A Look At Loan-To-Deposit Ratios At The Country's Largest Banks

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Includes: BAC, C, JPM, USB, WFC
by: Trefis

Since early 2011, the country’s banking sector has felt the impact of the prolonged low interest rate environment on profits, with tightening net interest margins putting pressure on revenues. Although loan volumes at banks have grown steadily over the period, the rate of growth has been relatively sluggish. The situation has only been made worse by the fact that retail and institutional investors are parking a bulk of their cash in bank deposits due to the lack of attractive investment options. Taken together, this has resulted in a marked reduction in loan-to-deposit ratios across banks, with deposits growing at a much faster rate than loans over the period.

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.

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.

The table below shows how the banks actually fare in this regard for each quarter since Q1 2011. 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 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
U.S. Bancorp 96.7% 92.1% 92.5% 90.7% 90.3% 90.8% 91.0% 90.9% 90.6% 91.6% 91.7%
Bank of America 91.8% 88.7% 87.1% 84.7% 82.8% 84.3% 84.6% 84.7% 83.6% 82.2% 80.9%
Wells Fargo 87.6% 80.9% 79.9% 78.6% 77.0% 76.7% 74.8% 73.8% 72.3% 72.1% 71.0%
Citigroup 73.8% 74.4% 72.3% 71.0% 69.9% 69.9% 69.5% 70.0% 68.9% 68.8% 69.3%
JPMorgan Chase 74.0% 65.1% 66.3% 65.9% 64.0% 63.4% 62.0% 60.5% 58.8% 58.7% 59.3%

The first 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 loans almost 92 cents for every dollar in deposits it has, the figure for JPMorgan is below 60 cents to a dollar. This is justifiable 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 that are at the bottom of the table –- JPMorgan and Citigroup -– have significant custody banking services, which require them to keep more of their deposits liquid.

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, and its deposits have seen notable growth over the last four quarters, thanks to which it enjoys a loan-to-deposit ratio of over 80%. On the other hand, Wells Fargo has witnessed a faster growth in deposits over the period than any of its peers, because of which its loan-to-deposit ratio has steadily fallen to 71%.

The Federal Reserve initiating its tapering plan early this year, and interest rates have begun to show signs of an increase. Although the banks’ net interest margin figures have yet to reverse the declining trend, the improvement in loan-to-deposit ratios for U.S. Bancorp as well as JPMorgan over the first half of the year can be seen as a positive sign. As the Fed eventually hikes benchmark rates (most likely early next year), a normalization in the interest rate environment should see the loan-to-deposit ratios at all the banks increase steadily in the future.

Disclosure: No positions.