US regional banks face results test as tariffs trigger uncertainty, growth worries

By Manya Saini and Niket Nishant

(Reuters) - Heightened uncertainty fueled by the on-and-off U.S. tariffs will likely take center stage as the nation's regional banks gear up to report first-quarter results next week, with investors tracking signs of stress in asset quality.

President Donald Trump's decision to pause many of his new reciprocal tariffs for 90 days provided a reprieve to regional bank stocks on Wednesday, but analysts warned that the broader conflict remains unresolved.

"The trade war isn't exactly over, and the pause didn't return the world to the time before Trump touched off the global instability," said Art Hogan, chief market strategist at B. Riley Wealth.

The turmoil sparked by the flip-flop starkly contrasts with the optimism at the start of the year when the banking industry rallied on hopes of strong loan growth and a rebound in deal activity under the new business-friendly administration.

"While near-term overhang from tariffs may have eased for now, regional banks likely face a challenging year," analysts at J.P. Morgan said, observing that loan demand may remain subdued as borrowers keep to the sidelines seeking clarity.

Investors should also pay close attention to the escalating tensions with China, they said. While most of the steep tariffs were temporarily eased, the U.S. raised duties on imports from China to 125% from 104%, with Trump accusing Beijing of showing a "lack of respect" for the world's markets.

A dispute between the two biggest economies of the world could weigh on growth. Any economic downturn is particularly risky for regional banks, which rely heavily on lending to local businesses and consumers.

Such banks also lack the scale of larger peers, and their smaller or non-existent trading operations leave them without an opportunity to cash in on market turmoil during times of volatility.

Since the new levies were first announced, the KBW Regional Banking index has dropped 7.5% through Wednesday's close.

REAL RISK

Fifth Third, Citizens Financial and Regions Financial are among the banks expected to report results next week. Forecasts and executive commentary will likely draw more scrutiny than the quarterly numbers themselves.

Markets have swung wildly in recent days as Trump first unveiled steep tariffs only to temper them a week later, raising investor interest in how banks plan to navigate the turbulence.

Analysts have warned of a spike in provisions for credit losses, or the capital that banks set aside to cover potential defaults by borrowers.