Banking Outlook 2025: Growth, AI, and the Uncertainty Ahead
Banks hold billions in assets, and with the constant danger of being "too big too fail" in an interconnected economy and fear of dragging the whole economy along with them, economists and policymakers alike are eager to predict the future. The treadmill of the world accelerates every year, with Digitisation and AI leading the charge toward a faster-paced society. In this what feels like a race-to-the-bottom context, banks cannot seem to afford to lag behind, as this could essentially be a death sentence.
The world has come from a tumultuous and challenging 2023, marked by significant bank failures, including the notable case of Credit Suisse. As we have entered 2024, the banking landscape has been somewhat more quiet, and banks have experienced a noteworthy growth in their revenue. However, 2024 is almost ending and question remains how 2025 (with some predicting a doom scenario as the commercial real estate distress continue to threaten the banks) will unfold in a world still navigating the complexities of these changes?
The key challenges reported for 2025:
Predicted low- growth and lower rate macro-economic environment will make it harder for banks to thrive. Lower loan demand, lending competition from non financial institutions, higher deposit costs, dip in net interest margin and commercial real estate distress (CRE), all poses challenges on banking performance.
Continuing decline in customer experience (CX) is posing challenges to customer loyalty. According to Forbes, banking CX quality in the EU dropped significantly from 2023 and US banking CX quality fell for the third year in a row. In Saudi the sentiment is not much better as shown by KSA Banking Sentiment Index by PwC Middle East and DataEQ.
Growth of the Non-Bank financial intermediaries (NFBIs) and private equity and credit entities might pose systemic risks due to growing interconnectedness with traditional banks (read more in this blog “The Rise of Private Credit Funds and the New EU (AIFMD) Rules”).
How banks will internalise and keep up with developments in Gen AI and Cyber Risks will be key to their performance.
Much emphasis has been placed on climate risks in the past for the banking sector, focusing on physical risks, such as extreme weather events, and transition risks, which include uncertainties related to a shift to a low-carbon economy. In its latest report, the EBA still emphasizes the need not to underestimate these dangers.
Due to the highly interconnected nature of our complex economies, predicting the future is just an exercise in ‘reading tea leaves ‘ —fraught with randomness and uncertainty. In the end, only time will tell.
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