Bank of Montreal winds down its retail auto finance business, shifts focus to other areas

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Bank of Montreal BMO-T is exiting a segment of the auto loan business dominated by two rivals, a move at the country’s third-largest lender that reflects a drive to cut costs and limit exposure to one consumer debt sector.

On Friday, BMO told dealerships it is winding down its retail auto finance unit, which provides loans to car and truck buyers that are arranged in showrooms, by the dealers’ sales teams.

In an e-mail on Sunday, BMO spokesperson Jeff Roman said: “By winding down the indirect retail auto finance business, we have the ability to focus our resources on areas where we believe our competitive positioning is strongest.”

BMO will continue to offer auto loans to customers in Canada and the U.S. through a “wide range of personal banking options,” said Mr. Roman. The bank will also continue to lend directly to dealerships.

BMO had a total of $17.4-billion of auto loans outstanding at the end of the most recent quarter, which was 2.7 per cent of its total credit portfolio. Indirect auto loans make up a small proportion of the portfolio; the bank doesn’t disclose how much it lends in the business it is exiting. None of the Canadian banks reported significant increases in bad loans to car owners. However, all the banks are seeing loan losses rise.

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. Through the first three 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 of 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 – that rank as market leaders in indirect car loans, according to a survey published in May by J.D. Power, a consumer insight service.

In a report, J.D. Power’s senior director of automotive finance intelligence Patrick Roosenberg said rising interest rates and a lack of new vehicles have dealerships pushing lenders for more efficient services and better financing terms.

TD Bank had $19.2-billion in auto loans when it reported financial results last month, while Scotiabank’s auto financing totalled $16.5-billion.

BMO expects to lay off employees in its auto lending group as the business is wound down, although some staff members are expected to be moved to other arms of the bank. Mr. Roman said: “We are working closely with affected employees to provide support and to ensure they are treated with fairness and respect.”

BMO sent dealers a letter on Friday stating its loan agreements would be terminated effective Sept. 15, but that the bank would fund all contracts submitted and approved prior to the date, according to a report published on Sunday by Reuters.

In August, BMO chief executive officer Darryl White pledged to continue cutting costs, as the bank announced a year-over-year decline in profits, partly owing to charges taken to integrate California-based Bank of the West. In a press release, he said: “We’re accelerating efficiency initiatives and remain focused on dynamically positioning the bank for long-term growth and sustained profitability.”

BMO is attempting to cut expenses by up to $400-million annually, according to 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 approximately 100 jobs in its investment banking unit – four per cent of the global head count – with half the cuts coming in Canada.

Three years ago, the bank shut down its Houston-based U.S. energy business, which had operated for more than 40 years. That decision, like the move to exit retail auto loans, reflected a move to allocate capital and employees to other sectors of the energy market, including Canadian oil and gas companies.

With a report from Reuters