How Have The Loan-To-Deposit Ratios For U.S. Banks Trended Over Recent Quarters?

September 9th, 2016 by Trefis Team
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The five largest U.S. banks have loan-to-deposit ratios (LDRs) ranging from 65% for JPMorgan Chase to 91% for U.S. Bancorp. The significantly diversified business models for JPMorgan as well as Citigroup (including a large custody banking division for both of them) are primarily responsible for their low LDR figures.

CB_QA_LDR_16Q1

The table below captures the changes in LDRs for these banks over the last five quarters. Notably, while the figure increased each quarter for Wells Fargo and JPMorgan, it shrank sequentially for Bank of America and Citigroup. The difference in trends can be explained by the fact that a push in commercial lending has helped Wells Fargo and JPMorgan report a faster growth in loans compared to deposits over the last five quarters, while the Bank of America and Citigroup have seen sub-par loan growth due to the negative impact of a run-off in legacy mortgage portfolios.

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CB_QA_LDRChange_16Q2

 

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 once the Fed resumes the rate hike process most likely early next year.

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

See full Trefis analysis for U.S. Bancorp | Wells Fargo | JPMorgan | Bank of America | Citigroup

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