Nick Kirrage Long Royal Bank of Scotland: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Nick Kirrage of Schroder Recovery Fund who pitched long Royal Bank of Scotland (RBS).


Nick Kirrage's London Value Investor Conference Presentation

The Schroders Global value team are the UK’s largest dedicated value investment franchise. Nick Kirrage and Kevin Murphy co-manage the UK Recovery Fund which has beaten the FTSE 100 by 2.9% per year over their ten year tenure with about 20% annual portfolio turnover. 

Kirrage’s presentation was titled Successful Failure and reviewed some of the losers they have had over the years. They are Graham and Dodd style value investors and believe that you have to fish in dangerous waters to get great returns.

They have had several big losers including Blacks Leisure, Wagon and Avis Europe. In Blacks and Wagon they were all but wiped out but the investment in Avis Europe went on to make good returns. At last year’s conference they pitched Lonmin which has lost 90% since then.  They still like Lonmin and doubled down on it during the rights issue earlier in the year.

The nature of their deep value approach means that they will often invest early sometimes by several years and they will often look stupid.


Investment idea: Royal Bank of Scotland RBS

Things have been getting better at RBS very slowly but most people have not noticed. Loans are down by a half since 2008. The investment banking arm has been more or less shut down. Regulatory capital is up by 6% and the regulation is much more stringent. Barriers to entry in retail banking in the UK are high even though the government has been encouraging challenger banks. Customers are sticky and do not change banks partly due to laziness. Retail banking has good long term returns with ROEs of >10%. Banks have been de-risking for nearly a decade.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

David Samra's Pitch on RBS: Invest For Kids Chicago

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is David Samra of Aritsan Partners who pitched RBS.


David Samra's Invest For Kids Chicago Presentation

•    Stock pitch is RBS.
•    Generally don’t like banks. 13 years, first ten didn’t own any banks.
•    Everybody hates banks.
•    Banks are generally difficult investments as money is commodity and banks are inherently leveraged.
•    When economic conditions are good, loan underwriting is sloppy and regulatory oversight is weak. Valuations then trade at a premium to book value.
•    Versus FY08, funding structure has improved. For RBS deposits has since doubled and use of repos has diminished as well as commercial paper issuance.
•    Complexity has decreased overall for banking. Similar trends for the UK.
•    P/BV multiples have went from over 2.0x to in some cases below book.
•    Today banks are better funded, higher quality assets, significant liquidity and trade at lower valuations.
•    Don’t want to be in them forever.
•    Right now 965B in gross assets, 44.5B of tangible equity and 586MM of pretax income. Going forward looking at 480B of assets, 25B of tangible equity and 4.4B of pre-tax.
•    Bailed out twice. UK gov owns 73% of shares outstanding, effectively nationalized. Mgmt has been selling assets and simplifying operations.
•    Sold off a trillion pounds of assets. Equity has increased from 36.4B to 44.5B.
•    16% tier 1 capital ratio. Highest amongst large banks.
•    Continue to sell assets and slim down to a retail/commercial bank. Shrink the investment bank. Wil take 3-5 years.
•    Top 5 banks control most of the market.
•    Thinks the core bank value should trade at 1.7x bv and 13.5x earnings or 43B, plus excess capital no longer required to support non-core assets (RWA of 150Bn) or 18B.
•    Need to deduct fines, write downs, etc. of 13BN
•    Add 16bn of earnings over next five years, estimated mkt value of 64bn versus 36bn  current market cap.
•    Risks government ownership – significant headline risk concerning fines, restricting, diminished asset liquidity and economic recession – time delay.


Check out the rest of the presentations from Invest For Kids Chicago 2015.

Notes From Invest For Kids Chicago: Lasry, Perry, Cooperman, Zell & More

Yesterday at Invest For Kids Chicago, numerous high profile hedge fund managers shared their latest investment ideas. The event had 800 attendees and raised $1.1 million (100% of the proceeds went to charities benefiting children). Please click the links below to view notes on each speaker's presentation:


Invest For Kids Chicago Notes:


Marc Lasry (Avenue Capital): Long General Motors & Hovnanian Bonds


Richard Perry (Perry Capital): GSE Junior Preferred Securities & RBS Tier 1 Securities


Leon Cooperman (Omega Advisors): Charming Shoppes (CHRS), KKR Financial (KFN), E*Trade Financial (ETFC)


Sam Zell (Equity Group Investments): Brazil's Investment Opportunity


Barry Rosenstein (JANA Partners): long McGraw Hill (MHP)


Thomas Russo (Gardner Russo & Gardner): Look abroad for opportunities, Nestle


Michael Milken (Milken Institute): Thoughts on Capital Markets


John Keeley (Keeley Asset Management): ITT Corp (ITT)


Barry Sternlicht (Starwood Capital Group): Likes Lowe's, Toll Brothers, NVR


Michael Elrad (GEM Realty Capital): Long Macerich (MAC)



For more of our coverage of the latest investment conferences, be sure to also head to notes & presentations from the Value Investing Congress.

Richard Perry: Long GSE Junior Preferreds, RBS Tier 1 Securities (Invest For Kids Chicago Notes)

At Invest For Kids Chicago yesterday, Richard Perry of Perry Capital gave a presentation on going long GSE Junior Preferred securities as well as RBS Tier 1 Securities.

Be sure to check out all notes from Invest For Kids Chicago where numerous high profile hedge fund managers shared their latest investment ideas.


Long GSE Junior Preferred Securities

Perry founded his firm 23 years ago and now manages $8 billion. He's only had 1 down year in 23 years. His first pick was to go long GSE Junior Preferred Securities as a highly asymmetric play.

Many people believe GSE's are the cause of the crisis and represent and endless black hole to the taxpayer and numerous politicians have called for their elimination. Perry takes the opposite view and believes GSE's will soon be breakeven and/or in a position to recapitalize themselves. He argues they provide necessary counter cyclical liquidity.

At 8.5 cents on the dollar, Perry thinks they offer asymmetric risk reward for huge upside. By changing the guarantee fee "a little bit," the CBO says they could raise $30 billion for each 10bps increase in fee and that could reopen the mortgage market and spur the economy (could happen over 2-3 years).


Long RBS Tier 1 Securities

Perry's other idea was going long securities of a bank that was at one point the largest in the world. In 2008 & 2009, RBS underwent a big housecleaning. Their Tier 1 securities have 'must-pay' dividends and 'may pay'. 'May pay' was shut off with the bailout through 2014 and trades at a 25-35% discount. This is the security he likes.

With Basel 3, core Tier 1 are likely to go away. All "real banks" will buy back to take off balance sheets. There's £10 billion of these and he expects them to turn on in 2012 (April for RBS and January for Lloyds).

Perry says that RBS' balance sheet is restructuring and you must analyze loan to deposits. US is roughly 95% and Italy is 120% to 150%. The UK has a government asset protection scheme where if RBS has a loss of ~60 billion, the government backstops other pool.

Systematically important banks trade at 7% yield on preferred stocks (Bank of America, Barclays, SocGen, BNP, UBS). If RBS pays the dividend they save 80 bps on funding (where better banks are) or 6 billion and pays 400 million in dividends which he says is good arbitrage.

For more of our coverage of Perry Capital, we've detailed Perry's investment thesis on Iron Mountain (IRM) as well as their thoughts on European markets.


You can view full notes from Invest For Kids Chicago here.

Thoughts From Bob Janjuah, RBS Chief Credit Strategist

I almost stopped reading this piece from Bob Janjuah, the Chief Credit Strategist at RBS after the first two sentences when he mentioned he was a fan of Liverpool Football Club (English soccer to those of you who might be confused). After all, I've supported Manchester United Football Club since I was 13, who just happen to be Liverpool's bitter rivals (and that's an understatement). Yet, it is a great read and you have no idea how much I'm struggling with the fact that a Liverpool fan's work is on the blog. But, a good read is a good read. Sigh. [hat tip again to Zero Hedge].


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