Australian financial institutions, particularly the big four banks, are facing an unprecedented challenge as hedge funds amass a record-breaking short position nearing $11 billion. This marks the largest dollar value ever recorded for bets against the sector, with the number of shares lent to speculators reaching levels not seen since 2018, following the Hayne Royal Commission. Historically, such short interest was often attributed to offshore funds expressing concerns over Australia’s property market and household debt, but this current wave presents a notably different narrative.
Unlike previous bear raids, the impetus for this short position is not solely predicated on the property market, nor is it primarily driven by international players. Instead, Australian long-short managers are leading the charge, convinced that the banks’ profits and valuations are vulnerable to multiple domestic challenges. Seasoned banking analysts foresee federal budget changes impacting negative gearing, potentially slowing credit growth. While rising interest rates might support bank margins, they are also expected to increase stress on households and businesses, contributing to concerns about earnings trajectory and a darkening operational environment.
The traditional defence against shorting the banks has been the relentless buying power of Australia’s $3 trillion superannuation sector, compelled to track the bank-dominated market benchmark. This “indiscriminate buying” largely propped up bank share prices, particularly last year, sending Commonwealth Bank to global valuation highs. However, traders now believe these super fund “transition flows” are abating, having largely squared up before the financial year-end. This suggests the big four banks’ current average valuation of 20 times earnings could recalibrate closer to their 20-year average of 15 times, as earnings forecast momentum turns negative and super money might even drive bets against the banks through systematic funds. Crucially, this is not viewed as a “widow-maker trade” but rather a conventional wager on fundamental shifts, with low dividend distributions mitigating risk for short sellers.
