BMO-T is exiting a sector of the auto loan industry dominated by two rivals, a move at the third-largest lender that reflects a drive to reduce costs and limit exposure to one consumer debt sector.
On Friday, BMO said it is winding down its retail auto finance division, which offers loans to car and truck buyers in showrooms by the dealer's sales teams.
BMO will continue to offer auto loan options to customers in Canada and the U.S. through a wide variety of personal banking options, Roman said. The bank will also continue to lend directly to dealerships.
BMO had a net balance of $17.4 billion of auto loans owing at the end of last quarter, which was 2.7 per cent of its total credit portfolio. The bank doesn't disclose how much it lends to the business it is exiting, making direct auto loans a small portion of the portfolio. No of the Canadian banks reported any significant increase in bad loans to car owners. All banks are experiencing loan losses rising, but the banks are not seeing a decrease in loan losses.
The North American economy and the bank's clients are under pressure as BMO is winding down part of its auto loan business due to inflation and higher interest rates. In the first quarter of fiscal 2023, BMO set aside $1.7 billion for bad loans, including $256-million for consumer debt defaults, compared to $313-million in total loan losses in 2022 and $151-million for consumer loan losses.
In auto lending, BMO is pulling out of a sector where it competes against both credit offered by automakers' financing arms and two rivals - the Bank of Nova Scotia BNS-T and Toronto-Dominion Bank TD-T - that rank as market leaders in indirect car loans. Patrick Roosenberg, the senior director of automotive finance intelligence at Power, said rising interest rates and a lack of new vehicles have dealerships pushing lenders for more efficient services and better financing terms.
TD Bank had $19.2 billion in auto loans last month, while Scotiabank's auto financing totalled $16.5-billion.
BMO sent a letter to investors on Friday stating that its loan agreements would be terminated effective Sept. 15, but that the bank would fund all contracts submitted and approved prior to the date.
BMO is attempting to reduce expenses by up to $400 million annually, according to a recent report by RBC Capital Markets analyst Darko Mihelic, on top of more than $670-million in annual synergies that will come from the Bank of the West acquisition.
Earlier this year, BMO cut approximately 100 jobs in its investment banking unit - four percent of the global headcount - with half the cuts coming in Canada.
Three years ago, the bank closed its Houston-based energy business, which had been operating for more than 40 years. The decision to exit retail auto loans reflected a shift to allocate resources and staff to other sectors of the energy sector, such as Canadian oil and gas companies.