Improving Fundamentals in Canadian Auto Loan Market: Scotiabank Economics

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Oct 31, 2017, 08:30 ET

TORONTO, Oct. 31, 2017 /PRNewswire/ - Fundamentals in the Canadian auto loan market continue to improve. The pace of auto loan growth has moderated to single-digits in both Canada and the United States. Lending for new vehicles in Canada has advanced by only 4.6% y/y in Q2 2017, a percentage point lower than overall household credit growth.

"As Canadian vehicle sales continue to climb to record highs, much of the growth has recently shifted to leasing, prompting a moderation in auto loan growth," said Carlos Gomes, Senior Economist and Auto Industry Specialist, Scotiabank. "Auto loan growth in Canada is now lagging disposable income growth, highlighting the improving fundamentals in the Canadian auto loan market."

Canadian subprime loans account for roughly half the U.S. share, representing only 12% of the Canadian auto market, compared with 21% in the United States. Loans to more creditworthy clients continue to gain momentum, pointing to an improving credit profile. Most auto delinquencies occur among subprime borrowers and are virtually non-existent for clients with higher credit ratings. In Canada, delinquency rates are lower for auto loans than for most other credit products.

Despite some recent moderation in auto loan growth in the U.S., autos remain the fastest-growing component of consumer credit. U.S. auto loan growth was still nearly 8% y/y in mid-2017, outpacing overall household credit growth of 4.5%.

Across North America, there is a further strengthening in vehicle demand marked by sales picking up to their best performance since November 2016. Sales in the NAFTA region increased to 4.9% y/y last month. Canadian volumes advanced to 8% y/y; however, the U.S. was the big surprise in September, with volumes surging to an annualized 18.5 million units—the highest since July 2005—and significantly above the average of 16.9 million during the previous eight months.

Global car sales accelerated further through the summer, with volumes advancing 4.5% above a year earlier in August. Purchases continue to gain momentum in most regions with South America leading the way with year-to-date sales gains of 14%, including a 21% y/y surge in August. Volumes in Asia advanced at the fastest pace in six months as sales in China climbed to the highest selling-rate in almost a year. Inventories have also fallen to multi-year lows, pointing to stronger vehicle output.

Other highlights:

Sales continue to strengthen in Western Europe, buoyed by improving economic conditions and the strongest consumer confidence in more than fifteen years.
Purchases in Eastern Europe are advancing by 10% year-over-year for the first time since the opening months of 2012.
Car sales in Houston accounted for 6% of overall U.S. sales in September, triple its normal share, as Texans replaced vehicles damaged by Hurricane Harvey.
The rising popularity of leasing has driven the share of auto loans to less than 60% of the Canadian new vehicle market, the lowest level of the past decade and down from more than 68% in 2010.
Canadian subprime auto loans declined 7% below a year earlier in the second quarter, a sharp reversal from nearly 5% y/y growth in late-2016.

Read the full Scotiabank Global Auto Report online at: http://www.gbm.scotiabank.com/scpt/gbm/scotiaeconomics63/GAR_2017-10-31.pdf

Scotiabank provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

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