Margin lending, or the amount brokers can lend to individual investors to purchase shares, has been a big business in Hong Kong in recent years with a large number of equity floats luring retail buyers.
Hong Kong had 851,157 margin lending accounts with total loan volume of HK$161.8 billion ($21 billion) in the first half of 2020, according to the city's Securities and Futures Commission (SFC), up sharply from 601,842 at the same time last year.
The expected surge in demand for margin financing for the Hong Kong tranche of Ant's initial public offering (IPO), poised to be the world's largest ever, underscores robust retail interest in the deal due to be launched next week.
Ant, which operates China's biggest mobile payments platform Alipay, is backed by Chinese e-commerce group Alibaba Group Holding.
Bright Smart Securities, one of the city's largest brokerages, said it would lend up to HK$50 billion - one of the firm's largest offerings - for the Ant IPO despite looming markets uncertainty due to the approaching U.S. election.
"We will make sure our interest rate will be the lowest among our peers," chief executive Edward Hui told Reuters, adding retail investors would only have to put up 5% as a deposit to take on a margin loan to buy Ant shares.
Another Hong Kong brokerage UOB Kay Hian has earmarked HK$20 billion for Ant IPO margin financing, a spokeswoman said.
Retail investors in Hong Kong - from taxi drivers to junior professionals - borrow heavily as larger bids boost the chances of IPO share allocation, and they look to benefit from a first-day pop.
The lending could be for 6-7 days and is lucrative for the brokerages as they earn commission on executing trades as well as interest income from margin financing.
"We see in Hong Kong that retail investors are always keen to buy into IPOs, it's almost a form of gambling and there is a strong trend for them to only hold on to them for a day or two," the Hong Kong Institute of Investors' chairman Ricky Tam said.
PRESSURE ON RATES
Retail brokers said the margin interest rates would be set closer to the IPO's launch date. The strong demand could raise the short-term Hong Kong Interbank Offered Rate (HIBOR).
The two-week Hong Kong Interbank Offered Rate <HIHKD2WD=> rose for a fourth straight session on Thursday to its highest in more than seven weeks.
The retail bidding frenzy poses some risks for the brokerages and their clients, especially on any heightened market volatility in an economy already badly hit by the pandemic as well as last year's anti-governments protests.
"The risk for subscribers is that they are paying a lot in commissions to try and get allocations, they are paying interest and it's likely the shares will be priced at the top of the range," GEO Securities chief executive Francis Lun said.
"That could leave very little room for profit."
(Reporting by Scott Murdoch and Donny Kwok in Hong Kong; Editing by Sumeet Chatterjee & Shri Navaratnam)
By Scott Murdoch and Donny Kwok