DBRS Ratings anticipates slower growth in the auto ABS sector this year of 4% to 5% down from the 16% growth rate the year prior, according to a report forecasting trends in the market.
Although new-vehicle sales are expected to come down this year, DBRS still expects growth in the used market given that average vehicle age is at a record-high of 11 years and many consumers may be looking for better-quality off-lease vehicles that are in high supply.
Other headwinds include looming interest rate hikes from the Federal Reserve Bank, which may dissuade consumers from financing a new purchase especially with household debt at record highs, according to the report. Additionally, auto loans 90 days or more delinquent are at their highest levels since 2012.
Many of the trends observed in 2017 are expected to carry over into 2018 as well, DBRS wrote in the report. Notably, auto lease issuances grew in volume by 42% year over year to $20 billion driven by captives looking for additional funding.
Prime auto ABS — which accounts for the greatest share of total volume — grew by 10% year over year to $42 billion. In part, two Canadian banks drove the spike in volume as Bank of Nova Scotia tripled it issuance volume to $1.5 billion, and Bank of Montreal — the parent company of BMO Harris Bank — issued its first prime securitization of $750 million. Bank of Nova Scotia was unable to comment by press time and BMO Harris told AFN it is in a quiet period heading into 1Q18 earnings.
Subprime auto ABS volume grew by 1.5% in 2017 compared with a 5% decline in volume during the 2016 period. However, it’s not clear that growth will continue in 2018 as delinquencies and losses rise and subprime lenders tighten credit. Subprime auto originations represented 31.7% of total originations in the third quarter 2017 compared with 34.1% during the same period the year prior, according to the report.
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