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  4. Here's why investors are betting $3.7 billion against Toronto-Dominion, making it the world's most-shorted bank

Here's why investors are betting $3.7 billion against Toronto-Dominion, making it the world's most-shorted bank

Zahra Tayeb   

Here's why investors are betting $3.7 billion against Toronto-Dominion, making it the world's most-shorted bank
  • Investors have made Toronto-Dominion the most-shorted bank in the world, per S3 Partners.
  • Short sellers have accumulated a staggering $3.7 billion in wagers against the Canadian lender.

Investors appear more bearish on Canada-based lender Toronto-Dominion (TD) than any other bank in the world.

Short sellers have increased their bets against TD to $3.7 billion – the biggest short position against any financial institution, according to S3 Partners. Here's a closer look at what's going on.

What is short-selling?

Short selling, also known as shorting, refers to investors borrowing stock to sell with the goal of buying it back later at a lower price and returning it to the lender, pocketing a profit. Traders engage in short selling when they expect a company's stock price to decline, and want to make money if that happens.

Why are investors shorting TD?

TD is being targeted because of its planned takeover of US regional bank First Horizon, its exposure to Canada's weakening housing market, and its ties to troubled US lender Charles Schwab, per Bloomberg.

The lender first announced its $13.4 billion buyout of First Horizon in February 2022. But sentiment has turned against regional banks following the collapse of Silicon Valley Bank, and TD's shareholders aren't so enthusiastic about the deal anymore.

"Walk away and take the break fee and be able to get other deals cheaper now," one shareholder told Reuters, suggesting TD may be overpaying for its acquisition.

First Horizon shares are trading about 30% below TD's offer price of $25 a share. Since announcing the takeover, shares of Canada's second-largest lender are down about 11%.

Meanwhile, TD's exposure to Canada's housing slowdown is also eroding investors' confidence in the bank. That's because the lender operates in an environment where variable-rate mortgages are popular and consumer insolvencies are growing.

According to the Canadian government, the total number of insolvencies rose by 13.5% in January. If fewer people are repaying their debts, that could pose problems to TD if it has a substantial number of consumer loans on the line.

"TD sits uniquely in the middle of two broad headwinds," Daneshvar Rohinton, a portfolio manager at Industrial Alliance, told Bloomberg. "The fears around Canadian housing will be projected onto TD," he added.

At the same time, TD's 10% stake in Charles Schwab – whose stock price tumbled after it revealed $28 billion in unrealized losses on its bond holdings as of December 31 – has contributed to investor bearishness toward TD.


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