By Nivedita Balu

TORONTO (Reuters) -Bank of Montreal (BMO) is winding down its retail auto finance business and shifting focus to other areas in a move that will result in an unspecified number of job losses, Canada's third largest bank said on Saturday.

The move, applicable in Canada and the United States, comes after BMO's bad debt provisions in retail trade surged to C$81 million ($60 million) in the quarter ended July 31 compared with a recovery of C$9 million a year ago, in a sign of growing stress consumers face from a rapid rise in borrowing costs.

"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," BMO said in a statement to Reuters.

The bank is working closely with employees who will be affected by job cuts to provide support, it said.

In a letter sent to car dealers and seen by Reuters, the head of the business Paul Hunsley said the termination of the dealer agreement would be effective as of Sept. 15, but the bank would fund all contracts submitted and approved prior to the date.

Under the indirect retail auto finance business, the bank provides financing to the vehicle seller instead of directly to the buyer, who makes monthly payments to the lender.

Gross loans in its retail auto business rose about 34% in the third quarter from a year earlier to C$17.36 billion, and accounted for 2.7% of the bank's overall loans, according to BMO's latest financial report released in August.

A rapid rise in interest rates is slowing the Canadian economy, and banks are setting aside more funds to deal with an expected pick up in bad loans. Last month BMO said provision for credit losses rose to C$492 million, compared with C$136 million a year earlier.

It said commercial impaired losses in the United States were up 10 basis points from the prior quarter, driven by a large provision in the retail trade sector.

BMO has been turning to the United States for new avenues of growth as markets remain saturated in Canada, spending $16.3 billion to acquire Bank of the West earlier this year and expand in 32 states in the western United States including California.

The United States now accounts for more than two-thirds of BMO's overall profits.