Emerging Potholes in Operating Environment Will Require Skillful Driving for U.S. Auto Finance Companies
This commentary discusses the building headwinds impacting the auto finance sector.Key highlights include:
• Following two years of strong results due to robust used vehicle values and lower credit losses, potholes are emerging in the operating environment for U.S. auto finance companies that will be headwinds to their financial performance over the near-term.
• Going forward, we see higher funding costs as continuing to pressure net interest margins and company bottom lines, especially as the U.S. Federal Reserve continues to ratchet up the Fed Funds rate.
• Auto finance companies' asset performance began to normalize in 2022 following two years of strong performance supported by the outsized level of federal stimulus that flowed into the economy as well as payment accommodations and forbearance provided to borrowers to offset the impact of the coronavirus pandemic.
“With the backdrop of a potential mild recession, we anticipate further deterioration in sector credit fundamentals including weakening asset performance and lower earnings generation,” said Mark Nolan, Vice President - Global FIG.
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