Bank of Montreal (BMO) has announced plans to discontinue its retail auto finance business and shift its focus to other areas, resulting in an undisclosed number of job reductions, the third-largest bank in Canada stated on Saturday.
This strategic move, which applies to both Canada and the United States, comes in response to a surge in Bank of Montreal’s bad debt provisions within the retail trade sector, amounting to C$81 million ($60 million) for the quarter ending on July 31. This contrasts sharply with a recovery of C$9 million recorded a year ago and reflects the growing financial strain faced by consumers due to the rapid increase in borrowing costs.
Competitive Positioning is Strongest
In a statement provided to Reuters, Bank of Montreal explained its rationale, stating, “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.” The bank emphasized that it is actively collaborating with employees affected by the job cuts to offer support during this transition.
A letter sent by Paul Hunsley, the head of the auto finance business, to car dealers and reviewed by Reuters, indicated that the termination of the dealer agreement would take effect as of September 15. However, the bank committed to funding all contracts submitted and approved before that date.
BMO’s indirect retail auto finance business involves providing financing to the vehicle seller instead of directly to the buyer, who subsequently makes monthly payments to the lender. This sector saw a notable increase in gross loans, rising by approximately 34% in the third quarter compared to the previous year, amounting to C$17.36 billion. This segment accounted for 2.7% of the bank’s overall loans, according to BMO’s most recent financial report released in August.
10-basis-point rise in Commercial Impaired Losses
The Canadian economy has been grappling with the adverse effects of a rapid surge in interest rates, prompting banks to allocate additional funds to address the anticipated rise in non-performing loans. In August, Bank of Montreal reported an increase in provisions for credit losses to C$492 million, compared to C$136 million recorded a year earlier. The bank also noted a 10-basis-point rise in commercial impaired losses in the United States during the previous quarter, primarily driven by a significant provision in the retail trade sector.
To diversify and find new growth avenues, Bank of Montreal has been looking to the United States. Earlier this year, the bank invested $16.3 billion to acquire Bank of the West, expanding its presence in 32 states across the western United States, including California, as domestic markets in Canada remain saturated.
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