short interest in canadian Banks at highest level since lehman collapse

Short interest in Canadian banks has risen to the highest level since the Lehman collapse, but one analyst doesn’t expect the bearish traders to stick around much longer. The short interest ratio for Canadian banks, which shows how long it would take short sellers to cover their positions if a stock began to rise, has moved up to 10.1 trading days. Anything more than five days is generally considered bearish. The ratio for U.S. banks is only 1.3 trading days. “The increase in short interest for Canadian banks, we believe, has muted price-to-earnings multiple expansion and negatively impacted share price performance,” said Kevin Choquette, an analyst at Scotiabank. Short interest in CIBC has increased 72% year-over-year, followed by Royal Bank of Canada at 28%. Short interest in TD was the only one to decrease in the past year, falling 10%. “The increase in Canadian bank short interest, we believe, is due mainly to concerns about a housing bubble, and weak economic growth outlook,” Mr. Choquette said. But he doesn’t see the high level of short interest as a negative for Canadian banks. Instead, Mr. Choquette said the shorters are likely to soon become discouraged as Canadian banks begin to defy expectations and continue to post healthy earnings. “We believe fears of a Canadian housing correction are overly discounted in bank valuations,” he said. “Short sellers, we believe, will eventually lose patience as Canadian banks continue to earn their way through the housing slowdown, capital begins to be more aggressively repatriated to shareholders, and the cost of carry, due to high bank dividend yields, begins to be costly.” Once that happens, short sellers will begin covering their positions more heavily, which Mr. Choquette said should result in a bank rally, particularly for CIBC and National Bank of Canada. He upgraded the former to sector perform from underperform as a result.