Short interest in bank-related stocks traded on the New York and American stock exchanges grew 3.1% in the month ending Oct. 13, while total short positions in stocks traded on the exchanges shrank.
The growth in bank short interest was mostly attributable to sophisticated hedging strategies related to pending bank mergers, analysts said. But some said a possible rationale for the traditional form of short- selling, predicated on a negative view of an industry, may have crept back into the market.
"We turned negative on the bank stocks four weeks ago. We think the stocks have gotten a little ahead of themselves," said Michael Durante, a bank analyst at McDonald & Co., Cleveland.
Although Mr. Durante said he did not foresee a major shakeout in the banking industry that would justify rampant short-selling, he said there could be a 10% to 15% correction in banks stocks as credit costs rise next year. And he said that some of the recent short-selling may reflect a similar view.
Short interest is the outstanding volume of shares sold short - that is, borrowed and promptly sold. Short-sellers are betting that the stock price will fall, so their short positions can be covered profitably with cheaper shares.
Most professional short-sellers pulled out of the bank market after the industry escaped the clutches real estate and energy-related crises of the 1980s and early 1990s, noted Tom Barton, a manager of White Rock Capital, a Dallas-based hedge fund.
Short interest has been on the rise lately, however, because of merger- related arbitrage strategies, analysts said. By short-selling the acquirer's stock and investing in shares of the target, an arbitrager can lock in the premium being paid on the target's shares.
A case in point is the short interest in shares of PNC Bank Corp. - the largest and fastest growing position in the industry, according to data from the New York Stock Exchange and the American Stock Exchange. (See tables above and on page 38.) PNC's short position grew by more than 5.2 million shares to 35.1 million in the month-long period.
PNC's plans to acquire Midlantic Corp. could explain most of the activity, Mr. Durante said. But the size of the increase probably indicates "there are some guys out there truly shorting the stock."
PNC's share price has increased recently, reflecting what may be overly optimistic earnings expectations for the year ahead, Mr. Durante said.
Recent increases in the short interest in some California thrifts also probably reflect a negative view. Short interest in Glendale Federal Bank rose 516,017 shares, the 10th-largest increase. Golden West Financial's 107% increase was the fourth-largest percentage increase among the banking- related stocks.
"These stocks have run up, and that always attracts short-sellers," said Thomas O'Donnell of Smith Barney. But he said the asset quality problems that short-sellers associate with thrifts are a thing of the past, assuming the California economy continues to improve.
The companies represent a good investment on their own, Mr. O'Donnell said, and the likelihood that some will be acquired at a premium rose with the announcement this week of a hostile takeover of First Interstate Bancorp by Wells Fargo & Co.
A deal would force acquirers from out of state to consider the thrifts as an entry vehicle, Mr. O'Donnell argued.
Merger-related arbitrage was the predominant factor in the short-selling of bank shares. Seven of the eight largest increases in short interest were in banks with acquisitions pending, including PNC, First Union Corp., NationsBank Corp, Fleet Financial Group, National City Corp., First Chicago Corp., and Chemical Banking Corp.
The ninth-largest increase in short interest the industry, a 516,000 share uptick in Citicorp's short position, also can be explained by arbitrage.
Earlier this year, the short position in Citicorp was the largest in the industry. But the position has declined as convertible preferred stock - issued when the bank was undercapitalized - began to be redeemed. Analyst said arbitragers who had shorted the stock while collecting the dividend on the preferred were closing out their positions.
The fresh round of short-selling probably was prompted by the announcement that the bank is calling more of the preferred shares, said Frank DeSantis, of Donaldson Lufkin & Jenrette. "When they fix the exchange ratio on the (convertible preferred shares), but they are still outstanding, there's an opportunity to hedge," Mr. DeSantis said, adding that the short interest is likely to decline again as the convertible shares are redeemed.
In trading Friday, shares of Northern Trust Corp. rose tktk to tktk, after Goldman Sachs & Co. added the stock to its recommended list.
Analyst Sally Pope Davis cited accelerating earnings growth and lifted her 1996 earnings-per-share estimate on Northern Trust to $4.35 from $4.05.