Asset quality and residual value reversion will loom over many consumer and commercial finance and leasing companies (FLCs) globally, underpinning Fitch's negative sector outlook for 2017. That said, manageable leverage across most issuers, appropriate positioning for potential interest rate increases and a stabilization of the regulatory environment all support Fitch's stable rating outlook for 2017.

The 2017 finance and leasing company outlook report published today addresses FLC subsectors including: auto loan/lease, credit cards, student loans, consumer unsecured, mortgage companies, aircraft leasing, railcar leasing, truck rental and leasing, and commercial fleet leasing. Fitch recognizes that the market dynamics may vary by subsector and by region, but the report identifies major trends expected to affect all players in the coming year.

"Auto lenders/lessors are dealing with a shift towards a higher mix of leasing, used car financings and nonprime borrowers at a time when used car values appear to have peaked, all of which will likely be critical drivers of future credit performance," said Sean Pattap, senior director, Fitch Ratings.

Other consumer finance subsectors have different credit dynamics. Delinquencies and charge-offs for credit card issuers should continue their upward trend in 2017 as a result of loan growth and portfolio seasoning. Private student lenders are benefiting from strong secular trends that support loan growth including rising costs of attendance and steady enrollments, but face persistent regulatory scrutiny. Unsecured consumer lenders face the prospect of heightened regulatory scrutiny in North America, Latin America and Europe. Mortgage companies should benefit from rising values of mortgage servicing rights in a rising interest rate environment.

Among commercial finance subsectors, aircraft leasing remains a bright spot, due to increasing air traffic and ongoing consolidation that enhances larger firms' negotiating power with customers and manufacturers. Railcar lessors are in the midst of a downturn, particularly in tank cars leased to transporters of crude oil and sand cars that support crude and natural gas drilling. Fitch views commercial vehicle and truck lessors as having relatively less cyclical business models than other large equipment lessors since they have a greater focus on essential services and benefit from a shorter order-to-delivery cycle, although long-term technology threats such as autonomous vehicles loom.

"The global interest rate environment for FLCs differs by region and while rising rates will ultimately add to FLC funding costs, Fitch believes firms could benefit from higher rates through expanded margins," added Pattap.

Fitch expects interest rate increases in the U.S., although monetary policy in other regions such as Europe, certain Latin American countries, and Asia, particularly China and Japan, is expected to remain highly accommodative for the FLC sector.

In the current rate environment, FLCs continue to reduce refinancing risk and improve liquidity. Nevertheless, given FLCs' typical reliance on wholesale funding sources (and to a lesser extent internet deposits for certain U.S. and European entities), issuers remain exposed to funding risk during periods of stress.

Deteriorating access to capital or reversion in asset quality that exceeds long-term historical averages could result in negative rating actions for FLCs broadly. Weaker underwriting standards and/or heavier regulation affecting earnings, though not anticipated by Fitch, could pressure individual FLC ratings.