I am looking into investing in US bank stocks. What I know is banks collect interest on loans and pay interest on deposits. The difference is called "spread" which contribute to big part of bank's income.

To identify good bank's stock, I tend to check these ratios:

  1. Loan-to-Assets - measure business diversity
  2. Loan-to-Deposit (LDR) - measure liquidity

For Citigroup Inc, the ratio is roughly:

  1. Loan-to-Assets: 33%
  2. LDR: 66%

Based on this article, it suggests LDR should be around 80-90%.

Generally what's the acceptable range for these 2 ratios for good US bank stocks to invest in?

  • While you are correct that a bank's general business is to collect interest, a massive global investment bank like Citigroup is so much more complicated than that. It has revenues from investments, financial services to corporations and individuals, real estate and many more businesses. I can't imagine breaking something with so many moving parts into two ratios.
    – rhaskett
    Dec 31, 2017 at 8:03
  • @rhaskett This is 1 of the criteria I am checking for banks. Also looking at bank's Net Interest Margin, PE, dividend yield. Any other suggestions? Dec 31, 2017 at 9:34
  • Dividend yield can change in a hurry based on factors completely unrelated to the health of the company, perhaps especially in the financial sector. P/E based on historic data says nothing about the future; P/E based on estimates of future earnings can change in a hurry if those estimates change for any reason. I'm not saying they aren't valid to look at, but recognize their limitations.
    – user
    Dec 31, 2017 at 12:04

2 Answers 2


Your original supposition does NOT make for a very good way to analyse a bank for many reasons.

One is that in US banking not all deposit accounts are the same to a bank, A Demand Deposit Account (a DDA) things like personal savings, checking, etc - all require the bank keep almost 100% of that amount in cash reserves (for lack of a better term). The need for that is a big reason for our banking system and the interbank rates, etc. where they lend money to each other for (generally very short_ periods.

Other deposit accounts - like a Certificate of Deposit (CD) have specific time frames before the bank is expected to need to have the cash - so say one that is for 36 months requires much more kept on reserve than one due in 10 years. Each type of those offering has a different amount required for the bank to keep in cash (and the difference between having to keep cash or not is a matter of leverage on the return - a BIG difference in profitability). In fact on a loan given when rates were lower to the customer than they are now to the banks it could actually cost them to maintain the cash reserve, even though the interest spread may be great in writing.

Also, the way a portfolio of loans (say mortgages) gas many ways it may be handled, not relative to the difference between the rate on the amount loaned and the cost of the funds NOW. (Many banks main involvement with mortgages for example is they only SERVICE (accept and process the payments) for mortgage loans others actually own. For this they make a fixed fee from the lender. (And consider, if the bank you look at has someone else service its loans - then THEY are actually making much less than the interest spread noted - and less than one that services it themself...albeit they don't have the cost of the service function).

There are many other reasons you should learn more about the operations of the many different types of chartered banks in the US and the system they operate in than to think the difference between the (many) rates they charge for a borrowing and the many different rates they pay for different deposit vehicles (all constantly changing) would actually indicate profitability.


If you want to minimize risk, but like banks, then it should be possible to get the desired exposure by buying a bank ETF.

Although I have sometimes had fun doing it, I try not to expect my occasional individual stock picks to give me an excess return. This is because large corporate investors get far more benefits from a higher-return investment than I. This allows them to justify doing more research to find such investments. Their resulting purchases then increase the price of their selected stocks thereby reducing the excess returns to the point where it is not worth me or other private investor's time to look for them.

On the other hand, as you say, the various bank ratios are different and changing. It should therefore be possible to invest for minimum risk. However, if these risks are correlated with the general market beta, then the expected returns should be lower as well.

I don't think using the ratios to maximize return would work however. I get the impression that some investors are so desperate for return, that the higher risk shares are bid up to the point where the expected return is no better than the lower risk investments. I would be interested if anybody thought you could increase returns using such parameters though.

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