2025 Global FINS Outlook

Evolving industry operating models to build the future

2025 Financial Services & Insurance Industry Outlook

Global Banking Industry Outlook

How—and to what extent—will macroeconomic shifts impact US banks in 2025?
Key messages:

Macroeconomic and geopolitical uncertainties should keep bank executives on their toes.

Higher deposit costs will keep net interest income in check.

Noninterest income could offer a bright spot for topline growth.

Higher compensation expenses and technology investments should keep expenses elevated.

Credit quality is expected to normalize but could edge higher in 2025.

Adapting to a low-growth, low-rate environment will be a challenge. But many will be happy to close the chapter on 2024, a year that was remarkable in many respects.

The US economy will likely have performed better than expected in 2024, with annual GDP growth estimated to end at 2.7%, higher than forecast at the beginning of the year.

However, in 2025, economic growth is expected to decelerate and interest rates to drop meaningfully. Deloitte’s latest United States economic forecast anticipates a soft landing, with US GDP likely to grow at 1.5% in its baseline scenario.

2025 is shaping up to be a challenging year for American consumers. With record-high consumer debt at $17.7 trillion and dwindling savings from the pandemic era, things are looking a bit shaky. It's a tough spot to be in, especially with inflation starting to ease and potential interest rate cuts on the horizon.

Businesses aren't immune to these pressures either. Many are dealing with lower cash reserves and higher debt levels. It's a balancing act, and we'll have to see how it all plays out.

With inflation cooling down, we can expect interest rates to follow suit. Short-term rates, especially, might drop faster than long-term ones. This could mean the yield curve, which has been inverted for a while, might start to normalize.

Global Banking

Central banks around the globe are likely to adjust their monetary policies. The European Central Bank, for instance, is expected to lower its interest rate to 2.75% by the end of 2025. The Bank of England and the Bank of Canada will probably follow suit. However, the Bank of Japan might have a tougher time balancing inflation and growth.

In short, we can anticipate some interesting rate movements in the coming year, with different economies taking different approaches based on their unique economic situations.

Banks have had to deal with a surge in costs from higher compensation expenses and investments in technology, along with inflation. Growing noninterest income should also lead to higher compensation expenses in the form of incentives and performance bonuses. Overall, expenses are expected to remain higher in part because banks will need to prioritize tech modernization and retaining high-quality talent.

Large, diversified banks will likely perform better

In 2025, big banks could have an edge thanks to their diverse businesses. They might even lower deposit rates a bit without losing customers, thanks to their strong brand and lots of cash. Smaller banks, on the other hand, might have a harder time adjusting their deposit rates, especially since the cost of these deposits is currently high at 3.15%.

Credit card companies are in a good position. As interest rates rise, more people might turn to credit cards, boosting their profits. Other payment companies, while not seeing huge growth, could face challenges with more people falling behind on payments.

Banks that focus on investments and trading could do well, but they'll likely have to pay their employees more. Large banks are better equipped to handle potential loan losses, while smaller banks, especially those with a lot of commercial real estate loans (around 199% of their risk-based capital), could face tougher times.

Global Perspectives

In Europe and Asia, rates are expected to come down as inflation cools off. But slower economic growth will impact banks’ prospects. Many European banks could find it hard to adjust to a low-rate environment, and their profitability will likely suffer more than banks elsewhere.

The stronger European investment banks will look to challenge US banks’ dominance in dealmaking and issuance activities. In the Asia-Pacific region, banks operating in high-growth emerging markets should experience stronger results. However, central banks’ timing in cutting rates across these countries will likely test banks’ resilience and growth potential.

Impact of Generative AI

The transformative potential of AI in banking is swiftly becoming a reality. Rapid advancements in both traditional and cutting-edge AI technologies are set to revolutionize the delivery and consumption of banking services.

Imagine a bank powered by AI - a bank that uses the latest tech like machine learning and natural language processing to make things super efficient. These banks aren't just experimenting with AI; they're using it to transform their entire business.

But many banks are still stuck in the past, with outdated systems and slow processes. While they see the potential of AI, they're hesitant to make big changes. This is a big problem, because AI can't work its magic without a solid foundation.

According to a 2024 Citigroup report, AI could propel global banking industry profits to a staggering US$2 trillion by 2028, reflecting a 9% increase over the next five years.

To truly benefit from AI, banks need to modernize their technology. This means upgrading their core systems and embracing cloud computing. It's a big investment, but it's necessary to stay competitive.

AI isn't just about flashy new tools. Traditional AI, like machine learning, can still deliver impressive results. For example, JPMorgan Chase used AI to increase the completion rate of product applications by 10-20%. Even smaller banks are using AI to improve customer service and efficiency.

As we move into 2025, we'll likely see a surge in AI adoption across the banking industry. Banks will start using generative AI for everything from software development to fraud prevention. While many banks may initially rely on closed-source AI models, we could see a shift towards open-source models as the technology matures.