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Feb 5, 2019

S3 Analytics: Australian Banking Shorts Down $248 million on Benign Royal Commission Report

The Australian banking sector rallied over 4% after the release of the Royal Commission final report which deemed that no major regulatory changes were necessary, just increased and tighter oversight and stronger and more judicious enforcement of existing regulations. The fear of tighter lending rules and a massive overhaul to banking regulations had spurred heavy short selling in the sector over the last several months.


While today’s rally added $14.5 billion of mark-to-market profits for long shareholders, short sellers nearly doubled their 2019 losses, with today’s $248 million in mark-to-market losses bringing year-to-date losses to over half a $ billion. Commonwealth Bank of Australia (CBA AU) and Westpac Banking Corp (WBC AU) short sellers were the big losers today, incurring $178 million in total mark-to-market losses.

The Royal Commission report outlined 76 recommendations which are aimed at overseeing financial advisors and empowering regulators, but with no changes to lending regulations and the preservation of vertically integrated financial institutions banks were spared costly reorganization expenses and any major changes to their business models. The threat of fines and prosecution of bank executives still exists and along with a tightening credit market, future bank earnings and quarterly profitability levels may be volatile in the short term.

We’ll see over the next several days if any shorts were squeezed out of their positions due to heavy losses they incurred today. With this surge of both retail and institutional buying in these bank stocks, stock prices may be pushed even higher and short interest may decline significantly. If shorts begin to cover in size and banking sector short interest reverts back to the $3 billion level we last saw in the 4th quarter 2018, stock prices will be buoyed not only by long buying, but also by massive short covering.

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

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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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