(Repeats to add editing credit)
By Nick Carey
DETROIT, March 27 As U.S. auto sales have
peaked, competition to finance car loans is set to intensify and
drive increased credit risk for auto lenders, Moody's Investors
Service said in a report released on Monday.
"The combination of plateauing auto sales, growing negative
equity from consumers and lenders' willingness to offer flexible
loan terms is a significant credit risk for lenders," Jason
Grohotolski, a senior credit officer at Moody's and one of the
report's authors, told Reuters.
Motor vehicle sales have boomed in the years since the Great
Recession. U.S. sales of new cars and trucks hit a record annual
high of 17.55 million units in 2016.
Industry consultants J.D. Power and LMC Automotive on Friday
reiterated their forecast for a 0.2 percent increase in sales in
2017 to 17.6 million vehicles. )
But Moody's says it expects U.S. new vehicle sales to
decline slightly to 17.4 million units in 2017.
In its view, that would mean lenders will be chasing fewer
loans, "which could cause them to further loosen loan terms and
loan to value criteria."
Over the past several years, lenders have supported
automotive credit growth with "accommodative financing,"
including longer loan terms, the report added.
"With every successive year, lenders' profitability is
getting thinner and thinner, and their credit losses have been
growing," Grohotolski said.
In the first nine months of 2016, around 32 percent of U.S.
vehicle trade-ins carried outstanding loans larger than the
worth of the cars, a record high, according to the specialized
auto website Edmunds, as cited by Moody's.
Typically, car dealers tack on an amount equal to the
negative equity to a loan for the consumers' next vehicle. To
keep the monthly payments stable, the new credit is for a
greater length of time.
Over the course of multiple trade-ins, negative equity
accumulates. Moody's calls this the "trade-in treadmill," the
result of which is "increasing lender risk, with larger and
larger loss-severity exposure."
To ease consumers' monthly payments, auto manufacturers
could subsidize lenders or increase incentives to reduce
purchase prices, though either action would reduce their
profits, the report said.
Lenders could further lower annual percentage rates and keep
extending loan terms, though the latter would increase their
credit risk, it added.
(Reporting By Nick Carey)