Trucking, energy loans posing problems for BMO Financial

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BMO Harris Bank is feeling the sting of a slowdown in freight traffic and falling natural gas prices in the U.S.

Its parent company, Toronto-based BMO Financial Group, said Tuesday that several of BMO Harris’s customers in the trucking industry are struggling to repay their loans as freight traffic has declined due in part to the Trump administration’s ongoing trade war with China.

Some clients in the natural gas sector have also fallen behind on loan payments as a result of “very low commodity prices,” Patrick Paul Cronin, BMO Financial’s chief risk officer, said on a call discussing the company’s first-quarter results. (Canadian banks’ fiscal-year first quarter ended Jan. 31.)

BMO Harris set aside $113 million for loan losses in the quarter, up from $54 million three months earlier and just $5 million in the same quarter last year. As a result of the higher provision, profits at the Chicago-based unit fell by nearly 20% from the same period last year, to $267 million.

For BMO Financial, Canada’s fourth-largest bank with $811.2 billion of assets, first-quarter profits climbed 5% year over year, to $1.19 billion.

On a call with analysts after the report, Cronin cited “continued weak conditions” in the trucking industry and “one large loss” for the bulk of the provision increase.

The U.S. trucking industry faced slowing freight demand last year partly as a result of the Trump administration’s trade war with China. Roughly 640 trucking companies fell into bankruptcy in the first half of 2019, according to Broughton Capital. The global spread of the coronavirus has added to the industry’s problems as supply chains have started closing down, according to ACT Research, which tracks the trucking market.

Meanwhile, an oversupply of natural gas, resulting from increased U.S. production from frackers and falling demand abroad, has kept prices so low that producers have resorted to burning excess gas in the oil fields. Futures on natural gas dropped below $2 per million British thermal units at the end of January, the lowest level in almost four years.

BMO had about $4.1 billion in exposure to U.S. oil and gas producers at the end of January, down 4% from the previous three months. About 81% of these loans are considered non-investment grade, according to the bank’s earnings report.

On the earnings call, Cronin said he expects loan losses tied to the trucking industry to begin to normalize in the second quarter.

“This quarter in our view is an anomaly,” Cronin said.

Future provisions, he added, would likely be driven by continued low natural gas prices in the U.S.

“There is potential for more” provisions, Cronin said. “Things are fairly stressed there.”

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