Moody's: Post-crisis Spanish auto, consumer loan borrowers have stronger credit fundamentals

New-vintage Spanish borrowers of auto and consumer loans are stronger than their pre-crisis counterparts, says Moody's Investors Service. As a result, post-crisis Spanish asset-backed securities (ABS) are likely to exhibit more solid performance than older deals.

"The crisis forced Spanish banks to tighten lending criteria for auto and consumer loans. Consumer lending in 2016 is only one-third of the total volume compared to 2007, due to risk aversion. Past risky practices observed in pre-crisis securitisations have stopped," says Antonio Tena, a Vice President and Senior Analyst at Moody's.

"These days, we see improvements in borrower profiles. Spanish borrowers enjoy better labor market conditions, with lower unemployment and moderate wage growth. A 3.6% rise in household consumption as of Q2 is a key engine of growth and supports the creditworthiness of the consumer loan market," says Mr Tena.

Other risky practices observed in the past, such as the securitisation of restructured loans (with bad credit history) or loans with broad holidays payments, are not present in the loans backing recent securitisations in Spain.

"Payday loans, one of the riskiest practices in the consumer loan market, is not present either in securitisations. Securitisation is isolated from the weakest profile of borrowers, who do not apply for lending to traditional banks, but to specialised lenders," says Mr Tena.

Moody's report, entitled "Auto and Consumer ABS -- Spain: Post-Crisis Transactions Show Stronger Credit Fundamentals," is available on www.moodys.com. The rating agency's report does not constitute a rating action.

Moody's says newly securitised consumer loans avoid exposure to risky practices observed in the past, such as broker origination, restructurings or loans granted to non-Spanish residents. This better situation contrasts with the relaxation of underwriting criteria and the appetite for risk observed before the 2008 financial crisis, which contributed to the fast performance deterioration of legacy deals.

Moody's expects a better performance for the consumer and auto ABS it has recently rated in Spain, compared to pre-crisis transactions. The credit quality of underlying loans backing these transactions has improved in recent years. The borrower profile in these types of loans have strengthened significantly after the financial crisis. The performance data per vintage show the huge difference in performance for loans granted after 2008, with 2014-15 vintages showing the lowest levels of defaults, which is credit positive for recent transactions. These vintages represent 75% to 100% of portfolios backing transactions closed in 2015-16.

Looking forward Moody's expects this strong performance to continue, given its growth projection for Spain in 2016 (+2.9%). Despite growth slowing to +2.0% in 2017, Moody's outlook for Spanish consumer ABS remains positive. The economic recovery is on the back of stronger domestic demand, in particular, private consumption.

Auto and consumer loans backing recent transactions are not exposed to risky practices observed in pre-crisis loans backing legacy transactions. This includes granting to foreign residents, as described above. This is also the case for broker origination, which played a key role in the buoyant lending market before the financial crisis. The profile of borrowers using brokers to achieve bank lending is weaker, and banks lacked any track record of these new borrowers. These factors, as well as the misalignment of interest for the performance of newly originated loans, made this old practice especially risky.