NEW YORK -

Fitch Ratings projected that increased supplies of off-lease vehicles coupled with rising inventories and new-vehicle production could hurt the wholesale market and auto ABS performance metrics over the long term.

Citing data from Ward's Automotive, Fitch indicated that days' supply (the number of days the used-vehicle inventory would require to be completely liquidated) at the end of 2013 was 63, up from 59 in 2012.

"In our view, 63 is within a range that is unlikely to have a negative impact on ABS," Fitch analysts said. "However, in the first weeks of 2014 several auto manufacturers indicated they plan to increase their supply of cars in 2014. That could lead to a decline in prices and the values of cars in existing ABS transactions if additional production exceeds demand.

"If these trends continue, we expect decreasing auto loan recoveries and lease residual realizations to contribute to increased loss levels on auto loan and lease ABS," Fitch continued.

"However, ratings should remain stable as Fitch's auto loan and lease methodologies address these risks by incorporating periods of weak wholesale market performance," the firm went on to say.

Fitch also mentioned increases in supply could also increase competition and reduce pricing through the offering of new incentives.

"Incentives have increased over the past year, but they are being used within reason to date," analysts said. "More competition has historically driven incentive levels higher. We would expect competition and incentives to develop in some car categories more severely, such as compacts."

Fitch wrapped up its latest update by noting the wholesale market is almost certain to be pressured by a glut of off-lease vehicles and activity in retail leasing in recent years is likely to reduce wholesale values.

"Lease residual realizations have already started to decline," analysts said. "Fitch's auto lease residual realization index still registered 5 percent gains as of November 2013, but those gains have decreased notably in the past two years."