The numbers coming out of the transportation segment at Canada’s BMO bank show an industry whose financial position is as strong as it has been in years.
BMO (NYSE: BMO), the former Bank of Montreal, purchased the transportation operations of GE Capital’s transportation finance business in 2015. And while there are plenty of large, publicly traded trucking companies whose quarterly reports provide a look at the financial performance of individual firms, most of them fairly large, BMO’s transportation segment lends to companies big and small, so its numbers give a broader overview of the financial strength of the sector. Though there are nontrucking companies in the figure, BMO has said trucking customers make up the vast majority of the transportation sector’s clients.
Consider this one number: In the first nine months of the 2020 fiscal year, ended July 31, 2020, BMO took transportation division write-offs of CA$90 million (approximately $71.2 million at current exchange rates). This year, in the first nine months of fiscal 2021, transportation reported write-offs of just CA$27 million.
The third quarter was particularly strong. BMO reported transportation write-offs in the quarter of just CA$6 million, down from CA$10 million in 2021’s second quarter and CA$11 million in the first quarter. A year ago, in 2020’s third quarter, the write-offs totaled CA$30 million. Going back to the BMO takeover of the GE Capital business, the only lower write-off figure in the sector was the very first quarter of BMO ownership, the first quarter of 2016, when the write-offs were just CA$2 million.
In other words, based on BMO’s report, the trucking industry’s just-completed quarter might have been the strongest in recent years, despite the rising cost of diesel and labor.
To show just how healthy the year has been, BMO’s annual full-year write-off total in the transportation sector between fiscal 2017 and fiscal 2020 ranged from CA$63 million in 2018 to CA$113 million last year, fiscal 2020. Sitting at CA$27 million after three quarters, for this year to match the lowest number in that range — the CA$63 million from 2018 — the sector’s write-offs in the fourth quarter would need to be CA$36 million. In the years of BMO ownership, quarterly write-offs have only topped CA$30 million once, in the third quarter of 2017.
The size of the book of business in the transportation sector also moved up significantly in the third quarter. That book had been trending down, but it was coming off a second-quarter 2020 inflated figure of $13.3 billion, a huge jump from earlier levels. That increase was largely believed to be because many companies in all sectors of the economy took their financial advisers’ recommendation to pull down the full amount on their revolving credit loans to help ensure liquidity in the first days of the pandemic.
BMO’s book of business in transportation dropped to $12.2 billion in the second quarter. But it rose to $12.6 billion in this year’s third quarter.
Write-offs are not the only indication of industry health in the report. As a bank’s customer fails to hit certain metrics, the bank may take allowances for possible credit losses on impaired loans. In the third quarter of 2021, BMO’s transportation sector took allowances of CA$21 million. That is the lowest figure since the CA$18 million recorded in the second quarter of 2018.
Gross impaired loans of CA$105 million for the third quarter were the lowest since the fourth quarter of 2016. That was significantly less than the CA$142 million in the second quarter.
However, the data on the size of the gross impaired loans at BMO in the transportation sector shows it soaring after the first year of ownership by BMO after the GE Capital sale, suggesting that BMO may have brought a more aggressive definition of “impaired” to the business than GE Capital had. If that first year of BMO ownership is excluded, the CA$105 million in gross impaired loans for the third quarter was the lowest since the sale by GE Capital.