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Lender's Transportation Sector Write-Offs Flat, Size of Impaired Loans Down

Underlying financials for the thousands of trucking-related borrowers serviced by Canadian bank BMO remain strong, based on the numbers reported in the bank’s latest quarterly earnings.

BMO (TSO: BMO.TO) is a major lender to the trucking sector, with the size of its clientele believed to be well above five figures. As a result, the breakdown it provides each quarter on the performance of its transportation group, which is overwhelmingly geared toward trucking, is seen as a strong indicator of financial trends. 

As strong as the third quarter of 2021 was, the numbers released last week for BMO’s fourth-quarter show even further improvement when conditions are measured by troubled borrowers. (BMO’s fourth quarter ended Oct. 31). 

Write-offs in the transportation sector at BMO remained at CA$6 million ($4.69 million), unchanged from the third quarter. Write-offs were as high as CA$35 million in the second quarter of 2020, during the heart of the pandemic. Even in 2018, an exceptionally strong freight market, write-offs that year trended around CA$15 million per quarter.

Allowances for credit losses also dropped. That banking line item reflects allowances taken by the bank on loans defined as impaired but in which the loan’s condition is short of needing to be written off.

For the fourth quarter, BMO posted transportation allowances for credit losses of CA$17 million,   down CA$4 million from the third quarter. And the third quarter already was an extremely low number by historical standards. Transportation allowances for credit losses ran in excess of CA$30 million for all four quarters of 2020. 

The transportation allowances figure was lower in much of 2017 and 2018, but the bank’s book of business then was smaller. Gross loans and acceptances for the transportation group were CA$9.9 billion in 2018’s first quarter, rising to CA$11 billion by the fourth quarter. By the fourth quarter of this year, the transportation book of business at BMO was approaching CA$13 billion. So the slight increase in the allowance for credit losses of a few million Canadian dollars compared to 2018 is coming against a book of business that has grown by almost CA$2 billion. 

Gross impaired loans for the transportation group were CA$90 million in the fourth quarter of 2021. That is down from CA$105 million just one quarter earlier and down almost CA$100 million from the second quarter of 2020. In 2018, that figure averaged CA$145 million.

As strong as the transportation group performed, it pales compared to BMO’s oil and gas division. Gross impaired loans in that group’s fourth-quarter were CA$140 million. During the pandemic, they peaked at more than CA$700 million. 

The fourth-quarter book of business of CA$12.96 billion is not the largest in BMO’s recent history. The second-quarter 2020 book was CA$13.38 billion as a result of companies — not just in transportation but in other fields as well — pulling down all or a large chunk of their revolving credit lines. Many advisers at the time had suggested that rapid pull-down of revolving credit lines to ensure liquidity during the uncertain early days of the pandemic.

More significant is that BMO’s book of business in transportation declined steadily after that second-quarter 2020 surge, dropping down to CA$12.2 billion. But the increase to CA$12.96 billion in the latest report shows the strength of the trucking market, as it could be impacted by such factors as the higher cost of trucks and other equipment as well as new entrants into the field. The higher cost of fuel also could be a factor.

BMO is a long-term lender. Despite its significant role in the trucking industry, it does not provide factoring services.

More articles by John Kingston

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