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Another big Canadian bank pursues cross-border auto loan securitization

Bank of Montreal stands to become the second Canadian bank in the last several years to issue U.S. dollar-denominated securities backed by auto loans originated in its home country.

The bank's Canadian Pacer Auto Receivables Trust 2017-1 plans to issue $500 million in class A notes on or about Oct. 11, according to an S&P Global Ratings presale report. The deal would take place one week after the latest U.S.-dollar-denominated securitization sponsored by Bank of Nova Scotia closed.

As outlined by S&P Global Ratings, the BMO deal contains fixed-rate class A-1 notes preliminarily valued at $110 million, some combination of fixed- and floating-rate class A-2 notes worth $202 million in the aggregate, and $136 million and $52 million of fixed-rate class A-3 and A-4 notes, respectively. BMO plans to initially retain the C$19.3 million in class B notes and C$16.1 million of class C notes.

The transaction is backed by a collateral pool with an initial aggregate balance of C$654.5 million. The loans have a weighted-average borrower credit score of 752, a weighted-average original term of 64 months and a weighted-average remaining term of 42 months, implying seasoning of 22 months. Just over 66% of the pool is comprised of loans on used vehicles.

Scotiabank's Securitized Term Auto Receivables Trust 2017-2 is structured in a similar manner, with U.S. dollar-denominated class A notes and Canadian dollar-denominated class B and C notes. It follows two previous transactions of the kind by the bank in October 2016 and February 2017. S&P Global Ratings sized the latest deal at $750 million when assigning ratings Oct. 4, an increase from $500 million as initially proposed.

That transaction's C$698 million collateral pool, as originally presented, contained loans with a weighted-average borrower credit score of 780, a weighted-average original term of 64 months and a weighted-average remaining term of 45 months, according to S&P Global Ratings. Loans on new vehicles account for 71.1% of the Securitized Term Auto Receivables Trust 2017-2 pool.

Neither pool contains loans with original terms of more than 72 months, despite the relative popularity of longer-term products in Canada. A July 2017 Automotive News article cited J.D. Power data that showed an average auto loan term in Canada of 75 months. Scotiabank, for example, pitches auto loans with terms of up to 96 months on its website. Experian Automotive put the average original term of new vehicle loans in the U.S. at 68.8 months in the second quarter.

S&P Global Ratings reported in June that issuers had generally limited the amount of extended term loans that they have included in auto ABS pools. But the rating agency noted that loans with original terms of between 72 and 84 months "are more pronounced in Canada" than in the U.S.

The size of BMO's U.S. indirect auto book has declined sharply over the course of the year. Among the 26 U.S. banks and thrifts that held $1 billion or more in consolidated auto loans at the top-tier level as of June 30, 2016, BMO's year-over-year rate of decline of nearly 45.1% was by far the highest. The bank reported $3.09 billion of consolidated auto loans as of June 30, according to data filed with U.S. banking regulators, down from $5.62 billion on the same date a year earlier. The second-fastest rate of decline among the 26 institutions was less than 14%. The holdings of market leader Ally Financial Inc. increased by 4.8% on a year-over-year basis in the second quarter.

BMO sold a portion of its U.S indirect auto book during the first quarter of fiscal year 2017, which ended Jan. 31. On a calendar-year basis, bank regulatory data show that the sharpest decline in BMO's auto loans occurred during the fourth quarter of 2016.

Bank executives described the auto loans as representative of a lower-yielding part of their overall portfolio.

"We wanted to reduce it for that reason," said BMO CFO Thomas Flynn during a February conference call. "We do think being in the business in our footprint makes sense, and so we'd expect the portfolio to continue to be in the zone that it's in now — maybe a little bit of growth but not significant — and we're not looking at completing another sale."

In Canada, BMO reported average net consumer installment and other personal loans, which includes but is not limited to auto finance, of C$44.95 billion in the third quarter of its fiscal year, up from C$43.95 billion in the year-earlier period.