The biggest U.S. banks including JPMorgan Chase & Co. and Citigroup Inc. are lending the smallest portion of their deposits in five years as cash floods in from savers and a slow economy damps demand from borrowers.
The average loan-to-deposit ratio for the top eight commercial banks fell to 84 percent in the fourth quarter from 87 percent a year earlier and 101 percent in 2007, according to data compiled by Credit Suisse Group AG. Lending as a proportion of deposits dropped at five of the banks and was unchanged at two, the data show.
Consumers and companies are reluctant to take on risk until they see more signs that business is improving, even as the Federal Reserve maintains near-record low interest rates designed to fuel growth. Putting more of the unused money to work could boost profit and help turn around the U.S. economy, whose 0.1 percent annualized drop in the fourth quarter was its worst showing since 2009.
“You’ve got to see sustainable economic activity before lending picks up,” said Paul Miller, an analyst who follows the industry at FBR Capital Markets Corp. Until then, banks will be stuck with idle cash, Miller said. “There’s no place for them to put it.”
Bankers are also holding back as regulators and investors pressure them to curtail risks that fueled the 2008 global credit crisis. They’re facing a barrage of new federal rules and capital requirements that require them to hold more funds in reserve and evaluate borrowers more stringently, amid concern that loans made at current rates may turn into losers when more normal levels return.
“They’re just kind of stuck, that’s why right now banks are keeping things very, very short,” said Nancy Bush, an analyst and contributing editor at SNL Financial LC, a bank-research firm in Charlottesville, Virginia. “The banking outlook is maddening, it’s hard to see where that real inflection point is.”
JPMorgan, the biggest U.S. bank by assets, had the lowest year-end ratio in the group at 61 percent, down from 66 percent in 2011. Citigroup’s ratio fell to 70 percent from 76 percent last year and Bank of America Corp. slid to 84 percent from 92 percent the previous year, a five-year low at both firms. SunTrust Banks Inc. decreased to 94 percent from 96 percent.
Loan-to-deposit ratios measure how enthusiastic bankers are about lending, with higher numbers signaling a more aggressive stance. Analysts including Bush and Miller say the right number can vary depending on what kind of businesses and loans an institution holds and that firms such as Citigroup and JPMorgan, which have large investment banks, look very different from more traditional lenders.
“There really is no magic number,” Bush said. “You just don’t want to see a bank over 100 percent,” which may indicate the lender is relying on outside sources for short-term funds to finance loans, Bush said.
Ratios at Wells Fargo & Co. and U.S. Bancorp remained unchanged from the previous year at 84 percent and 90 percent respectively, compared with 110 percent and 117 percent five years earlier, the data show. PNC Financial Services Group Inc. was the only bank to post a year-over-year increase to 87 percent from 85 percent, according to the lender. It was 83 percent in 2007, PNC said.
The eight banks account for more than half of all U.S. loans and about 48 percent of all deposits.
Falling ratios don’t mean banks have shut the lending spigots. Measured in dollars, total loans rose in the fourth quarter for the biggest eight lenders to $3.9 trillion.
At the same time, total deposits also reached a five-year peak of $5.04 trillion, according to the data, leaving hundreds of billions of dollars of potential fuel unused. Hypothetically, JPMorgan could make more than $260 billion in additional loans and still not exceed the 84 percent average loan-to-deposit ratio of its peers, based on its current level of deposits.
The funds piled up at banks even as the economy sputtered, with annualized growth topping 3 percent during only three quarters since the middle of 2009.
“People are worried right now,” said Paul Ashworth, chief U.S. economist at Capital Economics Ltd. in Toronto. “No one wants to borrow money, everyone wants to hoard it.”
For small businesses, the economy isn’t improving enough to justify the risk, said William Dunkelberg, chief economist for the Washington-based National Federation of Independent Business. Those that do want to borrow aren’t always credit-worthy, said Bob Seiwert, vice president at the American Bankers Association, a trade group based in Washington.
“Bankers out there are drowning in liquidity -- we’re dying to make loans,” Seiwert said. The challenge is to find qualified borrowers, “and in this economy, there just aren’t that many,” he said.
The share of small firms turned down by lenders in the fourth quarter rose to 22 percent at the end of 2012 from 10 percent in the same period in 2011, according to Minneapolis-based Barlow Research Associates Inc. Among midsized firms, 9 percent were denied credit, triple the level in 2011.
JPMorgan saw growth on “both sides of the equation,” said Mark Kornblau, a bank spokesman. “Deposits are up significantly in recent years as we’ve added new branches, offices and bankers. In 2012, we had over $1.8 trillion in capital raised and credit provided to consumers, businesses, and communities.”
Chief Executive Officer Jamie Dimon, 56, said in his annual letter to shareholders last year that the cumulative impact of new regulations made credit less available and helped make “the recovery worse than it otherwise would have been.”
At No. 2-ranked Bank of America, the loan-to-deposit ratio was skewed lower as the Charlotte, North Carolina-based lender got out of some businesses, sold unwanted loans and allowed others to expire, according to Jerry Dubrowski, a spokesman. CEO Brian T. Moynihan, 53, is paring risk after the Countrywide mortgage unit drew fire from regulators for overly aggressive lending that cost the company more than $40 billion.
Simultaneously, the bank’s commercial and corporate clients held on to cash and boosted deposits while waiting for a meaningful improvement in the economy, Dubrowski said. The past two quarters have seen growth in commercial loan balances as demand improves, he said.
Tim Sloan, Wells Fargo’s chief financial officer, told investors Feb. 13 that the flood of deposits late in 2012 will drive loan growth this year, and he sees signs that’s already happening. The bank’s typical loan-to-deposit ratio has been about one to one, and Wells Fargo is “eager to make new loans,” said Ancel Martinez, a spokesman for the San Francisco-based company, run by CEO John Stumpf.
“We would anticipate as the economy improves and business confidence increases, we will return to a more normalized loan to deposit ratio,” Martinez said.
SunTrust’s Mike McCoy said the Atlanta-based bank’s ratio improved in last year’s second and third quarter, dropping in the final three months as the company sold loans to clean up its balance sheet. “We remain committed to making loans to qualified borrowers, and we continue to have sufficient liquidity and capital to support loan growth,” McCoy said.
Mark Costiglio at New York-based Citigroup declined to comment. The bank, ranked third by assets, is trimming thousands of employees and shaking up operations as CEO Michael Corbat, 52, seeks to reduce expenses and improve profit. Average deposits at the North America retail unit climbed 9 percent last year while commercial loans increased 23 percent.
Spokesmen for the other lenders including PNC, Capital One Financial Corp. and U.S. Bancorp had no comment or didn’t respond to inquiries.
Drags on lending include the prospect that interest rates will rise, cutting into the value of loans made while rates hover near record lows.
“The added interest-rate exposure may itself be a meaningful source of risk for the banking sector and should be monitored carefully,” Federal Reserve Governor Jeremy Stein said in a speech in St. Louis on Feb. 7.
Federally insured banks increased their holdings in mortgage pass-through securities with a maturity longer than 15 years to $566.3 billion in the third quarter from $479.4 billion in the same period the year prior, according to the Federal Deposit Insurance Corp. website.
New regulations also impede lending, said Deron Weston, a principal at Deloitte & Touche LLP based in Atlanta. The changes include holding more capital to cushion losses, something demanded by the Federal Reserve and the new Basel 3 international standards, as well as stricter standards for approving and servicing mortgages.
“It is unfortunate when I hear some bankers say that they will stop offering mortgages if they can’t make them the same way that they always have,” said Federal Reserve Governor Elizabeth Duke in a speech on Feb. 5 in Duluth, Georgia. “Community bankers can respond within the new environment by creating products” that match customer needs.
Banks eased their standards and demand for prime residential mortgages, business and auto lending has strengthened, according to a Feb. 4 Fed survey of senior loan officers. They may still have to contend with fallout from Washington’s fiscal battle as President Barack Obama seeks to avert $1.2 trillion in spending cuts from the so-called budget sequester that starts to take effect on March 1.
To counter weak loan demand, Regions Financial Corp., Alabama’s biggest bank, has focused on specialty niches that are growing and attracting businesses backed by private equity, as well as industries that have rebounded such as energy, health care and technology.
With many borrowers on the sidelines, “you have to capture more market share,” said John Asbury, head of business services at Regions in Birmingham. “You do not have the rising tide like you used to, you have to go out and take it.”