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Nov 28, 2017

Short seller takes aim at RBC, CIBC

Bank towers are shown from Bay Street in Toronto's financial district

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The Great White Short is back.

Atlanta-based PAA Research is laying out a short argument against Royal Bank of Canada and CIBC, arguing the outlook can't get any better for the lenders amid cracks in the housing market.

"Time and time again in the two and half years that we have been following the Canadian housing market investors have suggested to us that the Big 5 Canadian Banks will be protected at any cost by the government. They are by all accounts ‘Too big to fail’. We get it," wrote PAA Research Founder and CEO Bradley Safalow in a report to clients Tuesday.

"There’s a huge difference between something that is deemed too big to fail and a good short."

Safalow, who is personally shorting RBC and CIBC, noted there's "a lot to like" about the banks considering analysts' expectations for single-digit revenue growth in the next couple of years and dividend yields in the four-to-five per cent range.

However, PAA thinks estimates for the lenders are going to have to come down, which it reckons could deliver 40 per cent returns for short sellers.

And in a worst-case scenario for the banks that PAA says could take three years to play out, a mix of factors including sagging home prices, tighter credit conditions and fallout from highly-leveraged consumers could force the lenders to issue stock and ultimately see their stocks plunge by 50 per cent or more.

PAA set price targets for RBC and CIBC at $70 and $76, respectively.

It’s not the first time Canada’s banks have been targeted by short sellers, but the lenders have consistently managed grow their profits despite suggestions it was only a matter of time before they stumbled.

“It’s an annual ritual we had for the last several years,” Ed Devlin, PIMCO’s head of Canadian portfolio management, said about the shorts in an interview with BNN.

“I think the risks have been building … but I don’t think necessarily, as some of these short sellers have highlighted for the last three or four years in a row, that they’re going to get any satisfaction this year.” 



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