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Declining Credit Metrics To Continue for U.S. Auto Finance Companies

February 19, 2009

NEW YORK -- A confluence of broader economic pressures are expected to lead to deteriorating credit metrics and higher funding costs for U.S. auto finance companies throughout this year, according to a Fitch Ratings report.

Contributing to Fitch's Negative Outlook for the auto finance industry will be a slowing economy, rising job losses, volatile commodity prices, and a weak used car market, combined with the poor financial health of the Detroit 3 manufacturers, according to senior director Meghan Crowe.

"The level of peak credit losses will be driven by the depth and duration of the economic downturn, though the degree of relative lender deterioration will be dependent upon an issuer's ability to tighten underwriting, manage portfolio growth, collect delinquent accounts, and manage the disposal of repossessed collateral," said Crowe. "Nonetheless, lender credit metrics will be impaired by portfolio contraction resulting from tighter underwriting standards and significant reductions in new car sales."

Fitch took numerous rating actions in the auto space in 2008 to reflect these trends. Portfolio credit losses beyond Fitch's expectations, with a corresponding hit to profitability, a reduction in liquidity, and/or deteriorating risk-adjusted capital levels could prompt negative rating action at non-diversified auto lenders. Rating action for larger, more-diversified, non-captive lenders is not likely to be driven by the performance of auto finance businesses alone, although auto segments could contribute to negative rating momentum.

Fitch's report also discusses current asset quality trends in the auto finance market; and provides updated growth and asset quality statistics for some of the largest captive and non-captive lenders in the U.S.

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