Bank of Montreal's BMO-T is leaving a division of the auto loan industry dominated by two rivals, a move at the country's third-largest lender that reflects a drive to reduce costs and limit exposure to one consumer debt sector.
On Friday, BMO told dealerships that it is winding down its retail auto finance unit, which offers loans to car and truck buyers arranged by dealership sales teams in showrooms.
BMO will continue to offer auto loans to Canadian and the U.S. customers through a wide range of personal banking options, Roman said. The bank will continue to lend directly to dealerships.
BMO had a net worth of $17.4 billion of auto loans at the end of the most recent quarter, or 2.7 percent of its total credit portfolio. Indirect auto loans are part of the portfolio, and the bank does not disclose how much it lends to the business it is exiting. No of the Canadian banks reported significant increases in bad loans to car owners. Banks are also seeing their loan losses increase, but they don't have to do so, they said in a statement.
BMO is winding down part of its auto loan business as the North American economy and the bank's clients face headwinds from inflation and higher interest rates. In the first quarters 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 withdrawing from a sector where it competes against both credit offered by automakers' financing arms and two rivals, Bank of Nova Scotia BNS-T and Toronto-Dominion Bank TD-T, which rank as market leaders in indirect car loans. Patrick Roosenberg, a senior director of automotive finance intelligence, said increasing interest rates and a lack of new vehicles have resulted in dealerships pushing lenders for more efficient services and better financing terms.
TD Bank had $19.2 billion in auto loans in April, while Scotiabank's auto financing totalled $16.5-billion.
BMO sent lenders a letter 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 US$670-million in annual synergies that will come from the Bank of the West acquisition.
Earlier this year, BMO eliminated about 100 jobs in its investment banking unit, four percent of the global headcount, with half of the cuts coming in Canada.
Three years ago the bank closed its Houston-based energy company, which had been operating for more than 40 years. The decision to leave retail auto loans, like the move to exit retail auto loans, reflected a move to allocate capital and workers to other sectors of the energy industry, including Canadian oil and gas companies.