Deloitte: Are Banks Ready for 2025?

Deloitte's annual banking outlook positions 2025 as a pivotal year for financial institutions as declining interest rates and digital disruption reshape the industry landscape. The report, released by Deloitte's Centre for Financial Services, examines how banks must address changing market dynamics while funding essential modernisation.

Economic Conditions and Market Dynamics

Deloitte forecasts US GDP growth will decelerate to 1.5% in 2025, though technology adoption could boost labour productivity to drive 1.9% growth. Conversely, persistent inflation and worsening geopolitical conflicts could restrict growth to 1.0%.

"Bank executives will welcome 2025 with mixed emotions," says Val Srinivas, Senior Research Leader for Banking & Capital Markets at Deloitte. "While inflationary pressures have subsided and interest rates are dropping, subpar economic growth and continuing geopolitical shocks will likely give bank CEOs anxiety."

Total US consumer debt has reached US$17.7tn as of Q2 2024, with pandemic-era excess savings depleted by March 2024. Companies show declining cash positions and higher levels of debt maturity. As such, the Federal Reserve is expected to implement three to four rate cuts in 2025, bringing the effective federal funds rate to 3.50-3.75%.

The yield curve should flatten and potentially revert to its normal upward slope after two-and-a-half years of inversion. The European Central Bank is expected to lower rates to 2.75% by end-2025, with the Bank of England and Bank of Canada following similar trajectories. Meanwhile in Asia, the Bank of Japan faces unique challenges balancing inflation and growth after prolonged deflation.

Technology Transformation and Cost Pressures

Core banking system modernisation emerges as a fundamental challenge, with only 25% of banks reporting adequate data management platforms for AI implementation. Citigroup projects AI could increase global banking profits by US$2tn by 2028, with JPMorgan already reporting 10-20% increases in product application completion rates through AI-powered customer engagement tools.

A growing trend is emerging as banks shift toward open-source AI models for greater control over design and data exposure. Small language models are gaining traction among regional banks, offering focused functionality for specific tasks like product information retrieval and transaction processing. 

The bulk of costs comes from financial crime compliance, with institutions in North America spending US$61bn annually. Banks implementing FinOps frameworks report success in optimising cloud resource allocation, though many struggle with fragmented data architecture and incompatible legacy systems. The Federal Reserve Bank of Kansas City notes institutions' hesitancy to transition to next-generation systems from newer, less-proven core providers.

Risk Landscape and Credit Quality

Compensation expenses at US banks with over US$10bn in assets reached US$149.6bn in H1 2024, rising 4.1% year-over-year. Credit quality metrics show concerning trends, with credit card delinquencies exceeding 90 days reaching 1.69% in Q2 2024, and net charge-off rates at 4% - though still below post-2008 crisis levels of 2.6%.

In addition, commercial real estate exposure presents particular challenges for regional banks. Institutions with assets between US$10bn and US$100bn show CRE loans at 199% of risk-based capital, while banks with assets exceeding US$250bn maintain ratios near 54%. The office segment continues to face significant distress, prompting some banks to reduce exposure and reposition balance sheets.

Revenue Diversification and Market Opportunities

Investment banking revenues show promise through evolving fee structures. Break-up fees for collapsed deals have increased to 25% for large transactions, up from the traditional 15%. Banks are securing higher "announcement fees" for fairness opinions and targeting mid-market deals for repeat business and private equity fundraising opportunities.

Elsewhere, payment networks demonstrate strong growth in value-added services, with Mastercard reporting 19% year-over-year growth to US$2.6bn in Q2 2024, driven primarily by cybersecurity solutions. Banks can generate additional fee income by providing accounting services to small and medium-sized business clients.

The wealth management sector remains underserved, with banks capturing only 32% of the global market and client satisfaction with fee structures at 36%. The report suggests expanding beyond core investment advice into tax planning, estate management, and long-term care services to justify fees and deepen client relationships.

Global Banking Landscape and Regulatory Evolution

The Basel III Endgame re-proposal suggests a 9% increase in common equity tier 1 requirements for global systemically important banks, significantly reduced from initial proposals. The UK has postponed implementation to January 2026, while European regulators emphasise maintaining an "international level-playing field."

European banks face heightened cost pressures, with 15 out of 26 large institutions expecting cost growth to surpass revenue growth in 2024. Deutsche Bank reports progress on its US$2.8bn Operational Efficiency plan, achieving US$1.3bn in savings through platform optimisation. Standard Chartered has reserved US$1.5bn for its "Fit for Growth" programme over three years.

Meanwhile, UK banks are transitioning to variable compensation structures following the removal of EU bonus caps, aiming to manage costs through economic cycles while retaining high-performing talent. Many banks are exploring strategic cost transformation initiatives and activity-based costing to identify underlying drivers of elevated expenses.

Michelle Gauchat, Principal US Banking Leader at Deloitte, concludes: "Banks face a defining moment for establishing sustainable growth. Success will depend on how effectively institutions balance technology transformation with traditional banking fundamentals in an increasingly competitive landscape."

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