Hedge Funds Have Bigger Appetite For Bank Stocks
March 04 2010 - 3:20PM
Dow Jones News
Hedge funds have taken a renewed interest in bank stocks.
The funds have significantly increased their investments in
banks in the last year, particularly buying more stock in the
fourth quarter, regulatory filings show. Hedge funds now own 19% of
Popular Inc. (BPOP), more than 9% of SunTrust Banks Inc. (STI), 6%
of Citigroup Inc. (C) and Zions Bancorp (ZION), and more than 4% of
Wells Fargo & Co. (WFC).
"Hedge funds like to buy bargains," said Anton Schutz, a
portfolio manager with Mendon Capital Advisors Corp., who bought
$3.4 million in Citigroup stock and invested in several regional
banks such as New York Community Bancorp Inc. (NYB).
Lori E Calvasina, an analyst with Citigroup Global Markets,
wrote in a recent research report: "For large cap financials,
average hedge fund ownership stakes are sitting at the highest
level we have seen since first quarter 2005, when our data series
begins."
It's not just banks; hedge funds also own 20% of E-Trade
Financial Corp. (ETFC), with several funds taking new positions in
the fourth quarter.
Big bank investors include Paulson & Co., which is now the
biggest shareholder of SunTrust, Appaloosa Management, and J.P.
Morgan Chase & Co's (JPM) Highbridge Capital Management.
None discussed their holdings or strategy.
According to Standard & Poor's Capital IQ research unit,
Appaloosa has 73% of its long equity portfolio invested in U.S.
banks, including Citi, compared to just under 20% a year earlier,
and Paulson invested 34% in banks compared to 14% a year
earlier.
A year ago, hedge funds owned 2.2% of Citi and less than 1% of
many banks, including SunTrust and Popular, according to Capital
IQ.
While some banks are still too risky for mutual fund portfolio
managers, hedge fund inflows reflect a belief that the worst may be
over for the banks. In some cases, like Popular, the investments
also show bets on which banks will be winners from industry
consolidation.
"We see this as a positive," one banker said. "These are very
awake investors. They test you all the time...(but) offer a lot of
ideas."
But some hedge fund managers warn that despite a recovery from
the worst of the financial crisis, their conviction to the bank
sector is only lukewarm, and they may ended up with bigger stakes
from recent equity offerings than they want. The filings show only
hedge fund's long position, and some said they use those stakes to
offset short positions.
The massive stock offerings of Citi, Wells Fargo, and Bank of
America late last year when the three banks repaid funds to the
government from the Troubled Asset Relief Program, offered an
attractive entry point, several fund managers said. Institutional
ownership of Citi stock doubled after that offering to 40%.
Citi, Popular, and South Financial Group Inc. (TSFG), which is
16% owned by hedge funds, also converted preferred securities
classes into common stocks last year, and for some hedge funds such
conversion were the entry point into a common stock ownership. At
Citi and Popular, meanwhile, several hedge funds have since
increased their stake.
Paulson, first reported a big 168 million-share stake in Bank of
America, worth $2.2 billion at the time, by June 30--and sold small
parts of it every quarter since. Bank of America's shares rose
almost 26% since Paulson reported the stake, to $16.41.
Citi's shares fell almost 30%, to $3.44, since Paulson reported
a first 300 million-share stake, worth $1.5 billion, on Sept. 30.
In December, Citi, which is 27% owned by the Treasury Department,
pulled off the largest equity offering in U.S. history, causing the
stock to decline.
-By Matthias Rieker, Dow Jones Newswires; 212-416-2471;
matthias.rieker@dowjones.com
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