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Short sellers are increasingly targeting this Big Bank stock

Bank shareholders can breathe a little easier going into the reporting season as short sellers are losing interest in our big banks, with the exception of Commonwealth Bank of Australia (ASX: CBA).

Australia’s largest mortgage lender is bucking the trend even as the improving global economic outlook has prompted many short sellers to exit the sector with Macquarie Group Ltd (ASX: MQG) noting that short positions in the majors have fallen by around $400 million to around 0.7% of shares on issue.

Short sellers are traders who borrow stock to sell on-market in the hope of buying it back at a lower price later to profit from the difference.

Shares in Commonwealth Bank is the most shorted among the Big Four, which includes Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

Commonwealth Bank is an ideal shorting candidate though and I won’t be surprised to see the stock continue to be targeted by short sellers leading up to its profit results next month.

The bank’s reputation is being dragged through the mud with the Australian Securities and Investments Commission (ASIC) the latest regulator to go after the bank. There is speculation that this case and another brought by AUSTRAC could force management to take a $700 million hit to their bottom line.

The bank said it’s too early to put a figure on provisions, but its ongoing legal woes and the fact that the bank is in the midst of a leadership transition to a new CEO will make Commonwealth Bank the least liked big bank stock on the ASX.

Interestingly enough though, offshore and domestic institutional investors have been net buyers of Commonwealth Bank stock in the December quarter, according to Macquarie. These groups have been most actively buying Commonwealth Bank shares compared to the other three banks with ANZ the only one to see a drop in these investors for the quarter.

Perhaps it’s the upcoming dividend payment from Commonwealth Bank that is generating interest. The bank is the only one of the Big Four that will be handing in its half year results in February (Feb 7 to be exact) and announcing its interim dividend.

I am underweight on the banks and I am avoiding the Commonwealth Bank for the reasons outlined above. The only bank stock that I am bullish on is CYBG PLC/IDR UNRESTR (ASX: CYB) – better known as Clydesdale Bank – mainly because it doesn’t operated in Australia.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, CYBG Plc, Macquarie Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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