Fitch: U.S. Auto Lender Asset Quality to Weaken Moving into '14

Mon May 6, 2013 9:11pm BST

Quotes

   

(The following statement was released by the rating agency) CHICAGO, May 06 (Fitch) U.S. auto lenders will likely report further weakening in asset quality metrics this year, driven mainly by lower used car values, a loosening of underwriting terms and further seasoning of loan portfolios, according to Fitch. Credit losses and delinquency rates increased on a year-over-year basis for all major auto lenders in the first quarter, and we expect that trend to continue as asset quality metrics retreat from historically strong levels reported in 2012. For Fitch-rated issuers, average credit losses increased 16 bps year-over-year in 1Q'13, and delinquencies were 67 bps higher than the year-earlier quarter. We view double-digit increases in auto leasing volumes for some issuers with caution, particularly since used car values will likely return to more typical levels after recent rises. Used car values will come under pressure as secondary market supply grows in the wake of stronger new car sales and higher lease volumes. This supply pressure is likely to build late this year and into 2014. Record used car prices have already begun to moderate, and we expect residual values to come under heavier pressure as more vehicles come off lease. The moderating trend in residual values can be seen in Fitch's Auto Lease ABS Residual Value Index, which increased by 5.75% in 1Q'13, down from an increase of 11.11% in 4Q'12. Auto lessors typically set residual values conservatively when they underwrite leases. However, increasing competition may drive residual values higher as lessors look to attract consumers with lower monthly payments. The expected weakening in asset quality for auto lenders is occurring after a period of record-low losses and delinquencies, and we believe the weakening of metrics will remain within historical norms, supporting ratings. All Fitch-rated issuers have been prudent in increasing credit provisions to account for portfolio growth and moderating used car value trends. First quarter profitability remained solid for all issuers, backed by portfolio expansion, lower credit costs and cheaper funding. Credit provision increases and pricing and margin pressure due to competition will be a headwind facing issuers for the remainder of this year. Fitch-rated issuers that have reported 1Q'13 results include Ally Financial, Capital One, Ford Credit, GM Financial and JPMorgan. Contact: Mohak Rao, CFA Director Financial Institutions +1-212-908-0559 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.