In a bold move echoing concerns about overvaluation and competitive pressures, veteran hedge fund manager Philip King and his team at Regal Funds Management Pty have taken a short position in shares of Commonwealth Bank of Australia (ASX: CBA). This decision comes amidst CBA holding the title of the priciest bank on the MSCI World Bank Index, boasting a forward price-earnings multiple of 22 times, in stark contrast to JPMorgan Chase (NYSE:JPM) & Co.'s 11.7.
King, who serves as the chief investment officer at Regal, highlighted his apprehensions in an interview in Sydney, stating his expectation of a decline in CBA's earnings-per-share in the coming years. "Australian banks are now getting attacked from all angles by competition," King remarked, pointing out the rise of buy now, pay later operators in consumer lending, non-bank lenders in business lending, and the growing presence of private credit across the loan book.
Moreover, King expressed concerns over stringent capital requirements, which he believes are making Australian lenders increasingly uncompetitive in the global market landscape. These factors collectively informed Regal's decision to take a bearish stance on CBA, reflecting broader industry trends and economic challenges impacting the banking sector.
Regal Funds Management, which has evolved significantly since its establishment in 2004, now manages approximately AU$12 billion (US$7.9 billion) across various markets and alternative investments from offices in Sydney, Singapore, and New York. The firm's expansion beyond its roots as a long-short equities fund underscores its adaptability and strategic vision in navigating complex financial environments.
The Regal Long Short Australian Equity Fund, under King's leadership, has demonstrated robust performance, delivering a remarkable 25% return over the past year, outperforming a significant majority of its peers in the hedge fund industry, according to data compiled by Bloomberg.
In contrast to CBA's recent gains, fueled partly by favorable interest rate environments globally, King emphasized the stagnation in earnings-per-share growth over the last decade as a critical factor in his short position strategy. He believes CBA's current valuation as one of the most expensive banks in the world could face downward pressure over the next decade if earnings do not meet market expectations.
Australia's enthusiastic adoption of buy now, pay later services has further complicated the landscape for traditional banks like CBA, as highlighted in a Bank of International Settlements report. This trend has intensified competitive pressures, particularly in CBA's core mortgage business, which continues to battle for profitability amid changing consumer preferences.
While taking a skeptical view on CBA, Regal Funds Management remains optimistic about select opportunities in other sectors. King specifically mentioned Capstone Copper Corp as a promising investment, citing its alignment with green-energy initiatives and advancements in artificial intelligence. Capstone, which focuses on copper and silver exploration and production across North and South America, represents a strategic bet for Regal amidst its diversified portfolio.