Low unemployment and even lower consumer default rates have pushed banks to diversify
Even with the proliferation of danger signs such as price declines and debt growth, the shares of Canada’s Big Six continue to surge, derailing short sellers’ plans of making money off financial sector weakness.
The banks’ stocks have instead shot up by 9.4% this year, Bloomberg reported.
“This is a process, not an event -- that’s how I think about it,” according to Bradley Safalow of PAA Research LLC, who advises short investors looking at banks. “There is some patience that’s absolutely required.”
The phenomenon has taken place amid an accelerating national economy that has seen unemployment at its lowest point in at least four decades. Consumer default rates have also stayed low, which has pushed banks to explore wider venues aside from domestic consumer lending.
Year-to-date up to March, values of short-interest positions in the Big Six gained 13% annually, with an average of 3.4% of their outstanding sales in shorts as of the end of March, S3 Partners LLC noted.
In particular, both CIBC and RBC’s stocks went up by significant margins in 2019, at 7.4% and 11%, respectively. As of the end of the first quarter, CIBC has 6.4% of its stock in short-interest positions, while Royal Bank has the lowest proportion among the Big Six at 1.5% of its stocks.
Toronto-Dominion Bank CEO Bharat Masrani said that these investors have long been trying to short Canadian banks, to little avail.
“I suspect the bet has not turned out too well if one has been trying it for 10 years,” he stated.
