With intense competition to capture loans, now more than ever it is important to have a strategic approach to loan pricing. This includes adequately covering your bank's costs and meeting profit objectives. It also includes differentiating loan interest rates to reflect relative risk, plus knowing that you CAN win the borrower's business on a basis other than the lowest price.
This session will cover two "big issues" that influence pricing, then three smaller issues. Along the way, we will demonstrate how to measure loan profitability and calculate the required rate of return on a loan. We'll discuss getting premiums for taking risk and for adding value to the customer relationship, and ways to compete with a lower rate for volume or when you are able to mitigate risk better than your competitor can.
The two "big issues" are:
1. Coming to grips with risk-based pricing
- Using odd-decimal pricing
- Differentiating on all risk metrics
- Recognizing economies of scale on larger loans
- Comparing relative loan pricing within your portfolio
- Watching out for loans that are typically under-priced
2. Linking asset/liability tools to structure and price
- Setting fixed rates on average life, not full maturity
- Creative ways to use funding sources to support loans
- Avoiding prime spreads for rates fixed over one year
- Recognizing proper indexes and spreads for setting fixed rates
Three smaller issues are (a) consistently giving your customer pricing options, (b) considering proportional pricing for floating rates, and (c) using performance pricing tied to the customer's financial performance and/or loan covenants.
Who Should Attend?
Small business lenders, commercial lenders, community bankers, private bankers and others involved in the lending process.
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