The tariff regime unveiled last week by President Donald Trump has injected a significant dose of uncertainty into the banking industry and unleashed the specter of an economic slowdown.
Banks and credit unions, to be sure, are not directly impacted by the sweeping tariffs being imposed on about 90 countries, including China, Japan and the European Union. But because they do business with industries that will be affected, they too are bracing for the consequences of a global trade war.
Banks are already feeling some pain in their stock prices. The KBW Nasdaq Bank Index, which tracks the performance of the 24 largest U.S. banks, was on a roller coaster ride Monday after sinking Thursday and Friday following Trump's tariff announcement. At market close, the index was up about 1%.
The tariffs went into effect on Saturday. Additional levies may go into effect on Wednesday.
Tariffs in general are "unconditionally bad" for banks because they cause economic disruption, Suryansh Sharma, an equities analyst at Morningstar DBRS, told American Banker on Monday.
"Any form of disruption is not good for the economy or for the banks," said Sharma, who covers JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, the nation's four largest banks.
In the near term, banks will likely be keeping close tabs on areas such as net interest margin, loan growth, fee income and credit costs, all of which ultimately affect their profitability, Sharma said. A lot will depend on whether the economy slows down or goes into a recession, which would potentially reduce loan growth, lower fee income and increase credit costs, he said.
Those topics and more will likely be top of mind as banks kick off their quarterly earnings season on Friday.
The impacts of tariffs on banks are likely to be wide-ranging. In the meantime, here are four areas to watch.
Trade financing
Banks that provide trade financing as part of their commercial banking services may see a ramp-up in activity as a result of the tariffs. At Citizens Financial Group, a specialty trade and supply chain finance department within the company's commercial bank works with both domestic and international clients to reduce risk and facilitate cross-border payments.
The department provides classic trade finance products such as standby letters of credit, which guarantee payments, and commercial letters of credit, which offer security to buyers.
The Providence, Rhode Island-based regional bank also lends money to importers to help purchase goods and advances funds to exporters as they await payments from suppliers.
In the weeks leading up to the tariffs, the company had plenty of conversations with clients, said Jonathan Heuser, the head of Citizens' trade and supply chain finance department. Companies were trying to figure out how they could build their inventory before the tariffs kicked in, he said.
Since Wednesday, when the tariffs were announced, Citizens' clients are taking a cautious approach, Heuser said.
"We're only talking about two-and-a-half business days … that have been characterized by a lot of ups and downs, downs in the market, new announcements, a lot of market turmoil," Heuser told American Banker. "We put our ears to the ground and we're talking to clients, but I think the strongest reaction … is that we need to wait and see, and let this develop."
Auto loans
Even before the new tariffs took effect, Americans were already
Now, added to the squeeze are a 25% tariff on all imported cars and a range of levies on the materials used to build them. With car prices almost certain to rise, lenders could see a drop in demand for auto loans as spooked consumers hold off on buying new vehicles.
James Chang, CEO of Pasadena Federal Credit Union in Los Angeles, said auto loans are his "bread and butter," making up about 60% of his consumer lending business. Now he fears the "cascading effects" of the tariffs.
"The prices of these cars are going to just skyrocket," Chang said. "It's going to price a lot of consumers out. The middle class will think twice about, 'Is it the time to buy?' And the individuals that are already struggling, they just can't afford it."
For Chang, this opens up a myriad of concerns: Inventories could dwindle as automakers search for ways around expensive supply chains or hold back on production. And if the tariffs turn out to be temporary, car prices may spike and then settle back down, leaving lenders in a precarious position.
"The prices of those cars are going to go up, but the value is not going to be there," Chang said. "If delinquencies continue to be an issue, and we have to take the car back … we're just going to have to eat a lot of that loan balance."
Mortgages
Shortly after Trump unveiled the new tariffs, mortgage rates suddenly dropped. On the day of the announcement, the average rate on a 30-year fixed mortgage was 6.75%, according to
That's because just after the tariff news broke, investors
That may create a silver lining for lenders: As mortgage rates come down, some homeowners may grow more willing to sell their houses and buy new ones. In that way, the tariffs may indirectly open new opportunities for loans.
"I think a lot of people were holding back because the rates were so high," Chang said. "So I think it's a good thing for the mortgage market — it can help."
Other ramifications are more of a mixed bag for banks. Lower mortgage rates make refinancing more attractive to consumers, which could generate more fee income for lenders but set loans at lower interest rates. Also, Chang pointed out, if the tariffs drive up inflation, that could induce the Fed to raise the federal funds rate, offsetting the benefit of new mortgages.
"The balance of that won't be good for any banks, because now you're going to have to pay more for deposits, but are getting less interest on big loans like mortgages," Chang said. "So that would squeeze our margins."
Bank M&A
For months, bankers have been hopeful that the change in administration would make it easier for
"While bank M&A activity had seemed poised for a strong return at the beginning of [the year], the many recent actions under Trump 2.0 … are ricocheting in the markets, and any substantial offensive bank M&A is also likely to evaporate as stock prices [equal] acquisition currency," Laurie Havener Hunsicker, an analyst at Seaport Research Partners, wrote in a note Monday.
Year to date, there have been 37 bank M&A deals announced, and none of the deals have involved banks with more than $10 billion of assets, according to Havener Hunsicker, who tracks the number of M&A deals throughout the year. There were
What's unknown is how long Trump's "steep, across-the-board" tariffs will be in effect and how bank M&A will be affected by the broader turmoil, Havener Hunsicker wrote.
"These self-inflicted tariffs, if unchecked, now appear poised to detail offensive bank M&A, despite earlier optimism around regulatory and tax relief," she wrote.
