CHARTS: Short positions in big Aussie banks have shrunk by more than $4 billion

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Short positions in the major Aussie bank stocks have steadily decreased since the middle of last year.

In a research note, Deutsche Bank analysts said that short positions reduced by around 24 basis points in March to an average of 0.9% of total bank shares outstanding. Average short positions for the big four banks have shrunk by 1% year-on-year.

After a sustained build-up, bank short selling reached a peak in May 2016. The majors were under fire amid calls for a royal commission into poor conduct, increased regulation and uncertainty about the medium-term interest rate outlook.

Those fears appear to have eased, as this chart tracks the reduction in short positions over the last 12 months:

After experiencing the most rapid reduction in shorts over the last 12 months, ANZ was the only major in which short selling ticked upwards in March. March shorts in ANZ stock rose by a fractional 4 basis points.

Calculating the reduced volume of short shares on issue with reference to the market cap of the big four banks before markets opened this morning, the reduced short volume equates to $4.89 billion worth of value. See here:

Deutsche Bank said that the key macro-prudential control administered by APRA was a 30% limit on new interest-only lending. DB said that it expects the new measure would only have a “modest impact” on credit growth.

“While this category contributes ~40% of the majors’ mortgage approvals, a large proportion of borrowers should be able to switch to P&I loans instead (particularly owner-occupiers who account for ~40% of interest-only loans)”.

The DB research shows that short positions in major banks were noticeably lower than their regional counterparts, Bendigo Bank and Bank of Queensland. This chart shows the discrepancy:

Bank of Queensland had short positions amounting to 2.6% of issued stock, with a minor uptick in March shorts. The bank’s reported half-year profit missed forecasts last week.

Looking at the short interest ratio, Commonwealth Bank is the only big four bank with a days-to-cover ratio higher than the ASX average:

The days-to-cover ratio shows the number of days it would take to close out all the short positions on a company’s stock. It’s calculated by summing the total number of shares currently shorted, divided by the company’s average daily trading volume.

When this number is high, it exposes short sellers to a rapid rise in share prices as they scramble to recover their borrowed stock from the market.

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