Note: If you’re new to these updates, we title them based on the month when we publish them, but they’re based on a review of the previous month’s pricing activity. This is the Commercial Loan Pricing Update for November, based on a review of October data.
Before we dive into the data for this month’s Commercial Loan Pricing Update, here are a few of the key takeaways:
- Pricing volume was at a lower run rate for the second straight month, as compared to average 2023 levels.
- Spreads on SOFR and Prime fell – with SOFR declines largely focused on larger loans.
- Floating rate funding costs stayed steady, but fixed rate funding costs spiked upward, as a result of reduced curve inversion.
- NIM fell on floating rate structures but rose slightly for fixed rate deals.
Read on to get the full story, and updates on other key market metrics.
Volume Levels Down for Second Consecutive Month
October pricing activity reinforced what we saw with September activity. As many FIS are finalizing 2024 financial plans – which include estimates for loan production and for spreads -bankers tell us that the deals they do now must be strategically aligned with institution balance sheet strategy, and that balance sheet maintenance – and even shrinking - is an acceptable outcome.
Priced Loan Volume in $
Indexed to January 2023 = 100
SOFR Spreads Decline – Particularly on Larger Deals
SOFR continues to move in a narrow 10 bps range since March, but it dropped 5 bps down toward the bottom of that range last month, to 2.57%.
However, it’s worth noting that the SOFR index itself have moved up 100 bps in 2023, via 4 rate hikes. The entire cost of that increase has been passed on to borrowers.
Weighted Average Spread to SOFR
We looked more closely at SOFR spreads and found that downtick was largely focused on the larger (>(>$25M) commitments; other commitment tranches remained little changed. The >$25M tranche posted 2.42% spread in October, down 21 bps from September, and reversing an upward trend from the past 7 months.
Spread to SOFR on Floating Rate Loans by Commitment Amount
Spreads to Prime Also Drop
Prime spreads also fell last month, dropping 7 bps. Unlike SOFR, this drop could be seen across all commitment tranches.
We suspect the high relative coupon rates on Prime-based structures deter some borrowers from accepting higher spreads, while the attractive NIM results on these structures appeal to bankers – even when the spreads drop. Pricing results appear to reflect these sentiments.
Weighted Average Spread to Prime
While Floating Rate Coupons Fall, Fixed Rate Coupons Surge
Both the Prime and SOR coupons fell, with drops that essentially matched their decreases in spread to index. Meanwhile, fixed rate loans added another 20 bps in October, up to 7.18%, on top of a 10-bps gain in September.
This market has been unique in that fixed-rate loans represent the lower cost options for most borrowers. Bankers tell us that some borrowers are willing to accept the fixed-rate structure in return for those lower costs in the near term, but that other borrowers remain skeptical about locking in on a long-term rate and are continuing to seek alternatives.
All rate type coupons have moved up YTD, tracking the four rate hikes, again a sign that bankers are passing on their higher costs to borrowers.
Coupon Rate by Month, Rolling Trend
Fixed Rate Funding Costs Rise, Floating Rate Costs Remain Unchanged
Floating rate funding remained unchanged over the past two snapshots, staying at ~5.54%, per the FHLB one-month reference.
While the 60-month term remains the low point for most fixed rate borrowing costs, the FHLB 60-month reference now has moved up to 5.0% and is closer to bank’s stated marginal cost of funds range that we reported on in the past two updates -- perhaps lessening the need for FI management initiated adjustments. In addition, the negative carry from the 1-month to 60-month point has narrowed to 54 bps from 81 bps at 9.30.23 and from 120 bps at 4.30.23 — as the inversion trough becomes shallower.
The upward movement in the FHLB curve in the 36-84 month range, where fixed-rate loans are typically priced and funded, has moved upwards ~65 bps since the June 30 snapshot, a lift that is captured both in the coupon rate increase (~60 bp) and funding costs (~55 bps) during that time span.
FHLB Composite Curve
Floating Rate NIM Falls; Fixed Rate NIM Rises Slightly
The recent decrease in SOFR and Prime spreads translated to corresponding drops in NIM fell — both are at their lowest points in 2023.
Fixed rate structure NIM managed a 4-bps increase, driven by the 20-bps lift in coupon, which helped counter the 16 bps increase in funding costs.
Loan NIM by Month
Our banking consultants and data scientists are combing through Q2 PrecisionLender pricing data every day. If there is anything you’d like to know about what they’re seeing, please send your questions to email@example.com.