LAS VEGAS — A large percentage of SUVs and trucks in auto lenders’ portfolios can lead to higher losses in a mild recession, Alex Yurchenko, vice president of data science at Black Book, told Auto Finance News at the AFSA Vehicle Finance Conference last week. Black Book has been working with “numerous” lenders to stress test their portfolios.
“The economy is probably as good as it’s going to get,” Yurchenko said. “We’re asking, ‘What would happen under multiple different [recessionary] scenarios? What do [lenders] need to do to minimize risk and prepare [for a downturn]?’”
In addition to conducting the Federal Reserve’s basic stress test required for banks — which models a recession similar to the Great Recession — Black Book also models “milder” downturns.
Losses for today’s lenders in a recession similar to the Great Recession would be “very different than 10 years ago,” Yurchenko said. “One of the reasons is the vehicle mix is different. Before, we had a 50-50 split with cars compared with SUVs and trucks. Today, SUVs and trucks make up more than 70% of portfolios.”
SUV and truck values typically dropped lower than car values during the Great Recession, Yurchenko explained, adding that, “Overall, it could be a much worse drop than [2009] in the worst-case scenario just because of the product mix.
“Take the [Ford] F-150, for example,” Yurchenko said. “It will probably show the [same depreciation] as 10 or 15 years ago, but now we just have more of those types of vehicles [in lenders’ portfolios]. That creates more risk.”
That risk can trickle down to lenders’ portfolios in a milder recession, Yurchenko said, depending on their portfolio mix.
While many economists in the auto finance space aren’t predicting a recession in 2020, a survey conducted by the National Association for Business Economics of its members last year found that 74% of respondents expected some sort of downturn by the end of 2021. Further, trucks and SUVs account for 70% of new financed vehicles and 60% of used vehicles, according to TransUnion’s most recent 3Q19 data.
“We’re in different times right now,” Yurchenko noted.
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