By Ketki Saxena
Investing.com – Toronto-Dominion Bank (TSX:TD) is now the biggest bank short globally, with nearly US$3.7 billion on the line as per an analysis by S3 Partners.
This puts the Canadian bank ahead of BNP Paribas (EPA:BNPP) and Bank of America Corp (NYSE:BAC).
Why Is TD Being so Heavily Shorted?
Much of the short interest has to do with “the general skittishness” , as per Bloomberg, toward the banking sector following the failure of three regional banks (SVB, FIrst Republic, and Signature Bank), as well as Credit Suisse (SIX:CSGN).
However, other reasons for the staggering short interest in TD is a result of the Canadian bank’s exposure to U.S. markets, and the housing slowdown in Canada.
Analysts also point to TD’s plans to close a $13.4 billion deal for U.S. regional bank First Horizon Corp - a deal that analysts widely expect to be renegotiated after banking turmoil sent shares of First Horizon crashing well below TD’s offer price.
Is the Short against TD Likely to Materialize?
Despite the staggering volume of money on shorting TD, short interest as a percentage of TD’s shares available for trading, or float, remains relatively low. That ratio currently stands at 3.3%, up from 2.8% a year ago.
Furthermore, the Canadian banking sector appears to have remained largely immune to the crisis affecting U.S. regional banks (plus Credit Suisse) so far, and indications of liquidity concerns in the country’s banking sector remain limited.
Despite the increase in bets against the Toronto-based lender, some analysts believe that the “big short” against TD is unlikely to materialize.
Short sellers "Will be Undone" by this Trade
Philip Petursson, chief investment strategist at IG Wealth Management noted in an interview to BNN Bloomberg, that he “Wouldn't put as much emphasis or fear on TD’s prospects.”
“TD is excellent in terms of its risk management. And I think that they've managed their U.S. exposure very well. I think the shorts will be undone by this.”
Petursson also noted that Canadian banks have withstood similar instances in the past.
“About 10 years ago, we called it the ‘great white short,’ which turned into the ‘widow-maker trade’ because everyone was shorting the Canadian banks thinking that there would be a repeat of what we saw in the U.S.” Petursson noted.
“That never materialized and I don't think it will [now]"