The banking sector is trading at its highest price/book multiple since the global financial crisis, with banks exposed to US export-related sectors at risk. European banks face challenges as US export tariffs impact balance sheets and credit risk. Investors should consider the potential impact on bank stocks before investing.

European banks are most at risk due to exposure to US export sectors like automotive and pharmaceuticals. Pressure on profit margins could lead to increased defaults among SMEs and companies reliant on global trade, impacting banks’ credit risk and quality of credit offered to retail customers. German and Italian banks are particularly vulnerable.

Banks in the UK and Nordic countries have lower exposure to export-sensitive sectors, with lending focused on service and commercial real estate sectors. Banks with a higher proportion of corporate loans, like UniCredit and BNP Paribas, may face greater vulnerability to tariff risks than those focused on retail lending.

Tariff exposure poses a significant risk to European banks, potentially leading to increased loan losses and reduced profits. Credit costs are currently lower due to government support during the pandemic, but normalization could result in a 50% increase in loan loss provisions, impacting earnings and profitability by around 10% compared to 2024 levels.

Read more at Morningstar: Which European Banks Are Most Exposed to US Tariff Risk?