Tightening Credit or Loosening Structure? A Bit of Both.

In the course of doing our analysis for our annual State of Commercial Banking webinar and report, we began to develop a theory about a brewing conflict between the credit and sales sides at banks. 

Credit folks had responded to surveys saying they expected standards to tighten in 2020. 

Meanwhile, we’d been hearing anecdotally from front-line bankers that competition for deals was competitive as ever, forcing them to concede on structure to win or maintain important relationships. 

So, based on 2019 data, which side is likely to carry out their approach in 2020? 

Both. 

How can two opposing pricing strategies play out in the same market? Because in 2019, there were really two markets. 

The data suggests that bankers driven to achieve the loan growth, NIM, and cross-sell goals pulled out all the tools in their arsenal to win business – but did so selectively. They lengthened terms, accepted less collateral coverage, and cut rates for larger banking relationships that were more impactful to the bottom line. 

Meanwhile … 

Bankers became more restrictive on smaller, higher-risk accounts – which are more likely to suffer in the event of a future downturn. 

This market bifurcation bore itself out in several ways. A few examples are listed below:

Prime Spread Trends

Note that on smaller deals, banks held out for higher spreads in 2019, while on the opposite end of the spectrum, they accepted less than in 2018. 

The same dynamic played out when we looked at LIBOR.

Risk/Return on LIBOR-Based Credits

For the larger, lower-risk deals, banks were willing to accept spread compression. But as the risk rose (and the deal sizes fell), banks held out for a higher pay-off. 

That was just one of the interesting findings that surfaced during our dive into 2019 commercial banking data. To learn more, make sure to register for our upcoming webinar, the State of Commercial Banking: 2020 Market Analysis. 

 

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