BMO’s transportation sector data suggests trucking credit markets worsening
The fiscal fourth-quarter earnings of major trucking lender BMO, the former Bank of Montreal, appear to show a sudden and significant weakening of trucking credit metrics.
BMO’s transportation bank of business — its gross loans and acceptances — rose to approximately CA$15.7 billion ($11.6 billion) in the quarter, its highest on record. But within that rising book of business, gross impaired loans climbed to CA$170 million, up from CA$113 million a quarter earlier — a more than 50% increase — and up from CA$73 million one year ago. That’s almost a 133% increase in the last 12 months.
An impaired loan is one in which a lender believes it is unlikely that it will collect full repayment of principal and interest. Its increase could be seen as reflecting that more borrowers within the more than 10,000 transportation clients at BMO — at least 90% of which are trucking companies — are suddenly finding themselves struggling to stay current on their payments.
Although the size of impaired loans at BMO is rising, the fourth-quarter figure is not a recent high. In 2020’s third and second quarters, impaired loans were CA$189 million. But that was in the middle of the pandemic.
Pre-pandemic, during the weak freight market of 2019, the highest number was CA$149 million in the fourth quarter.
Earnings at $BMO.TO show its #trucking-heavy transportation sector reported a big jump in loans in that portfolio that are considered impaired, meaning the bank is unlikely to collect all outstanding interest and principal. The deterioriation has been rapid and harsh. pic.twitter.com/PvB7oLgBdW
— John Kingston (@JohnHKingston) December 1, 2023
The growth in impaired loans was easily the most dramatic change in the BMO quarterly report. BMO’s position as a major lender to the industry can be seen most clearly at several industry meetings, where its ubiquitous booth is front and center as conference attendees walk into an exhibition hall. Its role as a major trucking lender dates back to its purchase in late 2015 of General Electric Capital Corp.’s Transportation Finance business. At the time BMO made the purchase, it described the GE unit as the largest lender to the trucking sector.
Actual write-offs of bad loans in the transportation sector rose to CA$20 million from CA$16 million in the third quarter. A year ago, they were CA$3 million. That figure is still below some of the pandemic numbers and even pre-pandemic numbers, when between the fourth quarter of 2019 and the final quarter of 2020, write-offs ranged from CA$23 million to CA$35 million.
While the rise in impaired loans signals trouble, the problems appear to be new enough that BMO has not greatly increased the allowances it has set aside for potential losses. In the fourth quarter, that figure was CA$20 million. One quarter earlier, it was slightly less than that at CA$18 million and was CA$17 million in the second quarter.
A write-off takes the loan off a bank’s balance sheet. An impaired loan or an allowance keeps the loans on the balance sheet as assets until there is some resolution in the loan’s status. Loans in which allowances have been created are in the CA$170 million figure for gross impaired loans.
One notable comparison is the allowances taken by the bank as a percentage of the loans that are impaired fell to its lowest level in several years, suggesting the impairment is growing at a pace faster than BMO’s decisions and processes to create allowances.
In the fourth quarter, allowances of CA$20 million were 11.7% of the impaired total of CA$170 million.
The only quarter in the last two years with a comparable ratio was the third quarter of 2022, when even though the freight market was beginning to implode, BMO had allowances of CA$8 million against impairments of CA$72 million, for an 11.1% ratio. For the other quarters of the prior two years, that ratio was as high as 18.9%. The ratio was 18.7% in the third quarter.
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