Note: You may have noticed the slight change in the title of this piece. Throughout 2023, banks have continually asked about what we’re seeing on deposits in our commercial pricing database. Given that the level of interest in deposits shows no signs of decreasing anytime soon, we’ll be including deposit metrics in our updates moving forward.
Before we dive into the data for this month’s update, here are a few of the key takeaways:
Rates paid for deposits continued to climb, but deposits remain very attractive as a funding option, and this value is reflected in FTP credit rates on these funds.
Despite numerous market challenges in 2023, bankers have held the line on commercial loan NIM.
That said, bankers continue to encounter difficulties when pricing fixed-rate loans.
Read on to get the full story, and updates on other key market metrics.
Deposits Remain Extremely Valuable
Since the fourth quarter of 2022, financial institutions have steadily increased the rates they have been willing to pay to secure deposits – a move that has enabled the FIs in our database to essentially “break even” in 2023, when it comes to deposit outflows vs. inflows. The overall deposit costs are nearly 1.60% as of October up about 100 bps from December 2022. And thanks to an even larger expansion in the FTP credit for funds (generally assigned by FI management), deposit NIM also steadily increased in 2023 and ended October at 354 bps, well above loan NIM levels of ~230 bps.
Deposit Rate Paid
Deposit Rate Paid vs. FTP Credit for Funds
Pricing Activity Continues to Ebb
Against the backdrop of limited deposit growth, FIs are also slowing their pursuit of loans. Anecdotally, bankers are telling us that they’re being more strategic about how they’re deploying their liquidity, and that shrinking the balance sheet is an acceptable outcome in the pursuit of higher quality deals. That’s reflected in the last three months of reduced pricing volume.
Priced Loan Volume in $
Indexed to January 2023 = 100
NIM Levels Remain in Narrow Ranges on Loan Pricing Activity
As noted in the introduction, throughout 2023 bankers have largely managed to protect NIM in 2023, despite difficult market conditions. SOFR NIM has remained in a narrow 2.20%-2.30% range throughout and rose to 2.29% in November. Meanwhile, fixed rate NIM has remained between 2.07%-2.18% since May. Note the drop in NIM on prime-based loans, about 20 bps since April, where alternate structures likely came into play during deal conversations.
Loan NIM by Month
Rolling Trend
Spreads are Consistent Across Indices
How have bankers been able to defend NIM in 2023? The first key factor has been their consistent application of spreads. Spreads to SOFR and been consistently around 2.6% since May, while Prime spreads have hovered around .2% since July.
Weighted Average Spread to SOFR
Fixed-rate spreads have lagged behind SOFR spreads in 2023, despite the comparative discount of fixed rate structures compared to their floating rate counterparts. Fixed-rate spreads have remained consistent, hovering around ~1.85% since June. The April and May spike appears to be an outlier.
Weighted Average Fixed Rate Spreads
Coupons Account for Rate Hikes
In addition to consistent spreads, bankers have protected NIM in 2023 by steadily absorbing the four rate hikes this year and passing those higher funding costs and index values on to borrowers in the form of higher coupons.
Note though that fixed-rate loan coupon took a dip in November – which reflects a significant drop in funding costs.
Coupon Rate by Month, Rolling Trend
Funding Costs Up YTD
Floating-rate funding costs climbed nearly 100 bps in tandem with the four 25 bps rate hike through July 2023 from a base of 4.60% to 5.50%. Note that since the last rate hike, floating rate loan funding costs have remained steady at about 5.50%. Meanwhile the middle section of the curve, which is commonly used for fixed rate loan pricing, has moved in both directions in recent months. After rising in September and October, the FHLB curve dropped significantly in November and continued to drop in early December, steepening its inversion to 120 bps. More on that below.
FHLB Curve, Selected Dates
Liquidity Costs Remain Elevated
In addition to the rise in base funding costs, FIs have also encountered persistent and elevated liquidity costs. Bankers have absorbed about 20 additional bps of FI imposed liquidity costs since March 2023.
Approximate Liquidity Cost, Rolling Trend
Inverted Yield Curve Makes Things Difficult for Fixed-Rate Lending
In addition to higher liquidity premiums, bankers attempting to price fixed-rate structures this year have had to deal with an inverted yield curve, with 100+ bps of amplitude.
FHLB Carry, 1-Month to 60-Months
This throws off pricing reference rates in relation to FI funding costs for bankers originating fixed rate deals. For example, while reference rates dropped 58 bps in November compared to October, the base COF dropped only 17 bps. It was the latest of several instances since June in which base funding costs have moved above the frequently used FHLB 60-month point since June.
Fixed Base COF vs. FHLB Curve 60-Month
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.
