Funding lending activities through deposits is a prudent strategy – as opposed to short-term capital markets fundraising products. The loans-to-deposit (LTD) ratio provides an indication of how exposed to alternative funding strategies banks are.
Last year, western European lenders had the highest regional average LTD figure of 125.39%. However, based on a sample of 882 banks, this figure has now declined to 116.72%, leaving central Asian banks with the largest ratio – an average of 119.87%. Third highest was the Latin American region, which saw average LTD ratio climb from 98.94% in 2011 to 112.33% this year as a result of high levels of lending.
Western Europe has by far the highest number of banks with an LTD ratio of more than 125%, with 81, compared with 14 from central and South America. It also has far more in the 100% to 125% bracket, with 57, compared with next-highest North America’s 20. These figures may be somewhat skewed by the fact that Nordic banks tend towards high LTD ratios because they rely heavily on wholesale funding rather than deposits. However, the risk this poses is offset by a strong domestic pension fund industry.
High LTD ratios can certainly be risky, but low values may also not be a good thing either, as overly low values may indicate that a bank is not lending as much as it could, and by extension is not producing the profits it has the potential to.
This year’s lowest LTD ratio is the Caribbean region with 70.7%. North America is second smallest with 80.3%, down from 88.89% in 2011. The Middle East also saw a decline, from 93.25% to 84.87%.
All Chinese banks have an LTD ratio less than 75% as regulations mandate that bank loans must be below the value of retail deposits that are not insured in the country.
