Scotia Buys ING Direct

Scotia-INGING Direct is getting a new parent. Scotiabank is buying it out for $3.1 billion.

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.

SCOTIABANK - Scotiabank Purchases ING Bank of CanadaHere’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.

Rob McLister, CMT

  1. rob i dont think youre wrong on that assumption…as an outsider who just wants the best deal (what consumer doesnt?) i just have these bad vibes..esp since i was a firstline customer…thanx for the analysis

  2. It doesn’t take spider sense to know banks have grown tired of the mortgage broker model.
    Which lender gets consolidated next? Any bets?

  3. Hi Rob! Great insight, as always. I am a mortgage broker, but I’m also registered as an investment advisor. For the benefit of your readers, I’ll share a previous experience with ING. After ING had been welcoming the deposits from brokers for a couple of years, they decided to unilateraly kick us out, keep our clients and stop our compensation.
    That is why I’m more than skeptical when I hear ING’s officials saying it’s business as usual. For them, maybe… But for us brokers, we will have to fight as with any other bank.
    Keep up the good work!

  4. Time will tell if this is good or bad for brokers but personally I am glad that of all the major banks making this purchase, it was Scotiabank who currently have the best broker relationship of all the major banks.

  5. I have the same vibes. It’s not a good trend. If brokers disappeared tomorrow, mortgage rates would be .2% to .3% higher within a month.

  6. ING’s mortgage yields and return on equity are below the bank average. That’s probably why it’s changing its distribution model.

  7. from what I have heard, they are not changing their distribution model, business as usuall. Scotia bought ING at very resonable price therefor, nothing to prove to shareholders + Scota knows that ING customers wont be interested in Scotias products, no need to change the already successful ING model.

  8. This purchase fits perfectly with Scotia’s stated goal of increasing their retail presence in Canada to compete toe to toe with RBC and TDCT. Waugh and Von Hahn are smart, determined, lifelong bankers who believe in Jack Welsh’s dictum that you have to be in the top 3.
    I have no doubt Scotia will continue to operate the branchless “consumer direct” side of ING as long as the license allows.
    Sadly the ING mortgage brokerage side will almost certainly be wound down and merged into Scotia’s SMA group. It’s a real shame to lose another quality bank lender and a great team of people. I hope SMA has room for as many as possible because it is a great group of individuals.

  9. Hey average joe,
    Interesting comment about being a past firstline customer…
    I wish i was one now… Have you heard of some of the offers the clients are getting from the CIBC retention team??
    No fees, no requalification, penalties waived, and below market rates! untouchable by the competition.
    If you still have a Firstline mortgage might be a good time to call in and ask what your penalty is to leave and try to work out a sweet deal for yourself!!

  10. Can you expand on this?
    Is this for mortgages coming up for renewal or just for threatening to leave early to another FI?
    How do you reach CIBC rentention? By calling Firstline # or CIBC directly?

  11. the cibc ‘retention team’ is all over us firstliners but from what i have been offered to date, no special deals they havent offered to the general client out there…firstline was a great company..a mortgage broker first hooked me into them when they were called renaissance and their rates always the bestest…then slowly after cibc took them over their great rates disappeared…i fear the same thing happening to ing..

  12. ING has a highly efficient balance sheet, being mainly individuals deposits and residential mortgages. The resi mortgages are split almost 50/50 insured and uninsured. The deposits are largely demand. Thus there does seem to be a large duration mismatch, borrowing short and lending long.
    The equity base is adequate but not excess. The RoA and RoE are low. Largely this is due to the low yield on the mortgages, and resultant tight spread. The cost of funds is on the high side.
    Scotia Bank’s upside opportunity is big! By shifting the excess deposits out of securities and into higher yielding loans and getting a higher yield on the mortgage portfolio.
    Scotia Bank paid more than Twice the Book Value for ING! Scotia Bank’s Strong Wealth management and branch network will allow Scotia to sell more products (Credit cards, Investment products,…) to 1.8 Million ING Customers. Also let’s not forget ING’s 2300 ATM machines across the country! At this time I don’t Think Scotia Bank had a chance to even worry about the “Broker Market” Strategy of this deal. This would have been one of the last items on their list. This will be something that they will study and address in next 18 months!
    Scotia Bank got Great People, Excellent client base and great platform in this purchase! Great Buy Scotia Bank!

  13. It’s totally case by case. Firstline undercut me on one of my clients by 8 basis points and overquoted one of my refi clients by 15 basis points.

  14. That information I am foggy on… Apparently these are mid term requests. I have received calls from 3 seperate brokers asking me to validate the offers their clients have been getting from Firstline directly… They had called some of their clients to help them break mortgages to get lower rates and the result was far from what they wanted! As now the mortgages are locked in for another 5yrs at even lower rates so that follow up pay check is now 5yrs away instead of 1 or 2.
    I would assume if you called firstline you may get the retention number but this is not a publicized process for obvious reasons and do not have a firstline mortgage myself to validate…
    Please give it a try and keep us all advised on how it goes and how deep the offer is including all costs/fees/qualifications waived!

  15. Hi Alex,
    How would Scotia get a higher yield on ING’s mortgage portfolio? Does that mean ING customers will be sold higher rates once Scotia takes over?

  16. Unless ING comes out and says we’re committed to brokers LONG TERM, I bet you’ll see a lot of small and medium size brokers shift volume to other lenders. Why would you try to hit status with ING if you don’t know whether its broker channel will be around in 12-18 months?

  17. ING’s online banking model rocks…we don’t need brokers to find the best mortgage rates. Banking is not complicated. Cut out the brokers and let the consumers reap the savings. Just make it public so we can comparison shop. As an ING customer, I am putting Scotia on notice. Change anything that increases fees, etc.. and I bail to the next best online bank… thank you and have a great day.

  18. That is an uneducated statement. Brokers are the very reason that rates at ING and other lenders have got so competitive. Brokers drive down rates for consumers and cost people absolutely nothing. If you think a Scotia-owned ING would offer the best rates without brokers, you are sadly misinformed.

  19. Maybe we should cut out mortgage specialists at the banks while we’re at it? Let’s all get our mortgages from a drive-thru window. No one needs advice anymore right?

  20. I want to know one thing. With a solid credit rating, zero debt, and a 46% downpayment on a waterfront property, where does one turn to when the Big banks say No just because it doesnt satisfy their pre-requistes like a washroom inside the cottage and no hydro?
    Do I have to be held ransom by Mortgage brokers with Third Party lenders who give you rates like 7%?

  21. Don’t blame brokers because you picked the wrong broker, don’t qualify for the best rates or have a difficult to finance property. Pick the right broker and you’ll find way less than 7%, assuming you have good credit and income.

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