OREANDA-NEWS. Increased non-prime lending, weakening underwriting standards, and a moderate reduction in used car values will contribute to a gradual decline in auto asset performance for auto finance companies through 2016 and subsequent years, according to a new report from Fitch Ratings.

"Following a strong 2015, we expect auto asset performance to deteriorate going forward, particularly as used car values begin to weaken," said Michael Taiano, Director, Fitch Ratings. "Sub-prime lenders and non-traditional auto lenders will experience the greatest performance variability due to their higher risk nature."

New vehicle sales increased in 2015 reaching nearly 17.5 million units due to growing light truck demand from low gas prices, the prevalence of cheap financing and heavy promotions. Heated competition, however, led to further loosening of industry-wide underwriting standards and increased non-prime lending which will have adverse implications for more recent vintages. Fitch further expects used car values to return to more normalized levels driven by downward pressure from increasing used vehicle supply caused by higher new car sales and elevated lease return volumes through 2018.

Despite the headwinds, credit quality remains strong, supported by a stable economic backdrop. Losses among the major auto finance lenders remain low relative to historical terms even though they have continued to creep up year over year (4Q15 versus 4Q14). Quarter-over-quarter, though, the average net loss rate for Fitch-rated lenders decreased marginally from 1.06% in 3Q15 to 1.03% in 4Q15 and average 30+ day delinquencies decreased slightly from 3.96% to 3.82% during the same period. Prime auto loan ABS also continues to perform well, although with slightly higher loss rates versus 3Q15 and year-over-year figures. Subprime, however, has not fared as well as prime, and the divergence in loss rates between the two sectors continued to widen into 2016.

Since year-end 2015 both prime and subprime ABS have seen some marginal improvement in performance with delinquencies and net losses falling slightly. Fitch notes, however, that this is occurring due to favorable seasonal trends and that the Mannheim index has continued to decrease in March.

Credit losses and delinquencies will continue to increase over time, largely due to the uptick in subprime lending and easing underwriting standards which are producing weaker new vintages. Falling used car values will also impact loss severity. Nonetheless, as auto lenders provision for higher losses, we expect Fitch-rated auto lenders will have sufficient capital and liquidity relative to their asset quality to support the uptick in losses.