NEW YORK (Standard & Poor's) May 18, 2015--Auto sales are strongly correlated with the availability of financing, and the rebound in sales to what they were before the recession has come hand in hand with the demand for financing, Standard & Poor's Ratings Services said today in a commentary published on RatingsDirect titled "U.S. Auto Lenders' Joyride Could End If Looser Underwriting Dents Credit Quality."
"Historically low interest rates, an improved economy, and looser underwriting standards have enabled many consumers to finance or lease vehicles, often higher-value ones than they could have afforded several years ago," said Standard & Poor's credit analyst Igor Koyfman.
At the same time, the strong resurgence in auto purchases starting in 2011 and the relative stability of the asset class has led to increased competition among banks, captive finance companies, and nonbank specialty lenders.
Standard & Poor's Ratings Services observed this trend last year, and we believe that competition has continued to intensify.
Despite the robust performance of the auto sector in the past few years, we believe bumpier roads may lie ahead. As lenders compete for market share, they have extended loan terms and increased the average financing amount, while yields have declined. Lenders have also increased their exposure to leases, which we believe leaves them vulnerable to falling residual values of cars. As a result, Standard & Poor's Ratings Services does not expect to upgrade many nonbank auto lenders in 2015 and 2016. In fact, we could lower ratings if increased competition, combined with looser underwriting standards, ultimately leads to significantly higher credit losses and weakened profitability. We will also monitor regulatory developments and the impact they could have on the auto industry.