Rational pricing is finally returning to the commercial loan market as the supply of credit continues to be squeezed.
Kelly King, the chief executive officer of the $152 billion-asset BB&T Corp. in Winston-Salem, N.C., said that for the industry as a whole, the pricing of large commercial loans has improved by 100-plus basis points over the last three or four months.
"I am very, very pleased with what's going on with regard to restoring pricing discipline," Mr. King said last week during his company's fourth-quarter earnings conference call.
Beth Acton, the chief financial officer of Comerica Inc., said the $67.5 billion-asset Dallas company has been able to increase its rates by 50 to 100 basis points on loans to new commercial customers and on new credit lines for current customers.
Brett Rabatin, an analyst at Sterne, Agee & Leach Inc., said commercial loan pricing became "out of whack" several years ago as lenders fought for commercial customers.
Aaron J. Deer, an analyst at Sandler O'Neill & Partners LP, said in an interview last week that the current credit cycle has eliminated a lot of irrational competition.
"There was a period when banks really were not getting adequate pricing for the risk they were taking, and that's clearly reflected in the credit issues that we have today," Mr. Deer said.
Today bankers say they can charge more because borrowers, in this worsening economy, pose a higher risk, and there are fewer lenders willing to make loans. An increase in rates should at least partially offset factors crimping margins, such as the 325-basis-point decline in the federal funds rate last year.
"Pricing on loans has increased to cover the credit risk," said Christopher J. Murphy 3rd, the CEO of the $4.5 billion-asset 1st Source Corp. in South Bend, Ind. "If you're having to pay 3% or even 4% for deposits, you need to get 4% to 4.5% on loans, or there won't be anything left to pay employees, taxes, or your shareholders."
His company said its fourth-quarter net interest margin rose 9 basis points from a year earlier, to 3.3%. Commercial and agricultural loans rose 8% from a year earlier but fell 4% from a quarter earlier, to $643 million as of Dec. 31.
Ric Carey, an executive vice president at the $8.3 billion-asset Umpqua Holdings Corp. in Portland, Ore., said it has set rate floors on its commercial loans, ranging from 4.5% to 4.75%. The company is scheduled to report its fourth-quarter earnings Thursday.
Mr. King said borrowers are more willing to accept a floor on rates in this market "because absolute rates are so low."
BB&T's commercial loans grew 4% from a quarter earlier and 12.5% from a year earlier, to $50.48 billion on Dec. 31. Its fourth-quarter margin expanded 22 basis points from a year earlier, to 3.46%. (According to generally accepted accounting principles, its margin declined 21 basis points, because of a settlement with the Internal Revenue Service related to leveraged lease transactions that reduced its net interest income.)
Comerica's commercial loan total rose less than 1% from a quarter earlier and just 1% from a year earlier, to $43.7 billion on Dec. 31. Its fourth-quarter net interest margin contracted 61 basis points from a year earlier, to 3.43%. The full-year margin was 3.02%.
Ms. Acton said better pricing on loans should help her company maintain margins this year, though it will be hard to offset the decline in overall interest rates completely.
She also said loan spreads will be "a more positive contributor to the margin in '09."