The downside risks to the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) banking sector is receding and short-sellers are on the retreat, although this isn't to say that ASX banking stocks are in the clear.
The Commonwealth Bank of Australia (AX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price have bounced on a number of tailwinds.
This includes the federal election outcome, the stabilisation in the housing market and less onerous testing criteria for borrowers.
Who're buying and selling ASX bank stocks
These positives were enough to scare short-sellers with the amount of short-interest in the sector dropping to around 0.9% compared to the five-year average of around 1.1%, according to Macquarie Group Ltd (ASX: MQG).
Short sellers are those who borrow stock to sell on-market in the hope of buying it back at a lower price later to profit from the difference. The bank that saw the biggest drop in short-interest is NAB followed by Westpac, ANZ and CBA.
NAB is also a winner when it comes to attracting buying interest from professional investors, such as fund managers.
"Bank positions across domestic institutional investors remained relatively stable throughout the quarter except for NAB, where there was sizable buying," said Macquarie.
"Offshore investors continued to unwind their underweight positions across the sector (which we believe is partly driven by index funds buying banks as share-prices rebounded). Across institutional investors, NAB was the most bought bank."
Retail investors not attracted to dividend yield
Interestingly, mum and dad investors were net sellers of bank stocks despite their attractive dividend yields and falling interest rates.
"Our data shows that retail investors were largest sellers of CBA, followed by NAB, ANZ and WBC," added the broker.
"While banks are trading at an attractive relative sector valuation (banks are trading at ~29% discount to All Industrials ex. Banks), in our view, it remains difficult for the sector to outperform until the earnings downgrade cycle stops and clarity on the RBNZ [Reserve Bank of New Zealand] capital proposal is attained."
ASX banks facing earnings pressure
Earnings are under pressure from a margin squeeze as falling interest rates are a negative for bank earnings. Banks are also likely to succumb to pressure to remove certain fees in the wake of the Banking Royal Commission.
While all banks are struggling on the earnings front, Macquarie believes that CBA is most at risk going into next month's reporting season because it is trading at a premium to its peers.
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