While inflation tapers off record highs and central banks continue to hold policy rates, brokerage firms continue to increase the heat on clients as they adjust margin loan rates upwards against the backdrop of compressed spreads and less business activity.

Barita Investments Limited is the latest firm to make adjustments to its product offerings as higher interest rates continue to compress its top and bottom line. Clients who use its margin loan product dubbed Barita Smart Loan will see the interest rate on their existing loans increase on December 1 between 25 to 100 basis points (0.25 – 1.00 per cent), depending on the time to maturity of the loan.

“In light of the increases in the policy rate, we have observed higher money market rates and tightening liquidity. These changes, as well as the higher-than-projected rate of inflation, have affected Barita Investments Limited [Barita] as they have the entire market. While we have held strain, even as other players in the market have adjusted their lending rates upward, in recognition of and commiseration with the current economic challenges that many of our clients are facing, we now, regrettably, are at the point where we, too, are forced to adjust our rates in response to prevailing market conditions,” said the letter sent to clients on October 27.

The letter gave an example, whereby a loan with an interest rate of 10.25 per cent with 25 months to maturity would be 11.00 per cent after 75 basis points are added. However, the letter also underscored that any loan partially or fully backed by one of its unit trust products would not have an increase on the existing interest rate.

A margin loan is a secured loan, whereby a client borrows against the value of a financial asset held with a particular brokerage firm. These assets include stocks, unit trusts, repurchase agreements (repos), and bonds. Barita clients can borrow against 80 per cent of the value of a fixed income investment and 55 per cent of equity-based investments. The fixed income unit trust products carry rates between 8.75 and 10.75 per cent, the other unit trust funds range from 10.50 to 12.00 per cent, and equity/stock accounts have rates between 11.25 and 12.75 per cent.

Though this will mean extra monthly costs for some customers, this increase can be described as minor compared to other broker rates in the market. VM Wealth Management Limited’s five-year margin loan rates in May 2022 was 10 per cent. Interest rates were adjusted in June 2022 with a one-year loan at 11 per cent and a five-year loan carrying a 13 per cent interest rate.

However, a recent increase in April 2023 has seen the VM margin loan offering cut from one to three years ranging from 17.25 to 19.25 per cent. For context, NCB Jamaica and Scotiabank Jamaica, the country’s two largest financial institutions, offer unsecured loans of 16.50 per cent and 19.49 per cent, respectively, following their own adjustments to loan rates.

Mayberry Investments Limited raised its interest rate on its margin loans in July 2022 from 12 to 15 per cent, while other brokerage firms in the space have also increased their margin loan rates as the cost of funding in the market rises to accommodate for the current economic reality.

While higher interest rates produce more interest income for firms, very few have been able to grow or maintain their spreads, given higher interest expense. Barita was able to grow its interest income by 45 per cent to $4.38 billion for the nine-month period, but its net interest income dropped 70 per cent from $1.39 billion to $422.55 million. VM Investments Limited, parent company of VM Wealth, reported a 24 per cent increase in interest income to $852.66 million for the first half of 2023, but saw its net interest income cut in half to $63.89 million. Mayberry’s consolidated interest income moved 70 per cent to $1.29 billion for the nine-month period, but it incurred a net interest expense of $93.32 million relative to the net interest income of $241.77 million in the prior period.

Mayberry CEO Gary Peart posited at an October 19 investor briefing that while the consolidated earnings showed one picture, the stand-alone financials for the brokerage firm had a positive net interest figure which was boosted by a bond raise in January.

Brokerage firms have also continued to raise the rates offered on repos to attract funds in their direction amidst a tight market. The average yield on a 7.50 per cent fixed rate Bank of Jamaica (BOJ) 30-day certificate of deposit was 9.64 per cent. NCB Capital Markets was offering 6.5 per cent rates on $1 million and above in September, while Barita’s repo rates are at 7.50 per cent for a year.

The BOJ’s monetary policy committee (MPC) will announce their next decision on November 21 to say if they’ll adjust the policy rate, which has remained at 7.00 per cent since last November. Point-to-point inflation up to September was 5.9 per cent, which was within the 4.0-6.0 per cent BOJ target range.

“During August 2023, the GOJ issued two instruments amounting to $3.0 billion. The auction of the two instruments was oversubscribed, with both instruments being priced above par and reflecting weighted average yields [WAYs] of 7.81 per cent and 9.61 per cent. These yields represented declines of 108 bps and 137 bps, respectively, relative to previous auctions in April 2023 and May 2022. The increase in bond prices for both instruments relative to their last respective auctions may indicate that investors expect that interest rates may be lower in the future,” said the BOJ’s MPC September minutes.