Betting on a bank share price crash

Aussie banks are overvalued say hedge funds

Australian banks are way overpriced according to foreign hedge funds, with several moving to short them.

Shorting is a technique that traders use to bet on share prices falling. And the hedge funds are gambling that Australia’s biggest four banks, ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) will see their share prices drop. CLSA analyst Brian Johnson has told the Australian Financial Review that the bearishness by foreign investors towards the banks is significant as offshore investors have been the incremental buyer for the last two years as they chased dividend yields.

The market cap of the Australian banks has jumped from just 2% of the global banking index to 14% over the past ten years, according to Bank of America Merrill Lynch strategist Michael Hartnett. The big four banks between them now represent 30% of the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO),  while in May, UBS analysts said the Commonwealth Bank was the most expensive bank in the world by nearly every standard valuation measure.

As Mr. Hartnett told an investment conference last week in New York, “There are a number of hedge funds that are short the Australian banks right now, trying to play on that demise of the emerging markets.” A slowdown in China would hurt Australia’s economy and the banks would be in the forefront. Heavy exposure to Australia’s property market leaves the banks vulnerable to a property price crash.

Foolish takeaway

Locally, Mum and Dad investors searching for high dividends have also been dumping their cash into the banks, thanks to their high yields and supposed ‘safe’ blue-chip status and adding to the view that banks share prices are in ‘bubble territory’. But banks are highly-leveraged businesses and any downturn in Australia’s economy could see their profits slammed and dividends slashed. Because Australia hasn’t seen a recession for more than two decades, many investors seem to think that bank shares can only go up in value. They could be about to learn an expensive lesson.

Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading


Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

More on ⏸️ Investing