The transportation group at BMO, the former Bank of Montreal, is generally viewed as the largest lender to the North American trucking industry. And one thing it isn’t doing is changing its approach to lending just because the trucking industry is in a bull market for the ages.
Lending standards have not changed, according to C. Daniel Clark, the head of transportation finance at BMO. Clark, in an interview with FreightWaves at the Truckload Carriers Association annual meeting in Las Vegas, said the business can’t abandon its earlier practices just because things are strong.
“You can’t play the cycles going forward and try to predict when it is going to change,” Clark said. He noted that many of the company’s loans go out five to seven years for tractors, and can go out 10 years for trailers. “You need to look at the business and how the company is performing through the cycle,” he said.
BMO became one of the leading companies in trucking finance when it purchased the transportation business of GE Capital in December 2015. Clark was there for that transaction; he has been there for multiple sales, ticking off five corporate owners he has worked for in his 41 years of lending to the trucking business, with GE and BMO being the final two. (Although the corporate parent is in Toronto, the transportation finance division is in Dallas.)
The group’s quarterly data, as part of the bank’s earnings release, breaks out a significant amount of information on the performance of all its segments, including transportation. And what it showed in the latest report is an industry firing on all cylinders, with low rates of write-offs and impaired loans.
Unlike the earnings reports of individual trucking companies, BMO data’s as an industry benchmark has the advantage of drawing on the full scope of the company’s transportation client base. Clark declined to give a number on the size of its clientele but confirmed that it would be “five figures.” Customers range from independent owner-operators to large fleets.
The transportation group does lend to other businesses, but Clark said its performance overwhelmingly represents trucking.
With the business so strong now — write-offs at BMO’s transportation group in the third quarter ending July 31 were just about CA$6 million ($4.75 million at current exchange rates), easily the lowest since the bank acquired the GE group — Clark said new lenders have been coming into the field.
“We’re constantly seeing new entrants coming in, and a lot of people got out in 2019 when they saw the stress,” Clark said, referring to the relatively weak market that year. One of the selling points that BMO invokes is that “we are there in good times and bad, and I think that’s important for a customer who doesn’t want the lender to liquidate the loan when things get tough.”
“There’s always going to be hot money coming in whenever you get a new cycle, but we continually go back and stick to what we do,” Clark said. That hot money, once there is a “hiccup” in the economy, will “just cut its losses and run.”
BMO’s position in the industry is driven home when a conference attendee walks into the exhibition hall for the TCA’s annual meeting. In both 2020 — right before the pandemic — and in this year’s meeting, the first sight they see is the large BMO mini-lounge at the front of the room.
When the pandemic hit, Clark said the rise in the company’s book of business for the transportation sector in the second quarter of 2020 reflected the fact that a lot of clients took the advice widely circulating in corporate America at the time: If you have a revolving credit loan, pull down everything on it and guarantee your liquidity. “Oh, yes, we saw that cash was king and most people got very liquid,” Clark said.
Gross loans and acceptances for the transportation sector surged to almost CA$13.4 billion in the second quarter of 2020, up from CA$12.2 billion in the prior quarter. It sank back to the CA$12.2 billion mark in the second quarter of this year but had climbed to CA$12.6 billion in the third quarter of 2021.
“It dropped and leveled off, but now we expect it to be rising,” Clark said.
BMO’s transportation group made other concessions to troubled borrowers at the start of the pandemic, Clark said. Many were granted a 90-day reprieve on payments, which helped bridge them through the weak market of 2020’s second quarter. When the freight market started to rise from the ashes by the third quarter, that 90-day reprieve “gave them a quick jump on the upside,” Clark said.
With the rising price of tractors and trailers — new and used — the danger in financing is that credit lines previously agreed upon can become inadequate. It isn’t just in trucking; any borrower can suddenly find itself in a position where previously agreed upon credit lines are nowhere near adequate to deal with rising prices.
Clark said most new equipment prices are up 10% to 15% from two years ago. Adjustments have been made for most customers, he said, “so they can continue to buy what they need.”
Given how strong the trucking market is, the low level of write-offs and credit allowances taken by the bank does lead to the question: Who is doing so poorly in this roaring era that they are falling behind in their payments? In addition to the approximately CA$6 million in write-offs in the third quarter, the size of the allowances taken by the bank for credit losses was CA$21 million, still the smallest for several years at BMO.
Clark said the bank’s book of business does include some businesses that remain impacted by the pandemic. For example, he cited trucking companies that service cruise lines that were shut for more than a year and are only now getting back on their feet. “They are generally specialized areas that were able to get through downturns in the past,” Clark said of the borrowers still struggling. “We never heard from them in the past, but now they were getting hit.”