The Small Short: Investors bet against 2nd-tier Australian banks after inquiry spares majors
* Shares of smaller banks experiencing spike in "short"
* Big bank shares have made back A$50 bln since December
* Smaller rivals seen hit by borrowing and regulatory costs
By Paulina Duran and Byron Kaye
SYDNEY, March 12 (Reuters) - Investors are shorting
second-tier Australian banks while the majors enjoy their
biggest rally in three years, as the market weighs up the
long-term impact of a public inquiry that exposed widespread
misconduct in the financial sector last year.
The capital shift shows investors believe higher regulatory
costs will hurt smaller lenders more than the big four market
leaders, whose business models - if not their reputations -
emerged largely unscathed from the year-long inquiry.
Short bets on regional lenders Bendigo and Adelaide Bank
and Bank of Queensland spiked over a fifth in
the weeks since the inquiry delivered its final report on Feb.
1, Refinitiv data shows. Their shares had already fallen about
15 percent in the same period.
Investors are instead putting money on the larger banks'
ability to safeguard profitability in an environment of record
low mortgage growth and falling house prices.
"The regional banks will struggle to compete with the major
banks," said Azib Khan, from stockbroker Morgans Financial Ltd.
As the government-backed independent inquiry known as a
Royal Commission continued through most of 2018, analysts feared
it would result in anything from enforced divestments to strict
controls over how much a bank could lend. But its final
recommendations focused mostly on cultural changes, sparing the
big lenders the prospect of tougher laws.
The inquiry wiped A$72 billion ($51 billion) from the
combined valuation of the top four banks - Australia and New
Zealand Banking Group, Commonwealth Bank of Australia
, National Australia Bank and Westpac Banking
Corp - from its February 2018 start to the last trading
week of 2018, amid constant headlines about fee-gouging,
cavalier sales tactics and poor governance.
Since then, their shares have clawed back A$50 billion. The
country's biggest lender, Commonwealth Bank, is now only 4
percent below its pre-inquiry level. ANZ's shares have risen 12
percent in the four weeks since the inquiry delivered its final
report last month, their biggest one-month leap since March 2016
and within 5 percentage points of full recovery.
While the inquiry found the smaller lenders generally had
behaved better than their bigger rivals, they have suffered
sharper falls in lending growth and profitability in the wake of
the Royal Commission.
"It's harder for them to absorb the extra regulatory costs,
and they have a lower credit rating than the majors and that
means that they've got a higher cost of funding," Khan said.
Recent updates from Bank of Queensland and Bendigo included
the banks' expectations of higher regulatory costs, highlighting
the disadvantages of the smaller lenders.
With home loan growth of just 1 percent during the first
half of the financial year, Bendigo reported below-expectation
profit and flagged higher regulatory spending in the second
half. Bank of Queensland also flagged lower half-yearly earnings
and warned the second half of the year would be challenging.
"The increase in compliance costs and expensive funding will
affect the smaller banks more than the larger banks," said Sean
Sequeira, chief investment officer at Alleron Investment
Sequeira said that while his fund did not hold short
positions in the banks, he agreed with the short call on
"They have a portfolio of reverse mortgages that leaves them
with a larger exposure to property than banks with standard loan
portfolios, which concerns us given the current weakness in
($1 = 1.4148 Australian dollars)
(Reporting by Paulina Duran and Byron Kaye; Editing by Stephen
First Published: 2019-03-12 07:05:18
Updated 2019-03-12 07:18:54
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