Fitch Lowers Outlook for Consumer Finance Sector

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Fitch Ratings on Monday lowered its credit outlook for the consumer finance sector, including credit card lenders, to negative from stable, warning that lenders’ credit performance could “deteriorate rapidly” as a result of the coronavirus crisis.

The credit rating agency said it expects most consumer finance companies to follow the lead of several auto lenders and invoke loan forbearance policies similar to those offered in the wake of hurricanes Harvey and Irma, which hit parts of Texas and Florida in 2017.

“Fitch believes these forbearance policies are prudent, given the unique nature of the crisis, and should help mitigate more severe credit loss implications, particularly for customers that can get back to work more quickly,” analysts said in a news release.

However, once forbearance expires, “credit performance for consumer finance companies could potentially deteriorate rapidly, particularly if displaced workers are unable to secure employment and businesses cannot resume operations once the economy reopens,” they added.

Regulators have been encouraging financial institutions to work with customers to soften the financial toll of the coronavirus. Among other moves, Ally Financial is allowing auto loan holders to defer payments for up to 120 days with no late fees and Fifth Third Bank is waiving payments on mortgages and car loans for 90 days.

Fitch noted that the $2 trillion emergency relief package signed by President Trump last week allows lenders to defer loan payments without having to categorize the loans as troubled debt restructurings, which would trigger special regulatory reporting, tracking, and accounting requirements that can be burdensome for lenders.

“Still, the increase in forbearance will temporarily suppress charge-offs that will be recognized in future quarters, creating a distortion in asset quality metrics beginning in 2Q20,” Fitch said.

Fitch also expects consumer finance firms’ capitalization to benefit in the near term from a decline in loan balances as loan growth slows and from a likely suspension of share buyback programs.

“However, a sharp and sustained increase in unemployment will drive loan loss provisions, and ultimately charge-offs, meaningfully higher, which may result in large operating losses and the erosion of capital from current levels,” it warned.

Generally speaking, both bank and non-bank consumer finance companies come into the current crisis in considerably better funding positions, Fitch said.

In particular, Fitch said that the pivot by banks and nonbanks away from securitization funding to unsecured debt and deposits would help, as it would increase the amount of unencumbered assets that can potentially be sold or pledged to raise additional liquidity.