While Brexit will probably not shift lenders’ preference for prime or subprime borrowers, there are already trends like interest rates, whose extension will prove a minor boon for both credit categories, with prime benefiting slightly more as a consequence of Brexit, said Sophia Koropeckyj, managing director at Moody’s Analytics.
“Low interest rates will provide further juice to the vehicle market by keeping rates low for prime borrowers, which make up the overwhelming share of borrowers,” Koropeckyj explained.
Prime borrowers account for 80% of the combined auto lending market of banks and finance companies, Koropeckyj said — 89% of bank auto lenders and 71% of finance company auto lending. Despite significantly higher interest rates amid subprime borrowers, these rates are not expected to rise appreciably in the years to come.
“There was a possibility for an increase in September, but now it’s more likely going to be December,” she said.
Post-Brexit, global investors are seeking safe options, and this has caused the demand for U.S. treasury bonds to increase, which in turn pushes bond yield down. Auto loan rates move in tandem to treasury bond yields. Consequently, interest rates for auto buyers are expected to be low. “The interest rate on a 48-month commercial bank new car loan was expected to increase steadily, rising from 4% at the end of 2015 to nearly 6% at the end of 2018. The increase is now going to be much slower. The expectation now is that the rate will reach only 5.3% by the end of 2018,” Koropeckyj said.
“After revising interest rates down, it’s becoming more clear that Brexit will have a positive impact on U.S. vehicle sales through the new interest channel,” she said. “Given that rates are low, and will fall further, not only can a borrower replace the vehicle sooner, but also buy a better car,” Koropeckyj said, adding that prime will benefit more than subprime.
But not everyone is comfortable with drawing conclusions just yet.
“From a lender’s perspective we want a better yield — but now there’s much more uncertainty about what’s going to happen. The vote to exit has left everyone a little skittish,” said Chuck Jones, head of national indirect lending at SunTrust Bank Inc.
Because of the current lending market, Jones thinks it’s too early to know what Brexit will do to the auto finance industry, “but over the next 60 days we’ll be able to talk about long-term forecasting,” he said. Jones added, “If used car values start going back to pre-recession periods — that’s the biggest risk you have as a lender.”
In general, Jones concluded that used car values decreasing industry-wide would be a bigger risk for auto lenders than the recent activity in Europe.
Turning to the origination process, Koropeckyj agreed with Jones’ assessment: “Bottom line is really not terribly exciting; on one hand lenders will have lower interest rates, but on the other hand the consumer will be hit a bit,” she summarized. “It’s likely dealers are slightly nervous, as sales are now past their peak, but I doubt U.S. consumers will even be aware of what’s going on on the other side of the Atlantic. Even with other bloviating factors like the presidential election, dealers will try to allay that by creating a conducive sales environment,” she said.
In terms of exchange rates, the lenders most affected will be those banks or lenders with the greatest international presence, she said. One would have a deeper understanding of the affect on a lender with knowledge of a lender’s investment strategies, she said. “Securities switching out of England will be bad for the U.K., good for the U.S.,” she said.
Since Brexit will result in a longer period of low loan interest rates, the ordeal will be good for the U.S. auto financing sector, according to Koropeckyj. “I don’t foresee an increase in marketshare, but Brexit ought to help make financing accounts more robust,” she concluded.”The market in general took a beating that Friday and the following Monday — but it has rebounded. The U.S. economy is resilient to this event.”
