What's behind U.S. investors' disdain for Canadian bank stocks?

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U.S. and Canadian investors see eye-to-eye on a lot of things – but not Canadian bank stocks.

Over the past six months, the number of bank shares sold short on U.S. exchanges has soared, even as the number on Canadian exchanges has fallen, raising the question of why two markets would take radically different views on the same investment.

More importantly, which view is right?

Short-selling is essentially a bet against a stock, since the investor profits if the stock falls in value. It shows that the view on Canadian bank stocks is turning increasingly dour in the United States and upbeat in Canada.

The numbers are remarkable. According to a recent research note from Peter Routledge, an analyst at National Bank Financial, the number of bank shares shorted – known as short interest – on U.S. exchanges has more than doubled over the past two years, but fallen by about 30 per cent on Canadian exchanges.

Royal Bank of Canada, Canada's largest bank, offers the clearest example of the trend. According to data from Bloomberg, short interest in the U.S. has risen to 32 million shares, up nearly threefold since December. In Canada, RBC's short interest has fallen to about 19 million shares, down about 24 per cent over roughly the same period.

For Canadian Imperial Bank of Commerce, U.S. short interest has doubled over the past six months, to nearly 14 million shares; it is essentially flat in Canada, at eight million shares.

You can't blame the differences on the national affiliations of analysts. U.S. and Canadian analysts have shown their differences on some Canadian stocks – notably, BlackBerry Ltd. (Canadians were bullish and Americans were bearish back when it was called Research In Motion) – but they line up quite well on banks.

In the case of RBC, analysts with Canadian brokerages have an average target price of $85.34, or slightly below the average target among non-Canadian brokerages.

However, high-profile commentators who have publicly declared their disdain for Canadian bank stocks tend to be American.

Steve Eisman, the guy who famously profited from the bursting of the U.S. housing bubble before the financial crisis, put Canadian banks in his crosshairs two years ago.

At the start of this year, Bank of America's chief investment strategist Michael Hartnett wrote that short-selling Canadian banks was among his top trading ideas for 2015.

Perhaps investors have been following his advice. Why? It boils down to housing and oil.

Although bank executives sound upbeat about the Canadian housing market, just about everyone else – including the Bank of Canada and the International Monetary Fund – is concerned about prices that could be as much as 30 per cent overvalued at a time when Canadians are juggling record debt loads.

At the same time, the sharp decline in the price of oil has weighed on Canadian economic activity, leaving banks struggling to grow within an economy that shrank in the first quarter.

For U.S. investors who have seen first hand what can happen when a housing boom turns into a bust and an economy sputters, Canadian banks no doubt look vulnerable.

However, shorting the banks looks downright dangerous.

Over the long-term, the banks are money-making machines that pay hefty dividends that rise steadily. Also, bank stocks have already declined an average of about 8 per cent from their highs in September, making the shorting idea look a bit stale at this point.

Rising U.S. short-selling activity is a good reason to ask tough questions about whether Canadians have become complacent about bank stocks and whether the banks' best days are behind them.

But anyone betting on a sharp decline could be waiting a long time.