Bank Stocks Anchor UK Equities Amid Tariff Turbulence

The UK banking sector has emerged as a stabilizing force for equities despite escalating trade tensions, with domestic-focused lenders outperforming their globally exposed peers. Tariffs imposed by the U.S. on UK goods—including 25% levies on steel, aluminum, and automotive parts—have reshaped the investment landscape, favoring banks with minimal international trade exposure.

Domestic Banks Lead the Pack

Domestic lenders such as NatWest (NWT.L) and Lloyds Banking Group (LLOY.L) have demonstrated resilience, buoyed by their focus on the UK’s service-oriented economy. While both face rising bad-debt provisions—NatWest’s rose 81% to £169 million in Q1 2025, and Lloyds’ quadrupled to £279 million—their insulation from global trade disruptions has shielded their core operations.

Global Banks Struggle Under Trade Pressure

Asia/EU-exposed banks like HSBC (HSBA.L) and Standard Chartered (STAN.L) face steeper headwinds. HSBC’s Q1 profits plummeted 38% to $7.8 billion as tariffs dampened Asian corporate lending and wealth management revenue. Its provisions for non-performing loans surged 20% to $868 million, while Standard Chartered’s shares fell 23% year-to-date amid concerns over credit quality and loan demand in tariff-affected markets.

Tariff Developments and Policy Responses

The U.S. tariffs, imposed under Section 232 and IEEPA emergency powers, have forced the UK government to adopt defensive measures:
- Tariff suspensions: £17 million in annual savings from suspending duties on imports like plastics and garden supplies until 2027.
- Export finance: UK Export Finance (UKEF) injected £20 billion to support businesses hit by trade barriers.
- Retaliation prep: Consultations on potential tariffs covering 8,000 U.S. product categories remain open, though no measures have been enacted.

Sector-Specific Risks and Opportunities

• Auto sector: UK automotive exports to the U.S. totaled £8.3 billion in 2024, but 25% tariffs risk job losses at firms like Jaguar Land Rover. Domestic lenders benefit indirectly as auto-related credit risks are concentrated in global banks.
• Pharmaceuticals: Firms like AstraZeneca (AZN.L) face supply-chain disruptions, but their exemption from tariffs has stabilized their financial health.

Analyst Outlook and Valuations

• Domestic banks: UBS rates NatWest as a top pick (500p target), citing its 6.5% dividend yield and strong balance sheet.
• HSBC: UBS warns of “overshadowed tailwinds” from cost cuts and Asian wealth management, with its shares trading at 0.8x P/B.
• Market divergence: European banks (including UK peers) are up 8% YTD, but HSBC and Standard Chartered lag, trading below historical averages.

Conclusion: Navigating Tariff Uncertainty

The UK banking sector’s performance reflects a stark divide between domestic and globally exposed lenders. While NatWest and Lloyds leverage their UK-centric models to weather tariffs, HSBC and Standard Chartered face mounting credit risks and operational costs. Investors should prioritize banks with diversified revenue streams and minimal exposure to trade-dependent sectors.

The Bank of England’s cautious stance on rate cuts and the government’s fiscal measures—such as tariff suspensions—provide near-term stability. However, with the IMF revising UK GDP growth to 1.1% (down from 2.8%) and global trade volumes expected to shrink, the sector’s long-term trajectory hinges on resolving trade disputes. For now, domestic banks remain the safest bet, offering dividends and balance-sheet strength in a turbulent market.

In this environment, NatWest and Lloyds exemplify the adage “safety in domesticity,” while investors in global banks must brace for prolonged volatility. The ultimate test will be whether the UK can secure tariff exemptions or negotiate a U.S. trade deal to restore investor confidence. Until then, the sector’s performance will remain a barometer of global trade health.