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Fitch says car loan delinquencies reach five-year high
Australian Financial Review Jun 20 2016 11:45 PM
Jonathan Shapiro
Late payments on vehicle loans have reached their highest level since 2010, triggering concerns that stresses among overextended car owners are beginning to build.
The delinquency rate is measured by credit rating agency Fitch and is based on about $12 billion of Australian auto loans that have been packaged and sold to investors in the form of asset-backed securities.
While the percentage of loans overdue by more than 30 days appears low at 1.46 per cent, that is the highest level in more than five years, since Fitch began tracking the arrears via its Dinkum Index.
The 29 basis point increase since the fourth quarter of 2015 is also above the historical average of 17 basis points, despite strong "economic fundamentals" prevailing during the period.
Lender losses on auto loans tend to be low because loan sizes are small, payments are manageable and loan tenures are no more than a few years. However, the rise has warranted closer scrutiny.
Fitch said it expects further deterioration in auto loans and low wage growth could threaten the future performance of the asset class.
"Borrowers who are unable to adjust their spending may struggle if wages do not increase in line with historic growth," the agency said in a report last week.
However, strong macroeconomic conditions such as a low unemployment rate, a robust consumer sentiment index and low retail petrol prices were supportive.
While auto arrears are rising from a low base, residential mortgage arrears tracked by Fitch have declined to a historic low of 0.95 percentage points of securitised loan, as a result of low interest rates, higher property prices and strong underwriting.
One complicating factor for auto lenders was lower recovery rates as a result of falling used car prices. That has come about as new car prices have fallen, which is one of the factors behind strong sales.
From 2018, second-hand imports of "near-new cars" will be allowed that could further weigh on used car prices.
Other observers believe a rise in loan losses should be expected, given a competitive market price and ultra-low interest rates provided by the financing arms of certain manufacturers had fuelled a binge in new car purchases.
Data from the Australian Bureau of Statistics showed a marked rise in financing of vehicles and in particular new vehicles. Outstanding financing for new vehicles has doubled in four years to May 2016, making up about 60 per cent of loans, compared to 50 per cent four years ago.
Sales on the rise
Meanwhile, new auto sales continue to show strong growth. Australians bought 96,672 new vehicles in May, a 3.6 per cent increase in sales compared to May 2015, driven by an increase in sports utility vehicle sales.
The strong growth in sales helped fuel one of the busiest years for the issuance of auto-backed bonds in 2015, with more than $6 billion of debt raised. So far, however, 2016 has been slower, with about $600 million raised.
The auto securitisation market is dominated by Macquarie, which issues securities in Australia and globally through its SMART financing program. St George is among several other issuers that have raised funds through auto loan securitisations.
The rise in arrears is not the first sign of stress in the sector. Earlier this year, lender Westpac told investors that it had experienced a rise in consumer loan losses as borrowers in troubled regions of Queensland and Western Australia fell behind on their payments.
Globally, investors are paying closer attention to this once sleepy sector of the credit market, where loan losses are often limited to fractions of the lending book.
Earlier this month JPMorgan chief executive Jamie Dimon called out the auto loan sector as being "a little stressed" warning that "someone will get hurt in auto lending".
New car loans in the US rose as employment increased and gas prices fell, luring buyers to take out cheap loans to buy cars. Some fear a glut of recently purchased cars will be sold as used, pressuring prices.