July 23, 2022 / VOLUME NO. 219

The Deposit Glut Is Over

Banks have begun to report second quarter earnings, with many reporting deposit outflows.

For The PNC Financial Services Group, average deposits dropped 1.5% in the second quarter compared to the first quarter, due to declines in the Pittsburgh-based bank’s commercial and asset management groups. That aligns with Federal Reserve data that finds industry deposits declining 2.4% in June, on the heels of a 1.1% slide in May. 

Bank investors may look at those data points with concern, given today’s uncertain economic environment. But those singular facts don’t tell the complete story.

It wasn’t too long ago that banks were experiencing unprecedented liquidity growth, with deposits soaring by a whopping 20.8% in 2020 and another 11.8% in 2021, according to the Fed. Short-sighted investors may look at recent declines and miss the forest for the trees, says Chris Marinac, director of research at Janney Montgomery Scott. 

“We have excess liquidity in the financial system. It has to get to work,” says Marinac. “It’s not healthy for it to sit there forever.” On the heels of tremendous growth, a decline in deposits was inevitable — and perhaps necessary. 

The loan-to-deposits ratio for the industry hit a low in the fourth quarter 2021, at 57.1%, according to a March 2022 report from FitchRatings. That’s well below the 20-year average of 81%. The ratio serves as an indicator of how much of its liquidity a bank has put to work, lending it out to customers. Lending activity has been tepid; banks will want to see that pick up. And deposits will inevitably decline, as companies and consumers start to spend more, and stimulus continues to wear away. 

That appears to be the picture for PNC in the second quarter. Average loans grew 5%, driven by commercial loan growth. The bank’s loan-to-deposits ratio rose to 71%, from 65% at the end of the first quarter. 

In PNC’s recent earnings call, Chairman and CEO William Demchak was asked if the bank’s loan-to-deposits ratio would return to its pre-Covid state, at 83%. 

“Our intention here is to keep deposits and grow deposits, if we can without having to be aggressive on rate,” said Demchak. “Inside of that, we'd like to grow loans. And if we manage to do [those] two things there and grow loan-to-deposits to 83%, we'll be making a lot of money given the fee mix we get when we grow loans.” 

Marinac sees an industry in transition, coming off the deposit highs of the pandemic. “We’re changing gears. That’s not good or bad; it’s just where we are,” he says. The second quarter was healthy for loan growth, Marinac adds. “Expect to see that liquidity start to drain.” 

The last few years have shown that the banking environment can change on a dime. How will financial institutions adapt as the landscape continues to shift? Where will growth come from, and will banks look to buy other banks to generate stronger growth? We’re planning the 2023 Bank M&A Survey right now. Loan and deposit growth, the regulatory space and the state of the economy — all of these factors will come to bear in this important research. With that in mind, I’d like to know your thoughts and concerns as you assess your own bank’s growth trajectory. Shoot me an email at [email protected] and let me know what’s on your mind.

Emily McCormick, vice president of research for Bank Director

Chief Risk Officers Help Community Banks Navigate Uncertain Environment

Bank boards can leverage chief risk officers to identify risks and opportunities, break down information silos and increase collaboration within their institutions.

If anything changed in the pandemic, perhaps it was a better understanding of how [the risk group] could better support the organization.” — Karin Taylor, Alerus Financial Corp.

Kiah Lau Haslett, managing editor for Bank Director


Creating a Winning Scenario With Collaborative Banking

Collaborative banking allows institutions to connect with customer-facing fintechs in a secure, compliant marketplace.


3 M&A Risks to Consider

Having a proper M&A plan in place to direct due diligence can help you execute the transaction seamlessly and with success.

The Growing Menace of Social Engineering Scams

Banks have struggled to address social engineering scams, where customers are tricked into executing payment themselves.

The Easiest Way to Launch a Digital Bank

When it comes to innovation, why do banks start with the core, which often offers the least amount of flexibility and the most friction?