Why loans are the most important earning asset for smaller banks



Large banks have a more diversified portfolio of earning assets

If we segregate banks according to their asset size, some very interesting trends emerge in terms of the percentage of loans as assets. The first important trend is that loans as assets are less important for larger banks. In other words, large banks tend to have a more diversified asset portfolio.

There are four banks with an asset size greater than $1 trillion. These banks are Wells Fargo (WFC), JP Morgan (JPM), Citibank, and Bank of America (BAC). For these banks, loans are nearly 45% of assets. There are 18 banks with asset books between $100 billion to $999 billion. These banks include some big names like US Bank (USB), Capital One, and PNC Bank. For these banks, loans are nearly 48% of total assets.

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The percentage of loans falls after a certain threshold

Even smaller banks with asset books between $50 billion to $99 billion have nearly 60% of their assets as loans. Very small banks with asset books between $500 million to $999 million come out the best. Such small banks are often concentrated in one state, a metropolitan area, or across a few towns. These banks have 66% of total loans as assets. Below this asset threshold, the importance of loans as assets starts to drop. Such small banks are often not featured in a broad ETF like the Financial Select Sector SPDR (XLF).

Loans fall after a certain threshold due to one primary reason. A small-sized bank means that the cost of deposits and other funds available are higher, which means higher rates on loans. Thus, it would be difficult for these banks to focus only on loans, so they have to look at other revenue sources too.


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