What latest BMO numbers tell us about trucking health: Weakening but not rapidly
BMO’s quarterly report on its transportation business shows deterioration, but not a huge amount. (Photo: FreightWaves)
Transportation charge-offs and impairments at Canada’s BMO Bank (NYSE; BMO), a major lender to the transportation industry, continued to rise in the company’s first quarter. But the deterioration was nowhere near a level that could be considered severe.
BMO’s transportation group had an inventory of approximately $13.7 billion for the first quarter ended January 31. With about 90% of the transportation group’s book of business related to truck loans, its financial performance can be taken as a strong indicator of the health of smaller fleets, as a large part of its business is believed to be focused in this segment. (The lowest estimate of the size of the transportation group’s customers is 10,000, which would mean the highest average loan per customer would be CAD$1.37 million, or just over $1 million in US currency at current exchange rates).
While depreciation and amortization figures have not increased significantly, tougher times for the industry appear to have had an impact on BMO’s book of accounts. Its size of $13.8 billion in the first quarter was about $900 million down from the fourth quarter of 2022. That’s the largest quarterly decline in the bank’s transportation sector in several years.
All of the deteriorations in various metrics in the transportation group come from an extremely low base, as the industry’s profitability over the past year has led to extremely strong credit numbers in various categories.
The most notable deterioration in the first quarter was in the category of gross impaired loans and acceptances. Investopedia defines impaired credit instruments, such as loans or acceptances, as “either a temporary situation that can be reversed or an early indication that the borrower may later encounter potential greater financial distress. In either case, an impaired credit rating is not a good omen.”
Impaired loans and allowances for BMO’s transportation group increased to CAD$82 million from US$73 million in the fourth quarter of fiscal 2022. That number is the highest since the $90 million recorded in the fourth quarter of fiscal 2021. But for perspective, even at that higher number, it’s well below the $142 million recorded in Q2 2021, which was a recent high.
Loan allowances, which are actual provisions established in anticipation of possible impairments, did not increase despite the increase in non-performing loans. It was $10 million in Q1 2023, flat from Q4 2022. Its recent low was $8 million in Q3.
But this category is still well below the level of a few years ago. Allowances in the BMO transportation group totaled $32 million in the first quarter of 2021 and $25 million in the second quarter of this year.
There are two ways to look at the bank’s transportation loan write-downs, which increased sequentially by $1 million from $1 million to $2 million to $3 million to $4 million over the last three quarters. dollars have gone up.
One way is to note that at $4 million, it’s still well below the first two quarters of 2021, which were $11 million and $4 million, respectively.
The other is that writedowns — the most draconian step a bank can take to deal with non-performing loans — have quadrupled since the second quarter of last year, albeit from a low base.
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