Which way next for the share prices of big banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia & New Zealand Banking Group (ASX: ANZ) & National Australia Bank Ltd (ASX: NAB) is a popular question on the share market.
It’s obvious why with the big 4 banks alone making up more than 25% of the wider S&P/ ASX200 Index (ASX: XJO) and being favourites for income-seeking SMSF investors and professional fund managers.
The bank share question has become more vexed recently due to a backdrop of weak GDP growth in Australia, slowing credit growth, and increased costs from the Royal Commission fallout.
In fact some hedge funds have regularly shorted bank shares in the belief they’re set to fall.
Historically though shorting the big banks has been known as a ‘widow-maker’ trade due to their dominant market positions and wild popularity as investment options amongst conservative income seekers.
I took a look at ASIC’s most recent short seller report as at May 28 to see which of the big banks has the highest percentage of its outstanding scrip shorted.
Although the below numbers may look relatively low, it’s worth remembering these are huge entities by market cap so even a tiny percentage shorted is actually a fair bit in nominal dollar values. Let’s take a look at the stats.
ANZ Bank has 0.7% of its scrip short sold.
CBA has 1.38% of its scrip short sold.
NAB has 0.83% of its scrip short sold.
Westpac has 1.6% of its scrip short sold.
As we can see Australia’s second-largest bank in Westpac is being the most heavily bet against in terms of percentage of scrip issued and while 1.6% might not seem much, it still represents around $1.5 billion worth of shares given Westpac’s $96 billion market cap.
Hedge funds are probably betting on the shares falling due to the well-known headwinds facing the local economy that some think might force the Reserve Bank to cut benchmark lending rates as low as 0.5%. If that prediction comes true then bank profits and consequently dividends are likely to come under further pressure.
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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 Scott Phillips.