Fitch: US Consumer Finance IPOs Signal Market Acceptance

Strong investor appetite for consumer finance companies that have recently gone public will likely provide support for additional IPOs later this year, according to Fitch Ratings. The allure of higher returns in consumer lending, particularly subprime lending, has attracted investors and new capital over the last several months. That said, the equity markets can be fickle and a continuation of current trends will depend greatly on underlying economic conditions in the US, continued job growth and favorable credit performance.

There has been a number of notable consumer finance IPOs in recent months, including the launch of Springleaf Holdings last October and Santander Consumer USA this month. This increases the likelihood that other institutions could move forward with IPOs later this year.

For example, Ally Financial's ownership structure continues to evolve. GM sold its stake in Ally in December, while the US Treasury has reduced its stake to 37% from 74%. Additionally, the company has stated its intention to pursue an IPO in the near term. Also, General Electric disclosed plans to complete a partial IPO of its consumer finance business later this year.

We believe a key milestone for Ally will be the results of the Fed's annual Comprehensive Capital Analysis and Review (CCAR) process, which is currently underway. Positive results under the CCAR stress test could be a catalyst in determining whether the company decides to pursue an IPO. Still, even if the CCAR outcome is positive, and eventual IPO remains uncertain and will likely depend on a number of factors, including the continued strength of the IPO market and the risk appetite of investors for consumer finance assets.

The healthier funding environment for consumer finance firms reflects investors' interest in increasing exposure to subprime lending. Fitch believes there are a number of factors that are likely driving increased investor interest, including the favorable trends in operating fundamentals and potential for higher returns. However, the market is cyclical, and credit issues can emerge quickly should macro trends deteriorate. As a result, Fitch remains cautious about the potential for some lenders to grow much faster than their industry peers.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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