U.S. auto lenders are likely to see subprime loan asset quality weaken in 2015, with annualized net losses (ANLs) above their historical averages of 6.24% recently reaching 8% before dropping to 7.26% as of the end of February. The level remains below the past Great Recession peaks of 9%-13%, according to Fitch.
Fitch predicts that subprime auto loan performance will continue to soften in 2015 due to heated competition-driving declines in 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, the rating agency says they are 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.
Fitch observes that while manufacturers have been disciplined on new vehicle production and incentive spending, strong overall vehicle sales have kept the industry vulnerable to competitive pressures. It believes that 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 during the past year.
