Black Book-Fitch Ratings: Vehicle Depreciation Report 2019
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BLACK BOOK-FITCH RATINGS: VEHICLE DEPRECIATION REPORT 2019 APRIL 2019 Black Book - Fitch Ratings Vehicle Depreciation Report 2019 Used Vehicle Prices Unusually Strong in 2018; Vehicle Depreciation to Increase in 2019; Auto ABS Losses to Normalize Higher New light vehicle sales volume increased in 2018 to 17.3 million, from 17.1 million in 2017. It was the fourth-straight year where the auto industry saw 17+ million units sold. Sales came in ahead of forecast, pushed up by strong economic conditions. The tax cuts and the resulting growth in jobs created an unusually high demand for both new and used vehicles. The new vehicle sales were particularly higher for commercial and rental fleets, while retail sales registered a slight decline. Leasing penetration remains stable at around 30%. Incentive spending remained stable in 2018 as auto manufacturers remained disciplined on price promotions to drive sales of new vehicles. The tax cuts enabled fleets to take advantage of additional money to eplacer vehicles, while the slowdown in sedan sales continued. Car segments constituted only 31% of the new sales volume compared to 47% in 2014. SUVs and pickup trucks are driving more new sales, while competition is heating up in these segments as more auto manufacturers introduce new and redesigned products. While retail sales of new vehicles experienced a slight decline, the demand for affordable used vehicles continued to be strong. For all the talk of trucks and SUVs, 2018 was the year of used compact and mid-size sedans. After several years of declining prices, mainstream sedan segments saw a bounce up from the lows in the used market. With lagging growth in real income levels, affordability remained front and center, driving demand higher for used cars. At the same time, franchise dealers embraced marketing and selling of used cars, with some creating separately branded rooftops to make the most of higher margins associated with selling used vehicles. This has enhanced awareness of used vehicles, particularly off-lease returns, and has contributed to keeping used vehicle values high. Black Book predicts new light vehicle sales to be at 16.8 million in 2019. We expect retail sales to be particularly lower, and incentive activity will likely increase as automakers offset the higher ticket prices of new vehicles and higher interest rate. We expect increased levels of incentives across all three types: more cash on the hood to drive sales, higher APR support in rising interest rate environment, and higher residual value subvention to offset declining residual forecasts. The supply of off-lease returns will continue to grow and peak in 2019. We are forecasting 4.2 million off-lease returns in 2019, about 300,000 more than the previous year. New vehicle sales are challenged to grow as more consumers are influenced to purchase from the increasing supply of affordable off-lease used vehicles. 1 Black Book - Fitch Ratings Economic Environment To Drive Auto Asset Backed Securities (ABS) in 2019 U.S. Macro Environment to Support Auto ABS in 2019 The U.S. economy will continue to expand next year, albeit at a slowing pace. Fitch’s baseline economic forecast is for 2.3% GDP growth compared with 2.9% for 2018, with the economy still growing above trend, albeit lower than last year. Unemployment is low, under 4%, and household income growth solid, both supporting consumer spending. We expect a strong job market will continue to anchor consumer confidence and ABS performance. Fitch’s forecast for new auto sales of 16.9 million units in 2019 is within range of 2018 sales and also Black Book’s prediction mentioned above. The U.S. consumer is benefitting from low unemployment and recent wage growth stemming from the benign macroeconomic backdrop. However, consumer debt is now at its highest absolute levels, driven by student loans, credit cards, and autos. While not our base case scenario, a shock that materially weakens the U.S. economy is a key downside risk to watch for in 2019. Subprime auto ABS pool performance will be more susceptible to volatility in economic performance. Business models dependent on origination volume are more vulnerable should loan demand soften due to higher borrower costs and stretched affordability, which include subprime auto ABS issuers/lenders, particularly the smaller, less capitalized companies that rely solely on ABS for funding (all of which Fitch does not rate). Prime Auto ABS Asset Performance Outlook: Stable | Rating Outlook: Positive While prime auto ABS asset performance peaked in 2017 and slowed marginally last year, Fitch expects 2019 to be another year of solid performance against a backdrop of supportive macro conditions and auto industry fundamentals. Our auto loan and lease ABS Rating Outlooks are Positive for 2019, consistent with 2018, reflecting stable asset performance and transaction structural protections. Fitch expects prime auto loan ABS losses to remain within our expectations in 2019, even as they slowly rise closer to 2005–2006 levels. Loss frequency will pick up this year, but severity should be relatively stable on the back of healthy-to-stable wholesale vehicle prices, as indicated by Black Book. Deleveraging transactions and building credit enhancement (CE) will support rating upgrades in 2019. Underwriting will again be a key factor across the auto lending spectrum for 2019, driven by intense competition so these late-cycle trends are areas ABS investors should be watching. One item that we are watching is consumer debt level which remains at record highs driven by credit cards, student loan, and auto lending, and could push loss frequency higher in 2019. Higher overall interest rates and higher vehicle transaction prices may make buying a vehicle more expensive in 2019. In turn, this may force lenders to stretch terms out further, increase LTVs, and move down the borrower credit spectrum. Fitch expects the used vehicle market to be relatively stable in 2019 with a slight increase in depreciation versus 2018, driven by elevated supply coming from higher lease return volume and a slow creep in repossessions. Lease penetration and return volume appear to have peaked entering 2019, which could slow used supply growth and provide further relief. If oil rises rapidly, larger vehicle segments could see pressure on used values, but this is not expected by Fitch as oil is forecast to be in the $65 range this year, and thus should not dent ABS performance. Further, consumers may opt for cheaper, smaller used cars and support used values and ABS recovery rates containing severity. Vehicle Depreciation Report 2019 2 Subprime Auto Loan ABS Asset Performance Outlook: Weakening | Rating Outlook: Stable/Positive Fitch’s outlook for subprime auto loan ABS is stable despite our expectations for asset performance to moderately weaken in 2019. Specifically, for the three subprime platforms rated by Fitch (General Motors Financial’s AMCAR; Santander Consumer USA, Inc.’s SDART; and World Omni Financial’s WOSAT platform), our Asset Performance Outlook is Stable as losses revert higher but stay within our initial forecasts. Rating momentum remains positive and continues to benefit from structural features mentioned prior. On the new issue side, Fitch continues to account for performance trends in its loss proxies and resulting CE levels by including recent weaker vintage performance, namely 2013-2015 vintages, when deriving ABS transaction loss proxies while also incorporating the weakest recessionary 2006-2009 vintages. Therefore, even if losses rise beyond our expectations in 2019, ABS deals will be able to handle such weaker performance without rating volatility. Subprime auto loan ABS remains more vulnerable to performance volatility given weaker borrower profiles and acute competition. The smaller, deeper subprime lenders’ ABS transactions, which are all not rated by Fitch, could be impacted and drive losses to record levels in 2019. Consolidation of these lenders could pick up in 2019 particularly if sales remain flat and there is limited opportunity for growth combined with intense competition. As losses move higher in 2019, servicing capacity and effectiveness will be a key focus and will test systems and practices at these institutions. Auto Depreciation Expected to Rise to 15% in 2019 According to Black Book, the annual depreciation rate on two-to-six-year old vehicles dropped to 12.4% in 2018, which was the lowest in four years. The average depreciation over the last eight years is 12.5%, with 2011 and 2012 Black Book Vehicle Depreciation registering the lowest due to strong pent-up demand right after the recession. Annual Depreciation** Prior to the Great Recession, annual depreciation of 16% was the norm. 2011 8.3% 2012 10.4% The demand for used vehicles peaked in 2018 due to a confluence of favorable factors: low interest rates, excellent credit availability with lower delinquencies, 2013 13.3% extremely high job growth, tax cuts enabling both consumers and commercial 2014 11.8% buyers to upgrade, increased marketing of off-lease vehicles, and disciplined 2015 13.2% incentives on new vehicles with rising transaction prices. According to the Bureau of Labor Statistics, 2.6 million new jobs were created in 2018, exceeding 2016 17.3% the number in the two prior years. These newly hired employees created a 2017 13.2% strong demand for affordable vehicles. Many of these favorable factors will 2018 12.4% remain strong in 2019, but will come off their peaks. As a result, the used 2019* 15.0% vehicle market is likely to see higher depreciation in 2019, but should enjoy * Forecast another year of relatively good performance in comparison to pre-recession ** Depreciation of 2-6 year old vehicles performance. Black Book expects used vehicles to depreciate at the rate of 15% in 2019, a 260 basis points increase from the previous year.