Tariff Turmoil will Weigh on Banks in 2025

• Although the announcement on April 9, 2025, by President Trump that higher tariff rates would be paused for 90 days led to a sharp rally in financial markets, including U.S. bank stocks, Fitch Connect still holds a cautious outlook for banks across the globe.
• Financial services have not been directly hit by the tariffs, but banks will continue to navigate a challenging environment as they are vulnerable to second-round effects from tariffs, including weaker economic growth, volatile exchange rates and changing interest rate expectations.
• Moreover, recession fears dim the loan growth outlook and increase the risk of higher non-performing loans in markets such as Canada and the U.S., while in Asia, lower bank profitability, notably in Mainland China, could be the key risk. The removal of several ‘reciprocal’ tariffs will, however, ease some of the stress on financial markets across Asia Pacific (APAC), but risks remain elevated.
• One of the main premises in Fitch’s view is that the tariffs could prompt central banks to cut interest rates more rapidly than previously anticipated to stimulate economic growth. This would weigh on banks’ net interest income (NII) and likely result in bank earnings falling to pre-tightening levels at a quicker rate than previously expected.
• Moreover, significant uncertainty persists despite the reprieve, and Fitch anticipates continued volatility as markets adjust. Q1 2025 earnings were released for some of the largest banks on April 11 and continued to show that the largest U.S. banks are in good financial health and have benefited from high trading activity owing to stock market volatility surrounding President Trump.
• However, Fitch believes that U.S. banks will continue to face headwinds in the coming months, through second-round macroeconomic effects from the tariff turmoil, weaker loan growth, possible deteriorations in loan quality and lower profits.

(Source: Fitch Connect)