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 second half of April 2021. We took a closer look at what's driving the continued increase in pricing volume, as well as where banks are struggling to generate ROE on fixed-rate loans. 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 insights@precisionlender.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.
April Volume on Par With March
The volume pace set in the first half of April continued into the second half, as the month finished with loan volume numbers very close to the high marks set in March – well above the monthly average for the 10 months dating back to July 2020.
Priced Loan Volume, by Month
(Indexed to July 2020 = 100)
As we did with the market update at the end of March, we dug into the volume numbers to see what they would tell us about where the growth is occurring. We compared April’s numbers with February, the last month before volume spiked upward, and placed them alongside the March/February comparison.
Interestingly, the April growth was driven more by the $10-25M loan tranche, as opposed to the >$25M loan tranche that keyed March growth.
% Priced Loans by Amount, MOM Growth
Fixed-Rate Spreads Continue to Decline
The downward march of fixed-rate spreads continued in the second half of April, continuing a slide since October 2020. We’ll get more into the details below.
Fixed Rate Spread Trend
Slight Easing in Fixed-Rate COF
While funding costs (and the funding curve) for floating rate loans again remained largely static, fixed-rate COF dropped slightly in the second half of April. The funding curve was largely unchanged from the first hal of April; a drop in maturities from 77 months to 75 accounted for the COF decrease.
COF by Month, Rolling Trend
LIBOR Coupons Rise
The only notable shift in coupons occurred with LIBOR-based floating rate coupons. Their 10 bps increase is explained by a comparable 9 bps increase in the spread to 1-Month LIBOR. That increase, when coupled with previously mentioned static funding costs, and an increase in yields, led to a 14-bps NIM improvement for LIBOR-based floating rate loans in the second half of April.
Fixed-rate coupons dipped slightly in April (- 3 bps) while Prime-based floating rate coupons continued in the narrow 5 bps track it’s had since December 2020.
Coupon Rate by Month, Rolling Trend
The Full Fixed-Rate Story (Part 2)
The continued decline in fixed-rate performance necessitated another deeper dive into the data – something we first did in our Market Update at the end of March.
First, we pulled together multiple metrics on the same chart to highlight what’s happened to fixed-rate NIM since the end of 2020. During that time, the coupon has been largely unchanged (up just 4 bps since December 2020), while spreads have declined (-45 bps in same period) and funding costs have risen (+42 bps in same period). It’s a recipe for significant margin compression (-36 bps since December 2020).
Fixed-Rate Loan Coupon Resistance and NIM Pressures
Fixed-Rate NIM by Tranche
We dug a level lower and looked into fixed-rate NIMs in two of the most popular maturity tranches: 13-36 months and 37-60 months. Together those two tranches represent 55% of the loan volume in the PrecisionLender database. Both tranches have shown downward NIM trends since December 2020: 33 basis points for the 13-36 month tranche and 52 basis points for the 37-60 month tranche.
Fixed-Rate NIM Trend, by Selected Maturity
ROE Trends vs. Target
We then took a step back from the deep dive into Fixed-Rate NIM to see how both fixed- and floating-rate loans were faring in terms of ROE vs. Target.
Prime-based floating-rate loan ROEs have stayed well above targets during the December 2020-April 2021 period, moving upward in January and staying in a tight range since then. LIBOR-based floating-rate loans ROEs have dropped closer to targets during this period but are sill 1.2% above.
The fixed-rate ROE story stands out. It’s fallen from 2.7% above target in Dec. 2020 to just 0.1% in April.
ROE vs. Target, Overall
Fixed-Rate ROE vs. Target
We pulled out the fixed-rate ROE vs. Target comparison to provide a clearer picture.
Fixed-Rate Trend: ROE vs. Target
Fixed-Rate ROE vs. Target by Maturity Tranche
Finally, as we did with fixed-rate NIM, we dug a level deeper to examine how fixed-rate ROEs compared to targets in the 13-36 month and 37-60 month maturity tranches. It’s a marked contrast.
Recall that at the end of 2020 we wrote that bankers had managed to hold firm on fixed-rate spreads and thus improve margins when funding costs dropped during the pandemic. That ROE cushion is still in place for 13-36 month maturities.
ROE vs. Target Trend, 13-36 Month Maturities
But for 37-60 month maturities, it’s all but disappeared.
ROE vs Target Trend, 37-60 Month Maturities
Got Questions?
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 insights@precisionlender.com.
