Aug 8 - Steady improvement in U.S. auto loan asset quality continued in the second quarter, even as lending standards at banks and captive finance companies eased somewhat and used car values fell slightly. Fitch Ratings expects robust loan demand and good liquidity in the capital markets to fuel further auto loan growth in the near term, but emerging competition, continued normalization of underwriting standards, and moderating used car prices will likely lead to a modest weakening of credit metrics over the next year. Most lenders reported historically low credit losses last quarter, helped in part by typical seasonal consumer loan payment patterns and still-resilient used vehicle values. Net charge-off rates improved again in the second quarter, falling by an average of 22 bps year over year for major Fitch-rated auto lenders. Similarly, 30-day delinquency rates were 43 bps lower versus the prior year period. New vehicle demand has remained strong through the summer, with seasonally adjusted annual light vehicle sales rates still topping 14 million units in July. Auto loan origination volumes have been robust for all major lenders in the first half of the year, and second half activity is likely to remain strong. Better demand for auto loan asset classes, including more subprime auto ABS offerings, is supporting liquidity in the auto financing space and also appears to be contributing to some easing of credit standards by lenders. The Federal Reserve's most recent senior loan officer survey, released earlier this week, highlighted auto loans as an area where lenders have reported some easing in credit standards over the past three months. The Fed reported that 23% of banks surveyed loosened application standards for individuals seeking auto financing over the last quarter. Survey respondents reporting eased credit terms noted that most changes were occurring in loan pricing, with 32% of banks noting that auto loan spreads over the bank's cost of funds narrowed over the last three months. Smaller fractions of lenders indicated that easing occurred in loan maturities and down payment requirements. The Manheim Index of wholesale used vehicle prices fell again in the second quarter, dropping 2% sequentially and 3% year over year. The index declined by an additional 1.8% in July, the fourth consecutive monthly decrease. Despite these price declines, used car prices remain elevated, supporting lender recoveries. We expect future used car price declines to proceed at a measured pace. Auto lender credit metrics are likely to weaken somewhat over the next year with further declines in used vehicle values and normalization of credit trends. However, metrics could deteriorate more quickly should larger lenders respond to emerging competition in the auto finance space by significantly loosening underwriting standards. We would view such developments negatively, but to date no evidence of a broad-based change in underwriting standards has appeared. While some normalization of credit metrics is likely, we do not expect auto lenders to report substantially weaker credit performance in the back half of the year. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.