Market Overview

Fitch: U.S. Auto ABS Losses Still Climbing But Some Lenders Push Back

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NEW YORK--(BUSINESS WIRE)--

As losses for U.S. auto ABS continue their steady climb, some lenders are responding by holding the line on underwriting quality, according to the latest monthly auto loan ABS index from Fitch Ratings.

Prime and subprime auto loan ABS annualized net losses (ANL) have increased in each of the last three months. Prime annualized net losses hit 0.70%, the highest rate since early 2011, while subprime ANL crossed the 9% mark for the second time in 2016. U.S. auto loan ABS performance slowed in September due to higher losses from 2013-2015 vintage ABS and rising vehicle depreciation in the weak fall months.

Despite these negative trends, loss rates across sectors are tracking within initial forecasts for outstanding Fitch-rated ABS transactions in 2016. Prime loss rates on outstanding 2013-2015 transactions are currently tracking similar to 2004-2006 transaction losses, and well below the 2008-2009 peak recessionary levels.

Further, prime and subprime ratings performance is solid and has not been impacted by slowing asset performance. Positive rating actions on subordinated notes in both sectors are on par with the number issued in 2015.

Interestingly, Fitch has noted that some auto lenders are attempting to curb underwriting declines to address declining asset performance. As a result, a number of auto ABS securitizations came to market last quarter with marginally better credit quality, including stable or marginally improved FICO scores. That said, only time will tell how long this trend will last and despite the pushback by some lenders, Fitch does not believe that these changes will have a significant positive influence on asset performance.

Prime 60+ day delinquencies crept higher to 0.44% in September and were 11.5% higher than a year ago. ANL climbed 17.3% month-over-month (MOM), and were 31% higher than September 2015. The current rate is approaching loss rates consistent with latter part of 2010 and early 2011.

Subprime delinquencies rose to 5.05% in September, the second highest level since 2001. Delinquencies were 13.2% higher than a year earlier. For the second time this year, subprime ANL rose above 9% hitting 9.29% last month, and were 4.6% higher MOM and 23% versus September 2015.

As Fitch has stated prior, subprime losses are higher due to poorer 2013-2015 vintage performance as well as a changing mix in its index. Smaller independent auto finance companies, including new market entrants with higher loss profiles, comprise a larger share of the index today versus two-to-three years ago.

Pressure on used vehicle values is rising due to a combination of higher off-lease supply entering the secondary market, lower new vehicle sales and higher vehicle inventory, and higher incentive levels. This will impact loss severity and ABS performance over the next six months.

According to Anil Goyal of Black Book, Q4 typically experiences the largest depreciation in vehicle values, and this trend started to manifest itself in the first two weeks of October with the largest year-to-date weekly decline in car values. Further, stronger performing trucks and SUVs which retained values well during most of 2016 are now starting to see an uptick in depreciation as well, driven by higher incentives on new vehicles.

Fitch's auto loan ABS indices track the performance of $97 billion of outstanding securitized collateral. $57 billion represents prime ABS collateral (58.5% of the index) with the remaining 41.5% comprised of subprime collateral. Further, the $97 billion of outstanding ABS collateral comprises only 8.8% of the total $1.1 trillion in auto debt outstanding.

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