ABS credit quality set to decline

Capital One’s annual survey of asset-backed securities (ABS) has found that more ABS professionals expect a decline in credit quality in 2016 than last year, and there has been a leap in the number who expect underwriting standards to become tougher.

The lender surveyed professionals from various asset classes for their views on the credit, underwriting and regulatory environment for asset-backed securities – and the assets backing them – in the next 12 months.

The research shows that 54% are predicting a drop in credit quality, compared with 29% the previous year. Half (50%) of respondents also anticipate that issuers of ABS securities will tighten their underwriting standards in 2016, up from 11% in 2015. Industry professionals expect marketplace lending to see the largest growth in the coming year.

Despite overall economic uncertainty, nearly 80% of respondents expect buy-side interest will increase or remain the same in the coming year, indicating that issuers and investors continue to see ABS opportunities. Furthermore, 51% of respondents see competition in this asset class increasing in the next year, with only 14% expecting a decrease.

Industry professionals expect the biggest percentage growth in marketplace lending (41%), followed by auto finance (12%) and credit card debt (11%).

“We are seeing cautious optimism in the marketplace; expectations of growth are balanced with understandable concern about asset quality and a potential tightening of credit standards,” said David Kucera, managing director, financial institutions group at Capital One Bank. “Financial institutions active in this space need a partner offering a full range of financial services as well as one that understands the unique underwriting and credit dynamics of this asset class.”

ABS professionals still see increased regulatory requirements and expenses as their biggest risk (68%) in the coming year. Next was limited access to credit (17%), which jumped from 6% in the 2015 survey.