Short bets on banks point to slump

The Australian 12:00am March 23, 2019

Michael Roddan

Sliding house prices and faltering economic conditions have sparked a resurgence in the “widow maker” bet, as fund managers pour millions into short positions against the major banks and regional lenders.

A flood of money betting on a housing implosion has coincided with a warning from global ratings agency Moody’s that tumbling apartment and house prices will push more borrowers into default.

Bank shares have already been hammered through the royal commission over the past year, but international fund managers expect stock prices to fall further.

Over the past three months, the slice of bank shares that are held short has risen by an average 50 basis points. Short selling is the practice of investors selling borrowed shares in the hope of buying the stock back later at a lower price to make a profit.

National Australia Bank, where the stock price has fallen 15 per cent over the past year, posted an 80-basis-point increase in short interest over the past month alone.

Commonwealth Bank is the most shorted bank, with 2.1 per cent of its shares held short. The smaller, regional lenders which have a larger exposure to mining-dependent economies are also being targeted. Short interest in Bendigo Bank has risen 150 basis points to 7 per cent over the past three months. Bets against Bank of Queensland have jumped by the same margin to 8 per cent.

Deutsche Bank analyst Matthew Wilson said the amount of time short-sellers were covering other positions had also increased to 11 days and was “now higher than the ASX200 average” of eight days, with CBA shares ranking the highest.

Mr Wilson said the main threat to the sector was the increased likelihood of a stalling in credit or a “funding crisis”, but he also raised concerns this week about a major flaw in the data ­collected by the prudential ­regulator, which could significantly understate the average balance of a loan by failing to adjust for split loans — where mortgages are divided up into multiple parts.

“APRA appears to have a data problem — the number of mortgages is up 75 per cent since March 2008, yet population is up only 18 per cent over the same period,” Mr Wilson said.

Moody’s this week said the number of borrowers defaulting on their loans was likely to rise over the coming year as house prices declined. Loans more than a month overdue had already risen to 1.58 per cent from 1.49 per cent over the last three months of 2018.

Moody’s analyst Alena Chen said “declining house prices, high debt levels and the conversion of interest-only mortgages to principal and interest mortgages” were to blame for the expected rise in arrears.

Shaw and Partners analyst Brett Le Mesurier said house prices — which have fallen by double digits in Sydney and Melbourne — were vulnerable to a further squeeze on growth in rental prices.

“A looming problem is an economic downturn which would adversely affect employment and, therefore, rents. It would also provide an unwelcome catalyst for a rising bad debt charge,” Mr Le Mesurier said.

Meanwhile, the powerful Council of Financial Regulators has knocked back a royal commission recommendation to extend legal protections to larger firms that would prevent lenders tipping businesses into default amid fears it could further reduce banks’ appetite to lend.