By Pradeep Saran, September 18, 2023
Bank of Montreal (BMO), Canada’s third-largest bank, has announced its decision to wind down its indirect retail auto finance business as part of a strategic shift towards other areas. This move will unfortunately lead to job losses, although the exact number of affected employees remains unspecified. The bank has operated this particular business in both Canada and the United States. This decision comes on the heels of BMO reporting an increase in bad debt provisions to C$492 million for the quarter ending July 31, compared to C$136 million during the same period the previous year. This increase reflects the growing financial stress faced by consumers due to a rapid surge in borrowing costs.
The indirect retail auto finance business involves the bank collaborating with car dealerships to facilitate financing for vehicle buyers who then make monthly payments to the lender. In its statement to Reuters, BMO expressed its intention to redirect its resources towards areas where it believes it has a stronger competitive advantage.
BMO is committed to supporting employees affected by the impending job cuts during this transition period. In a letter addressed to car dealers, Paul Hunsley, the head of the business, announced that the termination of dealer agreements would be effective as of September 15. However, the bank would honor all contracts submitted and approved prior to this date.
As of the end of July, BMO’s consumer installment and personal loan portfolio amounted to C$104 billion, which included C$54.7 billion in home equity loans. The remaining loans in this portfolio primarily comprise auto loans, but also encompass loans for boats, recreational vehicles, and motorcycles, according to Edward Jones analyst James Shanahan.
Data from the Bank of Canada has revealed that delinquency rates for vehicle loans have surpassed pre-pandemic levels, underscoring the financial strain on consumers as they grapple with high-interest rates while also dealing with mortgage repayments in a challenging economic environment.
The rapid increase in interest rates is currently hampering the Canadian economy, prompting banks to set aside more funds to address the anticipated rise in non-performing loans.
In search of new avenues for growth, BMO has turned its attention to the United States, given the saturation of domestic markets. The bank recently completed a $16.3 billion acquisition of Bank of the West, enabling its expansion into 32 states, including California. The United States now contributes more than one-third of BMO’s overall profits.