By Simon Jessop and Lawrence White
LONDON (Reuters) – Some of London’s biggest hedge funds are betting on even tougher times ahead for Britain’s Metro Bank even after the embattled lender halved in value following an accounting error.
City grandee Crispin Odey and hedge fund Marshall Wace have the biggest short positions against the bank, data from Britain’s Financial Conduct Authority showed, while others including Polar Capital have also doubled down since the news came out on Jan. 23.
Metro Bank’s shares fell a further 13 percent on Thursday to an all-time low, after the lender said Britain’s Prudential Regulation Authority had first discovered “potential inconsistencies” on its books, rather than the lender discovering the mistakes independently.
Metro shares lost a third of their value last week when it reported the mistake in the risk-weighting of some of its loans, which led to a 900 million pound ($1.2 billion) hit to its capital levels.
Since that initial disclosure, short-sellers have stepped up bets that the stock would fall further, amid speculation the bank would need to accelerate capital raising plans scheduled for 2020, data from FIS Astec Analytics reviewed by Reuters show.
(GRAPHIC: Metro Bank short sellers pile on, https://tmsnrt.rs/2BbH5Mi)
Metro Bank declined to comment.
“The events at Metro Bank are concerning. The Treasury Committee will keep a close eye on developments, and may choose to raise it with the PRA,” Nicky Morgan, chair of parliament’s Treasury Committee said in a statement to Reuters.
A so-called ‘short’ trade involves borrowing the stock of a company from a long-term shareholder such a pension fund and selling it into the market, hoping you can buy it back later at a cheaper price, pocketing the difference minus fees.
While many investors would book profits after such a heavy fall, Odey, Marshall Wace, Polar, CZ Capital and Connor, Clarke & Lunn all have bigger positions now than before the news broke, signalling they expect the shares to fall further in value.
The FCA data is collected daily from all those holding a short position greater than 0.5 percent of the target company’s stock, missing out the potentially much greater number of hedge funds holding smaller positions.
The data from FIS Astec Analytics suggests that demand to short is matched across the broader industry with the total number of Metro shares out on loan at a 52-week high, with eight out of every 10 shares available to borrow accounted for.
The sheer scale of demand to bet on further price falls could leave funds nursing heavy losses should good news emerge to send the shares higher.
In such a position, many funds would look to quickly buy back shares in the market so they can return them to the long-term holders, creating a so-called ‘short squeeze’.
(Additional reporting by Iain Withers and Sinead Cruise; Editing by Keith Weir)