Margin loans rise but risk still off table
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.
Frequently Asked Questions about this Article…
Margin lending has shown its first growth since the 2009 stimulus-driven market surge. After about three years of decline, brokers and major lenders have reported a recent uptick in new margin loans as investors respond to low borrowing costs and rising share prices.
CommSec has reported a strong rise in margin lending and said it wrote about $75 million in new loans over a recent three-week period. Bendigo and Adelaide Bank (Bendigo Wealth) has also detected early signs of recovery, driven largely by younger investors.
The article says investors are attracted by record-low interest rates, rising stock prices and the availability of fixed-rate margin loans. A younger cohort from generations X and Y is using margin loans to try to boost investment returns, and brokers reported increased use during the March quarter when the market rose about 5.4%.
No — the article notes that gearing levels are much lower than before the GFC. Bendigo Wealth reports gearing below 50% for most clients, and many investors show conservatism with a strong preference for blue-chip stocks rather than aggressive, high-gearing positions.
Total margin lending value has fallen from $21.6 billion in December 2009 to about $12.2 billion at the end of last year. The average margin loan size is also much smaller now — about $65,000 versus near $170,000 before the global financial crisis.
Fixed-rate margin loans appear to be an important draw: CommSec reported that a record 44% of its margin customers were using fixed interest rates of around 7%, suggesting some investors prefer the certainty of locked-in borrowing costs.
The article indicates that risks are still being managed carefully by investors and lenders. While there is growth, total exposure remains well below past highs and many investors are cautious — opting for lower gearing and blue-chip stocks — so the uptick does not mean risks have disappeared.
Reserve Bank data showed the rate of decline in margin lending was slowing in December, brokers reported growing margin loan use in the March quarter (when the market rose 5.4%), and lenders such as CommSec and Bendigo have reported recent increases and new-business flows that point to a potential turnaround.
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