There is no question that the Thai stock market is locked in a bull run, with the main index up by nearly 6% so far this year and now at its highest level since the mid-1990s.
Margin lending has jumped together with share prices and trading liquidity.
Top broker Maybank Kim Eng Securities (Thailand) reported that margin lending in January alone rose by nearly 10%, with current outstanding loans at the highest point in a decade.
Investors use margin loans to trade securities on credit. By using leverage, an investor can stand to profit significantly more from a rise in share prices than if trading solely on cash. But margin lending was at the root of more than a few broken wallets during the boom-and-bust of the market prior to the 1997 crisis.
Investors trading on margin are forced to pledge additional capital if share prices decline and could even see their stocks subject to a "forced sale" if they are unable to cover the shortfall.
Montree Sornpaisarn, Maybank Kim Eng's chief executive, said while margin lending has definitely risen in recent months, he does not believe there is any cause for alarm.
"The industry's outstanding margin loans of 45 billion baht are not really very high considering the market capitalisation of the exchange is 12.5 trillion baht," he said. "Before the 1997 crisis, margin loans peaked at 100 billion baht against a market cap of 3.5 trillion."
Maybank Kim Eng reported outstanding margin loans of more than 10 billion baht for January, up from 8.4 billion at the end of last year. As of Dec 31, the brokerage held a 20% market share of outstanding industry margin loans of 41 billion baht.
Mr Montree said while he does not see any systemic danger from margin lending, the broker does have controls to manage risk, with margin lending for non-SET100 stocks reviewed on a case-by-case basis and approved in accordance with the fundamentals of the target investment.
Brokers also pool data about industry margin lending and will cease lending if collective industry loans exceed 20% of the market capitalisation of an individual stock, he said. They will also decline to lend for investment in stocks singled out as potentially risky in the weekly turnover list announced by the Securities and Exchange Commission (SEC).
Mr Montree said margin loans meanwhile offer a good revenue stream for the brokerage, with interest rates ranging from 5.5% to 6.5% per year. Lending also receives support from the broker's parent, Kuala Lumpur-based Maybank, which wants to expand its retail footprint in this country.
At SCB Securities, chief executive ML Thongmakut Thongyai said margin lending has also increased by 10% to about 1 billion baht a month.
He agrees that lending levels have not reached any cause for alarm, considering the strong economic fundamentals of the Thai economy and favourable growth prospects for Thai listed firms.
Trading liquidity has risen thanks in part to foreign capital inflows into Thailand and elsewhere in Asia in search of higher yields, said ML Thongmakut.
"The Thai stock market may be expensive, but its regional peers are also not cheap," he said. "Many brokers see the SET index possibly reaching 1,500 or 1,600 points this year as energy and petrochemical stocks, which account for 30% of the index, see a rebound."
SCB Securities meanwhile plans to strengthen its research coverage for small- and medium-cap stocks, citing increased demand from investors.
The SET index closed on Friday at 1,499.22 points, up 25.02 points, in trade worth 58.5 billion baht.
It is now trading at a valuation of 19.59 times earnings, up from 18.25 times last year and just 12.07 times in 2011.
Meanwhile, the SEC on Friday urged securities companies to strengthen their credit review practices and "know your customer/customer due diligence" procedures, particularly for investors trading under cash balance rules or who have inappropriately transferred securities to boost credit limits.
Regulators have also asked the Association of Securities Companies to revise customer due dilligence guidelines and propose new rules for securities transfers between clients.
Vorapol Socatiyanurak, the SEC's secretary-general, said brokers had agreed to tighten reviews of credit line practices.
"The requirements are aimed at better reflecting the actual financial status and debt repayment capability of each client, thereby enhancing securities companies' risk management and preserving market confidence as a whole," he said in a statement.
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Source: http://www.news.thethailandlinks.com/2013/02/04/keeping-clear-margins/
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