My outlook for banks and financials in 2025 can be summed up as one of cautious optimism. While the market has expressed premature ebullience over Trump’s election, which definitely included strength in financial stocks, there are many loose and important ends still buried in uncertainties. A sea change in variables is likely to unfold.
Regulatory Relief: Banks and financials will clearly benefit from a shift in tone and substance on the regulatory front. Capital requirements were already in modification indicating lower hurdles than those of the initial Basel III “endgame,” although their final status is yet to be revealed. The key to finalized rules is probably how regulators incorporate AOCI.
On the merger front, we can also expect considerable relief and a probable revival of the long-stalled consolidation wave assuming a more bank-friendly posture after new appointments to lead the OCC, FDIC, Federal Reserve and Commerce department, pending confirmations. This is probably the clearest positive for the sector. AB: I strongly agree. Our Forum members expressed a strong consensus earlier last year that a change in the administration is the best way to spell RELIEF. That sentiment resonated sharply after the elections.
Loan Demand: On the macroeconomic front, probable benefits are more unclear based on likely Trump stimulus. The biggest benefit is likely in the commercial borrowing sector. Managements all indicated in their third quarter earnings calls that the hold-up in soft C&I loan demand and moribund corporate spending had been primarily due to election uncertainty as indicated by their business clients. Lower taxation is another positive for commercial demand. This should be another clear positive. C&I demand has already been slowing reviving, reaching 3% at yearend 2024 in the H8 data.
Offsetting this has been my longer-term concern for consumer spending, which has been the driving force in overall economic strength to date – a surprise to many economists. However, consumer spending, after definitively outpacing income growth for some time, has gradually decelerated more to the pace of disposable personal income. Moreover, DPI generally follows the combination of job growth and wage growth, which have been slowly ebbing (see exhibit), leading me to conclude some softening here is realistic from the unsustainable level of demand that appeared post-COVID. Consumer installment and home equity was still running 3%+ at yearend.
Additionally, job growth has been outpacing labor force growth for some time, which cannot continue, so it is reasonable to assume job momentum will continue to slow over the coming year. The surprisingly strong December jobs number seems to argue otherwise, but it is just one month’s number where seasonal adjustments play a large part in the result for this time of year. Further employment releases will importantly add clarity.
Interest Rates, Inflation and Net Interest Margins: Here the outlook is more complex. Inflation is still sticky and the level of U.S. Government debt is garnering greater attention. The overall pressure is resulting in higher long-term rates. A 5% or higher 10-year Treasury Rate is increasingly possible. The much-argued short-term neutral rate appears to be certainly above 3% and rising. While the former adds some potential upside to securities portfolio run-off opportunities, the higher resting place for the latter removes some potential upside from the effect of lower funding costs. Net interest margins may hold more benefit in this subsequent rate environment, but it could prove minimal to current expectations.
All considered, bank managements consider their asset/liability management position now neutral and largely insensative to further rate cuts or non. Inflation also appears likely to persist above the Fed’s target, not only for 2025 but perhaps beyond. The prospect for further Fed rate cuts, let alone monetary easing is dwindling for the moment.
Broader Macro Concerns: The likelihood of lower taxes under Trump should prove to be a boon to commercial earnings, but can only exacerbate the Federal deficit, resulting in likely higher interest rates. Higher tariffs on global trade is a distinctly mixed message. While careful imposition of tariffs could successfully be used for bargaining leverage, the risks of an all-out, indiscriminate tariff war going sour are a serious negative for global economic growth and a certainty for higher inflation. Recent news is encouraging, suggesting the Administration is considering application by specific imports rather than universal tariffs by country. It is impossible to forecast the net result at this time, but a higher-for-longer level of interest rates would be damaging to the general economy, especially for real estate.
Broader Global Political Uncertainties: War risk is only broadening, with central Africa capturing a new spotlight while Israel and Ukraine continue to fester. The new Administration supposedly boasts a quick, forced resolution for Ukraine that is likely to be seen as damaging to Europeans and NATO in general. Embers abound for a flight-to-quality period that would be especially damaging to bank loan portfolios tied to the SOFR index, which will fall relative to bank funding costs, starkly unlike the behavior of LIBOR, and few if any bank managements appear to recognize this risk.
In sum there are simply too many political variables, too many governmental unknowns to adequately assess the economic outlook in any helpful detail, until the Trump Administration’s specific policies and legislative options are better revealed. At this time, it is probably going to be April, at the earliest, for key legislation and executive mandates to help solidify the 2025 and beyond outlook. More drama is in store.
More line-specific guidance is included in the next section.
Fourth Quarter Results were generally above expectations, however sequential growth in net income was down slightly for many with a modest decline in net interest margins. Meaningful securities portfolio repositioning were taken by only a few. Credit was unremarkable while share repurchases gradually broadened. Guidance for 2025 was positive, but cautious on loan growth at this stage.
A soft economic landing is the consensus expectation with one or two more Fed rate cuts, or maybe none. The latest CPI print improves chances for possibly more, and QT is seen ending by mid-year while the odds of a reversal to higher rates again was just beginning to be considered. More argue fewer rate custs or even rate hikes should not materially alter net interest income guidance as the sector has gradually arrived at interest rate neutrality.
Loans were mostly growing in very low single digits sequentially, with 2025 guidance for a LSD pace led by a modest commercial & industrial demand revival, despite paydowns, and mixed consumer momentum. H8 data shows forth quarter C&I loan growth of already 3.1% on a year-over-year basis and rising. There were a few green shoots in utilization rates. Fixed investment hasn’t appeared yet, but is expected to occur later this year. I would expect second half overall balance sheet growth to be accelerating and bottom lines ramping upward.
Net interest margins were sequentially off again for many, with 2025 expected to show improvement for most, partly depending on the yield curve. By far, fixed asset repricing continues to be the most solid positive NIM variable going forward, followed by much slower migration into rate-sensitive or higher rate paying deposit categories. Noninterest-bearing deposit ratios were stabilizing.
Net interest income continued to be sluggish, with sequential declines for some and very low single-digit growth for others. The 2025 outlook is for LSD-MSD growth with notable second half acceleration. The outlook is relatively wide. Highlighting this width, the two largest banks have 2025 NII guidance down 2% to up 6%, with both based on similar economic and interest rate expectations. A few still await an NII trough mid-year, while many claim they are already well past their trough. Clearly all expect stronger momentum in the second half. I sense analyst expectations for 2025 are actually above current NII guidance.
Trading income was unusually strong and investment banking pipelines look healthy. All seem certain 2025 will be a great environment. Trust & investment management were also strong.
No surprises in expenses with positive operating leverage generally continuing for most. I get the sense that investment spending, while continuing, may be close to its speak and cloud-based platforms are increasingly common.
Loan loss reverse building has been generally modest, excepting in credit card. Chargeoffs were slightly higher, sequentially, with reserve coverage still considered adequate, pending future loan growth. Losses continue to be idiosyncratic. Most guide losses for 2025 at just slightly above 2024 levels. Nonperforming assets are seen peaking sometime this year. Little guidance on when reserve releases could take place, awaiting confirmation of an economic soft landing, but a slight decline in ACL ratio seems probable. A meaningfully higher rate environment could sharply change this outlook, particularly for CRE.
Capital ratios are more or less considered at their desired maximum now with shared repurchases gaining further momentum. Those above 11-12% CET1 are probably at their peak. AOCI damage increased for all in the quarter, however, and more analysts are questioning levels of CET1 marked for AOCI. The answers are always vague pending some resolution of new regulatory norms.
Merger & Acquisition questions were far more prevalent than in a long time, as analysts expect a friendlier regulatory environment. At present, the answers expressed typically modest interest, limited to regional fill-ins, not expanding footprints.