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Feb 1, 2019

S3 Analytics: Australian Banking Shorts Increase Ahead of Royal Commission Report

Short selling in the Australian banking sector has been increasing since September 28th when Commissioner Kenneth Hayne released his interim report of the Royal Commission into Misconduct in the Australian Banking, Superannuation and Financial Services Industry. Today the commissioner delivered the final version of the report which will be published on Monday. The expectation of a completely reformed regulatory infrastructure to address systemic misconduct and structural failures in the sector based on the report’s findings has led short sellers to increase their short exposure by 67% since the end of the 3rd quarter 2018.

Short selling increased in all seven of the major banks in the sector, with Commonwealth Bank of Australia (CBA AU), Westpac Banking Corp (WBC AU) and Australia & New Zealand Banking Group (ANZ AU) taking the lion’s share of new short sale activity. While short activity has been steady for the last four months, almost a third of the increase occurred in January, with Westpac Banking Corp and National Australia Bank (NAB AU) having the largest increases in short exposure in 2019.

Australian banking sector short sellers have done well since the interim commissioner’s report was issued in September, earning $194 million in mark-to-market profits for a +5.20% return and outperformed the S&P/ASX 200 index. Short returns in three of the top four shorts (WBC, ANZ & NAB) were over +10% over the last four months, but short sellers were down 1.37% in CBA ahead of expectations of a strong first half year earnings report next week.

Depending on the content of the commissioner’s report we should see continued short selling pressure in the Australian banking sector. Banks have already prepared for increased litigation costs, but if the ASIC begins to levy hefty fines in response to the report, long shareholders may become sellers as well. There is ample borrow supply in these names and borrow costs are at general collateral levels so there are no financing impediments to short stock. Institutional short investors have already positioned themselves in anticipation of sector wide price weakness, and if these stocks continue to trend downwards we can also expect momentum shorts to enter the sector as well. Monday may be a busy day in the Australian market.

Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, S3 Partners, LLC

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