In January, Q2 released its 2025 State of Commercial Banking Market Analysis, which examines data from the firm’s PrecisionLender proprietary database on commercial relationships from 140 banks and credit unions.
The banking industry started 2024 in a liquidity crisis, and the focus throughout the year remained on growing and retaining deposits. The 2025 report reflects on how the industry fared, reviews the impact of Federal Reserve policy on commercial loan pricing and lays out what challenges and opportunities financial institutions face in the coming months.
Key takeaways of the report include:
1. Liquidity has improved but became more costly, squeezing net interest margins. Financial institutions have emerged from the liquidity crisis with a solid foundation of deposits, approaching precrisis levels. The impressive deposit growth has come at a cost, with banks and credit unions paying incrementally more than Fed, both in periods of tightening and easing. Meanwhile, the revenue side has not kept pace with rising funding costs, intensifying pressure on the net interest margin.
2. Fed rate cuts have reshaped the commercial loan pricing landscape. The 100 basis points in Fed rate cuts between September and December 2024 contributed to a shallowing of the inverted yield curve, with short-term rates declining while mid-term rates spiked. This shift reflected changing market expectations as financial institutions anticipated a slower pace of future rate cuts. In response, funding managers adjusted their curves strategically, pushing fixed-rate loan coupons upward even as floating rates continued to decline.
3. There are pockets of credit stress in the commercial real estate sector. Credit performance has exceeded expectations across much of the market, with only a modest increase in delinquencies and a decline in commercial and industrial downgrades. In the commercial real estate sector, credit ratings have remained largely stable, although financial institutions have taken a more proactive approach to downgrading loans nearing maturity.
4. The ever-increasing burden of fraud requires a united, proactive response. Fraud continues to rank high among the concerns of financial institution executives, especially when it comes to checks and automated clearing house transcations. By embracing collaboration, advanced technologies like artificial intelligence and a centralized approach, banks and credit unions can be a strong ally for business customers against the ongoing battle against fraud.
5. Data and digital technology drive the acquisition and growth of small business relationships. The underserved small and medium-sized business market presents an opportunity for banks and credit unions looking to grow deposits. To take advantage, financial institutions need digital platforms that integrate with fintech solutions, deliver exceptional customer interaction and leverage data for personalized outreach.
6. Efficiency and user experience are becoming even more pivotal for midsize and large companies. Business customers are looking to their banks and credit unions to help streamline back-end processes and operate more efficiently. Institutions that offer ways to help — such as integrating digital banking with a company’s enterprise resource planning software or connecting with instant payments rails — will attract and retain business customers.
