DETROIT -- Ford Motor Co.'s finance arm said Monday that it expects to further reduce funds kept aside for bad loans despite a dismal U.S. jobs report that cast doubts over the health of the economy.
Ford Credit, which accounted for virtually all of the second-largest U.S. automaker's $1.5 billion pretax profit in the second quarter, reduced loan loss reserves by 85 percent in the period to $76 million from $542 million a year ago, according to a U.S. Securities and Exchange Commission filing.
The lower loan loss provision 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 provision) should come down," Dave Cosper, Ford Credit's CFO, told Reuters.
While noting that it is an uncertain economic period, Cosper said that Ford Credit's optimism stems from the fact that credit losses at the company were running nearly 30 percent lower than last year, and the U.S. unemployment rate was down.
U.S. nonfarm payrolls rose only 32,000 in July, far weaker than analysts' expectations. The unemployment rate, however, edged down to 5.5 percent in July from 5.6 percent in June, and was much lower from 6.2 percent last year.
It is not surprising that Ford Credit plans to cut loan loss provisions despite the weak jobs report, said Mark Vitner, chief economist with Wachovia Securities in Charlotte, N.C.
"The best predictor of future loan losses has been the unemployment rate ... not nonfarm employment," Vitner said.
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.
At the end of the second quarter, Ford Credit had $175 billion in managed assets, off from a peak of $204 billion at the end of 2002.
The goal for the full year is to have managed assets of about $170 billion, Cosper said.