Commercial Loan Pricing Market Update (March 30-April 3)

April 5, 2020 Anna-Fay Lohn

Given the recent economic uncertainty, we’ve been getting quite a few questions from our clients, asking us what we’re seeing in commercial loan pricing activity when we examine the PrecisionLender dataset. 

Each week we’re posting updates based on our observations. We’re looking at several popular metrics, and pointing out areas in which there have been noteworthy changes. Today’s update is through the end of last week – April 3. If you’d like to see our previous weekly pricing market updates, you can find them here.  

NOTE: PrecisionLender’s data reflects actual commercial relationships (loans, deposits and other fee-based business) from 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 Dropped for Third Straight Week 

Week 13 volume was down 27% from Week 12, which in turned had dropped 23% from the previous week. Anecdotally, we’ve heard from many bankers who stated that recent activity has been focused on other items, most notably preparation for the handling of SBA PPP loans. With the early volume that has been reported in PPP loans (in spite of the technical challenges during the early hours), we’re expecting to see another spike in the coming week. 

1-Month LIBOR Incidence Bounces Back

After a sharp drop in incidence during most of March, 1-month LIBOR rates were used more often last week, accounting for 24% of total loan volume. That’s a 26% increase week-over-week (from 19% of total volume in Week 12), but still down when compared to January incidence levels (28% of total volume.) The increase in 1-month LIBOR incidence coincides with a drop last week in fixed-rate loan incidence (down from 46% to 42% of total volume). 

Fixed-Rate COF Decrease, NIM Increases 

The significant decrease (38 bps) in FHLB advance rates on March 27 translated to a  drop in fixed-rate funding costs last week (from 1.77% down to 1.55%). As a result, NIM improved last week for fixed-rate loans, rising by 14 bps (from 1.97% to 2.11%). This marks the third straight week that NIM has risen, week-over-week, for fixed-rate loans. 

Note: We measure NIM with an assumed marginal funding cost, not the bank’s actual average cost of funds. 

While Amortizations Have Fluctuated, Maturities Have Remained Steady

The average amortization on floating rate deal last week was 20 months longer than the same metric in the first week of March (198 months vs. 178). Meanwhile amortizations on fixed rate deals were 10 months longer on average last week (248 months) than the previous time period (238 months). 

However, the maturities for both fixed and floating rates haven’t moved much during March, with floating maturities staying around the 36-month/3-year mark, and fixed maturities clustering around the 80-month mark. 

 

ROEs Are Down in March

While there has been week-to-week variance, ROE entered April at lower levels than when we initially measured three weeks ago. Floating ROEs were down 1.7% (from 20.0% on March 13 to 18.3% on April 3) while Fixed ROEs dropped 1.1% during the same time period (18.1% on March 13, 17.0% on April 3).

Funding Option Costs Diverged in March

An interesting development that may be affecting ROEs has been the divergence of various funding rates in recent weeks. In mid-February, the 1-month FHLB, Treasury, and LIBOR Swap rates were all within 20 bps of one another, ranging from Treasury (1.61%) on the low end and FHLB (1.81%) on the high end.

By early April, the rates had diverged significantly, with 89 bps separating Treasury (0.09%) on the low end from LIBOR swaps (0.98%) on the high end.

One-Month Rates

Divergence also occurred with 60-month rates, though in a different manner.

Again, all three metrics were closely bunched in mid-February, with a range of just 35 bps. By early April, the range was 116 basis points. 

60-Month Rates

This is due to the usual flight to quality in times of market stress. Treasury rates have dropped to near all-time lows, while FHLB and the swap curve have not dropped as far due to higher premiums for both credit and liquidity risk. It should be noted that this is not just a modeling issue; in times of volatility like this, the actual funding rates available to banks also diverge. The larger banks tend to be able to fund their balance sheets at relatively lower rates than smaller banks, due to their perceived safety.

ROE – Affected by Type of Deal and Type of Funding

As a result, the ROE could vary greatly depending on the type of deal a bank was structuring and the funding source available. 

We looked at 6 different examples of loans priced on March 6, vs. March 27. The ROE of a fixed rate 60/240 loan would be roughly 400 bps lower than the same deal on March 6 if it used FHLB as a funding source. But if the same deal used LIBOR Swap funding instead, its ROE improved by 225 bps during the same period.  

 

Got Questions?

Our banking consultants and data scientists are combing through PrecisionLender pricing data every day. If there’s anything you’d like to know about what they’re seeing, please send along your questions to insights@precisionlender.com.

 

 

 

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