A Capital One survey conducted at ABS East 2018—a conference convening professionals from across the asset-backed securities (ABS) industry—found that most respondents (94 percent) expect buy-side interest in ABS to increase or remain the same in the coming year while only 6 percent expect it to decrease.

Of the challenges facing the industry, only 15 percent of ABS professionals elected increases in interest rates. For the majority of respondents, uncertainty around regulatory requirements (30 percent), increased credit risk (25 percent) and increased competition (24 percent) pose the greater challenges for their businesses over the next 12 months.

“It comes with little surprise that there is strong enthusiasm for asset-backed securities as this is in line with findings from our past industry research,” said David Kucera, Senior Managing Director and Head of the Financial Institutions Group at Capital One. “However, this new data demonstrates that ABS professionals are somewhat comfortable in an economy with rising interest rates and view issues like regulation or increased credit risk as larger concerns for their businesses.” 

The industry was fairly split on sentiment around how and when lenders’ interest rates would increase compared to the benchmark rates. Forty-one percent said lenders’ rates will rise at the same time as benchmark rates, whereas 38 percent said lenders’ rates will rise more quickly and 21 percent said lenders’ rates will rise less quickly.

“As benchmark rates have risen over the past year, we’ve seen some hesitance from non-bank lenders to raise rates at the same pace in certain markets,” said Kucera. “However, we anticipate that trend may change as the economy continues to evolve, and lenders can no longer maintain the lower margins.”

Of those respondents who indicated that they are lenders, 60 percent said they plan to raise interest rates while 40 percent of lenders said they plan to maintain the same rates. Particularly, mortgage finance (25 percent), unsecured consumer lending (22 percent) and leveraged credit (22 percent) were selected as the top three sectors in which respondents believe interest rates will rise the most in the next 12 months.

Capital One’s Financial Institutions team is dedicated to the lender finance market and works with a wide variety of non-bank financial institutions and asset managers. The team is focused on providing customized lending, advisory and financing products and solutions—including asset securitization, recourse financing and interest rate hedging.