Considering if subprime is the ‘canary in the coalmine’


Financial advising firm UBS used the grim illustration of the “canary in the coalmine” at the beginning of a report it released this week involving the subprime auto finance space. To recap, that illustration stems from miners using caged canaries as a crude toxic gas detection method.

While birds didn’t appear to be harmed as UBS analysts compiled their report, they did acknowledge that a combination of factors has created an interest spike in subprime auto finance five times the normal level the firm typically receives from the investment community. The combination of deteriorating subprime auto finance metrics and results from its first-quarter consumer survey shedding light on the likelihood people will default sometime this year triggered the Wall Street fervor, according to the report obtained by SubPrime Auto Finance News.

“There are increasing signs that risky assets are vulnerable at elevated levels, from upticks in consumer delinquencies, to a major slowdown in bank and non-bank lending, to a stubborn increase in delinquent working capital loans,” UBS strategists Matthew Mish and Stephen Caprio wrote in the report.

The sentiment about defaulting came from UBS’ own research. Its Q1 survey revealed that 17 percent of participants said they either “strongly agree” or “agree” with the statement that "I am likely to default on a loan payment over the next year.” That question about payment not only includes auto financing but also other non-mortgage categories such as credit cards and student loans.

While the reading softened by 1 percentage point on a sequential basis, UBS pointed out the level soared about the survey mark generated in Q3, which was 12 percent.

And in terms of demographics, UBS’ survey showed that consumers between the ages of 21 and 34 told the firm they were most likely to default this year. Also of note, the annual income level of participants who acknowledged a default was coming this year was the highest segment among the three designated by UBS — individuals making $100,000 or more annually.

Mish and Caprio also referenced a previous report they compiled that mentioned many elements regarding delinquency and default previously highlighted by SubPrime Auto Finance News. The trends touched on S&P Global Ratings reporting that collateral performance in the U.S. subprime auto loan asset-backed securities (ABS) sector weakened in 2016 for the fourth straight year.

Also of note, the Federal Reserve Bank of New York indicated the amount of consumers who had a bankruptcy added to their credit reports during the fourth quarter softened to a new low going back 18 years.

The New York Fed reviewed Equifax data and found about 204,000 consumers had a bankruptcy notation added to their credit reports in the fourth quarter; an amount 4 percent below the same quarter in 2015 and a new series low that goes back to 1999.

In its UBS report, Mish and Caprio wrote, “Academic literature and recent data suggest the stigma associated with bankruptcy has declined post-crisis, particularly for the millennial generation.”

So with so much interest in the topic, what are Mish and Caprio telling UBS clients?

“We would limit corporate debt exposures in autos, auto lenders, rental car companies, credit card lenders, and non-bank providers of consumer loans and mortgages,” they wrote.