Clients will benefit from competition for their cash

By Rudy Mezzetta | November 2009

Canadian financial institutions are duking it out in an increasingly competitive market for deposits, whether the new business comes through deposit brokers or directly from consumers. New entrants into the industry are hunting aggressively for customers by launching high-interest savings products and services, while existing players are expanding their product lineups.

This past September saw the splashy launch of a new, online-only deposit-taker, Ally, into the retail high-interest savings-account and term-deposit space. Ally is a product line of Toronto-based ResMor Trust Co. , which in turn is a subsidiary of U.S.-based GMAC Inc. ResMor has applied to the Office of the Superintendent of Financial Institutionsto become a Schedule II bank, a Canadian subsidiary of a foreign financial institution, under the Bank Act.

In October, Toronto-based Canadian Tire Bank, a subsidiary of retailer of Canadian Tire Corp. Ltd., announced that it would be offering its direct-to-consumer deposit products and services nationally, following the completion of a two-year pilot project that offered them in selected cities only. However, Canadian Tire Bank also announced it will be retreating from the mortgage loan business, selling its existing book of $167 million in mortgages to National Bank of Canada.

Both Ally and Canadian Tire Bank deposit products are available across the country, except in Quebec, although both firms say they have plans to enter that market.

These two firms, along with dozens of other banks and financial services firms, are vying for a piece of the mountain of inves-tor dollars that have been sitting on the sidelines since the market crash.

In fact, according to a report released in September by Toronto-based Scotia Capital Inc., Canadians have an estimated $1 trillion in cash or near-cash vehicles such as term deposits. Much of that money is earning no interest — or next to none — in deposit accounts with the big banks. Indeed, even the high-interest vehicles of the banks usually pay out at significantly lower rates than those posted by some of the online players, such as Ally. This fact presents a chance for new and nimble players to establish themselves.

“It’s a large market in Canada, there’s a lot of opportunity for new entrants to gather share, and everyone else keeps going along happily,” says Ally’s managing director, Mike Spero. “The Big Six are still happy, and the new entrants are happy.”

But perhaps a bigger factor driving the hunt for deposits appears to be the continued absence of activity in the securitization market.

“We used to do securitizations for our credit card business, but that dried up over the past 12 to 18 months,” says Marco Marrone, president of Canadian Tire Financial Services, the Canadian Tire unit under which the banking arm operates. The firm last completed a securitization transaction based on its credit card portfolio in February 2008, he says. As of June 30, Canadian Tire Bank had raised $1.6 billion in broker deposits and $541 million in retail deposits.

In fact, the lack of an active securitization market has forced many financial institutions to adjust their business models significantly. Earlier this year, Xceed Mortgage Corp., an originator of residential mortgages, and HOMEQ Corp., which provides reverse mortgages through its Canadian Home Income Plan Corp. subsidiary, each applied for permission to convert into a Schedule I bank, a domestic bank under the Bank Act. CHIP has recently been approved and, as a result, is changing its name to HomEquity Bank. Both Toronto-based firms are interested in raising deposits through the broker network to help fund their mortgage businesses.

And there are few indications the securitization market is returning quickly. “While I see no reason it won’t come back [eventually],” says Raj Kothari, a partner and leader of the asset-management practice with Toronto-based consulting firm PricewaterhouseCoopers LLP, “I don’t think there’s enough confidence yet in the integrity of the system that will allow it to flourish as it did in the past 10 years.”

One thing that doesn’t seem to be preventing new players from entering the market is the threat of margin compression, which was one of the key challenges facing most financial institutions at the beginning of the financial crisis.

“Presumably,” says Maurice Levi, a professor of finance at the Sauder School of Business at the University of British Columbia in Vancouver, “the new players believe the margins between borrowing and lending rates are wide enough to be of interest.”