Daimler Earnings Bounce Back in Tandem With the Value of Its Leased Cars

A turnaround in the residual value of leased cars was a factor in the third-quarter earnings rebound at Daimler, said Bodo Uebber, board member for finance and controlling, and Daimler Financial Services.

Residual values are still under pressure, but not as much as last year, he said.

"For residual values, the development is positive, far down from the peaks we have seen a year ago. It seems to be the expectation for the fourth quarter is OK," as well, Uebber said in a webcast for reporters and analysts on Oct. 28.

For the third quarter of 2009, Daimler managed a thin net profit of about $83.3 million in the third quarter. That was about 74 percent below the year-ago quarter, but reversed three consecutive quarters of net losses.

In the year-ago quarter, Daimler took a one-time, pre-tax charge of about $668 million on a reassessment of the residual value of leased vehicles. That was partly due to Daimler's ongoing interest in leased vehicles at Chrysler, including a heavy percentage of big pickups and SUVs, which fell sharply in resale value last year.

At the end of a lease, most leased vehicles end up back in the possession of the leasing company, in Daimler's case Daimler Financial Services. Most off-lease vehicles are auctioned off in dealer-only wholesale auctions.

It's not uncommon for off-lease cars to fetch a lower price than the leasing company had forecast at the beginning of the lease, usually three or four years earlier. In fact, leasing companies often purposely inflate residual values in order to lower monthly payments for customers, as a form of price discounting.

In leasing, the customer borrows the difference between the upfront cost of the car, minus the projected residual value. A higher residual value, even if it's purposely inflated, yields a lower monthly payment for the customer.

Leasing companies set aside reserves to anticipate these losses, but if the losses on residual values are even bigger than expected, that can force the leasing company to take an even bigger hit to earnings.

Last year that forced Chrysler, Ford and General Motors to write off billions of dollars on residual values. The losses also prompted Chrysler, and to a lesser extent GM, to drop out of leasing entirely for several months. Since then, Chrysler and GM have cautiously returned to leasing, at lower volumes.

Chart: Daimler