Asset-backed securities issuance set a record in the second quarter as banks and other companies turned away from issuing straight public debt and tapped an alternative fuel for consumer loan growth.
All companies' issuance of asset-backed securities soared to $40.6 billion in the second quarter, reported Thomas Zimmerman head of the asset- backed research division at Prudential Securities. If the trend continues, issuance could reach $150 billion this year, 40% more than in 1995, he added.
Industrial and finance companies are still the largest issuers of asset- backed securities, but banks have become more aggressive in tapping the market.
"Several years ago, there were no banks that would securitize their auto loans," Mr. Zimmerman said, "but now big banks are securitizing them."
Bank issuers in July included Boatmen's Bancshares, which issued $290 million of auto-loan-backed securities; Chase Manhattan Corp., which issued $390 million of mortgage-backed securities; and NationsBank Corp., which issued $2.1 billion of securities backed by its auto loan portfolio.
These securities give banks an alternative funding source, said Paul Jablansky an asset-backed securities analyst at Salomon Brothers Inc.
Securitization not only lets banks get loans off their balance sheets but also is a form of funding.
That is especially true for credit card loans. Of the roughly $125 billion of outstanding credit card securities at the end of March, 80% had been issued by banks, Moody's Investors Service reported.
As with other fixed-income products, the spreads on most asset-backed securities are nearly as tight as they have ever been, said Prudential's Mr. Zimmerman. That means pricing is favorable to issuers.
"We have found that finance companies that have securitized have had a higher median average return on equity than finance companies that haven't securitized," Mr. Zimmerman said.
Another factor in the surge is loan volume.
The amount of revolving credit outstanding has risen steadily, to $395 billion in 1995 from $224 billion in 1990, while total consumer installment credit has surged to more than $1 trillion, from $735 billion, said Mr. Jablansky, citing Federal Reserve statistics.
To be sure, investors are starting to worry about deteriorating credit quality. When delinquencies increased recently in a pool of asset-backed securities issued by First Chicago NBD Corp., the bank had to add some performing loans to the asset pool, said Mr. Jablansky.
Still, "the market performance has been very positive," he said.
Edward Bankole, a vice president at Moody's, recently told the Senate Banking Committee that consumer lending probably would remain profitable for banks, although the rate of profit growth would decline.
