Deposit Growth

Deposit Growth

As previously discussed, deposits are the most common, and almost always the cheapest, source of loanable funds for banks. Accordingly, deposit growth gives investors a sense of how much lending a bank can do. There are some important factors to consider with this number. First, the cost of those funds is important; a bank that grows its deposits by offering more generous rates, is not in the same competitive position as a bank that can produce the same deposit growth at lower rates. Also, deposit growth has to be analyzed in the context of loan growth and the bank management's plans for loan growth. Accumulating deposits, particularly at higher rates, is actually bad for earnings if the bank cannot profitably deploy those fund.

Loan Growth

For many banks, loan growth is as important as revenue growth to most industrial companies. The trouble with loan growth is that it is very difficult for an outside investor to evaluate the quality of the borrowers that the bank is serving. Above-average loan growth can mean that the bank has targeted attractive new markets, or has a low-cost capital base that allows it to charge less for its loans. On the other hand, above average loan growth can also mean that a bank is pricing its money more cheaply, loosening its credit standards or somehow encouraging borrowers to move over their business.

Loan/Deposit Ratio(liquidity)

If the ratio is too high, it means that banks might not have enough liquidity to cover any unforseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be.

The loan/deposit ratio helps assess a bank's liquidity, and by extension, the aggressiveness of the bank's management. If the loan/deposit ratio is too high, the bank could be vulnerable to any sudden adverse changes in its deposit base. Conversely, if the loan/deposit ratio is too low, the bank is holding on to unproductive capital and earning less than it should.

the loan to deposit ratio is used to calculate a lending institution's ability to cover withdrawals made by its customers.

Efficiency Ratio

A bank's efficiency ratio is essentially equivalent to a regular company's operating margin, in that it measures how much the bank pays on operating expenses, like marketing and salaries. By and large, lower is better.

Capital Ratios

There are a host of ratios that bank regulators and investors use to assess how risky a bank's balance sheet is, and the degree to which the bank is vulnerable to an unexpected increase in bad loans. A bank's Tier 1 capital ratio takes a bank's equity capital and disclosed reserves and divides it by the bank's risk-weighted assets, (assets whose value is reduced by certain statutory amounts, based upon its perceived riskiness).