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Banking crisis triggers $977M for short sellers!


Banking crisis triggers $977M for short sellers

In 2024, short sellers targeting a key regional bank ETF in the United States have made a significant profit of $977 million on paper, according to data from Ortex, a prominent analytics firm.


This substantial gain is a direct result of the troubles faced by New York Community Bancorp (NYCB), which has had a domino effect on the broader banking industry. NYCB's struggle with the commercial real estate (CRE) market has been a key factor in unsettling investors, fueling apprehensions about the overall health and stability of the banking sector.


The CRE market's instability has been a major concern for the financial industry, particularly in light of NYCB's exposure. Robert Riva, a real estate expert at Cole Schotz, a corporate law firm, emphasized the widespread nature of this issue.



He pointed out that the risks associated with CRE exposure are not confined to a single institution or a repeat of past mistakes like those of Lehman Brothers; rather, it is a pervasive issue affecting banks across the board. Riva's comments reflect the growing anxiety within the financial sector about the potential impacts of CRE market fluctuations on various banking institutions.


The decline in the SPDR S&P Regional Banking ETF, which tracks regional banks, has been particularly beneficial for short sellers. The fund has seen a drop of 9.2% this year, allowing short sellers, who profit from falling stock prices by selling borrowed securities and aiming to repurchase them at lower prices, to capitalize on this downturn.


ETFs, by their nature, are investment vehicles that track a range of assets, including stocks, commodities, and bonds, functioning in a manner similar to index funds.


Short sellers have also targeted another banking industry-related ETF, the Invesco KBW Regional Banking ETF. Those betting against this particular fund have amassed paper profits of $663 million, highlighting the extent of the bearish sentiment in the sector.



Among the stocks within these ETFs, Bank of Hawaii Corp, Axos Financial, and Columbia Financial have been prime targets for short sellers. As of the start of March, the short interest in these companies, as a percentage of their freely tradable shares, stood at significant levels: 15.98% for Bank of Hawaii Corp, 11.73% for Axos Financial, and 9.38% for Columbia Financial.


These banks are notably involved in the CRE market, with a particular focus on multi-family properties, which are apartment buildings comprising more than four units. In the previous year, such loans made up a considerable portion of their lending activities, accounting for 27%, 32%, and 48% of their total loan books, respectively.


The banks in question did not provide immediate comments regarding these developments.

Brian Graham, the co-founder of Klaros Group, a consultancy and investment firm specializing in financial services, highlighted the significance of multi-family loans in the banking sector. He noted that this segment is a critical area of focus for nearly all banks in the country, underscoring its pivotal role in the financial industry.



NYCB's loan portfolio also had a heavy emphasis on multi-family loans, which constituted 44% of its lending as of the end of the previous year.


The bank's stock has experienced a dramatic decline of 65% this year, leading to short sellers earning $145 million in paper profits, as indicated by data from Ortex. This scenario underscores the heightened volatility and risk in the banking sector, particularly in segments heavily invested in CRE. Source: Reuters.


04.03.2024



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