Q3 2014 U.S. Banking Roundup: Loan-To-Deposit Ratio
A key metric for the banking sector – one that has taken a notable hit over recent years – is the loan-to-deposit ratio. While the Federal Reserve’s decision to hold benchmark rates at record lows since the economic downturn gave the banks’ loan portfolios a boost in 2010-2011, the subsequent drying up of lucrative investment options resulted in deposit growth outpacing loans – leading to a marked reduction in loan-to-deposit ratios across banks since 2011. This, in turn, has manifested itself as a reduction in net interest margins for all U.S. banks over the last three years – a situation unlikely to improve until the Fed hikes interest rates.
In this article, which is a part of our series on key metrics comparing the country’s five largest commercial banks – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) – we offer insights into their loan-to-deposit ratios and also highlight the expected change in this metric over subsequent quarters.
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The loan-to-deposit ratio, as its name suggests, is the ratio of a bank’s total outstanding loans for a period to its total deposit balance over the same period. So a loan-to-deposit ratio of 1 (100%) indicates that a bank lends a dollar to customers for every dollar that it brings in as deposits. But this also means that the bank doesn’t have cash on hand for contingencies. A combination of prudence and regulatory requirements suggests that a loan-to-deposit ratio of around 80-90% would be a good benchmark, depending on the bank’s business model.
The table below shows how the banks actually fare in this regard for each quarter since Q1 2012. The figures have been compiled using data provided by the banks in their quarterly SEC filings, and takes the ratio of the average loans outstanding with the average total deposits for each quarter.
| Q1 2012 | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 | Q2 2013 | Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | |
| U.S. Bancorp | 92.1% | 92.5% | 90.7% | 90.3% | 90.8% | 91.0% | 90.9% | 90.6% | 91.6% | 91.7% | 90.0% |
| Bank of America | 88.7% | 87.1% | 84.7% | 82.8% | 84.3% | 84.6% | 84.7% | 83.6% | 82.2% | 80.9% | 79.8% |
| Wells Fargo | 80.9% | 79.9% | 78.6% | 77.0% | 76.7% | 74.8% | 73.8% | 72.3% | 72.1% | 71.0% | 69.3% |
| Citigroup | 74.4% | 72.3% | 71.0% | 69.9% | 69.9% | 69.5% | 70.0% | 68.9% | 68.8% | 69.3% | 69.1% |
| JPMorgan Chase | 65.1% | 66.3% | 65.9% | 64.0% | 63.4% | 62.0% | 60.5% | 58.8% | 58.7% | 59.3% | 58.4% |
One thing that stands out from this table is the stark differences in the loan-to-deposit ratios for the five largest banks. While U.S. Bancorp lends almost 90 cents for every dollar in deposits it has, the figure for JPMorgan is just 58 cents to the dollar. This is due to the fact that U.S. Bancorp has an extremely risk-averse business model that focuses almost entirely on traditional banking services, and its regional focus also supports its high loan-to-deposit ratio. On the other hand, the two banking groups at the bottom of the table – JPMorgan and Citigroup – have significant custody banking services, which require them to keep more of their deposits liquid. Citigroup has seen the lowest change in this figure over the years, as its geographically diversified business model has allowed it to leverage its presence in key developing nations to grow both deposits as well as loans at roughly the same rate.
The trends shown by the loan-to-deposit ratio figures for Bank of America and Wells Fargo can be better understood by reading this table in tandem with those we detailed as a part of our recent articles on the deposit bases and loan portfolios for these banks. Bank of America has more outstanding loans than any of its competitors, which is why it enjoys a loan-to-deposit ratio of around 80% despite recording notable growth in its deposits over the last five quarters. On the other hand, Wells Fargo has witnessed faster growth in deposits over the period than any of its peers, because of which its loan-to-deposit ratio has steadily fallen to under 70% from more than 80% in Q1 2012.
The chart below represents the changes in loan-to-deposit ratio since Q1 2011, and makes it easier to comprehend the trend for each bank with respect to its peers.
The Federal Reserve has already announced the end of its asset purchase program and has hinted at a hike in interest rates early next year. Once the interest rates are actually freed up, we expect the banks’ loan portfolios to continue to grow around current rates even as the rate of growth of deposits falls considerably. This will allow the loan-to deposit ratios to begin improving starting late next year. Until then, one can expect the figure to continue to decline, albeit at a slower rate than what was seen over 2012-2013.
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