CIBC has made a fundamental change in its mortgage strategy.
Canada’s #5 bank says it will no longer focus as heavily on mortgage market share. It will instead aim for higher profit margins and “deeper client relationships.”
When we heard that on CIBC’s earnings call Thursday, we immediately wondered one thing: How is this good for consumers?
CIBC’s answer would probably be that better relationships with your banker yield financial benefits (e.g. one-source access to wide-ranging financial advice, convenience, multi-product discounts, etc.). There is some truth to that in theory, especially for those who value convenience over choosing the best individual providers of financial products.
On the other hand, CIBC was clear today that it wants to focus on profitable customers and earn higher net interest margins (NIM). We therefore suspect that CIBC mortgage customers will be pitched on more products/services and/or see less competitive mortgage discounting.
On the topic of rates, CIBC states that there has been “more aggressive (mortgage) pricing” in the broker channel. David Williamson, Retail Banking Head, said,“Rather than us just following that trend, what we’ve been doing is saying that some of those prices, the variable in particular, don’t make sense to us…So we've not priced with the market…We’re not just matching prices in that (broker) channel anymore.”
More surprising was this statement by President and CEO Gerald McCaughey. He said, “We are no longer targeting a number two position in mortgages, we are targeting a number four position in mortgages.”
That’s a gutsy change because it risks losing rate-sensitive clients who could potentially buy a lot of other stuff from CIBC (like bank accounts, GICs, investments, loans, credit lines, etc.).
The part that brokers should be most interested in is this: CIBC says higher earnings and “stronger client relationships” with branch customers are causing it to “focus on our branch channels more so than our broker channels.” Gerald McCaughey characterized mortgages like those originated by brokers to be of “diminishing value” to the bank.
Very few people anticipated that CIBC would take this stance so suddenly. Something must have tipped because tighter pricing in the broker channel is nothing new. As Darko Mihelic of Cormark Securities said on the conference call, “It's long been known that the brokerage channel in mortgages generally comes with lower net interest margins.”
For years, CIBC has generally held the title of biggest broker supporter (based on market share anyway). The Wall Street Journal reported today that up to 41% of CIBC’s $143-145 billion of mortgages have come from brokers.
In the last six months, however, CIBC has dramatically altered its view of broker business. You don’t have to be a Mensa candidate to realize that CIBC has consciously stepped back from our channel. It’s doing things that are totally contrary to winning brokers over, including pricing “substantively above the markets” in some cases, as it admitted on its conference call. It is also aggressively competing with its loyal brokers at renewal.
The results are predictable. Brokers are not about to sell poorly priced mortgages to their clients, so they’ve pulled business from FirstLine (CIBC’s broker division). That has caused FirstLine’s broker market ranking to plummet from 1st place six months ago to 4th last quarter.
As we’ve said before, we’re saddened to see this happen because FirstLine has excellent products and it’s run by good people who care about brokers. Unfortunately, CIBC’s upper management is tying FirstLine’s hands, based on what we’re seeing and hearing.
The fact of the matter is this: CIBC makes more money on branch-driven mortgages than broker-originated ones (brokers offer more competitive rates and generally don’t sell clients other bank products). So on the surface, it’s understandable that CIBC would favour branch business.
But we’re left wondering why CIBC can’t foster better relationships with broker-clients and sell more to them. CIBC could:
Implement branch signings like Scotia does
Replace the FirstLine name with CIBC to more effectively imprint the bank’s brand on people (Many consumers have no clue that FirstLine is part of CIBC.)
Give brokers other products to refer to clients at closing, like unsecured lines of credit, credit cards, high-interest savings, etc.
On this topic, CIBC does say that it is “taking certain steps right now to test how” its relationship with broker-originated clients “could develop, and whether it could be made to be a deeper relationship.”
One bone we’d pick is with a statement made by McCaughey. He suggests that working with a banker is “more of a fulfilling relationship from a client perspective.”
“The client satisfaction stats,” he says, “show a correlation between depth of relationship and contentment with [the bank relationship].”
He forgets that good mortgage planners have strong bonds with their clients. Clients come to brokers because they want lender choice, convenience, great rates, and specialized mortgage guidance. People do business with brokers because they don’t get these things from a bank branch.
Research firm Maritz says that 90% of consumers are satisfied with their broker. That sounds like a lot of fulfilling relationships to us.