Trump’s Tariffs Threaten U.S. Bank Earnings

Trump’s onslaught of tariffs heralds a new industrial policy era in the U.S. where the government will intervene more in free markets, and companies will have less flexibility in their decision making. The likelihood that countries will retaliate with a range of tariffs aimed at the U.S. will hurt individuals and businesses, making it more challenging for banks to be profitable.

Trump has barely been in office shy of 75 days, yet the volatility that he has inserted into economic policies in the U.S. and globally has been very significant. The U.S. Economic Policy Uncertainty Index is practically at a historic high, and just about 12% lower than March 2020 when Covid-19 struck globally.

This level of uncertainty is dangerous not only for the American economy at large, but especially for banks, which are very sensitive to inflationary and employment level pressures. Banks essentially make their money in three ways: credit products (i.e. loans, lines of credit, and credit cards), trading (stocks, bonds, currencies, and commodities), and fees (i.e. investment banking deals, asset management, custody, etc.

Credit Products

Net interest margin constitutes the largest percent of bank earnings for all banks, including even trading power houses such as Citibank and JPMorgan. This is why analysts and investors pay so much attention to borrowing levels of individuals and companies, as well as their default rates.

Significant uncertainty makes it practically impossible for individuals and companies to plan for their future and manage their financial affairs. In a worst-case scenario, it can lead to spending paralysis, which in turn, causes companies to lay-off workers.

Even if the proposed tariffs are renegotiated with the numerous countries involved, they will still be higher than they were in March. The tariffs are inflationary which raises borrowing costs for individuals and companies. While higher costs of borrowing can translate into higher net interest margins for banks, these inflationary tariffs are coming at a time that the U.S. has already been at elevated levels of inflation. Not only will higher borrowing costs reduce borrowing from individuals and companies who cannot afford such high levels of interest, they will increase defaults, especially among those who are already at high levels of indebtedness.

Higher tariffs are coming at a time of rising default probabilities and rates. According to Moody’s Ratings, U.S. companies’ default risk is at 9.2%; this is a post-financial crisis high. Higher default probability is being exhibited by a wide range of companies. Corporate leveraged loan and high yield bond default rates have been rising this year, as have default rates in the private credit markets.

Rising default probabilities are particularly a problem for very indebted Americans and now for the thousands of government and private sector workers who have been laid off in the first quarter of this year. Continuing jobless claims are now at their highest rate since November 2021. Even before the announcement of these tariffs, delinquency rates had been rising in auto loans, credit cards, and mortgages.

In addition to rising probabilities of default for both corporates and individuals, bankruptcy filings have also been rising. If both corporate and individual default rates and bankruptcies continue to increase, as look likely, it will be very difficult for banks to have healthy net interest margins.

Trading

Fixed income products such as bonds and bills, followed by currencies and then stocks, account for the largest percent of trading revenues. 2024 was a good year for banks with significant stock, bond, currency, or commodity trading portfolios. The last quarter of 2024, however, decreased significantly.

This year banks’ earnings in this segment could be adversely hit given declining stock market performance and rising bond default probabilities. Since Trump’s inauguration, the Dow Jones Industrial Average has declined over 6%. More challenging than the decline has been the market’s volatility level. While globally systemically important banks such as Citibank, Bank of America, JPMorgan, Goldman Sachs, and Morgan Stanley may be very adept at hedging against volatility, the vast number of other banks in the U.S. will be significantly. Additionally, the depreciation of the U.S. dollar will also hit banks’ trading revenues.

Fees

Mergers and acquisition transactions posted their worst first quarter in a decade. Corporations have been waiting to receive clear signals from the administration on what it would do about tariffs, layoffs, taxes, and deregulation. While there may now be clarity with the level of tariffs, the remainder of policies are still far from clear. Mergers and acquisitions are a significant revenue generator for banks, especially regional and globally systemically important banks.

Asset management, another fee generating business for banks, could also be hurt in the coming quarters. Asset managers will be challenged to earn big fees with declining performance of bond, stock, and currency portfolios.

Market Signs About Bank Earnings

Bank analysts have started to sound the alarm about the future of banks’ earnings. In a worrisome sign, JPMorgan bank equity analyst, Vivek Juneja, cut his U.S. banks earnings estimates. Until just a few days ago, the typical consensus was that bank earnings were expected to grow in 2025.

Bank indices are showing real-time that investors in bank stocks are worried. The KBW Bank Index declined by over 9% since yesterday, and as pointed out by Morningstar, the U.S. Bank Index declined by 8% after the new tariffs were announced. These declines are the most significant since the regional bank crisis of the spring of 2023.

Even before the tariff announcement, key bank indices have been under downward pressure due to tariff uncertainty as well as DOGE-induced government lay-offs. The S&P/TSX Composite Index Banks (TXBA), for example has declined over 4% just in the last 30 days. Additionally, the Dow Jones U.S. Bank Index, another bank index closely watched by stock investors has also been declining.

As long as tariffs and rising unemployment continue to dominate the news, it will be difficult for banks to make news. Even if Trump’s tax cuts and deregulation materialize, it will be a challenging time for banks in the coming months.

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