Loan-to-deposit ratio remained weak in 2014



What’s the importance of the loan-to-deposit ratio?

The loan-to-deposit ratio (or LDR), sometimes called the credit deposit ratio, is the ratio between a bank’s total loans and total deposits. It essentially indicates two main things. First, it indicates that a bank has enough liquidity. If a bank has an LDR of more than one, it indicates that the bank lends more than it deposits and may have a liquidity problem in a downturn. Second, it indicates if a bank is earning an optimal return on its loans. Discounting for capital requirements, banks may want this ratio to be in the range of 75% to 90%.

Banking loan-to-deposit ratio continued to decline in 2014

The loan-deposit ratio may also indicate the demand for loans in the banking system. In response to the subprime crisis, the Federal Reserve unleashed quantitative easing. This led to a large amount of money in the banking system. Institutions and individuals increased deposits, as we saw earlier in this series. However, the economic recovery has been anemic despite some signs of growth toward the end of 2014. The demand for loans has not picked up meaningfully yet. Loans have also increased, but not at the same rate as deposits.

Most banks continue to see a fall in loan-deposit ratio

The Bank of America (BAC), Wells Fargo (WFC), and JPMorgan (JPM), three of the big four, have seen the LDR fall in 2014. The only bank among the big four that showed some resistance and an uptick in loan demand was Citicorp (C). Outside the big four, US Bank, a part of the Financial Select Sector SPDR (XLF), continued to have a strong LDR despite a minor blip in the third quarter of the year.

More From Market Realist