A new era of corporate lending: Corporate Banking Survey 2023 reveals

Europe at the cross-roads

The world is changing rapidly, both geopolitically and economically. Uncertainty and volatility will remain, not only due to the geopolitical situation, but also as the unprecedented phase of fiscal and monetary expansion is coming to an end. At the same time, the global economy’s shift towards sustainability and net-zero emission targets is one of the biggest challenges for governments, corporates and banks and individuals of our times.

According to the 2022/2023 investment report from the European Investment Bank (EIB), an annual investment of 1000 billion euros is imperative to achieve a 55% reduction in greenhouse gas emissions by 2030 in Europe.

Transitioning to the digital economy of tomorrow is as much as costly as essential. With governments facing high levels of debt, it becomes apparent that the impetus for investment cannot rely solely on public sources and banks, but we will also need an integrated capital market in Europe to attract private investor’s money.

“This is where the bank’s financing and investment bank expertise will be needed – and banks are ready to step in” stresses Frank Rückbrodt, Head of ABBL’s Corporate and Institutional Banking Cluster, as well as CEO of Deutsche Bank Luxembourg.

Banks play a decisive role in financing the economy

“In Europe, a significant 70% of corporate financing needs are still covered by bank loans“, Frank Rückbrodt continues. “While this share is likely to fall with the realization of a European capital market, loans will still be a key financing product. Given Luxembourg’s pivotal position as an international financial center, at the ABBL we firmly believe that Luxembourg’s corporate and investment banks stand at the forefront of the new economic era, playing an indispensable role to tackle both immediate and long-term challenges“.

In the dynamic landscape of Corporate Banking, Luxembourg banks are thus gearing up for international expansion: 63% of corporate lending is already focused on the international market and a resounding 71% of respondents earmarking corporate lending as the cornerstone of their innovation strategy.

ABBL members are scanning the horizon, reacting to this new world

Banks are highly exposed to global trends, including climate change and the rise of artificial intelligence and machine learning. They must position themselves strategically to maintain competitiveness while preparing their workforce for significant demand from clients for advice on the emergence of new realities. The 2023 Survey has highlighted three key areas where banks are intensifying their focus: ESG financing, leveraging emerging technology, and empowering their employees.

“The emphasis on sustainability is not only driven by a recognition of the importance of ensuring a liveable planet, but is also crucial for the banking sector itself,” Frank Rückbrodt stresses. Environmental catastrophes and the uncertainties arising from climate change significantly increase lending risks for banks, making the world more unstable. Banks are tightening their scrutiny on greenwashing and demanding higher ESG standards from clients in exchange for sustainability-linked loans (SLL). With growing pressure to facilitate the green transition, supporting clients in their convergence is at the centre of their strategy. The survey also shows that corporate banking clients do see the transition not only as a challenge, but also as a growth opportunity. They seek bank’s help to navigate through their sustainability path. Another way to act as catalyst for this journey is to offer more favourable conditions on sustainable products.

Frank Rückbrodt: “The expansion through technology is another prominent trend evolving across the European corporate lending ecosystem. Leading corporate banking players view fintech, health technologies, and broader technological applications as high-growth sectors. Even in areas like infrastructure, there is a strong focus on digitalization and technological upgrades to existing assets“. Furthermore, ABBL members firmly believe that AI and technology, in general, are poised to transform the sector in the coming years. While AI adoption is still nascent within the sector, the EU AI Act is expected to have a catalytic effect.

“I find it encouraging that personnel skills, particularly “problem-solving,” emerged as the most widely cited skill when respondents were asked about the necessary ability to maintain competitiveness in the corporate lending business. This underscores the importance of well-rounded and agile personnel within a rapidly changing business landscape“, notes Frank Rückbrodt. Luxembourg is ideally positioned to deliver on this demand – with its large pool of multilingual talent, combined with a unique cross-border expertise.

A dynamic industry ready to embrace the future

2022 revenues were at a record high and are estimated to nearly EUR 5bn in 2022, signifying an increase of 24% from 2021 and mirroring the growth rate in the Private Banking segment. The Corporate Banking revenue figure also represents 35% of total banking revenues in Luxembourg.

Nevertheless, economic headwinds affected profits. They declined by 19% compared to 2021, monetary tightening policies and uncertainty over economic growth apparently having left an impact.

The Survey also highlights the growing contribution of the fund industry to corporate banking revenues, which rose by 14%, while revenues from corporates declined by 19%. The survey indicated significant growth in non-interest-based services, many of which are often provided to the asset and wealth management industry.

Methodology

The 2023 ABBL Corporate Banking Survey was conducted in collaboration between the ABBL and PwC Luxembourg, together with the support of the CSSF. To generate meaningful insights, the ABBL circulated an invitation-only survey comprised of an online qualitative questionnaire for CEOs and a set of quantitative questions addressed to bank CFOs. PwC’s ESG & AWM Market Research Centre, then analysed the results to obtain the qualitative and quantitative findings in this report.