May has started badly for Australian banking stocks, with Westpac getting crushed at the open today after a relatively marginal miss on cash profit at $3.9 billion for the half versus $4.1 billion expected.
The other banks are also lower, though not by as much.
Traders have been positioning for moves lower for months now – and the trend has been accelerating, as the following chart from Deutsche Bank shows. It demonstrates that, with the exception of the Commonwealth Bank, the amount of shares of in the major banks held in short positions has ripped higher over recent months.
The percentages may look tiny but consider that 3% of Westpac’s shares are worth $3 billion and you start to get a picture of the scale of the bets being placed.
Deutsche Bank explained in a note to clients:
Average major bank short positions as a % of shares on issue have increased by ~20bps to 2.3% over the last month. Over a 3 and 6-month period, the increase has been ~70bps. NAB (+1.0%) and WBC (+0.9%) have seen the biggest increases in short positions over the last 3 months, while CBA shorts have increased only marginally.
Pressure on the Australian banking sector is coming from a range of directions now – the corporate regulator is getting more money to oversee their activity following a string of scandals, the federal opposition has been talking about a royal commission, global regulators want to see more capital retention and the medium-term outlook for interest rates has suddenly turned a lot tougher.