The increasing share of battery-electric vehicles (BEVs) in European auto lease asset-backed securities (ABS) portfolios is amplifying residual value (RV) risk, as used BEV prices have lagged behind the broader market, according to Fitch Ratings.
The agency’s analysis of lease-backed transactions accounts for the uncertainty surrounding BEV resale values and how originators determine RV assumptions.
The composition of auto ABS pools largely mirrors Europe’s new car market with a lag, primarily due to the inclusion of used vehicles. The rising share of BEV collateral reflects BEV registrations, which accounted for approximately 21% of new car sales in 2023. In the third quarter of 2024, BEVs represented close to 11% of all Fitch-rated loan and lease ABS, up from around 6% in 2023.
Lease-backed ABS generally have a greater BEV share than loan-backed transactions, as they include new-car lease agreements. Corporate incentives, such as tax benefits and subsidies, encourage BEV adoption, while some customers opt for leasing to mitigate exposure to declining resale values. In the Netherlands, one lease portfolio includes nearly 50% BEVs, reflecting the country’s higher BEV penetration.
RV risk in auto ABS arises when obligors return vehicles instead of making a large final payment at contract maturity. Lease ABS portfolios typically bear direct RV risk, whereas non-UK loan contracts lack return options, with dealers or borrowers assuming the risk. Since 2023, used BEV prices have fallen more sharply than those of other powertrains, reducing proceeds from vehicle returns. For non-UK auto loan portfolios, lower BEV exposure means any impact is more likely to be indirect, affecting recovery proceeds from defaulted collateral.
The decline in BEV resale prices is driven by factors such as an influx of cheaper Chinese-manufactured vehicles, price reductions by established automakers, and consumer concerns about obsolescence. Regulatory uncertainty further weighs on BEV demand. Lessors may raise lease rates to counteract increased vehicle depreciation, potentially further weakening demand.
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By GlobalData
Leasing firms have responded by diversifying vehicle fleets by brand and model, extending lease terms, re-leasing used BEVs, and adjusting RV forecasts downward. The impact on resale prices will become clearer as affected vehicles are returned to the market.
Fitch’s assessment of RV risk in ABS transactions includes a quantitative evaluation of expected sales proceeds relative to contractual RV amounts, alongside a review of originators’ RV-setting policies. The agency’s base-case recovery assumptions may be set below historical data to reflect anticipated further declines in used-car prices. For portfolios with substantial BEV exposure, Fitch may assume sales proceeds below 100% if originators’ RV assumptions prioritise lower lease rates over realistic resale expectations.
The heightened RV risk associated with BEV resale price uncertainty and limited historical data is also reflected in higher haircuts within stressed assumptions for lease portfolios with significant BEV shares.
The future impact of BEV resale prices on RV risk will depend on new car market trends, which vary by jurisdiction and over time. BEVs’ share of new car registrations in the EU declined to approximately 14% in 2024 but is expected to rise in the medium term as manufacturers and regulators maintain their focus on the segment. Fitch anticipates BEV prices will continue to moderately underperform internal combustion engine vehicles.
