Japan's Aozora Bank Ltd. remained the most-shorted Asia-Pacific bank in the third quarter, though short sellers have reduced their bets against the lender.
Short sellers held 12.53% of Aozora Bank's shares as of Sept. 30, down from 20.67% as of Sept. 29, 2023, when it was also the most shorted bank in the region, according to S&P Global Market Intelligence's Securities Finance dataset. The Japanese bank was also the most-shorted lender during the second quarter, with 19.78% of its shares held by short sellers as of June 28.
Suruga Bank Ltd., another Japanese regional bank, was the second-most shorted bank in Asia-Pacific, with 6.04% of its shares held by short sellers at the end of September.
Including Aozora Bank and Suruga Bank, there were 17 Japanese lenders, most of them regional banks, in Securities Finance's list of the 25 most-shorted Asia-Pacific banks.
Investors "probably thought regional banks may not be able to increase lending margins easily unlike the megabanks," Toyoki Sameshima, a senior analyst at SBI Securities, said in an interview.
"Regional banks tend to link their lending margins to their short-term prime rates, while the megabanks raise their lending margins based on the market rates," Sameshima said.
The proportion of Japanese bank shares with short sellers may rise, according to Sameshima. "It looks like banks shares have hit a peak, pricing in almost everything," including further rate hikes, Sameshima said.
The Bank of Japan, which decided in late July to raise its policy rate to 0.25% from a range of 0% to 0.1% for its second hike, is open to further rate hikes if wages and inflation continue to rise in a virtuous cycle. Higher rates lead to higher lending margins for banks.
Major Japanese banks have seen steep declines in their stock prices, which pushed their implied upside to the highest level in at least three quarters, making them attractive for investors. Two Japanese megabanks, Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc., had the highest implied upside to share price targets in a sample of the 20 largest lenders in Asia-Pacific by market capitalization, according to Market Intelligence data.
Australian regional banks
Three regional banks were among four Australian lenders that made it to the list of the 25 most-shorted banks in Asia-Pacific.
Bank of Queensland Ltd. was the third-most shorted bank in Asia-Pacific, with short sellers holding 5.14% of the bank's stock at the end of the third quarter. MyState Ltd., headquartered in Tasmania, had 3.20% of its shares held by short sellers. Victoria-based Bendigo and Adelaide Bank Ltd. saw the number of its shares held by short sellers increase to 2.46% as of Sept. 30, from 2.36% as of June 30 and from 2.06% from Sept. 29, 2023.
Regional banks in Australia face intense competition as the country's four biggest banks command 72% of the country's A$5.951 trillion in banking sector assets. Investor sentiment has been muted on the regional banks as they face a host of challenges from increased margin pressure and funding concerns.
"I think if you're an investor, either internationally or domestically, large banks have just been a much better way to play the financial sector over the past five years," Andrew Dale, portfolio manager and partner at ECP Asset Management, told Market Intelligence.
Offshore investors are likely taking a macro view of the Australian economy and investing in banks that grow their credit at what the market's growing, Dale said. Regional banks face margin pressure, but unlike the bigger banks they do not have as good a funding structure, Dale noted.
