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 February 2021. Fixed-rate spreads, coupons, and NIM all rebounded significantly during this period, while LIBOR-based floating-rate loans dropped in all three of those metrics.
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 firstname.lastname@example.org.
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.
Volume Stays Strong
February loan volume is currently on pace to outstrip January’s numbers, which had rebounded after the end of 2020 lull. As we noted in our previous update, these volume numbers are accumulating while the second round of PPP is taking place. During the previous round of PPP, in April 2020, volume on the PrecisionLender platform dipped, because those deals didn’t really have a particular pricing and structuring element. So far, the 2021 volume may indicate that processing PPP loans isn’t interfering with banks’ more traditional commercial business.
Priced Commercial Loan Volume, by Month
(Indexed to July 2020 = 100)
LIBOR and Prime Spreads at Lowest Pandemic Points
LIBOR and Prime spreads both decreased in the first half of February, continuing a trend line since hitting peak pandemic levels in the fall. LIBOR’s 10-basis point drop took it to 2.54%, tying September for the lowest mark since the start of the pandemic. Prime spreads are also at their lowest mark during the pandemic, after dropping 6 bps to 0.40%.
We reported in our January review that the coupon, yield, and margin on prime-based loans were markedly higher than LIBOR and fixed-rate alternatives. So it’s not surprising that bankers may be more willing to accept a lower spread on prime-based loans when compared to other structures and scenarios. But the LIBOR spread drop is less clear and will merit continued monitoring.
Weighted Average Spread to 1-Month LIBOR
Weighted Average Spread to Prime
Fixed-Rate Spreads (REALLY) Rebound
Meanwhile, fixed-rate spreads made an abrupt u-turn in the first half of February. Having fallen 42 basis points since August – and 22 basis points from December to January - average spreads bounced back up 6 basis points in the first half of February.
The gains in the weighted average of fixed-rate spreads were even more significant. This metric had dropped 48 bps from August-January, and 21 bps from December-January. But in the first half of February, the weighted average rose 22 basis points, a large gain that is certainly worth tracking closely.
Fixed Rate Spread Trend
Funding Curves Continue to Rise
The 3-Month LIBOR Swap curve continues to rise, as the 30-year mark on the Feb. 12 snapshot is 64 bps higher than its Sept. 30 counterpart, and 18 bps higher than the Jan. 29 snapshot.
The chart also shows the clear point at which the snapshots of the curve begin to separate and steepen. Funding for floating-rate deals and fixed-rate deals shorter than 3 years has been essentially unchanged during this period. But that shifts markedly at the 36-month mark. By the 60-month mark, for example, the Feb. 12 measure is 25 bps higher than the Sept. 30 measure.
3-Month LIBOR Swap Curve
COF Gap Widens For LIBOR and Prime Loans
Fixed-rate funding costs remained at 1.04% their highest measured levels over the past 7 months. Meanwhile, COF for prime-based floating-rate loans rose 3 bps but fell 4 bps for LIBOR-based loans. The funding cost gap between the two – 11 bps – is the widest we’ve observed during the past 7 months. The results are influenced by the variety of liquidity premiums in use across the PrecisionLender client base, as well the funding methods employed at each institution.
COF by Month, Rolling Trend
Fixed-Rate Coupons Rise, Floating-Rate Coupons Fall
The aforementioned developments in spreads and funding costs combined to produce a 15-bps bump in fixed-rate coupons, up to 3.59% - the highest mark since August 2020. Meanwhile, LIBOR-based floating rate coupons fell 11 bps and primed-based floating rate coupons dropped 6 basis points.
Coupon Rate Trend
NIM Gap between LIBOR and Fixed Closes
Last month we observed that the difference in margins between LIBOR-based floating-rate loans and fixed-rate loans had been growing steadily since July – from just 3 bps then to 39 bps by the end of January. That trend reversed significantly in the first half of February.
Fixed-rate NIM improved in lockstep with the rise in its coupon rate - both 14 bps. Meanwhile, margins on LIBOR-based floating-rate loans fell more – 16 bps - than their coupon rate – 11 bps. The result is the shrinking of the NIM gap between fixed-rate and LIBOR all the way down to 9 bps. That’s the narrowest the gap has been since October.
NIM by Month, Rolling Trend
Rate Type Mix Reflects Recent Coupon Shift
The shifts in coupon rates for fixed-rate loans and LIBOR-based floating rate loans may have impacted client demand for each. That’s reflected in the changing mix of rate types. Fixed-rate deals dropped from 43% to 39% of the mix in the first half of February, the lowest share since we began tracking in March of 2020. Meanwhile, LIBOR-based floating rate loans rose from 22% to 26%.
Rate Type Mix
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 email@example.com.