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.
In today’s analysis, for the month of August 2021, volume’s upward trajectory continued, while fixed-rate and prime spreads to index returned to pre-pandemic levels. Meanwhile, we saw our first notable amount of SOFR pricing activity.
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 mailto:firstname.lastname@example.org.
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.
Pricing Volume Reaches Highest YTD Levels
The volume trend that began back in March has continued through the summer. August’s pricing volume was the highest monthly total in 2021, just edging out the high previously set in June. The monthly average for 2021 is now 30% higher than the volume priced back in January.
Priced Commercial Loan Volume by Month
(Indexed to January 2021 = 100)
Prime and Fixed-Rate Spreads Back to Pre-Pandemic Levels
We tried a different visualization this month, to get a better sense of how spreads have been trending since the onset of the COVID-10 pandemic.
We found that spreads for both fixed-rate and prime-based loans – after rising in the early months of the pandemic – have since fallen to pre-pandemic levels.
Prime Spreads to Index During Pandemic
After staying in a 10-basis point range for 12 months, Prime spreads have fallen 19 basis points since April. Still, the instruments originated from April 2020-April 2021 with spreads pushing 50 bps may bring a tailwind of boosted income over the average 27-month maturity of those loans.
Fixed-Rate Spreads to Index During Pandemic
The decline in fixed-rate spreads began earlier, at the start of 2021, but there’s been a recent bounce-back of 19 basis points from the lowest levels, reached in June. Still, in the face of institutional liquidity and ambitious growth goals, it’s hard to say where fixed-rate spreads head from here. As for the loans booked during the period of higher spreads (March 2020-January 2021), they may present a comparative earnings boost over the course of their time on the books. The average maturity of these loans is approximately six years.
LIBOR Spread Gains During Pandemic Continue to Hold Up
Meanwhile, LIBOR spreads have dropped a bit since late 2020 but are still ~15 bps higher than their pre-pandemic levels. A possible explanation: the low level of the LIBOR rate (~9 bps) may make it easier to maintain a higher spread.
LIBOR Spreads to Index During Pandemic
SOFR Activity Is Now on the Radar
August was the first month in which PrecisionLender clients began pricing floating rate loans tied to SOFR in notable volumes. About 11% of our clients participated with live, saved opportunities.
So, we added it to our usual monthly chart of Spreads to 1-Month LIBOR as source of comparison. While we previously mentioned that LIBOR’s low rate index may be helping maintain spreads, it’s worth noting that SOFR’s rate index (~5 bps) is even lower.
Weighted Average Spread to 1-Month LIBOR and SOFR
Funding Cost Trends, YTD
We opted for a different data visual this month when it came to funding costs. Rather than show the latest slop of the 3-Month LIBOR Swap Curve, our usual proxy for funding costs, we instead used the curve to chart the rates for 60-month maturities (our proxy for fixed-rate loans) and 1-month maturities (our proxy for floating-rate loans).
We also checked 84- and 120-month maturities. Both moved in virtual lockstep with the movements of the 60-month maturity – a steady progression upward since the start of 2021, with a slight dip in the early days of August.
That’s also resulted in a widening gap in funding costs between fixed-rate and floating-rate loans, as the latter has remained virtually unchanged throughout the pandemic.
3-Month LIBOR Swap Curve, Selected Maturities
Answering a Few NIM Questions
Finally, we went back to one of our standard charts, a look at NIM trends over the past six months. We were curious about how these numbers reconciled with some of our other findings.
Why was the Prime NIM up 10 bps month-over-month despite a 2 bps drop in Prime spreads during that same period?
Also, the Prime coupon and fixed-rate coupon were the same in August – 3.51% - but Prime NIM was 126 bps higher than fixed-rate NIM. That’s partially due to the funding cost difference we noted in the previous section. But it doesn’t explain the entire gap.
NIM by Month, Rolling Trend
Prime-Based Loans Enjoy Greatest Yield Lift
The rest of the answer lies in the Yield. Prime-based loans in August got an average of yield lift of 58 basis bps thanks to net fee income, while fixed-rate loans were only boosted by an average of 11 basis points of net fee income. That lift in the Prime yield was 8 points more than the previous month and more than offset the slight drop in Prime spreads.
Meanwhile the lower yield boost on fixed-rate loans, along with their aforementioned higher funding costs, explains why they trail the Prime-based structures so significantly in NIM and ROE.
Recent Yield Trends vs. Coupon
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 email@example.com.