Private banking: evolving in a challenging environment

This article written by Hélène Vaguet-Aubert (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2021) discusses the challenging environment in private banking based on her experience at the Banque Internationale à Luxembourg (BIL).

Banque Internationale à Luxembourg (BIL)

Banque Internationale à Luxembourg (BIL) was founded in 1856 and is now steered by Marcel Leyers, appointed as director and chairman of BIL’s executive committee in 2019 (BIL, 2021). Being a top bank for over 160 years and being owned to a 10% extent by the Luxembourgish government, BIL supports Luxembourg’s economy at all levels. BIL has also established itself as top international player thanks to its international subsidiaries. BIL’s international scope, 2,000 top-skilled employees worldwide, strong financial results and growth confirms its systemic importance.

Headquarters of Banque Internationale à Luxembourg (BIL)Source: BIL

BIL brings together all its banking business lines under a common umbrella in order to propose top-of-the-range solutions tailored to the requirements of a very diverse client base. Indeed, the bank has all the financial products and expertise necessary to fulfill all of its clients’ needs: private banking, retail banking, corporate banking and financial markets. As of H1 2019, the bank had a €45 million profit and €41.9 million of assets under management.

As BIL’s “create, collaborate, care” mission statement clearly indicates, BIL’s marketing strategy is client oriented. BIL’s objectives are to focus on core competencies to boost its revenues. To do so, BIL’s short term strategy is to strengthen its activities in mature markets such as Luxembourg and Switzerland. On the long term, BIL’s objective is to leverage the potential of Legend Holdings and the Chinese private banking market.

My internship at BIL

Passionate by strategy and sales, and willing to acquire international experience in the financial sector, I carried out a six-month internship in the Sales Management Department of Banque Internationale à Luxembourg (BIL). In this department, I worked with a team of five international people whose role was to design strategy, sales and marketing solutions to be the direct support of BIL front office and the private banking clients’ indirect support. During this internship, the responsibilities that I had where divided in two parts: on the one hand, sales and marketing, and on the other hand, strategy.

First, regarding the sales and marketing part, my role was to analyze the performance of the bonds and equity financial markets and mutual funds as well to develop weekly sell/buy/hold recommendations regarding BIL products. Once these sales recommendations were made, my role was to analyze the performance of wealth managers from BIL Europe, Asia and Middle East. Finally, once BIL products and wealth managers’ performances were analyzed, I had the opportunity to design relevant marketing content (pitch book containing the details of the financial products) for BIL 20,000 private banking clients.

Second, regarding the more strategic parts, I contributed to the management of two projects at the group level: digitalization of the commercial process on a selection of 2,500 products and repositioning of the private banking service offering targeting 2,000 customers.

Private banking

The financial concept that was the most linked to my experience at BIL is the concept of private banking. Private banking is the main subset of wealth management, it offers investment, banking and other financial services to high-net-worth individuals (HNWI) on different markets. The adjective “private” emphasizes a more consumer-centered approach than what is offered by retail banks since each client is usually assigned to dedicated relationship managers and benefits from tailor-made products. Historically, HNWI from different markets or private banks’ target, were individuals with liquidity over $2 million. However, now, it is possible to open a private banking account with cash and/or financial assets of $250,000. Hence, HNWIs segments that wealth management institutions such as private banks target can be divided into four categories based on their income:

• Affluent: between $250,000 and $1 million
• Lower HNWI: between $1 million and $20 million
• Upper HNWI: between $ 20 million and $100 million
• Ultra-High Net Worth individuals or UHNWI: over $100 million

Under one roof, private banks’ offering encompasses wealth management, tax and insurance services.

Pricing model

For these services, private banks can use three types of pricing models (Goyal et al., 2019):

• “Standard” model: the client pays custody fees, transaction fees and management fees
• “All-in fee” model: the client only pays management fees
• “Performance fee” model: the client pays performance fees and custody fees

Challenges

Today, the private banking industry is facing many threats such as: digitalization, enhanced regulations, rising clients expectations but I would say one of the most important one I noticed in the wake of my internship is: negative interest rates, which is the second financial concept I will introduce here. Indeed, in the wake of the 2008 financial crisis, central banks such as the European Central Bank (ECB) in 2014 had to charge negative interest rates to fight the deflationary spiral. These negative interest rates (-0.5% since September 2019) are a big trouble for European banks such as the ones in Luxembourg: banks must now pay interests on their reserves to the ECB. The excess in bank reserves has exploded since the “Quantitative Easing” program of the ECB in 2015. Therefore, banks have paid €25 billion of negative deposit rate to the ECB since 2014 which had a had a considerable impact on banks’ profitability, equating to a 4% decline in profits for European banks in 2018 for instance (Honoré-Rougé, 2019).

To compensate these profits cuts, some European banks have started charging their clients on their cash deposits or take the risk to grant more risky loans to maintain a decent level of profitability (Arnold, Morris & Storbeck, 2019). However, despite these negative economic trends, Luxembourg is still the leading asset management center in the Eurozone. In Luxembourg, AUM increased to $4.9 trillion in 2020 (+5.4% from 2019).

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Looking for an internship? Looking for a job? You may find useful information by reading other posts where students share their professional experience:

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   ▶ Suyue MA Expeditionary experience in a Chinese investment banking boutique

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   ▶ Youssef LOURAOUI SimTrade: an eye-opener for gaining insights into the world of finance

Looking for an internship or a job in finance, you may also be interested in the following resources to prepare your interviews:

   ▶ Alexandre VERLET Classic brain teasers from real-life interviews

Useful resources

Arnold, M., Morris, S., & Storbeck, O. (2019). European banks fear no escape from negative rates. The Financial Times, 1-3. Retrieved from https://www.ft.com/content/93015730-d960-11e9-8f9b-77216ebe1f17

BIL. (2021). BIL, a key player in the Luxembourgish financial market. Retrieved 27 December 2021, from https://www.bil.com/en/bil group/the-bank/Pages/discover-BIL.aspx

Goyal, D., Zakrzewski, A., Mende, M., Alm, E., Kowalczyk, L., & Wachters, I. (2019). Solving the Pricing Puzzle in Wealth Management. Retrieved 28 December 2019, from https://www.bcg.com/publications/2019/solving-the-pricing-puzzle-in-wealth-management.aspx

Honoré-Rougé, C. (2019). Les taux négatifs et leurs conséquences sur les banques de la zone euro. Retrieved 25 February 2021, from http://www.bsi-economics.org/1039-taux-negatifs-consequences-banques-zone-euro-chr

Relevance to the SimTrade Certificate

It relates to the SimTrade Certificate in the following ways:

About theory

• By taking the Discover SimTrade course (Period 1), you will discover the SimTrade platform that allows investors (or their financial advisors or private bankers) to invest in the financial markets.
• By taking the Market information course (Period 2), you will know more about how information is incorporated in the stock market price.

About practice

• By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
• By launching the Market order simulation and the Limit order simulation, you will practice market orders and limit orders that are the two main orders used by investors to build and liquidate positions in financial markets.

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About the author

Article written by Hélène Vaguet-Aubert (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2021).