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Fitch: Stable Outlook for Finance and Leasing Companies

November 22, 2019, 07:25 AM
Filed Under: Industry News

The 2020 sector and Ratings Outlooks for North American finance and leasing companies (FLCs) are stable, according to Fitch Ratings. The solid, albeit slowing, macroeconomic environment is expected to result in consistent credit loss performance and manageable residual value declines.

The stable outlook reflects manageable leverage across most sectors and adequate liquidity profiles, although asset quality expectations are more mixed across subsectors. While the Federal Reserve's (Fed) interest rate cuts should be supportive for borrower/lessee credit performance, lower absolute rates and a flatter yield curve will likely pressure margins in certain subsectors.

"The economic environment remains supportive for financing and leasing companies despite an expected moderation in GDP growth expected next year," said Michael Taiano, Senior Director, Fitch Ratings. "While key macro indicators suggest continued strength in subsectors sensitive to the U.S. consumer, subsectors more sensitive to commercial borrowers and lessees are likely to be pressured as uncertainty over global trade issues and the U.S. presidential election weigh on sentiment."

For consumer-focused FLCs, rising consumer leverage in recent years has been mitigated by strong job growth, rising incomes, rising asset values and lower interest rates, all of which have expanded the capacity to borrow. The subsector outlook for auto finance companies has been revised to stable from negative to reflect moderating loan growth and stable used vehicle prices. However, Fitch remains concerned that the continued extension of loan terms across the industry could result in higher loss severities longer term. The subsector outlook for the education finance sector has been revised to negative from stable to reflect margin pressure and higher leverage in the loan consolidation segment, as well as emerging political risks with the upcoming 2020 election.

"The resiliency of the U.S. consumer is reflected in stable credit performance for auto finance, credit cards and mortgage lending. Lower interest rates will be supportive of borrowers' ability to pay, but net interest margins and profitability will likely moderate from current levels for consumer lenders," added Taiano.

The Current Expected Credit Loss (CECL) accounting standard that will be implemented in 2020, although not expected to have near-term rating implications, will likely lead to higher earnings volatility for finance and leasing companies and has the potential to result in unintended consequences longer term.

Although macroeconomic indicators for commercial-focused FLC s have weakened recently and issuers appear more vulnerable to cyclical pressures, some secular trends are supportive for the group. In addition, issuers generally maintain conservative leverage and have appropriate risk controls to manage residual risk on leases.

Subsectors in Fitch's 2020 Finance and Leasing Outlook include: aircraft lessors, commercial fleet leasing, railcar leasing, truck rental and leasing, mortgage REITs, auto finance, credit card finance, education finance and mortgage companies. Detail on each subsector is available in the report, "Fitch Ratings 2020 Outlook: North America Finance and Leasing Companies," at

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