Bank of Montreal (BMO), Canada’s third-largest bank, has announced plans to cease its retail auto finance business operations, leading to an unspecified number of job losses in both Canada and the United States.
This strategic shift comes in response to mounting challenges in the sector, marked by a significant increase in bad debt provisions within the retail trade segment. In the quarter ending July 31, BMO’s bad debt provisions in retail trade surged to C$81 million ($60 million), compared to a recovery of C$9 million in the same period the previous year. This rise reflects the growing financial strain faced by consumers due to escalating borrowing costs.
BMO clarified its rationale for winding down the indirect retail auto finance business, emphasizing the need to redirect resources toward areas where the bank believes it holds a more competitive advantage. In light of the impending job cuts, the bank has pledged to work closely with affected employees, providing them with necessary support during this transition.
In a letter addressed to car dealers and reported by Reuters, Paul Hunsley, the head of the business, conveyed that the termination of dealer agreements would take effect from September 15. However, the bank committed to honoring all contracts submitted and approved before that date. In the indirect retail auto finance business, BMO collaborates with car dealerships to facilitate financing for buyers, who subsequently make monthly payments to the lender.
The bank’s financial report for August revealed that gross loans in its retail auto business had surged by approximately 34% year-over-year in the third quarter, reaching C$17.36 billion. This segment accounted for 2.7% of BMO’s total loans.
The decision to scale back the retail auto finance business aligns with broader economic trends. Rising interest rates have begun to impact the Canadian economy, prompting banks to set aside additional funds to address an anticipated rise in bad loans. Last month, BMO reported an increase in provision for credit losses to C$492 million, compared to C$136 million in the previous year. Notably, commercial impaired losses in the United States also rose, driven by substantial provisions in the retail trade sector.
Data from the Bank of Canada has revealed that delinquency rates for vehicle loans now surpass pre-pandemic levels, underscoring the financial strain on consumers, particularly as they grapple with high mortgage repayments in an environment of elevated interest rates.
BMO’s strategic focus has increasingly shifted toward the United States as it seeks new avenues for growth. Earlier this year, the bank invested $16.3 billion to acquire Bank of the West, a move that expanded its presence in 32 states across the western United States, including California. As a result, the United States now contributes more than two-thirds of BMO’s overall profits. This shift underscores the bank’s response to the challenges and saturation it faces in the Canadian market.
