For US Banks, Tariffs Pose Significant Macroeconomic Risks and Are Unconditionally Bad

President Donald Trump unleashed a barrage of tariffs on US trading partners that were significantly more aggressive and broader in scope than the market’s expectation. US banks reacted negatively to the tariff announcements, and the US bank index was down more than 8%.

Why it matters: The banking business is inherently tied to the macroeconomic performance of the US economy, and any negative impact on the economy will eventually percolate through the US banking industry’s profitability.

• Economic slowdowns (or recessions) have a materially adverse impact on the US banking industry’s loan growth, credit costs, investment banking fees, trading profitability, and asset management fees.
• A higher probability of a recession can also lead to the Fed cutting interest rates much faster than the market’s expectations, leading to net interest margin contraction for most banks in our coverage.

The bottom line: Given the significant uncertainty associated with the tariff announcements, we are currently in the wait-and-see stance and do not plan to materially change our fair value estimates for US banks.

• While there are selective opportunities, US banks are fairly valued on average even after today’s sharp correction, and we think investors should wait for a bigger margin of safety before going all-in into the sector.
• We like Bank of America BAC on a relative basis among the money-center banks and US Bancorp USB among regional banks.

Big picture: If the current tariff regime remains in place in the long run, the US banking industry will certainly be hit hard, and the probability of recession will increase substantially.

• We estimate a midteens percentage fair value estimate decrease for the sector in a bear-case scenario, but the bank stocks can correct significantly more than that in the near term, given the hit to their profitability.