Fitch: Auto ABS Performance on Track Despite Economic Headwinds

NEW YORK--()--Potential negative shifts in the consumer economic environment in 2013, stemming from sluggish economic growth and fiscal uncertainty, may drive auto ABS loss rates higher but will not derail the solid asset performance seen to date in prime auto ABS, according to Fitch Ratings.

Despite numerous potential headwinds facing the U.S. economy this year, the outlook for prime auto loan ABS in 2013 is stable, even as loss rates are expected to continue rising off record low levels. Positive rating actions will likely pick up this year, even if U.S. economic conditions weaken somewhat.

The recent expiration of payroll tax cuts, which reduced consumer pay by 2%, will cut into consumer spending levels, while additional post-sequestration fiscal drag may further cut income levels and slow the recovery in U.S. employment.

Rising gas prices, combined with lower monthly income following tax increases, could limit household purchases this year, including auto sales. Despite this, we predict new auto sales of 15.0 million units in 2013, as pent-up demand for new vehicles grows and access to financing remains good.

We expect additional pressure on consumers to contribute to an increase in auto loan losses this year in the prime and subprime auto ABS sectors. However, higher losses are manageable over time due to the strong asset quality and structural features that helped keep losses low in the 2009-2012 prime vintages. We are forecasting prime annualized net losses of 0.50%-1.20% in 2013, which is consistent with the strong 2005-2006 period.

Lower income consumers in the subprime sector will likely suffer more from negative shifts in economic conditions. Subprime auto ABS asset performance will see more effects if economic growth stalls, and these low-income consumers' financial profiles will suffer from smaller monthly incomes and higher expenses.

Despite the additional pressure on consumer incomes, subprime loss rates are currently at late-2005 to early-2006 levels (just below 7%) and can increase further in 2013 without materially affecting loss coverage levels and, ultimately, ratings.

Structural features such as increasing monthly credit enhancement and rapid transaction amortization, which result in rising loss coverage levels, will likely offset weaker asset performance if economic conditions were to decline this year. Further, continuing signs of stabilization in U.S. housing, evidenced by rising home prices, together with declines in jobless claims, represent positive factors that could buoy consumer sentiment even in a slow-growth scenario this year.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Hylton Heard, +1-212-908-0214
Senior Director
1 State Street Plaza
or
Robert Rowan, +1-212-908-1159
Senior Director
Fitch Wire
New York, NY 10004
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com