Short sellers targeting the SPDR S&P Regional Banking ETF have seen significant gains in 2024, with profits totaling $977 million according to data from analytics firm Ortex. This trend has been driven by concerns surrounding New York Community Bancorp’s exposure to the troubled commercial real estate market, which has sparked fears about the health of the broader sector.
Robert Riva, a member of the real estate department at corporate law firm Cole Schotz, highlighted the widespread impact of CRE exposure, suggesting that many banks could be affected regardless of whether they have underwritten properly. He likened the situation to the mistakes made by Lehman Brothers, albeit on a broader scale and potentially repeating similar patterns years later.
The SPDR S&P Regional Banking ETF has experienced a 9.2% decline so far this year, providing opportunities for short sellers to profit by selling borrowed securities and repurchasing them at lower prices.
Similarly, short sellers targeting the Invesco KBW Regional Banking ETF have accumulated paper profits totaling $663 million. Among the top targets for short sellers across both ETFs are Bank of Hawaii Corp, Axos Financial, and Columbia Financial, according to Ortex data.
Short interest for the three banks, as a percentage of their free float, was reported at 15.98%, 11.73%, and 9.38% as of March 1. These figures indicate significant bearish sentiment among investors regarding the outlook for these banks.
The trio of banks have substantial exposure to the commercial real estate (CRE) market, particularly in multi-family properties, which include apartment buildings with more than four units. As of last year, these types of loans accounted for 27%, 32%, and 48% of their respective loan books.
Brian Graham, co-founder of financial services-focused advisory and investment firm Klaros Group, emphasized the significance of multi-family properties in the banking sector, noting that it is a major focal point for most banks across the country.
NYCB, in particular, has a significant portion of its lending portfolio allocated to multi-family loans, comprising 44% as of December 31. The bank’s shares have plummeted by 65% this year, resulting in substantial profits for short sellers, estimated at $145 million according to Ortex.