Link to Fitch Ratings' Report: 2017 Outlook: Finance and Leasing
Companies (Credit Performance Inflection on the Horizon)
https://www.fitchratings.com/site/re/890004
Asset quality and residual value reversion will loom over many consumer
and commercial finance and leasing companies (FLCs) globally,
underpinning Fitch's negative sector outlook for 2017. That said,
manageable leverage across most issuers, appropriate positioning for
potential interest rate increases and a stabilization of the regulatory
environment all support Fitch's stable rating outlook for 2017.
The 2017 finance and leasing company outlook report published today
addresses FLC subsectors including: auto loan/lease, credit cards,
student loans, consumer unsecured, mortgage companies, aircraft leasing,
railcar leasing, truck rental and leasing, and commercial fleet leasing.
Fitch recognizes that the market dynamics may vary by subsector and by
region, but the report identifies major trends expected to affect all
players in the coming year.
"Auto lenders/lessors are dealing with a shift towards a higher mix of
leasing, used car financings and nonprime borrowers at a time when used
car values appear to have peaked, all of which will likely be critical
drivers of future credit performance," said Sean Pattap, senior
director, Fitch Ratings.
Other consumer finance subsectors have different credit dynamics.
Delinquencies and charge-offs for credit card issuers should continue
their upward trend in 2017 as a result of loan growth and portfolio
seasoning. Private student lenders are benefiting from strong secular
trends that support loan growth including rising costs of attendance and
steady enrollments, but face persistent regulatory scrutiny. Unsecured
consumer lenders face the prospect of heightened regulatory scrutiny in
North America, Latin America and Europe. Mortgage companies should
benefit from rising values of mortgage servicing rights in a rising
interest rate environment.
Among commercial finance subsectors, aircraft leasing remains a bright
spot, due to increasing air traffic and ongoing consolidation that
enhances larger firms' negotiating power with customers and
manufacturers. Railcar lessors are in the midst of a downturn,
particularly in tank cars leased to transporters of crude oil and sand
cars that support crude and natural gas drilling. Fitch views commercial
vehicle and truck lessors as having relatively less cyclical business
models than other large equipment lessors since they have a greater
focus on essential services and benefit from a shorter order-to-delivery
cycle, although long-term technology threats such as autonomous vehicles
loom.
"The global interest rate environment for FLCs differs by region and
while rising rates will ultimately add to FLC funding costs, Fitch
believes firms could benefit from higher rates through expanded
margins," added Pattap.
Fitch expects interest rate increases in the U.S., although monetary
policy in other regions such as Europe, certain Latin American
countries, and Asia, particularly China and Japan, is expected to remain
highly accommodative for the FLC sector.
In the current rate environment, FLCs continue to reduce refinancing
risk and improve liquidity. Nevertheless, given FLCs' typical reliance
on wholesale funding sources (and to a lesser extent internet deposits
for certain U.S. and European entities), issuers remain exposed to
funding risk during periods of stress.
Deteriorating access to capital or reversion in asset quality that
exceeds long-term historical averages could result in negative rating
actions for FLCs broadly. Weaker underwriting standards and/or heavier
regulation affecting earnings, though not anticipated by Fitch, could
pressure individual FLC ratings.
Additional information is available on www.fitchratings.com
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