JP Morgan: Credit losses to hit crisis levels as residual values drop

The negative impacts of the coronavirus crisis on the auto industry will likely put pressure on residual values and increase lenders’ credit losses as vehicle sales slow and unemployment rises, according to a research note by J.P. Morgan Chase this week.

Residual values will likely feel pressure from a number of different directions, the note said, including decreasing transaction prices as consumers trade down or opt for used vehicles, rental car companies “de-fleeting,” depressed new-vehicle sales and rising unemployment.

In order to estimate projected credit losses, J.P. Morgan’s analyst looked to the Great Recession as a reference to what the industry may experience as a result of declining residual values.

Credit losses are expected to be “more severe” than 2008 due to the prolonged shutdown of businesses and an estimated 12% decrease in residual values. For captives Ford Motor Credit and GM Financial, this type of drop in residual values could raise 2020 depreciation expenses.

J.P. Morgan estimates an increase by about $1.1 billion and $2.4 billion for Ford Credit and GMF, respectively.

“We worry that a potential prolonged — greater than one or two months — broader economic shutdown in the U.S. could have a lasting negative impact on the consumer, and in turn, weigh heavily on delinquency and charge-off trends,” J.P. Morgan noted.

Increased unemployment and declining consumer confidence have sunk new vehicle sales during the first quarter, with major automakers posting double-digit sales declines in March. The new vehicle SAAR forecast for 2020 shed 3 million units in a week, dropping to 10.7 million units, according to TrueCar ALG.

In addition, jobless claims doubled from last week, clocking in at 6.67 million, bringing the two-week total to more than 10 million new consumers filing for unemployment, according to the U.S. Department of Labor.