US Automobile: Sales, Financing and Used Vehicle Insights. Mike Buckingham Senior Director Auto Finance JD Power Data & Analytics

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1 US Automobile: Sales, Financing and Used Vehicle Insights Mike Buckingham Senior Director Auto Finance JD Power Data & Analytics

2 Agenda Ø JD Power PIN Data; Background/Source Ø New Vehicle Data; Auto Sales, Trends, Incentives and Outlook Ø Used Vehicle Data; Prices, Supply, Forecast and Outlook Ø Automobile Financing; Financing Type, Lender Segment Share, Credit Mix, Term Mix, LTV s and Pricing and Outlook

3 JD Power PIN Data Background/Source Ø PIN is an acronym for the Power Information Network. Ø We receive daily transactional data containing approximately 45% of all Vehicle Sales records from the Franchised New Car Dealers in the US. Ø Data is sourced from the dealers DMS (dealer management system). Ø Retail Sales data is published in PIN, Fleet/Commercial is excluded. Ø Credit Score Data referenced is derived from Trans Union, FICO Auto 08. Source: Power Information Network PIN, a business division of J.D. Power and Associates The credit scores provided within this application have been provided by FICO Risk Score, Auto 08 FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries

4 New Vehicle Data; Auto Sales, Trends, Incentives and Outlook

5 New Retail Sales Industry Retail Sales (Millions) 2017 Slightly Down, Again We forecast a modest drop of 200K units from F 5

6 New Vehicle Transaction Prices Selling Price, Net of Incentives (Thousands) Still breaking records. Transaction Prices are at Record Highs. Forecasted to climb even higher in $28.9 $29.8 $30.6 $31.0 $ F 6

7 Challenge: Passenger Car Sales Mix Car % of Retail Sales (Mar YTD) Passenger Car Slump Continues; - Mix down to 32% in % 43% 41% 37% 32% - Major Challenge for the Industry

8 New Vehicle Incentives Rising (but more Slowly) so far in 2018 Year End 2017 had a record level of $4,400 per unit. December 2017 incentives were 11% of MSRP, % per car, 9.5% per Truck Incentives/Unit (Thousands) $4.0? $4.4 $4.0 $3.5 $3.3 Jan Mar Jun Sep Dec 8

9 Fleet and Commercial Sales Non-Retail % of Sales (Mar YTD) Non-Retail Sales: 23.4% The Stealth Incentive 23.1% 22.0% 21.0% Fleet Volumes are clearly Rising 19.5%

10 Off-Lease Impact Impacting New Sales: Rising Used Vehicle Supply Deluge of late model Used Vehicles is cannibalizing New Sales Lease Maturities (Millions) F 19F 10

11 Used Vehicle Prices Softening As the used vehicle inventory increases; - Used Prices are falling. For 2018 we forecast the decline will be a modest $ Softening Used Prices impacts new sales as; - Consumer trade-ins are worth less. NADA Used Vehicle Price Index (Thousands) $15.9 $15.3 $14.9 $14.7 $ F 19F 11

12 New Sales by Pricing Segments Thus far in 2018, there has been steep sales declines in the Under $20k segment. A few factors are responsible; Sales by Price (Mar YTD Change) 7% 3% 2% - Less Demand for Passenger Cars - Credit Tightening by Lenders But, the upper end of the New Car Market continues to see growth. -15% Under $20K $20 - $30K $30 - $40K Over $40K 12

13 New Vehicle Credit Quality Sales by Credit Tier (Mar YTD) All Lenders, including captives, have tightened Credit Policy in the past two years. Thus far in early 2018, we have seen further tightening in the Lower Tiers. +2% A+ (720+) - 2% - 4% - 5% - 5% A B C D (<625) 13

14 Industry New Vehicle Sales Outlook Overall: We view the Industry as remaining Strong New Sales: Decline inevitable due to used supply and Credit Tightening Success: May be hard to find for some OEM s; Discipline Key Concerns: Rising Incentives, Fleet Sales, Car Production, Rising Interest Rates

15 Used Vehicle Data; Prices, Supply, Forecast and Outlook

16 2017 Used Vehicle Price Recap Wholesale used vehicle prices fell 2.9% Y/Y in CY 2017, this was the second consecutive Y/Y material decline (third straight Y/Y total) recorded since the last recession. In comparison, prices declined by 3.3% in CY Prices also ended CY 2017 down 6.9% relative to CY v % % % below CY 2011 levels Vehicles up to 8 years in age Source: JDP Valuation Services

17 Source: JDP Valuation Services J.D. Power Valuation Services Used Vehicle Price Index Compared to February, the seasonally adjusted used vehicle price index increased 0.9 points to The index is currently 2.5 points above March JDP Valuation Services Used Vehicle Price Index (SA) Mar. 17 Mar Jan-95 Aug-95 Mar-96 Oct-96 May-97 Dec-97 Jul-98 Feb-99 Sep-99 Apr-00 Nov-00 Jun-01 Jan-02 Aug-02 Mar-03 Oct-03 May-04 Dec-04 Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08 Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 Jun-15 Jan-16 Aug-16 Mar-17 Oct-17 Note: Vehicles up to eight years in age. January 2010 = 100

18 Used Supply Continues to Increase Led by a 13.5% increase in off-lease maturities, total used supply increased 7% in CY Lease volume will continue to drive used supply growth moving into CY 2018, total supply increase estimates reached 4.1% for CY Millions Used Vehicle Supply Estimates Vehicles Up To 5 years in Age % % Off-Lease +14.2% Rental/Commercial -3.0% Retail Purchase Rental/Commercial Off-Lease Total Retail Purchase +2.6% Source: JDP Valuation Services

19 Segment Supply Dominated by Cars Pickup and SUV supply growth is slowing but still expected to increase the most in CY Cars continue to dominate segment supply, however, Used Car supply is expected to decline slightly in CY Non- Lease Lease Car +2.3% -1.3% Pickup +10.7% % SUV +13.0% Van +10.7% +8.7% -2.0% Vehicles up to 5 years in age, millions Source: JDP Valuation Services

20 Source: JDP Valuation Services UsUsed Vehicle Price Outlook Vehicle Negative Price Impacts Outlook on Used Prices Incentives have surpassed historical highs, with the incentive-to-msrp ratio reaching 10.6% in CY17. Incentive growth is expected to level off, but will remain nonetheless. Led by a 13.5% increase in off-lease maturities, total used supply increased 7% in CY Lease volume will continue to drive used supply growth moving into CY 2018, total supply increase estimates reached 4.1% for CY Credit conditions will tighten as interest rates rise and consumer debt increases. Positive Impacts on Used Prices Regular grade gasoline prices are expected to rise moving forward, but just modestly. National prices are expected to remain below $3 p/gal. through CY21. The outlook for remaining macro factors is positive, helping to offset negatives associated with credit, incentives, supply and modestly higher fuel prices. These include house prices, driving demand, labor conditions as well as vehicle preference (shift in preference toward used vehicles).

21 Automobile Financing; Lender Segment Share, Credit Mix, Term Mix, LTV s, Pricing and Outlook

22 New Vehicle Financing by Lender Segment On a combined product basis, Loans & Leases, Captives share is largest at nearly 50%. 60.0% New Finance Share by Lender Segment Banks share fell significantly in 2017 from 36.6% to 33.6%. YTD 2018 share continues to decline. 50.0% 40.0% 30.0% Credit Unions have gained the most 20.0% in Automobile Indirect lending with 10.0% share increasing from 11% in 2015 to 15.4% in % Bank Captive Credit Union Independent YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 22

23 Sub-Prime New Vehicle Financing by Lender Segment On a combined product basis, Captives share is largest at 40%+. Banks share fell significantly in 2017 from 36.4% to 33.4%. YTD 2018 share continues to decline, down 9%. Independents have gained the most in New Automobile Indirect lending with share increasing 29% from 2015 to YTD 2018 is now 21% % 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% New Subprime Finance Share by Lender Segment Bank Captive Credit Union Independent YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 23

24 Used Vehicle Financing by Lender Segment On a combined product basis, Loans & Leases, Banks share dominates the Used Market but is declining. Captive and Independent share has remained fairly flat from Credit Unions appear to be taking share from the banks with share moving to 24% in Q1 2018, up 5% from % 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Used Finance Share by Lender Segment Bank Captive Credit Union Independent YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 24

25 Sub-Prime Used Vehicle Financing by Lender Segment Banks continue to have the largest share of the Sub-Prime Used Market, but share is falling (YTD 18 now 39%). Captive and Credit Union share has remained fairly flat from Independents appear to be taking share from the banks with share moving to 38% in Q1 2018, up 13% from % 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Used Subprime Finance Share by Lender Segment Bank Captive Credit Union Independent Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 25

26 New Financing Credit Mix New Vehicle Financing originations credit mix has been moving slightly higher in the past 2 plus years. Super Prime mix is now at 55%. 60.0% 50.0% 40.0% New Finance Credit Mix Non-Prime and Sub-Prime share has fallen 10% in the past two years, with the largest movement downward from 2016 to % 20.0% 10.0% 0.0% YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 26

27 Used Financing Credit Mix Similarly to New, in the Used segment, Super Prime is increasing, Prime is flat, and Non-Prime and Sub-Prime share is falling. Historically, Used Credit Mix has less share in the prime segments and higher levels in the lower segments. While Q1 data shows an uptick in Sub- Prime, the Q1 lift is seasonal, as the peak share season for Sub-Prime coincides with Tax Season. 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Used Finance Credit Mix YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 27

28 Sub-Prime New Vehicle Term Mix Loan Terms continue to increase in New Vehicle Sub-Prime Financing. In 2017, Sub-Prime Loans of beyond 72 months exceeded 23%, an increase of 10% vs (Total industry is 25%). All Lenders, including Captives, have increased term to support vehicle sales and market share. 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% New Subprime Finance Term Mix 0-60 mo mo mo mo 76+ mo YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 28

29 Sub-Prime Used Vehicle Term Mix In the Used segment, Sub-Prime Loans greater than 72 months averaged slightly more than 9%. This is much lower than the Industry Used average of 19%, reflecting the older collateral in the Sub-Prime segment. Similarly to New Vehicles, Su-Prime Used Terms accelerated the most from 2015 to 2016 but are increasing at a slower rate. 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Used Subprime Finance Term Mix 0-60 mo mo mo mo 76+ mo YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 29

30 Sub-Prime New Vehicle LTV s New Vehicle Sub-Prime Advances continue to accelerate and in 2017 nearly 67% had a Loan to Value exceeding 110%. (Industry avg. 40%). The softening used car market, which has reduced trade-in values, coupled with a competitive market place are both drivers of this trend. We believe this trend will continue in 2018 but the rate of growth may moderate. 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% New Subprime Finance LTV Mix 0-90% % % % 121% YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 30

31 Sub-Prime Used Vehicle LTV s Counter to New Vehicle, Su-Prime Used Vehicle advances were flat from During 2017, nearly 52% of all Used Vehicle loans had Loan to Values exceeding 110%. (Industry average is 45%) Drivers of this trend are similar to New Vehicle; but it can be argued by lenders that the collateral position is better than with the same advance levels in a new vehicle. 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Used Subprime Finance LTV Mix 0-90% % % % 121% YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 31

32 New Vehicle Loan Pricing - 72 months Super Prime Loan buy-rate pricing has increased nearly 90 Basis Point from the 2015 average to YTD Sub-Prime rates have risen nearly 225 basis points in that same period. Forecasts call for continued increases to the lenders COF. Pricing increases will negatively impact sales % 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% New 72-mo Non-Subvented APR YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 32

33 Used Vehicle Loan Pricing - 72 Month Term Used Pricing increases mirror New Vehicle. While the Used Vehicle rates are higher than New, the amount of rate increase has been slightly lower. The Used financing market is highly competitive and lenders have been more cautious balance profitability and market share % 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Used 72-Mo Non-Subvented APR YTD Source: PIN Navigator Data & Analytics, a business division of J.D. Power. 33

34 Automotive Financing Outlook New Automobile Vehicle financing Financing may reflect Outlook Captive gains in share as OEM s increase incentives and subvention to keep their sales at current levels and to preserve their Business Plans. Leasing may have peaked in New Vehicles and share may fall slightly. Used Vehicle Financing will increase as dealers supply grows and Dealers shift product strategy. COF is forecasted to increase moderately in Growth in Non-Prime and Sub-Prime appears to have peaked as Lenders, particularly Banks and Credit Union s grow more cautious. Extended Term financing may rise slightly as Captives seem more receptive to 72 month Subvention and Non-Captives (Credit Unions and Independants) seek to attract quality loans at even longer terms. LTV s may have not peaked as consumers need help with their trade-ins and lenders seek share gains.

35 Questions? Thank you for the opportunity to speak to you today. If you should have any questions or Data Needs after the conference please reach out to: Robert (Bob) Fox, PIN Business Development; Paul Linden, PIN Product Management; Mike Buckingham PIN Practice Leader Larry Dixon, Vehicle Valuations Market Intelligence Doug Ott, Vehicle Valuations, Business Development

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