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 is our first analysis for 2021 - a look back at what occurred in January. Fixed-rate NIM took a big drop, but it's a very different story for floating rate deals, where margins in some cases are actually above the 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 us at to 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.
Volume Rebounds After Holiday Dip
Pricing volume returned to familiar levels in January, reversing a two-month decline that coincided with the typical lull during the holiday season. The current level is in line with what we saw for much of the second half of 2020, as well as pricing volume in the market pre-COVID.
It's worth noting that January also included the return of PPP. The first time commercial banks wrestled with PPP, we saw a dip in volume on the PrecisionLender platform - because those deals didn't really have a pricing and structuring element. Does the steady volume in January mean that banks are better equipped for PPP and now have bandwidth to do more "typical" commercial deals? It's too soon to say, but we'll be monitoring this in future updates.
Priced Commercial Loan Volume by Month
(Second Half of 2020 - Present)
Floating-Rate Spreads Stay Steady
January continued a familiar story for spreads to 1-month LIBOR and Prime. We included all the monthly averages for 2020 to capture the full narrative: Spreads jumped shortly after the rate cuts last March and have remained with a narrow range ever since for both LIBOR and Prime.
Weighted Average Spread to 1-Month LIBOR
Weighted Average Spread to Prime
Fixed-Rate Spreads Sharply Decline
Spreads on fixed-rate loans have been steadily declining since August 2020, but that downward slope increased this month, with a 22 bps drop for the overall average and a 21 bps drop in the weighted average. We'll have more on the implications for margins in the section below.
Fixed-Rate Spread Trend
(Second Half of 2020 - Present)
Fixed-Rate Funding Costs Continue to Rise
The drop in fixed-rate spreads was accompanied by a continued increase in funding costs. The increases continue to begin at around the 60-month mark. The COF on 30-year deals for the January snapshot was 14 bps above the late December mark and 46 basis points above the mark at the end of Q3 2020.
Meanwhile, floating-rate funding costs continue to be relatively unchanged.
3-Month LIBOR Swap Curve, Selected Dates
Fixed-Rate Coupons Drop; Floating-Rate Coupons Stay Steady
After six months of staying in a narrow range, fixed-rate coupons fell 9 bps from December to January. That's something of a surprise given that fixed rates increased during the past month, as the aforementioned Libor Swap Curve showed.
As for floating-rate coupons, it was more of the same. Prime coupons continue to be approximately 100 bps higher than their LIBOR counterparts and both have moved within a narrow range since the start of Q3 2020 - reflecting the small variations in spreads to index and index rates.
Coupon Rates by Month, Rolling Trend
Floating-Rate NIM > Coupon Rates
Two things stood out when we looked at NIM this month. First, NIM on LIBOR-based floating rate deals and NIM on fixed-rate deals continue to move in opposite directions. Back in July the former was just 3 bps higher than the latter; now that gap has risen to 39 bps. Fixed-rate NIM dropped 18 points this month - a function of lower coupon rates and rising funding costs.
Second, both Prime-based floating-rate loans and LIBOR-based floating-rate loans currently have a NIM can be higher than their coupon rates - 12 bps higher for LIBOR and 6 bps for Prime. We'll dive deeper into that in the next section.
NIM by Month, Rolling Trend
Floating-Rate NIM Reflects Yield Gains
So how are commercial lenders managing to get floating-rate margins that can exceed their coupon rates? In large part it's because they've done a good job in increasing the yield on these deals, via net fee income and interest rate floors. Over the past four months, yields have been an average of 52 basis points higher than the coupon rate. Couple that with funding costs that have remained at low levels (~45 bps) and you have the recipe for producing margins that can exceed coupon rates.
Recent Coupon vs. Yield Trends on Floating Rate Loans