What latest BMO numbers tell us about trucking health: Weakening but not rapidly

Key lender’s quarterly report shows deteriorating conditions coming off low base

Transportation write-offs and allowances at Canada’s BMO bank (NYSE; BMO), a significant lender to the trucking industry, continued to rise in the company’s first quarter. But the deterioration was nowhere near on a level that could be considered severe.

BMO’s transportation group had a book of business in the first quarter, which ended Jan. 31, of about CA$13.7 billion. With about 90% of the transportation group’s book of business tied to trucking loans, its financial performance can be seen as a strong indicator of the health of smaller fleets, as a large portion of its business is believed to be centered on that segment. (The lowest estimate of the size of the transportation group’s number of clients is 10,000, which would mean the highest average loan per client would be CA$1.37 million, or just over $1 million in U.S. currency at current conversion rates).

Even if the figures for write-downs and allowances haven’t risen significantly, it does appear the tougher times for the industry have impacted BMO’s book of business. Its size of $13.8 billion in the first quarter was about $900 million less than where it was in Q4 2022. That represents the biggest one-quarter drop in the bank’s transportation sector in several years. 

All the deterioration in various measurements in the transportation group is coming off an extremely low base, as the profitability of the industry last year led to extremely strong credit numbers in various categories.

The most significant deterioration in Q1 came in the category of gross impaired loans and acceptances. Investopedia defines impaired credit instruments, such as loans or acceptances, as “either a temporary situation that can be reversed or an early sign that the borrower could face potential major financial distress down the road. In either case, impaired credit is not a good omen.”

Impaired loans and allowances for BMO’s transportation group rose to CA$82 million from $73 million in Q4 of fiscal 2022. That figure is the highest since the $90 million recorded in Q4 of fiscal 2021. But for perspective, even at that higher number, it’s well below the $142 million recorded in Q2 2021, which represented a recent high.

Allowances for loans, which are actual reserves set aside in anticipation of possible write-downs, did not rise despite the increase in impaired loans. It was $10 million in Q1 2023, unchanged from Q4 2022. Its most recent low was $8 million in Q3. 

But that category also continues to sit well below levels of just a few years ago. Allowances in the BMO transportation group stood at $32 million in 2021’s first quarter and $25 million in the second quarter of that year.

There are two ways of looking at the bank’s write-offs of transportation loans, which have sequentially risen by $1 million for the last three quarters from $1 million to $2 million to $3 million to $4 million. 

One way is to note that at $4 million it’s still well below the first two quarters of 2021, which came in at $11 million and $10 million, respectively, or the $35 million from 2020’s second quarter right in the opening months of the pandemic.

The other is that since the second quarter of last year, write-offs — the most draconian step a bank can take in dealing with bad loans — have quadrupled, even though due to a low base.