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Russia-Ukraine Conflict Likely to Extend High Used Vehicle Values Benefiting Auto Finance Companies

This commentary reviews the impact of Russia’s economic sanctions on the U.S. auto finance sector.

Key highlights include:

• The Russia - Ukraine conflict has led to a significant response from the U.S. and its allies, including the establishment of broad-based economic sanctions on Russia's central bank, several of its largest commercial banks, payment system, and transportation. These sanctions will have far reaching implications for many U.S. industries that are reliant on stable supplies of commodities.

• Over the near-term, we anticipate that higher commodity prices will lead to sustained upward pricing pressure on new vehicles, which will further diminish new vehicle affordability for many consumers, spurring higher demand for used vehicles, and in turn place sustained upward pressure on used vehicle values.

• The strong used vehicle markets have been a positive for the credit profile of those auto finance companies and rental car companies in our coverage universe. Higher used vehicle values have driven increased recovery rates on repossessed vehicles and reduced loss severities leading to lower net charge-offs, dampened the levels of provisions for loan loss reserves, and reduced residual value risk.

“Overall, the persistent strength in used vehicle values will continue to benefit auto finance companies' credit profiles, especially from above average recovery rates on repossessions and reduced loss severities.” said Mark Nolan, Vice President - Global FIG.