CIBC’s Mortgage Gamble

Bank-Strategy-GamblingCIBC felt it had to do something with its mortgage broker business.

It’s facing:

  • Shrinking mortgage margins
  • Slow balance sheet growth
  • Regulatory changes (IFRS and Basel II and III), which increase its mortgage funding costs
  • Policy changes (related to CMHC insurance, covered bonds, and securitization), which increase its mortgage funding costs
  • High broker compensation versus its proprietary sales force (50-100% more in some cases)
  • Lower retention rates on broker business
  • Far less cross-selling with broker-originated mortgages (compared to its retail sales force).

It had to make changes and it’s hard to blame CIBC management for evaluating all options, including curtailing its broker business.

That said, selling FirstLine (the broker-lending division that CIBC has spent 17 years building) and retreating from the broker channel would be a monumental gamble.

The potential price of failure—for shareholders, consumers, and the executives calling these plays—is significant.


Survival of the fittest applies in the mortgage market just like it applies in nature.

The “fit” lenders are generally the ones with growth and reasonable, sustainable margins.

The “fit” originators are the ones who provide value to consumers and sufficiently profitable mortgages to lenders.

Four out of five banks, trust companies, and wholesale mortgage lenders distribute through brokers because they feel most brokers are fit for their purposes.

BMO-MortgageThat said, with mortgage margins tight and getting tighter, some lenders feel they can squeeze more profit juice by originating mortgages exclusively in-house. This is why a small number of lenders, like BMO and HSBC, have exited the broker channel altogether.

But has leaving the broker market improved their lots?

Consider this: The following is BMO’s and HSBC’s market share performance since relying exclusively on their proprietary mortgage sales forces:

  • BMO’s market share upon exiting the broker market in Q1 2007:
  • BMO’s market share as of today:
    6.49% (Down 29% on a relative basis and 274 basis points in an absolute sense)
  • HSBC’s market share upon exiting the broker market in Q2 2010:
  • HSBC’s market share as of today:
    1.81% (Down 10% on a relative basis and 20 basis points in an absolute sense)

(This data is provided by McVay and Associates Ltd., for which we are much appreciative.)

Both of these banks expected share losses when they left the broker channel. But, to date, they still haven’t made up those losses and they continue to lose market share.

That’s even more surprising if you consider that BMO and HSBC have generally been advertising the lowest rates of any banks in Canada! What’s wrong with that picture?

Now, it must be noted that we don’t have data on BMO’s and HSBC’s mortgage margins since leaving the channel. Their margins have reportedly improved (at least somewhat) on a per-mortgage basis. But it’s still highly doubtful that said banks are now further ahead.

That bCIBC-Bankrings us back to CIBC, a bank with a mortgage book twice as big as BMO, and far more to lose.

If, as some expect, CIBC exits the broker channel (partially or completely), it will have its own potential market share waterfall to look forward to. The hundreds of new Mortgage Advisors it may hire this year will not make up the slack caused by divorcing thousands of brokers.

In a comprehensive report issued Friday, Darko Mihelic, Director, Institutional Equity Research at Cormark Securities, said this:

  • CIBC’s broker channel once accounted for up to 40% of its mortgage production
  • CIBC’s exit from the broker channel could “hurt” earnings
  • CIBC’s exit from the broker channel could “hurt the Company’s valuation multiple”
  • CIBC risks a “growing perception that (it) cannot help itself and needs to constantly tinker with its business plan every few years creating a one step forward two step backward kind of feeling”
  • CIBC could see significant “run-off” of its broker-originated mortgage portfolio
  • “The backlash and mortgage predation on (CIBC) could be formidable and not just the mortgages
    originally placed through FirstLine.”

Long story short, exiting the broker market could lead to an “unwelcome change in the eyes of investors,” says Mihelic.

But, it doesn’t have to be that way.

Profitability-analysisInstead of shutting the tap on broker deal-flow, CIBC could choose to re-tool their broker channel. (This option still cannot be ruled out in CIBC’s case, depending on what happens in relation to FirstLine’s reported potential sale.)

Among other things, CIBC could choose to:

  • Cross-sell more, by:
    1. Welcoming broker clients to the bank and assigning them a branch relationship manager (Granted, this would be easier if FirstLine and CIBC were not different brands), and
    2. Including optional product promotions in their approval documents(e.g.  Check a box if you’d like a line of credit at prime rate for six months, a pre-approved Aerogold Visa with no fee for a year, etc…)We’ve never understood why banks don’t do this more. Technology and cost accounting between divisions are sometimes cited as roadblocks, but those are not insurmountable.
  • Equalize compensation between brokers and CIBC’s proprietary sales forces (We’re seeing this slowly happen at other lenders, as a result of tiered pricing/compensation)
  • Pay brokers a token commission when their clients renew with CIBC, to reduce switching and lessen the appeal of competitors who pay trailer fees. (Trailer incentives do not have to be huge to be effective.)
  • Cut back on broker incentives (“Points” programs and the like)
  • Institute more policies and incentives to drive broker efficiencies.

Brokers wouldn’t be thrilled by the above, but we’d argue that it’s better than the alternative—losing a former #1 lender from the channel.

Banks have the power to make all of these adjustments and materially improve the profitability of broker originations. And now is the time to do it. The FirstLine news, and the concerning events that have preceded it, are making brokers increasingly receptive to more symbiotic lender relationships.

Sidebar:  Cross-sales are the nectar banks crave. Getting clients to bite on two or more optional products (high-interest savings accounts, GICs, lines of credit, credit cards, etc.) can boost mortgage profitability over 20%, says Deloitte. And bank employees have been more successful at it than brokers.

Banks cross-sell 3.4 additional products to mortgage clients who come through a branch, versus less than two products to broker originated clients (Source).

From a consumer’s perspective, not having to endure as many sales pitches is one of the many appeals of using a broker. Banks obviously have a different perspective.

Rob McLister, CMT

  1. Just curious – would the “Mortgage Advisors” have the same level of education as a Mortgage Broker with the AMP designation?
    Consumers are not stupid… they will go to whoever is more knowledge and can help them.

  2. 4 weeks ago, listened to Geryy McCaughey (CIBC CEO) speak. He said CIBC was changing strategy by doing the following (1)remain risk averse (2) pursue growth/profits not market share (3) cross sell.

  3. Like this:
    proprietary sales force
    I think CIBC issued most covered bonds in recent history. They are trying to make or break.
    As a matter of fact, most of the big banks are trying to do that.
    Are they really starving for profit?
    I wonder why they want to gamble at this time?

  4. This is a CMT ‘Top 10’ Broker Business article, a well written roadmap a Big Bank CEO can and should follow. Great one Rob!

  5. Very good article, and some excellent suggestions/alternatives for banks I’m not in the mortgage brokerage business, but looks like it’s missing some key figures to really draw any meaningful conclusions no?
    BMO’s mortgage market share dropped 29% relatively, but what’s the breakdown of that? Meaning what % of the drop resulted from dropping broker business, and what increase were they able to achieve by hiring extra branch mortgage advisers? Also, we don’t know they margin on these mortgages, but we also don’t know the non-mortgage impact of this change. Rob mentioned the 3.4 VS 2 cross-sell products, so how do you account for the profit from that extra 1.4 product per mortgage they were able to sell by using an in-branch adviser?
    I’m not pro-bank, and have used and will continue to use mortgage brokers for my business. However, It’s not hard to see why the banks would want to focus more on in-branch. The banks are out there to make a profit, and if they feel they’ll make more profit from selling in-branch, then I can’t blame them…

  6. One comment about BMO’s reduced market share upon leaving the broker channel: there’s no way to know whether this is attributed to moving out of the broker channel. While BMO has been aggressive with pricing for its “low rate” mortgage, other banks (i.e. National) have been just as aggressive with pricing. In fact, while BMO’s market share trickled, NBC’s market share increased precipitously over the same time period.
    HSBC was always a non-relevant player in the Canadian mortgage market with a very small share and catering mostly to the Asian community who need the flexibility of integrated international banking. Whether they’re in the business or not makes no real difference for brokers.
    I don’t believe that CIBC re-tooling their offerings to independent brokers, such as removing the BP program, would change anything because all they’re accomplishing in the process is commoditizing themselves. And with lenders like MCAP and its MPOINTS program, there would be little incentive to send business to a revamped (sic) FLM if we could get better pricing and terms for clients and better tools for us to compete effectively with other lenders.
    Brokers who still think that CIBC is committed to the broker channel are delusional. They’re not. CIBC has apparently made the conscientious decision to severe their relationships with brokers and push products exclusively under the CIBC umbrella. Whether this route would yield dividends in the long-run remains to be seen and shareholders would understandably hold management accountable if the gamble doesn’t pay off.

  7. Another very balanced and insightful article Rob.
    You are 100% correct on cross-selling . The most successful bank in the USA is Wells Fargo and their whole corporate culture is built around a goal of selling 6 different products to each customer. Clearly Firstline did not represent that model of creating a sticky, multi-product customer base for the bank.
    I think that RBC and TDCT answer some of the questions for us. These two banks have had the best results in terms of increasing mortgage share and they have one common element: the best operated and the most numerous direct sales force in the mortgage industry.
    Businesses tend not to be innovative; mainly they look at bigger competitors and try to copy them. On the surface, big direct mortgage sales forces equal market share increase. But as we all know, the devil is in the details. RBC and TDCT have been in the mortgage sales force business for a long time and have solid programs and bench strength; CIBC, not so much.
    But if I was a bank CEO I might make a logical conclusion that the right approach was mortgage sales force development. Sell Firstline because you would rather devote talent and capital to building up the direct mortgage sales force. In some ways it makes sense but as Rob pointed out: can branches and road reps offset broker losses in mortgage market share fast enough and in the end, can direct sales force development be executed successfully. Its a real risk.

  8. We have already seen evidence in Prince George that CIBC is well focused on what they want to accomplish. Following RBC, TDCT, BMO in competition with independent brokers. Brokerage lenders will need to develop extra services to compete for that extra market percentage.

  9. Unfortunately my “inside source” is low in the totem poll with BMO, so my comments are anecdotal, but when I was speaking with him/her a week or so ago, he/ she/they were in the midst of “handling” / dealing with the “higher” increase of fraud deals coming from their own sales staff, in comparison to the amount (lower numbers) of fraud experienced when dealing previously with brokers…. and questioning there actions in moving away from the Broker channel.

  10. I know it not great when a lender leaves, but frankly CIBC/FL cant seem to find their grove. CIBC has made terrible investment decisions in the past,along with some of the strangest decisions of the Big 5. FL is so cumbersome, I mean look at the emails the BDM’s send, its like reading a whole newspaper, I just delete them. Let them go, the channel doesnt need them. There are 2 new lenders coming in to replace them. The smart banks would allow us to cross-sell and pay us for doing it.
    Great article, but there are no tears for me with FL leaving, havent used them in years.

  11. hey john…back in the day when firstline was called rennaissance they rocked….now they suck… lookin good these dayz…who u with?

  12. Hi EconWatcher,
    According to M&A’s report, BMO’s share drop was 274 bps, give or take. That is an absolute loss according to the data. It was not made up by hiring extra branch advisers.
    The two analysts we spoke to about BMO (who admittedly know the company’s financials far better than us) were very skeptical that BMO could make up for this lost mortgage share in higher margins or otherwise. Mind you, BMO’s HELOC share has increased as they’ve been pushing them (in some cases as a mortgage substitute). But these HELOC volumes don’t compare to mortgage volumes.
    There’s a strong case to be made for leveraging every profitable channel a bank has access to. Broker distribution is profitable for the majority of banks, and can be made even more profitable as this story indicates.

  13. Hi Lior,
    Interesting perspectives. Here’s another take on some of the points…
    BMO has publicly acknowledged share losses resulting from its broker channel exit. It’s no secret. They’ve also reportedly had a material runoff in their broker book. Clearly, outside observers cannot confirm that all 274 bps of BMO’s market share losses since Q1 2007 were caused by this exit. Yet, it’s logical to assume that BMO’s share would not be anywhere close to 274 bps lower if it had broker volume.
    Re: National Bank vs BMO: I’m not aware of any advertised pricing National had that could consistently compare with BMO’s Low Rate and BMO Eco Smart products.
    Re: National Bank’s market share: It has benefited greatly from distribution via brokers and via partners (not the least of which is Investors Group).
    Re: HSBC’s relevancy: Suffice it to say, HSBC is a top 10 lender in Canada. They have been extremely competitive at times. Consumers are becoming increasingly aware of mortgage bargains and many wouldn’t hesitate to deal with HSBC if they had the best offer. HSBC is the 2nd largest bank in the world with ~3.5 times the assets of RBC.
    Re: FirstLine’s Points programs. Eliminating them would tick off a lot of brokers but would also help FirstLine be more cost-competitive. It could avoid commoditization by offering balance sheet products that monolines have trouble replicating. (Alas, this last part of the discussion is now probably academic.)

  14. CIBC once again is shooting itself in the foot. The solution to me is obvious in that CIBC should absorb Firstline Mortgages into CIBC Mortgages thereby they could cross sell at the branches and not be in contravention of the Bank Act. They could then scuttle the points program that they so complain about as being to expensive and remain in the broker channel with yes some growing pains but it beats removing the foot. There are thousands of brokers out there thathave not dealt with them and i am sure a lot of the existing ones would remain loyal

  15. Hi Rob,
    Excellent points as always. Regarding the last point, what do you expect to happen with Mortgage Centre franchises? One of the better advantage they have over other brokerages is having access not only to FLM but also CIBC retail incentives. With CIBC allegedly shedding FLM, TMC effectively becomes a CIBC branch – but with access to other lenders. Do you see that franchise surviving?
    Regarding HSBC, obviously they’re a huge bank simply because they have incredible international exposure. Even ING has a larger market cap than the major banks (although ING operates as a separate bank in Canada, it’s still part of the ING conglomerate in the Netherlands). That actually reminds me: Peter Aceto did a really good interview with BNN yesterday about the so-called rate war taking place in the mortgage market. The problem with HSBC is that while they do have some competitive offers, they often reserve their best rate to Premier clients who need to have a significant amount of assets with the bank to qualify (for Premier customers I believe the minimum is $100,000).
    I agree about National Bank and its success attributed in part to their partnership with brokers. But just like other banks, they too are limiting who has access to their best rates which remain unadvertised (unlike BMO).

  16. Wow, this is a great thread!Just entering the mortgage business as a mortgage agent, I can see things are shaking up considerably with regards to the major banks.
    Anybody have advise as to which brokerages look to have the brighter futures and have the best opportunities long term?
    Any advise would be greatly appreciated.

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