Global Auto Report (October 31, 2017)

GLOBAL ECONOMICS | GLOBAL AUTO REPORT

October 31, 2017

Improving Canadian Auto Loan Market Fundamentals

Global sales accelerate further.

Subprime auto loans decline in Canada, but lending to higher credit scores picks up.

Canadian subprime loans account for roughly half the US share.

Delinquencies are virtually non-existent outside of subprime clients.

RECENT GLOBAL NEW VEHICLE SALES DEVELOPMENTS

Global car sales accelerated through the summer, with volumes advancing 4.5% above a year earlier in August, double the growth of the previous three months. South America is leading the way, with a 14% year-to-date gain, including a 21% y/y surge in August. However, purchases have picked up in most regions. Volumes in Asia advanced at the fastest pace in six months, as sales in China hit the highest selling-rate in almost a year. Inventories have also fallen to multi-year lows, pointing to stronger vehicle output.

Sales continue to strengthen in Western Europe, buoyed by improving economic conditions and the strongest consumer confidence in more than fifteen years. Meanwhile, purchases in Eastern Europe have advanced 10% year-to-date, the best performance since the opening months of 2012; gains are broadly-based, with four countries reporting advances of more than 20% y/y in August. Volumes are back on the upswing in Russia, the region's largest market, with double-digit year-over-year sales gains in the last four months. The upturn reflects strengthening income gains and represents a sharp reversal from the cumulative slump of more than 50% in the Russian auto market during the previous four years.

More recent data for September point to a further strengthening in demand across North America. Sales in the NAFTA region picked up to 4.9% y/y last month, the best performance since last November. Canada led the way, with volumes advancing 8% y/y and setting a monthly record for September. However, the US was the big surprise in September, with volumes surging to an annualized 18.5 mn units, the highest since July 2005, and significantly above the average of 16.9 mn during the previous eight months. The rebound was aided by Texans replacing vehicles damaged by Hurricane Harvey. Car sales in Houston jumped 22% above a year earlier last month, rebounding from a 46% y/y plunge in August. The Houston area accounted for 6% of overall US sales in September, triple its normal share.

In Canada, the western provinces continue to lead the advance in new vehicle sales. Preliminary September volumes point to a fifth consecutive month of double-digit year-over-year gains. This stronger-than-expected performance has led us to increase our full-year 2017 sales forecast to 2.03 mn units.

AUTO LENDING DECELERATES

The Canadian and US auto loan markets have experienced rapid growth in recent years, raising concern among some analysts and credit rating agencies, especially since media headlines began highlighting the increase

CONTACTS

Carlos Gomes 416.866.4735 Scotiabank Economics carlos.gomes@

Chart 1

Auto Loan Growth Slows

16 y/y % change 14

12

10

US

8

6

Canada

4

2

0 11 12 13 14 15 16 17

Sources: Bank of Canada, Equifax, New York Federal Reserve.

Chart 2

Fewer Subprime Auto Loans in Canada

24 subprime share of total auto loans

22

US

20

18

16

Canada

14

12

10

15

16

17

Sources: TransUnion, New York Federal Reserve.

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GLOBAL ECONOMICS | GLOBAL AUTO REPORT

October 31, 2017

in default rates in the United States. However, we point out below that these risks are overstated, especially in Canada, where subprime auto loans represent a small and declining share of overall household loans.

Automotive lending expanded at a double-digit pace in both Canada and the United States during much of the current economic expansion, as credit availability improved following the global economic downturn of a decade ago. Year-overyear growth in auto loans peaked in Canada at more than 15% y/y in the first half of 2015, nearly double the advance in other types of household credit facilities. However, the pace of auto loan growth has since moderated to single-digits in both countries (chart 1).

The slowing in auto loan growth is especially evident in Canada, with lending for new vehicles advancing only 4.6% y/y in the second quarter of 2017, a percentage point lower than overall household credit growth. This reverses the sharp outperformance from early 2010 through mid-2015. In fact, auto loan growth in Canada is now even lagging disposable income growth, highlighting the improving fundamentals in the Canadian auto loan market. This also represents a sharp divergence from developments in the US where, despite some recent moderation in auto loan growth, autos remain the fastest-growing component of US consumer credit. According to the New York Federal Reserve, US auto loan growth was still nearly 8% y/y in mid-2017, outpacing overall household credit growth of 4.5%.

Canadian vehicle sales continue to climb to record highs, but much of the growth has recently shifted to leasing, prompting a moderation in auto loan growth. Leasing has improved vehicle affordability, by reducing the monthly payments required to drive a new car or light truck. Data from DesRosiers Automotive Consultants indicate that leasing now garners more than one-third of the Canadian retail new vehicle market, up from 19% four years ago and only 7% in 2009 during the global financial crisis. The rising popularity of leasing has driven the share of auto loans to less than 60% of the Canadian new vehicle market, the lowest level of the past decade and down from more than 68% in 2010.

FEW SUBPRIME AUTO LOANS IN CANADA

The slowdown in Canadian auto lending is taking place at the lower end of the credit spectrum--among subprime customers. In contrast, loans to more creditworthy clients continue to gain momentum, pointing to an improving credit profile. Data from TransUnion indicate that subprime auto loans declined 7% below a year earlier in the second quarter, a sharp reversal from nearly 5% y/y growth in late-2016. Meanwhile, loans to customers with a low delinquency history have accelerated to nearly triple the pace of a year ago. As a result, we estimate that subprime loans now represent only 12% of the Canadian auto market, compared with 21% in the US (chart 2). Auto loans also have a lower delinquency rate in Canada than other credit products.

INTERNATIONAL CAR SALES OUTLOOK

(millions of units)

1990?99

2000?13

2014

2015

2016

2017f

TOTAL SALES North America* Canada United States Mexico

Western Europe Germany

Eastern Europe Russia

Asia China** India

South America Brazil

39.20 16.36

1.27 14.55

0.54

13.11 3.57

1.18 0.78

6.91 0.43 0.31

1.64 0.94

53.74 17.74

1.61 15.15

0.98

13.79 3.25

3.03 1.83

16.08 6.52 1.18

3.10 1.90

71.18 19.42

1.85 16.44

1.13

12.11 3.04

3.81 2.49

31.69 18.37

1.87

4.15 2.50

72.61 20.64

1.90 17.39

1.35

13.20 3.21

3.15 1.60

32.29 20.01

2.06

3.33 1.82

77.29 21.05

1.95 17.50

1.60

13.97 3.35

3.14 1.43

36.06 23.57

2.09

3.07 1.39

79.58 20.75

2.03 17.10

1.62

14.39 3.47

3.39 1.55

37.58 24.28

2.23

3.47 1.53

*Includes light trucks. **Includes crossover utility vehicles from 2005. Sources: Scotiabank Economics, Ward's Automotive Reports, Bloomberg.

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GLOBAL ECONOMICS | GLOBAL AUTO REPORT

October 31, 2017

CANADA Cars Domestic Imports Light Trucks

UNITED STATES Cars Light Trucks

CANADA/US MOTOR VEHICLE SALES OUTLOOK

1991?05 Average

2006?14

2015

2016

1,398 797 583 214 601

15.5 8.3 7.2

(thousands of units, annualized)

1,643

1,898

783

714

491

476

292

238

860

1,184

(millions of units, annualized)

14.1

17.4

6.9

7.5

7.2

9.9

1,949 662 438 224

1,287

17.5 6.9

10.6

2017 Jan-Aug ** Annual f

2,045 658 468 190

1,387

17.0 6.1

10.9

2,030 650 460 190

1,380

17.1 6.1

11.0

NORTH AMERICAN PRODUCTION*

CANADA UNITED STATES MEXICO

15.58 2.50

11.67 1.41

(millions of units, annualized)

14.25

17.95

2.24

2.28

9.53

12.10

2.48

3.57

18.17 2.37

12.20 3.60

17.45 2.26

11.21 3.98

17.50 2.30

11.30 3.90

*Includes light, medium and heavy trucks. **Canadian sales are Scotiabank estimates. Sources:Ward's Automotive Reports, Statistics Canada.

CANADA

ATLANTIC

CENTRAL Quebec Ontario

WEST Manitoba Saskatchewan Alberta British Columbia

VEHICLE SALES OUTLOOK BY PROVINCE*

(thousands of units, annual rates)

1994?05 Average

2006?14

2015

1,446

102

936 366 570

408 42 36

166 164

1,643

123

1,017 411 606

503 48 49

231 175

1,898

140

1,205 444 761

553 56 54

236 207

2016

1,949

140

1,265 458 807

544 55 51

220 218

2017

Jan-Aug**

Annual f

2,045

145

1,300 452 848

2,030

142

1,295 450 845

600

593

60

60

57

55

248

248

235

230

*Includes cars and light trucks. **Scotiabank estimates. Sources: Statistics Canada, Canadian Vehicle Manufacturers' Association.

900 thousands of units

800

VEHICLE SALES BY PROVINCE

300 275

thousands of units

Alberta

250

700

Ontario

225

600

500

400

Quebec

200

175

British

150

Columbia

125

100

300

75

Atlantic

200 80 84 88 92 96 00 04 08 12 16

50 80 84 88 92 96 00 04 08 12 16

Includes cars and trucks (light, medium and heavy). Shaded bars indicate U.S. recession periods. Source: Statistics Canada.

70 thousands of units

60

50

Manitoba

40

30 Saskatchewan

20 80 84 88 92 96 00 04 08 12 16

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GLOBAL ECONOMICS | GLOBAL AUTO REPORT

October 31, 2017

AUTO MARKET SHARE BY MANUFACTURER -- CANADA*

(thousands of units, not seasonally adjusted)

2016

Jan to Sept

Units

% of Total

2017

Jan to Sept

Units

% of Total

2016

Sept

Units

% of Total

TOTAL Big Three General Motors Ford Chrysler

Japanese Honda Toyota Nissan Mazda Mitsubishi Subaru

Hyundai Volkswagen Kia BMW Mercedes-Benz Other

522.3 107.6

53.4 37.3 16.9

227.4 72.3 71.5 39.0 24.9 7.7 12.0

67.2 38.1 31.5 17.9 17.6 15.0

100.0 20.6 10.2 7.2 3.2

43.5 13.8 13.7

7.5 4.8 1.5 2.3

12.9 7.3 6.0 3.4 3.4 2.9

516.0 101.4

54.1 31.7 15.6

232.2 76.7 70.5 36.8 27.1 6.6 14.5

57.1 39.3 31.8 17.3 18.0 18.9

100.0 19.6 10.5 6.1 3.0

45.0 14.9 13.7

7.1 5.2 1.3 2.8

11.1 7.6 6.2 3.3 3.5 3.7

58.2

100.0

12.3

21.0

7.8

13.4

3.5

6.0

1.0

1.6

25.3

43.5

8.8

15.1

7.8

13.5

3.9

6.8

2.6

4.5

0.7

1.3

1.4

2.4

7.0

12.0

4.0

6.8

3.5

6.0

2.2

3.9

2.3

4.0

1.6

2.8

*Source: Dealer sales from the Global Automakers of Canada.

TOTAL Big Three General Motors Ford Chrysler

Other Domestic

Japanese Honda Toyota Nissan Mazda Mitsubishi Subaru

Hyundai Kia

Other Imports

LIGHT TRUCKS

TRUCK MARKET SHARE BY MANUFACTURER -- CANADA*

(thousands of units, not seasonally adjusted)

2016

Jan to Sept

Units

% of Total

2017

Jan to Sept

Units

% of Total

2016

Sept

Units

% ot Total

1,008.5 550.9 146.1 201.5 203.3

100.0 54.6 14.5 20.0 20.1

1,098.2 590.4 178.4 214.5 197.5

100.0 53.8 16.3 19.5 18.0

118.2 63.1 17.7 26.7 18.7

100.0 53.4 15.0 22.6 15.8

28.7

2.8

33.0

3.0

3.8

3.3

286.0

28.4

316.6

28.8

34.7

29.3

69.5

6.9

77.9

7.1

8.8

7.5

98.0

9.7

104.8

9.5

11.4

9.7

65.3

6.5

77.5

7.1

7.8

6.6

27.9

2.8

29.9

2.7

3.4

2.8

9.4

0.9

10.9

1.0

1.2

1.1

25.3

2.5

26.5

2.4

3.2

2.7

45.1

4.5

46.4

4.2

4.7

3.9

24.5

2.4

28.0

2.6

3.0

2.6

73.3

7.3

83.8

7.6

8.9

7.5

986.1

97.8

1,074.7

97.9

115.3

97.5

*Source: Dealer sales from the Global Automakers of Canada.

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2017

Sept

Units

% of Total

60.3

100.0

12.5

20.7

8.6

14.2

3.2

5.4

0.7

1.1

26.0

43.2

8.5

14.1

8.7

14.4

3.7

6.2

2.8

4.7

0.7

1.1

1.6

2.7

6.2

10.3

4.4

7.3

4.9

8.1

2.2

3.7

2.0

3.3

2.1

3.4

2017

Sept

Units

% of Total

129.5 64.1 18.6 27.7 17.8

100.0 49.5 14.4 21.4 13.7

4.2

3.2

40.3

31.1

9.7

7.5

13.3

10.3

9.7

7.5

4.0

3.1

1.4

1.1

3.5

2.7

5.8

4.5

2.9

2.2

12.2

9.5

126.4

97.6

4

CANADA

ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island

CENTRAL Quebec Ontario

WEST Manitoba Saskatchewan Alberta British Columbia

Source: Statistics Canada.

AUTO SALES BY PROVINCE

(thousands of units, not seasonally adjusted)

2016 Jan to Aug

2017 Jan to Aug

464.0

458.2

34.0 7.0

14.2 10.5

2.3

33.3 6.6

15.1 9.5 2.1

328.7 141.4 187.3

325.0 132.7 192.3

101.3 10.1 6.4 33.2 51.6

99.9 9.7 6.2

33.4 50.6

GLOBAL ECONOMICS | GLOBAL AUTO REPORT

October 31, 2017

2016 Aug

58.6

4.0 0.7 1.6 1.4 0.3

42.6 17.8 24.8

12.0 1.3 0.8 3.7 6.2

2017 Aug

60.9

4.7 0.8 2.3 1.3 0.3

43.4 18.7 24.7

12.8 1.2 0.8 4.4 6.4

CANADA

ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island

CENTRAL Quebec Ontario

WEST Manitoba Saskatchewan Alberta British Columbia

TRUCK SALES BY PROVINCE* (thousands of units, not seasonally adjusted)

2016 Jan to Aug

2017 Jan to Aug

893.5

961.7

65.0

68.2

16.5

16.9

23.4

26.5

21.3

20.9

3.8

3.9

555.6 180.7 374.9

580.1 184.5 395.6

272.9 28.5 28.2

117.0 99.2

313.4 32.5 32.2

136.9 111.8

*Light, medium and heavy trucks. Source: Statistics Canada.

2016 Aug

116.3

8.3 2.1 3.0 2.7 0.5

72.2 23.0 49.2

35.8 4.0 3.8

15.0 13.0

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2017 Aug 125.3 9.2 2.3 3.4 2.9 0.6 74.4 24.4 50.0 41.7 4.7 4.3 18.0 14.7

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