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Investors have bet a boggling $3.7 billion against the lenders, according to S3 Partners.
According to Bloomberg, numerous factors are behind the current situation, including T.D.’s planned takeover of U.S. regional bank First Horizon and the bank’s own exposure to a weakening housing market. Other factors are the T.D. ties maintained with the troubled U.S. lender Charles Schwab.
What Is Short Selling?
Commonly referred to as shorting, short selling is a scenario when investors borrow stocks to sell them to repurchase them later and at a lower price and return them to the lender, pocketing a profit in the process. Traders generally participate in short selling when they expect a particular company’s stock prices to fall based on numerous aspects associated with the company and, in some cases, with the industry.
Why Are Investors Shorting TD Bank Stock?
Investors are shorting the T.D. stock for three reasons mentioned above. To begin with, in February 2022, the Canadian lender announced a takeover of the First Horizon Bank, a U.S. regional bank, for $13.4 billion. With the failure of Silicon Valley Bank, shareholders have negative sentiments toward the acquisition. T.D.’s shares have dropped 11% since the takeover announcement, and First Horizon’s shares are trading 30% below the $25 per share offer price from T.D.
The second issue is T.D.’s exposure to a somewhat challenging housing market in Canada. As per data from the Canadian government, the total number of insolvencies rose by 13.5% in January. A higher default rate is bad news for a lender like T.D., which typically deals with variable-rate mortgages. With rising consumer insolvencies, T.D. has much to lose from the situation. A perception of a bank’s association with the impact of a slower and deteriorating housing market can have a lasting ill impact.
The Canadian lender also has a 10% stake in a U.S. lender Charles Schwab. The American bank has $28 billion in unrealized losses on its bond holdings as of December 31. It is not surprising that the stocks of the bank are taking a battering. T.D. Bank is also taking some hits as a result.
The trifecta of problems does not bode well for the bank. While some problems leading to the stock shorting are not in the Canadian Bank’s control, exposure to troubled lenders is. T.D. Bank would be well advised to cut its losses and regain the trust of its investors.
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