CIBC Revises its Mortgage Gameplan

CIBC-BankCIBC 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.

interest-rate-newsOn 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.

Falling-Market-ShareThe 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.

brokersOn 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.


Rob McLister, CMT

  1. Thanks to Rob for very sound analysis. CIBC failed to integrate the Firstline division in order to capitaize on cross-selling clients and while that failure has been swept under the rug in these comments by executives at the bank they are a fact.
    CIBC’s position is they want profitable mortgages and shareholders should have no complaint about that.
    It also is clever that CIBC management is positioning themselves for lower mortgage market share because based on the fact their road rep sales force is under performing RBC and TD and their branches have grown less successful marketing mortgages they will absolutely meet their goal of less mortgage origination.
    I think it is interesting to note the 3 domestic banks that have been the most successful in growing their domestic franchise in the last 5 years are RBC, TD and Scotia who all push the expansion of their residential mortgage portfolio.
    We shall see if CIBC management have chosen the right path or perhaps sometime shortly after this CEO retires we will hear about a “magor re-focus on Canadian mortgage share”

  2. Hi Welcome to CIBC…i want to be your friend, because if we are friends, my CEO says we can charge you more and make higher margins based on our deepened relationship. Sign here please, and press hard there’s 5 copies! Insert smiley face here.

  3. Well, for those wondering why FLM hasn’t had more competitive pricing, there’s your answer.
    I commend CIBC for focusing on advisory value instead of pricing, I really do, and I think it’s a positive development for brokers as well.
    The deep rate discounting by the major banks is just not sustainable. They have too much overhead, too many costs. I guess they hoped that by literally taking losses on mortgages they could compensate by cross-selling or up-selling somewhere else. And consumers shouldn’t kid themselves by thinking that the deep discounts on mortgages was a freebie. There’s no such thing as a free lunch with the big banks. They increased chequing fees, banking fees, and amounts required to waive fees, lowered savings rates, and jacked up LOC rates to compensate for margin losses.
    It can be argued that the strategy of deeply discounted pricing on mortgages actually backfired on them because it create da very price-centered environment where the value was solely the rate as far as mortgages are concerned.
    I couldn’t agree more on the last two paragraphs Rob mentioned. I guess this banker vs. broker nonsense is taking place even the highest levels.

  4. I’m with firstline…I was with them when they were known as Rennaissance Finance and back then they were aggressive as heck with terrific rates….
    does this announcement mean guys like me shld start looking around???
    ….quite frankly not surprised by this accouncement from cibc….u cld see the change in firstline once they got taken over by cibc….

  5. Thanks Ron.
    Word is, FirstLine is looking at ways to enhance the profitability of the broker relationship. If they can do that, then I sense they’ll be more consistently competitive in the channel again.
    For now, it looks like they’re heading down a track to downsize their number of brokers
    While they sort things out, hopefully they can at least come to market with some good specials. They don’t have to be the best in every term, but at least they can offer niche deals when treasury permits. Their short-lived but sweet 2.99% 4-year fixed offer was a good example.
    Cheers,
    Rob

  6. Some good points. Thanks Lior.
    It’s quite difficult for some brokers and bank reps to sell value instead of rate. By “value,” I mean useful advice that saves people actual money, not just salestalk about the benefits of paying more for bigger prepayment privileges you might never use.
    As a result, we see a growing number of “order takers” in the mortgage business. These brokers and bank reps have given up on selling value, and the reality is, clients are slowly but increasingly calling them first due to perceived savings. (I’m including bank reps in this mix as well, like those National Bank MDMs advertising on RedFlagDeals a while back.)
    Frankly, this trend has compelled us to re-evaluate our own model. We’re now looking at how we can better compete given what we absolutely know is going to happen to broker comp going forward.

  7. It does not surprise me…as a former employee with CIBC I have often wondered how this bank survives. Management seems totally devoid of any understanding of how to appeal to the general public. I could go on and on but suffice it to say I am very glad I sold my CIBC shares.

  8. BMO, HSBC left the broker channel. TD and CIBC are arming to leave in the next year or two. Scotia unclear, but birds of a feather…. I hate to use the term but I suspect it will essentially be all out warfare between the Big 5 and the broker channel. They all already, or soon will have, mobile sales forces in the 1000’s. if we look back 10 years they hardly existed. if we analyze history, specifically Sun Tzu’s the Art of War, one can easily draw conclusion of preparedness leading to strategic decisions. My point is, I think our channel in unprepared to meet this challenge as we continue to send large blocks of business to the 3 competitors(TD, Scotia and Firstline(CIBC). As an industry we need to better utilize non competing lenders, be they non bank like First Nat, MCAP, etc or Chartered Banks that don’t directly compete, ala Laurentian, ING, etc.
    A military leader would not prepare to meet on the battlefield with a supply line dependent on unfriendly states. Rather they would ensure they had a super strong bond with their allies. I recognize long term relationships propel brokers to support the Scotia, Firstline, etc. Here again history teaches a lesson, imagine if you were on one of the brokers who sent 60-70% of your business to BMO. I am sure the bitter taste of little regard and less time still lingers.

  9. Once every client of a big bank starts looking for better conditions, then will be real deal for the consumers. Let the big banks fight for clients.

  10. A couple of comments:
    First: It is accepted as a universal truth that broker originated mortgage volumes come with lower margins, but is this really the case?
    When banks estimate the profitability of their branch originated mortgages they do not normally include any of their ‘bricks and mortar’ costs, which are substantial. (When I worked at the bank we referred to these costs as “brown dollars” and they were treated as unallocated, “general” expenses). Without accurately assigning a portion of the bank’s general operating costs to mortgage products , people are just drinking the boardroom Kool-Aid that the branch division passes around at management meetings.
    Second: FirstLine’s model was badly broken. The company offered its top-tier brokers aggressive rates, additional discretionary pricing, the most generous bonus points program in the industry, a lavish year-end trip, and full compensation and volume bonus commission payments.
    When its model was designed, FirstLine assumed that a large portion of its business would come from low-volume brokers, on whom it would make wider spreads, to offset the cost of the ultra-rich incentive programs it offered to high-volume brokers.
    Over time (as some inside FirstLine’s walls predicted) the low-volume brokers either pooled their volume with high-volume brokers or sent their business elsewhere. In a business model designed to take from Peter to pay Paul, FirstLine was eventually left with only Pauls.
    Last week’s announcement was inevitable. The only surprise to me was CIBC took this long to face facts.

  11. Quote – “It is accepted as a universal truth that broker originated mortgage volumes come with lower margins, but is this really the case?”
    Yes for 3 reasons.
    1. Broker compensation is double that of banks’ sales forces in many cases.
    2. More bank reps now work outside of an office so there is no overhead in those cases.
    3. Branches cross sell twice as many products than brokers.

  12. Hi Andre,
    With respect:
    Don’t bank sales forces also receive employee benefits?
    And what about the massive cost of all of the advertising campaigns that the banks run to generate mortgage business? You’ll note that First National, Merix, MCAP et al do not incur anywhere near these costs when they originate through independent brokers – and that leaves a lot of money left over to pay higher comp.
    If many bank sales force leads come from branches, shouldn’t a true picture of comparative costs also assign a branch cost to the mortgage channel?
    When you say that branches sell twice as many products as brokers, how is that a relevant comparison when the banks severely limit the other products that independent mortgage brokers can offer clients on their behalf?

  13. “When you say that branches sell twice as many products as brokers, how is that a relevant comparison when the banks severely limit the other products that independent mortgage brokers can offer clients on their behalf?”
    To be fair independent brokers should never cross sell for the banks. That’s what makes the broker channel unique for the customer – impartial guidance. But you have a very valid point in that the banks don’t offer brokers access to numerous products as well as discretionary pricing.
    Example: As Rob mentioned, National Bank has been very aggressive with rates over the summer. They were pricing a 3-year fixed at 1.99% with, according to their mobile warriors who were scouring personal finance forums left and right until websites such as RFD banned them from posting rates, a one-year rate hold.
    Of course, they were plenty of strings attached such as the mortgage amount had to be minimum $250,000 and only immediate areas of the GTA. In contrast, the best rate National Bank offered its best brokers for the exact same product was like 3.50%. So when a bank undercuts its broker “partners” like that (in addition to paying Realtors 50 bps to send a client directly to the bank instead of a broker), in my opinion, why send them any business? Because of AIO? Gimme a break!

  14. I doubt TD and CIBC will leave the channel. They can’t afford to lose the market share. 4 in 10 CIBC mortgages come from brokers.
    They will probably just “rightsize.”

  15. Ron, for some one who doesnt know their stuff, You keep making uninformed comments!
    This isn’t what happened!
    The new policy alot has to do with margins, the $55 Billion Firstline book also this has to do with IFRS and Basel III.

  16. It will be interesting to see how all of this plays out, not just with CIBC, but with all of the banks that have bowed out of the broker channel.
    Now that everything is on the internet, the “rate sensitive client” is becoming more and more of us. Ironically, I am with CIBC because of the internet and because I’m a rate sensitive client. I was contacted by CIBC (not the other way around) via the net, and they offered me a great deal right from the get go. So, they were good to me in that gave me good service without being pushy AND they gave a good rate, and that made me leave my existing mortgage, to go with them.
    If CIBC is to focus less upon providing me competitive rates and focus more on trying to get me to sign onto other accounts I don’t need, I’ll likely just go elsewhere.
    OTOH, I will say I don’t care where I get my good rates, whether it’s through a broker or directly through a bank. However, if that earnings call really is indicative of CIBC’s future path, I’m thinking those good rates may not be with CIBC when I renew in a year or so.

  17. The 4 year offer was a forced hand by RBC, who was first to market with that number and rate in the late summer early fall. CIBC / Firstline has been in a reactionary market position for the balance of the past 2 years as the writing was becoming clearer on the wall.

  18. Mortgage brokers should all think carefully about the growing trend of major banks changing or shifting their approach away from our entire origination channel.
    The banks need to rationalize their profit margins combined with the growth of their internal sales forces may mean some banks will indeed leave our channel.
    There is another alternative to dropping us: Pay us less. If we are paid the same as the internal sales forces then the profit margin issue solves itself.
    I am not in favor of either alternative but facts are facts. Stay tuned.

  19. Disparity in compensation is part of the equation but I think at the end of the day it’s all about selling other products and services. The potential revenue stream from these additional services, under the disguise of building a relationship with the client, is huge. Banking fees, LOC balances, HELOC balances, mutual fund fees, brokerage commissions, margin accounts, and soon enough fees from managing PRPPs, all of which offer far better return than giving a customer discretionary rates on his or her mortgage.

  20. Lior, you are quite right, cross selling higher margin products are the bank’s goal; but trust me, changing broker comp is a front burner issue with most lenders these days not just the banks.

  21. So would brokers on this list accept a 20% cut in fees? 30% 50%
    that’s what it will take to get Banks to invigorate the channel rather than shrink it.

  22. Just to clarify for the consumers reading this. CIBC is in no way out of the mortgage business. They are pulling away from mortgage brokering which is brokers selling mortgages on behalf of many companies, alot of which are electronic banks (firstline included) where the clients only have a 1-800 number to deal with. CIBC is replacing this with a team of dedicated mobile mortgage advisors, that offer CIBC brand mortgages only (no PCF or Firstline)plus sound mortgage advice including an introduction to the clients local branch and a variety of cross sell products that benefit the clients unique financial situation. This is a good news story, and will benefit clients substantially.

  23. Without naming which big bank I work as an accountant, I can tell you that the major reason we got out of the broker channel was because the tight spreads weren’t worth it, nor did it provide an opportunity to cross sell as suggested in earlier posts. Everything is being done to get customers in the branch in order to get their business and begin the “relationship building” which eventually should lead to cross selling of high margin products. Look at BMO who has even installed coin star machines in some of their branches in order to increase foot traffic in the hopes of sparking a conversation (btw, coin star is a coin counter service that will be offered for free to everyone including non-customers). Another thing banks are tired of is explaining to customers is how the MS was able to offer a different rate than their independent broker even though it’s the same lender being dealt with.
    I can also tell you that a lot of work is done to determine the precise profitability of each of our products, including activity based costing which would incorporate back office support and even fixed cost allocations relating to brick and mortar costs.
    All big banks are moving in this direction, my personal opinion is that Scotia will be the only player of the big 5 left in the broker channel. To me they are the only ones to think of how to fix the problem of cross selling rather than getting rid of it altogether.

  24. On the contrary, this is a very bad news story for the public.
    Make no mistake, it is brokers who drive down rates for consumers. Left alone, banks would be charging highway robbery rates they like to call “special offers.”
    When a bank says it wants to create a better “relationship” with you, it’s because better relationships reduce your willingness to negotiate and shop around. How does that benefit the consumer??
    I’d also like to correct you on a number of points.
    CIBC is not pulling away from brokers. A huge chunk of its volume comes from brokers and it has assured brokerage heads that it will stay in the channel. What it is doing is simply dealing with fewer brokers until margins improve.
    Your claim that broker clients only have a 1-800 number to deal with is also misleading. Brokers are the #1 point of contact for their clients and they work outside of bank hours. Unlike bankers who change employers and positions routinely, customers can rely on good brokers being around when they need them 5 years down the road.
    Lastly I would question how CIBC mobile advisors will offer “sound mortgage advice.” Bank “advisors” do not recommend a competitor’s mortgage. Even if another lender’s mortgage is better suited to you, the bank will never tell you that. This is why banks can’t hold a candle to brokers.
    Mortgage clients don’t need or want biased advisors selling them other financial products. They are better served with true specialists that can shop multiple providers. Banks will never replace independent investment and insurance consultants.

  25. Banks have their heads stuck in their rear ends. Customers don’t want to be sucked into a branch only to be sold a list of junk they don’t want.
    It’s bad enough I can’t call for my mortgage balance without being accosted by a bank representative trying to peddle me a credit card.
    Give me a great mortgage and get out of my face. If I want to buy your crapasss GIC paying .001% I’ll let you know.
    Oh ya and one more thing. If banks don’t want to explain rate differences then offer the same rates through branches and brokers. Duh!!!

  26. I think you’re missing the point, the banks don’t want to offer their mortgages via the broker channel so of course they won’t offer the same rates.
    Despite what you think they are cross selling….they kind of remind me of the supermarket model, offer a weekly special at cost to bring more people in your store in the hopes that they fill up their basket with other higher margin products. So far so good, the banks are far from stupid, but it’s not to say there aren’t major opportunities to steal their market share. Like i said, Scotia has the right idea.
    Some alternative lenders also have something to offer, most don’t have the overhead of all the brick and mortar retail network that banks do so it should bode well for them to serve customers that want the cheapest rates….but we all know without deposits cost of funds is usually high for these lenders. I guess that only leaves alternative lenders that accept deposits and don’t have expensive retail networks….hmmm….Radius Financial?

  27. CIBC has yet to get it right. They had thousands of opportunities to take the business directed to them for new mortgages through CIBC or FirstLine – my clients have told me time and time again, they never have been contacted by the local branch for anything. The problem is the folks in the branch are not equipped to cross sell and they are so short staffed they cannot keep up. I can say this from experience having worked in the branch for many years, worked with HLC and now with a different brokerage. CIBC has had business handed to them on a silver platter and they couldn’t do it. I doubt things will change regardless of their strategy change.

  28. I guess all those Platinum brokers and gold better cash out all of their points asap. Imagine the panic to CIBC executives if all the brokers out there try and redeem all of their points right now !!! hahaha

  29. Isn’t upselling the rate how brokers earn these “points”? If true then it serves them right if the points become worthless.

  30. You are absolutely right, the only problem is the statistics don’t reflect this picture.
    If consumers really care about personal and impartial advice, the broker channel share would be greater than it is now. But the exact opposite is happening; broker origination in terms of % is either stagnant or declining. It seems that consumers in Canada tend to value the “relationship” with their banks who have been very aggressive with mortgage pricing but little with everything else.
    The same trend can be observed in the wealth management sector. There are so many good financial planners out there working for independent firms that provide impartial advice and lower fees and yet most Canadians have their accounts with MFDA amateurs (let’s not mention any of the firms but we know who they are) where commissions, trailers, and management fees come well ahead of the investor’s ROI. You’d think that with all these fees and how they erode the returns and the fact that the majority of these funds never outperform the index they’re benchmarked to, most Canadians would have the common sense to take their money elsewhere. But alas, they prefer being staying with these large firms who know how the market the “feel good” type of relationship that’s often one-sided.
    In both cases, be it the banks or mutual fund companies, they’re not interested in a relationship with you; they want a relationship with your money. At the end of the day it’s gotta be a two-way street. But it seems that many consumers are perfectly content with the status quo.

  31. CIBC is the same bank offering discounted rates (last I checked) of 4.04% on a 5 year fixed at the branch advertised EVERYWHERE yet 3.59% through the broker channel.
    On a $250k mortgage over 25 years they are essentially stealing $13k out of their clients pocket by not offering them the best rate possible while in some cases retaining these same clients because they go to the broker/agent who sends them to Firstline/PCF for those lower rates.
    I make sure that if a client comes in with a sour note about a specific bank that I tell them that Firstline and PCF (as an example using CIBC) are owned by CIBC.
    That way if they aren’t interested in dealing with CIBC we can look at their other mortgage options.
    Recently, they’ve all been money savers for clients.

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