Virus highlights asset quality differences

Moody's Investors Service says in a new report that the economic shock caused by the novel coronavirus pandemic has exposed intrinsic differences in securitized asset quality between foreign-owned and domestic auto finance companies (AFCs) in China.

"Delinquency rates for auto loan asset-backed securities (ABS) increased sharply in January and February amid coronavirus disruptions, but as economic activity picked up in March, delinquencies improved more swiftly for foreign-owned AFCs than for domestically owned AFCs, reflecting the higher credit quality of underlying loans," said Kan Leung, a Moody's vice president and senior analyst.

One key reason is that for ABS deals by foreign-owned AFCs, underlying borrowers' incomes are much higher on average than those in domestically owned AFCs. These borrowers can generally deal with periods of economic stress better than those with lower incomes.

In addition, foreign-owned AFCs have longer operating histories in China than domestically owned AFCs, which have enabled them to accumulate more comprehensive customer and credit data.

This, along with their ability to leverage overseas shareholders' consumer finance expertise, has supported their underwriting decision-making and loan quality, according to the report.

Moody's expects the performance gap between foreign and domestically owned auto finance companies' ABS to narrow and stabilize as the economy gradually recovers, although delinquency rates for the entire sector will stay higher than in 2019, given that economic activity will remain below potential.