Crushed By The Record Oil Squeeze, This Is How Energy Bears Are Shorting Crude Now
By Tyler Durden
The “short energy” trade worked great for a while and then, as we
It is these regional banks that Bloomberg finds are the object of shorts’ latest affection, as bearish bets have shot up 35% on average this year among the 10 most-shorted stocks in the KBW Regional Banking Index, and nowhere more so than at Cullen/Frost Bankers Inc. and Prosperity Bancshares Inc. in Texas, which have seen short interest surge about 60 percent.
The reason why shorts’ attention has been redirected to energy banks is well-known to our readers as we have been covering the banks’ exposure to energy since January: “as oil prices plunged, concern over energy companies’ ability to pay back loans drove investors to unload or bet against financial stocks judged to have the most at stake in the sector. So far, the rebound that pushed oil to around $40 a barrel has done little to dilute that speculation. Stubbornly low interest rates are also squeezing profits in a group that trades at a premium of almost 40 percent to their larger brethren.”
“It’s generally a very tough environment,” said Stephen Moss, a New York-based analyst at Evercore ISI. “Beyond oil and the yield curve, we have seen signs of credit softening overall. So going forward, it feels like you are going to have incrementally higher credit costs, which obviously will pressure earnings.”
The details are also mostly familiar, but here is a quick recap from Bloomberg:
Energy loans account for 15 percent of Cullen/Frost’s portfolio, while they make up 4 percent of Prosperity’s, according to Moss. Of the 10 most shorted regional banks, the majority do business in states like Texas, Oklahoma and Arkansas, centers of the drilling industry. Banks that have exposure higher than 4 percent to energy in their loan portfolios have slumped 22 percent since late 2014, Morgan Stanley’s Ken Zerbe wrote in a report earlier this month.
Bigger banks have also increasingly lured bears this year. Short interest makes up 6.2 percent of Zions Bancorporation’s shares outstanding and 4.5 percent percent of Comerica Inc. Seven percent of Zions’ loan portfolio is exposed to energy companies, and 6 percent of Comerica’s, according to Zerbe.
Being a smaller, regional bank instead of a TBTF, money-center bank means just that: “regional banks are more sensitive to the trajectory of interest rates, as a bigger proportion of their revenue stems from deposits and lending. The Federal Reserve scaled back its forecast for tighter policy on March 16, citing weaker global growth. That translates to lower-for-longer short-term rates, which crimp what local banks can charge on loans.”
But more so than the flat yield curve, the immediate catalyst are questions about the banks’ solvency if and when client O&G companies file bankruptcy, straddling the lenders with billions in bad debt.
Evercore ISI’s Moss said even if the Fed speeds up interest rates increases, a stronger dollar would hurt …read more
Source: Crushed By The Record Oil Squeeze, This Is How Energy Bears Are Shorting Crude Now
