Regional Banks Seeking a Comeback Are Instead Upended by Tariff War

(Bloomberg) — The long-awaited recovery story that US regional banks were ready to tell is being derailed by the growing recession fears spurred by President Donald Trump’s trade war.

The KBW Regional Banking Index has slumped 13% since new tariffs on countries around the world were unveiled late Wednesday. Among the regional lenders feeling the pain are Western Alliance Bancorp, which has slumped 19% since then, East West Bancorp, also down 19%; and First Horizon Corp. and Zions Bancorp, which have both seen their shares drop 15%. 

After navigating a crisis that consumed much of their attention in 2023 and into 2024, regional banks entered this year hoping they could finally shift their focus back to growth. Things looked rosy, with the Federal Reserve starting to cut interest rates and the incoming presidential administration promising a pro-growth agenda and decrease in regulations the banks believed had held them back.

Instead, Trump’s trade policies are now presenting a completely different picture. Rather than growth in gross domestic product, initial public offerings and business spending, Trump’s new tariffs — including threats of additional 50% import taxes on goods from China — are spurring economists to predict a recession is more and more likely, with Wall Street titans who once supported Trump now criticizing a trade policy that’s roiled global markets.

“Sentiment has deteriorated meaningfully given a significant increase in uncertainty and volatility,” analysts at Raymond James & Associates wrote in a research note Monday. “The increased uncertainty and resurfacing of credit concerns has led to a decrease in sector allocations.” 

Unlike the crash in regional-bank stocks in the spring of 2023, the declines this time are part of a broader selloff, with Trump’s tariff plans wiping out roughly $10 trillion from equity markets worldwide. Which particular companies are hit hardest can be technical based on investors’ portfolio strategy, analysts said, given that the impact of the tariffs on specific industries is not yet fully clear.

“There are very broad statements people can make, like, maybe consumer discretionaries are the worst place to be, and maybe supply-chain lending is a better place to be, but I think everyone is still figuring it out as they go along right now,” said Brian Foran, a managing director at Truist Securities. “It sounds generally bad, but we’re not sure which industry is able to adapt and which isn’t.”

While the largest banks face similar pressure with demand for the loans they offer, that’s countered by trading revenue poised to surge with the increase in market volatility. Regional banks are in a weaker spot because lending is their bread and butter.

“With this uncertain outlook, we are cautious on bank stocks and we prefer GSIBs to regionals overall, especially those with more offset from trading and prefer higher quality banks,” JPMorgan Chase & Co. analysts Vivek Juneja, Andrew Dietrich and Sai Nettem wrote in a research note Thursday, referring to global systemically important banks.

The pressure on regional banks will linger even with those already having a diversification strategy in place. JPMorgan analysts downgraded U.S. Bancorp to “underweight” last Thursday, saying the firm’s push to expand its investment-banking business will likely face challenges amid uncertainties surround mergers and acquisitions, and that it would be impacted by slower consumer spending because of its sizable payments business. Its credit-card portfolio, which accounted for 8% of total loans at the end of last year, is also at risk of relatively high losses relative to peers, the analysts wrote.

Still, regional banks have a stronger footing today, having tackled issues that surfaced during the crisis. They expanded retail deposits to replace the costly wholesale funding, restructured bond portfolios to ease the pricing gaps that caused unrealized losses and set aside capital in anticipation of stricter regulations. 

“I have not felt that way where it’s like, ‘Oh gosh, this doesn’t feel good,’” said Terry McEvoy, a managing director at Stephens Inc. “It does feel like it’s very different here. In the spring of ’23, it was very much a banking crisis, whereas now it’s more of an economic crisis.”

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