Asset quality reversion, growing regulatory scrutiny and profitability pressures are among the challenges facing finance and leasing companies (FLCs) globally in the coming year, supporting Fitch Ratings' negative sector outlook for 2016.
The Rating Outlook for FLCs, however, is Stable, reflecting steady funding and liquidity profiles, a modestly positive impact from rising interest rates, and manageable leverage levels following a period of de-levering post-crisis and a more measured approach moving forward.
The 2016 finance and leasing company outlook report published today addresses FLC subsectors including auto loan/lease, credit cards, student loans, consumer unsecured, mortgage servicing, aircraft leasing, railcar leasing, truck rental and leasing, and commercial fleet leasing. Fitch recognizes that the market dynamics may vary by subsector and by region, but the report identifies major trends expected to affect all players in the coming year.
Regulatory scrutiny and asset quality reversion are the top factors contributing to expected pressures on earnings for the next year. Consumer finance companies in particular are expected to begin to be challenged by asset quality deterioration, as Fitch expects U.S. auto lenders to continue to loosen underwriting standards as competition in the subsector heats up. Credit card issuers will also likely experience modestly deteriorating asset quality, given loan growth, portfolio seasoning and potential increased debt service burdens in a rising rate environment.
On the regulatory front, consumer finance companies are expected to continue to feel the most direct effects in 2016. The private student loan industry, for example, is a continual area of focus for policymakers. As marketplace lending activity increases, regulatory scrutiny of the business is expected to intensify, as evidenced by several European countries narrowing in on consumer lenders thus far in 2015.
On the commercial finance side, the pressures are viewed as less acute, although residual value risk looms, particularly for truck and commercial fleet leasing companies. A relative bright spot, however, is the aircraft leasing subsector, which will likely continue on its positive growth trajectory supported by increasing global air traffic, tailwinds from low fuel prices, strong lease rates and expected industry consolidation as more players have entered the space.
Fitch anticipates that leverage metrics will remain stable across nearly all asset classes despite new origination activity and acquisitive growth opportunities, as expected earnings growth will support potential capital needs. Leverage metrics remain below pre-crisis levels given more conservative leverage policies post-crisis and the uneven economic recovery.