Margin lending back in the mainstream media

I was interested to see an article about margin lending on the ABC news website this morning: There's a risky way to supercharge your savings that some Australians are embracing

Margin lending was a huge topic back in 2006/2007 during the huge bull market we had in the lead up to the GFC. Indeed the most popular article I wrote on the InvestEd website (now InvestChat) was a technical article about how margin lending worked (it was full of mathematical formulas).

When the GFC hit and the market kept dropping and dropping, most people with margin loans (if they didn't know how to manage them) ended up in a world of pain. Since then, lending criteria for margin loans has tightened up significantly and they have become very much a fringe product compared to the main stream they were back in the mid-2000's

But now that we're back into record territory on the ASX, and real estate prices are seen by many as being too high, while interest rates are at record lows - it seems that margin lending is back on the agenda.

Indeed, the linked article mentions that there has been a strong growth in margin loans recently:

"Figures from the Commonwealth Bank show, in the three months to September, the amount of money tied up in margin lending shot up from roughly $11 billion — where it had been for several years — to $17 billion.

That is an increase of more than 50 per cent."​

Given it's been 12 years since the GFC, there will now be a new generation of enthusiastic investors who have never lived through a serious market crash / downturn - and these people are likely to take advantage of the low interest rates and the promises that margin lending offers to gear up.

It will be interesting to see what impact this has moving forward - I'll certainly be keeping an eye out for more mainstream media coverage of margin loans. Wonder if we'll see a return to the day-trading mania of the dot.com bubble days (or are all the day traders now trading crypto currencies?)

 

Wow - that's rather generous. I've held the CFS Geared Share fund in my SMSF for a long time now - it can be very volatile.

 

... but we've just broken through for a new record high ... it's all blue sky from here, right?

 

I don't think we're quite at that stage yet.

 

Based on some comments made by @petewargent on Twitter, it seems that the article may have asserted a sudden growth in margin lending which isn't necessarily the case.

Here is Pete's version of the chart which is from the same data that the ABC was referring to:



That strong upswing in Sep 2019 is what prompted the following to be written in the ABC article:

"Figures from the Commonwealth Bank show, in the three months to September, the amount of money tied up in margin lending shot up from roughly $11 billion — where it had been for several years — to $17 billion.

That is an increase of more than 50 per cent."​

It turns out, that's not actually what happened (and the CBA charts actually mentioned this - it was just missed by the journalist who wrote the article).

What happened is that the RBA changed the source of the data! From https://www.rba.gov.au/statistics/tables/xls/d10hist.xls?v=2020-01-24-09-24-29

The data are compiled based on information supplied by banks and brokerage firms offering margin lending facilities. Between end-June 1999 and end-June 2019, these data were compiled from a survey that was conducted by the Reserve Bank on a quarterly basis. From September 2019, these data have been compiled from quarterly returns collected by APRA.​

I believe the basis for the change is that the APRA results should be more accurate (uses returns rather than surveys) - meaning that there probably really is $17B in margin loans, but it also probably didn't get there in the space of a single quarter.

So the assertion from the ABC that "margin lending has increased by more than 50% in a quarter" doesn't really seem to be accurate.

As a more general comment about margin loans - one of the main things that has changed between the GFC and now is that margin lenders can't just arbitrarily increase your margin loan when you ask for it - you actually have to prove serviceability.

In the leadup to the GFC, margin loans were basically just asset-loans. If you had the collateral in place (ie shares or property), then they would simply lend against that without any questions about whether you could afford to pay back the loan. Paying back the loan was never a part of the equation - you typically capitalised interest back into the loan and if you needed to pay out the loan, you sold the asset to do so.

The typical pattern was - tip in some cash and top it up with a margin loan to buy some shares (or funds, etc). As the shares went up in value, your loan limit would increase and so you simply increase the loan amount to purchase more shares. They went up as well, and you just kept increasing and buying - there simply weren't any limits, provided that you could manage the capitalised interest ... until the shares went down in value and you exceeded your loan-to-value ratio and you got a margin call!!!

In the post GFC world, those rules changed. So while I was easily able to borrow well in excess of $1m to invest in shares pre-GFC based purely on the value of my share portfolio - now, I have a fixed limit and need to apply for an increase and show I can service that debt.

So I doubt we will see such a huge ramp up in margin lending ever again, unless those rules are relaxed.

It's not time to call the peak yet.

Also limiting the increase in margin lending would be the large range of new products available such as CFDs, which give you a form of leverage into markets that work quite differently to margin loans.

 

I haven't quoted Pete at all in my post, other than copying the chart he posted on Twitter. All words which are not clearly indicated as quotes, are mine.