Justin Sullivan
Short sellers made $14.3 billion in unrealized profits betting against stocks within the global banking sector in March, a tumultuous month marked by the bankruptcy of three regional banks that fueled fears of contagion, according to a recent report by analyst firm S3. Partners.
About three-quarters of the $109.7 billion in total short selling remained in US, Canadian and European bank stocks. Bearish bets on such stocks accelerated 11.4%, or $12.8 billion, during the month.
Restlessness in the banking sector, fueled by one-week declines in Silvergate Capital (SI), Silicon Valley Bank (OTC:SIVBQ) and Signature Bank (OTC:SBNY), 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 fell, namely First Republic Bank (FRC), -88.8%KeyCorp (KEY), -31.9%Citizens Financial Group (CFG), -28%and Fifth Third Bank (FITB), -27%.
To the contrary, CFRA said the recent selloff in regional bank stocks set the stage for a buying opportunity for some stocks the firm felt were unfairly beaten, 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 over the past month has been a gold mine for short sellers. They made a 17.2% gain from shorting global bank stocks with average short interest of $82.4 billion, said S3 director Ihor Dusaniwsky, noting that “78% of every short stock in the banking sector was profitable, and 97% of every dollar in the short term in the banking sector was profitable.”
Temporary restlessness?
Although still deep in the black, short sellers (excluding SIVBQ and SBNY) gave back 4.5%, or $587 million, of their March 23 gains. This came after First Citizens ( FCNCA ) agreed to pick up SVB (OTC:SIVBQ) deposits and loans, and data from the Federal Reserve’s weekly balance sheet suggest that financial stress is easing.
“If this upward price trend continues across the rest of the regional banks, we should see short-covering as short sellers rush to take some of their profits at the market price,” Dusaniwsky said. In extreme cases, a short squeeze occurs when short sellers move en masse toward the exits due to a rising stock price, resulting in even higher prices.
Regional bank stocks 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 rose some 50% on March 27th after it became the new owner of SVB.
“Central bank interest rate stability or interest rate easing will prove to be a key point for future banking sector stock prices and the direction of additional short selling or short covering,” Dusaniwsky added.