Margin Lending Lemmings

Investors aboard the borrow to invest, get rich quick trainare finally jumping off, or more to the point falling off, with the number of open margin lending accounts declining in the September quarter, for the first time since the Reserve Bank of Australia (RBA) began publishing margin lending data in 2000.

Open margin lending accounts fell 2 per cent to 202,200, as investors with leveraging in mind are not just sitting on the sidelines waiting to re-enter, but totally exiting the market by closing accounts.

Client account growth had been rapid in recent years, increasing 5 per cent in the year to September 2008, 26 per cent in the last two years and 44 per cent in the last three.

The aggregate credit limit declined by 4 per cent to $71 billion, as expected due to account closures, but also indicating those margin lenders remaining in the market are not increasing lending limits.

Margin calls of 4.32 per day per 1,000 clients in the September quarter were over double the 1.75 the June quarter, and four times the 1.04 in the corresponding period a year before.

This could rise further in the December quarter when the data is released in early 2009 due to the roller coaster ride markets went on in October and November.

Adding perspective to the increase in margin calls in Q3, the September quarter 2006 and 2005 were 0.56 and 0.40 respectfully.

The combined value ofthe underling securities acting as collateral for margin loans plunged 29 percent to $59 billion, down from $83 billion in June, with the actual equity value making up the loans falling 14 per cent to $31.9 billion.

Margin loan volumes peaked at $37.8 billion in the December 2007 quarter, and have since declined 27 per cent.

Protected equity has increased its share of total margin lending to 10.1 per cent, up from 6.7 per cent one year ago and 6.3 per cent in the September quarter 2006.

Protected equity products were anticipated to become less attractive to investors, due to achange in government taxation rules in this year’s Budget.

The deductible portion was pegged to the RBA standard variable home loan indicator rate, currently 8.35 per cent as at October 2008, compared to previously being pegged to the RBA’s unsecured personal loan indicator rate, which is above 14 percent.