US Bank Stocks Sink as Trump's Tariffs Cloud Dealmaking, Loan Demand

The U.S. banking sector is facing a perfect storm of challenges as President Trump's tariffs cast a long shadow over the economy. The imposition of tariffs on steel, aluminum, and other goods has sent ripples through the financial markets, impacting everything from consumer confidence to business investment. As a result, bank stocks are feeling the heat, with investors growing increasingly wary of the potential fallout.

The tariffs, which have been a cornerstone of Trump's economic policy, are designed to protect American industries from foreign competition. However, the unintended consequences are becoming increasingly apparent. The cost of imported goods has surged, driving up prices for consumers and businesses alike. This inflationary pressure is already evident in the Personal Consumption Expenditure (PCE) Price Index, which rose 2.8% year-over-year in February, up from 2.7% in January. The impact on consumer sentiment has been stark, with the Conference Board’s Consumer Confidence Index falling to its lowest level since January 2021 and the Michigan Consumer Sentiment Index hitting its lowest since November 2022.



The ripple effects of these tariffs are far-reaching. For banks, the immediate impact is a potential slowdown in loan demand. As consumers become more cautious with their spending, the demand for consumer loans, such as credit card loans and auto loans, is likely to decrease. This is already reflected in the savings rate among U.S. consumers, which ticked up to 4.6% in February from 4.3% in January. The commercial real estate (CRE) sector, particularly the office segment, is also feeling the pinch, with regional banks potentially facing significant loan losses.

The uncertainty surrounding tariffs and trade policies is also taking a toll on business confidence. The preliminary March S&P Global Purchasing Manager Index data pointed to renewed softness in manufacturing activity, with manufacturers expressing concerns about trade and tariff uncertainty. This volatility is likely to lead to a decrease in business investment and loan demand, further impacting the credit quality of banks' loan portfolios.

The impact on M&A activity is another area of concern. The volume of smaller and mid-sized deals fell by a meaningful 18% in 2024, and the uncertainty surrounding tariffs could further dampen dealmaking momentum. As noted by Brian Levy, Global Deals Industries Leader, PwC United States, "An M&A recovery is overdue, but it may struggle to maintain its recent momentum at a time when long-term interest rates are rising and valuations are high. It’s a market that will distinguish top dealmakers from the rest. To be successful, they will need deep industry expertise and a laser focus on value."

The banking sector is also grappling with increased costs and reduced profitability. The imposition of tariffs on steel and aluminum, for example, could lead to higher costs for various goods, affecting the profitability of banks with significant exposure to these sectors. The overall net charge-off rate is expected to reach 0.66% in 2025, the highest in the last decade but significantly lower than the 2008–2009 crisis. However, if tariff uncertainty leads to increased loan defaults, this rate could rise further, impacting the credit quality of banks' loan portfolios.

In summary, the imposition of tariffs by the Trump administration is creating a challenging environment for U.S. banks. The increased costs, reduced consumer spending, disruption in supply chains, slowdown in M&A activity, and increased credit risk are all significant headwinds that banks will need to navigate. As the tariff situation continues to evolve, investors will be watching closely to see how the banking sector adapts to these new realities.