Banks Don't Pay Tariffs, but Tariffs Will Cost Them

Wall Street Journal

04-04-2025

Bankers don't import or export sneakers or cars. But that doesn't mean they are immune to tariffs.
In fact, American lenders face a potential triple-whammy from the new trade regime announced by President Trump on Wednesday.
The big threat is that a trade war leads to recession, or absent that, far slower economic growth. Bank revenues will tumble as customers, both consumers and companies, dial back on borrowing. They could also find it tougher to pay back their debts.
Meanwhile, a moribund economy could put downward pressure on long-term interest rates, even as inflation proves persistent and keeps short-term rates high. This would further squeeze bank profits. Amid all this uncertainty, dealmaking is likely to slow, and corporate investment could tumble, eating into Wall Street fees.
No wonder the new tariff announcements torpedoed shares of big U.S. lenders. On Thursday, the KBW Nasdaq Bank index had its worst one-day drop, nearly 10%, since March 2023, in the aftermath of the collapse of Silicon Valley Bank. Big banks have erased all of their gains since the November election, when they rallied on hopes for a rebound in dealmaking and business activity.
The threats will be a hot topic for investors later next week when JPMorgan Chase JPM -7.01%decrease; red down pointing triangle, Wells Fargo WFC -9.12%decrease; red down pointing triangle and Morgan Stanley MS -9.51%decrease; red down pointing triangle report first-quarter earnings.
U.S. banks 'aren't in the direct line of fire for tariffs, but they make their living lending and doing business with all the companies that are in the line of fire,' says Truist Securities bank analyst John McDonald. 'The second-order impacts on consumers are critical for banks as well.'
Big U.S. lenders are highly exposed to the fortunes of consumers via their credit-card portfolios. Recent data show that consumers have grown their average household card borrowing to levels not seen in several years. In some segments, consumers have also fallen further behind on their payments. This has rightly raised concern about the American shopper's vulnerability to economic shocks.
So consumers' budgets might be stretched further by the costs of tariffs through higher goods prices. Lenders could be among the first to feel that through missed payments, in addition to lower spending volume on those cards.
Banks might also be first to show signs of strain in another way. Because of their accounting practices, banks essentially act as an early warning system for consumer health.
Lenders must account for potential future losses to their loans over their lifetime. So economic data that points to slower growth can lead banks to take big loan-loss provisions that hit earnings well before consumers actually start to show visible distress.
Consumers aren't the only risk. Companies are, too.
Even if many companies succeed in passing along higher tariff costs to consumers, their revenues are likely to suffer. That could lead to less demand for new loans, which, in turn, could send a chill through boardrooms. Executives and directors might shy away from activity such as mergers and public offerings, hitting banks' fee income.
Declining consumer and business activity could be made worse if banks have trouble squeezing profit out of the loans they do make.
A diminished economic outlook causes long-term rates to fall. Ten-year U.S. Treasury yields tumbled on Thursday to around 4.03%, their lowest level since last October.
Typically, if the economy is starting to weaken, the Federal Reserve lowers short-term interest rates. That helps banks to reduce deposit rates, the main funding source for many. This can take pressure off their profit margins, or the difference between what they pay to borrow money and what they earn by lending it out.
Tariffs could throw a wrench into things. If they drive inflation higher, the Fed may have to stand pat on rates. In that case, banks would be hard-pressed to lower deposit rates and their profits could be crimped.
The pain, however, might not be shared equally among banks.
Wall Street banks with big trading desks might get a boost from market volatility, particularly from stock trading. Average U.S. equity-trading volumes rose year-over-year in January, February and March, according to data compiled by Morgan Stanley analysts.
Even so, in the past there have been 'good' periods of volatility—in which investors are eager to place bets and trade in and out of markets—and 'bad' ones. The latter are often driven by political uncertainty that leads active traders to move to the sidelines.
The last time bank stocks were down so sharply, they were the ones causing economic panic. Now, they are its victims.
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