Banks step up a gear with margin lending

As managed funds market share data affirms, the banks can be fierce competitors when they get their acts together. Now, Australia's major banks are taking more than a passing interest in the margin lending market, as Samantha Walker found out.

Five years ago, many would have scoffed at the idea of the major banks throwing their hat into the funds management ring and taking away the spoils. Yet today, traditional fund managers and life insurance offices are potentially facing their biggest threat as banks are beginning to give them a run for their money.

Recent ASSIRT figures had Commonwealth Financial Services topping the list of managers in funds inflow - beating out industry heavyweights such as the AMP, Mercantile Mutual and BT Funds Management. In fact, three of the four major banks made the top five managers in the listing.

The latest market the banks have their eye on is margin lending. With low interest rates and a seemingly pervasive bull market, the margin lending market is becoming increasingly popular with investors and the banks are moving in.

The market certainly has been heating up lately. BT Margin Lending head Gillian O'Mulloy reckons it has grown from about $800 million in 1993 to about $3.5 billion. In 1993, there was only three players in the market. Now there is almost 20 and there is talk rationalisation could be in the air.

This hasn't stopped the banks from pushing ahead with expansion plans. At the moment ANZ, Colonial and the Commonwealth Bank are offering clients gearing facilities. There has also been some industry speculation that another of the major banks will soon follow suit.

Commonwealth Securities is perhaps the most aggressive entrant to the market.

The success of their online broking service has fund managers sitting up and taking notice. Now it is the newest entry to the margin lending market, having set up shop just three months ago.

Already, the group is making an impression on the market. According to Commonwealth Securities director Paul Rickard, it currently has a loan book of $26 million. Rickard says the business is growing at the rate of $3 million a week.

Rickard says the group is able to take advantage of a client base of 320,000 for its share trading facility and is able to offer a one-stop shop for clients who are able to trade shares and organise a loan through the same source.

"People want to start small and then build up confidence in gearing," he says.

"They find the thought of margin calls intimidating."

As such, Commonwealth Securities offers gearing facilities for a minimum loan facility of $20,00, with a drawdown of $2,000. Clients can provide the security for the loan in one of two ways: either by placing a cash deposit on the loan or by using existing shares that they own.

Rickard says the group gears between 40 and 70 per cent, however will gear up to 90 per cent on lower risk investments such as bond funds. As with most other margin loan providers, Commonwealth Securities has a buffer zone on margin calls of 5 per cent.

The point, Rickard says, is to make sure clients are well versed in risk, rather than cashed up.

"Gearing magnifies both your profits and your losses," he says. "We try to screen people on their tolerance to risk rather than how much they have to invest. We also don't want to call people, so we try not to encourage high levels of gearing."

The average gearing level at Commonwealth Securities, according to Rickard, is "around 21 to 22 per cent". This is well below the gearing levels of most other margin lenders, but Rickard says this is largely because the lending facility is in its early stages.

Overall, though, Rickard feels confident Commonwealth Securities will continue to make inroads into the market, and says that the group is here to stay.

"I think Commonwealth Securities will be a very significant player within 12 months," he says.

One of the key issue with the banks' entrance into the market has been the charging of fees - are they cheaper than the more established margin lenders?

The banks claim their fees are not substantial. Commonwealth Securities, for example, charges no application fees for individuals applying for margin loans.

However, it does charge a transaction fee of $10 to clients using the facility.

The only bank in the margin lending market which claims to charge no transaction fees for individuals is ANZ Margin Lending.

Colonial charges clients no transaction fees provided they limit trades to no more than 10 a month. After this, the bank charges $20 for each new share purchase.

Colonial State Bank has also positioned itself within the market to cater to the mid range lender. Its loan book stands at $550 million.

Colonial State Bank's manager of margin lending, Paul Johnston, says that the margin lending market is growing to include investors who have had their appetites whetted through recent successful public floats.

"The actual market has grown," he says. "What's really helped has been sell offs like the Commonwealth Bank and Telstra. A lot of people have gained shares through this trend, and the banks have a fairly large market based to take advantage of this."

ANZ Margin Lending has been in the margin lending market since 1996, and has increased its loan book by 40 per cent in the past 12 months, according to marketing manager Sarah Frearson.

"We were the first bank on the scene. When we established our gearing capabilities there was only Leveraged Equities, BT and ourselves," she says.

The minimum investment required of a client is $50,000. Frearson acknowledges that this puts ANZ Margin Lending at the top end of the scale in the market, an approach that is deliberately designed to make sure clients are "sophisticated investors" who are able to withstand the higher level of risk associated with the product.

Frearson says that the reason the bank is able to cut the costs of margin loans is because of this high minimum investment.

"We see the $50,000 minimum investment as a screening," she says. "We are really aiming for the client who is more comfortable with risk for greater returns.

Our clients have some experience with the share market and now they are using gearing to extend their earnings growth."

ANZ Margin Lending has no entry, closing or transaction fees. Frearson believes that the economies of scale mean that players offering gearing facilities to the mid range of the market must recoup their costs through fee hikes.

"It is difficult to be profitable with clients who are investing less than $50,000 and I think the other players in the market hit investors with extra fees," she says.

In keeping with this approach, ANZ Margin Lending has recently increased their gearing to 80 per cent on the top stocks on their securities list. This 80 per cent gearing applies to stocks of the main four banks, Telstra, BHP and AMP. The bank hopes that by increasing the level of gearing on some stocks, it will allow clients to take advantage of both bull and bear market shifts in adjusting their gearing levels.

"We're really pleased we can offer that to clients. It gives them breathing space in a volatile market," Frearson says.

However, Leveraged Equities marketing manager, John Meagher does not see the banks' entrance into the gearing market as a threat as he says the market is big enough to absorb more service providers.

Meagher says that it is an "ideal market" for gearing, and as such, he is not surprised that the banks have begun offering gearing products to clients.

Leveraged Equities is the second largest player in margin lending, with a loan book of $650 million.

It offers clients a minimum loan of $25,000. Though this minimum is higher than both Commonwealth Securities and Colonial State Bank, Meagher says it still weighs in at the lower end of the market.

Leveraged Equities charges no application fees for individuals and no transaction fees, with the exception of fees associated with clients buying into and then selling public floats.

The only threat, he says, to current growth in gearing, is a long term bear market.

However, while Meagher says he has no "crystal ball", he does believe this may be a while off yet, and the margin lending market will continue to expand.

"Though the market has grown in recent years, it's still only embryonic," he says.