Auto lenders fail to analyse residuals

An increasing proportion of new vehicle purchases are on lease, but a significant number of auto finance lenders are failing to analyse future residual values in sufficient detail to handle the expected volumes of used cars coming onstream, according to research by Black Book.

The company, which specializes in analyzing auto data, surveyed more than 500 auto finance company executives about their portfolio strategies.

While 74% of lenders believe residual data is either critical or valuable in key areas to their business, 64% said they do not leverage the data when evaluating portfolios. This is despite the fact that most (39%) said remarketing is their largest strategy for dealing with the increased volume of lease returns.

Black Book points out that remarketing relies heavily on collateral insight, which can be gained through the use of more residual data.

“Residual forecast and collateral data can play an instrumental role in managing risk and increasing profit potential for any lender portfolio,” Anil Goyal, senior vice president of automotive valuation and analytics at Black Book, said. “Not all vehicles depreciate alike, and residuals can help determine how certain vehicles will perform in a portfolio, particularly as lenders become more curious as to new strategies for off-lease supply.”

Goya suggested the consistently high used car values in recent times may be one reason why there is a discrepancy between lenders acknowledgement of the importance of information on residuals and their apparent failure to collect or assess this. During this period, ongoing measurement of residuals has not been a critical component to risk management for lenders.

“As the risk increases in a market that is seeing sales plateau, as well as more sub-prime lending, there is a greater need for projecting losses better in both loan and lease portfolios,” Goyal said. “Some lenders are looking more at residuals use, but they haven’t caught up to improve their processes in a whole lifecycle analysis scenario.”

Given forecasts of increased supply and accelerating vehicle depreciation, a majority of finance companies (52%) reported that tightening underwriting criteria is viewed as the key option they will use to better manage their portfolio risk in the future.