Traders garner $14.3B paper profit in March from shorting global bank stocks
Justin Sullivan
Short sellers gained $14.3B in unrealized profit from betting against stocks within the global banking sector in March, a tumultuous month marked by three regional bank failures that sparked contagion fears, according to a recent report from analytics firm S3 Partners.
About three-fourths of the $109.7B in total short selling took hold in U.S., Canadian and European bank stocks. Bearish bets on such equities accelerated 11.4%, or $12.8B, during the month.
The tumult in the banking sector, triggered by the downfall of Silvergate Capital (SI), Silicon Valley Bank (OTC:SIVBQ) and Signature Bank (OTC:SBNY) all within one week, was felt across a number of related benchmarks, including the SPDR S&P Regional Banking ETF (KRE) and the iShares U.S. Regional Banks ETF (IAT), both down 29.5% from a month ago. Of course, many stocks in the space plunged, namely First Republic Bank (FRC), -88.8%, KeyCorp (KEY), -31.9%, Citizens Financial Group (CFG), -28%, and Fifth Third Bank (FITB), -27%.
For a contrarian view, CFRA said the recent selloff in regional bank shares has set the stage for a buying opportunity in some stocks that the firm thought were unfairly beaten down, 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 insured deposits.
Clearly the volatile price action over the last month has been a gold mine for those selling short. They made a 17.2% profit from shorting global bank stocks on average short interest of $82.4B, said S3 Managing Director Ihor Dusaniwsky, while noting "78% of every stock shorted in the Banking sector was profitable and 97% of every dollar shorted in the Banking sector was profitable."
Temporary turmoil?
Although still deep in the green, short sellers (excluding SIVBQ and SBNY) gave back 4.5%, or $587M, of their March profits since the 23rd. That comes as First Citizens (FCNCA) agreed to scoop up SVB's (OTC:SIVBQ) deposits and loans, and weekly balance-sheet data from the Federal Reserve suggested that financial stress is moderating.
"If this upward price trend continues in the rest of the regional banks, we should see short covering as short sellers rush to realize some of their mark-to-market profits," Dusaniwsky said. In extreme cases, a short squeeze occurs when short sellers head for the exits en masse due to a rising stock price, resulting in even higher prices.
Regional bank stocks that were classified as "more 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 surged some 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 tipping point for future stock prices in the Banking sector and the direction of additional short selling or short covering," Dusaniwsky added.