Coverage: weekly note · Information to 20 January 2025
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TGB Weekly Research Note · 20 January 2025
Banks enter 2025 with strong earnings and capital, but slower and uneven rate cuts, soft spots in credit, a fragmenting Basel III timetable and new operational resilience rules will shape the year.
The desk view
Banks start 2025 from a position of strength. JPMorgan Chase reported record full-year 2024 net income of $58.5 billion, EU/EEA banks earned a return on equity of 11.1% in the third quarter of 2024, and euro area banks' aggregate CET1 ratio stood at 15.8% in mid-2024. Five forces will act on those profits. Policy rates are falling, but the Federal Reserve's own projections now imply a slower path. Margins have passed their peak in Europe. Credit weakness is concentrated in offices and credit cards. The Basel III timetable is splitting across the EU, the UK and the US. And the EU's Digital Operational Resilience Act (DORA) applied from 17 January 2025, with no transitional period. Our reading is that 2025 rewards balance sheets that can absorb a slower easing cycle and a longer period of regulatory uncertainty.
Rates are falling, but more slowly and unevenly
Theme one: a shallower easing path
The Federal Open Market Committee (FOMC) lowered the federal funds target range by 25bp to 4.25–4.50% on 18 December 2024. That followed a 50bp cut to 4.75–5.00% on 18 September 2024, so the range has come down by 100bp in total from 5.25–5.50% before the September cut. The more important signal for banks was in the projections. The median FOMC participant now expects the federal funds rate at 3.9% at the end of 2025, against 3.4% in September, a shift of 0.5 percentage point.
European central banks are moving with similar caution. The European Central Bank (ECB) cut its three key rates by 25bp on 12 December 2024, taking the deposit facility rate to 3.00% from 18 December 2024. The ECB said it is not pre-committing to a particular rate path, and its staff now expect a slower recovery than in September, with growth of 1.1% and headline inflation of 2.1% in 2025. The Bank of England's Monetary Policy Committee held Bank Rate at 4.75% by a vote of 6–3 at its meeting ending on 18 December 2024, with three members preferring a cut to 4.5%. The Bank of Japan kept its call rate at around 0.25% by an 8–1 vote on 19 December 2024.
The global backdrop supports a gradual rather than rapid easing. The International Monetary Fund (IMF) projects global growth of 3.3% in both 2025 and 2026, and said upside risks could lift already-robust growth in the United States in the short run, while risks in other countries are on the downside amid elevated policy uncertainty. A wider growth gap between the US and other economies points to wider gaps in policy rates and, with them, in bank margins.
Major central bank policy settings at the turn of the year
| Central bank | Policy rate | Latest decision |
|---|---|---|
| Federal Reserve | 4.25–4.50% | Cut 25bp, 18 December 2024 |
| European Central Bank (deposit facility) | 3.00% | Cut 25bp, effective 18 December 2024 |
| Bank of England | 4.75% | Held by 6–3 vote, 18 December 2024 |
| Bank of Japan | around 0.25% | Held by 8–1 vote, 19 December 2024 |
Source: Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (18 December 2024), 18 December 2024; European Central Bank, Monetary policy decisions, 12 December 2024 (press release), 12 December 2024; Bank of England, Bank Rate maintained at 4.75% - December 2024 (Monetary Policy Summary and minutes), 19 December 2024; Bank of Japan, Statement on Monetary Policy, 19 December 2024, 19 December 2024.
Earnings are strong, but margins and credit are turning
Theme two: profitability past the margin peak
US bank earnings remain high. FDIC-insured institutions reported net income of $65.4 billion in the third quarter of 2024, down 8.6% from the prior quarter, largely because about $10 billion of one-time gains did not recur. Industry return on assets was 1.09%, and the net interest margin rose 7bp to 3.23%, still 2bp below its pre-pandemic average. On 15 January 2025 JPMorgan Chase reported record full-year 2024 net income of $58.5 billion, which included a $7.9 billion net gain related to Visa shares; excluding significant items it was $54.0 billion.
In Europe the margin peak has already passed. The European Banking Authority (EBA) reported that EU/EEA banks' net interest margin fell 3bp from its historical peak in the first quarter to 1.66% in the third quarter of 2024, while return on equity rose 20bp to 11.1% and the cost of risk stood at 47bp. The ECB said higher interest rates continued to sustain profitability, but that the weakening macroeconomic outlook calls for heightened vigilance. This suggests that as policy rates fall, European earnings will depend more on lending volumes and fee income than on margin.
Theme three: credit weakness in pockets, not across the book
The US past-due and nonaccrual ratio rose to 1.54% of loans in the third quarter of 2024, and for non-owner occupied commercial real estate (CRE) it reached 2.07%, the highest since the fourth quarter of 2013, driven by office loans at banks with more than $250 billion in assets. The credit card net charge-off ratio was 4.48%, 100bp above its pre-pandemic average.
In the EU the non-performing loan ratio rose 2bp to 1.88% and the share of Stage 2 loans was 9.2% in the third quarter of 2024. Nearly half of banks surveyed by the EBA expect asset quality to deteriorate over the next 6 to 12 months, particularly in consumer credit, SME and CRE lending. Unrealised losses on US banks' securities fell $148.9 billion to $364.0 billion in the third quarter of 2024, but the FDIC said the rise in longer-term rates since quarter-end would likely reverse most of that improvement. For banks, a slower easing cycle with higher long-term rates eases pressure on margins but keeps pressure on bond portfolios and on borrowers who must refinance.
Rules diverge as resilience requirements arrive
Theme four: a fragmented Basel III timetable
The EU banking package implementing Basel III applies from 1 January 2025, but in July 2024 the European Commission adopted a delegated act postponing the market risk standards of the fundamental review of the trading book (FRTB) by one year to 1 January 2026. The Commission cited a lack of clarity on US implementation. On 17 January 2025 the Prudential Regulation Authority (PRA), in consultation with HM Treasury, delayed UK implementation of Basel 3.1 by a further year to 1 January 2027, citing uncertainty over US timing as well as competitiveness and growth. Full implementation in the UK remains 1 January 2030, so transitional periods will be shorter.
In the US the framework itself is unsettled. In September 2024 the Federal Reserve's Vice Chair for Supervision said he would recommend re-proposing the Basel III endgame and G-SIB surcharge rules, which together would raise aggregate CET1 requirements for global systemically important banks (G-SIBs) by 9%. On 6 January 2025 the Board announced that the Vice Chair for Supervision would step down from that position effective 28 February 2025, or earlier if a successor is confirmed. The euro area offers a contrast in predictability: the ECB's 2024 supervisory review raised overall CET1 requirements and guidance only slightly, from 11.2% to 11.3%. For internationally active banks, the practical effect is a period in which capital planning has to work across several possible rulebooks.
Theme five: operational resilience and non-bank links
DORA applies in the EU from 17 January 2025, and the European Supervisory Authorities (ESAs) stressed that it has no transitional period. Competent authorities must report banks' registers of ICT third-party arrangements to the ESAs by 30 April 2025, and the first designation of critical ICT third-party providers is expected in the second half of 2025. The ECB's supervisory priorities for 2025-27 focus on resilience to macro-financial threats and severe geopolitical shocks, timely remediation of known shortcomings and the risks of digital transformation, and it said concerns around governance, risk management and operational resilience persist.
Banks' links to the rest of the financial system are also growing. US loans to nondepository financial institutions rose $112.9 billion, or 14.4%, in the year to the third quarter of 2024, against total loan growth of 2.2%. This suggests that the channels through which a shock would reach banks this year run as much through technology providers and non-bank borrowers as through traditional loan books.
How the five themes fit together
The five themes share one implication: the tailwind from high rates is fading just as the demands on capital and operations are rising. EU/EEA banks reported a fully loaded CET1 ratio of 16.0% and a liquidity coverage ratio of 161.4% in the third quarter of 2024. The banks best placed this year are likely to be those that do not depend on margin for growth, keep credit concentrations in office and consumer lending under control, and can plan capital without a final US rulebook.
What to watch
- 28 February 2025: the Federal Reserve's Vice Chair for Supervision steps down from that position
- 30 April 2025: deadline for competent authorities to report DORA registers of ICT third-party arrangements to the ESAs
- 1 January 2026: EU application date for the FRTB market risk standards
- 1 January 2027: new UK implementation date for Basel 3.1
Primary sources: International Monetary Fund, World Economic Outlook Update, January 2025, 17 January 2025; Board of Governors of the Federal Reserve System, Summary of Economic Projections, December 18, 2024: FOMC projections materials, accessible version, 18 December 2024; JPMorgan Chase & Co., Form 8-K with Exhibit 99.1, fourth-quarter and full-year 2024 earnings release (FCA National Storage Mechanism copy), 15 January 2025; Federal Deposit Insurance Corporation, FDIC-Insured Institutions Reported Net Income of $65.4 Billion in the Third Quarter (press release), 12 December 2024; Bank of England (Prudential Regulation Authority), The PRA announces a delay to the implementation of Basel 3.1, 17 January 2025; European Supervisory Authorities (EBA, EIOPA, ESMA), DORA application (Joint Committee public statement JC 2024 99), 4 December 2024; European Banking Authority, EU/EEA banks' profitability is holding up well despite declining net interest margin (Q3 2024 Risk Dashboard press release), 18 December 2024; European Central Bank (Banking Supervision), ECB keeps capital requirements broadly steady for 2025, reflecting strong bank performance amid heightened geopolitical risks (press release), 17 December 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (18 December 2024), 18 December 2024; European Commission (DG FISMA), Banking package: Moving forward with the implementation of the Basel standards, while preserving the international level playing field - Questions and answers, 24 July 2024; Board of Governors of the Federal Reserve System, The Next Steps on Capital (speech by the Vice Chair for Supervision), 10 September 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (18 September 2024), 18 September 2024; European Central Bank, Monetary policy decisions, 12 December 2024 (press release), 12 December 2024; Bank of England, Bank Rate maintained at 4.75% - December 2024 (Monetary Policy Summary and minutes), 19 December 2024; Bank of Japan, Statement on Monetary Policy, 19 December 2024, 19 December 2024; Federal Deposit Insurance Corporation, Quarterly Banking Profile, Third Quarter 2024 (release statement), 12 December 2024; Board of Governors of the Federal Reserve System, Federal Reserve Board announces Michael S. Barr will step down from his position as Vice Chair for Supervision, effective February 28, 2025, 6 January 2025.