Investors are selling TD short

Don’t freak out, but global investors are staking a lot of money on one of Canada’s biggest banks hitting some seriously choppy waters.

Driving the news: TD is currently the most-shorted bank in the world, with short-sellers collectively holding a ~US$3.7 billion position against Canada’s second-largest lender. 

  • Following the collapse of Silicon Valley Bank (SVB), banks have been a popular target for investors looking to short (i.e., betting a company’s stock price will fall).

But how did a relatively sturdy Canadian bank with no immediate liquidity issues become the bank du jour for short-sellers? Well, there are a few contributing factors…

  • For one, TD has heavy exposure to Canada’s slowing housing market, potentially putting it on the hook for heavy losses (to be fair, that’s true for all Canadian banks).

  • TD also has a ~10% stake in the US brokerage Charles Schwab which just had its worst-performing month since 1987 due to concerns about unrealized bond losses.

There’s also TD’s pending purchase of US regional bank First Horizon—one of the many regional banks hit hard following SVB’s collapse—which has become so contentious that some shareholders are calling on TD to renegotiate the deal or even scrap it entirely

Why it matters: We’ve been told Canada’s banking system is largely insulated from the turmoil roiling the sector, but clearly there are fissures some investors feel they can exploit.

  • And bets are hitting. TD stock dropped like a skydiver in March, losing CA$18 billion in market capitalization and seeing the largest price dip in the S&P/TSX Banks Index. 

Zoom out: This short-selling spree doesn’t mean investors think TD will fail, just that its share price is set to fall substantially, which would take a bite out of Canada’s broader GDP.