Q2 2015 U.S. Banking Review: Loan-To-Deposit Ratio

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The Federal Reserve’s decision to keep interest rates around record lows since the economic downturn has played a crucial role in ensuring strong growth in loans for U.S. banks over recent years. But the move also led to a drying up of lucrative investment options for investors – in turn helping deposits grow at a faster rate than loans. This has resulted in a marked decline in loan-to-deposit ratios across the industry since 2011. To put things in perspective, data compiled by the Federal Reserve indicates that the loan-to-deposit ratio for the U.S. commercial banking industry has fallen from a peak level in excess of 100% in late 2008 to 77% now. [1]

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 changes in this metric over subsequent quarters.

See our full analysis for Bank of AmericaCitigroupJPMorganWells FargoU.S. Bancorp

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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 for a traditional bank the loan-to-deposit ratio should be around 80-90%.

The table below shows how the banks actually fare in this regard for each quarter since Q1 2013. 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.

Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15
U.S. Bancorp 90.8% 91.0% 90.9% 90.6% 91.6% 91.7% 90.0% 89.5% 89.0% 86.3%
Bank of America 84.3% 84.6% 84.7% 83.6% 82.2% 80.9% 79.8% 78.8% 77.2% 76.9%
Wells Fargo 80.9% 79.3% 78.5% 77.0% 76.5% 75.5% 73.9% 73.9% 73.5% 73.4%
Citigroup 69.9% 69.5% 70.0% 68.9% 68.8% 69.3% 69.1% 69.3% 70.6% 69.2%
JPMorgan Chase 63.4% 62.0% 60.5% 58.8% 58.7% 59.3% 58.4% 57.5% 56.7% 59.6%

One thing that stands out from this table is the stark difference 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 less than 60 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 giants JPMorgan and Citigroup have significant custody banking services, which require them to keep more of their deposits liquid. Notably, 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 deposits and loans at roughly the same rate.

The chart below represents the changes in loan-to-deposit ratios since Q1 2011, and makes it easier to understand the trends for each bank with respect to its peers. The trends can be better understood by reading this data in tandem with those we detailed as a part of our recent articles on the deposit bases and loan portfolios for these banks.

LDR 15Q2

The primary factor that will determine the trends in loan-to-deposit ratios is the timing of the Federal Reserve’s interest rate hike. With the uncertainty in global economic conditions making an increase in the benchmark rate unlikely this year, these ratios should continue to fall in Q3 and Q4. Once the interest rates are increased, however, we expect the banks’ loan portfolios to continue to grow around current rates even as the rate of growth in deposits falls considerably. This will allow the loan-to deposit ratios to begin improving starting early next year.

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Notes:
  1. Customized Chart for H.8 Assets and Liabilities of Commercial Banks in the United States, Federal Reserve Website []