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CIBC Shies Further Away from Lending

31 August 2012

CIBC announced early this year that it wanted to exit the mortgage broker channel and sell FirstLine, its mortgage branch. Also announcing that they were planning to keep their mortgage products (and the customers that went with them) within their branches, it was thought that the move was being made solely so that CIBC could stop paying broker commissions and keep more profits to themselves. The fact that a few buyers came forward but a deal couldn’t be made because CIBC wanted to keep their current mortgage customers, only seemed to further that argument.

Now though, it seems the move was made so that CIBC could reduce their activity in the consumer lending market overall.

Thanks to Peter Routledge, an analyst at National Bank Financial who prepared the below chart, it’s easy to see that consumer lending at CIBC has nearly stalled – this from Canada’s fifth-largest bank.

But how intentional was this on the part of the bank? At this point, there seems to be very little pointing towards the fact that it was at all. With perhaps the exception, that they did in fact close FirstLine after not being able to sell it. However, what if that were just a strategy went awry? What if more Canadians started going to mortgage brokers and because brokers no longer had access to CIBC, the bank’s profits simply went down? It’s no secret that more Canadians are starting to use mortgage brokers, and this in fact could have played a part.

Some have argued that the move was in fact purposeful on the part of the bank; and that they did it to reduce the amount of risk that they had within the market. But how viable is that argument? According to the chart below prepared by Moody’s, CIBC may very well be one of the big banks in the country that has some of the least risk on the market.

They fall somewhere right in the middle with concern to how many uninsured, or conventional mortgages, they carry; and these carry very little risk at all because the borrowers have equity on the table should they default. CIBC is also on happy middle ground when it comes to the amount of uninsured non-mortgage and consumer debt they currently have out on loan. This is the most dangerous kind of debt banks can carry and luckily for CIBC, they neither have too much nor too little.

And yes, it’s true that CIBC also has the highest amount of insured mortgages, meaning the highest amount of borrowers that didn’t have a 20 per cent down payment. But the majority of those mortgages are also backed by the federal government, taking the bank’s risk out of it completely.

Whether or not it was intentional for CIBC to take such a drop in their lending practices is debatable. What’s not is the fact that the move has been very good for the other major banks in Canada. BMO and Scotiabank are the two most recent that have reported higher profits and boosted dividends, as reported by The Toronto Star here.

“We note,” said Mr. Routledge when he released his findings, “that CIBC’s competitors in the mortgage broker channel have benefited from its departure.”

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