The Suprising Way Banks Have Changed Since the Collapse of Lehman Brothers

Bank of America, Wells Fargo, and Citigroup have changed in big ways since the financial crisis, but there is one major change that is almost never discussed.

Jun 3, 2014 at 7:56AM

Much has been said about the financial crisis and what it has meant for the biggest banks. But one little known fact could mean big things in the years to come.

The unknown reality
The research division at Bank of America (NYSE:BAC) recently revealed a stunning chart outlining just how dramatically the banking landscape has changed since 2008. This could mean big things for it, Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and others: 


For nearly a decade, banks had more loans than they did deposits. But following the collapse of Lehman Brothers, that number has plummeted. And with their loan-to-deposit ratio now standing below 75%, banks are operating in a way that is completely counter to what had been the case during the last 30 years.

At their core, the purpose and business of a bank is driven by collecting deposits from some and lending to others. And while issuing more loans than deposits is a questionable, the lower the percentage, the more money paid out versus what is taken in.

A quick glance at the ratios for the three banks mentioned above shows just how dramatically things have fallen (and continued to fall):

Loan to Deposit RatioQ1 2008Q1 2010Q1 2012Q1 2014
Bank of America 108% 95% 84% 79%
Wells Fargo 106% 94% 80% 74%
Citigroup 93% 81% 68% 67%

Source: Company Investor Relations.

In the case of Bank of America, Wells Fargo and Citigroup, they have more deposits sitting on their balance sheets than they seemingly know what to do with.

And that picture gets even more dramatic when you consider not just their loans divided by their deposits, but the raw dollar amounts they could theoretically lend out but haven't yet:

Source: Company Investor Relations.

As you can see, both Bank of America and Wells Fargo have each added nearly $300 billion more deposits than loans, and Citigroup isn't far behind with $260 billion.

What this means to investors
It's easy to think this is one more example of banks greedily holding onto their money at the expense of the U.S. economy. But a simple back of the envelope calculation of the banks issuing loans at 4% would mean an additional $9.4 billion in income for Bank of America, $11.3 billion at Wells Fargo, and nearly $13 billion for Citigroup over the course of the year.

One has to believe the banks aren't willingly turning away nearly $35 billion in possible income, and a big reason for this is that people and businesses simply aren't asking for loans from the banks. But of course investors need to watch how these banks fare relative not only to one another, but the industry as a whole.

Because when demand for loans picks up again with the banks clearly able to meet those needs, it will mean big things to their bottom lines.

Big banking's little $20.8 trillion secret
While the difference between the growth of their loans versus their deposits is a billion dollar secret, there's a trillion dollar one coming. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, and Wells Fargo and has the following options: short June 2014 $50 calls on Wells Fargo and short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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