Ford Motor Credit outpaced expectations in Ford’s overall second-quarter performance, cementing it as a “pillar of strength” for the company with a balance sheet that “remains extremely solid and positions [Ford] to weather further disruptions and headwinds,” Chief Executive Jim Hackett said on the earnings call. Lower delinquency and loss-to-receivables (LTR) rates contributed to the captive’s profitability, even amid a pandemic that is hurting new-car sales.
Total net receivables for consumer loans and leases clocked in at $73.7 billion, with an average Fico score of 743 and the percentage of “higher risk notes” in the portfolio unchanged at 6% on a year-over-year basis.
The captive generated $543 million in earnings before taxes, a 1,710% increase from last quarter, but a decrease of 34.7% from the prior year, according to the company’s earnings presentation.
The results are better than expected amid low vehicle sales due to COVID-19, Chief Financial Officer Tim Stone said during the call. “Ford Credit delivered a strong profitable quarter, demonstrating its uniquely compelling value for customers and competitive advantage. Our prudent actions in the first quarter ensured we were adequately reserved in light of the macro uncertainty created by COVID,” Stone said.
Ford emphasized growing liquidity in the first quarter, building to $35.1 billion for Ford Motor Co. and $28 billion for Ford Motor Credit.
That growth continued in the second quarter, with Ford Motor Co.’s liquidity of $39.8 billion, and $32 billion for Ford Credit, which was stronger than expected, providing a cushion for the months to come, according to a research note from J.P. Morgan. “We expect the Ford Motor debt structure to tighten modestly post the release of better than expected second quarter results across the board, as the company exhibited solid execution amidst the pandemic,” the note read.
Payment assistance programs and the federal stimulus are contributing to Ford Credit’s seemingly healthy portfolio in the U.S., with 60-plus day delinquencies sitting at 0.15%, a 1 basis point (bps) decrease from last quarter but an increase of 4 bps YoY. LTR clocked in at 0.15%, a decrease of 47 bps from last quarter and 24 bps YoY. Ford is suspending involuntary repossessions amid the pandemic, contributing to a repossession rate of 0.52%, a decrease of 72 bps from last quarter and 61 bps YoY.
However, those low rates could be short-lived as Ford Credit scaled back extensions by 96% in June from a peak in mid -March. The company granted 361,000 extension requests, or 11% of outstanding contracts, from March to May. Of accounts in deferral, 84% have made a payment, 12% made a payment and chose to re-extend, 1% have opted for another extension and 3% have neither made a payment nor signed up for a second extension.
“We think Ford Credit remains appropriately capitalized to weather further stress in consumer credit and/or residual values,” read the J.P. Morgan note.
Distributions paid from Ford Credit to the parent company amounted to $275 million, the same as last quarter and a decrease of $375 million from the same reporting period in 2019.
Still, Ford Credit has joined other lenders in building allowance for credit losses, increasing ACL by $800 million from this time last year to $1.3 billion. The credit loss ratio of 1.18% is an increase of 11 bps from last quarter and 75 bps YoY.
Second-quarter revenue for Ford Motor Co. was halved to $19 billion, down from $38.9 billion the prior year. Ford Motor sold 645,000 wholesale units, a decrease of 481,000 units from last quarter and 719,000 from the same period in 2019.
“Looking at results in automotive, both wholesale and revenue are down due to the suspension in manufacturing. Earlier this year, pre-COVID, we had expected wholesale units to be about 800,000 higher than the 645,000 we reported in the quarter. Our decline in automotive EBIT was driven by the decline in volume,” Stone said.
Ford Motor’s earnings before interest and taxes (EBIT) loss of $1.9 billion came in ahead of an expected $5 billion loss, largely due to strong pricing and higher supplemental depreciation on leases in Ford’s major geographies, according to J.P. Morgan.
Ford expects wholesale auction prices for its off-lease units to drop 5% YoY, according to the company’s earnings presentation.
Shares of Ford stock [NYSE: F] were trading up 1.21% to $6.69 as of market close. Ford has a market capitalization of $26.61 billion.
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