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.
In today’s analysis, for the month of July 2021, we continued to look closely at the drive for volume that has been the focus for many commercial banks this year. We found that the push to find a home for so much liquidity has led banks to make some unusual pricing decisions.
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 Maintains Momentum
While the volume of pricing activity in July didn’t quite match the 2021 high set in June, the numbers were still well above the year-long average and significantly higher (+43%) than what we saw in January.
Priced Commercial Loan Volume By Month
(Indexed to January 2021 = 100)
Fixed-Rate Funding Costs Fall
Using the 3-Month LIBOR Swap Curve as a proxy for interest rates and funding costs, we observed a significant drop when comparing our end of July snapshot to its end of June counterpart.
Of particular note was the rate drop for maturities in the 60-120 month range. Double-digit drops were observed for 60-month (-16 bps), 84-month (-19 bps) and 120-month (-17 bps) maturities.
3-Month LIBOR Swap Curve, Selected Dates
Fixed-Rate Spreads Stay Steady
After dropping early in the year, fixed rate spreads have stabilized, staying in a 10 bps range since March. July’s average spread was up 5 bps from June. As noted previously, with growth the overarching objective, it’s hardly surprising that profitability elements (coupon, NIM, spread) are moving in narrow ranges.
Fixed Rate Spread Trend
We also looked at July spreads in a range of term tranches, focusing in particular on the range from 37 to 120 months, which makes up nearly 70% of the fixed-rate loans priced. The most common deals are in the 37-60 month tranche; they show a spread of 306 bp. In contrast, we found that the 61-120 month tranche posts spreads that are ~60 bps lower, at 238.
That unusual finding prompted us to do a little more digging …
Average Fixed Rate Spreads, July 2021 Activity
A Closer Look at Fixed Rates (Basis Point Carry)
We’ve pointed out that the funding curve(s) have flattened since March 2021, but both the LIBOR Swap and FHLB curves have positive carry between 60- and 120-month terms. As the chart below indicates, we should expect to see approximately a 50-60 basis point carry between the coupon rates on 60- and 120-month term loans.
Basis Point Carry in Curves Between 60- and 120-Month Terms
But at the same time, we’ve been hearing anecdotally from clients that fixed-rate 120-month deals were being priced at historically low rates, in an effort to make use of institution liquidity. Others went so far as to say they were “indifferent” about rates on 60-month loans vs. 120-month loans.
A Closer Look at Fixed Rate Coupons: 60-Month vs. 120-Month
When we dug deeper into the data we found evidence that corroborated what we’d been hearing. Over the past three months, the average coupon on deals in the 37-60 month tranche have been HIGHER than those in the 61-120 month tranche. It’s a trend that held true across both community and regional banking segments. In addition, the volume of deals priced in each tranche was roughly equivalent.
Average Coupon, Fixed-Rate Loans by Selected Maturity Tranche
The expected carry from the curves appears to have no influence on how these deals are priced. As a result, the coupon “concession” on the 61-120 month deals carries on through the NIM result, which is about 50 bps lower than 37-60 month deals. In addition, 61-120 month deals often consume more capital and place downward pressure on these returns, which are approximately 300 bps lower than the return on 37-60 month deals.
This is further evidence, as we noted earlier, that the push for growth trumps all right now – even that means concessions on profitability.
LIBOR and Prime Spreads Move in Opposite Directions
Finally, we took a break from examining fixed-rate pricing to check in on LIBOR and Prime spreads on floating-rate deals.
One-Month LIBOR spreads continued to remain in the 250 to 260 bps range, but rose 7 bps in July, to 2.58%.
Weighted Average Spread to 1-Month LIBOR
Meanwhile, Prime spreads dropped out of their narrow range, falling 11 bps in July, down to 0.28% That’s the lowest level for Prime spreads since March 2020.
Weighted Average Spread to Prime
We’ve noted on several occasions the comparative Yield, NIM, and ROE advantage that prime-based loans compare vs. LIBOR-based loans. Given this higher performance for prime-based instruments, trading a bit of spread here may make sense.
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.