Argonaut’s Norris reverses European bearish stance

Argonaut Capital’s Barry Norris has reversed his severely bearish stance on the European banking sector by adding several banks to his funds.

Mr Norris, chief investment officer and fund manager at the London-based boutique, said for the first time in five years he was “positively enthused by the potential for a positive earnings surprise among a select number of banking stocks”.

Mr Norris said he had taken six positions across his three funds in stocks he thought were well placed to take advantage of an improving European economic backdrop.

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The manager has bought positions in UBS, Danish bank Jyske Bank, Belgium-based KBC and Intesa for his £179m IM Argonaut European Alpha fund and is overweight banks in his Dublin-domiciled Ignis International Pan European Alpha fund through positions in UK banks RBS and Lloyds.

“We have picked banks which have raised capital ratios sufficiently, can bounce back as European growth picks up and which have a credible capital allocation strategy”, Mr Norris said.

The manager said Lloyds in the UK and Intesa would have “significant opportunities” to re-lever their strong balance sheets and dominant retail market share when domestic demand picked up, and Jyske Bank had a “fantastic opportunity to consolidate the Danish market through the purchase of smaller rivals unable to adequately fund themselves”.

“It may come as a disappointment to some, but European economic growth and interest rates will eventually normalize, and bank profits will be the beneficiary,” he added.

“The sole remaining recovery trade from the financial crisis – leverage to Europe’s economy – is now the main stock market opportunity.”

Mr Norris had previously been bearish on banks because of his view that anaemic European growth would mean banks would have to keep provisions for bad loans high for a longer period than analysts were forecasting.

He also said the process of balance sheet repair would “dilute shareholder earnings and see revenues fall”.

But he said the environment banks were operating in had now changed.

“We recognise that the improvement in European economic growth, the prerequisite for provision charges normalising, is not likely to be huge, will vary from country to country, and is by no means guaranteed,” he said.

“However, banks exposed to economies where economic activity has been depressed, but is now returning to growth, will likely see the inflection point in provisioning sooner e.g. RBS to the UK, and KBC and RBS to Ireland as examples.”

Mr Norris said banks such as Intesa would see the benefits of “improving asset quality in their bottom line sooner than peers” because of the way it had managed its bad loans.

However, he said he was still cautious about some banks in Europe.

“We are also wary of banks which have been over-earning from their emerging market exposure in recent years, Santander and BBVA by way of example, where any leverage to a European recovery may be offset by lower profits from overseas,” he said.