Toyota Finance Arm, Used Cars Help North America Recovery

The close relationship between the used-car market and the new-car market is under-appreciated, even within the auto industry, but better used-car values helped captive finance company Toyota Motor Credit Corp. turn an operating loss in North America for parent Toyota (TM) to an operating profit in the quarter just ended.

In the year-ago quarter, Toyota as a whole suffered an operating loss in North America of about $451 million, as Toyota sales fell with the rest of the market. In the quarter ending Sept. 30, 2009, which was the second quarter of Toyota's 2010 fiscal year, Toyota had an operating profit of about $298 million, despite continued lower sales.

Overall, Toyota reported worldwide net income of about $232 million for the quarter, down about 84 percent from a year ago.

The parent company said yesterday that Toyota's U.S. financial services arm contributed through higher lending margins, due to lower funding costs; decreased expenses for anticipated loan losses; and lower residual losses due to improved used-car values.

Residual losses are incurred when cars come back to the finance company at the end of a lease. If the resulting used car is worth less than Toyota predicted it would be worth at the inception of the lease, the finance company incurs a loss. U.S. used-car values have generally improved in recent months, which means lower residual losses. Daimler (DAI) and other competitors have gotten a similar boost from residual values.

Toyota's lending arm also has lower funding costs relative to other automakers, especially the finance operations for Chrysler, Ford and GM. Toyota lost its "AAA" credit rating late last year, which had long been unique among car companies, but it is still rated higher than its competitors, at "A-1+" by Standard & Poor's.

All this is not to say Toyota Motor Credit Corp. has had it entirely easy. In the last two quarters of the fiscal year that ended March 31, 2009, the finance company more than doubled its allowance for anticipated credit losses, to just over $2 billion.

"Our customers continue to be affected by the adverse trends in the macroeconomic environment," the finance company said.

Chart: Toyota