Just CA$2 million. That’s the size of the write-offs that BMO (TSX: BMO.TO) took in its transportation sector in the first quarter of 2022, which ended Jan. 31.
The number is so low that it almost defies description. BMO is a major lender to the trucking industry; the size of its book for the quarter was CA$13.26 billion (US$10.4 billion) and the number of clients it serves is believed to be measured in the tens of thousands. Its detailed earnings report each quarter is a strong indicator of the financial health of the trucking industry because the contributors to the data are so numerous.
Although the sector is referred to as the transportation group at BMO, it is overwhelmingly made up of financing to the trucking industry. BMO, headquartered in Montreal, acquired it from GE Capital in late 2015.
To put the size of the write-offs in perspective, in Canadian dollars, quarterly write-offs sequentially in 2020 were $25 million, $35 million, $30 million and $23 million. There was continued improvement in 2021, with sequential write-offs of $11 million and $10 million and two consecutive quarters of $6 million.
Even with the pandemic stripped out of the equation, the $2 million in transportation write-offs is stunning. In 2018, a year considered to be one of the strongest trucking markets in recent history, BMO recorded quarterly write-offs, sequentially, of $17 million, $17 million, $15 million and $14 million.
And now BMO has recorded write-offs that totaled just $2 million in a book of business that has grown to almost match the levels of the second quarter of 2020. That quarter is significant because the size of the book during those three months — $13.39 billion — was inflated by companies rushing to pull down their lines of credit as the pandemic began. The most recent book was just $13 million less than a period that was artificially boosted by the pandemic.
It should be noted that BMO’s customers are performing well enough financially that write-offs in other sectors actually for the first quarter did come in at zero. For example, oil and gas write-offs were zero; they were $35 million in the second quarter of 2020.
The growing size of the transportation book, which was $12.4 billion just a year ago, also suggests the possibility of additional trucking capacity even as equipment is difficult to procure from OEMs strained by various supply squeezes.
BMO’s report has numerous other data points that suggest a trucking sector that has not plateaued but instead continues to get financially stronger. For example, provisions for credit losses were negative $2 million in the first quarter. A negative number in a bank’s credit loss provisions is a sign that it was able to release reserves that had been held to protect the bank against expected credit losses.
In the first quarter of 2021, the provision for credit losses in BMO’s transportation group was positive $12 million. In the depths of the pandemic, BMO’s transportation group had provision for credit losses of $38 million.
Another sign of a strong trucking market in the data was BMO’s allowance for credit losses in the transportation group. That is a reserve created by the bank based on an estimate of the size of the loans it estimates will not be collectible, so it can be seen as a precursor to a write-off.
In the first quarter of 2022, BMO’s transportation group had allowances of $14 million. A quarter earlier, it was $17 million. A year ago it was $32 million and at its pandemic peak was $36 million.
Another positive data point is the size of the transportation group’s gross impaired loans, which have been determined to be unlikely to be collected but where allowances have not necessarily been established.
For the quarter, that category stood at $77 million. In comparison, it was $90 million in the prior quarter, $134 million 12 months earlier and recorded consecutive quarters of $189 million in the depths of the pandemic.
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