Note: Don’t worry! You haven’t missed one of our commercial loan pricing market updates. We’ve made a slight change to the title of these posts to clear up a bit of confusion with our readers. The title now reflects the month in which we’re sending you the update – so this is the Commercial Loan Pricing Update: June 2023.
As we continued to examine the PrecisionLender commercial loan pricing database for potential signs of credit tightening, the signals remain mixed. While market factors referenced in this update – like spreads to index, liquidity, and funding costs – would seem to point toward tightening, we have yet to see the changes in bank approach – to capital assignments, loan loss provisions, and LTV – that would confirm this is the case.
Here are some of the key takeaways that we’ll discuss in greater depth below:
- SOFR spreads rose – powered by bigger banks. Meanwhile prime spreads moved closer to negative territory.
- Spread increases were largely negated by rising funding costs, leading to largely unchanged NIM numbers.
- Smaller banks and larger banks are taking different routes to adding in similar liquidity premiums.
Deal Volume Rebounds
Pricing activity move back upward in May to 136% of the July 2022 benchmark – the second highest mark of the past 11 months. The uptick in activity was present across the market, with 60% of community banks and 80% of regional/enterprise banks showing growth.
Priced Commercial Loan Volume, by Month
(Indexed to July 2022 = 100)
SOFR Spreads Reach Their Highest Levels
Spreads to the SOFR index show signs of trending higher, reaching 2.63% in May – the highest mark since we began regularly reporting on this metric in January 2022. As part of the aforementioned “mixed signals,” this one could be seen as a sign of potential credit tightening.
SOFR structures overall represent nearly 50% of the balances priced – 43% from SOFR floating structures and 6% from SOFR Swaps.
Weighted Average Spread to SOFR
Bigger Banks Are Driving the SOFR Spread Increase
While regional banks have been consistently garnering higher spreads to SOFR, it was the enterprise banks that pushed up the overall spread numbers in May. SOFR spreads in that segment increased by 18 bps from April to May – to the highest levels so far in 2023.
Trend in Spread to SOFR by Segment
Prime Spreads Heading Toward Negativity Territory?
Meanwhile, spreads to prime dropped to their lowest point since we began our market updates back in March 2020 – just 5 bps.
Weighted Average Spread to Prime
But this drop, must of, course, be considered within the context of the coupon rate on prime deals. Given that prime coupons continue to climb (to 8.27% in May), it wouldn’t surprise us to see continued downward pressure on prime spreads, perhaps even into negative territory.
Coupon Rate, by Month
NIM Remains Flat
The rising coupon rates reflect bankers’ attempts to pass along some of their rising funding costs to the customer. But the costs continue to rise at a faster rate. Thus, despite improved spreads, net interest margin remains relatively flat. Or, if you prefer a positive spin, despite rising funding costs, bankers were able to push for spreads that enabled them to protect their current margin levels.
NIM by Month, Rolling Trend
A Close Look at Liquidity Curves
Using the aggregate results from PrecisionLender clients, we’ve constructed the liquidity curve below.
It remains positively sloped and moves from about 45 bps to about 220 bps for the May 2023 loan pricing activity when sliced into loan maturity tranche. (Note: This view includes only those institutions and loans that have a liquidity cost as part of the total funding cost.)
The average liquidity cost for May for this subset of all loans is about 78 bps. This value is low when compared to the shape of the curve because of the distribution of balances—85% of balances are within the 60-month maturity point where liquidity costs, when present, run from about 34 bps to 86 bps.
Funded Liquidity Premium by Loan Maturity
Different Approaches to Liquidity Premiums
Finally, we wanted to share an interesting finding related to the different approaches taken by smaller and larger banks when it comes to liquidity premiums. We’ve noted before that bigger banks add in their own liquidity premiums when calculating their funding costs.
Liquidity Premium Within Overall Cost of Funds
But it’s also worth noting that the FHLB funding curve favored by many community banks is considerably higher than its SOFR counterpart.
Funding Curves Comparison
FHLB vs. SOFR Swap
To compare all-in funding costs, we then added in the implied liquidity premium curve to the SOFR swap curve to see how it would then compare to FHLB.
The result should give community banks a measure of comfort; the FHLB curve appears to include a liquidity premium that is commensurate with what bigger banks are adding after performing their internal calculations.
Funding Curves Comparison
FHLB vs. SOFR Swaps + Liquidity Premium