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Depreciation Expected to Accelerate, Black Book/Fitch Report

August 26, 2015

LAWRENCEVILLE, GA — Black Book and Fitch Ratings Inc.’s latest joint vehicle depreciation report shows that overall vehicle depreciation is expected to reach between 14% and 14.5% by the end of the year. The main driver will be rising used-vehicle supply.

Fitch does not believe marginally rising depreciation rates will have much impact on auto ABS asset performance. Despite this prediction, the agency believes loss rates will rise due to marginal declines in used-vehicle values in the latter half of 2015, as trade-in and lease returns continue to pressure wholesale values.

Black Book’s analysis in the report shows that the supply of used vehicles will continue to increase, ultimately leading to larger depreciation. Annual depreciation on two- to six-year-old vehicles was 12.1% in 2014, similar to the levels seen in 2012 and 2013. The annual depreciation in 2011 was unbelievably strong at 7.7%, the firm noted, given limited manufacturer vehicle production and low inventory levels, combined with a strong pick-up in demand for both new and used vehicles after the recession.

Annual depreciation in prerecession years ranged from 14% to 18%, which will put the expected depreciation of 14.5% in 2015 at the lower end of the range in peak depreciation periods.

Auto loan and lease ABS asset performance is stable for the prime sector, even with loss rates likely to rise marginally for the remainder of the year. The outlook for ratings performance is positive, with Fitch likely to continue issuing rating upgrades this year on par with the number issued in 2014.

Fitch said it believes that pools of loans and leases securitized will be susceptible to vehicle segment concentrations present. This is due to various factors that drive used values by vehicle segment, including gas prices, interest rates, and industries. For example, with the building industry picking up, demand for trucks has improved and so have values in 2015.

Several factors have contributed to the strength of the used-vehicle market since the recession, including employment growth, a strengthening economy and healthy credit availability.

Truck segments have continued to show higher volatility in recent years, according to the report. Some truck segments are showing unusual strength. The prime models are the full-size vans and wagons with a refreshed design, driving higher used demand for the “old” style. Overall, yearly depreciation in 2014 was much better than volumes suggested and better than 2013. The average age of vehicles on the road, which stands at more than 11 years old, continues to support replacement with new and slightly newer used vehicles.

“Demand has remained strong over the last few years, but at this point the attention will turn toward overall supply in the market,” said Anil Goyal, vice president of automotive valuation and analytics for Black Book. “With off-lease vehicles approaching all-time highs in the coming years, we expect that supply will be a primary driver for the accelerating depreciation over the next few years.”

Hylton Heard, senior director of Fitch Ratings, added: “There remains talk of increased interest rates in the near term, and auto lenders are expected to rely more heavily on collateral trends in order to analyze and assess their portfolio to identify continued opportunities for growth.

To down the Black Book-Fitch Vehicle Depreciation Report, click here.

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