Global Banks Face Challenging Times, Indian Banks To Maintain Stability In 2025

As the global economy slows down, the global banking industry will be tested on its ability to generate income and optimise costs in this changing economic scenario. In 2025, banks will grapple with a unique set of challenges and opportunities influenced by shifting interest rates, rewiring of trade relationships, evolving consumer behaviours, and regional economic disparities.

Given the current economic and political landscape, the IMF has forecasted that the world economy will grow at less than 3%. The advanced or developed countries, such as the USA, Japan, and England, are expected to grow at a very slow rate of 1.4%. The emerging economies, due to their young demographic dividend, strong consumer base, and improvement in trade balances, are expected to have more encouraging growth, particularly India, with a growth of 6.3% in 2025.

• Lower interest rates in 2025 may ease deposit costs but will lead to modest loan growth globally.
• Global banks will face challenging times and will struggle with rising costs and slow revenue, while Indian banks will maintain stability and remain profitable.
• Stricter global regulations and rising cybersecurity threats will challenge banks, while Indian banks benefit from strong growth and technological advances.

Higher interest rates have benefitted the banking industry, with net interest income rising significantly in 2022—18% for US and Canadian banks and 11% for European banks. However, these elevated rates are increasing funding costs and squeezing margins, particularly for regional and midsize banks.

Deposit costs have risen sharply, with larger US banks at 2.2% and smaller ones at 2.5%. While global banks may struggle to lower deposit costs as rates drop, regional variations will occur. European banks might reduce costs more quickly due to less competition from money market funds, while Asian banks, especially in India, are likely to sustain higher rates due to robust economic growth.

The growth in the loan segment is expected to be modest at best, given the various macroeconomic factors at play and the higher cost of borrowing that will affect lending.

In 2025, global banks tightened and added restrictive measures to their lending policies across different product categories, further affecting the economic outlook. However, the impact of this will not be uniform in the retail and B2B space. In the more robust economies, consumer spending is still quite high. As the savings are depleted, the demand for credit is likely to increase. Loans to corporates weakened in the first half of 2025 but are likely to pick up towards the year's end.

2025 has turned out to be a litmus test for the profitability of banks as funding costs have increased and revenue growth has been sluggish. Banks that have multiple revenue streams and can optimise costs have been able to maintain and, in some cases, even increase their profitability.

The banking landscape has seen American and Chinese banks dominate the global rankings. However, this trend is now witnessing a change as more and more banks from India and the Middle East will start featuring in the ‘top 100 global banks’ list. As the Indian economy grows, more banks from India will see their balance sheet numbers grow due to growth in domestic markets and infrastructure. Similarly, the sovereign wealth funds of the Middle East will also exert a significant influence on the global flow of money.

Governments across the globe are looking at stricter financial regulations for the banking sector. Earlier, only the largest banks used to come under intense scrutiny, but this is now likely to extend to mid-size and even smaller banks. Banks will have to double down and deploy more resources towards risk management frameworks and consumer protection.

The Basel III proposal is almost in the finalisation stage and aims to strengthen global banking regulations by increasing capital requirements, improving risk management, and enhancing liquidity standards. It also seeks to ensure that banks are better equipped to absorb shocks and reduce the risk of financial crises.

The Indian banking sector is experiencing good stability and resilience with healthy growth in credit and moderate profitability.

Although the Indian banking system faces challenges such as NPAs and cyber threats, it continues to thrive, backed by improvements in asset quality, robust demographics, and domestic consumption.

1. Improved profitability despite NIM pressure: Indian banks are expected to see profitability improvements. However, net interest margin (NIM) compression will limit earnings growth due to rising funding costs from increased deposit competition.
2. Shift from investments to loans: Banks are reallocating excess investments in government securities towards loan growth, raising the proportion of loans in their assets to 63% in FY24 from 56% in FY22.
3. Loan-to-Deposit ratio (LDR) growth: While loan growth outpaced deposit growth, the LDR rose moderately to 81% in FY24, with banks holding a higher share of low-cost deposits having an advantage.
4. Competition impacting low-cost deposits: The share of low-cost deposits fell by 490 basis points to 39% in FY24 due to competition, driving a shift towards higher-cost term deposits.
5. Positive outlook for profitability: Fitch expects Indian banks' earnings and profitability to continue improving, boosting their overall financial strength.