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 second half of March 2021. The lead items are the increase in pricing volume last month and the continued steepening of funding curves. 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.
Sharp Increase in March Pricing Volume
The strong pricing volume numbers we observed in early March continued through the rest of the month. It’s the largest month-to-month increase 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)
This sort of increase necessitated a deeper dive into the data. We found that the growth was broad-based, both across the PrecisionLender client institutions (about 66% showed volume growth in March) and across all loan sizes. The overall growth rate was 28% month-over-month. (See chart below).
That said, the growth rates for pricing activity were greater among larger banks than community banks. And we found more growth among larger loan amounts as well.
As we’ve stated before: We don’t know yet whether this is the beginning of a trend, an anomaly, or a new rate. We will continue to monitor it.
Priced Loans by Amount, March over February Growth
Funding Curve Steepening Begins at 24 Months
The 3-Month Libor Swap Curve – which we use as a proxy for interest rates and funding costs – continued its seven-month steepening trend, but with a notable change. Whereas in previous months the steepening began at the 36-month point, our end of March snapshot showed a 6 bps separation at the 24-month mark.
These rate increases caused fixed-rate loan funding costs to increase, but as we continue to note, this steepening is only a fixed-rate story. The 1-month floating rate has been largely static in recent months.
3-Month LIBOR Swap Curve, Selected Dates
Liquidity Costs Continue to Drop
Periodically we like to check in on the PrecisionLender estimated liquidity curve. We estimate this curve from the market rates on Brokered CDs and Interest Rate Swaps. While interest rate swap rates have been on the rise during 2021, Brokered CD rates have not moved as much in comparison.
As a result, this measure of liquidity has fallen to near 0 (see chart below). In addition, the curve is now largely flat since mid-2020. Anecdotally, we hear from clients that balance sheets are well supplied with deposits – an indication of institutional liquidity.
Estimated Liquidity Curve Trends
Selected Term Points
Fixed Rate Funding Costs Spike in March
Despite the aforementioned drop in liquidity premiums, cost of funds for fixed-rate loans shot up in March, by 22 bps – mirroring the increase and steepening of the funding curves. It’s the highest fixed-rate COF measurement over the past 7 months. Meanwhile, COF for LIBOR- and Prime-based floating-rate loans remained relatively unchanged.
As a reminder: PrecisionLender uses an assumed marginal funding cost, not the bank’s actual average cost of funds.
COF by Month, Rolling Trend
Fixed-Rate Coupons Increase Slightly
The fixed-rate coupon did increase again in March, continuing to climb since dropping to 3.44% in January. But the 6 bps increase to 3.60% is still significantly less than the COF increase of 22 bps. In addition, fixed-rate spreads down slightly in March, by 2 bps.
Meanwhile, coupons for both 1-Month LIBOR and Prime-base loans were relatively stable – each dropped 3 bps in March. Spreads to LIBOR and Prime were up 2 and 3 basis points respectively.
Coupon Rate by Month, Rolling Trend
Fixed-Rate NIM Drops
With the fixed-rate coupon increase failing to match the rise in COF, fixed-rate NIM suffered. It fell 16 basis points in March (to 2.39%) and is now down 35 basis points over the last six months. The NIM gap between LIBOR-based floating-rate loans and fixed-rate loans, once just 8 bps in October 2020, is now 34 basis points.
NIM by Month, Rolling Trend
The Full Fixed-Rate Story
We’ve explored the details of fixed-rate loan activity in several charts each update. To tell that story more succinctly, we brought the various aspects into one view on the chart below.
We found that fixed-rate loans may be showing some resistance to increasing coupon rates at the same pace as marginal funding costs. The former has increased by 16 bps from January to March, but during the same period COF has risen by 27 basis points. Meanwhile, the weighted spread has fallen in 2021 down to 2.52% in March. As a result, NIM contracted from 2.68% in December 2020 to 2.39% in March.
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.