Least Lending by US Banks in 5 Years
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consumer companies, including some of the biggest US banks seem to shy away from making loans as they are lending the smallest portion of their deposits. These companies are reluctant to take on the risk until they see more signs of improving business and macroeconomic conditions. This is despite the Fed’s continuous efforts to stimulate the US economy by maintaining record low interest rates. These low rates will make borrowing cheap, and the more unused money is put to work, the more profits will boost the US economy in a turnaround.
Banks and other consumer financial companies are not helping the Fed in its efforts. US banks are under pressure from investors and regulators to curtail the risk that was behind the 2008 credit crunch. Upcoming regulatory and capital requirements are requiring the banks to hold more cash in reserves and evaluate borrowers more strictly. The average loan-to-deposit ratio for the top eight commercial banks in the US fell 84% at the end of 2012, compared to 87% a year ago and 101% in 2007. This is the lowest in the past five years, according to the data compiled by Credit Suisse. At the same time, average deposits of $5.04 billion touched a five-year peak.
JPMorgan (NYSE: JPM), which is the biggest bank by assets in the US, reported the lowest year end ratio of 61%, compared to a 66% loan-to-deposit ratio in 2011. At the same time, JPM reported strong growth in deposits during the year 2012. The bank reported consumer & business banking average total deposits of $404 billion, up 10% from a year ago. According to Bloomberg, JPM can make another $260 billion in additional loans and still not exceed the 84% average loan-to-deposit ratio of its peers. This is the amount of excess liquidity banks are downed in.
A similar trend was witnessed when Bank of America (NYSE: BAC) reported its performance for the full year 2012. Its loan-to-deposit ratio of 84% for 2012 came down from 92% in the previous year. The 84% loan-to-deposit ratio for BAC is also its five year low. America’s number two bank’s loan to deposit ratio is skewed lower as Bank of America divested some businesses, got rid of unwanted loans and allowed others to expire.
At the same time, Bank of America’s commercial and corporate clients boosted deposits and held on to cash while waiting for an economic recovery. The past two quarters have seen solid growth in commercial loans as demand improves. During the most recent quarter, Bank of America reported a 7% increase in its commercial loans and leases to $252 billion.
Similarly, Citigroup (NYSE: C) reported a decline in its loan-to-deposit ratio from 76% in 2011 to 70% at the end of the recent year. This is the lowest for Citigroup in five years. At America’s third largest bank by assets, average deposits increased 9% in its retail unit, while commercial loans increased 23%. The bank is aggressively pursuing an expense reduction program to improve its bottom line.
The loan-to-deposit ratio at Wells Fargo (NYSE: WFC) remained unchanged from the previous year at 84%, however, unlike its peers, Wells Fargo is keen to make new loans, says the bank’s spokesman. The bank posted strong figures when it reported its fourth quarter performance. While it is already considered America’s largest home lender, Wells Fargo's diversified business model and the growth in its deposits and loans are considered to be the reasons for such outperformance during 2012. The bank reported an average loan portfolio of $787.2 billion at the end of the fourth quarter, up 135 basis points over the linked quarter. Its core deposits grew 3.7% to $928.8 billion over the same time period.
I believe the top large US banks are missing on a big opportunity due to their reluctance to lend. I further believe this drag on lending will continue until interest rates rise. However, Wells Fargo’s eagerness to make new loans will result in the bank’s outperformance during the coming quarters. Therefore, I am bullish on Wells Faro.
equityfinancials has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!