The absolute level of interest rates is an important factor in bank profitability because of the carry trade in commercial banking. Here, whether banks admit it or not, a material amount of the return is driven off speculation of interest rates and liquidity.
Tag: Loan Pricing
For certain debt financing, banks are able to earn interest without paying federal, state and/or local taxes. These tax-exempt lending opportunities allow banks to offer much lower interest rates to qualified borrowers and create opportunities for community banks to structure very competitively priced loans to local tax-exempt entities.
One trick every bank lender should have up their sleeve is the ability to meet a client’s maturity and amortization targets but limit risk of the bank by adjusting the rate on a loan. This tactic is especially germane in today’s market as certain sectors, in certain cities, are likely reaching the end of their safety zone. In this article, we will take a quantitative look at this tactic and cover some case studies on how and when to apply this with the goal of making sure the customer gets what they want while the bank has a profitable loan on a risk-adjusted basis.
Research has demonstrated that companies do not sell their products or services evenly throughout the week, month, quarter or year. Instead, in many industries, success rates and failure rates fluctuate throughout periods. This stems from a number of reasons. Sales reps are motivated by quotas which must be achieved at the end of the month, quarter or year. Furthermore, clients are conditioned to expect a change in behavior from sales reps and come to expect disc
Earlier this week, we discussed why community banks need more granularity in their credit grades in order to compete with more sophisticated banks (HERE). Our example focused on just the credit and loan loss allowances between a set of loans that were all rated with a credit grade four by one bank as we showed what happens over the course of a quarter when they have to compete. We stopped short on pricing, which is our topic today.
As we head into the second quarter, banks are reporting being slightly behind their commercial (C&I) and commercial real estate (CRE) loan budgets for 2017 by 3% to 10%. Higher short-term yields, the delayed evolution of President’s Trump economic agenda, and commercial real estate concentration regulatory pressure have all played a role. Pricing has remained steady over the first quarter in most markets with some major metro markets experiencing a slight decrease in pricing to the tune of two basis points.
We are at the ICBA 2017 Live convention in San Antonio, and there is nothing like a heated banking discussion over dinner with good bankers. We were comparing battle stories and the ever-important concept of loan pricing came up. Our banker friend lamented on the tight pricing in his territory and that his competition was pricing commercial loans 25 to 50bps below Prime.
We recently worked with a bank that was competing for a loan relationship. This initial credit opportunity with this client was just over $4.5mm.
Yesterday, many banks realized that the Federal Reserve Board of Governors’ H.15 website was no longer going to be the source for daily interest rates and indices. For decades, the “H15” screen was ubiquitous in banking and was the definitive place to get Libor/Eurodollar, Prime, Treasury, swap, mortgage and bond levels on a daily basis. Banks used these rates to price loans and deposits as well as to feed various models to include asset-liability (ALM), loan pricing, relationship profitability and funds transfer pricing (FTP) calculations.
If you got past the title it is likely that you care about the accuracy of your loan pricing more than the average banker. Banks have long ignored the variability around default risk and it is starting to be a problem, as with tighter spreads, there is now less room for error. While bankers solve for credit risk through taking loan loss reserves and through pricing, it is rare that a community banks takes into account default variability. Many large banks do and this article shows how community banks can gain about 80% accuracy through a simple methodology.