Commercial Loan Pricing Market Update: September 2023

September 5, 2023 Anna-Fay Lohn

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 September, based on a review of August results. 

As we combed through our commercial loan pricing database for August, we found that many of the metrics mirrored what we saw in July. Overall, bankers are continuing to protect NIM but aren't showing advances in profitability. That said, we did spot some interesting developments in these areas:

  1. SOFR spread variance across deal size.
  2. Evidence on how bankers are managing the challenges associated with fixed rate pricing.

Read on to see exactly what we uncovered. 

Pricing Volume Holds Steady 

In line with our recent updates, pricing volume across segments remained steady in August, as activity from the month remained at the index value of 112. This maintains the year-to-date value of 109.

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

Spread to Index Remains High 

Overall, SOFR spreads haven’t seen much variance either for the past 4 months — still well above early 2023 levels. Prime spreads also remained nearly flat last month, at 21 bps. Banker have been protecting this key revenue metric in recent months. 

Weighted Average Spread to SOFR

Spreads to SOFR Continue to Converge Across Deal Size

But as we took a closer look at SOFR spreads across deal sizes, we noticed a continued narrowing—a byproduct of bankers exerting a spread increase of 8 bps month over month, for the largest borrowers (>$25M). This increase in spread to index for this segment has played a key role in the overall upward movement of SOFR spreads since March. For August activity, the variance in spread was 12 bps, compared to 38 bps in January.

Spread to SOFR on Floating Rate Loans, by Commitment Amount

Funding Curves Remain Unchanged, But All-In Cost of Funds On Loans Priced Move Higher 

When looking at funding curves (not shown), we found that the FHLB and SOFR swap curves stayed essentially unchanged month over month, and the 60-month term remained the low point on both curves, as the common reference for fixed rate structure funding.  

However, that didn’t match up with what we saw when we looked at banks’ all-in cost of funds for SOFR structure and fixed-rate structures, which continues to trend upward. In particular, the 17 bps increase in fixed-rate funding is noteworthy. 

All in COF by Month, Rolling Trend

We then checked to see whether liquidity might explain this rise, but quickly determined it did not, as liquidity costs have remained relatively flat since stabilizing in June 2023. Liquidity costs on fixed-rated loans posted 41 bps in August, compared to 39 bps in July.  

Liquidity Cost, Rolling Trend

Then we looked closer at the base funding costs for fixed rate loans and found that banks may be deviating from what the FHLB curve suggests. The chart below shows that the base COF pushed through the FHLB 60-month point in July and the gap widened in August, to 17 bps. We’ve heard from many clients that current marginal COF for their institutions range from 4.5-5.25%. In addition, we've spoken with many clients considering strategy options to alter the trough of the funding curves to address this reality. We’ll continue to monitor this developing story—and its associated trends—in the months ahead. 

Fixed-Rate Loan COF vs. FHLB Curve 60-Month

Fixed Rate Coupons Increase …

That increase in funding costs enabled bankers to bump up their fixed rate coupons by 25 bps in August. That makes four straight months of fixed-rate coupon increases, a 61 bps increase since April.  

Coupon Rate by Month, Rolling Trend

… But Fixed Rate NIM Stays Flat

However, increasing the coupon rate really only helped bankers tread water when it came to fixed-rate NIM. It remained unchanged from July to August, and still down 13 bps from April levels. 

NIM 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  

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Commercial Loan Pricing Market Update: October 2023
Commercial Loan Pricing Market Update: October 2023

A look at what Q2 PrecisionLender data tells us about the commercial loan pricing market in October 2023.

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