While most banks still have plenty of liquidity, a growing segment of financial institutions is seeing their lending obligations outpace deposits, and sometimes at a rapid pace.
More than 85% of more than 800 U.S. commercial banks saw increases in their loan-to-deposit ratios between the fourth quarter of 2021 and the fourth quarter of 2022, according to a Janney analysis of FDIC call-report data. At close to a third of the banks, the loan-to-deposit ratio increased by at least 10 percentage points.
A decline in deposits at many banks is putting pressure on loan-to-deposit ratios, a key metric of bank liquidity. Even as loan demand wanes in many categories, loan-to-deposit ratios are rising at some banks. Banks with higher loan-to-deposit ratios may face challenges if they run into unexpected funding needs.
“We’ve seen a continual slew of banks on their earnings calls kind of raise the white flag and say they’ve moved from a position of asset sensitivity to liquidity sensitivity as our liquidity guideline,” said Bob Warnock, director at Curinos, a financial services research firm.
Banks with between $3 billion and $10 billion of assets have seen the sharpest rises in their loan-to-deposit ratios since last year, according to Curinos. Some banks have reported swings of between 15 and 25 percentage points over the past year.
Unity Bancorp in Clinton, New Jersey, currently has a loan-to-deposit ratio of 118%, up from 104% at the end of 2020. In an effort to attract more deposits, the $2.4 billion-asset bank opened a branch in Lakewood, New Jersey, late last year, and had plans to open two more branches in 2023.
Banks that want to boost their loan-to-deposit ratios by raising deposits will have to make certain sacrifices in the short term, Warnock said.
“It’s too late to play defense right now because it’s going to degrade your operating earnings and your equity,” Warnock said.
Consistent interest-rate hikes by the Federal Reserve have forced banks to boost the own rates they offer to depositors. The race for deposits at banks large and small heated up last summer, when banks — concerned they would lose depositors if they moved too slowly — began to meaningfully boost the rates they paid. Almost 20% of banks offered to pay savings rates of 2% or more last month, up from just 1% a year prior, according to Curinos data.
“Banks who were kind of asleep at focusing on those core accounts have had to wake up and be more proactive,” said Chris Marinac, director of research at Janney. “There are some banks that really focused on relationships, and they have to work harder to keep those relationships and pay them more, but they still have them.”
Deposits at U.S. commercial banks fell to $17.6 trillion this month, down from more than $18 trillion a year ago. Banks are facing deposit competition from securities such as Treasuries, which often offer higher returns than traditional bank accounts.
Bank executives expect loan demand to be weaker in 2023, but persistent inflation is helping to keep demand alive. When goods and services cost more, customers must take out larger balances to afford them. And those bigger loan balances can put more pressure on banks’ liquidity.