Margin lending continues phenomenal growth

The amount of money flowing into margin lending products over the next three years will continue to grown quickly, according to BT Margin Lending senior vice president Glenn Toohey.

The amount of money flowing into margin lending products over the next three years will continue to grown quickly, according to BT Margin Lending senior vice president Glenn Toohey.

Toohey estimates that the amount of money in the margin lending market will double in the next three years from $6.8 billion in May. Shares and managed funds purchased using margin loans currently makes up about 0.9 per cent of the stock market, which he says may grow to about 1.8 per cent in three years time. This would also double the number of investors with margin loans from about 75,000 presently.

Toohey says the margin lending industry in Australia rose 35 per cent last year and 200 per cent in the last three and a half years.

In the US, margin loans account for about 1.25 per cent of share market capitalisa-tion and the figure is on the rise.

However, Toohey told the recent Gearing and Investment conference in Sydney that there are threats to the phenomenal growth of margin lending.

“The single biggest risk to the margin lending industry and individual participants is greed,” he says.

Toohey says BT Margin Lending is receiving requests by advisers and clients to borrow against speculative stocks and increase its lending ratio. He says BT will resist the pressure to relax its credit policies, however, other institutions looking to grow market share may be tempted.

“The problem is that these accommodating credit policies will probably result in greater losses in any downturn in the market, losses that may threaten the viability of the lender,” he says.

Toohey also says regulators are likely to take an increasing interest in the margin lending market, citing a warning sent out by the Australian Securities and Invest-ments Commission, alerting consumers to risks involved in margin lending.