Bank of Montreal (BMO) has announced that it will be winding down its retail auto finance business in Canada and the United States. This decision comes as a result of a significant increase in bad debt provisions in the retail trade sector, indicating the growing financial stress that consumers are facing due to rising borrowing costs.
By closing down the indirect retail auto finance business, BMO aims to redirect its resources towards areas where it believes it has a competitive advantage. However, this move will also result in job losses, although the specific number of job cuts has not been specified.
Paul Hunsley, the head of the business, sent a letter to car dealers informing them of the termination of the dealer agreement, effective from September 15th. However, BMO has assured that all contracts submitted and approved prior to this date will be fully funded.
The bank’s retail auto business has experienced significant growth, with gross loans rising by approximately 34% in the third quarter compared to the previous year. This segment accounted for 2.7% of the bank’s overall loans, according to BMO’s latest financial report.
The decision to wind down the retail auto finance business comes at a time when the Canadian economy is being affected by rising interest rates, leading to banks setting aside additional funds to handle an expected increase in bad loans. In August, BMO reported a provision for credit losses of C$492 million, compared to C$136 million in the previous year.
BMO has been expanding its operations in the United States to seek new avenues of growth, as the Canadian market remains saturated. In its efforts to diversify, the bank acquired Bank of the West earlier this year for $16.3 billion, allowing it to expand its presence in 32 states, including California.
The closure of the retail auto finance business reflects BMO’s strategic shift towards other areas of focus and the bank’s commitment to managing risk and adapting to changing market conditions.