland in 2017.

• The revenue situation in the Swiss segment is considerably more dependent on net commission result (77.9% relative share) than the market average 50.6% relative share, since private banking, depositary banking and investment fund servicing are key components of the business model. Net interest result takes only a minor role.

• Swiss banks have a more expensive cost structure due to their business model (77.7% cost-income ratio compared to a market average of 55.16%). Salaries are significantly higher than the market average.

• In 2016, there were the following exits and entrants in the Swiss segment:- UBS (Luxembourg) S.A. has become a branch of UBS

Europe SE. Therefore, we have decided to eliminate UBS (Luxembourg) S.A. from previous year figures in order to have a better comparability in the Swiss segment.

- Cornèr Banque (Luxembourg) S.A. has ceased its activities in 2016.

- The shareholders of UBI Banca International S.A. have decided to sell 100% of its capital to EFG International AG. Therefore the bank was transferred from the Italian to the Swiss segment and we have added UBI Banca International S.A. to the 2015 and 2016 figures.

- Commerzbank International S.A. Luxembourg has been acquired by Julius Baer Group and renamed Bank Julius Baer Luxembourg S.A. and was also added to the 2015 figures in order to have a better comparability.

- In terms of figures for 2015, this means that the balance sheet total was adjusted from EUR 33,030.5 million to EUR 29,400.8 million and the annual net profit from EUR 230.5 million to EUR 137.2 million.

Branches outside Luxembourg

Swiss segment

Private banking Lending Custody Treasury Service centre Investment fund servicing

• Union Bancaire Privée (Europe) S.A. is focussing its resources on its core business, private banking and has transferred the function of custody bank of investment funds to another local bank.


• The net interest result increased by a total of 14.2% to EUR 137.4 million. Seven out of ten banks have increased their net interest result, of which Edmond de Rothschild (Europe) S.A. by 119.6%, Lombard Odier (Europe) S.A. by 38.5% and Pictet & Cie (Europe) S.A. by 36.5%.

• The decrease in net commission result of EUR 71.6 million (-12.9%) is attributable to less customer transactions, on one hand (eg. at Bank Julius Baer Luxembourg S.A., Credit Suisse (Luxembourg) S.A. and Edmond de Rothschild (Europe) S.A.) and to outsourcing of activities (eg. the transfer of the funds distribution to another group entity at Pictet & Cie (Europe) S.A. and decreased commissions in wealth management (eg. at Edmond de Rothschild (Europe) S.A.), on the other.

555.0

120.32015

483.4

137.4

2016



• The balance sheet total decreased by 5.2% (compared to a 3.6% increase for the overall market). On one hand, seven out of ten banks saw their balance sheet total decreasing by EUR 3.3 billion, of which Bank Julius Baer Luxembourg S.A. with EUR 1.4 billion due to its separation from the Commerzbank Group and related asset/liability transfer as well as UBI Banca International S.A. with EUR 0.8 billion. On the other hand three out of ten banks recorded a total increase of EUR 1.9 billion, of which Pictet & Cie (Europe) S.A. with EUR 1.5 billion.

• The balance sheet structure in the Swiss segment is characterised by deposits by investment funds, institutional and private clients (84.8% of the balance sheet total). These are then distributed within the group (51.9% of the balance sheet total) or to clients (29.6% of the balance sheet total). The three largest institutions, Pictet & Cie (Europe) S.A. at EUR 8.7 billion, Credit Suisse (Luxembourg) S.A. at EUR 7.2 billion and Edmond de Rothschild (Europe) S.A. at EUR 5.4 billion, account for 76.3% of the aggregated balance sheet total.


2015

29,400.8

2016

27,859.1

• An increased net other result of EUR 30.6 million, mainly driven by Bank Julius Baer Luxembourg S.A.’s profit of EUR 49.1 million due to the sale of their participation at Argor Heraeus S.A. has limited somewhat the decrease of the total net result.

• Only four out of ten banks have made a profit this year, totalling EUR 168.3 million of which Pictet & Cie (Europe) S.A. contributed EUR 82.6 million, Bank Julius Baer Luxembourg S.A. EUR 54.2 million, Union Bancaire Privée (Europe) S.A. EUR 17.8 million and Edmond de Rothschild (Europe) S.A. EUR 13.7 million.

• Pictet & Cie (Europe) S.A. recorded a decrease of annual net profit by 30.7%. Taken into account the exceptional withdrawal of the funds distribution to another group entity, the decrease would be significantly smaller. In addition, they recorded lower margins and additional costs for recruitment purpose in 2016.


2015

137.2

2016

120.4

• Annual net profit of 2016 decreased by EUR 16.8 million (-12.2%, compared to a market increase of 0.2%*). The reduction is mainly due to a decrease in net interest and commission result by EUR -54.5 million (-8.1%), whereas the net interest result has increased by EUR 17.1 million (+14.2%, market average: 5.3%) and net commission result decreased by EUR -71.6 million (-12.9%, market average -2.3%). * without the one-off effect

70 PwC Luxembourg

Return on equity

8.19%

2015 2016

9.05%

• The return on equity of the Swiss market has shown an increase by 0.86% year-on-year, due to a smaller decrease of the annual net result (-12.2%) compared with the decrease of own funds by 20.6%.

• Nevertheless, this ratio is heavily influenced by the net results of Pictet & Cie (Europe) S.A. and Bank Julius Baer Luxembourg S.A. which showed ratios of 19.57% and 133.17% respectively.

Return on assets

• The Swiss segment’s decreased average return on assets of 0.43% is influenced by a decreased overall net result by 12.2% while the balance sheet volume has decreased only by 5.2%.

• In the Swiss segment four out of ten banks contributed with positive ratios. Bank Julius Baer Luxembourg S.A. showed the best return on assets (5.77%), as it has posted a gain of EUR 54.2 million as a result of extraordinary items and decreased balance sheet volume by 60.7%. Union Bancaire Privée (Europe) S.A. shows also a ratio far above the market average due to reduced total assets (-40.9%) while the annual net result decreased only by 6.3%.

2015 2016

0.43%0.47%

Swiss segment


0 10 20 30 40 50 60 70 80

2016

2015

77.72

76.74

Market

54.52

55.16*

• At 77.72%, the cost-income ratio is considerably above the market average of 55.16%*. This is due to overall very high staff costs compared to the other country segments.




0 50 100 150 200

2016

2015 173.2

163.1

Market

118.1

117.7

0 50 100 150 200

2016

2015

57.1

66.2

Market

156.9

156.5*


Headcount

• The annual net profit per staff member has decreased due to the drop of the annual net profit (-12.2%) while the headcount remained stable.

• The Swiss segment’s salary structure is considerably higher than the market average.• Administrative costs per staff member remains stable on average and above market level. However, eight of ten banks

showed improved ratios.

2,108

2,071

2016

2015

0 30 60 90 120 150

2016

2015 125.4

124.1

Market

110.9

113.0





Pictet & Cie (Europe) S.A. 8,665.3 20.8% =

Crédit Suisse (Luxembourg) S.A. 7,174.4 5.3% =

Edmond de Rothschild (Europe) S.A. 5,423.5 -2.2% =

UBI Banca International S.A. 1,927.3 -28.7% =

EFG Bank (Luxembourg) S.A. 1,228.1 -17.6% +1

Lombard Odier (Europe) S.A. 1,019.6 -1.9% +2

Bank Julius Baer Luxembourg S.A. 937.8 -60.7% -2

Union Bancaire Privée (Europe) S.A. 672.9 -40.9% -1

BSI Europe S.A. 550.5 -24.8% =

Mirabaud & Cie (Europe) S.A. 259.7 49.5% =

1

2

3

4

5

6

7

8

9

10

72 PwC Luxembourg

Assets

• Despite a decrease in loans and advances to credit institutions this caption remained the main component in 2016, accounting for 51.9% of total assets.

• The decrease of 14.0% (EUR -2.6 billion) is mainly attributable to Bank Julius Baer Luxembourg S.A. (EUR -1.4 billion). Eight out of ten banks reduced this position significantly, ranging from -72.0% (Bank Julius Baer Luxembourg S.A.) up to -3.3% (Edmond de Rothschild (Europe) S.A.).

• Pictet & Cie (Europe) S.A. (+123,7%; EUR 1,037.0 million) and Mirabaud & Cie (Europe) S.A. (+24,3%; EUR 27.7 million) increased loans and advances to credit institutions.


• The increase in loans and advances to customers by EUR 1.6 billion (+24.2%) is mainly due to a rise at Pictet & Cie (Europe) S.A. (EUR +0.8 billion), Credit Suisse (Luxembourg) S.A. (EUR +0.5 billion) and Bank Julius Baer Luxembourg S.A. (EUR +0.2 billion).

• With the exception of Union Bancaire Privée (Europe) S.A. (EUR -44.5 million; -42.9%) and UBI Banca International S.A. (EUR -90.0 million; -21.1%), all banks increased loans and advances to customers in 2016.


• Bonds and other transferable securities decreased by EUR 642.2 million (-12.0%) year-on-year. This is primarily attributable to decreased volumes at Pictet & Cie (Europe) S.A. (EUR -0.4 billion; -7.9%), whose transferable securities nevertheless account for 87.0% of the Swiss segment.


Swiss segment

57.2%16.9%

22.6%

1.1%0.4%

51.9%1.7%

18.2%

0.3%20162015

29.6%

• The interbank business in the Swiss segment has been declining steadily over the past three years, with -14.0% in 2016, compared to -1.6% for the overall market. However, with 51.9%, loans and advances to credit institutions still remain the largest balance sheet item, which is in line with the overall market.

• Loans and advances to customers increased by EUR 1.6 billion (+24.2%).

• Bonds and other transferable securities dropped by 12.0% mainly due to a reduction of the portfolio at four out of ten banks.


2016

14,453.2

2016

4,708.1

2016

8,255.4

2015

16,802.9

2015

5,350.3

2015

6,648.7

Swiss segment

Market1.2%2.0%

19.1%

21.0%

1.3%1.9%

50.4%

28.1%

49.6%

25.4%

20162015






Liabilities

• Amounts owed to credit institutions have decreased significantly by EUR 2.2 billion (-50.1%) year-on-year to EUR 2.2 billion, as six out of ten banks showed a decrease.

• This decrease is mainly attributable to the change in strategy focussing on private customers at Bank Julius Baer Luxembourg S.A. (EUR -1.4 billion; -97.5%) and to the decrease at Credit Suisse (Luxembourg) S.A. (EUR -0.6 billion; -55.0%). On the other hand, Pictet & Cie (Europe) S.A. increased this position by EUR 0.4 billion mainly due to a growth of business with related entities.


2016

2,170.9

2015

4,348.6

• Amounts owed to customers are by far the largest component of the liabilities (making up 84.8% of the balance sheet total), due to the Swiss banks’ dominance in retail banking, as well as to asset servicing for the investment fund sector.

• The top three contributors are Pictet & Cie (Europe) S.A. (EUR 6.9 billion), Credit Suisse (Luxembourg) S.A. (EUR 6.3 billion), and Edmond de Rothschild (Europe) S.A. (EUR 4.9 billion).

• Five out of ten banks registered strong growth, of which Bank Julius Baer Luxembourg S.A. with +147.2% (EUR +0.5 billion), Credit Suisse (Luxembourg) S.A. with +18.1% (EUR +1.0 billlion) and Pictet & Cie (Europe) S.A. with +17.7% (EUR +1.0 billion). A strong decrease was recorded by Union Bancaire Privée (Europe) S.A. with -63.8% (EUR -0.5 billion).


• Own funds decreased in 2016 by EUR 0.3 billion (-20.6%), which is essentially due to the decrease at Bank Julius Baer Luxembourg S.A. (EUR -0.3 billion) because of a capital reduction and an interim dividend of EUR 357.1 million before the acquisition by Julius Baer Group. In October 2016 a capital increase of EUR 8.2 million was recorded by a contribution of the shares from Julius Baer Investments S.à r.l., Luxembourg.

• Three out of ten banks were able to increase their own funds; Union Bancaire Privée (Europe) S.A. (+11.9%), Pictet & Cie (Europe) S.A. (+4.3%) and Lombard Odier (Europe) S.A. (+4.9%).

• Mirabaud & Cie (Europe) S.A. recorded a share capital increase of EUR 2.0 million in 2016 and Lombard Odier (Europe) S.A. an increase in share premium of EUR 15.0 million as a result of the contribution in kind by LO Holdings S.A.


14.8%

0.5% 7.8%

84.8%74.0%

2.7%

2016

2015

4.8%

0.1%

5.7%

0.5%

2.0%

2.3%

Swiss segment • Increased client borrowing (+8.5%) still remains by far the largest source of refinancing in the Swiss segment while all other captions decreased.

• Deposits by investments funds, institutional and private clients in the Swiss segment remain significantly higher than the market average.


2016

23,619.9

2016

1,329.8

2015

21,761.6

2015

1,674.5

Amounts owed to credit institutions Amounts owed to customers Securitised liabilities Subordinated debts Own funds Other liabilities

Market

37.1%

7.7%

45.8%

3.6%

34.3%

43.7%

7.3%

3.5%20162015

0.6%

0.7%

8.0%

7.7%

74 PwC Luxembourg


Pictet & Cie (Europe) S.A. 82.6 -27.1% =

Bank Julius Baer Luxembourg S.A. 54.2 >100.0% NEW

Union Bancaire Privée (Europe) S.A. 17.8 -6.3% -1

Edmond de Rothschild (Europe) S.A. 13.7 -16.0% -1

Mirabaud & Cie (Europe) S.A. -2.2 66.2% +4

EFG Bank (Luxembourg) S.A. -2.2 >-100.0% -1

Crédit Suisse (Luxembourg) S.A. -8.3 >-100.0% -3

BSI Europe S.A. -10.5 >-100.0% NEW

UBI Banca International S.A. -11.3 >-100.0% -2

Lombard Odier (Europe) S.A. -13.4 30.1% =

1

2

3

4

5

6

7

8

9

10



2.45.8

67.1

96.8

483.4

137.4

-615.1

-5.5-43.7

66.258.7

555.0

120.3

-624.3

-46.9

137.

2

120.4

+14.2%

-12.9%

+46.2%

Swiss segment

Net interest result




Income taxes

Risk provisioning



2015 2016


• Seven out of the ten banks saw their net interest result increase. Net interest result grew by a total of 14.2%.

• Pictet & Cie (Europe) S.A. improved its net interest result by EUR 14.5 million (+36.5%).

• Edmond de Rothschild (Europe) S.A. recorded a rise of EUR 11.6 million (+119.6%) due to interest rate swaps combined with deposits at the central bank offering higher returns than reverse repurchase agreements.

• Credit Suisse (Luxembourg) S.A. increased its net interest result by EUR 7.3 million (+23.2%), due to increased client loan volumes.

• A decrease in net interest result of EUR 17.4 million (-112.3%) was recorded by Bank Julius Baer Luxembourg S.A. mainly due to the exit out of the Commerzbank Group and related asset/liability transfer.

2016

137.4


Pictet & Cie (Europe) S.A. 54.2 36.5% =

Crédit Suisse (Luxembourg) S.A. 38.8 23.2% =

Edmond de Rothschild (Europe) S.A. 21.3 119.6% +2

UBI Banca International S.A. 11.5 0.9% NEW

EFG Bank (Luxembourg) S.A. 5.7 32.6% +1

1

2

3

4

5

2015

120.3


• In contrast to the net interest result, the net commission result decreased by EUR 71.6 million (-12.9%), meaning nine out of ten banks saw a decrease of their net commission result.

• Pictet & Cie (Europe) S.A. recorded a decrease of EUR 35.1 million (-16.2%), Edmond de Rothschild (Europe) S.A. of EUR 13.2 million (-14.7%) and Lombard Odier (Europe) S.A. of EUR 9.2 million (-22.4%).

• Mirabaud & Cie (Europe) S.A. recorded an increase of EUR 6.3 million (+40.1%).


Pictet & Cie (Europe) S.A. 181.4 -16.2% =

Crédit Suisse (Luxembourg) S.A. 90.9 -7.2% =

Edmond de Rothschild (Europe) S.A. 76.7 -14.7% =

Lombard Odier (Europe) S.A. 31.9 -22.4% =

Union Bancaire Privée (Europe) S.A. 29.3 -17.2% =

1

2

3

4

5

2016

483.4

2015

555.0


76 PwC Luxembourg

• Other operating income and expenses increased significantly in 2016 by EUR 30.6 million (+46.2%) primarily due to Bank Julius Baer Luxembourg S.A. which recorded a strong growth of other operating income with net profits on the sale of their participation Argor Heraeus S.A. of EUR 49.1 million.

2016

96.8

2015

66.2


57.5%

44.1%

55.9%

42.5%

20162015

Swiss segment • Total current staff costs for

the segment decreased by EUR 14.8 million (-4.1%). This decrease is primarily attributable to Edmond de Rothschild (Europe) S.A. (EUR -10.0 million) due to a decreased headcount. Bank Julius Baer Luxembourg S.A. shows an increase of EUR 5.1 million in staff costs caused by the reintegration of services which were previously outsourced to Commerzbank Group.

• The overheads in the Swiss segment increased slightly by EUR 1.9 million (+0.7%). While five out of ten bank increased the overheads by EUR 10.2 million; five banks show a decrease of EUR 7.5 million. Edmond de Rothschild (Europe) S.A. recorded a notable increase of +15.1% (EUR 7.8 million), and EFG Bank (Luxembourg) S.A. of +19.1% (EUR +1.7 million) as a result of increased business volumes.

Breakdown of current operating expenses 2015-2016


• UBI Banca International S.A. shows a decrease of 14.2% (EUR -1.8 million) mainly because the net carrying amounts of goodwill were fully amortised in 2015.

Swiss segment

Market

51.6%

49.0%

51.0%

48.4%

20162015


• Due to the Swiss banks’ business models, risk provisioning remains low in comparison with the market as a whole.

• Additional risk provisions were booked at UBI Banca International S.A. (EUR 8.7 million) mainly due to one major customer in each of its branches in Madrid and Munich, at BSI Europe S.A. (EUR 4.5 million) in relation with the integration project and restructuring as well as on a participation and at Crédit Suisse (Luxembourg) S.A. (EUR 4.2 million) mainly related to overdue interests on loans.

• Edmond de Rothschild (Europe) S.A. recorded a net income of EUR 11.5 million by using part of its reserves for general banking risks in the amount of EUR 12.0 million.

• The increase in net profit on financial operations for the Swiss segment is primarily attributable to the growth at Bank Julius Baer Luxembourg S.A. (EUR +9.6 million), mainly due to net gains from the disposal of available-for-sale financial instruments and Union Bancaire Privée (Europe) S.A. (EUR +5.5 million), due to higher margins of forward foreign exchange transactions. On the contrary, Pictet & Cie (Europe) S.A. recorded a decrease of EUR 7.7 million.



2016

-5.5

2015

5.8

2016

67.1

2015

58.7

78 PwC Luxembourg

Key takeaways – Chinese segment

Number of banks


Total 10 11

2015 2016

Private banking Lending Treasury Retail banking Service centre

Business areas

7.7%

17.6%

38.5%

11.8%

11.8%

15.4%

7.7%

30.8%

• The Chinese segment is continuing to show the strongest growth in Luxembourg in terms of balance sheet totals and headcount.

• On 7 May 1991, the Bank of China became the first Chinese bank to open a subsidiary in Luxembourg. It has had a branch office here since 1979. The Industrial and Commercial Bank of China (Europe) S.A. followed in 2006. It has had a branch here since 1999. More banks have arrived since 2013 (China Construction Bank, Agricultural Bank of China, Bank of Communications, China Merchants Bank), meaning there are now six Chinese banking groups operating five subsidiaries and six branches in Luxembourg. In addition, China Everbright Bank will establish a subsidiary and a branch and the board of Shanghai Pudong Development Bank voted to establish a European division and branch office in Luxembourg in the future.

• The Chinese banks operate predominantly in corporate banking (trade and project financing and syndicated loans). The clientele are Chinese companies investing in Europe, as well as European companies with business interests in China. Furthermore, the subsidiaries act as service hubs for the European branches or for the branches of their parent companies in Luxembourg.

• Bank of China Luxembourg Branch issued the first BOC Green Bond listed at the Luxembourg Stock Exchange.

• Industrial and Commercial Bank of China (Europe) S.A. and Bank of China (Luxembourg) S.A. currently account for 87.0% of the aggregated balance sheet total.

• The balance sheet total grew strongly, up 14.0% (compared to a market-average growth of 3.6%). This is primarily due to loans and advances to customers (+31.2%) and bonds and other transferable securities increasing significantly (+43.4%). This was offset by a decrease in loans and advances to credit institutions (-24.2%).

• This growth was mainly driven by Bank of China (Luxembourg) S.A. (EUR +763.2 million), China Construction Bank (Europe) S.A. (EUR +479.6 million) and Bank of Communications (Luxembourg) S.A. (EUR +431.1 million); the latter two of which more than doubled their assets.

• Asset growth is still mainly refinanced by inter-group bank deposits, as amounts owed to credit institutions increased by EUR 1.2 billion (+20.2%).


2016

12,415.5

2015

10,889.1

• Chinese banking groups in Luxembourg typically open both a subsidiary and a branch. The subsidiaries use the EU passport to distribute financial services through their branches in other European countries. The branches are subject to reduced local regulatory requirements, since these are enforced at parent-company level (e.g. total equity ratio) and therefore it is possible to execute capital-intensive transactions (such as lending) using the parent company’s equity.

• With the Bank of Communications (Luxembourg) S.A. having opened two branches in France and Italy, and China Construction Bank (Europe) S.A. having opened a branch in Italy, four of the six Chinese banking groups operate a total of 17 branches in eight different countries as at 31 December 2016.

• Furthermore, China Construction Bank (Europe) S.A. will open a branch in Poland in 2017.

Branches outside Luxembourg

Netherlands Belgium Poland Sweden Portugal Spain

France Italy

5.9%5.9%

11.8%

17.6%

17.6%

Chinese segment


• Annual net profit in the Chinese segment increased by 123.9% (compared to an increase of 0.2%* for the market as a whole).

• This significant increase is due to positive net interest and net commission results coming from the investments made in staff, infrastructure and new branches in the recent years, and due to Industrial and Commercial Bank of China (Europe) S.A. incurring a net result on financial operations of EUR 14.8 million.

• In 2016 three banks – Industrial and Commercial Bank of China (Europe) S.A., Bank of China (Luxembourg) S.A. and Agricultural Bank of China (Luxembourg) S.A. saw their annual net results increasing.

• In addition, it is important to note that total net profit or loss in the Chinese segment is particularly distorted as the Luxembourg branches cannot be included in the calculation due to their annual accounts not being published.


37.3

112.2

2015 • The Chinese segment’s income situation is mainly based on corporate banking, which makes up 71.8% of the share of net interest income.

• Net interest income grew by +0.7%. Bank of China (Luxembourg) S.A. recorded a growth of EUR 4.5 million (+18,8%) due to an increase of the loan portfolio, China Construction Bank (Europe) S.A. saw an increase of EUR 4.2 million (+150.0%) as well as Bank of Communications (Luxembourg) S.A. recorded a growth of EUR 2.8 million (+311.1%). Industrial and Commercial Bank of China (Europe) S.A. saw a decrease of its net interest result of EUR 10.7 million (-12.7%).

• Chinese banks recorded an overall profit on commissions this year with an increase by 19.0% (EUR +7.1 million). Bank of China (Luxembourg) S.A. needs to be highlighted here, as it nearly tripled its net commission result from EUR 6.0 million to EUR 17.1 million, driven by arrangement and upfront fees for granting new loans. The Industrial and Commercial Bank of China (Europe) S.A. recorded a decrease of EUR 8.5 million (-27.2%) due to risk participation fees.

44.4

113.0

2016



Return on equity

1.23%

20162015

0.66%

• The Chinese sector’s total equity increased by 19.8% to EUR 1.3 billion (e.g. Bank of China increased the subscribed capital by EUR 200.0 million).

• Despite solid equity (10.4% of the total balance sheet) the return on equity is significantly under the market average of 6.64%*, due to the low annual net profit.

Return on assets

• Despite a balance sheet growth of 14.0%, the ratio has slightly recovered due to an increase of net profits, which have more than doubled.

• The return on assets is low compared to the market average of 0.53%* due to a high level of investments made by the banks in this sector currently to stipulate future growth.

0.13%

20162015

0.07%

2015

7.1

2016

15.9



80 PwC Luxembourg

0 30 60 90 120 150

2016

2015


2016

2015

0 10 20 30 40 50 60 70 80

79.88

76.98

Market

55.16*

54.52

• The year-on-year decrease of the cost-income ratio was driven by the significant growth of the total income of 33.1%, which prevailed the increase in operational expenses by 29.2%.

• Cost-income ratio is far above average due to investments by banks in expanding their network, staff expenses increased by 37.7% (with 18.6% increase in headcount) and current operating expenses by 13.1% for this segment year-on-year.

Market

118.1

117.7

0 50 100 150 200

2016

2015 12.8

24.2

Market

156.5*

156.9

0 20 40 60 80 100 120

2016

2015 71.6

68.3

Market

110.9

113.0

656

553

2016

2015

• The annual net profit per staff member has almost doubled as a consequence of increase in total net profit (up 123.9%) compared to the headcount increase of 18.6%.

• Salary costs per staff member significantly increased by 16.1% and are even above the level we saw in 2014 (KEUR 122.4). This development is due to the expansion of the branch network starting end of 2015 which is reflected in the 2016 figures.

• Chinese banks continue to experience the largest increase in headcount (+18.6% year-on-year). The Industrial and Commercial Bank of China (Europe) S.A., Bank of China (Luxembourg) S.A. and China Construction Bank (Europe) S.A. have the highest headcounts (351 (up 12.5%), 130 (up 32.7%), and 123 (up 21.8%), respectively).

• Administrative costs per member of staff decreased year-on-year due to increase in headcount, which prevailed the growth of current operating expenses (+13.1%). The ratio is far below the market because the level of outsourced services seems to be below the market average.




Headcount

115.0

133.5

Chinese segment





Industrial and Commercial Bank of China (Europe) S.A. 7,353.0 -1.9% =

Bank of China (Luxembourg) S.A. 3,452.4 28.4% =

China Construction Bank (Europe) S.A. 810.3 145.0% +1

Bank of Communications (Luxembourg) S.A. 780.0 123.6% -1

Agricultural Bank of China (Luxembourg) S.A. 19.8 -16.1% =

1

2

3

4

5


82 PwC Luxembourg

Chinese segment

33.5%

16.7%

60.2%

0.4%0.5%

22.3%

52.3%

0.4%13.3%

0.5%

20162015

• Loans and advances to credit institutions in the Chinese segment fell by 24.2%, meaning that their share in total assets dropped to 22.3%. The main reason was Industrial and Commercial Bank of China (Europe) S.A. continuing to enlarge its loans and advances to customers while reducing loans and advances to credit institutions (especially related parties) by another EUR 0.6 billion (previous year EUR 0.7 billion). The overall decrease in loans and advances to credit institutions by EUR 0.9 billion was counteracted by loans and advances to customers increasing by EUR 1.8 billion, as well as bonds and other transferable securities increasing by EUR 0.6 billion.

• Besides Agricultural Bank of China (Luxembourg) S.A., all other banks were able to increase loans and advances to customers, with Bank of China (Luxembourg) S.A. leading with an increase of EUR +1.0 billion (+66.4%) driven by syndicated loans, followed by China Construction Bank (Europe) S.A. (EUR +0.4 billion; +179.2%), Industrial and Commercial Bank of China (Europe) S.A. (EUR +0.3 billion; +6.9%) and Bank of Communications (Luxembourg) S.A. (EUR +0.2 billion; +103.9%).

• Bonds and other transferable securities increased by EUR 0.6 billion (+43,4%), of which EUR 0.3 billion at Bank of Communications (Luxembourg) S.A. due to income generation and liquidity management, EUR 0.2 billion at Industrial and Commercial Bank of China (Europe) S.A. and EUR 0.1 billion at Bank of China (Luxembourg) S.A. to ensure compliance with regulatory requirements.


Assets





Chinese segment

Market

1.2%2.0%

19.1%

21.0%

1.3%1.9%

50.4%

28.1%

49.6%

25.4%

20162015


• The main sources of refinancing for the Chinese banks are amounts owed to credit institutions, which are up by EUR 1.2 billion (+20.2%), mainly driven by the Bank of China (Luxembourg) S.A. (EUR +0.4 billion; +60.5%), the Bank of Communications (Luxembourg) S.A. (EUR +0.4 billion; +172.8%) and China Construction Bank (Europe) S.A. (EUR +0.3 billion; +266.9%).

• Significant parts of the amounts owed to credit institutions are with related parties: 100% at Bank of China (Luxembourg) S.A., 92.1% at China Construction Bank (Europe) S.A., 79.5% at Bank of Communications (Luxembourg) S.A. and 65.3% at Industrial and Commercial Bank of China (Europe) S.A.

• The large increase in amounts owed to customers of EUR 0.2 billion (+781.5%) at China Construction Bank (Europe) S.A. is due to term deposits or deposits with agreed periods of notice.

• Own funds have also notably been increasing by EUR 213.8 million (+19.8%). Bank of China (Luxembourg) S.A. has done a share capital increase by EUR 200.0 million in 2016.

Chinese segment

0.9%

30.6%

1.0%

57.9%

54.9%

34.1%

2016

2015

0.1%

0.1%

10.4%

9.9%


Liabilities

Amounts owed to credit institutions Subordinated debts Amounts owed to customers Own funds Other liabilities

Market

37.1%

7.7%

45.8%

3.6%

34.3%

43.7%

7.3%

3.5%20162015

0.6%

0.7%

8.0%

7.7%

84 PwC Luxembourg

8.2

37.3

112.2

-103.3

-11.2

-18.8

-17.37.09.2

44.4

113.0

-22.6

-133.5

-1.6

Bank Annual net profit/loss (EUR million) Shift Change in

rank

Industrial and Commercial Bank of China (Europe) S.A. 28.5 74.8% =

Bank of China (Luxembourg) S.A. 4.8 23.1% =

Agricultural Bank of China (Luxembourg) S.A. -0.2 83.3% =

Bank of Communications (Luxembourg) S.A. -6.8 58.1% =

China Construction Bank (Europe) S.A. -10.4 -36.8% =

1

2

3

4

5

• After having fallen by 87.8% to EUR 7.1 million in the previous year, the Chinese segment’s annual profit increased by EUR 8.8 million to reach EUR 15.9 million. This is mainly due to an increase of EUR 12.2 million (+74.8%) at Industrial and Commercial Bank of China (Europe) S.A.

• However, the three more recently established Chinese banks (Agricultural Bank of China (Luxembourg) S.A., Bank of Communications (Luxembourg) S.A. and China Construction Bank (Europe) S.A.) are continuing to incur start-up losses amounting to a total of EUR 17.4 million.

• Total net interest and commission result grew by 5.3% or EUR 7.9 million, due to four banks increasing by a total of EUR 27.1 million, but offset by Industrial and Commercial Bank of China (Europe) S.A. decreasing by EUR 19.2 million, driven by an increase in risk participation fees and increased interest payable derived from amounts owed to credit institutions.

• At the same time, current operating expenses increased by 29.2% (2015: 34.2%). This is due to increasing staff and administrative costs across all banks.

• The main positive drivers for net profit are the net profit on financial operations (up EUR 26.5 million from the loss position in previous year) and the reduced risk provisioning (down EUR 9.6 million year-on-year), both mainly incurred by the Industrial and Commercial Bank of China (Europe) S.A.

7.1

15.9

+0.7%

+19.0%

+29.2%



Chinese segment

Net interest result




Income taxes

Risk provisioning



20152016

86 PwC Luxembourg

Roxane HaasBanking Leader+352 49 48 48 [email protected]

Contacts

For further information about our firm and our services, please contact PwC’s Marketing and Communications department at

[email protected]

PwC Luxembourg2, rue Gerhard Mercator B.P. 1443 L-1014 Luxembourg Tel +352 49 48 48 1 Fax +352 49 48 48 2900

www.pwc.lu/banking

Jörg Ackermann

Banking Consulting +352 49 48 48 [email protected]

Björn Ebert

Banking Audit+352 49 48 48 [email protected]

PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,700 people employed from 58 different countries. PwC Luxembourg provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice. The firm provides advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. The firm helps its clients create the value they are looking for by contributing to the smooth operation of the capital markets and providing advice through an industry-focused approach.

The PwC global network is the largest provider of professional services in the audit, tax and management consultancy sectors. We’re a network of independent firms based in 157 countries and employing over 223,000 people. Talk to us about your concerns and find out more by visiting us at www.pwc.com and www.pwc.lu.

© 2017 PricewaterhouseCoopers, Société coopérative. All rights reserved.In this document, “PwC” or “PwC Luxembourg” refers to PricewaterhouseCoopers, Société coopérative which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.

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