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 October, based on a review of September results. 

As we continued to comb through our commercial loan pricing database this month, we uncovered a notable contraction in volume — the first time this metric has dropped since March. 

And while loan NIM continues to stagnate, the value of deposit NIM keeps rising — underlining the behavior we’re seeing as banks push to retain and add more deposits. 

Read on to get the full story. 

Volume Drops for First Time in Months 

September marked the first month that loan volume deviated from a five-month stretch of steady activity. And the drop is widespread; it’s observed among institutions across all segments. It appears the sentiment we’ve been hearing from bankers for months has come to fruition: deal selectivity is vital to bank strategy and available liquidity is being carefully deployed. 

Priced Commercial Loan Volume in $
Indexed to January 2023 = 100

Spreads Remain High  

It’s no surprise then that bankers continue their efforts to protect spreads as well. We’ve now seen five months of consistent spreads to SOFR (2.62% for September) that all fall within the high end of the range since ~January of 2022. In addition, spreads to prime advanced 1 bps to 0.22%.  

Weighted Average Spread to SOFR

Loan NIM Continues to Tread Water 

Despite the more selective approach to lending, September’s data for spreads, funding costs and coupon rates (see details for the latter two metric lower in this article) all added up to another month in which loan NIM continued to tread water.  

NIM by Month, Rolling Trend

This prompted us to ask: “What are bankers doing to offset flat performance shown in loan pricing?”

Deposit NIM Expands, Exceeds Loan NIM 

FIs have demonstrated an ability to increase the rate they’re paying for deposits and to expand the FTP credit for those deposits. In fact, the FTP credit rate has moved up 155 basis points more than deposit costs over the past year, expanding Deposit NIM from 194 bps in July 2022 to 349 bps in August 2023. This signals to bankers the high value of adding deposits into their new opportunity conversations. 

Deposit Rate and FTP Credit

It’s probably not accidental then that Deposit NIM was 116 bps higher than Loan NIM in August 2023. Cross sell matters a great deal right now because deposits are generating more of the overall bank NIM.  

Deposit NIM vs. Loan NIM

Bigger Banks Outperform on Cross-Sell 

Given that importance of cross-sell and how much we hear relationship banking emphasized during our conversations with bankers, we took a closer look at cross-sell activity across segments to see if the emphasis has yielded results. 

Overall, bankers are recording expected cross sales within their pricing opportunities about 30% of the time. More specifically, the >$50 billion segment are recording loan pricing cross-sell to a higher degree than both the $10-$50 billion and the community segments.

% of Opportunities Including Deposits or Non-Credit Business

While the bigger banks have slightly higher rates of cross-sell frequency, they really separate themselves from the other segments when it comes to how much they’re bringing in when they expand beyond loans. For opportunities priced in Q3 that included a deposit cross-sell element, bigger banks expected to bring in a deposit to loan ratio of 76%. That’s up 9% over Q1. Meanwhile, community and regionals each expect to produce a ratio of only 14% on Q3 priced opportunities that include deposits. 

Ratio of Expected New Deposits to Loans on Priced Opportunities with Deposit Cross-Sell 

Fixed-Rate Funding Costs Rise, While Floating Remains Flat  

Turning back to loan-pricing metrics, the FHLB’s 60-month reference moved up to 4.72%, a 28-basis point increase since the end of August snapshot. This is now closer to banks’ marginal cost of funds - which exceeded the FHLB curve last month – and perhaps lessens the need for FI-initiated adjustments. 

The inversion trough has also shallowed: The area framed in red on the chart below shows the upward movement in rates since the June 30 snapshot for fixed rate loans priced and funded between 36 and 84 months. Stated differently, the negative carry from the 1-month to 60-month point has dropped to 81 bps, down from 120 at the April 30 snapshot and 96 bps on June 30.   

Meanwhile, floating rate funding costs were essentially flat – 5.53% at the 1-month reference. 

FHLB Composite Curve, Selected Dates 

We also continue to track All in Cost of Funds. Fixed-rate COF is up 12 bps to 5.14% while SOFR COF dipped for the first time in 2023, down 7 bps to 5.95% (likely aided by reduced liquidity costs, which dropped 3 bps to 0.49%). 

Coupon Rates Hold Steady 

Finally, Coupon rates for prime and SOFR structures continued to hold steady. Meanwhile, fixed rate coupons jumped 10 bps this month, to 6.98%. 

Note: The mix of loans priced has been largely consistent year-to-date, with SOFR floating at 47% (up from 41% in January), fixed at 24% (down from 31% in January) and prime floating at 13% (up from 11% in January).    

Coupon Rate by Month, Rolling Trend

Got Questions? 

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 insights@q2.com.