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 March 2021. The big story was continued volume growth, combined with NIM decreases across the board. 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.
March Pricing Volume Starts Strong
The pricing volume for the first half of March is already at 69 percent of the total indexed to July 2020 (the monthly average since July is 94%, with July indexed at 100%). This continues the upward trend we saw in February. March is now on pace to be the strongest month for commercial pricing volume since July.
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 Commercial Loan Volume, by Month
Indexed to July 2020 = 100
Funding Curve Steepening Continues
The 3-Month Libor Swap Curve – which we use as a proxy for interest rates and funding costs – continued its six-month steepening trend. The 60-month rate on the March 12 snapshot was already 15 basis points higher than the Feb. 26 snapshot, while the 120-month rate was 7 bps higher. The curve then flattened on the far end for the 240-month and 360-month rates.
As noted before, this steepening is only a fixed-rate story for loans priced with maturities beyond 24 months. The 1-month floating rate has been largely static in recent months.
3-Month LIBOR Swap Curve, Selected Dates
Fixed-Rate Funding Costs Climb Rapidly
Not surprisingly, given the aforementioned funding curve steepening, fixed-rate funding costs also went up in the first half of March. It’s the continuation of the marked increase we observed during the second half of February. In total, fixed-rate COF has jumped up 26 bps across the last two observation periods.
Meanwhile, COF went up just one basis point for prime-based floating-rate loans and three basis points for LIBOR-based floating-rate loans.
As a reminder: PrecisionLender uses an assumed marginal funding cost, not the bank’s actual average cost of funds.
COF by Month, Rolling Trend
Floating-Rate Spreads Dip
Spreads on floating-rate loans dropped back down toward the lower-end of their pandemic period ranges – LIBOR dipped 10 basis points to 2.53% and Prime went down 5 basis points to 0.44%.
What’s interesting is that the continual movement up and down in those ranges has been occurring while floating-rate funding costs have remained largely unchanged since September 2020. The indication is that spread reminds a sensitive negotiation point during floating-rate loan pricing conversations. That said, bankers appear to be largely protecting the spread increases we saw last spring after the rate drops.
Weighted Average Spread to 1-Month LIBOR
Weighted Average Spread to Prime
Fixed-Rate Spread Decline Slows
With the exception of an uptick in the first half of February, fixed-rate spreads have declined significantly thus far in 2021, down 38 bps so far this year. The silver lining: the decline in the first half of March was slight – just 2 bps after the 21 bps drop in the second half of February.
Fixed-Rate Spread Trend
Fixed-Rate Coupons Increase; Floating-Rate Coupons Drop
Minimizing the spread decline while funding costs increased markedly meant that the coupon for fixed-rate loans increased by 9 bps.
Meanwhile, the drop in the coupons for floating-rate loans (-11 bps for LIBOR and –5 bps for Prime) essentially mirrored the decreases in spreads to the index.
Coupon Rate Trend
NIM Falls Across the Board
The fixed-rate coupon increase though, wasn’t enough to offset the COF increase. Meanwhile, fee levels on fixed-rate deals remained largely unchanged. Thus, yields didn’t rise enough to keep fixed-rate NIM from dropping again. It’s fallen 27 basis points over the last two observation periods.
While NIM also fell for floating-rate loans (9 bps for LIBOR and 4 bps for Prime) the NIM gap between Libor-based floating-rate loans and fixed-rate loans continues to widen. (We previously noted this in January). Back in October 2020 LIBOR-based floating-rate NIM was just 8 bps higher; in the first half of March it was 30 bps higher.
NIM by Month, Rolling Trend
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.