Fitch lowers loan outlook for consumer finance sector
Fitch cuts its outlook on loans for the consumers in the finance industry
Fitch Ratings on Monday lowered its outlook on credit risk for the credit sector for consumers including credit card lenders, from the negative range from stable to advising that the credit score of lenders could “deteriorate quickly” due to the recession. Coronavirus crisis.
The rating agency has said that it expects the majority of companies in the field of consumer finance to follow the example of auto lenders in a variety of ways and invoke quick cash loan forbearance policy similar to those that were offered following hurricanes Hurricanes Harvey as well as Irma that ravaged areas of Texas and Florida in the year 2017.
“Fitch believes these forbearance programs are prudent given the particular nature of the crisis and will help to mitigate the negative consequences of credit losses, specifically for those who are able to return to work earlier,” Analysts said in an announcement.
However, once the grace period ends, “the credit performance of firms that provide consumer finance could decline rapidly, especially in the event that workers who have been displaced are not able to find a job and companies are unable to resume their operations immediately. After the economy has opened, “they added.
Financial institutions have been urged by regulators to collaborate with their clients in order in order to lessen the financial burden caused by the coronavirus. As an example, Ally Financial allows auto customers to delay the payment for up to 120 calendar days with no charges for late payments. Fifth Third Bank waives payments on auto loans and mortgages until 90 days.
Fitch pointed out that the $2 trillion relief package signed by President Trump this week permits lenders to delay loans without the need to categorize these loans under distressed restructurings which triggers special regulatory reporting accounting, tracking and reporting requirements that could be burdensome for lenders. .
“Still the increased forbearance could temporarily eliminate costs that will be recognized over the next few quarters and will cause a shift in asset quality indicators starting the 2Q20 period,” Fitch said.
Fitch also believes that the capitalization of the consumer credit companies to gain in the near time from falling balances on loans as growth slows, and there is a possibility of discontinuation of buyback programs for shares.
“However an abrupt and prolonged rise in unemployment could cause a significant rise in the provision for loan losses as well as eventually, accrued liability that could result in significant operating losses as well as the loss of capital. At present, “he warned.
In general, both banks and non-bank credit companies for consumer credit enter the present recession with much better funding position, Fitch said.
Particularly, Fitch said that the shifting of banks and other non-bank institutions away from securitization financing to deposits secured by debt is beneficial as it could increase the amount of assets unencumbered that could be pledged or sold to generate. additional liquidity.
Fitch completes Consumer Finance Peer Review; Negative Rating Actions Are Taken
Fitch Ratings has completed a review of seven consumer finance firms due to the significant risk to the financial profile metrics arising from the coronavirus outbreak. Since the appearance of the coronavirus pandemic the middle of March, Fitch has revised its U.S. Bank, U.S. auto finance and U.S. credit card sector outlooks from stable to negative (the forecast for the education sector was previously negative). The actions taken by Fitch today are a sign of the emergence of a significant risks to issuers’ financial performance metrics as a result of the steps taken by the states and federal governments to stop spreading of the coronavirus virus, which has led to dramatic decreases within U.S. economic activity. The federal government’s programs, like grants and loans to small companies, enhanced unemployment insurance, and one-time payments for middle and low income households together along with an extension of lenders’ forbearance programs are expected to help ease the financial impact of the outbreak, the drastic decrease in economic activity comes with serious risks to lenders’ portfolios.
The sector of consumer finance is extremely dependent on macroeconomic variables such as the growth of GDP, which fuels consumer spending as well as the volume of loans, as well as unemployment rates Both of which are expected to suffer severe negative shocks, as shown by the record number of unemployment benefit applications in the last few weeks. A lot of uncertainty exists about the duration of the economic slowdown caused by the unprecedented steps that have been taken by local and state authorities across the nation to limit the spread of coronavirus.
According to Fitch’s Global Economic Outlook (GEO) is currently forecasting a dramatic rise of unemployment in the U.S. unemployment rate, up to 14% during 2Q20, but it will decrease over the next few months, but remaining more than twice the levels pre-crisis in 2021. Although Fitch believes that forbearance programs can assist in avoiding defaults for who are temporarily unemployed however, it may also help reduce the risk for those who will be without work for a prolonged period. After the forbearance period expires, Fitch believes credit performance for firms that deal in consumer finance could be deteriorating rapidly especially if those who are displaced are not able to find employment and companies are unable to resume business after the economy opens. The severity of the consumer credit loss will ultimately be affected by the amount and length of measures to disengage socially.
Fitch anticipates that near-term profits and revenue to be significantly affected by a drop in loan and purchase originations in the coming months, in addition to the increased the amount of late fee waivers. The effect from the Fed’s interest-rate reductions will impact different aspects of net interest margins in the sector however, they will be an issue for many consumer lenders in the coming year.
In the near future, capitalization will benefit from a reduction in the balance of loans because loan growth slows and the end of shares purchases. In addition, regulators have tried to ease the cost of implementing the current estimated credit loss accounts (CECL) on banks’ capital ratios through an extension of two years (prior to the three-year phase-in). But, a significant and persistent rise in unemployment could push the amount of loan loss provision higher which could lead to massive operating losses as well as loss of capital from current levels.
Fitch believes that banks and non-bank consumer finance companies enter the current financial crisis in better funding positions than when they had been when the financial crisis began in the year 2008. A large number of non-bank lenders were transformed into banks during 2008, and they are in a position to benefit from the Fed’s numerous relief programs and discount window and also have significant portions of their assets financed with retail deposits which are an easier and more stable cost source of funding (particularly in times of stress). In addition, the majority of banks and other non-banks have moved away from securitization for secured loans (and deposits) and deposits, which Fitch is a fan of since it expands the number of non-encumbered assets that could be pledged or sold to generate liquidity in times of financial pressure. In the event that difficulty getting access to the ABS market persists for a long time, Fitch believes it would be a greater challenge for non-bank consumer lenders who are not as diversified in their variety of funding options as banks do.