Ira Sohn London: John Armitage, Chief Investment Officer of Egerton Capital

Ira Sohn Conference notes John Armitage

Trade Idea: Nordea Bank AB (STO:NDA-SEK) and Ocwen Financial Corp (NYSE:OCN)

Price Target:

Valuation:

Themes:

John Armitage on Nordea Bank

Low-risk stock enjoys a leading position in the Nordic region. No 1 or 2 bank in every country within Scandinavia. Banking peer Sampoo brought 21% of Nordea Bank AB (STO:NDA-SEK) and controls a large part of the company. Sampoo likes boring, boring is good, has achieved great returns during the past few years, low income volatility. Now imposing the same upon Nordea.

Nordea Bank AB (STO:NDA-SEK)’s lowest ROE during the finical crisis was 8% as the company sought out riskless assets – boring is better. 10 years average of ROE low double-digits. Nordea Bank AB (STO:NDA-SEK) pays the same interest rate on debt as French sovereign debt to borrow in the market. Loan losses have run historically at 16 bps annually, low loans losses. Core Tier 1 now stands at 13.4% – self-help should take this to 15-16% by 2015. Dividend payout ratio is expected to rise to 60-65% during next through years. Within this period 20% of stock price expected back in dividends and company will have plenty of room for growth. Nordea is targeting slow growth steady return on equity and capital return to investors, not targeting rapid growth.

John Armitage on Ocwen Financial

Play on the U.S. housing market. Mortgage service company. 22% owned by founders and managers. Non-aggressive account practices. Servicer of delinquent mortgage loans. Servicing of delinquent loans is costly for banks and there are lots of delinquent loans, there are also litigation reasons as well as ‘image’ (protestors and people claiming banks took their homes) reasons. Ocwen Financial Corp (NYSE:OCN) is one of the few dedicated mortgage service companies. 70% of staff outside of the U.S., company rekons cost of servicing is 70% below the costs that big banks will have to put up with. Company has spent 20 years creating a ‘dialogue engine’ to drive customers to pay the delinquent loans. ‘Dialogue engine’ is automated, low cost and easily transferable. According to Moody’s Ocwen is better than its peers at recovery. Free cash flow yield is in the low single-digits.

Catalysts:

Ocwen Financial Corp (NYSE:OCN)

Plenty of opportunities for growth. Lower delinquency rates will improve profitability and lower costs. Improving credit environment will lead to more lending. Strong free cash flow will support buybacks. $400 billion pipeline for acquisitions of loan books. Ocwen Financial Corp (NYSE:OCN)’s model of servicing means that it can be scaled to many other different credit markets such as auto loans, credit cards, etc…

See: Ross Turner Sees DCC As Well-Positioned For Growth In Europe