Canada-based Bank of Montreal (BMO) recently released its third-quarter earnings statement to investors, indicating a further decline in credit conditions in the trucking industry, so much so that the major lender to the trucking industry has increased its loan loss provisions beyond previous estimates.
BMO CEO Daryl White said during the earnings call, “While the cyclical increase in credit costs has resulted in loan loss provisions above our historical range, performance has been supported by operating momentum across our diversified businesses, including continued revenue growth in Canadian Personal and Commercial Banking and stronger client activity in our market-sensitive businesses. Across our U.S. markets, we’re adding new customers and expanding capabilities, contributing to consistent pre-provision-pre-tax earnings in our U.S. Segment.”
In its transportation portfolio, BMO has raised its allowances (resources maintained against potential risk and losses). The portfolio includes about 90% in loans to the trucking industry.
The number of impaired loans in the trucking sector soared from only $72 million two years ago to a whopping $424 million in Q3 of this year. With an impaired loan, the lender will probably not collect some amount of the principal and interest.
Write-offs on bad loans, however, did improve from $51 million in Q2 to $47 million in Q2. Those numbers contrast significantly with only $2 million in write-offs recorded just two years ago.
During the earnings call, Piyush Agrawal, BMO’s chief risk officer, said, “The trucking segment has been in a cyclical downturn with weak freight volumes and reduced spot rates, although there are early signs of stabilization.”
Agrawal continued, “Transportation is going through a tough time, a tough cycle. But we’ve been in the business 40, 50 years. It’s still profitable. It just happens to have a higher PCL (provisions for credit losses) through a cycle.” He also noted that he is “beginning to see some improvements.”
BMO’s transportation portfolio, including its gross loans and acceptances, fell slightly in Q3. It was $14.88 million in the quarter, down from $15 million a quarter earlier. But that remains above where it was the past few years, with only the prior three quarters above it in the history of the group.
Overall, negative numbers for loans to trucking are at their highest levels since BMO purchased its transportation unit from GE Capital nine years ago.
