Banks’ profitability to decline in 2025 as interest margins narrow

Commercial banks may cut personnel, and regulators may prioritize stability over staff retention in M&As.

Banks’ profitability is expected to decline in 2025 as interest rates fall.

“Banks enjoyed several years of strong profits when interest rates were high, but their profitability will decline in 2025 as interest margins narrow,” said Swarup Gupta, lead analyst for financial services, Economist Intelligence Unit (EIU).

Declining margins will lead to lower dividend payouts, EIU said in its "Financial Services Outlook 2025” report published in October 2024.

Whilst falling interest rates will eat into banks’ margins, lending activity will rise, as the policy rate cuts will ease conditions for borrowers and especially mortgage holders.

“We expect corporate borrowing to rise further as workers return to the office, although mortgage underwriting rules will tighten, especially in the US,” the report said.

Less branches and staff?
Commercial banks are expected to further shrink their physical banking networks, including ATMs and branch offices.

Personnel is also expected to be reduced on the back of investments in artificial intelligence, the EIU reported.

“[Banks] are already using AI to improve their predictive capabilities, but the technology’s ability to increase the efficiency of the existing workforce will become visible as soon as next year,” it said.

Regulators are also expected to prioritise systemic stability over protecting jobs “that will be at risk” during M&As.

In Europe, domestic mergers and acquisitions (M&As) are likely such as between Spain’s BBVA and Banco Sabadell.

Policy loosened and bond markets rally
Most central banks except Japan are expected to loosen their monetary policy.

“We forecast that the Bank of Japan will further normalise its policy after ending negative rate territory in 2024, but will do so cautiously given weak domestic demand and the strain on the public finances from higher borrowing costs,” the EIU said.

Bond markets are also expected to see a rally. Emerging markets will attract fund flows, and equities will be supported by earnings growth— notably in the US.

Amongst countries in Asia, India and Singapore are expected to attract a wave of new equity listings. Hong Kong’s bourse will also likely see a resurgence, the EIU said.

Reinsurance risk will rise in 2025, however, on the back of extreme weather events and heightened geopolitical tensions.

Basel III delayed
Gupta expects Basel III implementation to be delayed and additional capital requirements to be watered down.

“We also expect continued debate over the Basel III endgame after the US weakened its proposals,” Gupta said.