Local banks and credit unions are bracing for a hit to demand for loans and other services among businesses of all types. iStock illustration
The Trump administration’s back-and-forth tariff policy is engendering skepticism from local financial institutions at the same time it appears to be scaring consumers and local businesses.
The University of Michigan’s highly-regarded index of nationwide consumer sentiment dropped 27.1 percent year-over-year this month and 10.5 percent over February.
One month before, the Associated Industries of Massachusetts Business Confidence Index suffered its largest one-month drop since the onset of the COVID-19 pandemic. The index declined 5.2 points to 50.4, just above pessimistic territory amid the first reports of tariffs and massive cuts to federal support for the higher education institutions and biotech research that form a bedrock for the state economy. The index ended the month 4.1 points lower than in February 2024.
President Donald Trump signed an executive order Feb. 1 to impose tariffs on imports from Mexico, Canada and China starting Feb. 3. But two days after the executive order, the president announced a 30-day pause on the Canadian and Mexican tariffs.
Then on March 4, the tariffs against Canada and Mexico went into effect before Trump walked back most of the tariffs days later. Trump postponed the 25 percent tariffs on many imports from Mexico and some imports from Canada for another month, including some critical building materials.
“It’s really hard for everyone to get a read on what’s happening. If you think about it, news is coming out so rapidly,” said Robert Cashman, president and CEO of Metro Credit Union. “On one hand, somebody says something, and then five minutes later, it’s the complete opposite. So, I think there’s a lot of uncertainty that’s here.”
Biz Lending Could Take Hit
All the anxiety this uncertainty creates is likely to ripple through the Massachusetts financial system, local bankers say, just when some had been hoping for a rosier 2025 after two difficult years.
With business sentiment growing more and more skeptical, banks could see a reduction in companies seeking loans or funding. Amid a widespread commercial real estate downturn, several local banks had made big efforts to attract new business customers who might have an appetite for loans to power investments.
With increasing costs, margins will be even tighter and some loans that worked on paper previously won’t pencil out. Companies themselves could also respond to the high-cost environment by staying on the sidelines and putting off projects that require funding.
“Our customer base as a whole is always going to be affected by uncertainty, especially on the business side where capital investment is such a key component to decisions that are being made in businesses,” said Matt Sosik, Hometown Financial Group chairman and CEO. “Businesses always require at least a certain degree of certainty. They’re risk-takers because they’re entrepreneurs to start with, but risk takers still require an environment which they have confidence in their best guess.”
Deposits could also take a hit, said Cashman. If the price of goods continues to rise, account-holders may have to dip into their savings – and if that isn’t an option, utilize credit cards.
“In general, if there are tariffs on products, no matter what it is, whether it be food or just general merchandising, that’s going to cost the consumer more money, which means that they may not have it,” he said. “What they end up doing is they put more on their credit card as such credit card debt grows, and that increases individuals cash flow payments, putting additional pressure on consumers and their ability to basically live while that is all taking place.”
An Opportunity to Gain Deposits
Just like customers, banks also require some level of certainty to be able to plan for the future.
But economic downturns can still provide an opportunity for local financial institutions, said Julie Thurlow, president and CEO at Reading Cooperative Bank. In times of uncertainty, she said, consumers like to have their money closer to home.
“One thing that actually I’ve observed for many years and many cycles, because I’ve been in the seat for as long as I have, is downturns are actually good for community banks in a lot of cases, unless they’ve gone too far out on the curve,” she said. “A lot of times, consumers want to be closer to their money or know that their loan is closer to home when there is uncertainty in financial markets.”
Thurlow also noted that while banks’ cost of deposits could increase as a result of economic uncertainty and tariffs, on top of the potential for deposits to trend downwards, there is the opportunity for banks to add new customers in a banking environment that continues to see merger and acquisition activity.
Business and consumer confidence are both falling amid uncertainty over the Trump administration’s tariff policies. iStock illustration
CRE Impact the Biggest of All?
But commercial real estate stands to be the Trump administration tariffs’ biggest impact on Massachusetts’ banks and credit unions.
Developers are already dealing with high land, capital and labor costs, on top of costly municipal affordable housing and carbon emissions rules. Now, the financial pressure could be turned up even more on a sector that until just recently was a huge source of income for local banks and credit unions.
If the tariffs do go into effect next month, the National Association of Home Builders trade group says it would add $3 billion to the cost of critical imported construction materials nation-wide, from Canadian lumber and Mexican gypsum – used in drywall – to all manner of metal and home appliances from China.
Anecdotal evidence from the trade group suggest each new single-family home might become $10,000 more expensive to build, and that’s without the threat of additional tariffs on Canadian lumber mooted by the Trump administration for later this year.
Sosik noted that there could be a slowdown in CRE lending in 2025 due to tariffs and the possibility of a larger economic slowdown in Massachusetts. Thurlow also noted that valuations are making it harder for deals to make sense for banks.
“You are starting to see valuations not meeting what is necessary to accomplish a project,” she said. “So, then, projects are not going forward, which doesn’t help with the housing challenge that we are experiencing here in Massachusetts, either.”
Sosik said that, anecdotally, it appears like builders are already seeing their suppliers pass on higher materials costs.
“Literally, as we speak, those are lumber suppliers, lumber yards, etc, and building products suppliers building in significant cost increases immediately, and then they’ll likely try to stay nimble as the news and the actual impacts bleed through,” Sosik said. “Maybe those haven’t bled through into projects we’re looking at right now, but builders on the ground are already facing significant price increases in the challenges that follow.”
Sam Minton
Early-Stage Projects Most Vulnerable
While projects that are further along in construction might not be affected, projects in the early phases could face the brunt effects of tariffs, Cashman said.
“We think that people are already into their projects now or towards the tail end of their projects are going to be fine, but individuals that are just starting off with projects in the beginning stages, or are thinking about starting a project, that could be impacted, primarily because of the fact that there is so much uncertainty,” he said. “Can they complete the project? Can they get it done within the time frame and the dollars associated, due to the fact that expenses will be higher in the event that tariffs do occur?”
While the Trump tariffs’ potential impacts haven’t yet made it into hard data like employment and manufacturing output, said Daniel Curtin, New England market manager of J.P. Morgan Private Bank, it’s still early days.
“It can cause growth projections to fall, so there is long-term risk about the growth of the economy maintaining the level that it’s had over the last several years,” he said. “The thing to be aware of is a lot of the impact is really just some of the soft data so far. If you look at soft data, I mean, like [the consumer price index], uncertainty metrics, people are concerned, but it hasn’t flown through yet to some of those hard data.”
