The deal is subject to regulatory approvals and is expected to close by December.
Scotia has been looking “intensively” at ING for four months now. National Bank was reportedly the other finalist buyer in the running.
The deal would make Scotia the second largest mortgage lender in the country based on balance sheet mortgage assets. RBC would be $11 billion ahead of a combined Scotia/ING, according to June data from McVay & Associates.
Bay Street will dissect this deal seven ways to Sunday, so we’ll stick to just the mortgage implications. And those implications are significant.
First, some random points of note:
ING Direct is Canada’s eighth largest bank.
Its 1.8 million customers have the highest average household net worth of any Canadian Bank (That should dispel most doubts about the quality of clients that direct banking attracts. These are people “who don’t want or need branch service and advice,” says ING CEO Peter Aceto. They’re also a prime market for Scotia to cross-sell to.)
ING has about $29 billion in residential mortgages on its balance sheet.
Scotia will operate ING as a standalone business. It says it is “committed to keeping this unique platform.”
Within 18 months, Scotia says it will jettison the ING name and rebrand the company.
“Well above half” of ING’s mortgages come from brokers and mortgage purchases, says Scotia.
Here’s the concern for mortgage brokers:
Scotia hinted multiple times that as ING mortgages mature, Scotia intends to allocate some capital from those mortgages to other higher-returning uses. (That said, ING is not getting out of mortgage lending.)
Scotia was somewhat cryptic when asked by CMT during their conference call how mortgage brokers will be impacted in the short and long term.
Anatol von Hahn, Group Head, Canadian Banking for Scotia, said this about ING’s mortgage focus going forward:“It’s predominantly in the retail channel because that’s where the day-to-day relationship is with the customers.”He said that ING’s broker channel will potentially be pulled back.
(CIBC has also used the phrase “customer relationships” in the past. It did so ad nauseum, right before it pulled the plug on its broker distribution arm, FirstLine Mortgages.)
Peter Aceto, president and CEO of ING DIRECT Canada, added:“We’re very optimistic about our ability to originate more mortgages through our direct channel…As Canadians become more and more comfortable with doing business in a direct way, we’re really the best option for them to do that.”
Sean McGuckin, CFO of Scotia, said:“We can also use [Scotiabank’s well-developed mortgage distribution channel] to source mortgage assets for ING Direct.”
Our spidey sense is that this news won’t be positive for brokers. Scotia’s executives clearly plan to de-emphasize broker originations at ING, in favour of what they view as a higher margin direct-to-consumer model.
The official statement from ING is:
“To our valued brokers, ING Direct Canada confirms that it is business as usual. Scotiabank confirms that ING Direct will continue to operate separately – as a wholly-owned subsidiary. We will continue to provide you and your customers excellent service and great value, while keeping you apprised of any further developments during the upcoming transition period.”
A Scotiabank spokesperson later told CMT:
“Approximately half of ING’s mortgage book was built by purchasing third party mortgages where there is no customer relationship. This business will be allowed to reduce over time…We will, in due course, work with the management team at ING to consider the value of these channels and the degree to which they support ING Direct’s unique value proposition.”
If Scotiabank did choose to curtail broker business at ING, it would be reducing a material threat to the Big 6 Banks’ mortgage franchises. Doing so could (at least slightly) improve the margins and mortgage pricing power in Scotia’s retail channel and in its broker division. That’s one of the reasons we like this deal from a shareholders’ perspective.
As brokers, however, this news smells bad at first whiff—both for our industry and for mortgage consumers who benefit from broker-driven price competition. Hopefully we’re wrong.
Sidebar: If you’re an existing ING mortgage customer, rest easy. This transaction should have no negative impact on your current mortgage.