Investors who set up bearish trades in the belief the sector's stock prices would fall further have lost an estimated $1 billion so far this month, according to analytics firm Ortex, after making $2.7 billion in March, their largest profit on European bank short positions in more than a year.
The STOXX European banks share index has risen by as much as 18% from late March's lows. Italy's UniCredit - one of the top shorted stocks, according Ortex and S&P Global Market Intelligence - has since rallied 35% to its highest since 2016. "Rate hikes have significantly boosted interest income and that's not going to fall right now. It is not time yet to leave the financials out of your portfolio," said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan. Only a few weeks ago, at the peak of the banking turmoil, markets braced for a deep downturn and the possibility central banks would reverse course and start cutting interest rates. The stress has eased and investors are again factoring in more rate hikes, helping banking stocks to recover, but catching short-sellers and other investors who cut their exposure to the sector off guard.
"Banks fail to reflect the positive impact of interest rates so far. They have much stronger capital bases than they've had in other times of economic weakness and therefore the European Central Bank has continued to approve (share) buybacks," said James Rutland, fund manager at Invesco in London, which has its biggest overweight position within financials.
According to Refinitiv IBES, European financials should report first quarter earnings growth of 31% - the bulk of corporate earnings growth in Europe - with full-year growth forecast at 19.5%.
But a Bank of America survey showed fund managers cut bank exposure in April to the lowest since May 2020, as they piled into more recession-proof defensive sectors.
Investment managers Bridgewater Associates, Millennium Management and Marshall Wace added to short positions on European banking shares after the collapse of Silicon Valley Bank in mid-March. Data from Breakout Point shared with Reuters on Friday showed that short-selling on the banking sector had seen virtually no changes big enough to require disclosure to the relevant European regulators. Hedge funds are often prevented from commenting on positions by regulations in various global regions. Ortex estimates short interest on European banks is close to 1% of the free share float, an 11-month high. Among the top 15 bank shorts in both Ortex and S&P rankings are BNP , Santander and ABN , which have more than halved their losses since early March. Svenska Handelsbanken , another highly shorted bank, remains 12% lower, however.
One area of concern is exposure to commercial real estate
and investors will be alert to any sign of emerging stress as
European lenders report earnings next week.
(Reporting by Danilo Masoni in Milan and Joice Alves and Nell
Mackenzie in London; Editing by Amanda Cooper, Kirsten Donovan
and Barbara Lewis)
