Strong Canadian banks dash short sellers’ monetary hopes

Bloomberg

Canadian households are wallowing in debt. Home prices are falling. Credit growth, the key driver for bank earnings, is hovering close to its slowest pace since 1983. All of which should be bad news for the country’s lenders — and good news for investors betting against them.
“Should” being the operative word. Even with danger signs piling up, the shares of the six biggest Canadian banks have stubbornly refused to drop, instead surging 9.4 percent this year — and frustrating short sellers hoping to make money on stock-price declines.
“This is a process, not an event — that’s how I think about it,” said Bradley Safalow, whose firm PAA Research LLC advises investors to short companies including Canadian Imperial Bank of Commerce and Royal Bank of Canada, and who has short positions in those banks himself. “There is some patience that’s absolutely required.”
The bet against Canadian stocks has become known as the “Great White Short” and investors pushing it remain confident that the decline will finally come — it’s just a matter of time. There’s simply too strong an argument against the banks, they contend.

JUMP IN SHORTS
Canada’s six big banks had a 13 percent jump in the value of short-interest positions from the start of the year to the end of March, according to financial-analytics firm S3 Partners LLC. Those lenders had an average 3.4 percent of their outstanding shares in short-interest positions as of March 31, up 25 percent from a year earlier, S3 data show. CIBC’s stock has the greatest proportion of short-interest positions, at 6.4 percent, while Royal Bank is the lowest, with 1.5 percent of its shares shorted to the end of March.
Yet both banks’ shares are on the rise, with CIBC’s stock up 7.4 percent this year and Royal Bank gaining 11 percent. In comparison, short-interest positions at the major US banks range from about 0.6 percent of outstanding shares for Wells Fargo & Co., JPMorgan Chase Co. and Citigroup Inc. to 2 percent at Goldman Sachs Group Inc., according to S3.
“I don’t lose sleep over this question, personally,” Bank of Montreal Chief Executive Officer Darryl White said in an interview when asked about short sellers after the lender’s annual investors meeting on April 2. About 2.7 percent of his bank’s outstanding shares are shorted. “I think the market is a lot healthier than some people think it is.” Toronto-Dominion Bank CEO Bharat Masrani said some investors have been trying unsuccessfully to short Canadian banks for the past decade. “I suspect the bet has not turned out too well if one has been trying it for 10 years,” he said in an interview after his bank’s annual meeting.
Indeed, the argument for being long on banks is a strong one. Canadian unemployment is at its lowest in at least four decades and economic growth is accelerating. And, despite some signs of deterioration, consumer default rates remain low. Banks have bolstered their case by diversifying beyond domestic consumer lending, delving deeper into wealth management, commercial loans and private banking while expanding operations in the US and other foreign countries.