Since March 2020, we’ve posted regular updates on the commercial loan pricing markets, based on what we’ve seen when examining the PrecisionLender dataset. We look at several popular metrics and point out areas in which there have been noteworthy changes.
Today’s analysis is for the first half of April 2021. The lead items are the continued increase in pricing volume, the flattening of the funding curve for longer-term rates, and continued downward pressure/upward resistance on the fixed-rate coupon. If you’d like to see our previous loan pricing market updates, you can find them here.
If you have questions about metrics that have appeared in previous posts, but not this latest one, please reach out to us at email@example.com.
NOTE: PrecisionLender’s data reflects actual commercial opportunities priced (loans, deposits, and other fee-based business) by more than 150 banks in the United States, ranging in size from small community banks to top 10 U.S. institutions. In addition to their variance in size, these banks are also geographically diverse, with borrowers in all 50 states.
Pricing Volume Continues to Increase
The strong pricing volume numbers we observed in March continued into the first half of April. These are the largest increases we’ve seen since March 2020, when the pandemic began and interest rates plummeted.
Reminder: We are using the time period since July 2020 because this is when we saw the commercial market start to “settle” after the rate drops of March and then the PPP and Main Street activity in the following months.
Priced Loan Volume, by Month
(Indexed to July 2020 = 100)
LIBOR Spreads Drop, Prime Spreads Steady in Q1
Since January, spreads have moved to the low end of the post-pandemic range, including a 2.54% mark for the first half of April. These spreads, along with the largely LIBOR Index as the 1-month mark, translated to lower coupon rates for LIBOR-based floating-rate loans so far in April.
Meanwhile, Prime spreads present a less clear trend. They remain in the 40-46 bps range in 2021 and match the overall average of 46 bps since October 2020.
We reported on the “resistance” to increased coupon rates for fixed rate loans in the prior post, which we’ll revisit below. There may also be pressure on floating rate coupons for the same reasons: High institutional liquidity and intense competition influencing how bankers price and structure their deals.
LIBOR Spread to Index
Prime Spread to Index
Funding Curve Flattens at 84-Month Maturity and Beyond
The 3-Month Libor Swap Curve – which we use as a proxy for interest rates and funding costs – reversed its upward trend slightly at the 84-month mark. The April 15 snapshot showed rates were unchanged through 36 months, ticked upward by 3 bps at 60 months, but then dropped by ~10 bps for 84+ month tenors. It’s the first case of flattening we’ve recorded since July 2020.
These rate changes cause fixed-rate loan funding costs to change, but as we continue to note, this curve activity is only a fixed-rate story. The 1-month floating rate has been largely static in recent months.
We continue to hear from bankers that institutional liquidity remains high on bank balance sheets and that internal funding costs have not moved upward since year end 2020 to the same degree as this interest rate curve has moved.
As a reminder: PrecisionLender uses an assumed marginal funding cost, not the bank’s actual average cost of funds.
3-Month LIBOR Swap Curve, Selected Dates
Fixed Rate Funding Costs Continue to Climb
Despite the aforementioned 10 bps decrease in long-term rates, cost of funds for fixed-rate loans climbed to 1.37% overall in the first half of April, up from 1.31% in in March. The explanation lies in the increase in the average maturity of fixed-rate loans, from 73 months in March to 77 months in the first half of April.
Meanwhile, COF for LIBOR and Prime-based floating-rate loans remained nearly unchanged—within 1 bps of March levels.
COF by Month, Rolling Trend
Fixed-Rate Coupons Fall
Despite the increase in COF, the fixed-rate coupon dropped 3 bps in this period, to 3.57%
Meanwhile, LIBOR coupons were down 1 bp to 2.65%, tracking the static spread. Prime coupons increased 5 bps, tracking that spread as well. In sum, generally stable inputs for spreads and indexes have led to generally stable floating rate coupons.
In the last post we presented results on the possible “resistance” to increasing fixed rate coupons to match the increase in market interest rates. Similarly we’re not seeing any upward pressure on floating-rate coupons either thus far in 2021
Coupon Rate by Month, Rolling Trend
Fixed-Rate NIM Drops (Again)
With the fixed-rate coupon falling and COF increasing, fixed-rate NIM suffered. It fell 7 basis points in FH April to 2.32% and is now down 40 basis points over the past six months. The NIM gap between LIBOR-based floating-rate loans and fixed-rate loans, once just 8 bps in October 2020, is now 29 basis points.
Floating rate NIM moved up 6 bps on Prime, based on the change in spread cited above. Meanwhile, Libor NIM dropped 8 bps to 2.61%, even though spread, index and COF were nearly unchanged. The NIM downtick here was driven by yield, which fell 13 bps on lower fee income during the first half of April.
NIM by Month, Rolling Trend
The Full Fixed-Rate Story—Chapter 2
It continues to appear that institutional liquidity is having a significant impact on fixed-rate pricing conversations in 2021. This recent market snapshot reinforced the inability to move the coupon upward.
But it’s also worth that noting that NIM for Libor and Prime-based floating rate loans has also moved lower recently. In our next update we’ll take a deeper dive into the contributing factors for this decline
Fixed-Rate Loan Coupon Resistance and NIM Pressure
Our banking consultants and data scientists are combing through PrecisionLender pricing data every day. If there is anything you’d like to know about what they’re seeing, please send along your questions to firstname.lastname@example.org.