Credit conditions in trucking as measured by the quarterly earnings report of major lender BMO took a significant downturn in the three months ending July 31, though with one slightly positive sign.
Allowances taken by Canada-based BMO (NYSE: BMO) in its transportation group soared to CA$54 million ($40 million) in the third quarter. That puts the allowances figures at more than double what it was in the second and first quarters and is multiples above the allowances ever taken by the transportation group. First- and second-quarter allowances were both $24 million. They were $8 million as recently as the second quarter of 2022.
An allowance is described by Fincylopedia as being “created and maintained against potential losses and certain risks.” It is taken as a result of “management’s estimate of a certain probability that may adversely impact the value of its assets.” An allowance is taken based on historical data.
The book of business in the transportation group of BMO, the former Bank of Montreal, is about about 90% trucking loans. Its Canadian home is not reflective of a dominance of Canadian trucking companies in that clientele; it operates through all of North America. Given that, its quarterly report on the group’s performance provides a broad view of the level of credit weakness among the bank’s borrowers, which exceed 10,000.
The other sign of credit weakening is the identification of gross impaired loans in BMO’s transportation group, which also set a record.
That figure rose to $424 million, up from $305 million in the second quarter. In the third quarter of 2022, when the post-pandemic boom trucking market was starting to fizzle, gross impaired loans in the transportation group were $72 million.
An impaired loan, according to Accounting Tools, is one for which the bank has determined that some of the principal and interest probably will not be collected.
The one area of slight improvement in the transportation group’s operations was write-offs.
Write-offs in transportation were $47 million in the quarter, an improvement from the $51 million recorded in the second quarter. In the third quarter of 2022, with the group coming off one of the strongest trucking markets ever, write-offs were $2 million.
On the company’s earnings call, Piyush Agrawal, BMO’s chief risk officer, said transportation was a sector that the bank “continues to monitor closely.”
“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 said.
Later in the call, in an answer to an analyst question, Agrawal expanded on that theme.
“Transportation is going through a tough time, a tough cycle,” he said. “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.”
Agrawal said BMO is “beginning to see some improvements.”
BMO’s book of business in transportation, more formally described as its gross loans and acceptances, fell slightly. It was $14.88 million in the quarter, down from $15 million a quarter earlier. But that it still significantly above where it was the past few years, with only the prior three quarters above it in the history of the group.
BMO’s transportation group dates back to the bank’s acquisition of the transportation lending operations of GE Capital in December 2015.
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