02:03 PM EDT, 04/07/2025 (MT Newswires) -- The Trump administration's aggressive tariffs may dent mid-cap banks' earnings and loan growth amid rising concerns than the US economy may be heading into a recession, Morgan Stanley said in a note emailed Monday.

The investment bank downgraded the sector to in-line from attractive and slashed the price targets by a median 19% for the group. The brokerage lowered earnings-per-share estimates by 4% and 8% for 2025 and 2026, respectively, after last month's cuts of 2% and 3%.

The revised EPS forecasts take into account slower loan growth and lower net interest margins as credit losses are expected to rise in 2026, Morgan Stanley said.

"An extended period of heightened global trade tensions seems under way, and risks to growth skew meaningfully to the downside, and risks to inflation to the upside," Morgan Stanley said in the note. "This elevated uncertainty with higher downside risks is a negative for both loan growth and credit at regional banks."

Last week, the White House announced tariffs on imports from several countries, including China, which on Friday responded with its own retaliatory duties. President Donald Trump on Monday threatened additional 50% tariffs on China unless Beijing reverses its retaliatory actions.

The heightened economic uncertainty will likely drive "middle-market companies to push out investment spend," impacting commercial and industrial loans, the brokerage said.

"Banks are likely to tighten lending standards as recession risks rise," according to the report. Morgan Stanley doesn't expect a recession in its base case.

The firm downgraded Comerica ( CMA ) to underweight from equal-weight and East West Bancorp ( EWBC ) to equal-weight from overweight. The firm upgraded Commerce Bancshares ( CBSH ) to equal-weight from underweight.

"In a more uncertain macroeconomic environment, we are also increasing our preference for defensive names across the group," Morgan Stanley said. "This includes banks with higher levels of excess capital and strong credit quality, driving our upgrade of (Commerce Bancshares ( CBSH ))."

Price: 73.32, Change: -0.72, Percent Change: -0.97

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