Improving Commercial Loan Pricing: A market-based approach using AFS' Market Practice Database

Commercial lending in the US is a large market and an important source of revenue for banks -- which hold nearly $3 TN in commercial and commercial real estate loans, generating over $70 BN in revenues annually. In the Oliver Wyman whitepaper Improving Commercial Loan Pricing: A market-based approach using AFS' Market Pricing Database (MPDB), we evaluate the AFS' MPDB, which contains up-to-date loan-level information on nearly $1 TN of US commercial loans, from the perspective of banks seeking to use the MPDB for better pricing.

We also have developed a methodology to estimate market pricing for specific loans, controlling for factors such as risk, size, region, and industry. Our main findings are as follows:

• Pricing practices across banks are widely varying even when controlling for loan characteristics -- some banks consistently beat market and others do not
• Relationship managers drive the majority of pricing dispersion -- some price consistently above market and others do not
• Given the wide range of pricing practices, the typical institution has a ~20 bps opportunity to generate costless, capital-less revenues through greater pricing discipline

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Authors
Kirk Saari, Partner in NA Corporate & Institutional Banking
George Morris, Partner and the Head of NA Corporate & Institutional Banking and Wealth & Asset Management

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