How Is The Loan-To-Deposit Ratio For U.S. Banks Expected To Change In The Near Future?

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The loan-to-deposit ratio (LDR) for the largest U.S. banks fell steadily for nearly every quarter between 2010 and 2014, as deposit growth outpaced loan growth during a period marked by record low interest rates. But the trend began to reverse in 2015, as expectations of a Fed rate hike gave a boost to loan growth. While Citigroup and Bank of America reported a quarter-on-quarter reduction in LDR figures in Q1 2016, JPMorgan has seen a sizable increase in this figure over the last five quarters.

CB_QA_LDRChange_16Q1

The five largest U.S. banks have LDRs ranging from 65% for JPMorgan Chase to 91% for U.S. Bancorp. The significantly diversified business model for JPMorgan as well as Citigroup (including a large custody banking division for both of them) is primarily responsible for their low LDR figure.

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CB_QA_LDR_16Q1

The loan-to-deposit ratio is the ratio of a bank’s total outstanding loans for a period to its total deposit balance over the same period. So an LDR figure of 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 significant cash on hand for contingencies. A combination of prudence and regulatory requirements suggests that for a traditional bank, the LDR should be around 80-90%. With a business model that relies heavily on traditional loans-and-deposits services, U.S. Bancorp has an LDR figure that appears to be optimal. As for the other banks, the ratio seems to be inversely proportional to the degree of diversification in the business model – the more diversified the bank in terms of offerings, the lower the LDR figure.

With the Fed initiating its rate hike process last December, benchmark interest rates are expected to gradually reach pre-recessionary levels over coming years. As higher interest rates will provide investors with more lucrative investment options, this will lead to slower growth in deposits in the future even as loans continue to grow largely at current rates. This will result in an overall increase in LDR figures.

See the links below for more information about the 5 largest U.S. commercial banks:

Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment/ ask questions on the comment section
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to the full Trefis analysis for U.S. Bancorp | Wells Fargo | JPMorganBank of America | Citigroup

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