Increased issuance of asset-backed securities (ABS) by U.S. banks and nonbank financial institutions (NBFIs) could affect some issuers’ credit profiles if it leads to a sustained increase in secured wholesale funding sources, says Fitch Ratings. However, we believe that this trend does not yet represent a structural shift, with many consumer finance-oriented financial institutions raising consumer ABS issuance opportunistically to take advantage of attractive pricing and to enhance the liquidity of their ABS programs.
U.S. ABS issuance totaled $157 billion over the first seven months of the year, an approximate 21% increase from the same period in 2016, according to Asset-Backed Alert. Increased demand and attractive pricing have spurred some credit card issuers in particular to increase issuance. American Express and Citigroup are two notable issuers thus far in 2017, after having forgone the market in recent years. BlackRock’s plans for a U.S. consumer ABS exchange-traded fund (ETF) could also further boost demand and narrow funding spreads. BlackRock has been encouraging U.S. consumer financial companies and banks that issue consumer asset-backed bonds to increase ABS issuance to fill the planned ETF’s portfolio.
The recent growth in U.S. consumer ABS issuance runs counter to a broader trend of consumer finance companies shifting their funding mix toward unsecured funding and, for some, internet deposits following the financial crisis. For example, as of June 30, 2017, the funding mix of the four largest consumer internet banks – American Express, Discover Financial Services, Synchrony Financial and Ally Financial – included on average 62% internet deposits, 19% ABS and 19% unsecured funding. By contrast, in 2007, American Express and Discover Financial derived 23% and 54%, respectively, of their funding from ABS (Ally Financial and Synchrony Financial were not independent public companies at that time), with a considerably lower proportion of their overall funding coming from deposits.
The trend toward increased ABS issuance has not yet resulted in a sustained shift in funding mix, particularly for consumer internet banks. However, improved pricing in the ABS market could lead to a more meaningful shift in funding mix NBFIs, which would be credit negative. The normalization of interest rates, expected in the coming years, is a potential factor that could sustain the trend if ABS issuance ultimately becomes a cheaper funding source relative to internet deposits.
Fitch generally views overreliance on securitization funding to be a credit negative because asset encumbrance reduces financial flexibility. Access to the securitization market also can be less certain than retail deposits during periods of economic stress. However, in some cases, securitization may be positive for an issuer’s credit profile if it results in diversification of funding mix, is more cost effective and better matches the issuer’s asset duration.