An overwhelming majority (90 percent) of asset-backed securities (ABS) professionals feel that adopting new technologies will be important to preparing their businesses for the next economic cycle, according to Capital One’s sixth annual survey at SFIG Vegas 2019.

The survey also found that machine learning and artificial intelligence (AI) (35 percent) leads the charge as the technology offering the greatest potential to the industry. Following closely behind are blockchain (23 percent) and online and mobile payments (19 percent).

“Falling in line with our expectations, technology will continue to have an impact on the financial world. What’s most interesting to see is that more than one-third of the survey respondents may be channeling resources into machine learning and artificial intelligence,” said David Kucera, Senior Managing Director and Head of the Financial Institutions Group at Capital One. “Whether that means the industry will utilize AI to determine who they lend to or improve compliance functions, it will likely influence the way these businesses function, especially as the economy evolves.”

Regulatory Risk is Still Present, but Concern Continues to Drop
 
The survey also revealed that ABS professionals believe the biggest risks to their businesses are uncertainty around regulatory risk and increased credit risk, both at 29 percent. However, despite regulatory risk being a top concern, the industry’s apprehension has nearly cut in half over the last two years. In 2018, 48 percent noted regulations were the biggest risk to their businesses while 58 percent thought so in 2017. Additional top-of-mind concerns for 2019 include increases in interest rates (18 percent) and increased competition (17 percent).

With regulatory and credit risks casting a dark cloud over the industry, it is understandable why overall optimism around credit quality is low. The survey results show 55 percent of the industry expects that credit quality will worsen while only 5 percent expect it to improve and 40 percent expect it to remain the same.

Positive Outlook Despite Risks and Low Optimism

Although there are risks, respondents still expect growth within the industry. Twenty percent expect that both unsecured consumer loans and esoteric assets will have the highest growth in the coming year. Surprisingly, only 18 percent expect residential mortgage finance to be the sector with the highest growth in the coming year, whereas 34 percent chose that sector in 2018. Additionally, ABS professionals have very low expectations for ABL and factoring (11 percent), which is a 7 percent decrease from 2018.

“Such a decrease in optimism over the last year may be a reflection of the state of interest rate hikes in the U.S.,” said Kevin Gibbons, Managing Director, Capital One. “When interest rates increase, American consumers are less likely to buy homes and take out residential mortgages, which could explain why the industry is skeptical about growth in that sector this year. However, it’s important that we continue to keep an eye on unsecured consumer loans and esoteric assets as they make their way to the forefront.”

This year, 41 percent of ABS professionals expect that underwriting standards will remain the same while 34 percent expect that they will loosen, which is a 20 percent decrease from 2018.

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.