S&P Warns Trade Tensions Could Cut European Bank Profits Up to 30%

S&P Global Ratings' recent stress tests indicate that escalating trade tensions between the United States and other global powers, particularly under President Trump's trade tariffs, could cause European banks' pre-tax profits to decline by up to 30%, primarily due to increased corporate credit losses. While no bank in the 90-plus institutions tested is expected to incur annual losses, banks such as Credit Agricole, BPCE, Commerzbank, Rabobank, and DLR Kredit are identified as potentially the most affected. The tests reveal that loan defaults linked to corporate exposure in industries tied to international trade could rise, increasing non-performing loans and pressuring banks' profitability and lending capacity. Despite these risks, European banks have shown resilience, maintaining low non-performing loan ratios and stable asset quality, supported by higher interest rates, accommodative fiscal policies, and resilient consumer spending and employment. Upcoming regulatory stress tests by the European Central Bank and European Banking Authority are anticipated to confirm these findings, reinforcing confidence in the sector's capacity to withstand economic shocks. Overall, while profit margins may compress, the banking sector's improved risk management and diversified economic conditions mitigate the risk of severe financial distress.