GFC scars help reduce margin loan exposure
AMID the carnage of Australia’s stockmarket slump earlier this week, a poster child of pain in the global financial crisis – margin loans – was largely silent.
That’s partly because of a dive in popularity of margin loans, where investors borrow to lift their exposure to the stock market.
Latest Reserve Bank of Australia statistics indicated total margin lending topped out at $41.6 billion in the December 2007 quarter and were worth $12.4 billion in 2015’s June quarter. Account numbers also fell, from 260,000 in December 2009 to 144,000 in the last quarter.
The performance of margin loans during the GFC is a reason why people flinch from the product. “A lot of people got burnt very badly,” Australian Shareholders’ Association chairwoman Diana D’Ambra says.
Some customers got careless or bad advice in a rising market and borrowed too heavily. When markets plummeted during the GFC, their shares’ value as collateral was decimated. Many then had shares sold out because they could not refill enough cash to meet what’s known as a margin call. Even CEOs got hit, such as Eddy Groves (pictured) of Brisbane-based childcare chain ABC Learning. Ms D’Ambra said older investors could be more risk adverse to such a product now. “There’s been a lot of stigma attached,” she says. But younger people might have been hit, she says.
Brian Phelps, general manager of CBA’s Commonwealth Securities, says strengthening of regulations, such as serviceability checks, had also helped decrease margin-lending.
He added some people might be using home equity drawdowns instead.
Mr Phelps also said investors were using margin loans in “a more guarded fashion now”. The average portfolio would have 12 shares now, whereas it was about five earlier, he said.
Gearing levels had also dropped from an average 50 per cent to 30 per cent, he said.
He said of 30,000 clients, 400 had margin calls after Monday’s market slump, and all safely met the margin call.
Suncorp also has noticed lower margin-loan demand, saying consumers had since the GFC become “more conservative with their financial portfolio”