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A New Bank With a New Model — Canadian First
By Rob McLister, Editor, CanadianMortgageTrends.com
Being a Canadian bank puts you in exclusive company. There are5,991 commercial banks in the U.S., but just 25schedule I banks in Canada.
That number will soon become 26 because Canadian First Financial Holdings Limited has just received OSFI approval to incorporate as a bank. (The bank’s name will be announced later.)
Canadian First’s business model is to build a full-service institution and make quality financial advice accessible to “all Canadians.” It will do that by originating mortgages through brokers, who will then be able to directly sell retail banking products to customers. They’ll also be able to refer clients to Canadian First advisors. Those specialists will assist clients with selecting investing and insurance products that match the individual’s personalized financial plan.
Canadian First’s bank, which is expected to launch later this year, will be unique in various ways:
- Stacked Management: The company boasts some top gun talent with three Canadian Association of Accredited Mortgage Professionals (CAAMP) Hall of Famers on board: Co-founder Karl Straky, CEO Peter Vukanovich (formerly Genworth Canada’s CEO) and Rob Leeming (founder of SIT, one of the largest bank IT companies in Canada). Add to that the likes of David Kassie (Chairman of Canaccord Financial and former Vice Chair of CIBC), Nick Mancini (former CEO of Assante and an EVP at Canada Trust), Bernard Roy (who launched Canadian Tire’s retail bank and its “One and Only” account), Peter Wallace (who built Midland Walwyn before it was sold to Merrill Lynch) and Paul Leonard (former CFO at Ally Bank/ResMor Trust and ING Direct).
- Mortgage Products: While most of its products will be the “standard fare” initially, the company does plan to offer a few “niche” mortgages right out of the gate. We’ll hear more on those in the next 90 days Straky says. It also plans a readvanceable mortgage within 12 months of launch. That product will support multiple mortgage components and lines of credit. It’ll also link to people’s deposit accounts so their dormant cash offsets their mortgage interest, à la Manulife’s “One” and National Bank’s “All-in-One.” (A readvanceable product isn’t surprising given that Leeming built the technology behind Manulife One. If priced properly, it could be a huge seller with brokers who route most such business into National Bank’s All-in-One.)
- Cross-Sale: Canadian First is the only lender that allows brokers to generate revenue by referring a wide array of non-mortgage products. Those products will include high-yield savings accounts, RRSP loans, credit cards, GICs and credit lines. “We plan to launch banking product bundles to go with the mortgages they sell,” notes Straky. (Product referrals require a broker to own a retail location.)
- Funding: Unlike most lenders who solely distribute through brokers, Canadian First will fund some of its mortgages with its own balance sheet (i.e., through deposits – as opposed to selling them off to investors). That’s expected to give it more flexibility in terms of mortgage features.
- Financially Aligned Brokers: The bank will be a private company with most of its individual investors being from the mortgage broker community. Canadian First will leverage its broker partners to execute “a rapid expansion in the first 12 months,” says Straky. It’ll do that by letting established brokers apply for a retail location and become shareholders. (It already has 11 retail locations and another 12 “referring partner groups.”) While there are no hard and fast rules, an “established” broker is essentially a mortgage professional with a built-out infrastructure, a retail location and a few thousand clients, Straky says. “We have brokers in the network doing $40 million and $400 million (in annual volume).” The company will also deal with smaller brokers, but those brokers won’t get access to deposits, wealth management and insurance products.
In terms of mortgage pricing, Straky says the company will be “very price competitive.”
“If you’re out of the market by 5-10 basis points, that makes a significant difference to consumers.” But “our key differentiator isn’t on pricing, it’s on value,” he states. “We believe in offering a full suite of products.”
All in all, Canadian First sounds like a promising entrant to the broker market. From a mortgage standpoint, a few things remain to be seen, including its:
- Product breadth: The world doesn’t need more vanilla insured mortgage products. Will Canadian First offer customers mortgage features that they can’t get elsewhere?
- Capital Base: Having a big balance sheet, which is the company’s goal, lets a lender offer specialized products (e.g., readvanceable mortgages, RRSP loans, equity financing, etc.). But it’s not enough to have lots of deposits to fund such products. You also need lots of capital. In Canadian First’s case, it’ll need to post roughly 10% capital for every mortgage it funds through deposits. To truly scale its business, it’ll need hundreds of millions of dollars in capital and that might take years to amass if it does so solely from retained earnings. That said, it could accelerate the whole process by raising cash via private placement or via the public equity market.
- Rates: It’s getting harder to sell an averagerate. And a lot of brokers and lenders who talk about selling “value,” don’t have great rates. If Canadian First’s rates aren’t better than average, that could slow its uptake for two reasons: (1) discount brokers and mortgage reps at major banks have become ferociously competitive; and (2) rate comparison sites will dramatically exacerbate consumers’ rate sensitivity. That said, Straky notes, “If all you have is to reduce your business to price, you will get beaten. Consumers want higher level advice. Rate aside, why do they pick a mortgage professional in the first place?”
- Liquidity Event: Our sense is that the company wants to go public eventually. That will appeal to brokers wanting to buy-in while it’s still private. Then again, there’s a list of other broker-owned entities that haven’t panned out as expected. MortgageBrokers.com rings a bell, not that it’s an apples to apples comparison (since it wasn’t a bank).
Sidebar: As Canadian First announces its products and lending policies, we’ll report back with all the details.
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