The former #1 broker lender is now officially on the block.
In its earnings announcement today, CIBC (FirstLine’s parent) stated:
“…We are announcing this morning our decision to explore options, including a potential sale, of our broker mortgage brand, called FirstLine…”
It continued by saying:
“We do not expect this process will be a lengthy one. Once this process is complete, we plan to increase renewals into our CIBC brand from the FirstLine platform over time. Benefits of this will include higher net interest margins and deeper relationships as these clients enter into CIBC branded channels.
We believe the time is right for us to make this move. Over the past number of years, we have invested in our branch-based mortgage business, including a substantial
build of our mortgage advisers. The results of these investments are paying off as evidenced by our growth rates over the past year. CIBC branded mortgages have grown at a rate of 10% over the past year compared to the industry average of 7%.”
Rumour has it that there are at least three capable buyers evaluating an acquisition of FirstLine.
CIBC is reportedly keeping FirstLine’s mortgage book for itself. So the main “assets” are FirstLine’s:
Origination, underwriting and funding platform
Future potential to fund via the Canada Mortgage Bond (CMB) program
Broker incentive program
Our take on the value of each is this:
#1) FirstLine’s brand has taken a buttkicking since April 2011 when CIBC chose to price FirstLine out of the variable-rate mortgage (VRM) market. Back then, VRMs were a huge portion of its volume, so this impacted a lot of brokers.
#2) Apart from the broker relationships, the rest of its platform can be replicated. There could potentially be job cuts if an acquirer wants to run a lean operation.
#3) It would have been valuable if FirstLine’s CMB allocation of (up to) $2 billion was included. CMB funding is limited (hence why there’s an “allocation”) and is virtually the lowest-cost source of mortgage funds. Unfortunately, any buyer would probably have to apply to get CMB “approved lender status.” Hence, the “new” FirstLine might have a limited ability to fund through the CMB market, at least out of the gate. (One overriding question is: How would a buyer fund FirstLine’s $14-$15 billion in originations? It would take tremendous capital.)
#4) Many consider this a liability more than an asset. Some brokers have over one million basisPOINTS (a type of broker incentive). For those brokers, these points are theoretically worth tens of thousands of dollars. The value of those points going forward is now in question. Presumably, any new buyer would honour them (if it wants to avoid irate brokers). In the unexpected event that FirstLine is dissolved, however, there is seemingly nothing to assure that CIBC would pay brokers a fair value for these points. This uncertainly may, as one lender exec told us, spark various “spring (rate) promotions” by brokers using their point balances to buy down rates.
CIBC’s sale announcement results from its desire to “enhance the client experience and to accelerate profitable revenue growth,” among other reasons.
CIBC says FirstLine “clients are sold single products” with relatively little cross-selling. In turn, it says “broker mortgage margins continue to be compressed relative to our other channels.”
On CIBC’s conference call today, David Williamson, Head of CIBC’s retail banking, reiterated that it’s largely about “client relationships.” He says:
“Deeper client relationships result in less velocity in our client base due to lower rates of attrition, are positively correlated to higher client satisfaction, have higher NIMs, result in the ability to derive more revenue from an existing base of clients and more fully engage both sides of the balance sheet.”
“We anticipate that our efforts to streamline our processes will also provide increased revenue or lower cost structures as a by-product over time.”
CIBC says its other major priority is to:
“…acquire and retain clients that are aligned to our strategic objectives.”
“Our existing client base is relatively large but has not shown appropriate levels of growth. In addition, the degree of depth of some of our client relationships is comparatively low due to our prior product orientation, and our historic involvement in channels that typically result in single product client relationships. We want to shift to deeper relationships as they have lower rates of client attrition leading to better client retention and satisfaction.”
“Once this process is complete, we plan to increase renewals into our CIBC brand from the FirstLine platform over time. Benefits of this will include higher NIMs and deeper relationships as these clients enter into CIBC-branded channels.”
CIBC’s total mortgage funding in 2011 was a reported $45 billion. That includes an estimated $140 million of volume from Mortgage Centre brokers (the only brokers with access to CIBC brand products).
To keep its momentum going after unloading FirstLine, CIBC is on a mortgage adviser hiring spree. It’s reportedly offering above-normal compensation in an effort to add 500-1,000 mortgage salespeople by year-end. A few of our mortgage specialist friends at the major banks tell us they’ve already received calls from CIBC recruiters.
It also appears clear that CIBC’s retention department will be working overtime. It will try to steer renewing FirstLine clients away from the originating mortgage broker and into the arms of its CIBC brand. You can rest assured that brokers will move heaven and earth to offer those clients better terms, in spite of CIBC.
As of December 31, 2011, FirstLine was the 3rd-ranked lender in the broker channel by volume, according to D+H data. “Until a strategic decision is made, we will continue to originate new mortgages in the FirstLine channel,” CIBC said.
CIBC did have a few positive things to say about FirstLine. Williamson called FirstLine “a well run channel, with rigorous and effective credit adjudication and substantial origination capability supported by highly capable mortgage brokers.”
Most of the broker industry is pulling for FirstLine and its dedicated employees. They know it is CIBC calling these shots and not FirstLine. Given the right buyer (likely a buyer with a strong balance sheet), there’s no reason why FirstLine can’t successfully re-assert itself in the market.