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 May 2021.
In many of our early conversations with PrecisionLender clients, we often show this simple Venn diagram.
It’s meant to guide a conversation about strategy. Where a bank chooses to focus in one of these three areas always has an effect on what happens in the other two.
We bring that up in today’s update because, as you’ll see in the charts below, commercial banks right now are clearly focusing on growth, at the expense of returns/profitability. (And as Dallas Wells and Jim Young discussed in the latest Purposeful Banker podcast, risk mitigation is also now less of a focus.) That’s not a new story for fixed-rate loans, but it appears that LIBOR-based floating rate loans may also be joining that narrative.
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 Continues to Climb
The strong pricing volume numbers we observed in March and April continued into the first half of May. March and April 2021 represented the largest month-to-month increases since March 2020, when the pandemic began and interest rates plummeted. May, so far, is on pace to surpass both months.
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)
Floating-Rate Spreads Drop
After staying within a 10-basis point range for much of the past year, LIBOR spreads dropped sharply in the first half of May, down 14 bps to 2.45%. That matches the lowest mark (March 2020) since the pandemic began and the move is the largest we’ve seen since we have been tracking this metric. We’ll continue to monitor this to see if it’s an anomaly or the beginning of a trend or new run rate.
LIBOR Spread to Index
Prime spreads also dropped in this period, though not as dramatically, falling six basis points. Still, at 0.39%, Prime spreads are now at their lowest levels since March 2020.
We have reported on the “resistance” to increased coupon rates for fixed rate loans in previous updates. There may be pressure on floating rate coupons as well for the same reasons: High institutional liquidity contributes to bankers working toward deal success/volume goals.
Prime Spread to Index
Fixed Rate Spread Stabilizes
For a change, fixed-rate spreads weren’t the main story in this period. They had mixed results, with the average spreads falling 4 bps to 2.93% while, the weighted average spread increased 5 bps to 2.47%.
Fixed-Rate Spread Trend
Funding Curve Largely Unchanged; Small Changes in COF
The 3-Month Libor Swap Curve – which we use as a proxy for interest rates and funding costs – has been largely unchanged over the past six weeks, for both fixed- and floating-rate funding. There was a slight drop in fixed-rate COF (- 6 bps), thanks to a decrease of three months – from 77 to 74 – in overall maturity. Similar-sized increases in COF for floating-rating loans are likely a result in reduced liquidity premiums.
3-Month LIBOR Swap Curve
Coupon Rates Track Spread Shifts
With funding costs not moving much, the coupon rates for fixed- and floating-rate loans in the first half of May largely tracked the aforementioned shifts in spread. Prime-based coupons fell 6 bps, the same amount as prime spreads, while LIBOR-based coupons were down 15 bps, just a tick more than the 14 bps drop in LIBOR spreads. Meanwhile fixed-rate coupons were a non-story, up just one bps in the first half of May.
Coupon Rate by Month, Rolling Trend
NIM Gap Narrows Between Fixed and 1-Month LIBOR
Fixed-rate NIM was up for the first time since February. The 9 bps increase was a combination of the drop in COF, the small increase in the fixed-rate coupon and a slight increase in yield.
The more compelling story emerges when that fixed-rate NIM increase is paired with the 21 bps drop in in 1-Month LIBOR floating rate NIM. Previously we’d reported about how the NIM gap between fixed-rate and 1-month LIBOR floating rate had widened significantly since October 2020. But it’s now narrowed rapidly in the first half of May, with just 3 bps separating the two markts.
NIM by Month, Rolling Trend
ROE Cushions Gone for Fixed and LIBOR-Based Floating
When we looked in on ROE vs. Bank targets in our previous update, we noted that, after spending much of 2020 protecting fixed-rate margins, banks had clearly changed pricing tactics, as their ROEs had fallen from 2.7% above targets in December to just 0.1% in April. The fall continued in the first half of May, with fixed-rate ROE now actually below bank-set targets.
Meanwhile, the rapid change in 1-Month LIBOR floating rate pricing has had a dramatic effect on ROEs for that period. The 1.2% cushion above target they enjoyed in April disappeared almost entirely in May.
ROE vs. Target, Overall
Taking a closer look at just Fixed and 1-Month LIBOR ROEs gives another sense of the rapid shift in how things have changed for LIBOR-based floating rate loans. Just as with NIM, the ROE gap between these two groups has narrowed significantly.
ROE Trend – Fixed and LIBOR
We’ll continue to monitor this in future updates, but at first blush it appears that the pricing tactics for fixed-rate loans we’ve observed in recent periods - where excess liquidity appears to have spurred a push for volume and thus a willingness to accept reduced spreads – have now also adopted by banks with LIBOR-based floating rate loans.
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.