Banco Santander has surpassed UBS to become the largest bank in continental Europe by market capitalization, a shift influenced by U.S. trade policies. As of Wednesday's close, Banco Santander boasted a market cap of 91.3 billion euros ($103.78 billion), eclipsing UBS's 79.5 Swiss francs ($97.23 billion), according to FactSet data. The divergence in their share performance is notable, with Banco Santander gaining nearly 35% year-to-date, while UBS has shed 17.2%, according to LSEG data.

The imposition of U.S. tariffs has generally impacted the broader European banking sector, given the reduced growth prospects for tariff-affected European countries and the looming possibility of a U.S. recession. Initially, Washington imposed 20% tariffs on imports from the European Union, later reduced to 10% under a 90-day pause announced on April 9. Switzerland, not an EU member, faces a steeper 31% levy once the pause concludes. Additional duties on imported drugs have also been threatened, potentially harming the Swiss pharmaceutical industry, which showed strong growth in the fourth quarter.

In contrast, the European Union's ReArm initiative, launched in March, has provided a boost to EU banks. This initiative aims to relax regional fiscal rules, encouraging borrowing to increase defense spending.

Banco Santander and UBS have differing exposures to the U.S. market. Banco Santander is a significant auto lender in the U.S. and is expanding through a partnership with Verizon; however, only about 9% of its total profits for 2024 came from the U.S. For UBS, the U.S. represents a crucial market for its global wealth management division, with approximately half of its invested assets concentrated in the Americas region last year, according to its annual report.

UBS's outlook is further complicated by potential new capital requirements from Swiss authorities, following its acquisition of Credit Suisse, which also brought a substantial U.S. presence. The bank anticipates further clarity on these guidelines next month. The strength of the Swiss franc, a traditional safe-haven asset, has appreciated by around 8% against the U.S. dollar since the tariffs were introduced, potentially impacting UBS's profitability. The strong franc could exacerbate existing pressures on Swiss exports and contribute to deflation, possibly leading the Swiss National Bank to make further interest rate cuts. The bank had already reduced interest rates to 0.25% in March.

The European Central Bank is also expected to cut its key deposit facility rate by a quarter point at its upcoming meeting, bringing it to 2.25%. This potential rate cut follows the ECB's March statement that its monetary policy was "becoming meaningfully less restrictive," a signal interpreted by some analysts as a cautious approach to further rate reductions. Declines in national interest rates generally put pressure on local lenders' net interest income from loans.