Commercial Loan Pricing Update (November 2022)

As we looked at Q2 PrecisionLender data for November, we also got a pretty good picture of December since December activity is minimal. So this month’s market update also serves as a general look for all of 2022. 

One trend we’ve observed is that fixed rate loan structures have continued to regain lost ground—basis point by basis point in net interest margin—returning almost to the same level it was at the beginning of the year of 200 bps. This demonstrates banker resilience in setting incrementally higher coupon rates despite yield curve inversions and twists that have affected fundings costs in unexpected ways. In addition, after the Fed rolled out another 75 bps hike on November 2, both Prime and SOFR held position on spread to respective indices. Over the year, we’ve remarked on the consistency of the coupon spread to SOFR month after month reinforcing banker alignment in passing higher nominal costs to borrowers.     

Volume Declines but Mix Remains Mostly Unchanged 

There was a sharp contraction in pricing activity during November to 116, about a 13% decline over October. The year-to-date average is 118, higher than the last half of 2021 at 100 versus the second half of 2022 trending toward 121.       

Priced Commercial Loan Volume by Month, Indexed to January 2022 = 100 

  

Mix is virtually unchanged month over month with respect to fixed rate, floating SOFR, and floating Prime loans. With respect to fixed-rate loans, we’ve received questions from clients about which pricing indices are used as reference rates. Although it is not required to employ reference rates on fixed-rate deals, when they are used, we find that about 25% are referenced to Treasury as well as to SOFR. Prime as a reference rate grabs about 30% of the activity.      

Rate Type Mix, Selected Months 

   

SOFR Spreads Drop Slightly; Prime Spreads Hold Steady     

We have reported the narrow range of SOFR spreads across pricing activity YTD. November dropped narrowly by 3 bps to 2.43%—the lowest monthly reading in 2022. The range of spread remains narrow at about 10 bps. 

Meanwhile, spreads to Prime showed little movement in November at 21 bps overall despite the 75 bps rate hike on November 2. Prime-based coupons and, therefore, borrowers’ costs remain above fixed rate and SOFR rate structures. 

Weighted Average Spread to SOFR 

Weighted Average Spread to Prime 

Fixed Rate Coupon Movement Indicates Potential Support for Increases 

SOFR coupon, at 6.28% for November, exceeded fixed-rate coupon by 5 bps, 6.23%. The SOFR coupon increase of 34 bps is influenced by upward moves in SOFR and the CME Term SOFR benchmark partially offset by the modest 3 bps drop in spread to the index. Fixed-rate loan coupon moved the least, up 12 bps month over month. As a market reference, five-year Treasury fell 35 bps during November. The implication is that fixed-rate pricing shows some diversification in reference points and potential support for coupon increases. Meanwhile, the move in Prime-based loans, up 67 bps, tracks from the Prime rate change during November. 

Coupon Rate by Month, Rolling Trend 

 

Fixed Rate Gains Ground Over SOFR in COF and NIM 

For the second time this year, fixed rate funding costs have held steady month over month—June/July showed a brief stall in addition to October/November. Meanwhile, floating rate funding costs continue their upward march. These funding costs often include term liquidity premiums that have moved higher in 2022, amplifying the upticks in short-term funding costs. 

Cost of Funds by Month, Rolling Trend 

 

We notice in the April to November period that fixed rate loans moved upward in net interest margin and approached January’s mark of 200 bps—up 31 bps from the April low read of 1.65%. On the other hand, floating rate structures have moved lower in NIM during this period: down 11 bps on Prime and 15 bps on SOFR structures. The fixed rate movement to regain lost ground continues and appears to be led by banker resilience in setting coupon rate. 

Net Interest Margin by Month, Rolling Trend 

 

The Story on Convergence Since the Pandemic  

We have reported on the convergence of coupon rates across the SOFR and fixed structures for much of the past five months. We went back to January 2020 (when we began this market update blog) and found that prepandemic data indicates equivalent coupon rate for fixed and floating structures leading into the pandemic. But the value proposition was very different in early 2020. 

Fixed Rate Coupon Versus LIBOR/SOFR Coupon, January—November 2022 

 

When looking at the coupon rate minus funding costs on fixed rate loans, it is clear these structures’ performance moved more during the pandemic than the corresponding spread to index performance measure for the dominant floating structure. Specifically, the LIBOR/SOFR spread has shown a narrow range of 20 bps or so from 2.40% to 2.60% over the past two years. Fixed structures exceeded the 200 bps metric through the pandemic, falling sharply in fourth quarter 2021 back to 200 from a high of 260. This trend also reinforces the April 2022 possible low point on fixed rate value. 

Fixed Rate Coupons Spread and Floating Spread to Index, 2020—2022 

 

For interest-bearing non-time deposits, there was an incremental increase of 15 bps in median rate paid month over month to 78 bps. For time deposits, we found an overall 19 bps lift in median rate to 1.22%.   

Time Deposits Rate Paid 

 

Interest-Bearing Non-Time Deposits Rate Paid 

 

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 your questions to insights@precisionlender.com

About the Market Update   

Since March 2020, we’ve posted regular updates on the commercial loan pricing markets based on what we’ve seen when examining the Q2 PrecisionLender dataset. We look at several popular metrics and point out areas in which there have been noteworthy changes.  

Q2 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 

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

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