CMT: We’re here today with David Stafford, managing director of real estate secured lending at Scotiabank. David, thanks for being with us today.
DAVID: Thanks for having me, Rob.
CMT: Before we jump into some questions, can you kind of describe your role at Scotiabank?
DAVID: Product and marketing for the real estate secured lending business. So, residential mortgages, secured lines of credit, anything related to home financing.
CMT: Fantastic. So you’re in a great vantage point to see the evolving trends in the marketplace?
CMT: Let’s start with an interesting statistic. So, a recent Ipsos poll found that 96% of Canadians say interest rate is the most important differentiator of mortgages. Do you get a sense that mortgages nowadays are becoming somewhat of a commodity?
DAVID: I don’t think so. My belief is interest rate is sort of a legacy measure that most Canadians use to judge one mortgage against the other. There are a lot of interesting features on mortgages. We’ve seen two of our peers in the press recently advertising against each other, sort of on the frills vs. no-frills basis. There is more to a mortgage than rate.
CMT: How do you see the internet kind of changing things? Obviously, it seems to have made things more competitive, but let’s say that you look out 10 years from now, what would you say the internet impact on the mortgage business might be?
DAVID: I think that’s a very dangerous thing to project. If you think back to what we thought it was going to do 10 years ago, lots of things have changed, but I’m not sure we had a good prediction of them. I think what the internet has revolutionized more than anything else for most Canadians is the ability to do research on their own, before they start to make a purchase decision. So, there’s lots of information available, lots of tools available, lots of perspectives available on home financing and the best approach in various markets across the country.
CMT:It seems like, you know, based on the data I’ve seen anyway, that the trend in discounts over time has increased somewhat, and do you think you could attribute that to the internet perhaps, and the availability of information?
DAVID: I think what you might have seen is less regionalization of rates. But, the discounting posted is really a theoretical discussion. The real rates in the marketplace are still based on the same fundamentals that they’ve always been based on.
CMT: Speaking of posted rates, that’s something that people wonder a lot about. So obviously consumers are far savvier than they were 20 years ago, you know, they generally realize that most people don’t pay posted mortgage rates anymore. So why do posted rates still exist? I mean, what’s their purpose and do you expect them to maybe someday just go away?
DAVID: They may. I think part of it, the biggest part of it, is legacy. They’ve been there forever, and we’ve gradually moved away from them on a very slow basis. Starting out in sort of the mid-90s, I would say, with spring lending loan sales off posted, and then we’d go back to posted. And then over time the discounting has continued and grown ever so slightly over the last almost 20 years now. I think there are a couple of things that keep posted alive. Like I said, one is legacy. Another on a regulatory front, posted rates are used for adjudication or for qualifying rates a lot of the time, so they continue to be an issue there. And then the third thing is there are certain products that are somewhat dependent on posted rates, such as cashback products. So it gives you a basis for appraising cashback
CMT: Right, gotcha. Let’s shift a bit to the business side of lending, so, Canada’s # 1 and # 4 banks don’t have broker channels. Scotiabank does. So why has Scotiabank made mortgage brokers such an integral part of its business model?
DAVID: We’ve been in the broker business for a long time now, dating back to the early ‘90s, and we’ve seen it evolve over time to really a significant component of the Canadian market. You know, depending on which survey you look at, 25-30% of Canadians use a mortgage broker when they’re finding their financing. So to start with, that would be a big part of the market from our perspective to cut off. Second of all, we are in the market for new customers. We have a great relationship banking model, but we are looking to generate new customers for the franchise. And, disproportionately, the broker business brings brand new customers to our door. And by definition, they’re all homeowners, so they tend to be great customers. And since brokers also focus, or tend to overindex on first time homebuyers, those customers are also going to have a long runway for financial services needs.
CMT: Interesting. So, from a bank’s perspective, you know, we hear in the industry some other banks citing lack of cross-sale and whatnot through the broker channel. Is that a key advantage that maybe a bank rep or a mortgage specialist at a bank has over a broker, and should brokers maybe evolve, in some sense, to ensure that they’re indispensable to the banks long term?
DAVID: You know, I think the brokerage industry has evolved a lot in the last 15 years, and it’ll continue to evolve as the needs change and, you know, relevance to consumers changes. I think we offer – the one perspective could be that we would offer a broker sort of a back office of financial services. They could be the front person. But brokers are generally specialized in home financing. But to the extent that customers are looking for a more full service relationship, we can provide that to them; we can provide that to their customers.
CMT: Gotcha. And in comparing the retail and the brokerage channels, how comparable is the return on equity and the common metrics like the banks use to judge their success?
Again, we talk about things like cross-sale and the greater cross-sale through the retail channels and the broker channel. But mind you, Scotia has a great branch signing system and whatnot. So, how would you say that the origination costs and the return on equity, and all those other things are between the retail and the broker channels?
DAVID: There are lots of variables to contend with. And the first one would be, if we weren’t dealing with a broker for some of these customers, we’d never get a chance at them at all. They’ve gone to a broker for their business, and the fact that we’re in that business, and a large player in that business, gives us an opportunity to meet and talk to those customers being referred by brokers. So, the opportunity cost of walking away from that is not measured in a typical ROE.
As for the cost of onboarding, new customers in every channel, in every business costs us more than existing customers that take additional services. So, you’ve got to factor that in. branch channel in our world deals predominately with existing customers of the bank and selling additional services into them. Broker channel deals almost exclusively with brand new customers to the bank, so there’s always a greater expense in onboarding a brand new customer.
As for cross-sell, I think all the research that we have shows that the actual customers themselves, and their need for financial services, doesn’t vary much by channel. But the sales conversation is a little bit different, because somebody who walks into one of our branches or is dealing with one of our employees, you know, on a mobile specialist basis, has sort of put their hand up and already opted for the brand Scotiabank. When they come from a broker, it’s more of an indirect referral, and we have to work a little harder to prove the value of the Scotiabank brand. Where we can get the brokers to help us with that, where we’re also, you know, lead lenders with those brokers, our success on cross-sell is strong.
CMT: Interesting point. So we’re seeing a lot in the market right now with the 2.99% offers out there on fixed mortgages, what is conceivably a play for market share. So in your view, which would you say is more important, large market share and perhaps lower interest spreads, or smaller market share but perhaps higher interest spread?
DAVID: I think every lender would look at that differently. We’re really trying to find a balance between the two. You will see people pricing, from the competitive standpoint, is the one thing that all your competitors can latch on if they want to very quickly. It’s far better to compete on other facets. But when people want to compete on price, the market will move quickly. When the last round of 2.99’s was announced, I think everybody was on board within probably 72 hours. And it’s run for a while, we pulled out last week (March 20), National Bank I think announced Friday (March 23), Royal Bank announced today (March 26), bond markets have been moving up. So you’ll see that some people will walk away from market share at some point to preserve margin. And, at any given point, we’re looking at, you know, a week or two at a time, so it’s not material to the big portfolio, but you have to make a judgement call.
CMT: Right. One thing that’s interesting, We follow the different products that are released on the market. We haven’t seen that much innovation in terms of mortgage product development, in the last year or so. Do you think that we will see products as innovative as, and I’ll use yours as an example, the Scotia STEP [Scotia Total Equity Plan]? Do you think we’ll see products as innovative as that was when it was first launched?
DAVID: I don’t know. That was pretty radical when it was first launched. That was an entirely new way of lending. Whether we’ll see anything as innovative as that again, I can’t see what that would be. But I think there’s more opportunity for product development and product enhancements that help customers focus on the right thing.
You mentioned at the outset rate. You know the real cost of a mortgage to most consumers is a combination of the rate they pay, the amount they borrow, and how long they have it. And in the current market with rates low and most people not having a lot of flexibility over how much they need to borrow. The real opportunity right now is to not borrow for as long. And so we think there’s some innovative things that can happen on that front to shorten the amortizations–not in a painful way, not having to put you on massive budgets, or major belt-tightening, but small tweaks that we can do with customers over time to take 5, 10, even 15 years off the length of their mortgage, and save them tens of thousands of dollars. And the big message right now, in terms of rate, is not all the rates are good, not all the rates are low, but the opportunity right now is to use those rates to your advantage and use those to shorten the duration of the mortgage.
CMT: Yeah, you know when we talk about rates, the funding cost often comes into play, into the conversation. Like some of its competitors, Scotiabank has relied somewhat heavily on the mortgage-backed securities market, particularly those backed by bulk-insured mortgages. With this, I believe the cap’s about $1 billion now or so on CMHC bulk insurance through the banks. With that, how do you see this impacting the cost of funding conventional mortgages?
DAVID: I don’t think it’s going to have a material impact on how we fund conventional mortgages. I mean, we still primarily fund mortgages from deposits. Those vehicles that are used, particularly MBS, and to some extent covered bonds, are as much about liquidity as they are funding. And on the group treasury side of the bank, everything’s measured in individual basis points. We don’t typically re-price mortgages on that basis. We tend to do sort of larger chunks. So you’ll usually see rates about 10 or 20 basis points at a time, which if you’re in the bond trading world, that’s massive. So I think it will have basis point impacts on things in terms of costs of funds. It may cause us to have to look at other vehicles that we haven’t used in the past. But I don’t see any direct connection between available funding vehicles or liquidity vehicles and consumer mortgage prices in any major way.
CMT: So in this case the liquidity isn’t necessarily strongly correlated with the funding cost of a conventional mortgage?
DAVID: It’s related, it’s related, but a lot of the needs of liquidity for the banks in Canada are related to regulatory changes, things like Basel III. So it’s more positioning the balance sheet.
CMT: Ok, well hey, listen, fantastic perspectives David, I appreciate it. That about wraps it up. I want to thank you so much for being on the call today.
DAVID: Thank you Rob
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