Auto finance market metrics look robust

The auto finance market continues to look resilient according to Fitch Ratings’ latest auto loan asset quality report, which reports strong US auto loan performance and fewer banks easing underwriting terms.

While underwriting terms remain eased relative to historical standards, the ratings agency says recent Federal Reserve senior loan officer survey data showed that just 3.3% respondents eased underwriting standards in the second quarter of 2015. This compares with 14% of respondents who did so in the July 2013 survey.

Although Fitch views this trend positively, the agency says that as long as terms continue to be relatively relaxed, newer loan vintages will continue to underperform earlier ones, eventually leading asset quality to revert to historical averages over the medium term.

An improving employment picture, steadier economic conditions and falling gas prices are contributing to robust auto sales, with predictions suggesting new vehicle sales in the US this year could break 17 million units for the first calendar year since 2001.

Fitch believes that high levels of competition between major auto lenders will still result in further easing of terms, lower credit score ratings for loans and new entrants into sub-prime lending over the near term, despite the decreased pace of easing.

Auto loans are expected to remain one of the faster growing asset classes for US banks and other financial institutions, the data reveals. The July Fed loan survey showed that over second quarter of 2015, loan officers seeing an increase in auto loan demand exceeded those seeing decreases by a margin of 18%.

Fitch argues that macroeconomic factors that correlate with auto loan performance, such as unemployment, also point to the market remaining robust. That said, competitive underwriting conditions, combined with potential future pressure on auto residual values and consumers’ ability to continue to service their personal debt obligations in a rising rate environment, could push the market toward weaker asset quality over the medium term.

Sub-prime lending steady

Currently however, despite competition, US auto lenders are still enjoying generally strong asset quality through the first half of 2015. Year-over-year performance for the top nine Fitch-rated auto lenders was mixed, reflecting the continued easing of underwriting standards, higher sub-prime lending and a decline in used car values in recent periods.

However, prime loans saw improvements that were attributable to better consumer discretionary spending — a seasonal effect typical in the first half of the calendar year following year-end consumer spending surges.Fitch’s prime Auto ABS index performance remained solid, while Fitch’s sub-prime auto ABS index experienced a 47% increase in annualized net losses to 5.44% in second-quarter 2015. Nonetheless, the sub-prime auto loan index still remains well below peak recessionary levels in late 2008 to early 2009.

The top nine Fitch-rated auto lenders, including captives, held about $473 billion of auto loans at the end of June 2015. Of the nine, only General Motors Financial and Capital One have any meaningful sub-prime exposure in their loan portfolios.

Tier Zero

A presentation from Greg Goebel, chief executive and founder of DealerStrong, a dealership training and consulting firm, backed the view that the auto finance market is healthy and pointed to a new trend in lending.

Speaking at the F&I Industry Summit organised by Auto Finance News, Goebel said that Santander Consumer USA (SCUSA) is one of a number of lenders to have increased auto loans for customers with no credit score, that is consumers who are either first-time borrowers or customers with no active credit history.

Based on a sample of more than 1.5 million transactions from 700 dealerships, Goebel said SCUSA was now the leader in what he called “Tier Zero” year-to-date through July. The lender now holds 19.5% of the category, up from sixth place and a 3.6% share a year ago. Goebel said seven lenders had more than a 5% Tier Zero share, including credit unions as a group in second place, followed by Wells Fargo Dealer Services, Credit Acceptance Corp, Capital One, Ally Financial and Regional Acceptance.

A year ago, only five lenders had more than 5% share in the category, Goebel said. However, some lenders have queried his figures, suggesting that lenders may be able to track credit histories for potential buyers in circumstances where dealerships cannot.