BMO says its mortgage balances grew 0.5% last quarter. It was the first such increase since it exited the broker market in 2007.
“We are successfully replacing the runoff of our broker-channel loans with our branch originated (mortgages),” says BMO, whose quarterly market share decreased once again.
BMO now owns an estimated 9.3% of the mortgage market, a number that’s been falling for several quarters.
BMO is hungrily trying to recoup that share, partly by slashing advertised rates. Two examples are its 3.79% low-frills 5-year fixed and its 4.95% 10-year fixed. They’re the lowest advertised rates by any national lender for these terms. (Of course, brokers and branches can and will do better for well-qualified applicants.)
This, of course, begs the question: Will BMO’s overt rate competition pay off?
ING Direct is widely credited with starting the deep-discount mortgage rate model in the late 1990s. Since then, TD, RBC, and BMO have each taken a stab at the “no haggle” below-market pricing model. The result was that their margins collapsed, driving each of them back to the more concealed and profitable “selective-discounting” strategy.*
It remains to be seen if BMO sticks it out this time, and if any other Big 6 banks follow its lead. CIBC has come the closest with its cash-back switch program. But, while the switch program had fantastic effective rates, CIBC’s nominal (advertised) rates haven’t had the sizzle of BMO’s.
If competitors do join BMO in openly advertising deep-discount rates, margins will fall all around and BMO may be no better off.
So far, however, BMO says it’s “pleased with the success” of its new rate promotions. “Our goal is to grow market share and we remain focused on improving the business through investment in the sales force and achieving productivity gains.”
_______________________________________________________
Partial Sources: BMO Q3 Report, BMO Q3 Presentation
* Selective discounting is where a bank provides its best rates only to those who negotiate for them.
Last modified: April 26, 2017
The other banks won’t follow because it doesn’t serve their interests. If all the major banks in Canada suddenly adopt marketing purely discounted rates, the margins of the banking sector as a whole would drop significantly. Shareholders won’t allow that. While BMO can offer clients 3.79% for a low-frills 5-year fixed mortgage, brokers can offer the same rate if not lower without any of the conditions that BMO attach. BMO’s strategy is purely to drive up its own market share as oppose to setting an industry-wide standard, which why the remaining banks aren’t in a rush to provide clients with the same low rates.
Interesting, cause RBC in my area has offered two of their clients 3.64% with regular prepayment privileges
Royal is offering 3.60% 5 yr term to an existing client on a $155,000 mobbile home mortgage. Sign of the times when business slows up.
That’s exactly as Rob said -“selective-discounting” strategy.*
I’m fighting with TD right now and they went down from 3.99 to 3.60% already. I wish I could get a retainer – sick and tired of those games.
Whoopy Doo. A whole 0.5% in mortgage growth! Only at BMO would the suits be patting themselves on the back on such anaemic achievements!
Their stock was down 6% on Tuesday based on their latest quarterly results. Most businesses would be listening to their shareholders when such a stock correction occurs instead of serving up Gob service.
Hi Lior,
Thanks for the note. BMO definitely doesn’t want to set a standard. There’s too much benefit to being the only bank advertising leading rates.
You can bet your last dollar, however, that the other banks will react if BMO keeps this up. I just don’t know how, yet.
There’s certainly academic research to suggest that following BMO’s lead would harm margins, but at the same time, losing a chunk of market share is not a peachy alternative.
Cheers,
Rob