18/02/2016: Is Wall Street shorting Aussie banks?

18/02/2016: Is Wall Street shorting Aussie banks?

Scott Schuberg: Good afternoon members, and welcome to Rivkin Virtually Live Local for Thursday the 18th of February. I'm Scott Schuberg joined by Shannon Rivkin. How are you Shannon?

Shannon Rivkin: Good, thanks Scott. How are you?

Scott Schuberg:  Very well, thanks. A reminder to everybody everybody that this show contains general advice only.

Denny from Queensland. "I've heard a few comments, particularly on Talk Back Radio financial shows that quite a few WallSstreet brokers have taken rather large short positions on Australian banks. Have you heard this or have any thoughts/comments other than to stop listening to Talk Back Radio."

Shannon Rivkin: That was definitely one of their comments.

Scott Schuberg: Yeah. Again, you want to try and stick to the data in these situations. The short story in Aussie banks is definitely there, but it's out of kilter with the current cycle of volatility. It wasn't really the August volatility that prompted that. It wasn't the October or November or December or January volatility that prompted shorts in banks.

More so, it was the change in the interest rate environment early 2015 and the anticipated change to the net interest margin for the banks that made that change. To put it into perspective, we're talking about a less than a two percent net short position in the big banks, which is quite big considering how large the banks are.

That grew around June, July, August last year before the Chinese volatility hit in late August. On the prospect of business models of the banks would suffer, because the Aussie RBA interest rate easing cycle had seemingly ended, it was going to be a tougher environment for them to make the margin between what they can borrow at and what they can lend at. That's where that came from. It was true.

The positions increased from maybe around one percent or a little under one percent to over one and a half percent, and it sort of fluctuated between one and a half and two percent since. There are plenty of short positions as far as the banks being a target in particular for Wall Street hedge fund managers. Probably any long short global asset manager that wanted to take a view that those banks were going to come off would have implemented that. Two ways of looking at that. They're too big to try and create a real squeeze on the banks and have a material effect on their business by putting enough short pressure on them. It's not really a possibility.

It's probably more so just following a 2015 consistent downtrend in some of these banks. Then on the flip side you've got the fact that those short positions ... If I want to borrow stock to sell it and hold that position for a long time, I'm going to borrow it from somewhere, right? A custodian like UBS or Morgan Stanley might have CBA, and I say, "I want to borrow some stock, sell it, because I want to buy it back, hopefully at a lower price." They lend that to me, but they lend it to me at a price.

So there's a rate that I'll pay on interest, I'll loan that stock and short sell it.  You don't hold these positions forever. At some point, they'd become unwound, and that does create buying support for the stocks. Yes, relative to this time last year, there is more net short interest in the big four. If there was a downtrend that persisted beyond this point, they would remind in tact, and they'd possibly grow.

If you see the market's stabilised, then those short sellers will get a little concerned, because they want to try and at least pick the apex not necessarily the absolute bottom, but the region where there's a turning point. At the same time, they don't want to pay too much to hold these positions for too long, because interest rates are so low around the world. In normal circumstances, if you short sell, you can get paid interest to short that stock. The current environment, there's no real room there to make money out of holding short, so at some point, they'll spring back. I'd expect that might exacerbate a rally backing banks, once the market's enthusiastic enough to....

Shannon Rivkin: Yeah.

Scott Schuberg: To put one to work.

Shannon Rivkin: Look. On the Australian banks, as well, I think that what the results have shown as well is that probably at least at the top end and in the top four is they've shown that they have the competitive position to raise rates out of cycle, which undoubtedly protecting their margins in the last resolvement, and last year you saw that. As well, at least in the big four, there's such a big percentage of their funding comes from deposits, as well. They're a little bit protected to the blowouts we're seeing in wholesale funding as well. If you're looking at some of the regional banks, like Indigo, they've faired far worse, because they don't have that same level of protection.

Again, another reason to be bullish on the banks ... On what we talked about before as far as bad loans, anecdotally, there going to be some concerns. Even we saw yesterday. Arium, which is the old Onesteel an ounce of their debt has blown out to over two billion dollars now. Undoubtedly, we're going to see some exposure from some of the Australian banks there and some secure debt, which is actually even more head scratching to see how that happens. Names like that, yes you're going to see some bad losses, but overall, it's been spread between only a few small names. The majority of debt is really to the big healthy names like the BHPs and the Rios. As we've said, I just don't think we're going to see those loans impaired, because they remain very, very healthy.

Scott Schuberg: Yeah. Relative to the foreign banks, Aussie stocks have held up pretty well. If you look at the trends in the big guys, and you're HSBC, Lloyds, we shock of the Deutsche bank had last year. These banks have been savaged. The big four in Australia, it feels unusual for those to be sold off, because they're so widely held and well supported by our superannuation industry that wants good earners in their portfolios to distribute income. It probably just feels a little more overdone that it really is when you look at the global banking sector.

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