The weak trucking market finally has caught up to the quarterly report of Canada’s BMO, a major lender to fleets.
In its quarterly earnings report, BMO (TSX: BMO.TO) breaks out the financial performance of its various lending sectors. Transportation is its own sector, and BMO officials have said about 90% of that book of business is trucking. The data is considered a strong indicator of the health of fleets both big and small as the BMO book of business is at least 10,000 customers.
Even as reports from the road and in the earnings report of publicly traded companies weakened over the last six to nine months, the BMO earnings report showed some level of deterioration but nothing dramatic at the former Bank of Montreal.
That ended with the latest report, issued Wednesday. In the most dramatic number reported for the second quarter of fiscal 2023, which ended March 31, provisions for credit losses in the quarter rose to CA$18 million from $6 million in the prior quarter. Provisions in the fourth quarter of 2022 were just $2 million, and BMO for the five quarters prior to that posted negative provisions. That meant BMO took more dollars out of the provisions for credit losses than it put in, fueled by the strong performance of the trucking market.
BMO had negative provisions of $7 million for all of fiscal 2022, a sign of strength despite the “negative” term. But the last two quarters combined mean that in 2023, that figure for provisions is already up to positive $24 million for six months.
Provisions for credit losses result in a negative impact on bank profitability. Allowances for credit provisions are an estimate of potential losses but do not have an impact on income. They are defined as a “contra asset.”
Allowances also showed a significant increase in the second quarter. In the transportation group, they rose to $17 million from $10 million. It was the highest number since the fourth quarter of 2021, when they were also $17 million. They are still well below the $30 million and more figures recorded in eight consecutive quarters between 2019 and 2021.
To highlight how significant the most recent quarter was in the transportation book at BMO,
even when it posted a $38 million provision for credit losses in the second quarter of 2020, during the heart of the pandemic, that quarterly figure rose only from $29 million, representing a 31% increase. By contrast, the jump to $18 million in the latest quarter from $6 million just three months earlier marks a 3X jump.
Write-offs were up 250% to $10 million. BMO posted a three-quarter run of write-offs of just $2 million, $1 million and $2 million in the final quarter of 2021 through the second quarter of 2022 and had not been at $10 million or more since the second quarter of 2021. The $10 million figure for the second quarter represents a 250% increase from the first quarter.
The BMO data also suggests that trucking companies were hitting their lines of credit to a greater degree in the second quarter. Even in a market in which trucking companies are disappearing, gross loans and acceptances at BMO rose to $14.6 billion, up from $13.7 billion. The second-quarter number was just slightly less than the final quarter of fiscal 2022 and still well above the $13.4 billion recorded in the second quarter of 2020, when companies in all industries were being advised to pull down as much as they could from their credit lines given liquidity concerns created by the pandemic.
Impaired loans also rose. Gross impaired loans climbed to $91 million from $82 million. But for perspective, gross impaired loans at BMO — defined as loans in which it is not likely the bank can collect the full principal and interest — were $105 million as recently as the third quarter of 2021 and peaked at $189 million in the second and third quarters of 2020.
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