2016 Personal Bankruptcy Forecast
Fitch projects 2016 personal bankruptcy filings to contract further by 6-8% from levels observed in 2015. Key elements that drive the level of filings are macroeconomic factors, including unemployment, consumer indebtedness, the interest rate and housing environment, among others. Fitch believes sustained job growth, low jobless claims and stronger consumer sentiment as a result of positive equity and real estate markets will support the overall decline. Annual bankruptcy filings totaled 798,690 in 2015, falling by 10.2%, or 90,745, from 889,435 observed the prior year. Personal filings in 2015 closed below the one million mark for the second consecutive time in eight years. The year marked 12 straight periods of fewer bankruptcies recorded per month versus the prior-year same periods, signaling that the postrecession improvement has not yet slowed. Fitch’s 2016 estimate of a 6%-8% decline from 2015 implies filings will total approximately 735,000-750,000 this year. Although the expected decline is lower compared with the projection in 2015, the forecast remains favorable given continued positive macroeconomic conditions, and Fitch believes 2016 will be on target for a sixth straight year of lower personal bankruptcy filings.
U.S. Employment Strong
Lower personal bankruptcy filings post-recession continues to be largely attributed to gains in U.S. employment over the same period. Following its peak in 2009 when many turned to bankruptcy as a result of inability to service debt, the unemployment rate had since continued to ease from prior-year levels. With a full-year average of 6.2% in 2014, the unemployment rate declined further in 2015, averaging 5.3%. As such, the U.S. unemployment situation improved to levels not seen in more than eight years while remaining approximately 45% lower than the highest level observed during the crisis and still 14% lower YOY. Similarly, initial jobless claims also declined in 2015, as the labor market continued to hold strong with stable opportunities in the marketplace. The number of Americans applying for unemployment benefits tumbled, posting year-long improvements of sub-300,000 filings. Total nonfarm payroll continued to report gains in 2015, albeit not higher than the previous year. In 2015, the U.S. added more than 2.5 million jobs, marking the third straight year with more than two million jobs created, according to data from the Bureau of Labor Statistics. Fitch believes unemployment will remain at or slightly below 5.0% through 2016.
Consumer Credit Expands
Consumer credit continued to expand on a seasonally adjusted basis through 2015, with upward trends YOY following a credit-crisis pullback in 2010. Total consumer credit reached $3.5 trillion in October 2015, marking increases for 52 straight months. 2015 saw a 7.3% increase from the prior year, with a larger percentage of gains attributed to nonrevolving, over revolving, credit. Nonrevolving credit, which generally includes automobile and student loans, has surged rapidly, accounting for approximately 74% of aggregate consumer credit. Nonrevolving credit increased roughly 8% YOY and stood at $2.6 trillion as of December 2015. Revolving credit, which mostly comes from credit card usage, has risen at a quicker pace in the last 1218 months, with banks shifting strategies from a once conservative to now looser approach in underwriting guidelines. Revolving credit rose just above 5% from 2014 and totaled approximately $930 billion as of December 2015. However, Fitch believes recent the loosening in lending requirements and resulting rise in credit lines have not yet translated to a noticeable change in collateral performance. Although still tight by historical standards, Fitch believes the effect of underwriting has positively reinforced the trend of lower filings. However, the pace of improvement will become slower over the long term.
Interest Rate / Gas Price Low
Consumer confidence is an important economic indicator of consumers’ willingness to spend and measures the degree of optimism they have about the overall state of macroeconomic and financial conditions. The Consumer Confidence Index (CCI), produced by The Confidence Board, is developed to assess the relative financial health and spending power of the average consumer in the U.S. Consumer confidence in 2015 increased YOY as improving labor conditions, ongoing strength in housing and equity markets and low fuel prices helped boost prospects for economic growth. The CCI in 2015 started the beginning of the year elevated at 103.8 (versus 100 in 1985) and produced the highest average in more than seven years at approximately 98 points. Amid improved home values, coupled with lower gas prices, throughout most of last year, consumers were left with more discretionary spending. In addition, with interest rates remaining low, consumers’ approach to home, auto and credit card loans also have continued in a positive direction. Consumers took advantage of the lower rates to refinance home mortgages, consolidate debt and reduce interest payments, which have, in turn, contributed to the lower rate of filings.
Consumer ABS Performance
Credit Card ABS
Securitized credit card receivables performance improved again and exceeded expectations in 2015. Rapid improvement in collateral quality and well enhanced trust structures continued to yield low levels of ratings volatility. Delinquencies and chargeoffs, as calculated by Fitch indices, remained at or near historical lows, while monthly payment rates reached new historical highs. Steady yields, coupled with lower chargeoff levels, produced robust excess spread measures.
Chargeoff performance was kept below 3% for all of 2015, with an average of 2.68%. Chargeoffs improved approximately 6% from previous year’s levels, marking an improvement of over 70% from peak levels in 2009. Late-stage delinquencies registered new historical lows during the same period and fell below 1% for the second half of the year. Late payments of 60 days or more dropped further and averaged 1.03%, compared with the 2014 average of 1.12%.
Absent any material external pressures, Fitch expects performance trends to slowly approach normalized levels longer term, albeit at a measured pace but remaining well within historical averages. Fitch anticipates prime chargeoff levels to level off and stay near 3% driven by banks’ further loosening of underwriting standards and ease of credit availability; however, a relapse to long-term average delinquency and chargeoff levels for credit card collateral in the near term is highly unlikely. Given the quality of collateral pools and structural enhancements in place, Fitch expects the credit card sector and ratings to remain stable.
Auto Loan ABS
Fitch’s outlook for prime and subprime auto loan ABS asset performance is stable for 2016, even as loss rates experience pressure and rise this year, particularly subprime transactions (Fitch only rates the subprime Santander Consumer USA’s SDART and General Motors Financial’s AMCAR platforms). The outlook for ratings performance is positive. Losses will come under pressure from rising loss severity resulting from weaker used vehicle values, along with softer credit quality in the 20132015 vintage securitizations. Loss frequency is less of a concern due to the relatively healthy outlook for the U.S. economy despite existing volatility, even if interest rates and/or gas prices were to rise marginally.
Fitch expects recovery rates to decline slowly due to pressure on used vehicle values in 2016, stemming from higher used vehicle supply hitting the market. This will arise from increasing offlease vehicle returns and elevated vehicle trade-ins, along with rising fleet volumes hitting the secondary market, and move loss rates higher in 2016. Performance could suffer if demand for both new and used vehicles slows in 2016 and interest rates rise while incentives increase.
Fitch is focused on underwriting standards in 2016, including weaker credit quality, higher loan to value ratios (LTVs) and longer loan terms. If interest rates rise in each quarter in 2016, auto lenders may decide to further loosen overall credit quality to drive origination volumes, which could contribute to softer asset performance later in the year; however, Fitch believes this scenario unlikely given recent market volatility early this year. Ratings performance should remain strong in 2016 despite negative trends that could dent asset performance this year. Fitch expects the prime sector will experience a similar level of upgrades in 2016 as in 2015, albeit perhaps at a slower pace. There were over 90 upgrades issued by Fitch in 2015, the second highest level going back to 2007. Auto lenders are facing stiff competition, particularly in the subprime sector, where smaller lenders could face heightened pressure and make them ripe for consolidation, particularly if auto sales dip in 2016. This could further pressure these companies’ bottom lines and stress their funding sources, including access to ABS issuance, for which they most heavily rely on for funding. Ultimately, this could also possibly force merger and acquisitions activity to rise and even some to go out of business, particularly the newer two- to three-year old lenders that have just entered the market. Moreover, private equity investors may look to exit their investments as they hit or approach their fund divesting periods and take profits by exiting and selling their stakes