Fall in Anglo shares on loan signals short selling dip

THE PROPORTION of Anglo Irish Bank's shares on loan - an indicator of the level of short selling on the bank's share price declining - fell in July for the first time this year, new figures show.

The percentage of Anglo's stock on loan dropped to 14 per cent last month from 15.2 per cent in June.

However, of the four publicly quoted Irish banks, Anglo still has the highest amount of shares on loan, according to figures released by the Brussels-based securities settlements firm Euroclear.

Stock on loan for AIB, Bank of Ireland and Irish Life & Permanent increased last month to their highest levels this year. The rising proportion of the banks' stock on loan shows that the level of short selling against the banks is likely to have increased last month as their share prices fell further.

Short-selling investors - who profit from betting on share prices declining - have enjoyed significant gains this year. The Isef index of Irish financial stocks has fallen 50 per cent this year, as the four listed banks have shed €17 billion in value. The banks are now worth less than AIB's market value at its peak in February 2007.

Short selling is a common practice. Investors borrow shares from long-term investors and sell them in the hope that the price will fall, allowing them to buy them back more cheaply and make a profit.

Bank of Ireland's percentage of shares on loan increased in July to its highest level this year. Its stock on loan rose by more than two percentage points to 9 per cent. AIB's loaned stock rose to 4 per cent in July from 2.64 per cent the previous month, while Irish Life & Permanent's loaned stock rose to 11 per cent from 10.8 per cent.

The decline in Anglo's stock on loan is thought to be linked to businessman Seán Quinn converting his investment in the bank from contracts for difference (CFDs) derivative products into shares.

Mr Quinn announced on July 15th that he and his family were converting their CFD positions into a stake of almost 15 per cent.

The conversion has the potential to take a large amount of Anglo's stock that could be used by investors taking short positions in the bank out of circulation.

CFD investors do not buy shares but take a leveraged position on the stock by putting up an initial outlay or deposit and borrowing the remainder of the stock's value.

The underlying shares on CFD positions, which are held by third parties, can be loaned to other investors. Long-term stockholders can earn money by lending stock out to investors in the short term.

Mr Quinn is estimated to have lost up to €1 billion on his investment in Anglo from the fall in the bank's share price over the last 15 months. Anglo's share price has plummeted 70 per cent since its peak at €17.85 in May 2007.

The monthly statistics for stock on loan shows that the level of betting against the Irish banks has been rising steadily since the start of this year. The drop in Anglo's stock on loan in July is the first significant decline in a bank's shares on loan this year. AIB's stock on loan fell slightly in March.

Some bankers have privately criticised hedge funds and short-term investors who take short positions for exacerbating their share price falls. The economic downturn and falling property values have made the Irish banks targets for short sellers seeking profits.

Euroclear says its figures do not reflect the exact level of short selling in particular companies, as loaned stock can be used for other purposes. However, market sources said the figures show the stocks that are most susceptible to short sellers.