Last year, Canadian Imperial Bank of Commerce had a “retention issue.” The bank was losing too many customers when it came time to renew their mortgages. As retail banking head Laura Dottori-Attanasio looked for answers, one problem stood out: the fax machines.
Thirty days before renewal deadlines, the bank was sending letters “in ugly, old typeset” to customers, offering similarly “ugly posted rates” that were much higher than the bank’s best offer, she said. The letters invited clients to send a fax or visit a branch to renew.
“Now, just think about that for a moment right? We’re in 2020,” Ms. Dottori-Attanasio said. “That’s a letter that pretty much says, ‘Why are you dealing with our bank?’”
Cutting references to faxing from correspondence and reaching out to clients more often are just two ways the bank has removed “pain points” that turned off customers. They are part of a concerted effort to revive the bank’s residential mortgage business after it fell behind competing banks. And they are emblematic of the kind of unforced errors that kept CIBC’s mortgage portfolio in a state of flux for years.
The ill-fated decision that forced CIBC to play catch-up was made four years ago, when Canada’s housing markets were roaring, as they are now. At the time, CIBC was a front-runner churning out mortgages faster than any other Big Six bank – by a wide margin. But that attracted scrutiny from investors and regulators who worried about risks in a frothy housing market, and they put CIBC under a microscope.
Under pressure, chief executive officer Victor Dodig and his team tried to dial back the rapid growth in the bank’s mortgage book, but hit the brakes too hard. He also shook up CIBC’s management ranks, redeploying dozens of executives. In little more than a year, the bank swung from having the fastest rate of increase in mortgage balances to being the only major bank with a shrinking mortgage portfolio.
So, has CIBC now found a sweet spot? Efforts to close the gap and bring consistency to the bank’s mortgage growth have become “a litmus test for management,” Bank of America Securities analyst Ebrahim Poonawala wrote in a note to clients earlier this year.
Recent data suggest the comeback strategy is working, just in time for CIBC to catch the latest wave of housing mania. The bank is increasing its mortgage lending at a rate on par with major rivals – and even slightly ahead over the past two months. It’s hard to gauge how much a booming housing market has lifted all banks, but with housing prices soaring again, central bankers and regulators are once again voicing concerns about overexuberant real estate markets.
The next test of CIBC’s progress comes on Thursday, when the bank will report quarterly earnings up to April 30.
With Ms. Dottori-Attanasio in charge of personal and small business banking, the watchwords of CIBC’s latest plan for its mortgage business are “consistent and sustainable.” But the persistent question on investors’ minds is whether CIBC can produce the steady growth in its mortgage book that has eluded it in recent years.
“To lead again would be a great thing from my perspective,” she said in an interview, “but we just want to make sure ... that we’re doing it in a balanced way.”
CIBC’s mortgage business reached an apex in the spring of 2017, just as fears about Canada’s hot housing markets were peaking, and the bank’s executives were at odds with one another about how to respond.
Over the past five years, CIBC had dramatically changed the way it sold mortgages, building a large in-house sales force of mortgage advisers to reduce its reliance on third-party brokers. As housing sales and prices surged, that shift was paying off. From May to July of 2017, CIBC’s mortgage balances increased 12 per cent year over year – three times the average growth rate of its big-bank peers at the time.
“You had pushback from the investment community: ‘What the heck is going on?’ ” said Gabriel Dechaine, an analyst at National Bank Financial Inc., in an interview. “Growing too fast ... in any product category is going to get some attention.”
Politicians and regulators also took note. In B.C. and Ontario, provincial governments had introduced 15-per-cent taxes on home purchases by foreign buyers. And behind the scenes, Canada’s banking regulator was ramping up its scrutiny of banks’ mortgage activity.
Mortgages make up about 55 per cent of CIBC’s loans, which is a larger proportion than at any other major Canadian bank. At the time, CIBC was a big player in large loans for homes costing millions of dollars in the two metropolitan areas with the most feverish activity: Toronto and Vancouver. That left it more exposed than other banks to policy changes designed to cool housing markets.
In meeting after meeting, CIBC executives debated what to do next, according to three sources with knowledge of the discussions. Bankers in the mortgage business wanted to keep their foot on the gas, arguing the rapid growth was generating a stream of new, low-risk income. But top leaders, including Mr. Dodig and Ms. Dottori-Attanasio, who was chief risk officer at the time, were concerned about the negative attention the bank was attracting for being out of step with the industry trend, the sources said.
The Globe and Mail is not identifying the sources because they are not authorized to discuss the bank’s deliberations.
At the same time, CIBC was undergoing major changes. The bank was pursuing a major deal, acquiring Chicago-based PrivateBancorp Inc. as the cornerstone of a return to banking in the United States. But for months, CIBC chased a moving financial target to secure the deal, twice raising its bid, ultimately to US$5-billion from US$3.8-billion. The move to expand in the U.S. was one way to assuage investors’ concerns that CIBC was too concentrated in Canada, and especially in mortgages.
Days before the deal closed in June, 2017, CIBC shuffled more than 40 senior executives. Retail banking head David Williamson left the bank, replaced by Christina Kramer as head of personal and small business banking. The departure of Mr. Williamson removed a staunch defender of the bank’s rapidly growing mortgage book, the sources said.
Mr. Williamson declined to comment.
Weeks later, in July, 2017, the Office of the Superintendent of Financial Institutions (OSFI) published draft changes to its guidelines for mortgage underwriting, proposing a tougher stress test on uninsured mortgages (for which borrowers must have at least a 20 per cent down payment) and tighter procedures to verify a borrower’s income. When the revised rule took effect in 2018, it required banks to make “rigorous efforts” to verify documents that proved a borrower’s income – a higher standard than the “reasonable” efforts under the old rule.
“From a risk perspective, we looked at that and said, are we doing a reasonable job? Absolutely,” Ms. Dottori-Attanasio said. “Would we define what we were doing as rigorous? No. We thought we’d have to do more.”
She added: “Because we were growing the most in that market, we got impacted most.”
It wasn’t long before CIBC’s moves to rein in some of the fastest-growing parts of its mortgage portfolio started to squeeze its advisers.
The bank dramatically cut back three programs catering to foreign investors buying Canadian homes, self-employed buyers and owners of multiple rental properties. Each of those categories of borrowers were prominent in Vancouver and Toronto, the two largest mortgage markets in the country, and all had been major drivers of growth in CIBC’s mortgage portfolio, setting it apart from other banks.
“I think it was a combination of being overindexed to a certain type of buyer, overindexed to a certain type of geography, both of which needed to cool down,” said Mr. Poonawala of Bank of America, in an interview.
As the bank made fewer of those loans, some CIBC mortgage advisers saw a large share of their business and referrals dry up. The bank’s roster of 1,200 mortgage advisers – which had nearly doubled in size since 2013, attracting top producers from rival banks – shrunk by a quarter as some 300 advisers left the bank.
“They went to competitors. And that just further, I’d say, aggravated our [declining] growth rates to where we continued to drop, whereas the rest of the market was kind of picking up,” Ms. Dottori-Attanasio said.
After CIBC’s mortgage balances increased 10 per cent, year over year, in the first fiscal quarter of 2018, the business started to stall. Balances rose by just 1 per cent in the fiscal fourth quarter that year. The mortgage portfolio then contracted by as much as 5 per cent in each fiscal quarter of 2019, compared with the previous year. In that same span, mortgage balances at the rest of Canada’s major banks were increasing by 3 per cent to 5 per cent, on average.
At a conference of analysts and investors in September, 2019, Mr. Dodig acknowledged what was already apparent to Bay Street: “Candidly, I think we went too far left in slowing things down, put the brakes on too hard, and we’re re-adjusting for that,” he said.
But once CIBC had turned down the flow of new mortgages, it was harder to turn it back up.
Faced with a need to jump-start its performance, CIBC shuffled key leaders for the second time in less than three years in February of 2020. Ms. Dottori-Attanasio took over the retail banking division and Ms. Kramer moved to run the bank’s technology and operations groups. Ms. Dottori-Attanasio, who supported the effort to temper the bank’s booming mortgage portfolio a few years earlier, assumed the challenge of reviving it.
She made further changes to the leadership of the mortgage business. The senior vice-president in charge of personal lending products including mortgages, Dilprit Grewal, left the bank four months later. Ms. Dottori-Attanasio said she brought experts into the bank’s mortgage business and gave the division head broader authority over every aspect of issuing a mortgage, from reaching out to clients to the technology that fulfills a loan.
The turnaround plan they created is drawn from a tried and tested playbook: Bulk up the front-line sales force, put a premium on retaining customers when mortgages come up for renewal, focus on answering new mortgage applications quickly and continuously strip out clunky features in internal systems that bog down the approval process.
To bring discipline to the rebuild, Ms. Dottori-Attanasio set up a weekly “war room” meeting to measure progress and fix problems as they arose.
Through hiring, CIBC has restored its sales force to about 1,200 mortgage advisers, but this time they are spread more evenly across the country. Approximately 44 per cent of the growth in CIBC’s mortgage book now comes from the Greater Toronto and Vancouver regions, compared with about 67 per cent in 2017. “That way our results should move more in line with the market,” Ms. Dottori-Attanasio said.
The bank also struck partnerships with Re/Max to match clients from the real estate giant with CIBC mortgage advisers.
Retention rates for clients with mortgages have risen from the high 80-per-cent range to more than 90 per cent as the bank has worked to keep in closer contact with existing clients. Feedback from customers suggests “they want to hear from us more often,” Ms. Dottori-Attanasio said. “We would expect, as we continue to take out pain points in the system, that our retention rate will continue to do better,” she said.
The gap between CIBC and its competitors has largely closed. In the banks’ fiscal first quarter, which ended Jan. 31, CIBC’s mortgage book increased by 5 per cent year over year, compared with an 8-per-cent average for the other Big Six banks. But regulatory data show CIBC’s loans secured by real estate increased the most of any major bank in February and March, rising by 1.9 per cent, compared with an average of 1.2 per cent among peers, according to a report from RBC Dominion Securities.
That growth has helped reduce the discount that has dogged the bank’s share price. CIBC’s price-to-earnings multiple trailed the average of other large banks listed on the TSX by 10 per cent to 20 per cent for much of the period from 2017 to 2020. But the valuation on CIBC’s stock now trails peers by less than 4 per cent, at 13.5 times earnings, according to Bloomberg. “I think they’re on the right track,” said Mr. Dechaine of National Bank.
The bank had about $230-billion of residential mortgages at the end of March, up from $214-billion two years ago. But its recent pick-up in mortgage growth comes as the Bank of Canada raises concerns about “exuberant” housing markets driving up household debt, and OSFI, Canada’s banking regulator, prepares to make the stress test on some mortgages tougher starting this week.
Among investors, “there is still skepticism,” Mr. Poonawala said. But CIBC’s turnaround in mortgages is one reason the bank is getting more credit: What was once a weight dragging on the bank’s performance is becoming a measure of returning faith in CIBC. “If [Mr. Dodig] gets it right over the next year or two and the stock valuation recovers, I think he would have proven himself, that he was able to pivot and take the feedback and translate it into good execution.”
After five years of fluctuations, CIBC’s mortgage book is finally acting more predictably. The true test, Ms. Dottori-Attanasio knows, is to keep it that way.
“It feels good,” she said. “We do have some really good momentum across all of our consumer businesses. ... And we still have work to do.”
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