TORONTO (Reuters) – Hedge fund bets against Canada’s TD Bank Group on Wednesday hit $4.2 billion, making it the most-shorted banking stock globally, according to data provider ORTEX’s calculations, with some analysts concerned about the bank’s exposure to U.S. regional lenders. Around 4.1% of TD’s outstanding shares were out on loan to hedge funds, while the second-most shorted bank stock, JP Morgan, only had $2.3 billion worth of shorts, showed the data. Hedge funds profit when they borrow a stock from an institutional investor and sell it back when the price falls, pocketing the difference, a practice known as short-selling. Turmoil in the banking sector began last month with the collapse of regional banks Silicon Valley Bank and Signature Bank, sparking a crisis of confidence. The Biden administration on Thursday called for stricter rules to reduce future risk.
TD is the midst of acquiring U.S. regional lender First Horizon Corp for $13.4 billion, though some shareholders have urged the Canadian bank to either scrap the deal or renegotiate a lower price.
The First Horizon deal would catapult TD to the sixth-biggest commercial bank in the U.S. from the tenth-largest now, according to the Federal Reserve. The next-largest Canadian bank in the U.S. is BMO, which is number 23 on the list. TD shares are down 15.7% since the beginning of the regional bank crisis and down 3.4% this week. Peer Bank of Montreal (BMO) is down 15.8% over the same time period and is down 2.2% this week. Around 2.9% of BMO’s outstanding shares were out on loan to hedge funds, or about $1.8 billion. A spokesperson for TD was not immediately available for comment. “The bank’s acquisition of First Horizon is also not looking great in the current context,” Eric Compton, equity analyst at Morningstar, told Reuters via email. “TD has the most exposure to the U.S. regional banking system,” Compton added.
He noted TD also has a material stake in Charles Schwab, which is down 40% year to date.
TD awaits regulatory approval of its takeover of First Horizon.
Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks
On the surface, Charles Schwab Corp. being swept up in the worst US banking crisis since 2008 makes little sense. The firm, a half-century mainstay in the brokerage industry, isn’t overexposed to crypto like Silvergate Capital and Signature Bank, nor to startups and venture capital, which felled Silicon Valley Bank. Fewer than 20% of Schwab’s depositors exceed the FDIC’s $250,000 insurance cap, compared with about 90% at SVB. And with 34 million accounts, a phalanx of financial advisers and more than $7 trillion of assets across all of its businesses, it towers over regional institutions. Yet the questions around Schwab won’t go away. Rather, as the crisis drags on, investors are starting to unearth risks that have been hiding in plain sight. Unrealized losses on the Westlake, Texas-based firm’s balance sheet, loaded with long-dated bonds, ballooned to more than $29 billion last year. At the same time, higher interest rates are encouraging customers to move their cash out of certain accounts that underpin Schwab’s business and bolster its bottom line. It’s another indication that the Federal Reserve’s rapid policy tightening caught the financial world flat-footed after decades of declining rates. Schwab shares have lost more than a quarter of their value since March 8, with some Wall Street analysts expecting earnings to suffer. “In hindsight, they arguably could have had more prudent investment choices,” said Morningstar analyst Michael Wong. “There would be a sufficient amount of liquidity right there to cover if 100% of our bank’s deposits ran off,” Bettinger told the Wall Street Journal in an interview published Thursday, adding that the firm could borrow from the Federal Home Loan Bank and issue certificates of deposit to address any funding shortfall. Through a representative, Bettinger declined to comment for this story. A Schwab spokesperson declined to comment beyond the Thursday statement. The broader crisis showed signs of easing on Monday, after First Citizens BancShares Inc. agreed to buy SVB, buoying shares of financial firms including Schwab, which was up 3.1% at 2:29 p.m. in New York. The stock is still down 42% from its peak in February 2022, a month before the Fed started raising interest rates. Schwab is unusual among peers. It operates one of the largest US banks, grafted on to the biggest publicly traded brokerage. Both divisions are sensitive to interest-rate fluctuations. Like SVB, Schwab gobbled up longer-dated bonds at low yields in 2020 and 2021. That meant paper losses mounted in a short period as the Fed began boosting rates to stamp out inflation. Three years ago, Schwab’s main bank had no unrealized losses on long-term debt that it planned to hold until maturity. By last March, the firm had more than $5 billion of such paper losses — a figure that climbed to more than $13 billion at year-end.
It shifted $189 billion of agency mortgage-backed securities from “available-for-sale” to “held-to-maturity” on its balance sheet last year, a move that effectively shields those unrealized losses from impacting stockholder equity.
“They basically saw higher interest rates coming,” Stephen Ryan, an accounting professor at New York University’s Stern School of Business, said in a phone interview. “They didn’t know how long they would last or how big they would be, but they protected the equity by making the transfer.” The rules governing such balance sheet moves are stringent. It means
Schwab plans to hold more than $150 billion worth of debt to maturity with a weighted-average yield of 1.74%. The lion’s share of the securities — $114 billion at the end of 2022 — won’t mature for more than a decade.
The benchmark 10-year Treasury yield now: 3.5%. Which means the $150 billion value they book these bands at now in reality are worth $75 billion. and if my prediction is right and the yield goes north of 5% they could be wroth as little as $10 billion dollars…. the dumb fucks
Schwab’s other headache from higher interest rates stems from cash. At the root of Schwab’s income is idle client money. The firm “sweeps” cash deposits from brokerage accounts to its bank, where it can reinvest in higher-yielding products. The difference between what Schwab earns and what it pays out in interest to customers is its net interest income, among the most important metrics for a bank. Net interest income accounted for 51% of Schwab’s total net revenue last year. “Schwab’s counting on inertia,” said Allan Roth, founder of Wealth Logic, a financial-planning firm. After a year of rapidly rising rates, there’s greater incentive to avoid being stagnant with cash.
While many money-market funds are paying more than 4% interest, Schwab’s sweep accounts offer just 0.45%.
Though it’s an open question just how much money customers could move away from its sweep vehicles, Schwab’s management acknowledged this behavior picked up last year. “As a result of rapidly increasing short-term interest rates in 2022, the company saw an increase in the pace at which clients moved certain cash balances” into higher-yielding alternatives, Schwab said in its annual report. “As these outflows have continued, they have outpaced excess cash on hand and cash generated by maturities and pay-downs on our investment portfolios.” In their statement, Bettinger and Schwab wrote that “client deposits may move, but they are not leaving the firm.”
To plug the gap, the brokerage’s banking units borrowed $12.4 billion from the FHLB system through the end of 2022, and had the capacity to borrow $68.6 billion, according to an annual report filed with regulators. Schwab borrowed an additional $13 billion from the FHLB so far this year, the filing showed.
Analysts have been weighing these factors, with Barclays Plc and Morningstar lowering their price targets for Schwab shares in recent weeks. Bettinger and Schwab said that the firm’s long history and conservatism will help customers navigate the current cycle, as they have for more than 50 years. “We remain confident in our client-centric approach, the performance of our business, and the long-term stability of our company,” they wrote in last week’s statement. “We are different than other banks.” NN: Yea they are different. They charge you 0 commissions your trades and fuck you out of 4% interest on your funds they hold….. and are losing on long term instruments that are underwater.
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