Fitch: US Auto Loan Quality Weakens, Particularly for Subprime

NEW YORK -- March 16, 2015: US auto lenders are likely to see loan asset quality weaken in 2015, with annualized net losses (ANLs) moving closer to their historical averages, says Fitch Ratings. While prime auto loans continue to perform well, subprime auto loan ABS ANLs are deteriorating at a quicker pace, recently crossing 8% before dropping to 7.26% as of the end of February. The level is above the 10-year average of 6.24%, but below the past recession peaks of 9%-13%.

Fitch expects subprime auto loan performance to continue to soften modestly in 2015 due to heated competition-driving declines in subprime loan pricing, easing underwriting standards and moderation in used car values.

These factors contribute to Fitch's negative 2015 sector outlook for finance and leasing companies, but at this stage they are viewed as manageable relative to available capital levels and current auto lender ratings. For auto ABS, asset performance remains in line with loss expectations and Fitch's outlooks are stable for prime and subprime auto loan ABS performance.

While manufacturers have been disciplined on new vehicle production and incentive spending, strong overall vehicle sales have kept the industry vulnerable to competitive pressures. We believe loan demand is likely to remain strong amid improving economic indicators in the US, despite an increase in consumer indebtedness.

Fitch sees not only an easing of overall credit terms (inclusive of loan term, pricing and down payments), but also a decline in average FICO scores. These factors have led to increases in subprime lending and a rise in subprime auto ABS issuance over the past year.

We see the eased standards being driven by smaller, less capitalized market participants, some backed by private equity capital. These lenders are competing to win market share and capture increased loan yields. We see loosened standards likely to affect the performance of the 2014 and 2015 loan vintages.

Against the backdrop of easing loan standards are the counterforces of an improving macro environment and currently healthy used car values, which help underpin the stable outlooks on auto ABS.

US auto loan and lease credit losses and delinquency rates increased in the second half of 2014 due to the seasonal effect of lower available consumer discretionary spending and, despite picking up in the fourth quarter, an overall decline in recovery values on used vehicles.

The average net loss rate for Fitch rated lenders was 1.06% in fourth-quarter 2014, up 5 bps from the end of 2013. Average 30-plus day delinquencies were 3.96%, an increase of 7 bps since fourth-quarter 2013, reflecting continued easing of underwriting standards and higher nonprime lending. Both metrics still remain comfortably below precrisis levels.

The top nine Fitch-rated auto lenders, including captives, held about $450 billion of auto loans at year-end 2014. Of the nine, only General Motors Financial and Capital One have any meaningful subprime exposure in their loan portfolios.

For complete review of Auto Asset Quality, please see the associated report: 'U.S. Auto Asset Quality Review: 4Q14,'dated March 13, 2015.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: U.S. Auto Asset Quality Review: 4Q14 (Asset Quality Deteriorates Slightly; Continued Moderation Expected In 2015)

fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861807