Australian Banks under fire by the Hedge Funds again

Rising bad loans and falling earnings are the trigger

It seems that the mainly international hedge funds have set their sights on the Australian banks yet again. Current data shows that the funds have ‘borrowed’ A$9bn worth of stock to sell short against the Big 4 banks in Australia. The trigger for this increase to record short selling against the banks started with the ANZ’s most recent result, which saw the bank cut its dividend and increase their bad and doubtful debt book for the first time since 2008.

According to this report from the Wall Street Journal, the Australian banks normally pay an average of 78% of their earnings as dividends and this makes them attractive to yield hungry investors, particularly Self Managed Super Funds.

This strategy isn’t new for the hedge funds as they have been trying to call the end of the housing boom in Australia for some time. “It’s a tough trade,” said Andrew Macken, a fund manager at Montgomery Global Investment Management in Sydney, who asserts that the banks still have the ability to make large profits and “they’re still some of the most profitable in the world, competition is limited and they enjoy an implicit government guarantee.”, according to Mr Macken.

According to the chart below, ANZ is forecast to maintain the current income levels whilst still being able to grow their net margin. Whether this is correct won’t be known for a while.

In the meantime, the hedge funds are more than willing to bet against that scenario.


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