Part of the problem is that corporations haven’t made capital investments during the pandemic, limiting commercial and industrial loan demand. Banks say they’re optimistic about the post-pandemic economy as trends and economic activity appear robust compared to 2019. The only current concerns are lagging spending on travel and entertainment, though there are also some short-term supply-chain bottlenecks and inventory constraints to overcome. For these reasons, we believe the loan growth malaise is temporary.
In addition, much of the government stimulus sent to consumers has ended up in the bank. Consumers’ spending patterns have improved over the past 12 months, but they’ve also paid down loans and credit cards, further depressing loans outstanding.
Not only have loans decreased for the time being, but regulatory changes have increased the liquidity that banks need to have on hand and manage efficiently. Banks that might have loaned out over 90% of deposits in the past are aiming for a level closer to 75% today. But the industry isn’t even hitting this new, lower target. The industry’s loan-to-deposit ratio is currently at 60%, and one of the four largest banks is at a miserable 45%. That means there is a lot of capital on bank balance sheets just waiting to be invested.
In fact, we believe that excess funding is over $2.5 trillion. To fully deploy that much excess funding into loans could take more than four years, assuming loan growth returns to pre-pandemic levels of 3% to 4% annually. That’s at least four years or more that banks will be buying an elevated level of securities in the open market.
Learning From Japan’s History
Some investors have expressed concern that the US’s current low loan-to-deposit ratio might be forewarning economic duldrums because it mirrors the move Japan’s ratio made in the 1990s (Display).