Why 2025 Could Be a Great Year for Big Banks

Global banks have experienced significant growth in recent years, but their journey has been anything but smooth. As 2025 approaches, the financial industry could find itself cruising on steadier ground, with the potential for a balanced year across various business segments.

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The Federal Reserve’s recent indication that it may only cut interest rates twice in the coming year, driven by persistent inflation, initially led to a broader market sell-off. However, a scenario of “less high for longer” rates bodes well for banks. This outlook hints that 2025 might favor nearly all areas of operation for large, diversified financial institutions.

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The past few years have been marked by uneven performance across banking divisions. In 2022, global trade rebounded sharply after pandemic-driven disruptions, creating a surge in revenue for transaction-focused intermediaries like Citigroup, HSBC Holdings, and BNP Paribas. The fixed-income, currency, and commodities (FICC) trading desks of major players such as JPMorgan Chase and Deutsche Bank also benefited from heightened client activity. Russia’s invasion of Ukraine and the onset of a global rate-tightening cycle fueled demand for hedging against interest rate, foreign exchange, and energy price risks.

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However, adverse economic conditions led to a sharp decline in underwriting fees as companies pulled back on issuing equity and debt.

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In 2023, the story shifted again. Large banks saw revenue climb, thanks primarily to an 11% increase in net interest margins, according to Visible Alpha data. After years of minimal spreads, banks finally capitalized on the gap between borrowing costs and depositor rates. Yet, dealmaking slowed considerably, with high borrowing costs and geopolitical tensions stifling activity in mergers, acquisitions, and initial public offerings (IPOs).

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Some challenges persisted into 2024. Central banks reduced rates, cutting into net interest income and weighing on revenues from commercial and wealth management operations, as well as transaction banking. Trading desks handling government bonds and other rate-sensitive products also had a subdued year, contributing to slower overall revenue growth.

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Despite these challenges, 2024 marked a turning point for bank stocks. The banking components of the S&P 500 and Stoxx Europe 600 outperformed their broader indexes, delivering returns of 35% and 32%, respectively, compared to 25% and 6% gains in the general market. This reflects investors’ growing preference for predictable and diversified returns from banks, rather than reliance on volatile FICC trading.

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In 2024, normalization began to take hold. Mergers and IPOs showed signs of recovery, and corporate treasurers faced pressure to refinance debt ahead of looming bond maturities. While investors shied away from government debt, they eagerly purchased fixed-income products like corporate bonds, which offered attractive spreads and long-term high yields.

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This sets a positive tone for 2025. For the first time since 2021, analysts expect all divisions of top global banks, except FICC trading, to grow revenue, according to Visible Alpha’s median estimates. Even FICC might see improvement, with early December bringing a notable shift: yields on three-month Treasury bills dipped below those of 10-year Treasurys for the first time since 2022, which could rekindle interest in fixed-income investments.

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Steeper yield curves are another positive sign for banks, as they widen net interest margins and boost profitability. However, there are risks to consider. If policymakers ease borrowing costs less than anticipated, consumer spending could take a hit, and some commercial real estate loans might encounter difficulties. The European economy remains particularly fragile. Yet, default rates are currently low, and the overall impact of these risks appears manageable.

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Advisory services also look poised for growth in 2025. Private equity firms face increasing pressure to exit long-held investments, which could lead to a surge in deal activity. Bain & Company estimates that by the end of 2023, 46% of private equity-owned companies had been held for four years or longer—the highest proportion since 2012. While some firms are delaying exits through tactics like rolling assets into continuation funds, the need to offload investments could drive significant advisory business for banks.

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Adding to the optimism, the Trump administration’s potential easing of regulatory scrutiny on the financial sector and mergers could serve as another boost. If realized, banks like Goldman Sachs are likely to emerge as major beneficiaries.

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All signs point to a year where global banks could finally operate at full throttle, capitalizing on favorable economic conditions, regulatory changes, and revived client activity across various segments. If these trends materialize, 2025 could mark a period of sustained growth and balanced performance for the world’s leading financial institutions.

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