justin sullivan
Short sellers earned $14.3 billion in unrealized gains by betting against stocks within the global banking sector in March, a tumultuous month marked by three regional bank failures that raised fears of contagion, according to a recent report by research firm S3. . partners.
About three-quarters of the $109.7 billion in total short sales were in US, Canadian and European bank shares. Bearish bets on such stocks accelerated 11.4%, or $12.8 billion, over the month.
The tumult in the banking sector, sparked by the fall of Silvergate Capital (SI), Silicon Valley Bank (OTC:SIVBQ) and Signature Bank (OTC:SBNY) in a week, was felt across a number of related benchmarks, including the SPDR S&P Regional Banking ETF (KRE) and iShares US Regional Banks ETF (IAT), both down 29.5% from a month ago. Of course, many stocks in the space tumbled, namely First Republic Bank (FRC), -88.8%Key Corp (KEY), -31.9%Citizens Financial Group (CFG), -28%and Fifth Third Bank (FITB), -27%.
To a contrary view, CFRA said the recent sell-off in regional bank shares has set the stage for a buying opportunity in some stocks the company thought were unfairly hit, including East West Bancorp (EWBC), Citizens Financial (CFG) , Synovus Financial (SNV), Regions Financial (RF), Webster Financial (WBS) and Fifth Third (FITB), citing a combination of strong deposit balances and a high percentage of deposits insured.
Clearly, the volatile price action over the past month has been a gold mine for short sellers. They made a 17.2% profit on shorting global bank shares with an average short interest of $82.4bn, S3 managing director Ihor Dusaniwsky said, noting that “78% of every stock shorted in the sector Banking was profitable and 97% of every dollar shorted in the banking sector. The banking sector was profitable.”
Temporary riot?
Though still in the green, short sellers (excluding SIVBQ and SBNY) returned 4.5%, or $587 million, of their March profit since the 23rd. That comes as First Citizens (FCNCA) agreed to pick up the deposits and loans from SVB (OTC:SIVBQ), and weekly Federal Reserve balance sheet data suggested that financial stress is easing.
“If this bullish price trend continues at the rest of the regional banks, we should see short covering as short sellers scramble to take some of their market-adjusted gains,” Dusaniwsky said. In extreme cases, a short squeeze occurs when short sellers flock to the exits due to rising stock prices, resulting in even higher prices.
Regional bank stocks that ranked as “most squeezable” were First Citizens (FCNCA), KeyCorp (KEY), First Horizon (FHN), Zions Bancorp (ZION), Western Alliance (WAL) and First Republic (FRC), according to the report. Note that FCNCA increased by 50% on March 27 after becoming the new owner of SVB.
“Central Bank interest rate stability or interest rate easing will prove to be the turning point for future stock prices in the banking sector and the direction of additional short selling or short covering,” added Dusaniwsky.
