October 3, 2023 | Stamford, CT — Banks’ competition for deposits appears to be having an impact on bankers’ pricing decisions and slowing increases in rates on corporate loans—at least slightly. 

SOFR spreads on floating-rate commercial loans fell in Q2 2023 to the lowest point since the start of 2022. At least some of that spread contraction can be attributed to bank efforts to stem deposit outflows and build a more holistic customer relationship. According to data from the latest Greenwich Commercial Lending Market Insight from Coalition Greenwich, banks appear to be reducing some lending rates in an effort to incentivize borrowers to hold deposits and use other commercial products such as treasury management. 

“Although the decline in spreads over the past year has only been about eight basis points, the continued contraction in spreads is at least helping to minimize the impact of rising rates on commercial borrowers,” says Gregory Schneider, Director, Greenwich Commercial Loan Analytics at Coalition Greenwich.

Bank deposits have declined for the past five quarters. Banks started losing deposits when the U.S. Federal Reserve began increasing rates in 2022 and deposit losses spiked during the regional banking crisis earlier this year. Although the rate of those losses slowed considerably from Q1 to Q2, the erosion of deposits has put banks under pressure.

“This emphasis on building strong overall relationships with commercial clients—which includes loans, deposits and treasury management services—has led to some banks discounting credit offerings when applicable,” says Gregory Schneider.

Rates on fixed-rate loans have continued to rise in step with Fed rate hikes, but borrowers are hoping for a reprieve. In September, the U.S. Federal Reserve decided to pause, leaving rates unchanged. That said, Fed policymakers have made clear that they remain vigilant and will resume rate increases if necessary.

Mixed Signals on Risk Changes and Line Utilization
Fed policymakers parsing the economic data for clues on how to proceed will not get much clarity from the commercial lending market, where the signals are decidedly mixed. For example, the share of loan renewals experiencing a change in risk rating, both upgrades and downgrades, has been climbing over the past year. However, in Q2 2023, risk changes were about evenly balanced, with 24% of borrowers experiencing a risk upgrade and 22% experiencing risk downgrades.

There is a clearer trend in commercial line utilization rates, which have declined by nearly two percentage points over the past year. But even these data contain some mixed messages. Utilization rates for the finance and insurance industry rose sharply in Q2 after dropping off during the regional banking crisis in February and March. In contrast, utilization rates for manufacturers have slumped over the past year, and a steady decline in utilization rates among retailers accelerated over the past quarter.

Greenwich Commercial Lending Market Insight is a quarterly review of data and analytics from the Greenwich Commercial Loan Analytics team.