Magazine article American Banker

Continuing Need Seen to Use Capital Markets for Meeting Loan Demand

Magazine article American Banker

Continuing Need Seen to Use Capital Markets for Meeting Loan Demand

Article excerpt

A newly released analysis of Federal Reserve data shows banks losing capacity to meet loan growth with deposits, suggesting that many institutions must use capital markets to keep pace with double-digit loan growth.

In 1994, the 500 largest U.S. commercial banks on average saw their ratio of loans and leases to deposits surge by 4 percentage points, to 85%, according to a survey of call report data performed by Donaldson, Lufkin & Jenrette. Over the two years ended Dec. 31, the increase was 7 percentage points.

"Loan demand is up, while deposit (growth is) not quite as active," said Allerton Smith, a bank bond analyst at Donaldson Lufkin. "Wholesale funding is filling that gap."

While experts generally appear comfortable that banks are not assuming undue liquidity risks by turning to nondeposit funding, the trend does raise questions about costs and profitability. Banks that fail to pass along higher funding costs to borrowers will find loan growth a hollow exercise.

A separate study recently released by Bear, Sterns & Co. underscores the point that balance sheet loan growth remains strong.

The average loan-to-asset ratio in the 57-bank coverage universe at Bear Stearns was 61.3% at the first quarter of 1995, up 70 basis points for the quarter and up 310 basis points for the 12 months.

"Loan growth is back," said Bear Stearns analyst Ann Robinson. "This reflects the turn in the credit cycle."

Banks having between $5 billion and $20 billion of assets showed the greatest deposit leverage at yearend, said Donaldson Lufkin. On average, the 38 institutions in that category posted a 92% ratio of loans to deposits - a 9 percentage-point surge from the end of 1992. Following closely in deposit leverage were the 78 banks having between $5 billion and $10 billion of assets. Their average ratio of loans to deposits ballooned by 13 percentage points over the two years ended Dec. …

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