Daily News: October 30, 2018

Capital One: ABS Optimism Remains High Despite Rising Interest Rates

A Capital One survey conducted at the ABS East 2018 Conference found that 94% of respondents expect buy-side interest in asset-backed securities to increase or remain the same in the coming year, while only 6% expect it to decrease.

Of the challenges facing the industry, only 15% of ABS professionals elected increases in interest rates. For the majority of respondents, uncertainty around regulatory requirements (30%), increased credit risk (25%) and increased competition (24%) pose the greater challenges for their businesses over the next 12 months.

“It comes with little surprise that there is strong enthusiasm for asset-backed securities as this is in line with findings from our past industry research,” said David Kucera, senior managing director and head of the Financial Institutions Group at Capital One. “However, this new data demonstrates that ABS professionals are somewhat comfortable in an economy with rising interest rates and view issues like regulation or increased credit risk as larger concerns for their businesses.”

The industry was fairly split on sentiment around how and when lenders’ interest rates would increase compared to the benchmark rates. Forty-one% said lenders’ rates will rise at the same time as benchmark rates, whereas 38% said lenders’ rates will rise more quickly and 21% said lenders’ rates will rise less quickly.

“As benchmark rates have risen over the past year, we’ve seen some hesitance from non-bank lenders to raise rates at the same pace in certain markets,” said Kucera. “However, we anticipate that trend may change as the economy continues to evolve, and lenders can no longer maintain the lower margins.”

Of those respondents who indicated that they are lenders, 60% said they plan to raise interest rates while 40% of lenders said they plan to maintain the same rates. Particularly, mortgage finance (25%), unsecured consumer lending (22%) and leveraged credit (22%) were selected as the top three sectors in which respondents believe interest rates will rise the most in the next 12 months.

Respondents to the survey included various professionals from across the asset-backed securities industry. Percentages are based on 115 responses.