Loan-To-Deposit Ratios For Largest U.S. Banks Slide In Q3

by Trefis Team
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Loan-to-deposit ratios (LDRs) for the largest U.S. banks have yet to recover from the steady decline that has been witnessed since 2010, even though the average figure for the U.S. banking industry has been upbeat over the last few quarters thanks to the Fed’s rate hike process. This is primarily because total deposits for the largest banks continue to grow at a faster rate than loans – as opposed to comparatively slower deposit growth for the U.S. banking system as a whole.

The LDR ratios for the 5 largest banks ranges from around 65% for JPMorgan Chase and Citigroup to well over 80% for U.S. Bancorp. The significantly diversified business models for JPMorgan and Citigroup (both of which have large custody banking divisions) is primarily responsible for their relatively low LDR figures, while U.S. Bancorp’s traditional loans-and-deposits business model explains its higher LDR figure.

We maintain a price estimate of $75 for Citigroup’s shares, which is slightly above the current market price.

The table below captures the changes in LDRs for these banks over the last five quarters and is based on numbers reported by these banks in their quarterly SEC filings. The average figure for the top 5 banks is obtained by taking the ratio of the total loans across these banks with the total deposits for these banks. Notably, Citigroup stands out here with its improved LDR figure for Q3 – primarily due to the fact that the bank’s huge balance of foreign loans and deposits fluctuates a lot from one quarter to another in tandem with exchange rate changes.

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.

The Fed’s ongoing rate hike process has improved the interest rate environment – helping deposits grow at a slower rate than loans. This is in contrast to the rapid deposit growth seen over 2011-2016, when low interest rates led to more cash being parked by individuals and institutions with banks. As higher interest rates provide investors with more lucrative investment options, this has led to slower growth in deposits. However, this trend has yet to be seen for the largest U.S. banks – something we believe is because customers are shifting their cash from smaller banks and credit unions to larger banks. This shift is most likely because account holders would like to benefit from the increased convenience and security the larger banks offer, especially in terms of online/mobile banking as well as payments and transfers. Once this trend settles down, the largest banks shuold also begin to see an overall increase in LDR figures.

The chart below shows Citigroup’s consumer banking deposits over the years and our forecast for it going forward. You can understand the impact of changes in these deposits on our estimate for Citigroup’s share price by modifying this chart.

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

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