Fitch, KBRA, S&P project short-term auto ABS & US economic performance
Fitch Ratings, Kroll Bond Rating Agency (KBRA) and S&P Global Ratings each shared their data and projections about auto delinquencies, the securitization market and the general U.S. economy through separate reports and news releases distributed in recent days.
Before getting into greater detail about the subprime space, Fitch reported that prime delinquencies as of the end of the first half of 2022 stood at 0.20%, slightly up from the record low 0.14% a year earlier but still below the pre-pandemic reading of 0.25% at the same juncture of 2019.
Fitch then noted the trailing 12-month average prime delinquency rate sat at 0.19% when this year reach its midpoint, down from 0.21% at the halfway point of 2021.
Meanwhile, Fitch indicated subprime delinquencies jumped to 4.38% halfway through 2022, up from 2.77% at the same point last year. Analysts determined the latest level is similar to the same period in 2020. That’s when delinquencies were in the midst of declining from pre-pandemic levels that peaked at 5.93% in August 2019 to the pandemic low of 2.58% reached in May 2021.
On a current trailing 12-month average, Fitch said subprime delinquencies registered at 3.98%, continuing a gradual creep upward from the trough of 3.46% posted last October.
Delving even deeper into subprime, Fitch called that part of the auto ABS market “strong” since the subprime segment hit $20.7 billion in new issuance at the midpoint of this year, exactly in line with that of the same period in 2021.
For all of 2021, Fitch tabulated new subprime issuance amounted to $43.6 billion, compared with $27.4 billion for 2020 and $31.0 billion for 2019.
Also of note, Fitch determined cumulative net losses for 2018-2020 vintage ABS subprime transactions are exhibiting “improved performance” over prior recent vintages.
Analysts said in a report sent to SubPrime Auto Finance News that “2018 vintage performance is comparable to 2012 vintage performance at the same points of seasoning. 2019 and 2020 vintage performance is comparable to 2010 vintage performance at the same points of seasoning.”
What might happen during the remainder of 2022?
“Fitch’s 2022 asset performance outlook for prime ABS remains stable given the considerable strength and resiliency observed in the sector. The stable rating outlook reflects the conservative base case loss proxies (credit and RV loss proxies), transaction structural features and strong performance,” analysts said in the report.
“Fitch’s outlook for subprime ABS performance is neutral, but Fitch anticipates losses will remain within expectations. The rating outlook is positive as transactions are deleveraging and building credit enhancement (CE) that supports upgrades of subordinate classes of Fitch-rated subprime transactions,” they continued.
“U.S. auto loan delinquencies have moderated slightly from the record low observed in summer 2021 but remain below pre-pandemic levels. Both prime and subprime delinquency rates improved during the pandemic, resulting initially from lender payment relief efforts and U.S. government stimulus, then further supported by higher household savings rates and a strong labor market,” Fitch went on to say.
“As expected, as U.S. government stimulus programs largely ended last fall, delinquencies began increasing incrementally. Delinquencies are likely to continue to normalize as inflationary pressures persist, particularly in subprime ABS,” the firm added.
Latest KBRA indices reveal notable deterioration
Over at KBRA, analysts said as a part of its latest update that August remittance reports showed a third straight month of weakening credit performance across securitized prime and non-prime auto pools.
Analysts indicated annualized net losses in KBRA’s prime auto loan index climbed 4 basis points month-over-month and 16 basis points year-over-year to 0.24%, while prime 60-day delinquency rates rose 3 basis points month-over-month and 10 basis points year-over-year to 0.37%.
Meanwhile, analysts found that annualized net losses in KBRA’s non-prime index increased to 6.25%, which is 120 basis points higher month-over-month and 310 basis points higher year-over-year.
KBRA added that the percentage of non-prime contract holders who are 60 days or more past due climbed 26 basis points month-over-month and 177 basis points year-over-year to 5.3%.
“Although COVID-related stimulus has caused some variances to the norm since early 2020, auto loan credit performance has historically followed a very predictable seasonal pattern,” KBRA said in its report. “Delinquency rates and net losses typically improve in the first quarter of the year, as borrowers receive an additional source of cash in the form of tax refunds and, in some cases, annual bonuses. Performance metrics then rise during the summer months, as the benefits from tax refunds dissipate and consumer budgets are squeezed by summer travel.
“Performance in the autumn months has historically been more mixed, but have generally held steady until holiday spending pushes delinquency and loss rates higher through year-end,” analysts continued.
Like Fitch, KBRA also looked ahead toward what might occur during the rest of the year and into 2023 when it comes to credit performance shown via securitizations.
“In our view, a return to more normalized seasonal trends in 2022, as well as continued inflationary and interest rate pressures over the coming months, will likely push prime and non-prime auto loan delinquency rates back to or above pre-pandemic levels by year-end,” analysts said. “However, both prime and non-prime index loss rates will likely remain at depressed levels until later in 2023 (see Figure 3 and Figure 4), as loan recovery rates continue to benefit from a strong used car market.
US Q4 economic outlook
Finally via report titled “Economic Outlook U.S. Q4 2022: Teeter Totter,” S&P Global Ratings revealed its U.S. GDP growth forecast to be 1.6% for 2022 and 0.2% for 2023, as the economy falls into a shallow recession in the first half of the year
S&P Global Ratings said the jobs market is still tight as workers quickly find jobs. Analysts said the labor force participation rate for prime age female workers (25 to 54 years old) climbed in August to its highest rate since before the pandemic, as COVID-19 vaccines to young children and reopening of schools helped parents return to the workforce, to improve business needs.
S&P Global Ratings now expects the unemployment rate to reach 4.8% by the end of 2023 and peak at 5.7% by early 2025. Analysts said it will hold above 5% through 2026. Inflation likely peaked in third-quarter 2022 but will remain high on continued supply-chain disruptions.
Core prices, excluding food and fuel, is expected to remain above the Federal Reserve’s 2.0% target until the first quarter of 2024, according to S&P Global Ratings.
Analysts see the Fed pushing interest rates higher by a total of 400 to 425 basis points by early next year. S&P Global Ratings thinks the Fed will keep monetary policy tight until inflation begins to moderate during the second half of next year.
“While our baseline now includes a shallow recession, we can't rule out chances of an even harder landing,” S&P Global Ratings U.S. chief economist Beth Ann Bovino said in a news release. “As we write this, the Fed has indicated that it will tighten the screws more if needed. A more aggressive Fed would likely mean an even harder landing than in our baseline.
“One upside could be that, as the economy tumbles, demand softens, lowering prices, allowing the Fed to change course to avoid an economic crash. The economic ship re-rights itself and manages to steer toward safer waters,” Bovino added.