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Bank of Montreal Shifts Focus as it Winds Down Auto Finance Business Amid Rising Debt Provisions

Bank of Montreal (BMO) has made a strategic decision to wind down its indirect retail auto finance business, a move that will lead to job losses and a shift in focus to other areas, according to the bank’s recent announcement. This change impacts operations in both Canada and the United States and follows BMO’s increased bad debt provisions, reflecting the growing financial stress consumers face due to rising borrowing costs.

The bank’s bad debt provisions for the quarter ending on July 31 surged to C$492 million, a notable increase from the C$136 million recorded the previous year. Under its indirect retail auto finance business, BMO collaborates with car dealerships to arrange financing for buyers, who subsequently make monthly payments to the lender.

BMO explained its decision, 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 is committed to supporting employees affected by these job cuts during this transition period.

In a letter addressed to car dealers, Paul Hunsley, the head of the business, conveyed that the termination of dealer agreements would be effective as of September 15. However, the bank would honor all contracts submitted and approved before this date.

As of the end of July, BMO’s consumer installment and other personal loan portfolio stood at C$104 billion, which includes C$54.7 billion in home equity loans. The remaining loans in this portfolio primarily consist of auto loans, as well as loans for boats, recreational vehicles, and motorcycles, as noted by Edward Jones analyst James Shanahan.

Data from the Bank of Canada reveals that delinquency rates for vehicle loans have now surpassed pre-pandemic levels, underscoring the financial strain on consumers as they grapple with both mortgage repayments in a high-interest rate environment and vehicle loan obligations.

The rapid increase in interest rates is having a slowing effect on the Canadian economy, prompting banks to allocate more funds for anticipated bad loans. In response to the saturated Canadian market, BMO has been actively seeking new growth opportunities in the United States. The bank recently invested $16.3 billion to acquire Bank of the West, thereby expanding its presence in 32 states, particularly in the western United States, including California.

With the United States now accounting for more than one-third of BMO’s overall profits, this strategic shift reflects the bank’s ongoing efforts to diversify its operations and navigate changing economic conditions.

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