Fitch Ratings-New York-22 March 2017: Auto loan and lease credit performance will continue to deteriorate in 2017, according to a new U.S. Auto Asset Quality Review by Fitch Ratings. Credit losses weakened in the second half of 2016, consistent with seasonal trends, but credit performance versus the second half of 2015 also deteriorated.
"Subprime credit losses are accelerating faster than the prime segment, and this trend is likely to continue as a result of looser underwriting standards by lenders in recent years," said Michael Taiano, Director, Fitch Ratings.
Banks are starting to lose market share to captive auto finance companies and credit unions as they begin to tighten underwriting standards in response to deteriorating asset quality. The weaker asset quality primarily reflects the seasoning of vintages originated in a sustained period of looser underwriting standards, particularly from 2013-2015 vintages, and a rising proportion of nonprime lending.
According to the Federal Reserve's January 2017 senior loan officer survey, 11.6% of respondents (net of those who eased) reported tightening standards, compared with the five-year average of 6.1%. This trend is consistent with comments made by several banks on earnings conference calls over the past couple of quarters. Fitch would view continued tightening by auto lenders as a credit positive. The tightening, to date, primarily relates to pricing and LTVs, but average loan terms continue to extend into the 72 to 84 month category.
"The tightening of underwriting standards is likely a response to expected deterioration in used vehicle prices and the weaker credit performance experienced in the subprime segment," added Taiano.
Used car price declines have accelerated more recently which will likely pressure recovery values on defaulted loans and lease residuals. NADA's Used Vehicle Price Index, which measures wholesale prices of used vehicles up to eight years old, declined over 6% in 2016 and was down 8% year over year in February 2017, marking the eighth consecutive monthly decline. U.S. light vehicle sales grew to nearly 17.5 million units in 2016 (a 0.4% increase over 2015). Fitch expects full-year 2017 U.S. light vehicle sales to dip slightly to 17 million in 2017.
On a more positive note, macroeconomic conditions including the low level of unemployment and growth in household wealth should help constrain upward pressure on credit losses. Unemployment claims fell to a four-week moving average of 236,500 as of March 4, 2017, which typically correlates with positive auto loan credit performance. However, consumer debt outstanding continues to trend higher, reflecting sustained strong growth in auto, student loans and credit card debt, which could weaken borrowers' ability to service their debt.
The full report 'U.S. Auto Asset Quality Review: 4Q16' is available at www.fitchratings.com or by clicking on the link.