David Herro Sees Opportunities in European Financials and Japan

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David Herro, chief investment officer at Harris Associates and manager of the Oakmark International Fund, was interviewed on Bloomberg and remarked about the attitudes that provide investment opportunities.

Specifically, Herro commented on one of the most hated sectors, European financials, which he doesn’t believe will be “trashed for generations,” despite the problems they are encountering currently. The fear in the market provides opportunities which is the essence of value investing, according to Herro.

Herro referred to Credit Suisse (CS) which he said is more of an investment management company that has, attached to it, an investment bank. CS gets treated as if it were a lending institution that collects deposits and its very different than that, he added. CS is trading at lows we haven’t even seen during the financial crisis despite their extremely strong capital position.

Herro commented on Banco Santander (STD), “whose crime is that it’s based in Spain.” However, less that 20% of its profits and probably less than 35-40% of its loan book is based in Spain according to Herro. He added STD has operations in the U. S., Brazil, Mexico and UK.

Herro stated that CS and STD share characteristics such as strong balance sheets, good deposit structures, or some unique business attribute that will keep them valuable when the negative cycle clears up.

Bloomberg’s Betty Liu introduced a clip from a radio interview where Pat Dorsey of Sanibel Captiva Trust Company questioned the idea of investing in European banks when there are so many other opportunities available. Herro responded that each of the banks are very different and he would probably agree with Dorsey regarding Socgen and Deutsche Bank (DB). But Herro said to take a look at Intesa Sanpaolo (ISNPY) based in northern Italy.  Northern Italy is characterized by a very high savings rate, stable asset quality, very low cost ratios, etc. He said you can get this at 1/2 book value and during normal times they trade at over one times book value. When the storm clears you’ll double or triple your money in some instances, according to Herro.

The interview continued with Herro commenting on the importance of being selective, the biggest opportunity outside of European financials (Japan), and the reasons investors shouldn’t focus on where a company is located.

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