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Short Sellers Piling Into Big Bank Stocks Ahead Of Q3 Earnings

C.BAC, DB, GS, WFC | September 22, 2017

With third-quarter bank earnings season now less than a month away, short sellers seem to be betting on a disappointing quarter from big banks. According to a new report from financial analytics firm S3 Analytics, short sellers have been piling into the largest bank stocks in recent weeks.

In fact, S3 reports that shorts have upped their bearish bets on big bank stocks by $1.9 billion so far in the third quarter.

Analyst Brett Weiss says short sellers are more bearish on some big banks than others. Deutsche Bank AG (USA) (NYSE: DB) has endured a 69.9 percent increase in short exposure in Q3, more than any other large bank. Goldman Sachs Group Inc (NYSE: GS) and Wells Fargo & Co (NYSE: WFC) were a distant second and third, with short interest up 50.7 and 33.3 percent, respectively.

Surprisingly, the bearish bets seem to be concentrated on a handful of the largest names. Short interest in the global banking sector is actually down $296 million from a month ago.

Banks with large trading operations may be hit particularly hard in Q3 due to a challenging trading environment. Leucadia National Corp. (NYSE: LUK)’s Jefferies reported a 7-percent year-over-year decline in Q3 trading revenues this week, a bad sign for other banks.

On the other hand, investment banks which rely heavily on fees see Jefferies’ record Q3 fee revenue as a potential positive indicator.

“As Q3 approaches a close, the market will see if the Wall Street banks can depend on robust investment banking conditions to stem the expected shortfalls coming from trading,” Weiss wrote.

S3 reported Bank of America Corp (NYSE: BAC) is the only mega-bank that has witnessed a significant reduction in short interest so far in the third quarter.