Aug. 7 (Bloomberg) -- Toyota Motor Corp., the world's second-largest carmaker, reported the biggest drop in profit in five years as U.S. sales of sport-utility vehicles and trucks plunged.

Net income fell 28 percent to 353.7 billion yen ($3.2 billion), or 112.28 yen a share, in the three months ended June from 491.5 billion yen, or 153.89 yen, a year earlier, the company said in a statement today. Sales declined 4.7 percent to 6.22 trillion yen. The result was better than the 329 billion yen median estimate by five analysts compiled by Bloomberg.

Operating profit in North America fell 57 percent as record gasoline prices cut demand for large vehicles, forcing President Katsuaki Watanabe to halt U.S. production of Tundra pickups and Sequoia SUVs for three months from August. The models eroded gains from fuel-efficient vehicles that spurred an 8.1 percent increase in net income for Honda Motor Co., which doesn't make full-size trucks.

``Toyota can't escape a terrible market,'' said Fumiyasu Sato, chief executive officer of Milestone Asset Management, a Tokyo-based investment adviser. ``Truck demand will keep shrinking and the shift to small cars will accelerate.''

The Tundra and Sequoia accounted for 7.6 percent of Toyota's U.S. sales through July.

GM, Ford

Operating profit, or sales minus the cost of goods sold and selling, general and administrative expenses, fell 39 percent to 412.6 billion yen in the quarter, Toyota said.

A stronger yen cut profit by 200 billion yen. Watanabe, 66, based the company's earnings on 105 yen to the dollar and 163 yen per euro, compared with 121 yen and 163 yen, respectively, in 2007.

Toyota declined as much as 4 percent in German trading to 26.88 euros and traded at 27.15 euros as of 12:45 p.m. in Frankfurt. The Tokyo-traded shares fell 1.3 percent to 4,580 yen before the earnings announcement. The shares have fallen 24 percent this year compared with a 14 percent decline for the Nikkei 225 Stock Average and a 59 percent decline for General Motors Corp.

GM, the world's largest carmaker, and Ford Motor Co., both more dependent on trucks and SUVs, posted losses in the quarter as sales plunged and they wrote down the value of leased vehicles.

Corollas, Camrys

Toyota's decline in profit was limited by stronger demand for hybrids and fuel-efficient Corolla and Camry models as gasoline surpassed $4 a gallon in the U.S.

Operating profit at the company's financial services unit dropped by 21.8 billion yen, excluding a valuation gain from interest rate swaps, as Toyota had to write down the value of loans and leased vehicles.

The company increased its provision for leased vehicles by 9 billion yen compared with the previous year, Takahiko Ijichi, a senior managing director said on a conference call without giving the exact amount. The provision for possible loan defaults was increased by 30 billion yen.

``A higher percentage of credit losses in the U.S. as well as the increase in reserves for bad debt and residual value losses resulting from the decline of used car prices were the main reasons for the decreased profit,'' the company said in a statement.

Toyota is the latest carmaker forced to book a drop in the residual value of vehicles previously leased by its auto- financial units. The residual value is what a vehicle is worth when a customer returns it at the end of a lease.

GM reported a quarterly loss of $15.5 billion, the third- worst in its 100-year history, as it took a $2 billion expense because of the decline in the residual values of leased vehicles. Ford posted a loss of $8.7 billion as it reconfigures truck plants to build cars and took a $2.1 billion charge for the leased vehicles.

`Time Bomb'

``Credit losses are ticking time bombs,'' said Edward Rogers, chief executive officer of Tokyo-based Rogers Investment Advisors Y.K., which advises clients on what hedge funds to invest in. ``There are more lurking out there.''

Honda, Japan's No. 2 carmaker, lowered its annual operating profit forecast by 3.1 percent partly because of a 25 billion yen charge on leased vehicles including Pilot SUVs and Odyssey minivans. Nissan Motor Co., Japan's third-largest automaker, had a 43 percent drop in quarterly net income after writing down 42 billion yen for the drop in the value of leased vehicles including Titan pickups and Pathfinder SUVs.

Toyota, based in central Japan's Toyota City, cut its fiscal-year vehicle sales forecast to 8.74 million from 9.06 million. It slashed its North American forecast to 2.63 million from 2.77 million. Global sales to dealers totaled 2.19 million vehicles in the first quarter, little changed from a year earlier, Toyota said. The company scrapped its 2009 sales goal of 10.4 million vehicles and will set a new target later this month.

U.S. Decline

In the U.S., Toyota is heading for the first annual drop in sales since 1995. The price of gasoline topped $4 a gallon in June and was at $3.86 yesterday. Waning popularity for trucks and sport-utility vehicles caused Toyota's U.S. retail sales to fall 7.8 percent last quarter, led by a 20 percent drop in demand for light trucks. U.S. industrywide sales fell 12 percent in the period.

The company reiterated its fiscal-year forecasts. Net income will likely fall 27 percent to 1.25 trillion yen for the year ending March 31. Operating profit may drop 30 percent to 1.6 trillion yen, as sales may decline 4.9 percent to 25 trillion yen.

Toyota based its annual earnings forecast on an assumption of exchange rates of 105 yen to the dollar and 161 yen per euro. That compared with its May forecast that was based on 100 yen and 155 yen respectively. The currency traded at 109.5 yen to the dollar today.

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net.

Last Updated: August 7, 2008 06:50 EDT