The outlook for the credit quality of Canadian asset-backed securities (ABS) remains stable, but issuance is expected to slide this year, says Moody’s Investors Service in a new report.
The stable outlook for Canadian auto and credit card ABS reflects very strong collateral attributes in both segments, the rating agency says. However, it says that neither sector will likely be able to match their strong levels of issuance from 2012.
“While we expect stable and strong auto ABS performance, a period of economic weakness or consumer credit stress would result in higher default and loss levels on loans that have extended terms,” says Moody’s vice president and senior credit officer, Michael Buzanis. “Weak-but-positive growth in the Canadian economy and stable unemployment rates will keep auto loan defaults at current low levels through this year.”
The long-term ratings of the bank sponsors of credit card ABS remain high, Moody’s notes, which supports a stable outlook for the ABS. Also, their collateral is comprised of highly seasoned accounts from prime quality obligors, “which points to continued strong performance,” it says.
“However, the sector will face a stable-but-weak economic outlook and a Canadian unemployment rate that is not likely to decline so performance will not improve much further,” Moody’s adds.
Additionally, it notes that the credit quality of all seven Canadian covered bond programs is stable based on the strong financial standing of the sponsors, and the high quality of the residential mortgage collateral.
As for the issuance outlook, the auto and card sectors accounted for 95% of issuance in 2012, with credit card ABS issuance reaching a record of $9.5 billion. This year, Moody’s says that attractive alternative funding options, and the impact of Royal Bank of Canada’s purchase of auto ABS sponsor, Ally Credit Canada, will dampen auto ABS issuance. Whereas, credit card ABS issuance will continue to be bolstered by the attractiveness of cross-border issuance, but will not equal the $9.5 billion issued in 2012. Instead, Moody’s expects credit card ABS issuance this year to be in the $8 billion range.