13 October 2014Actuarial & underwriting

Captive landscape to become more competitive

The captive landscape is expected to become increasingly competitive as banks increase their focus in growth areas such as auto finance and equipment finance.

This is according to rating agency Fitch, which added that an increasing focus in growth areas is likely to put pressure on pricing/margins and may lead to a further loosening of lending standards.

It also added that lending growth in captives’ portfolios continued in 2014, driven by growing demand from a gradually improving global economy, improved supply of liquidity in funding markets, and slight loosening in lending standards.

“The benign credit environment in the US has continued to benefit both consumer and commercial captives. Most captives reported net losses and delinquencies at or near historical troughs in 2013. However, Fitch believes that asset quality improvement has run its course and expects metrics to normalise as increased competition pressures underwriting standards, rising rates increase borrowers' debt service burden, and used vehicle/equipment values continue to moderate, impacting recoveries,” said the rating agency.

Fitch added that ratings on captives that are considered core will move in tandem with the ratings of their respective parent. It does not envision a scenario where a captive would be rated higher than its parent.

“That said, a material increase in leverage, an inability to access funding for an extended period of time, and/or significant deterioration in the credit quality of the underlying loan and lease portfolio for a captive, could become restraining factors on the respective parent's ratings,” said Fitch.