DBRS: Tariffs Quickly Weaken the Operating Environment for US Banks

Key Highlights

• Tariffs and the uncertainty surrounding them have reduced investment and will likely be inflationary, and both consequences have adversely affected the operating environment.
• If tariffs are sustained, we would expect additional weakness in earnings and asset quality that could pressure our mostly stable US banks’ credit ratings.

Following Donald Trump’s reelection as US president, businesses and investors anticipated a pro-growth agenda underpinned by less regulation and lower taxes. As a result, loan growth and mergers and acquisitions were expected to pick up significantly. At the time of the election, tariffs were not expected to be widespread and were primarily understood as a negotiating tool. However, on April 2, the Trump administration announced that widespread tariffs would be imposed on trading partners large and small. This caused a severe stock market reaction, with the S&P 500 losing over $5 trillion, or 10.5%, over the last two trading days. Meanwhile, bank stocks have come under even more pressure, with the KBW Nasdaq Bank Index declining over 15% during this time.

While tariffs do not directly affect US banks, they do affect both consumers and businesses. Tariffs and the uncertainty surrounding them have reduced investment and will likely be inflationary; both consequences have adversely affected the operating environment. As a result, we expect US banks to have to increase their loan loss provisioning to reflect this deteriorating environment while they deal with muted loan demand. Moreover, the bounce in investment banking from increased M&A and underwriting will likely not materialize over the short term, as was previously expected. If tariffs are sustained, we would expect additional weakness in earnings and asset quality that could pressure our mostly stable US banks’ credit ratings

Q1 2025 US Bank Earnings Expectations

While the tariff impact will be more pronounced in coming quarters, the on and off threats from the United States in the first quarter of 2025 created significant uncertainty that likely muted loan growth and capital markets activities. We still expect sales and trading results to support earnings at banks with capital market businesses, given the volatility seen during the quarter. Wealth management fees should be strong as well, but are typically earned based on lagged market valuations, so this revenue line will likely come under pressure soon if the markets do not rebound.

Asset quality is expected to deteriorate modestly but is not yet a credit ratings concern. Meanwhile, net interest margins are expected to benefit primarily from lower-yielding loans and securities maturing, with the funding being used either to reinvest in higher-yielding securities or pay down more expensive funding sources. Overall, earnings are expected to be sound, but management teams express significant caution about their outlooks.

Future Concerns Are Rising

Tariffs are likely to at least reduce economic growth—or worse, cause a recession—as taxes and uncertainty inhibit economic activity. JP Morgan has raised its odds of a US recession happening in 2025 to 60%. In the short term, the tariff-induced market shock has resulted in significant margin calls by prime brokers asking for more collateral. This could cause a doom loop, with further market declines driving additional margin calls, forcing funds to sell assets to meet them. This brings back bad memories for banks—specifically the collapse of Archegos in 2021, which lost various investment banks over $10 billion when it couldn’t meet margin calls.

Tariffs generally protect domestic businesses at the expense of foreign producers by making foreign goods more expensive. Domestic businesses protected by tariffs also typically raise their prices. Regardless, consumers face higher prices. Many consumers, especially those in the lower income brackets, are already struggling with the cost of living, so any additional pressure from higher prices will result in reduced discretionary spending and potentially increase credit losses at banks. While the banks in our coverage universe are generally well-diversified, without any outsize exposures to sectors that tariffs would most affect, a rapidly deteriorating macro environment could result in significant earnings pressure, especially if it leads to job losses.