Ahead of Friday evenings EU bank stress test results, how have investors been playing this sector? We feel it is worthwhile to put some facts on the table in contrast to the spin and rumour that pervades the media on this issue. We have looked at the 53 banks that are on the EU’s list that are liquid and publicly traded.
Which names are being targeted by short sellers?
The following have all seen rising short interest over the last quarter by c. 50%: Bank of Cyprus, Otp Bank (Hungary), Marfin Popular Bank (Greece), Dexia SA (Belgium), Bankinter (Spain), Sydbank (Denmark), National Bank of Greece, Kbc Groep NV and Erste Group Bank (Austria). Dexia and Kbc stand out as the only big names in this clutch while, in general, short sellers seem to have been recently targeting the smaller eastern European banks. The biggest shorts by the % of shares outstanding on loan with greater than 9% are Otp Bank, Banco de Sabadell (Spain), Banco Popular Espanol then the following have greater than 5% short interest: Banco Comercial Portugues, Erste Group and Bankinter.
Where is the short covering?
Over the last 90 days short selling has fallen by 8% on average with the biggest reduction in Banco Comercial Portugues, Allied Irish Bank, Atebank, Deutsche Postbank and EFG Eurobank. It is not surprising that this group of companies have seen some short covering given the general lack of risk appetite against the backdrop of regulatory changes, bank merger rumors and general uncertainty.
Which names are the longs most active in?
Using our proxy for institutional ownership (daily inventory totaling $11 trillion belonging to funds who engage in securities lending) we have looked at the 90 day change. On average we see no overall rise in institutional ownership. Unfortunately for these banks, long only institutions are not overall buyers. The following see an increase of more like 20% – Bank of Ireland, Allied Irish bank ADR, Jyske bank(Danish), Bank of Cyprus, Kbc and Dexia (so a divergence of opinion vis a vis short sellers for the latter three). Conversely, Institutions have been reducing their holdings most significantly in Marfin Popular Bank, TT Hellenic Postbank, Atebank, National Bank of Greece, Alpha bank, Efg Eurobank and Piraeus Bank. It is unsurprising to see the institutions reducing their exposure to these eastern European banks given the reluctance to take risk that is so pervasive at present and evidenced by the general lack of short selling.
What is the Securities Finance angle?
The most expensive to borrow are National Bank of Greece, Banco Pastor (Spain), Banco de Sabadell, Bank of Cyprus, Allied Irish Bank ADR, Otp Bank, Bank of Ireland ADR, Sydbank, and Allied Irish PLC. Securities lending has generated approximately $70 million over the past 12 months for lending this basked of 53 names. At present, the lending income represents c. 8% of the total revenue from lending European equities – a huge proportion given they represent less than 1% of all lendable securities in Europe. Securities Finance desks have to hope that the results of the stress tests doesn’t precipitate the closure of all the shorts in this area.
