Bank of Nova Scotia is paying $233-million to acquire a Canadian mortgage business, vaulting it into third place among the country's leading home lenders and positioning it to take advantage of a potentially lucrative market: "near-prime" borrowers.
Scotiabank said it will gain 42,000 mortgages, valued at $7.5-billion, along with $1-billion in deposits, as part of its purchase yesterday of Maple Trust Co., a division of Toronto-based Maple Financial Group Inc. C The deal will give the bank a 13.2-per-cent share of the Canadian mortgage market, behind only Royal Bank of Canada C, with close to 16 per cent, and Canadian Imperial Bank of Commerce C, with about 15 per cent.
More importantly, however, it will effectively double the amount of mortgages the company brings in from brokers - the fastest growing source of new business in the industry. Scotiabank will now have the country's second-largest broker-origination business, behind only CIBC.
Currently, brokers represent about one-quarter of the residential mortgages purchased each year by Canadians, or about $35-billion worth. Only a few hundred of these brokers plied their trade 15 years ago, but this number has ballooned quickly to about 10,000, as first-time home buyers have preferred to let someone else haggle with their banks and compare deals.
The question is whether the growth in this area has already peaked. Brokers drove one-third of the mortgage business two years ago, but have seen their share slip. One of the challenges facing the broker channel is its popularity: the droves of new - and sometimes inexperienced - professionals who are rushing to take advantage of demand from new home buyers.
The Maple Trust deal is a relatively small one for a company of Scotiabank's size, and it will hardly dent the company's $5-billion worth of excess capital. Yet it is symptomatic of how few opportunities there are to add heft in Canadian banking, particularly in the retail and wealth management market, where Scotiabank has fallen behind some of its rivals.
Several analysts described the deal yesterday as "solid," if unspectacular, and pointed out that the bank got the mortgage portfolio for a decent price - another way of saying that with all this extra cash piling up, a relatively cheap purchase like this is better than doing nothing at all.
Scotiabank executives, however, sought to portray the deal as a growth story, and a chance to sell additional products to more than 40,000 new customers.
Maple Trust had $2.9-billion in originations last year, and is regarded as a very low-risk lender, with more than 90 per cent of its mortgages covered by default insurance. That said, it is well positioned to help the bank grab a larger piece of the near-prime market, a $20-billion opportunity that has traditionally been neglected by the Big Six banks. The near-prime market is a group whose credit profile has a few blemishes, but is considered less risky than the sub-prime borrowers. It is also a group that tends to favour doing business with mortgage brokers rather than banks.
"We believe there is good growth there," said Alberta Cefis, executive vice-president of domestic personal lending and insurance at Scotiabank. She said the bank launched a pilot project a few months ago, and will roll out the product nationally in the spring. "It's an untapped market."
Mortgages are viewed as an important anchor for the banks, enabling them to establish long-term relationships with clients and cross-sell new products to them.
The overall value of residential mortgages across the country is forecast to hit about $700-billion this year, a 7-per-cent increase over 2005, according to Ms. Cefis.
Privately held Maple Financial Group is partly owned by Ontario Teachers Pension Plan Board, which has a 27-per-cent stake, and National Bank of Canada, with 24 per cent. Maple Financial has banking operations, a derivatives arm, and an alternative investment business.