NEW YORK (S&P Global Ratings) May 9, 2017--U.S. auto loans and leases have risen steadily over the past several years to reach all-time highs in 2016 -- facilitated in part by loosening underwriting. This has raised questions about whether the growth will ultimately lead to significant asset quality deterioration and increased depreciation on leases, as well as which lenders will bear the impact, according to an article published by S&P Global Ratings, titled "How Worsening Auto Finance Conditions Could Affect Banks, Nonbank Finance Companies, And Captive Finance Companies." Along with this, subprime auto delinquencies have climbed recently, and used-car prices have declined somewhat.
"We believe the greatest areas of market and credit risks are leasing and nonprime -- including subprime -- lending, respectively, and the financial institutions with significant concentrations in those areas, or in auto finance in general, are at risk of declining earnings or even bottom-line losses," said S&P Global Ratings credit analyst Brendan Browne.
Among the financial institutions we rate, that includes captive auto finance companies (those owned by auto manufacturers), given that they hold the lion's share of leases. Because of their loan exposure, it also includes two nonbank auto finance companies, DriveTime Automotive Group and Credit Acceptance, as well as a handful of banks--most notably Santander Holdings U.S.A. (SHUSA) and Ally Financial.
"If used-car prices continue to fall, the captives likely will have to report higher depreciation expenses on their leases, and nonprime lenders will have lower recoveries on defaulted loans," said Mr. Browne. "A further increase in delinquencies and losses on loans would affect lenders. We could lower our ratings on companies in auto finance if these trends were severe enough."
A few factors that provide some protection against downgrades include support from parents (as in the case of the captives and SHUSA), diversification outside of auto (for most banks), and ratings that already factor in an expectation of high losses on auto loans (as in the case of the nonbank finance companies). Still, we view worsening conditions in auto finance as a negative rating factor for all of these companies.
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