Margin loans rise but risk still off table
Margin lending is growing for the first time since the stimulus-induced sharemarket surge of 2009, as investors seek to capitalise on record low interest rates and rising stock prices.
The country's biggest lender in the sector, CommSec, says in recent weeks there has been a strong rise in margin lending - where people use borrowed money to invest in shares or managed funds - after the first quarter of growth in three years.
Bendigo and Adelaide Bank, which is the equal fourth-largest margin lender, also said it had detected early signs of a recovery, with a younger cohort of generation X and Y investors driving the growth.
CommSec's margin loan book had been shrinking for the past three years until recently, but general manager of distribution Brian Phelps said tentative growth in February had strengthened in March, with the bank writing $75 million in new loans in the past three weeks.
This was the strongest growth in at least three years and reflected increased confidence and the low cost of borrowing through fixed-rate loans, he said.
"Since about 2010, the margin lending book had gradually been getting smaller, month on month. This is the first time it's really stopped and turned around and started to grow," Mr Phelps said.
"In the last three weeks we've written $75 million worth of new business, so that is a strong uptick and the first real indicator that people are starting to draw and re-activate their margin loans quite significantly again."
The total value of margin loans remains a fraction of previous highs, and gearing levels are much lower than before the global financial crisis. But Mr Phelps said the trend could be a sign of a turnaround in growth.
"This last quarter is the first time we've seen growth in the last three years, and potentially it's showing signs of coming back a bit."
The rise comes after a three-year decline in the value of margin loans, from $21.6 billion in December 2009 to $12.2 billion at the end of last year. The last period of growth was the December half of 2009, in which share prices jumped by almost a quarter as markets were spurred on by ultra low global interest rates.
Bendigo Wealth's head of wealth markets, Alex Tullio, said there had been signs of increased margin lending recently, but the bank's clients remained cautious. Gearing levels were below 50 per cent and people had a strong preference for blue chip stocks.
"We see a lot of conservatism still in the market. The bulls aren't running, so to speak, just yet," Ms Tullio said.
She said the "vast majority" of new business was coming from generations X and Y - those in their 20s, 30s and 40s - who were trying to use margin loans to boost investment returns.
Mr Phelps said investors were also attracted by fixed interest rates of about 7 per cent - which were being used by a record 44 per cent of the bank's margin loan customers.
"That tends to suggest that people have a bit more confidence, they're prepared to go in and take a loan out for a longer period and fix the interest on it, so they're less concerned about having to get out quickly," he said.
Latest Reserve Bank figures from December show the rate of decline in margin lending was slowing. Brokers have reported growing use of margin loans during the March quarter, in which the sharemarket rose 5.4 per cent.
The average margin loan size has fallen to about $65,000, compared with near $170,000 before the global financial crisis.