Why are short-sellers betting on TD Bank to stumble? – National

Why are short-sellers betting on TD Bank to stumble? – National

Bets against TD Bank’s stock have been on the rise in recent weeks as aftershocks from banking turmoil in the United States continue to ripple north of the border.

Market analysts who spoke to Motorcycle accident toronto today say customers of one of Canada’s biggest banks have little cause for concern, and some investors could even find opportunity in the uncertainty surrounding TD.

Reuters reported early in April that TD Bank had become the most shorted bank in the world as hedge funds bet billions of dollars that the institution’s share value would fall. As of last Wednesday — a day before TD’s annual shareholders meeting — that figure had risen to US$6.1 billion, a 45 per cent increase in just two weeks.

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Shorting refers to a stock market play that sees investors — oftentimes hedge funds — bet against a particular stock’s performance and profit when it goes lower, rather than higher.

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Investors do this by borrowing a number of shares from a firm and selling them at the purchase price, promising to pay back that borrowed stock at a future date when they hope the share value has fallen — thus netting the difference in price as profit.

“Shorting, to put it simply as possible, is betting on a stock that the share price of that company is going to fall versus move higher,” explains Allan Small, senior investment adviser with iA Private Wealth.

Motorcycle accident toronto today reached out to TD Bank on Tuesday for comment about whether it was concerned about an uptick in bets against the bank’s stock on financial markets but did not receive a response by publishing time.

Experts like Small say there are a few reasons why TD Bank might’ve been targeted by short-sellers lately — some having to do with TD in particular, and some tied to the Canadian financial system as a whole.

TD’s U.S. ties under scrutiny

While there’s no single explanation for an uptick in shorting interest, Small says TD Bank’s exposure to the U.S. banking market has been under scrutiny amid recent turmoil in the banking sector south of the border.

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“There are a few things that TD Bank has exposure to that other Canadian banks don’t have exposure to,” he explains. “TD is interesting in that they’re a lot more tied to the U.S. market … than really all our other major banks in Canada.”

The collapse of Silicon Valley Bank last month and fears of a spreading crisis among other regional banks in the U.S. come with potential knock-on effects for TD, Small says.

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He notes, for instance, that TD is a major investor in Charles Schwab, a U.S.-based bank and brokerage that has seen its stock tumble this year amid liquidity concerns in the market.

TD Bank is also in the midst of acquiring regional U.S. bank First Horizon, a US$13.4-billion deal that the bank says would make it the sixth-largest financial institution in the United States.

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Some shareholders have been urging TD to ditch the deal amid the banking uncertainty.

“There have been a lot of questions since the turmoil in the U.S. regional banking sector last month as to whether or not that deal should continue, more or less because investors are worried that TD is no longer getting a very good deal,” says Ing-Haw Cheng, associate professor of finance at the University of Toronto’s Rotman School of Management.

TD Bank president and CEO Bharat Masrani stood by the deal when asked by investors and shareholders at the company’s annual general meeting April 20, though he conceded it would likely not close by the projected May 27 deadline.

“We’ve outlined (the benefits) very clearly and I’ve said that many times before. That’s why we are into extension discussions with First Horizon,” Masrani said.

The most recent data available is from before the AGM, making it difficult to say yet whether Masrani’s comments had any impact on short-sellers’ positions.

Is Canada’s financial system stable?

Outside the U.S., there are concerns about Canadian banks — TD among them — and risks tied to the housing market.

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Cheng says that all Canadian lenders have at least some exposure to the housing market through their mortgage businesses.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), last week noted a risk to the financial system as higher interest rates drive up mortgage costs, putting pressure on Canadian homeowners and ratcheting up the odds that banks will see more defaults on their books.

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Home values have also gone through a steep correction in the past year, Cheng notes, though there are early signs the price declines are stabilizing in some housing markets this spring.

While TD is standing out in the volume of short-selling activity, there’s been an uptick in bets against Canadian banks across the board, Cheng says, amid this general weakness in housing.

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“I would say investors are somewhat pessimistic on the financial sector right now, just given that we see so much trouble in housing markets and that you’ve seen some elevated short selling because of that,” he says.

Should Canadians be worried about TD Bank?

Despite seeing the arguments for shorting TD Bank, Small has a healthy dose of skepticism towards such bets.

“Make no mistake about it, even though I’m here to tell you why the short-sellers went after TD Bank and started shorting their stock, I don’t agree with it whatsoever,” he tells Motorcycle accident toronto today.

Small believes most of the fallout from the collapse of Silicon Valley Bank and other banking turmoil was subdued after U.S. regulators stepped in and assured customers that they’d backstop deposits at banks in danger of going under.

“The ripple effects, some analysts are saying we still haven’t seen the last of them. But I think for the most part, at least for now, everything seems to be a lot more calm,” he says.

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Small notes that one ongoing risk is further movement from the U.S. Federal Reserve on interest rates. While he expects the Fed will deliver another quarter-point hike before signaling a pause like the Bank of Canada, Small says some clarity that the days of rising rates are coming to a close would let the banking industry “breathe a sigh of relief.”

As for TD Bank specifically, Small says he has “no worries whatsoever” that the bank’s deposits or the institution itself is in serious danger.

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In fact, Small believes the shorting activity could end up being a net benefit for the bank as he argues a depressed share value would allow investors to get the stock on a discount.

The short could also end up backfiring and becoming a “short squeeze” — a phenomenon where a rising stock pushes short-sellers to bail from the position en masse and buy the stock to return the shares they borrowed, inadvertently sending the share price higher, Small explains.

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Canadian banks have a strong reputation for stability, he adds, and are “very conservatively managed.” Weakness in global financial markets spilling onto Canadian institutions is not necessarily a cause for alarm in the long run, Small argues.

“When there are issues in the economy, whether it’s inflation, higher interest rates or anything else, the banks are the first place you’re going to see that pressure felt,” he says.

“I have no worries in the slightest that our banks will continue to do well. … I have no doubt that they actually represent buying opportunities, perhaps for those who are looking for good dividends and good growth going forward.”

Cheng says there are risks that a worsening housing correction materializes and that could hurt Canadian banks’ portfolios, but that doesn’t necessarily portend a financial crisis.

“If the Canadian housing market continues to deteriorate and borrowers don’t make payments, that’s of course bad news for the bank. But as of right now, I think we’re a long way from a Canadian banking crisis,” he says.

“I’ve still got my money in the banks and I’m not particularly worried about the fate of the large Canadian banks.”

— With files from Motorcycle accident toronto today’s Anne Gaviola, Reuters