🔒Lower interest rates could boost loan demand in 2025; lenders eye AI, cybersecurity investment

Interest rate uncertainty dominated the headlines in 2024.

The topic is likely to get a lot of attention in the year ahead as well.

Banks in Connecticut and nationwide had to contend with a higher interest rate environment through most of last year, which slowed demand for new loans, tightened credit availability and curbed profitability.

Through the first three quarters of 2024, the majority (nearly 69%) of the 29 banks headquartered in the state recorded lower profits, while five lenders lost money during that time period, according to Federal Deposit Insurance Corp. (FDIC) data. During the year-ago period in 2023, only 48% of in-state banks recorded lower profits.

Meantime, the state’s 72 credit unions reported a combined $57.8 million in net income during the first nine months of 2024, down nearly 25% from the year-ago period, according to National Credit Union Administration data.

Conditions began to change this past fall, after the Federal Reserve lowered the target federal funds rate via three separate rate cuts that occurred between September and December.

The current target rate ranges between 4.25% to 4.5%.

The rate cuts were driven by easing inflation and a slowing job market.

HBJ recently talked to four financial services CEOs about the industry’s 2025 outlook. They included:

• Luke D. Kettles, president and CEO of Windsor Federal Bank, with $796.3 million in assets.

• John Holt, CEO of Nutmeg State Financial Credit Union, with $690.2 million in assets.

• Frank Micalizzi, Bridgeport regional president and head of Connecticut commercial banking for M&T Bank, with $209.6 billion in assets.

• and Lesa Vanotti, president and CEO of Torrington Savings Bank, with $932.7 million in assets.

Here are some banking trends to watch in the year ahead.

Interest rate outlook

Bankers agree that interest rates are likely to continue to fall in 2025, but there is uncertainty by how much.

“Although most economists are projecting a 75 to 100 basis points reduction over the next three to four quarters, I feel it is not a given that will occur,” Kettles said. “In general, we expect rates to stabilize or adjust slightly downward, depending on inflation levels, economic growth, labor market dynamics and geopolitical factors.”

The incoming Trump administration throws another curveball into the equation. Trump has announced economic policies that may include import tariffs and increased energy production, which would likely have varied impacts on the economy and inflation — and the Fed’s future decision on rates, Kettles said.

Micalizzi said M&T Bank expects the Fed to reduce the benchmark interest rate to a range of 2.75% to 3% by the end of 2025.

“We expect that to bring other interest rates down, easing the lending environment, which will lead to more economic activity and growth,” Micalizzi said. “Banks will benefit from this if they are able to ensure that their balance sheets can take on the additional risk that supports this growth.”

Micalizzi said there will be particular demand for multifamily development loans in 2025, “fueled by new residents, downsizing homeowners, and the ongoing need for affordable housing.”

Holt said lower rates typically foster business growth and higher commercial loan demand, while also putting pressure on lenders’ profit margins.

“If credit unions can manage risk effectively and sustain their margins in this lower-rate environment, 2025 could offer an opportunity to expand loan offerings and strengthen member relationships,” he said.

Regulatory concerns

Vanotti said one of the top issues she will be watching in 2025 is whether “the regulatory tsunami we saw (under) the (Biden) administration eases.”

“Nationally, the industry resorted to legal action in 2024 to stem some of the proposals purporting to protect the consumer,” she said. “But the devil is in the details on many of them, and unanticipated consequences aren’t always thought through.”

That legal activity included a February 2024 federal lawsuit filed by the American Bankers Association, U.S. Chamber of Commerce and other groups against the Federal Reserve, FDIC and Office of the Comptroller of the Currency over proposed updates to the Community Reinvestment Act (CRA), which was established in 1977 to end historical practices that denied or limited financial services in minority neighborhoods.

The updates would allow regulators to evaluate banks’ CRA ratings more broadly, including based on online lending in areas where lenders don’t have a physical branch.

More recently in December, bank and credit union associations sued the Consumer Financial Protection Bureau over a rule that limits overdraft fees lenders can charge.

Any regulatory relief in the year ahead “would be welcome and allow the banks to get back to the business of taking care of our customers,” Vanotti said.

Increased focus on data security, along with greater scrutiny of fees and other sources of noninterest income, will place additional pressure on credit unions, Holt added.

“The disproportionate regulatory burden imposed by the Consumer Financial Protection Bureau on credit unions, compared to larger financial institutions, may force these institutions to raise loan rates to cover the added costs of compliance,” Holt said. “This could make credit less accessible for those who need it most.”

Bankers are optimistic that the incoming Trump administration will ease regulations on capital requirements and consumer protections.

The Trump transition team has discussed the possibility of shrinking, consolidating or even eliminating top bank watchdog agencies, including the Consumer Financial Protection Bureau and FDIC, the Wall Street Journal has reported.

Deterring cyber criminals

With cybersecurity threats on the rise, Connecticut banks must also prioritize significant investments in advanced security measures to protect against fraud and data breaches, M&T’s Micalizzi said.

“These institutions face increasing pressures to stay ahead of evolving cyber risks, which threaten financial stability and customer trust,” he said. “Enhancing cybersecurity safeguards will be crucial for maintaining client confidence and mitigating risk in an increasingly digital banking landscape.”

Vanotti said despite banks’ best efforts, customers continue to fall for scams.

“The criminals are good at preying on vulnerable consumers,” she said. “AI is going to make this even easier for bad actors. We can’t over communicate to our customer base that they need to trust their banker and be honest when we question suspicious transfers and transactions.”

AI/tech investment

Speaking of artificial intelligence, technology investment will continue to be a priority for growth-minded banks, executives said.

There will be a particular focus on adopting AI tools that enhance operational efficiency, improve customer experience and manage risk.

“Key applications will include fraud detection, credit risk assessment, automation of regulatory compliance, personalized customer service, and process automation,” said Windsor Federal’s Kettles. “Banks will begin adapting these solutions with caution to ensure security of non-public data, and must also meet the challenge of maintaining compliance with stringent regulatory requirements that will require monitoring, validation and auditing of the AI systems and process.”

Nutmeg’s Holt said members increasingly expect seamless, mobile-first experiences, and he’s focused on digital tools that will provide simpler money movement, online loan applications, financial education resources and account management features.

However, increasing use of technology does not mean financial institutions can abandon human touch, Vanotti said.

Torrington Savings will be exploring how AI can support basic functions so the bank can redeploy its workforce into more engaging and value-added roles. Chatbots and AI assistants will become more prevalent in call-center environments, she said.

Additionally, Torrington Savings will launch a financial management tool to help consumers improve their finances through monitoring, budgeting and more, Vanotti said. 