CHICAGO — Fitch Ratings projected that U.S. auto lenders will
likely report further weakening in asset quality metrics this year, attributing
three reasons for its forecast.

Analysts arrived at their assessment by mentioning three
factors:

—Lower used-vehicle values
—Loosening of underwriting terms
—Further seasoning of loan portfolios

"Credit losses and delinquency rates increased on a
year-over-year basis for all major auto lenders in the first quarter, and we
expect that trend to continue as asset quality metrics retreat from
historically strong levels reported in 2012," analysts said.

For Fitch-rated lenders, the firm indicated average credit
losses increased 16 basis points year-over-year in the first quarter, and
delinquencies were 67 basis points higher than the year-earlier quarter.

Fitch-rated issuers that have reported Q1 results include
Ally Financial, Capital One Auto Finance, Ford Motor Credit, GM Financial and Chase
Auto Finance.

"We view double-digit increases in auto leasing volumes for
some issuers with caution, particularly since used-car values will likely
return to more typical levels after recent rises," analysts said.

"Used-car values will come under pressure as secondary
market supply grows in the wake of stronger new car sales and higher lease
volumes," they continued. "This supply pressure is likely to build late this
year and into 2014."

Fitch pointed out that record used-vehicle prices have
already begun to moderate, "and we expect residual values to come under heavier
pressure as more vehicles come off lease," analysts added.

The moderating trend in residual values can be seen in Fitch's
Auto Lease ABS Residual Value Index, which increased by 5.75 percent in the
first quarter, down from an increase of 11.11 percent in the fourth quarter.

"Auto lessors typically set residual values conservatively
when they underwrite leases. However, increasing competition may drive residual
values higher as lessors look to attract consumers with lower monthly payments,"
Fitch said.

"The expected weakening in asset quality for auto lenders is
occurring after a period of record-low losses and delinquencies, and we believe
the weakening of metrics will remain within historical norms, supporting
ratings," analysts went on to say. "All Fitch-rated issuers have been prudent
in increasing credit provisions to account for portfolio growth and moderating
used-car value trends."

Fitch wrapped up its latest commentary by acknowledging Q1
profitability remained solid for the lenders it tracks closely. The firm
believes these companies had positive results backed by portfolio expansion,
lower credit costs and cheaper funding.

"Credit provision increases and pricing and margin pressure
due to competition will be a headwind facing issuers for the remainder of this
year," Fitch said.

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