Margin loans not deterring investors

INVESTORS in margin loans have had a torrid six weeks yet appear to be emerging bloodied but unbeaten.

Margin loans not deterring investors

WITH Australia's share market in continuing turmoil, investors in margin loans have had a torrid six weeks yet appear to be emerging bloodied but unbeaten.

At least two providers - CommSec and St George Bank - have reported first signs of growth in margin lending after turbulent trading in January.

St George Bank wealth management head Geoff Lloyd said there was evidence of a return to buying, as investors who had been sitting on the sidelines with cash returned to the market.
CommSec, Australia's biggest retail share broker, made margin calls on less than 4 per cent of its 85,000 clients from the beginning of the year.

“Calls average between nil and 20 a day, and in volatile times can be several hundred a day,'' said CommSec managing director Matt Comyn.

Wednesday's 111-point fall in the market and weakness in the financial sector set off about 250 margins calls for CommSec: a substantial amount but well short of the market blip on January 22, which triggered more than 2000 margin calls.

Concerns about margin lending have been intense as the share market in January sustained a run of falls for about 11 days straight and one margin lender, Tricom, failed to settle its share trades by the daily deadline required by the Australian Securities Exchange.

St George on Thursday revealed it had a $25 million margin loan to struggling property developer MFS. It is secured against MFS shares and personal guarantees. The property group's shares are still suspended and the bank admitted that recovery would depend on arrangements with the borrowers and the outcome of the asset sales.

Reserve Bank of Australia figures for the December quarter show margin-lending activity increased by more than 5 per cent to $37.7 billion in value and 4 per cent in the number of borrowers to just on 200,000.

However, those using margin loans were already growing cautious, with the proportion of capital-protected loans rising 17 per cent to $28 billion.

“I suspect since then that the market has contracted,'' Mr Comyn said. “We have had Tricom unwinding large margin-lending books and positions. It will be interesting to see where the industry sits in this quarter.''

CommSec has added its voice to calls for greater standardisation across the margin-lending industry as a means to enhance client protection.

The call comes as the Australian Securities and Investments Commission seeks new powers to regulate the burgeoning $36billion sector, including requiring lenders and advisers to clearly disclose the risks associated with borrowing to invest in shares. ASIC wants margin lending to be regulated under the Corporations Act.

Australian Securities Exchange chief executive Robert Elstone has also called for greater regulation of margin lending.

CommSec informs clients between 4pm and 6pm on the day the shares break agreed loan-to-valuation ratios, giving them until 2pm the following day to either find more cash or collateral, or sell the shares.

Other margin lenders do not inform clients until the following morning, giving them as little as nine hours to respond instead of 22 hours from CommSec.

At CommSec, one in five margin calls this year resulted in the client selling shares, but only 4 per cent of those sales were forced on clients.

Mr Comyn said CommSec had comprehensive disclosure statements and client suitability tests in an effort to protect customers. It is planning to put more information on its website about ways that clients can manage their loans.