Loan-to-deposit ratios (LDR) across the banking industry have declined steadily for the last couple of years, but National Building Society(NBS) stands out in this key metric for the year ended 2017 as it registered a loan-to-deposit ratio of 115%.
The LDR is the ratio of a bank’s total outstanding loans for a period to its total deposit balance over the same period. If the ratio is too high (more than 100%) as in NBS’s case, it means that NBS is lending more than its deposits and may not have enough liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too low, banks may not be earning an optimal return on its deposit. Prudence in lending suggests that an LDR of around 80-90% is a good target, depending on the bank’s business model.
NBS’s LDR reflects that its loan portfolio grew at a faster rate than its deposits base in 2017. However, the trend could steadily halt in the near future since deposits across the sector continue to rise faster than loans. But this is only subject to whether NBS continues with its aggressive lending practices.
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What is the cause of NBS’s aggressiveness?
NBS’s rapid growth of its loan portfolio is as result of other building societies and banks involved in mortgage financing growing more aggressive on mortgage lending as well. Accordingly, NBS is just responding to competition (although it is overdoing it). Although the default rates are coming down, the systemic risk for NBS might increase if the economic situation further gets worse than it is now and borrowers start to default.