Ford’s finance arm reportedly said on Monday it expects to further reduce funds kept aside for bad loans despite a dismal US jobs report that cast doubts over the health of the economy.
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According to Reuters, Ford Credit, which accounted for virtually all of the automaker’s $US1.5 billion pretax profit in the second quarter, reduced loan loss reserves by 85% in the period to $76 million from $542 million a year ago, according to a US Securities and Exchange Commission filing.
The report said the lower loan loss reserves helped boost second-quarter earnings of Ford Credit – which offers fleet financing and finances new, used and leased vehicle purchases – to a record high $897 million, up sharply from $401 million a year ago.
“If things continue to go well, it (loan loss reserves) should come down,” Dave Cosper, Ford Credit’s chief financial officer, told Reuters.
While noting that it is an uncertain economic period, Cosper reportedly said that Ford Credit’s optimism stems from the fact that credit losses at the firm were running nearly 30% lower than last year, and the US unemployment rate was down.
Reuters said that US nonfarm payrolls rose only 32,000 in July, far weaker than analysts’ expectations, but the unemployment rate edged down to 5.5% in July from 5.6% in June, and was much lower from 6.2% last year.
It is not surprising that Ford Credit plans to cut loan loss reserves despite the weak jobs report, Mark Vitner, chief economist with Wachovia Securities in Charlotte, North Carolina, told the news agency.
“The best predictor of future loan losses has been the unemployment rate … not nonfarm employment,” Vitner reprtedly said.
The news agency noted that Ford Credit has also shrunk in size over the past few years as it pulled back on loans to higher credit-risk customers, reduced lending on non-Ford vehicles and cut back on leasing – further decreasing the risk of credit losses.
