Why CIBC’s Mortgage Growth Has Stalled

CIBC-MortgagesThe Financial Post ran a story this week suggesting that CIBC is retreating from consumer lending due to risk concerns. That was likely a stretch.

The article was based primarily on one data point, percentage change in mortgage and household lending.

Since CIBC has near-0% volume growth in the first five months of 2012—whereas the other Big 6 banks are at ~2% or more—it’s implied that CIBC doesn’t like the consumer lending space.

If you’ve listened to CIBC’s quarterly conference calls, that doesn’t add up. CIBC has never expressed concerns about mortgage lending in general. It simply wants to shrink what it deems insufficiently-profitable mortgage lending.

Specifically, CIBC wants to refocus from brokered mortgages to mortgages originated through its branches and Mobile Mortgage Advisors. The bank has invested heavily to build those latter channels.

According to a good source at the bank, the closure of its FirstLine mortgage division is the #1 reason why CIBC’s mortgage growth has dropped. That is intentional. The bank is in the process of retooling its mortgage business to ramp up retail distribution, and it’s going to take time.

(Whether that strategy pays off is an entirely different story. More on that here: CIBC’s Mortgage Gamble.)

There may be secondary factors at play as well. We’ve heard some say that CIBC wants to focus more on wealth management, for example. But there’s little evidence to suggest that CIBC’s flat mortgage volumes are an indictment of the housing market.

Robert McLister, CMT

  1. As you said, it’s “intentional”.
    CIBC doesn’t want the broker business. How about blogging about the reasons for why CIBC doesn’t want it?
    (1) How long does a broker mortgage stay with a bank before moving to another lender?
    (2) Do broker applications require more, less or same admin / follow-up as internal originations?
    (3) Do brokers submit more, less or same numbers of apps they “know” won’t fund (just to see if they will fund)?

  2. Hey Thomas,
    The reason behind CIBC leaving the Broker channel has been covered on CMT in various articles in the recent past and do cover an extensive list of why they intentionally slowed their originations at all costs philosophy…
    In my unconfirmed opinion:
    1) profitability
    A) Points- The compensation of Broker deals submitted to FLM by “Statused” brokers where more costly than by non statused brokers as the pay was higher and the rates lower sucking alot of the profitability out of the mortgages.
    B) Cross sells – single product line did not allow for a profitable cross sale market which drive the profitability of retail banking. ROD – Return on deposit or checking account balances being the most profitable up there with Insurance, Credit cards, and small high rate consumer loans. Mortgages are a teaser product for most banks in the first term anyways.
    C)Compensation – the average bank MS – gets paid half the comp of a licenced broker. (I heard a TD specialist gets about 55BPS on a fully discounted 5yr and a DLC Broker with V/B was getting 125BPS at 2.99% recently)
    2)Nature of broker originated mortgages – Previous market had a high prepensity for selling on “rate” which leads to high attrition rates for lenders… if it is rate that gets them in the door it will be rate that gets them out…
    3)Underwriting challenges – some brokers may not be as clear on internal guidelines due to large selection of lenders and policy variances… though die hard FLM users would not be included in this… But Bank MS only have one policy guide to know like the back of their hand so deals structured correctly and simplified underwriting process for maximum efficiency.
    My opinion about the top 3 reasons anyway

  3. Island,
    That’s great info, particularly (1)(c).
    I think your point (2) is critically important to this discussion. What do you think the “attrition rate” is?
    It’s not reasonable to expect a bank to expend resources on something like a 2 yr, low margin client right?

  4. A better article would be:
    (1) How CIBC will never again have access to tens of thousands of customers it once did with brokers
    (2) How CIBC dropped the ball by not bringing Firstline customers into the bank’s fold, selling them other CIBC products and making the transaction profitable.

  5. Let’s stop talking in abstractions.
    What was CIBC netting, over the life of a “typical” FLM mortgage? Was it even $10k???

  6. I think they want out of consumer banking as a whole. Their service sucks (I can’t pay their LOC online from another bank) and they raised their LOC rates the a ridiculous 9.5% and then when I quickly paid down the balance they decreased my credit limit.
    Their actions show that they don’t want me as a customer so I closed the account and moved on.

  7. Bob: I have a CIBC L of C. I can withdraw funds from my TD account by sending an email transfer to myself. When I receive it I am asked where to deposit it. I answer CIBC and pick the L of C account and it is credited to i. It is all done in 1.2 h

  8. fyi, I have managed both broker originated sales and in house commissioned sales forces in 3 FI’s. I can tell you that once you factor in management, training, IT, fulfillment and sales support there is not a material difference in the origination costs of the two channels.

  9. Thanks Rob. The difference in mortgage margins are insignificant. However, the big difference is cross sell and clearly the in house mobile mortgage generated clients have many more products. The increased sale of creditor insurance alone creates a big revenue gap between the two channels. Add on chequing accounts, credit cards and higher retention on renewal it is no wonder the banks are growing their proprietary sales forces. If the broker channel wants to retain its market share and augment profitability brokers would be wise to find ways to partner better with its lender base. A good place to start would be better penetration of creditor insurance.

  10. Rick,
    %’s aren’t illuminating.
    How much $$$ did CIBC make from a typical FLM originated mortgage?
    Can you at least say how long the average mortgage client stayed with FLM?

  11. Never take a bank’s creditor life insurance. It’s not portable if you switch lenders and the premiums are usually higher than you can get elsewhere.

  12. with all due respect CIBC FLM specific information is confidential to CIBC. As for MO’s comments, I respect the broker interests and client flexibility but talk of switching lenders and selling alternate insurance feeds the banks’ bias towards their own sales forces.

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