J.P. Morgan said it was updating its analysis of John Deere’s Financial Services business following recent 10-Q filings. The update said the portfolio performed well in the second quarter; equipment on operating lease was relatively flat, and delinquencies decreased sequentially. Net income for the Financial Services business dropped 22% year-over-year in the second quarter, however, causing John Deere to downgrade its FY23 outlook for Financial Services net income from $820 million to $630 million, J.P. Morgan reported. According to the update, this revision implies a 28% year-over-year decline in net income in FY23.

According to the authors of the update, the Financial Services business represented 7% of John Deere’s consolidated revenue and 1% of its net income in the second quarter, down from 11% and 33% at peak contribution in FY16 and FY15, respectively. Financial Services net income for 2Q23 was $28 million, down 87% year-over-year, as earnings on a higher average portfolio were offset by less favorable financing spreads and a higher provision for credit losses, J.P. Morgan said. Net income was down 22% year-over-year to $163 million, representing 6% of Deere’s consolidated net income in F2Q. The authors of the update said they are modeling Financial Services net income of $641 million in FY23 vs. guidance of $630 million, representing approximately 7% of consolidated net income.

According to J.P. Morgan, the Financial Services business held $6.5 billion of equipment on operating leases at the end of the second quarter, up 1% year-over-year and roughly flat quarter-over-quarter. Depreciation expense for John Deere Capital Corp (JDCC), which the authors of the update said largely reflects the Financial Services business in North America, decreased 3% year-over-year in the second quarter. Its total operating lease residual value at the end of Q2 was $3.3 billion, which represented 55% of gross equipment on operating leases — a percentage that J.P. Morgan said remained flat year-over-year.

Other income was up 16% year-over-year to $41 million in the second quarter and approximately flat YTD as higher interest earned on cash and equivalents was offset by lower gains on operating lease dispositions, the update said.

JDCC receivables more than 30 days past due increased 13% year-over-year to $429 million in Q2, a decline of 12% quarter-over-quarter. According to J.P. Morgan, delinquencies typically serve as a leading indicator for write-offs. However, despite the year-over-year increase, delinquencies remain at a low level relative to the portfolio size, the analyst said. Non-performing receivables rose to $340 million in the second quarter — up 31% year-over-year and 16% quarter-over-quarter.

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