TD Bank Crisis

TD Bank Crisis :

Rapid rate hikes by the Fed is causing banking crisis including run on some of the banks.

In this backdrop, TD bank’s stock became the largest shorted banking stock that came as a shock to many Canadians.

Question to ask is, do we need to move our money to other safer banks while keeping under CDIC’s guarantee limits.

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What is Short selling :

Short selling is a type of trading strategy where investors make money as the stock price falls.

They sell borrowed shares now and return them later on, which they buy as stock price falls.

But if price goes up, short seller may lose money because they must buy shares now at a higher price than what they initially sold them for.

Short selling does have some risk like a short squeeze, which occurs when short sellers bet against a stock and it’s price begins to go up.

So investors should do their research while undertaking due diligence at their end, before they invest.

It's also important to set stop-losses to limit potential losses thus avoiding getting caught in a short squeeze.

Most Shorted bank :

Turns out, Canada’s TD Bank became the biggest short position in the world of banking stocks.

Recently, short sellers have upped their bearish bets against TD to roughly $3.7 billion.

Strangely this bearish position is way ahead of BNP Paribas or even Bank of America.

All these banking issues started creeping up as three US regional banks failed, while Credit Suisse was forced to be sold to UBS.

Surely some Canadian lenders might have some asset mismatch, but short sellers have been actively shorting into a declining banking sector.

The real culprit here is rapid rate hikes, which are creating multiple problems for banks and other financial institutions.

Reasons :

Short sellers targeted TD as it holds a 10% stake in Charles Schwab, which has lost huge market cap because of unrealized bond losses.

Evidently, slowdown in Canadian housing market where rising variable rate mortgages are creating consumer insolvencies.

Surely TD faces two major headwinds thus facing heat on the stock market.

During challenging times, heavily indebted customers face margin calls or had to sell properties that amplify problem for TD bank, as a result stock fell by more than 10%.

Just keep in mind, these short seller profits can evaporate overnight even if we see a short market rally.

Hope you get the point.

First Horizon takeover :

TD first announced its $13.4 billion buyout of First Horizon in Feb of 2022.

Now sentiment has turned against regional banks following collapse of Silicon Valley Bank in the US, rightfully so TD's shareholders aren't so enthusiastic about this takeover deal anymore.

The message is loud and clear, walk away and pay up the break fee as there might be other cheaper deals available.

Also the mood is suggesting TD may be overpaying for its acquisition right now.

Surely this takeover would catapult TD to become the 6th biggest commercial bank in the U.S., but experts are doubtful about the risk that comes with this takeover, hence the selloff.

Strong Fundamentals :

Fundamentally financials of TD look quite strong from a growth prospective.

It has grown in the past 5 years at the following compounded annualized rates:

Revenue @ 7%, Operating earnings @ 6.7%, Net income @ 8.4% and EPS @ about 8.8%.

This is a decent growth for a company that only trades at less than 10 times earnings.

When business is growing proportionate to stock price, that means valuations are not racing ahead of fundamentals.

Surely it is far from being the cheapest bank based on valuations, but that is the price you have to pay for the lower risk of collapsing.

My perspective :

A bank takes deposits while offering loans where they makes money on the interest rate spread.

All this changed as Fed rapidly increased rates that created an asset mismatch and bond losses for the banks.

After 2008 crisis, regulators put in additional capital requirements for risky assets, but TD is well capitalized just in case.

In current banking crisis, rising rates dampened long term bond valuations thus creating liquidity risks if depositors move the money.

This quickly unfolded with SVB and credit Swisse, but TD maintains a liquidity buffer of more than 12% for it’s $1.2 trillion deposit base.

Frankly a bank run can still happen to anyone creating liquidity crisis, as we follow a fractional banking system.

Disclaimer :

As a disclaimer, I’m not a financial advisor please consult one before investing based on your personal financial situation.

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