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S&P report - Luxembourg's financial centre maintains attractiveness through adaptation

Posted: 01 May 2008

Luxembourg is set to maintain its attractiveness as a financial centre, Standard & Poor's Ratings Services says in a report published today, "Bank Industry Risk Analysis: Luxembourg's Banking System Is Evolving Steadily To Maintain Its Strong Position."

"Luxembourg is responding rapidly and effectively to an increasingly competitive and constantly changing environment," said Standard & Poor's credit analyst Stéphanie Carillon.

The Luxembourg economy revolves around its financial sector - the eighth largest in the world, and second in investment funds - which contributes more than 30% of GDP and employs 20% of the national workforce. The sector is characterized by low credit risk, highly liquid banks, and sound capitalization; a favourable fiscal and legal framework, and tight banking secrecy; a stable, flexible, and wealthy economy; an advanced technological infrastructure; the existence of a highly qualified workforce; and a favourable geographic location.

Implementation in July 2005 of the EU-wide directive on the taxation of savings has not so far significantly altered operations of Luxembourg-based financial institutions, given the in-principle agreement by non-EU countries to implement equivalent measures, and the fact that banking secrecy rules will not be affected until at least 2011.

Standard & Poor's continues to classify the Luxembourg banking industry within group 1 of its Bank Industry Country Risk Assessment (BICRA) rankings, the strongest category. Most banks operating in Luxembourg have little exposure to the local economy. They are typified by a low credit risk profile, with low-risk interbank assets dominating their balance sheet. Tensions in credit (particularly related to subprime assets) and liquidity markets have only a limited impact on the financial sector as key revenues come from sectors such as private banking or securities services, which we expect to show resilience in the current market turmoil. The banking sector therefore remained stable throughout the market instability of 2007 and exhibited satisfactory profitability.

"Despite the recent financial turmoil, we believe the outlook for the financial sector remains favorable," said Ms. Carillon.

While business opportunities exist, the speed of expansion could level off, however, primarily due to the intensifying competition currently prevailing in asset gathering. New financial centres have emerged, raising the possibility that some Luxembourg operations might be outsourced to cheaper locations that have boosted their quality and infrastructure connections to a comparable standard.

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