Margin calls on rise as bourse beats a retreat
The S&P/ASX200 is down more than 10 per cent since its peak in May, as investors sold shares after the US Federal Reserve announced it would wind back its stimulus program. Fears over a possible credit bubble in China have also weighed on sentiment.
Margin lending occurs when investors borrow money to invest in the sharemarket, usually against the value of their property. Banks are required to make a call to investors when the securities they hold decrease in value beyond a certain level.
Bendigo and Adelaide Bank, the country's fourth-largest margin lender, said the recent market falls had triggered a rise in the number of margin calls, but the number was still low given "market volatility and when compared to historic levels".
"In a falling market, people are required to cover their security," a spokeswoman said.
The sharemarket fall has coincided with a sell-off in Australian government bonds, with 10-year yields hitting a 15-month high on Monday. Chinese equity markets also witnessed their biggest daily loss in four years this week after diving 5.3 per cent in Shanghai and 6.7 per cent in Shenzhen on Monday.
National Australia Bank's head of equity lending, Adrian Hanley, said the number of margin calls made by the bank had risen to an average of 30 calls a day per 10-12,000 clients in recent weeks, up from 10-20 calls a day before the market dropped.
This was significantly lower than during the global financial crisis, when an average of 700 calls were being made. However, he said clients now received an SMS or email when they were about to reach their buffer, reducing the need for as many calls.
"We have seen a marginal lift in margin call activity because of the recent wave of volatility," he said. "But clients are still entering the market at more conservative levels, maybe as a result of the GFC experience where they sailed a bit too close to the wind."
He said gearing levels averaged 30 per cent, compared to pre-GFC levels of 45-50 per cent. Reserve Bank figures from March show about $12.5 billion tied up in margin loans, down from a peak of $41.5 billion in the December quarter of 2007, but higher than the previous quarter at $12.2 billion.
The biggest lender in the sector, CommSec, would not comment on the state of its margin lending book.
Frequently Asked Questions about this Article…
A margin call happens when investors borrow money (margin lending) to buy shares — often secured against property — and the value of the securities falls below a required level. Banks must ask investors to top up their account or sell holdings when that buffer is breached.
The S&P/ASX200 has fallen more than 10% from its May peak, and broad volatility — including a sell-off in bonds and big losses in Chinese equities — has reduced the value of securities. That drop has triggered more margin calls as lenders enforce required security levels.
Bendigo and Adelaide Bank, the country's fourth-largest margin lender, said recent market falls have increased the number of margin calls but that call levels remain low relative to historic volatility.
NAB reported margin calls rose to about 30 calls a day per 10–12,000 clients in recent weeks, up from 10–20 calls a day before the market drop. The bank also noted clients now get SMS or email warnings when they’re approaching their buffer, reducing the need for as many direct calls.
The article notes current call volumes are far lower than during the GFC, when an average of about 700 calls were being made. Gearing levels are also lower now, averaging about 30% compared with pre-GFC levels of 45–50%.
Reserve Bank figures from March cited in the article show about $12.5 billion tied up in margin loans — down from a peak of $41.5 billion in the December 2007 quarter but slightly up from $12.2 billion the previous quarter.
Yes. The article links selling pressure to the U.S. Federal Reserve winding back its stimulus and to fears about a possible credit bubble in China. Chinese markets had steep one-day falls (Shanghai down 5.3% and Shenzhen down 6.7%), which weighed on sentiment and contributed to volatility that can trigger margin calls.
CommSec, identified as the biggest lender in the margin sector, declined to comment on the state of its margin lending book, according to the article.
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