Investing

Toronto-Dominion's Position as World's Most-Shorted Bank Isn't a Good Look

Will Ashworth

Published: April 7, 2023 7:37 am

A March 29 report from New York-based S3 Partners, a provider of financial data analytics, says Toronto-Dominion Bank (CA:TD, US:TD) is the most-shorted bank stock anywhere in Canada, the U.S., or Europe.

Fintel’s Short Interest Tracker shows, as of the April 6 close, short interest is 56.11 million shares or 3.13% of the float. That gives it a short interest ratio of 5.25 days to cover.

TD stock was down slightly on April 5 on the news.

According to Bloomberg News, short sellers have bet $3.7 billion [all figures in U.S. dollars unless noted otherwise] against the Canadian bank, considered the country’s second-largest lender behind Royal Bank of Canada (CA:RY, US:RY). As noted in the report, the short interest is up 50 basis points from a year ago.

TD stock is down 8.8% so far in 2023. That compares to a 1.2% increase for the Horizons Equal Weight Canada Banks Index ETF (CA:HEWB), which holds all six of the country’s diversified banks. RY stock is up 3% year to date.

On the Horizon

The bank is in the middle of trying to close its $13.4 billion acquisition of First Horizon Corp. (US:FHN), a Memphis-based regional bank with $79 billion in total assets, $65 billion in deposits, and a $57 billion loan portfolio, that operates in 12 southern U.S. states.

The acquisition was originally announced in February 2022 when First Horizon shares were trading around $18. They rose to the $25 share price TD offered by February 2023, only to fall below $15 due to the Silicon Valley Bank collapse. The shares have recovered slightly in the weeks since but remain 31% below TD’s offer.

Not only has the deal’s original offer come into question due to First Horizon’s lower share price, but regulatory issues have prompted the two parties to extend their termination date by three months to May 27.

On March 2, TD CEO Bharat Masrani said during the bank’s conference call with analysts that he didn’t think it would be able to complete the transaction by May 27. As a result, it’s possible the termination date could be extended a second time, well into the summer.

Walk Away

Some TD shareholders believe the bank should walk away from its deal.

“I don’t think it’s something TD should go ahead with in this environment,” said Barry Schwartz, portfolio manager at Baskin Financial Services, a shareholder in TD, Reuters reported on April 4.

“Walk away and take the break fee and be able to get other deals cheaper now, Schwartz said.”

The problem is that TD could find itself in a lawsuit with First Horizon if it walks, potentially costing it hundreds of millions should it lose in court. So, the financial costs at stake are high.

Other Issues

In addition, two other problems have caught the attention of short sellers.

First, TD is a large mortgage lender on both sides of the border. As a result, higher interest rates could translate into higher mortgage defaults. Secondly, it owns 12% of Charles Schwab (US:SCHW). Schwab’s stock has fallen more than 36% over the past month on concerns it will lose significant deposits to the big U.S. banks like JPMorgan Chase & Co. (US:JPM).

In addition to having the highest dollar amount of stock short, the short interest as a percentage of the float is also considerably higher than most of the big U.S. banks. Only Citigroup (US:C) comes close, at 2.36%. However, TD’s short interest relative to its float is still much lower than many European banks.

Short sellers made approximately $519 million in profits from TD in March, the third-highest profitable bank short behind only First Republic Bank (US:FRC), which survived, and SVB Financial, which did not.

One thing to remember about short seller data, says Ihor Dusaniwsky, S3 Partners’ Managing Director of Predictive Analytics, is that it can quickly reverse course.

“Outsized short-selling like we saw in the banking sector are usually knee-jerk reactions to market turmoil and can reverse as quickly as they occur,” Bloomberg reported Dusaniwsky’s comments.

This article originally appeared on Fintel