Episode summary
Banking on the big picture: How patience can pay off
Capital Ideas Podcast
· · 31 min · Hosts: Mike Gitlin · Guests: Alfonso Barroso
Summary
European banks have rallied sharply because profitability improved after a long period of zero or negative rates, and because regulators now let banks return more capital to shareholders. Alfonso Barroso said the move from sub-book valuations to near-book valuations reflects both stronger earnings and higher dividends and buybacks, with some banks still trading at about a 30% discount to U.S. peers. He thinks the sector could re-rate another 20% to 30%, though he emphasized that regulatory and macro risks remain.
Barroso framed his investment style around downside protection first. He said some of his best results came from avoiding blowups in technology and real estate, and he described European banks, industrials, and other unloved areas as places where patience can be rewarded. In Europe, he likes truck maker Volvo AB and tire producer Michelin because weak end markets, low expectations, and attractive yields can create value before earnings recover.
He also explained why being a balanced portfolio manager matters: it lets him compare equities, bonds, sovereign yields, and capital structures in one framework. He said that broader view, plus frequent collaboration with fixed income colleagues, helps identify relative value and avoid mistakes like the Ahold accounting scandal, which seared the importance of balance sheets and liquidity into his process.
Key takeaways
- Barroso said European banks have re-rated from roughly 7x forward earnings to 9x and from 0.8x book to 1.2x book, with room for another 20% to 30% upside.
- He argued that higher rates and restored capital returns drove bank profitability and shareholder payouts after years of negative or very low rates in Europe.
- Barroso said his edge is focusing on downside first, and he credited that approach with helping him avoid major blowups in tech and real estate.
- He likes Volvo AB and Michelin because weak industrial end markets have depressed valuations, even though both offer attractive yields and no obvious balance-sheet stress.
- He said being a balanced portfolio manager helps him compare equities and bonds on the same risk-reward spectrum and work more effectively with fixed income colleagues.
Notable quotes
“I think about downside as much as I do about upside. And that's typically the very first thing I will ask myself about a stock”
“when savers have their money with you, you're actually burning a hole in your pocket as a bank”
“I think there's a potential for the banks to re-rate another 20 or 30%, but there are also risks going the other way”
“what the role of the balance manager is really meant to do is to have someone that can look at the entire capital structure of the financial markets”
“Dividends Oughta Grow." And what that really means is that a high yield by itself doesn't necessarily mean it will be a good investment”
How the episode opens
- Welcome to another episode of our "Capital Ideas Podcast," where we get to know the people behind the portfolios. We spend time with portfolio managers and analysts, hear a little bit about them as individuals and also their ideas, lessons learned, their investment edge. Today we have Alfonso Barroso with us.
He's been at Capital Group for more than 30 years. He lives in London. He's an equity portfolio manager.
And we'll chat a bit about Europe, in particular, the banks. Who would've thought over the last year they've done better than the Magnificent Seven. So, something a lot of folks might not know.
But Alfonso, welcome. - Thank you very much. - So, we're going to go way back.
We're not just going to jump into European banks. How'd you get here? How'd you get to Capital Group?
- I joined in 1994 as part of the associates program called TAP. It's currently called Capital Associates Program. And it's a program pitched at undergraduates.
So, I had just finished college, and I was considering taking up jobs at a couple of investment banks, but out of pure luck, I came across Capital. They sent me a letter when they were in the Boston area recruiting. And I met just the most wonderful people.
- And you were 21 or 22 years old. - That's right, yes. But I could see myself working with the people.
And what sealed the deal for me was I got a telegram, which back then was even like outdated and kind of ancient mode of communication. - Yeah. - But it was really touching because I got a telegram from the person I first interviewed with, Joe Higdon, very warmly saying that she really wanted me to join.
- A telegram. Do you still have that?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- european banks
- patience investing
- downside risk
- macro view
- portfolio construction
Watch the episode
Watch “Banking on the big picture: How patience can pay off” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Capital Ideas Podcast, this episode and its artwork belong to Capital Group. Octagon is not affiliated with the show; this page is an independent summary.
