BMO bank takes significant charges in truck-lending transportation unit

The transportation sector at BMO, the former Bank of Montreal, performed poorly enough in the company’s first quarter that it took a relatively large provision for credit losses. 

Earlier this week BMO announced its quarterly earnings for the three months ended January 31. The provision for credit losses (PCLs) for the transportation sector were C$29 million (U.S. $21.8 million). It wasn’t the largest sector charge for the bank; the oil & gas sector took charges of C$54 million.

But an analyst who follows BMO who asked not to be identified said the transportation sector at the bank has been problematic now for four consecutive quarters. 

“Overall, portfolio credit quality remains good with some pressure in two areas and we expect provisions to come down from this quarter’s level,” CEO Darryl White said, with the two areas identified as transportation and oil & gas, a problem for virtually every bank that has lent into those sectors now besieged by low prices.

On the call with analysts, chief risk officer Pat Cronin said the problems with the transportation and oil & gas sectors – particularly natural gas – were not creating overall problems for the bank. “While our impaired provisions are elevated this quarter, the overall credit quality of our lending books remain sound and we do not see any indications of broad-based credit weakness,” he said, according to a transcript of the earnings call supplied by SeekingAlpha. “Consequently based on current business conditions, we expect our loss rate on impaired loans to revert to more normal levels in the coming quarters.”

He cited the “specific weakness in transportation finance” as one of the reasons for an elevated rate of PCLs.

The increase in PCLs in the U.S. commercial sector for the bank was due to one “larger loss and elevated provisions in the transportation finance sector, reflecting continued weak conditions in the U.S. trucking market.”

More broadly, he said, “ there’s no broad-based deterioration in the portfolio, outside of that weakness in [transportation finance].”

BMO got deep into the financing of transportation when it bought General Electric Capital’s Transportation Finance business in 2015. At the time of the acquisition, BOM called the unit “North America’s largest financier to the truck and trailer segment.”

BMO CFO Tom Flynn said on the call that the size of the portfolio now in the Transportation Finance group is $12.8 billion. When the unit was acquired, he said, the portfolio was “closer to $10 billion than to $12 billion.

“So it’s grown at a gradual rate over time and we didn’t expect it to be a fast grower. It’s a mature business and a good one from a [return on equity] perspective,” he added. 

Dave Casper, the head of the U.S. Personal & Commercial business for BMO – most of the group’s activities are in the U.S. – also expressed long-term support for the transportation finance unit. He called the leadership “the most experienced team in the industry” and said it has “been through the cycles, they’ve seen the cycles and they generally can predict the cycles.”

The current cycle, Casper added, is likely to be a shorter one. “A number of our competitors get in when things are really good and get out quickly,” Casper said. “And we’ve seen that recently a couple have gotten out and that just makes it better for us.”