Short sellers are doubling down on these European banks — and Credit Suisse isn’t their top target

Short-sellers are sitting on nearly $US2 billion ($2.98b) in profit from bets against the European banking sector this month so far. And, perhaps surprisingly, Credit Suisse wasn’t the most profitable short.

Instead, France’s biggest bank BNP Paribas topped the list, yielding $US357 million in (as yet unrealised) profits for short sellers in March in total dollar-value terms, according to stock market data provider S3 Partners as of midday March 15.

Short-sellers profit when a stock falls. They borrow shares to immediately sell them with plans to repurchase them later when the price is lower, making a profit from the difference.

Bank shares worldwide began their decline on fears of contagion in light of the collapse of Silicon Valley Bank last week. The worries heightened in Europe on Wednesday as Credit Suisse shares fell by 24 per cent — its biggest daily loss.

As a result, short-sellers betting against Credit Suisse were up $US238.6m in unrealised profits for the month by midday trading Wednesday, according to S3 Partners.

However, data shows that Credit Suisse — Switzerland’s second-largest lender — doesn’t even make the list of the top five most-shorted European Banks.

BNP Paribas remains the biggest target for short-sellers, with $US3.1b in total wagers expecting shares to fall. Its shares have fallen by 20 per cent so far in March, making it one of the biggest losers among large banks in the Stoxx Europe 600 Banks Index.

Italy’s two largest lenders, Intesa Sanpaolo and Unicredit, were the second- and third-largest targets for short-sellers, together attracting nearly $US2.5b in bets against them. Spain’s Banco Santander and Hong Kong-listed shares of HSBC Holdings rounded off the list.

Bets against the European banking sector have ramped up in the past month, rising by $US5.42b. Short-sellers raised their bets by $US1.3b against Unicredit alone over the past 30 days.

These potentially highly profitable trades haven’t always been a rewarding bet for short sellers.

In fact, on a year-to-date basis, bets against European banks were nursing unrealised losses of $US1b on a total short interest of nearly $US20b in total, according to Ihor Dusaniwsky, managing director at S3 Partners.

“But in March we’ve seen a reversal of fortune with European Bank shorts up $US1.89b in month-to-date mark-to-market profits, up +8.04 per cent on an average short interest of $US23.52b,” he said in an email to CNBC Pro.

Hedge funds, many of which have short positions, have also faced significant losses on their portfolios elsewhere due to large short-term movements in equities and bond prices.

Strategists at Swiss investment bank UBS said that many such funds were flat until last week’s market turbulence, but have quickly lost more than 4 per cent in total value.

As a result, UBS said in a note to clients on March 15 that many such funds “significantly reduced their long positions in equities, selling $25-30 [billion] worth of stocks since the announcement of the SVB collapse.”

They also warned clients that “more selling flows are coming,” which will eliminate hedge funds’ exposure to equities in the short term.

CNBC