Loan growth and bank valuations
Jijun Niu​∗
Beedie School of Business, Simon Fraser University, 8888 University Drive, Burnaby, BC, Canada V5A 1S6
articleinfo
Article history: Received 21 May 2015 Received in revised form 24 January 2016
Available online 10 February 2016
JEL classification: G21
Keywords: Bank Loan growth Valuation
abstract
This paper examines the relation between loan growth and bank
valuations. Using publicly-traded bank holding companies in the US from
2002:Q1 to 2013:Q4, we find that faster loan growth is associated with
higher bank valuations. This finding holds both in normal times and
during the financial crisis of 2007–2009. When we divide banks into
several size groups, we find that faster loan growth is associated with
higher valuations at small and medium banks, but not at large banks.
Further analyses show that large banks (1) have a lower ratio of loans to
total earning assets, (2) have a higher ratio of nonperforming loans to total
loans, and (3) are more likely to engage in securitization activity. These
characteristics help explain why the relation between loan growth and
bank valuations differs at small and large banks.
© 2016 Board of Trustees of the University of Illinois. Published by
Elsevier Inc. All rights reserved.
1. Introduction
Loans are the main earning assets for banks, and the interest rates
on loans are usually higher than those on securities. For exam- ple,
loans accounted for 52% of all the assets held by US banks at
year-end 2013. The average interest rate on loans was 4.7%, while
the average interest rate on securities held by banks was only
2.3%​1​. One may thus conjecture that, if a bank is able to grow its
loan portfolio at a faster pace, its valuations will increase.
But loan growth can occur for a variety of reasons. For example, a
bank seeking to grow its loan portfolio may maintain a liberal
credit policy: reducing collateral requirements, weakening
covenants, and providing loans to borrowers rejected by other
banks (see, e.g., ​Rajan, 1994; Dell’Ariccia & Marquez, 2006;
Foos, Norden, & Weber, 2010​). In such cases, faster loan growth
needs not lead to higher valuations.
In this paper, we empirically examine the relation between loan
growth and bank valuations. Our sample contains quarterly
observations on a large number of publicly traded bank holding
companies (“banks”) in the US from 2002:Q1 to 2013:Q4. We use
Tobin’s q as a measure of bank valuations (e.g., ​Laeven & Levine,
2007​). To measure loan growth, we use the quarterly growth rate
of total loans and leases adjusted for unearned income (e.g.,
Kupiec, Lee, & Rosenfeld, 2014​).
∗ ​Tel.: +1 778 782 4491.
E-mail address: ​jijun niu@sfu.ca ​1 ​These numbers are calculated using data from
the Statistics on Depository Insti- tutions,
​ available on the Federal Deposit
Insurance Corporation website.
Using the full sample, we find a positive relation between loan
growth and bank valuations. This positive relation is economically
large and statistically significant and holds after controlling for
var- ious bank characteristics such as size, capital, asset
diversification, and profitability, as well as time fixed effects.
We perform a variety of robustness checks. For example, we (1)
use alternative measures of valuations and loan growth, (2) con-
trol for bank fixed effects, and (3) use an instrumental variable
approach to address the concern that loan growth and bank valua-
tions could both be affected by an omitted variable. Throughout,
we find a positive relation between loan growth and bank
valuations.
Calomiris and Nissim (2014) ​show that the relations between
many bank characteristics and bank valuations have changed dur-
ing the financial crisis of 2007–2009. To see whether the positive
relation between loan growth and bank valuations holds under
different market conditions, we run separate regressions for the
periods before, during, and after the financial crisis of 2007–2009.
We find that faster loan growth is associated with higher
valuations in each period.
Small and large banks differ along many dimensions (see, e.g.,
Demsetz & Strahan, 1997; Berger & Udell, 2002; Berger &
Bouwman, 2013; Bertay, Demirguc-Kunt, & Huizinga, 2013;
Zemel, 2015​). To see whether the relation between loan growth
and bank valuations differs at small and large banks, we divide
banks in our sample into several size groups, and run regressions
separately for each group. Interestingly, we find that faster loan
growth is associated with higher valuations at small and medium
http://dx.doi.org/10.1016/j.qref.2016.02.001 ​1062-9769/© 2016 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.
The Quarterly Review of Economics and Finance 61 (2016) 185–191
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186 J. Niu / The Quarterly Review of Economics and Finance 61 (2016) 185–191
ways. First, large banks have a lower ratio of loans to total earning
assets. Second, large banks have a higher ratio of nonperforming
loans to total loans. Finally, large banks are more likely to engage
in securitization activity. We then show that these differences help
explain why faster loan growth is associated with higher
valuations at small and medium banks, but not at large banks.
Our paper is related to the literature that examines the conse-
quences of loan growth. A robust finding from this literature is
that faster loan growth is often associated with higher loan losses
in the future (e.g., ​Clair, 1992; Keeton, 1999; Salas & Saurina,
2002; Jimenez & Saurina, 2006; Hess, Grimes, & Holmes, 2009;
Foos et al., 2010; Amador, Gomez-Gonzalez, & Pabon, 2013​). In
addition, ​Foos et al. (2010) ​show that loan growth has a negative
impact on the risk-adjusted interest income. ​Amador et al. (2013)
show that excessive loan growth over a prolonged period of time
reduces bank solvency.
Our paper is also related to the literature that examines the val-
uation effect of bank loan announcements on the lending banks.
Kracaw and Zenner (1996) ​find that the announcements of highly
leveraged transactions result in positive wealth effects for the lend-
ing banks. ​Mosebach (1999) ​finds that the announcements of large
lines of credit also result in positive wealth effects for the lend- ing
banks. In contrast, ​Waheed and Mathur (1993) ​document that bank
stock prices react negatively to the announcements of foreign
lending agreements. ​Megginson, Poulsen, and Sinkey (1995) ​find
that bank stock prices react negatively to the announcements of
loans to Latin American borrowers. ​Kang and Liu (2008) ​consider
a sample of bank loan announcements in Japan. They find that the
abnormal returns for borrowing firms are significantly positive,
but those for lending banks are sometimes significantly negative.
They also find that there is often a wealth transfer from Japanese
banks to borrowing firms.
Our paper is closely related to ​Zemel (2015)​. She finds a positive
stock market reaction to loan growth in high earnings banks, but a
negative stock market reaction to loan growth in low earnings
banks. She also finds that the information content of loan growth
depends on bank characteristics and loan types. Finally, she shows
that loan growth, when taken in conjunction with earnings, pre-
dicts future nonperforming loans. Our results corroborate those of
Zemel.
banks, but not at large banks.
To understand the reasons behind this result, we first show that
large banks differ from small and medium banks in the following
The remainder of this paper is organized as follows. Section ​2
outlines some theoretical considerations. Section ​3 ​describes the
data. Section ​4 ​presents the main results and robustness checks.
Section ​5 ​concludes.
2. Theoretical considerations
2.1. The relation between loan growth and bank valuations
There are strong reasons to expect a positive relation between loan
growth and bank valuations. First, during the recovery and
expansion phases of a business cycle, there is strong demand for
bank loans (e.g., ​Clair, 1992; Keeton, 1999​). Companies borrow
more in order to undertake larger investments, and households
borrow more in order to increase consumption. Moreover, busi-
ness upturns improve borrowers’ net worth, and thus increase their
debt capacities (e.g., ​Bernanke & Gertler, 1989; Bernanke, Gertler,
& Gilchrist, 1996​). More loans translate into higher profits for
banks, boosting their valuations.
Second, banks are subject to capital requirements. A large lit-
erature shows that banks cut back on lending when they perceive
they are at risk of violating capital requirements (e.g., ​Bernanke &
Lown, 1991; Furlong, 1992; Brinkmann & Horvitz, 1995; Peek &
Rosengren, 1995; Gambacorta & Marques-Ibanez, 2011​). ​Carlson,
Shan, and Warusawitharana (2013) ​find that capital has
a positive impact on lending during the financial crisis of
2007–2009. ​Berger and Bouwman (2013) ​find that capital helps to
increase market shares for small banks at all times and for medium
and large banks during banking crises. Thus, all else being equal,
if a bank achieves faster loan growth because it has higher capital,
its valuations should be higher.
Finally, regulators examine the safety and soundness of banks and
assign ratings to banks. Banks with low ratings are often sub- ject
to various constraints that may affect their ability to lend. For
example, ​Peek, Rosengren, and Tootell (2003) ​find that banks with
the lowest regulatory rating shrink their loans dramatically. ​Curry,
Fissel, and Ramirez (2008) ​find that the impact of regulatory
ratings on loan growth is period-specific as well as loan
category-specific. ​Kupiec et al. (2014) ​find that regulatory ratings
have a strong impact on loan growth. Thus, all else being equal, if
a bank achieves faster loan growth because it has higher regulatory
ratings, its valuations should be higher.
There are, however, situations in which faster loan growth is
associated with lower bank valuations. ​Rajan (1994) ​presents a
model in which bank managers have incentives to manipulate the
bank’s current earnings. An easy way to do so is for the bank to
alter its credit policy. For example, the bank can reduce collateral
requirements, weaken covenants, or simply provide loans to very
risky borrowers. The bank receives fees and interest income from
these newly issued loans, yet there is no immediate increase in
loan losses because borrowers rarely default during the first year
after they receive a loan (see, e.g., ​Clair, 1992; Berger & Udell,
2004​). Thus, the bank is able to increase its current earnings at the
expense of higher loan losses in the future​2​. Rajan’s model
suggests that man- agerial concerns for current earnings may
motivate a bank to adopt a credit policy that is too liberal. In
practice, such a credit policy can increase loan growth but reduce
bank valuations.
Jensen (1986) ​analyzes the agency costs of free cash flow. He
argues that managers have incentives to grow their firms beyond
the optimal size. This is because growth increases the resources
under managers’ control and their compensation. If left uncon-
strained, managers may invest in low-return projects rather than
returning free cash flow to shareholders. In the banking indus- try,
loan growth is a form of investment (​Megginson et al., 1995;
Houston & James, 1998​). Thus, the agency costs of free cash flow
J. Niu / The Quarterly Review of Economics and Finance 61 (2016) 185–191 187
multiple interactions with the borrower, the borrower’s suppliers
and customers, and other members in the local community. The
bank evaluates the profitability of servicing the borrower over time
and across products (​Boot, 2000; Boot & Thakor, 2000; Berger &
Udell, 2002​). In contrast, transaction lending is mainly based on
quantitative and verifiable information (e.g., financial ratios, credit
scores), and each transaction is evaluated on a stand-alone basis.
Theory suggests that small banks have an advantage over large
banks in delivering relationship lending. ​Berger and Udell (2002)
argue that a bank offering relationship lending must delegate more
lending authority to its loan officers, because they have greater
access to relevant information. This delegation of authority, how-
ever, creates agency problems within the bank. Small banks have
fewer layers of management, and thus are better able to deal with
these agency problems. ​Brickley, Linck, and Smith (2003) ​find
that small banks have few branches and normally concentrate in
one local market area, and local office managers and investors
from the local community own almost all the stock in such banks.
The authors argue that such an ownership structure provides small
banks with an advantage in dealing with the agency problems
associated with relationship lending. ​Stein (2002) ​argues that the
organizational structures of small banks strengthen the incentives
of loan officers to produce “soft” information that is necessary for
relationship lending​3​.
A large body of literature finds that small banks engage more in
relationship lending, whereas large banks engage more in trans-
action lending. For example, a number of studies find that small
may cause a bank to grow is loan portfolio beyond the size that
maximizes shareholder value.
Dell’Ariccia and Marquez (2006) ​present a model of a credit
market in which banks have private information about the credit-
worthiness of some borrowers (“known” borrowers) but not others
(“unknown” borrowers). Banks can choose tight lending standards
to avoid financing those borrowers that are rejected by their com-
petitors. When the proportion of unknown borrowers in the market
is high (e.g., during the expansion phase of a business cycle), how-
ever, banks may loosen their lending standards. This results in a
banking system with a deteriorated loan portfolio and lower prof-
its. The model by Dell’Ariccia and Marquez suggests that there are
periods in which faster loan growth is accompanied by lower bank
valuations.
2.2. Relationship lending and transaction lending
Different banks may use different lending technologies. While
some banks emphasize relationship lending, others engage largely
in transaction lending. Under relationship lending, loan approval is
based on information collected from a variety of sources such as
A number of studies show that faster loan growth is often followed by higher ​loan
2 ​
losses several years later (e.g., ​Clair, 1992; Keeton, 1999; Salas & Saurina, 2002;
Jimenez & Saurina, 2006; Hess et al., 2009; Foos et al., 2010; Amador et al., 2013​).
banks tend to allocate a higher proportion of their assets to small
business loans (e.g., ​Berger, Kashyap, Scalise, Gertler, &
Friedman, 1995; DeYoung, Hunter, & Udell, 2004; McNulty,
Murdock, & Richie, 2013​). Such loans often require the use of soft
information. ​Scott (2004) ​and ​Uchida, Udell, and Yamori (2012)
find that small banks are more active in producing soft
information. ​Cole, Goldberg, and White (2004) ​find that large
banks base loan approval decisions pri- marily on verifiable
financial data of the borrowers, whereas small banks rely more on
pre-existing relationships with the borrow- ers. ​Berger, Miller,
Petersen, Rajan, and Stein (2005) ​present several pieces of
evidence consistent with the notion that small banks are more
likely to engage in relationship lending.
3. Sample and variables
We begin with a list of publicly-traded bank holding companies
(“banks”) in the US​4​. For each bank on the list, we obtain
quarterly accounting data from the Federal Reserve’s Y-9C
reports, and stock data from the Center for Research in Security
Prices (CRSP). Our sample period goes from 2002:Q1 to 2013:Q4.
The sample starts in 2002:Q1 because several variables used in our
analyses became available in that quarter.
A bank can grow its loan portfolio mainly in two ways. First, the
bank can increase lending to existing borrowers or find new
borrowers (“internal growth”). Second, the bank can engage in
mergers and acquisitions (“external growth”). Previous studies
find that these two types of growth have different impact on bank
performance (e.g., ​Clair, 1992; Foos et al., 2010​). Because theories
(e.g., ​Rajan, 1994; Dell’Ariccia & Marquez, 2006​) focus on
internal growth, if a bank is involved in a merger or acquisition in
a given quarter, the corresponding bank-quarter observation is
excluded
3​
Stein (2002) ​defines soft information as “information that cannot be directly
verified by anyone other than the agent who produces it.”
4​
The list is derived from the CRSP-FRB Link provided by the Federal Reserve
Bank of
​ New York.
Table 1 ​Variable definitions.
Variable Definition
before and after the merger or acquisition are included in the
sample. Our final sample includes over 15,000 quarterly
observations on 632 banks.
Following the literature (e.g., ​Caprio, Laeven, & Levine, 2007;
Laeven & Levine, 2007​), we use Tobin’s q as a measure of bank
val- uations. Tobin’s q is calculated as the ratio of the market
value of equity plus the book value of liabilities to the book value
of assets. Later in robustness checks we employ an alternative
mea- sure of bank valuations. Following ​Kupiec et al. (2014)​, we
measure loan growth as the quarterly growth rate of total loans and
leases adjusted for unearned income. We employ an alternative
measure of loan growth in robustness checks.
Laeven and Levine (2007) ​investigate the impact of diversifi-
cation on bank valuations. We use their empirical specification to
select control variables. First, we control for bank size, measured
as the natural logarithm of total assets in thousands of constant

Tobin’s q The ratio of the market value of equity plus the
book value of liabilities to the book value of assets Loan growth The quarterly
growth rate of total loans and leases
adjusted for unearned income Size The natural logarithm of total assets in
thousands
of constant December 2013 dollars Capital The ratio of equity to total assets Loans
The ratio of net loans to total earning assets, where
total earning assets include net loans, securities, and investments Deposits The ratio
of total deposits to total liabilities Asset diversity 1 ​− |​(net loans ​− ​other earning
assets)/total earning
assets​|​, where other earning assets include securities and investments, and total
earning assets include net loans, securities, and investments Market-to-book ratio
The ratio of the market value of equity to the book
value of equity Abnormal loan growth A bank’s loan growth in a given quarter
minus the
median loan growth of all the banks in the same quarter Return on equity The ratio
of pre-tax profits to book value of equity Cost-income ratio The ratio of total
noninterest expense to total operating income Loan loss provision The ratio of loan
loss provision to net interest
income Nonperforming loans The ratio of nonperforming loans to total loans,
where nonperforming loans are loans that are 90 days or more past due or have
nonaccrual status Securitization An indicator variable that equals one if a bank
engages in securitization activity in a given quarter, and zero otherwise
December 2013 dollars​6​. Second, we control for the ratio of equity
to total assets. Third, we control for the ratio of net loans to total
earning assets, where total earning assets include net loans, secu-
rities, and investments. Fourth, we control for the ratio of total
deposits to total liabilities. Finally, we control for asset diversity,
computed as 1 ​− |​(net loans ​− ​other earning assets)/total earning
assets​|​, where other earning assets include securities and invest-
ments. Asset diversity takes value between zero and one, with
higher values indicating more diversification cross lending and
non-lending activities.
Table 1 ​lists the definition of each variable used in this paper.
Because most of the variables in our sample contain outliers, we
5​
We identify mergers and acquisitions in the banking industry using the merger
files provided by the Federal Reserve Bank of Chicago.
6​
We convert dollar values to constant December 2013 dollars using the Consumer
Price Index obtained from the Bureau of Labor Statistics.

from our sample​5​. However, all the observations on the bank

188 J. Niu / The Quarterly Review of Economics and Finance 61 (2016) 185–191

Table 2 ​Summary statistics.

Variable Mean Std. dev. 25th percentile Median 75th percentile N

Tobin’s q 1.043 0.068 0.993 1.037 1.085 17,533 Loan growth 0.017 0.043 ​−​0.008 0.013 0.035 16,406 Size 14.680 1.510 13.622 14.307 15.337 17,533 Capital 0.094 0.026 0.077
0.091 0.106 17,533 Loans 0.741 0.141 0.671 0.765 0.839 17,510 Deposits 0.833 0.120 0.783 0.859 0.914 16,973 Asset diversity 0.485 0.225 0.315 0.461 0.644 17,510

Note: This table reports summary statistics for the main variables. Please see ​Table 1 ​for variable definitions.

Table 3 ​Correlation matrix.

Tobin’s q Loan growth Size Capital Loans Deposits Asset diversity

Tobin’s q 1.0000 Loan growth 0.2593​* ​1.0000 Size 0.1093​* ​−​0.0312​* ​1.0000 Capital ​−​0.0036 ​−​0.0187 0.0934​* ​1.0000 Loans ​−​0.1584​* ​−​0.0031 ​−​0.2223​* ​−​0.0144 1.0000 Deposits
−​0.0957​* ​−​0.0371​* ​−​0.4302​* ​0.0094 0.3694​* ​1.0000 Asset diversity 0.0971​* ​−​0.0370​* ​0.0782​* ​−​0.0191 ​−​0.7751​* ​−​0.1072​* ​1.0000

Note: *​ ​indicates significance at the 1% level. Please see ​Table 1 ​for variable definitions.

winsorize all the continuous variables at the 1% and 99% levels to
mitigate the effect of outliers.
Table 2 ​presents summary statistics for the main variables. Tobin’s
q has a mean of 1.043, indicating that for an average bank in our
sample the market value of assets exceeds the book value of assets
by 4.3%. Loan growth has a mean of 1.7%, which is compa- rable
with the 1.4% reported by ​Kupiec et al. (2014)​. Loan growth
varies widely across banks and time, as indicated by the standard
deviation of 4.3%. On average, loans account for 74.1% of total
earn- ing assets, and deposits account for 83.3% of total liabilities.
Asset diversity has a mean of 0.485 with a standard deviation of
0.225, suggesting that banks in our sample differ considerably
with regard to the composition of their earning assets. This result
is consistent with ​Laeven and Levine (2007)​.
Table 3 ​presents the correlation matrix of the main variables. We
note that the correlation between loan growth and Tobin’s q is
posi- tive and significant. This correlation result is informative but
it does not control for other bank characteristics. We therefore
estimate regressions.
4. Empirical results
To examine the relation between loan growth and bank val-
uations, we regress Tobin’s q on loan growth and a set of bank
characteristics. We include quarter fixed effects to control for
com- mon factors that affect the valuations of all the banks in a
given quarter. We estimate the regression using ordinary least
squares (OLS). Because the observations on a specific bank over
time are not independent, the standard errors are clustered at the
bank level.
The baseline regression results are presented in column (1) of
Table 4​. The coefficient on loan growth is positive and significant
at the 1% level. This result shows that faster loan growth is
associated with higher valuations. The economic magnitude of the
coefficient is also significant. A one percentage point increase in
loan growth is associated with an increase in Tobin’s q of 0.118,
which amounts to 11% of the sample mean of Tobin’s q.
Turning to control variables, we find that size is positively asso-
ciated with bank valuations. As ​Laeven and Levine (2007) ​point
out, size often affects valuations through economies of scale.
Capital is also positively associated with valuations, which is
consistent with the theory of ​Mehran and Thakor (2011)​. The
coefficient on loans is negative, indicating that a larger share of
loans in total earning
J. Niu / The Quarterly Review of Economics and Finance 61 (2016) 185–191 189
assets is associated with lower valuations. The coefficients on
other control variables are insignificant.
We perform a series of robustness checks. In column (2) of ​Table
4​, we use the market-to-book ratio as an alternative mea- sure of
bank valuations. This ratio is computed as the market value of
equity divided by the book value of equity (​Caprio et al., 2007​).
The results indicate that loan growth is positively associated with
the market-to-book ratio.
In column (3), we regress Tobin’s q on abnormal loan growth
instead of loan growth. Following the literature (e.g., ​Foos et al.,
2010; Amador et al., 2013​), abnormal loan growth is equal to a
bank’s loan growth in a given quarter minus the median loan
growth of all the banks in the same quarter. As shown, the results
are very similar to those reported in column (1).
In column (4), we include additional controls in the regression.
Return on equity is the ratio of pre-tax profits to book value of
equity. Cost-income ratio is the ratio of total noninterest expense
to total operating income. Loan loss provision is the ratio of loan
loss provision to net interest income. We find that return on equity
is positively associated with valuations, while cost-income ratio is
negatively associated with valuations. Importantly, the coefficient
on loan growth remains positive and significant.
In column (5), we include bank fixed effects in the regression to
control for unobserved, time-invariant differences across banks.
We continue to find that faster loan growth is associated with
higher valuations.
Another concern about our results is that loan growth and bank
valuations could both be affected by an omitted variable. If this is
the case, OLS estimation will produce biased coefficient esti-
mates. To address this concern, we use an instrumental variable
approach. Specifically, we use deposit growth as an instrument for
loan growth. The ex ante rationale for the use of the instrument is
as follows. On the one hand, theories (e.g., ​Kashyap, Rajan, &
Stein, 2002; Song & Thakor, 2007​) suggest a strong link between
lend- ing and deposit-taking (instrument relevance). On the other
hand, we are not aware of any theory that suggests that deposit
growth directly affects bank valuations (instrument exogeneity).
Column (6) reports the second-stage regression results​7​. The
instrumental
In the first-stage regression (not reported), deposit growth enters signifi- cantly
7​
​ at
the 1% level. Because the model is exactly identified (i.e., the number of

Table 4 ​Loan growth and bank valuations.​(1) Baseline model (2) Market-to-book
ratio
(3) Abnormal loan growth
(4) Additional controls
(5) Bank fixed effects
(6) Instrumental variable
Loan growth 0.118​*** ​(0.023) 1.820​*** ​(0.251) 0.057​*** ​(0.022) 0.045​*** ​(0.012) 0.050​** ​(0.023) Abnormal loan growth 0.117​*** ​(0.023) Size 0.008​*** ​(0.002) 0.101​*** ​(0.017) 0.008​***
(0.002) 0.007​*** ​(0.002) ​−​0.018​*** ​(0.005) ​−​0.018​*** ​(0.005) Capital 0.188​* ​(0.097) ​−​1.185 (0.851) 0.188​* ​(0.097) 0.090 (0.102) ​−​0.266​*** ​(0.057) ​−​0.267​*** ​(0.057) Loans ​−​0.079​*
(0.048) ​−​0.808​* ​(0.445) ​−​0.079​* ​(0.047) ​−​0.081​* ​(0.048) 0.022 (0.038) 0.025 (0.036) Deposits 0.046 (0.029) 0.620​** ​(0.276) 0.046 (0.029) 0.045 (0.028) 0.023 (0.023) 0.024 (0.022)
Asset diversity ​−​0.029 (0.026) ​−​0.248 (0.247) ​−​0.029 (0.026) ​−​0.033 (0.026) 0.014 (0.020) 0.015 (0.019) Return on equity 0.183​*** ​(0.042) 0.054​*** ​(0.019) 0.054​*** ​(0.019)
Cost-income ratio ​−​0.024​*** ​(0.009) ​−​0.012​*** ​(0.005) ​−​0.012​*** ​(0.005) Loan loss provision 0.006 (0.006) ​−​0.009​*** ​(0.003) ​−​0.009​*** ​(0.003) Constant 0.975​*** ​(0.062) 0.695 (0.584)
0.977​*** ​(0.062) 1.014​*** ​(0.060) 1.317​*** ​(0.080) – Quarter fixed effects Yes Yes Yes Yes Yes Yes Bank fixed effects No No No No Yes Yes Observations 15,887 15,887 15,887
15,886 15,886 15,823 F-test of excluded
instruments (p-value)
0.000
R-squared 0.454 0.482 0.454 0.488 0.663 0.663
Note: The dependent variable is Tobin’s q in every column except column (2) where the dependent variable is the market-to-book ratio. Standard errors are clustered at the bank level

and reported in parentheses. ​***​, ​**​, and ​* ​indicate significance at the 1%, 5%, and 10% level, respectively. Please see ​Table 1 ​for variable definitions.
Table 5 ​Different sample periods.
(1) Before the crisis
Table 6 ​Sample split by size.
(2) During the
(3) After the
(1) Small banks (2) Medium crisis
crisis
banks
Loan growth 0.070​*** ​(0.024) 0.210​*** ​(0.039) 0.154​*** ​(0.050) Size 0.013​*** ​(0.002) 0.001 (0.002) 0.004​* ​(0.002) Capital 0.219​* ​(0.114) 0.072 (0.138) 0.169 (0.112) Loans ​−​0.091​**
(0.038)
(3) Large banks
Loan growth 0.102​*** ​(0.023) 0.159​*** ​(0.031) 0.035 (0.048) Size 0.015​* ​(0.008) 0.013​*** ​(0.004)
−​0.008 (0.005)
−​0.131​* ​(0.076) ​−​0.038 (0.073)
Capital 0.071 (0.105) 0.140 (0.109) 0.494​* ​(0.256) Loans ​−​0.042 (0.038) ​−​0.079 (0.068) ​−​0.075​* ​(0.045) Deposits 0.114​*** ​(0.028) ​−​0.007 (0.047) ​−​0.040 (0.051)
Deposits 0.110​*** ​(0.035) 0.043 (0.040) ​−​0.034 (0.061) Asset diversity ​−​0.052​**
Asset diversity ​−​0.020 (0.019) ​−​0.018 (0.037) ​−​0.032 (0.023) (0.021)
Constant 0.784​*** ​(0.113) 0.913​*** ​(0.096) 1.313​*** ​(0.117) Quarter fixed effects Yes Yes Yes Observations 5210 8331 2346 R-squared 0.501 0.485 0.469
Note: The dependent variable is Tobin’s q. The full sample is divided into three groups: small banks (total assets up to $1 billion), medium banks (total assets exceeding $1 billion and

up to $10 billion), and large banks (total assets exceeding $10 billion). Standard errors are clustered at the bank level and reported in paren- theses. ​***​, **​
​ , and *​ ​indicate significance at

the 1%, 5%, and 10% level, respectively. Please see Table
​ 1 ​for variable definitions.
and Levine (2007)​, who find a diversification discount in financial conglomerates.
Small and large banks differ along many dimensions (see, e.g., ​Demsetz & Strahan, 1997; Berger & Udell, 2002; Berger & Bouwman, 2013;
Bertay et al., 2013; Zemel, 2015​). To see whether the relation between loan growth and bank valuations differs at small and large banks, we divide
banks in our sample into three groups: small banks (total assets up to $1 billion), medium banks (total assets exceed- ing $1 billion and up to $10
billion), and large banks (total assets exceeding $10 billion). We then run regressions separately for each group.
Columns (1) to (3) of ​Table 6 ​present the regression results for small, medium, and large banks, respectively. The results indi- cate that faster loan
growth is associated with higher valuations at small and medium banks. In contrast, there is no such asso- ciation at large banks​8​. Interestingly,
these results are consistent with ​Zemel (2015)​, who finds that loan growth, in conjunction with
8​
Our results are robust to how we define large banks. For example, we obtain qualitatively
​ similar results when we define large banks as those that have total assets exceeding $5
billion, or exceeding $50 billion. ​−​0.007 (0.041) ​−​0.006 (0.039)
Constant 0.860​*** ​(0.047) 1.142​*** ​(0.097) 0.983​*** ​(0.092) Quarter fixed effects Yes Yes Yes Observations 8184 3287 4416 R-squared 0.177 0.270 0.175
Note: The dependent variable is Tobin’s q. The sample period is from 2002:Q1 to 2013:Q4. It is divided into three periods: before the crisis (2002:Q1–2007:Q2), dur- ing the crisis

(2007:Q3–2009:Q4), and after the crisis (2010:Q1–2013:Q4). Standard errors are clustered at the bank level and reported in parentheses. ​***​, ​**​, and ​* ​indicate significance at the 1%,

5%, and 10% level, respectively. Please see ​Table 1 ​for variable definitions.
variable results confirm that faster loan growth is associated with higher valuations.
Calomiris and Nissim (2014) ​find that the relations between many bank characteristics and bank valuations have changed dur- ing the financial
crisis of 2007–2009. To see whether the positive relation between loan growth and valuations holds under differ- ent market conditions, we divide
the sample period into three periods: before the crisis (2002:Q1–2007:Q2), during the crisis (2007:Q3–2009:Q4), and after the crisis
(2010:Q1–2013:Q4). We then run regressions separately for each period. Our definition of the crisis period follows ​Berger and Bouwman (2013)​,
and the results are robust to alternative definitions.
Columns (1) to (3) of ​Table 5 ​present the regression results for the periods before, during, and after the crisis, respectively. The results indicate
that faster loan growth is associated with higher valuations in each of the three periods. Turning to control vari- ables, we find that asset diversity
is negatively associated with valuations before the crisis. This result is consistent with ​Laeven
instruments equals the number of endogenous regressors), we cannot perform a test of overidentifying restrictions.
190 J. Niu / The Quarterly Review of Economics and Finance 61 (2016) 185–191
Table 7 ​Comparison of banks of different size.
(1) Small banks Mean
(2) Medium banks
(5) Medium vs. Mean
large Difference in mean
Loans 0.758 0.750 0.675 0.084​*** ​0.075​*** ​Nonperforming loans 0.016 0.019 0.020 ​−​0.004​*** ​−​0.001​** ​Securitization 0.031 0.063 0.470 ​−​0.439​*** ​−​0.407​***
Note: The first three columns report the mean values of selected variables for small, medium, and large banks. The last two columns test for significant differences in means using the
unequal variances t-test. Small banks have total assets up to $1 billion, medium banks have total assets exceeding $1 billion and up to $10 billion, and large banks have total assets

exceeding $10 billion. ​*** ​and **

​ ​indicate significance at the 1% and 5% level, respectively. Please see ​Table 1 ​for variable definitions.
Table 8 ​Including interaction terms.
(1) (2) (3) (4)
Loan growth ​−​0.173​** ​(0.070) 0.124​*** ​(0.026) 0.137​*** ​(0.023) ​−​0.111 (0.074) Loan growth ​× ​Loans 0.421​*** ​(0.092) 0.354​*** ​(0.095) Loan growth ​× ​Nonperforming loans ​−​4.917​***
(0.957) ​−​5.105​*** ​(0.993) Loan growth ​× ​Securitization ​−​0.118​** ​(0.058) ​−​0.014 (0.057) Loans ​−​0.091​* ​(0.048) ​−​0.074 (0.047) ​−​0.082​* ​(0.049) ​−​0.085​* ​(0.049) Nonperforming loans
−​0.727​*** ​(0.074) ​−​0.683​*** ​(0.073) Securitization ​−​0.018​*** ​(0.006) ​−​0.013​** ​(0.006) Size 0.008​*** ​(0.002) 0.009​*** ​(0.002) 0.010​*** ​(0.002) 0.010​*** ​(0.002) Capital 0.180​* ​(0.097)
0.122 (0.098) 0.191​* ​(0.099) 0.125 (0.099) Deposits 0.046 (0.029) 0.041 (0.027) 0.038 (0.029) 0.036 (0.027) Asset diversity ​−​0.031 (0.026) ​−​0.030 (0.026) ​−​0.031 (0.027) ​−​0.032
(0.026) Constant 0.983​*** ​(0.062) 0.981​*** ​(0.059) 0.960​*** ​(0.065) 0.977​*** ​(0.062) Quarter fixed effects Yes Yes Yes Yes Observations 15,887 15,887 15,828 15,828 R-squared 0.457
0.487 0.462 0.492 Adjusted R-squared 0.455 0.485 0.460 0.490

Note: The dependent variable is Tobin’s q. Standard errors are clustered at the bank level and reported in parentheses. ​***​, **​
​ , and *​ ​indicate significance at the 1%, 5%, and 10% level,

respectively. Please see ​Table 1 ​for variable definitions.

earnings, conveys value-relevant information about small banks, but not about large banks.
Turning to control variables, we find that size is positively asso- ciated with valuations at small and medium banks, but not at large banks. One
possible explanation is that small and medium banks enjoy economies of scale, while large banks are too complex to manage. Deposits are
positively associated with valuations at small banks. Capital is positively and loans (as a share of total earning assets) are negatively associated
with valuations at large banks.
To understand why the relation between loan growth and bank valuations differs at small and large banks, we report three dif- ferences between
small and large banks in ​Table 7​. First, large banks have a lower ratio of loans to total earning assets (e.g., ​Bertay et al., 2013​). Second, large
banks have a higher ratio of nonperforming loans to total loans (e.g., ​Clair, 1992; Demsetz & Strahan, 1997​). Finally, large banks are more likely
to engage in securitization activity (e.g., ​Casu, Clare, Sarkisyan, & Thomas, 2011​). We then examine whether the relation between loan growth
and bank valuations depends on the ratio of loans to total earn- ing assets, the ratio of nonperforming loans to total loans, and a bank’s tendency to
engage in securitization activity. ​Table 8 ​reports the results. In column (1), we include an interaction term between loan growth and the ratio of
loans to total earn- ing assets. We find that the coefficient on this interaction term is positive and significant, indicating that an increase in loan
growth is associated with a larger increase in valuations at banks where loans account for a larger share in total earning assets.
In column (2), we include an interaction term between loan growth and the ratio of nonperforming loans to total loans. The coefficient on this
interaction term is negative and significant, indicating that an increase is loan growth is associated with a smaller increase in valuations at banks
with a higher ratio of
(3) Large banks Mean
(4) Small vs. large Difference in mean
nonperforming loans to total loans. Indeed, faster loan growth at such banks is likely to be the result of a liberal credit policy (​Rajan, 1994​).
In column (3), we include an interaction term between loan growth and securitization, which is an indicator variable that equals one if a bank
engages in securitization activity in a given quarter and zero otherwise. We find that the coefficient on this interaction term is negative and
significant. Thus, the positive relation between loan growth and valuations diminishes at banks that engage in securi- tization activity. This result
is consistent with ​Zemel (2015)​. She argues that loan growth has less impact on valuations at banks that are more likely to remove loans from their
balance sheets through securitization.
Finally, in column (4), we include the three interaction terms simultaneously. We find that the results are qualitatively simi- lar, although the
coefficient on the interaction term between loan growth and securitization is no longer significant.
5. Conclusion
Motivated by the importance of loans for banks, we investigate the relation between loan growth and bank valuations. Using quar- terly
observations on a large number of banks, we find a positive relation. This finding holds under different market conditions, and is robust to
controlling for a number of time-varying bank charac- teristics as well as bank fixed effects.
When we divide banks into several size groups, we find that faster loan growth is associated with higher valuations at small and medium banks,
but not at large banks. To understand the reasons behind this result, we first show that large banks differ from small and medium banks in the
following ways. First, large banks have a lower ratio of loans to total earning assets. Second, large banks have a higher ratio of nonperforming
loans to total loans. Finally, large
J. Niu / The Quarterly Review of Economics and Finance 61 (2016) 185–191 191
comments and suggestions. All errors are my own.
banks are more likely to engage in securitization activity. We then
show that these differences help explain why faster loan growth is References
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