Margin calls quadruple amid stockmarket turmoil

The number of speculative traders receiving a margin call has quadrupled over the past week as global sharemarkets plunge.

Stockmarkets’ red ink is raising the prospect of investors receiving margin calls Picture: AAP

The number of speculative traders receiving a margin call has quadrupled over the past week as the plunge in global sharemarkets ­accelerates.

Specialist margin lender Leveraged, owned by Bendigo and Adelaide Bank, told The Australian almost 4 per cent of its customer base had been “subject to a margin call over the past couple of weeks”, up from less than 1 per cent at the end of last month.

The unravelling of the outstanding $17bn worth of speculative finance for share buying as the Australian market heads into bear market territory — constituting a fall of 20 per cent or more from its February 20 peak — has raised fears that panic selling from underwater margin loan investors will add further downward pressure on prices.

The nation’s biggest retail brokerage, CommSec, a division of Commonwealth Bank, has been inundated with phone calls to its margin loan department.

“We’re currently experiencing a high level of inquiries. All our telephone staff are currently busy,” said a recorded message on the CommSec hotline.

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Although the margin-lending industry has shrunk from the peak just before the global financial crisis at $42bn in the December quarter in 2007, lending boomed last year as the local market was primed for a rally after the federal election and three rate cuts by the Reserve Bank, jumping from $11bn to $17bn between the June and September quarters.

Margin loans involve a revolving line of credit that allow an investor to borrow money to invest, and uses shares or managed funds as security. But due to the loans’ risky nature, investors can face huge losses if the market fails and can owe more than the original investment. This prompts a margin call to top up the equity in the loan.

“Given the large falls in the market over the past two weeks, there has been an increase in the number of margin calls issued. However, it is still well down on what we saw at the height of the GFC,” a CBA spokesman said.

About 85 per cent of CommSec’s margin loan customers are aged over 46, meaning many may have experienced a margin call during the GFC.

Head of Leveraged Lily Elliott said most of the margin loan company’s customers had low-to-moderate levels of gearing.

“To date, less than 4 per cent of our client base has been subject to a margin call over the past couple of weeks,” Ms Elliott said. “Compared to rapid market movements in the past, our customers are far better diversified in terms of their investments with borrowing across a broader range of asset classes.”

A spokeswoman for Westpac’s BT Financial said customers who received a margin call needed to “take appropriate action by 2pm the following business day”. BT said: “While the recent volatility in markets has seen a rise in the number of margin calls, the number of customers receiving calls is currently less than 3 per cent.”

Stephen Innes, Asia-Pacific market strategist at AxiCorp, said Friday’s market falls of about 4 per cent on Wall Street could have sparked another wave of margin-related selling.

Shane Langham, a senior private wealth adviser at Phillip Capital, said none of his clients had yet had any margin calls. “A lot of my clients have not been using their margin accounts and have already deleveraged before the recent drop in the market,” Mr Langham said. “This I believe is due more to the fact that margin loan interest rates are quite high compared to home loan rates.”

The level of outstanding margin debt per investor has more than doubled between 2012 and 2019, from $111,000 to $235,000, according to RBA figures.