HONG KONG, 27 February 2020. Pengyuan International has released one research report, “China’s Auto Loan ABS Market 2020: Characteristics and Outlook”.
This research report studies the creditworthiness of auto loan asset-backed securities (ABS) issued in China Interbank Bond Market based on the analysis of the ABS transactions’ underlying asset quality, note performance, transaction structure, counterparties, and legal structure. The report also provides outlooks for the development of the auto loan ABS market by incorporating our views of macroeconomy, automotive industry, and auto finance industry.
Here are some key takeaways from this report:
In 2020, we expect that auto financing companies (AFCs) will continue to issue auto loan ABS products to meet the financing needs of auto manufacturers in line with their sales targets, as auto manufacturers are facing the dual capital pressures from the weak passenger vehicle market and developing new energy vehicle market. In addition, the increasing penetration rate of auto financing provides room for further growth in the issuance of auto loan ABS.
The asset pool of auto loan ABS has performed well historically, with an overall cumulative default rate less than 1.5 percent and falling each year. For the auto loan ABS issued after 2016, the deals originated by commercial banks have generally demonstrated higher default rates on the underlying assets than the deals originated by AFCs. For brand differentiation, the loan performance of luxury car has been better than other brands in most cases.
We believe the overall credit quality of the underlying assets of auto loan ABS will decline in 2020. The main reason is that we expect the pressures on China's economy will continue to increase due to the US-China trade war and the outbreak of COVID-19 in China. The residents are likely to face greater unemployment risks and may lack of short-term liquidity. In addition, their consumption may be further influenced by the substitution effects from housing. All these factors will have negative impacts on the solvency of residents, thus affecting the overall credit quality of auto loans.
The characteristics and structures of China's auto loan ABS provide supports to the performance of the senior tranche notes. China’s auto loan ABS are typically of fast repayment rate, short maturity and low loan-to-value ratio (LTV). These characterises coupling with the structural features such as interest/principal accounts and pass-through payment will continue to give credit supports for the senior tranches of China’s auto loan ABS.
In our view, the credit quality of auto loan ABS might decline in the following situations: 1) Some AFCs loosen their underwriting standards and lend to borrowers of low credit quality. That typically results in a decline in credit quality of the asset pool; 2) as a result of COVID-19 outbreak, falling incomes and higher unemployment may adversely affect the products’ credit performance; 3) if more used car loans enter the asset pool, then the asset default rate might become higher; and 4) introducing the revolving structure might reduce the pool’s credit quality and lower excess spread due to the potential low credit quality of the newly purchased loans and lack of qualified assets.
We expect limited impacts on auto loan ABS’ short-term credit performance if the loan base rate (LPR) mechanism is introduced into these products in the future.
Ke Chen, PhD
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