The Bank Threat

coast-capital-savingsCoast Capital is a credit union that makes banks look over their shoulder.

It’s one of the few financial institutions that “get it” (i.e. realize what customers want and deliver it without games).

As a result of management’s mortgage strategy in 2010, Coast Capital posted $6.2 billion in mortgage volume, a 10.7% jump from 2009. During the same period, membership surged by 29,000 to 454,000.

That is thanks in part to rates that are among the best in British Columbia, and flexible products like the popular You’re the Boss Mortgage.

For a deeper look at what makes Coast tick, we spoke with President/CEO Tracy Redies…

Tracy_Redies_Coast_CapitalRedies reeled off some impressive numbers…

  • Approximately 40% of Coast’s 2010 income growth stemmed from its mortgage business
  • Mortgage volumes ballooned by roughly half a billion dollars in 2010
  • The You’re the Boss mortgage, which launched on Nov. 9, 2010, hit $100 million in volume by Dec. 31
  • 40% of Coast customers have been choosing the You’re the Boss (YTB) mortgage.
  • Most YTB customers are selecting the Half & Half rate option (i.e., ½ five-year fixed + ½ five-year variable, with an exceptionally low combined rate of 2.85% as of March 22, 2011).

Redies says “very strong liquidity” is a key to Coast’s pricing. She says Coast enjoys this liquidity “because deposit growth is so high.” That’s due to banking initiatives like Coast’s free chequing, which has driven the majority of customer growth since its launch last year.

Deposits let Coast fund loans cheaper and get customers in the door so Coast can cross sell other products. The company is so well-stocked with cash that it hasn’t had to securitize any mortgages for the past few years. (Most non-deposit-taking lenders—who rely on securitization—are at a disadvantage from a funding cost standpoint.)

A second key to Coast’s mortgage success is customer-friendliness. Redies says “One of our hallmarks is our haggle-free rates. We’ve been consistent (in offering) the lowest rates and transparency.”

Coast made a “conscious shift” to low-rate pricing last year, and we (CMT) get the sense it’s here to stay.

A third pillar of Coast’s strategy, says Redies, is to have “killer products.” The YTB product is a case in point, with the biggest prepayment options (30%) of any closed mortgage in Canada (that we’re aware of anyway…although ComSavings, for example, also has 30% lump-sum pre-payment privileges).

Coast-CapitalWe get the sense that much of Coast’s competitiveness is due to its structure. It operates a cooperative model that’s very different from the major banks. Whereas the large banks may be more driven to pad margins, Coast seems more motivated to trim margins and give back to customers in the form of lower rates. Coast also donates 7% of pre-tax earnings to charity ($5 million last year).

In terms of distribution, Coast takes a balanced approach. Most mortgages are closed through its branches and mobile mortgage specialists, and 25-30% of volume is referred by brokers. Redies says Coast has “good mortgage broker relationships” and brokers have generally been a “win win.” Although, she hints that brokers can’t match bank employees when it comes to cross-selling.

COO Kathy McGarrigle says that long-term, the “trends are more towards mobile mortgage specialists and brokers,” with less relative production from branches. That’s because “sophisticated people have less time and want people to come to them.”

McGarrigle notes that Coast has seen “very good (deal) quality coming through brokers.” She says that brokers who sign on to market Coast products “must go through a rigorous process.”

In terms of growth, Coast has national expansion on its mind. But, first it must wait for official regulations in support of federal credit unions, which Redies expects later this year. That legislation was approved as part of bill C-9, she said.

“We’re working closely with the federal government and other credit unions” to solidify federal legislation for credit unions. Redies says the federal government has been “very supportive.”

National expansion would need to be ratified by 2/3 of Coast Capital’s members. Thereafter, it could take “a few years or more” to prepare a rollout outside of BC.

Redies sees different reasons for national expansion. For one, banking “margins are quite thin,” she says. “It’s what we call a scale business.” Size allows for better access to capital and a broader base to spread expenses. In addition, national expansion offers geographic diversification (helpful if Vancouver’s real estate market eventually underperforms).

Rob McLister, CMT

  1. Finally, a financial institution that actually “gets it”. I just hope that once they expend outside of B.C. they won’t meet the same fate as Citizens Bank, which I absolutely loved, or even worst be bought out by a major bank who have a tendency to ruin everything they touch.
    Turns out even though Citizens were so fantastic with their accounts and customer service, the business didn’t take off as well as it should have. I recall reading that when they finally decided to fold their banking operations, they had about 30,000 members in Canada.
    ING Direct, Coast Capital, the more competition in the marketplace against the major banks, the better off the consumer would be.

  2. I doubt any C.U.’s, their members or Boards would approve any mergers with Banks. C.U.’s detest Banks.
    Allowing C.U.’s to cross Provincial borders would increase what has been happening in recent years. Namely, the amalgamation of smaller C.U.’s with the large and well capitalized C.U.’s like Vancity, Coast Capital, Servus, Meridian etc.
    This is a win win for brokers and their clients IMO since C.U.’s are a formidable competitor for Banks. Especially in Western Canada where they have a longstanding presence.

  3. Trouble with their popularity is their service is suffering. It now takes them around 10 business days to get an approval back for real deals on a purchase. We have to go to other lenders because of this slow service.

  4. Reminds me of how bad HSBC was whenever they ran a rate special. We waited 3 weeks for an approval one time. Needless to say we lost the deal. There is no excuse for bad service when the end customer is paying thousands of dollars in interest to a lender.

  5. In any F.I. underwriting dept, you can’t just hire casual labour off the street to meet spikes in demand. In any business, if you have a popular product or favorable price, you are going to have service performance issues.

  6. I agree. Credit unions also think outside the box and come handy when a deal doesn’t meet the lending criteria of the big banks who have strict limits over what they can do. If we can get 2 or 3 “Coast Capital” institutions competing on a national level with the banks in addition to the virtual banks that are already operating in the marketplace such as ING and hopefully Ally, it would put a lot of pressure on the banks’ profit margins. With far less overhead than the major banks and lending that’s centered around client deposits, the physical branch, in my opinion, would become increasingly irrelevant to a new generation that’s becoming technologically savvy.

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