Fitch Ratings-London/New York-14 November 2017: The Rating Outlook for finance and leasing companies (FLCs) globally in 2018 is Stable, Fitch Ratings says. The Stable Rating Outlook reflects modest leverage across most sub-sectors, adequate liquidity profiles, and the generally muted impact of rising interest rates in certain regions on FLCs' earnings. The sector outlook is still negative based on Fitch's expectation of weakening asset quality and residual values across many asset classes, in addition to regulatory environment uncertainty.
Most FLCs are better capitalized than pre-crisis, given more conservative leverage policies. This should serve as a structural tailwind to offset tougher portfolio credit profiles. However, FLC leverage ratios in China are increasing as the Chinese market, along with some other high-growth markets, is exhibiting capital pressure.
Consumer finance sector outlooks are mostly negative as Fitch expects credit deterioration due to portfolio seasoning following recent growth, and residual value pressure. In contrast, commercial finance sector outlooks are mostly stable as there are still opportunities for outsourcing ownership of assets like aircraft, commercial fleets and trucks.
Financial technology (fintech) is likely to play an increasingly important role in financial services globally in 2018, increasing market efficiency but also introducing potential competitive disruption. However, given the nascent and evolving nature of fintech, its main impacts are likely to be beyond the 2018 outlook horizon.
Key factors impacting sub-sector outlooks are as follows:
--In auto lending and leasing, the primary drivers of weaker credit performance are likely to be declines in used vehicle prices and the seasoning of 2013-2015 auto loan vintages, which Fitch believes were characterized by weaker underwriting standards.
--In credit card lending, Fitch believes that recent loan growth for several large issuers in the high single digits, and in some cases low double digits, is unsustainable longer-term and will likely result in further pressure on credit losses if this pace continues for an extended period.
--In the U.S. student lending market, Fitch expects loan growth to moderate in 2018 due to slower enrollment growth and a flattening of tuition fee increases.
--In the consumer unsecured sub-sector, marketplace lenders appear to be in a transition phase with several of the largest lenders shrinking volumes and some smaller players either shutting down operations or being sold.
--In mortgage servicing, Fitch expects consolidation of smaller nonbank mortgage servicers in the medium term. Servicing costs continue to rise and companies are seeking to rationalize costs and improve margins through maximizing economies of scale.
--In aircraft leasing, the overall market for commercial aircraft benefits from strong growth of global air traffic, moderate fuel prices and largely stable airline credit fundamentals.
--In railcar leasing, weak freight car prices are likely to continue to pressure railcar residual values and lessor profitability into 2018, but declines should moderate.
--In commercial fleet leasing, portfolio growth should continue in 2018, driven in part by increased fleet management outsourcing due to the rising cost and complexity of maintaining fleet ownership.
The report "2018 Outlook: Finance and Leasing Companies" is available at www.fitchratings.com or by clicking the link above.