RESEARCH — Jan 17, 2025

Banking risk: Key themes to watch in 2025

S&P Global Market Intelligence foresees few major changes in 2025, with low risk of major financial sector disruptions, even amid global policy uncertainty.

Here are our top 10 themes to watch in 2025:

1. Nominal credit growth rates will slow in 2025. Credit growth rates are likely to decelerate in 2025 to reflect higher interest rates, slowing macroeconomic growth, and wider trade and monetary policy uncertainty. Overall, we expect the ghost deleveraging that has been apparent for over a decade to continue but to a smaller degree. 

Credit to GDP gaps, number of countries

2. Non-performing loans (NPLs) will deteriorate on average, but only marginally. Scope for improvement is constrained by the already historically low level of NPLs in most countries. A likely pause in the US interest rate easing cycle will maintain pressure on weaker, interest rate sensitive borrowers there and in countries that mirror US policy rate movements. There are notable outliers that also face more rapid NPL accumulation, including Turkey and Russia.

NPL share of total loans

3. Authorities will continue to deploy loan forbearance measures to mitigate shocks. Since the global financial crisis, regulators have been more prone to step in with support measures for bank borrowers affected by various shocks. The outcome of this “propensity to support” will be fewer surges in NPLs but potentially larger increases in other adverse asset quality metrics like Stage 2 and past due loans, along with negative pressure on bank profits.

4. A high-for-longer US interest rate environment and difficulties in imposing domestic fiscal consolidation will maintain pressure on commercial banks to purchase local sovereign debt in vulnerable developing economies. With monetary policy loosening now forecast to pause in the United States from mid-2025, the higher interest rates on dollar-denominated debt – which makes new debt issuances more expensive – and a strong dollar – which increases debt servicing costs on existing foreign debt – are likely to maintain pressure on banks in developing economies to fund fiscal deficits by increasing their sovereign debt holdings. Fiscal consolidation efforts also are likely to face popular pushback, testing government resolve to reduce subsidies and improve fiscal capture. These dynamics will continue to crowd out private sector financing, holding back financial sector deepening and further exacerbating substantial bank-sovereign linkages in markets like Pakistan, Mozambique, and Senegal.

5. Global growth and exchange rate dynamics exacerbate risk of foreign currency shortages. Below-potential growth forecast for major advanced economies and our forecast for a persistently strong US dollar combine to indicate weakness for emerging market currencies, especially in countries already facing sizeable twin deficits. These dynamics raise indirect foreign exchange risks for banks with elevated foreign currency lending and increase the risk of foreign currency shortages and subsequent payment delays reemerging in 2025.

6. Robust levels of accumulated deposits will limit funding volatility, and banks’ liquidity resilience is unlikely to be challenged. The high concentration of sovereign debt in banks’ liquid assets holdings will continue to constitute a vulnerability for banks if they require abrupt or significant liability redemptions. This risk will remain particularly important in countries with underdeveloped secondary markets for sovereign debt which have been largely dependent on central bank support, such as in Egypt. Banks are likely to aim to preserve their liquid asset reserves during 2025, seeking to stem their decline versus short term liabilities. More positively, as indicated by banks’ declining loan-to-deposit ratios globally since the pandemic, banks have managed to lower their structural liquidity risks, reducing their exposure to wholesale funding volatility. At a retail level, in countries where policy rates decline quickly, we expect the popularity of longer maturity time deposits to diminish after having expanded in the last two years as depositors locked in historically high term deposit rates. Banks in countries that do reduce policy rates substantially face greater volatility in liquidity ratios as depositors shift back to demand deposits.

Dynamics of banks' deposits

7. Global regulatory priorities will shift from tightening regulations to improved supervision. After nearly two decades of tighter global banking sector regulations following the global financial crisis, global standard-setting bodies are shifting from new measures to enhance regulations to monitoring the enforcement of existing guidelines and improving supervision. The recent push-back in the US and subsequently in Europe to final Basel IV capital guidelines will likely spill over to slower adoption of Basel III guidelines amongst lagging developing economies. Furthermore, with global regulation on commercial banks having tightened considerably over the last two decades, regulators in advanced economies are likely to adjust their focus towards increasing supervision of nonbank financial institutions, which have grown rapidly and currently lack regulatory scrutiny. Better understanding of risk transmission channels between NBFCs and commercial banks and monitoring those linkages is likely to be prioritized.

8. Local regulators are pivoting away from prioritizing financial stability to prioritizing growth, but only slightly. Although the global economy was resilient in 2024, many of the structural factors that have supported global growth over the last several decades are shifting. As a result, we expect regulators to marginally adjust their policy focus from securing financial stability to give greater scope for local financial sectors to act as an engine of growth, but only in a measured way. This is likely to manifest through slower deployment of macroprudential measures like countercyclical capital buffers, higher loan to value ratios and lower risk weights for priority sectors, particularly within emerging European banking sectors.

9. Cybersecurity will remain a critical focus. As digital banking grows and banks integrate new technologies, the potential vulnerabilities from large-scale cyberattacks also increase. Banks are leveraging AI to enhance their services while cybercriminals are in parallel using it to make attacks more efficient. Given the growing cost involved, there is likely to be an increased regulatory focus on cyber resilience, cyber stress testing, and vulnerability assessments given the significant downside risk associated with this largely opaque area of risk for global banking sectors.

10. Cross-border mergers and acquisitions are likely to remain regional and follow shifting trade patterns. Domestic discontent is driving a divergence from the global economic order established over the past three decades, giving rise to more regionalization of trade patterns. Larger banks are adjusting their footprints to reflect these changing trading patterns and to improve their capital positions by focusing in core markets. As a result, we expect global financial networks to continue realigning, with large Western banks continuing to reduce their presence in emerging and frontier markets. This provides opportunities for regional emerging market leaders to continue consolidating their market share and expanding their cross-border presence, aligning this with expanding intra-regional trade links and initiatives. Downward pressure on profitability from slowing credit growth, as well as large infrastructure investment needs in developing markets, will further encourage merger and acquisitions. 

Want to understand the global landscape in 2025? Click here for our special report, Power Plays in 2025

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.