Despite concerns that increasing auto sales and more accessible credit might be signs of less stringent underwriting standards and potentially weaker credit in auto ABS, Wells Fargo analysts believe that the potential for credit risks is overblown.
In research released this afternoon, analysts said that the recent trends in the auto ABS sector represent a normalizing lending market after many years of disruption.
In spite of the dramatic increase of auto ABS issuance in the past few years, they said that the amount of auto credit outstanding has grown at a more moderate pace, citing Federal Reserve of New York data comparing auto, credit card and student loans as well as other consumer credits.
The Fed report demonstrated that auto loan outstanding has been increasing at a reasonable pace since reaching a low in 2Q10, although it went up to 4.4% year-over-year in 1Q12.
Analysts think that the modest growth in auto credit in addition to the stable credit enhancement levels and spreads suggest that underwriting standards are in fact not easing at an alarming rate.
Additionally, they compared the original weighted-average coupon (WAC) on auto loan ABS pools with the cumulative net loss rates generated by offerings that were issued between 2000 and 2010. Analysts said that the weighted average coupon on auto loan pools is a good indicator of credit risk.
They added that market participants and regulators can use the WAC as a reliable measure to differentiate the level of credit risk between auto loan pools.
According Wells Fargo analysts, the demand for auto loans has risen significantly,citing the bank respondents in the Federal Reserve’s survey, specifically over 1H12. They think this is partly a result of the pent-up demand for autos, which built up in the last few years.
“The strength in demand has also helped the auto ABS sector to regain much of its lost vigor,” Wells Fargo analysts wrote. “Particularly as lenders have shifted to a greater use of securitization for funding amid strong demand and tighter pricing spreads."
Meanwhile, Standard & Poor's analysts in a short note this morning said that the wider investor base that autos have gained lately is a positive for ABS liquidity, although they warned of the negative impact on underwriting if the sector expands rapidly.
S&P cited a Wall Street Journal report saying that Google, diversifying out of Treasurys, has recently bought the auto ABS paper of Hyundai Motor Co.and Honda Motor Co. The firm joined 3M Co. and Automatic Data Processing (ADP) that have bought asset-backeds in the sector over the past year, the report said.
Google’s investment thus far is less than $400 million while ADP’s auto ABS as a percentage of its investment portfolio is in the lower single digits, the rating agency noted.
Auto Numbers
In an Aug. 3 research report, Bank of America Merrill Lynch analysts cited figures from the firm's equity research team covering U.S. auto manufacturers that projected U.S. vehicle sales of 14.5 million for 2012 and 15.7 million for 2013. The investment bank's economics team is also estimating 13.8 million units in 2012 and 13.7 million in 2013.
Thus far in 2012, 8.4 million vehicles have been sold, an increase of 14.0% year-over-year. The year-over-year increases in vehicle sales have boosted new-issue volume in auto ABS. So far this year, BofA Merrill said $48.9 billion of retail auto loan and lease transactions and $6.2 billion of auto floorplan asset-backeds have been issued. Through July of last year, $33.3 billion of retail auto loan and lease ABS were issued plus an added $4.5 billion of auto floorplan ABS. The firm's full-year projection for all auto securitization sectors is $100 billion of gross supply.
In 2012 so far, Toyota has seen the most market share gains. Meanwhile GM has experienced the greatest loss. Even though this firm's market share plunged, its year-to-date vehicle sales actually rose by 2.7% year-over-year. BofA Merrill's equity team noted that vehicle sales for Japanese manufacturers have experienced considerable gains versus July 2011’s supply-constrained levels and the analysts believe this phenomenon will continue throughout the back half of 2012.
