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By Shannon Zimmerman | 09-07-2012 09:00 AM

McGregor Staying Cautious With Banks

Although he notes the potential problems of investing in financial-services names, Oakmark's Clyde McGregor sees some mispricing in European banks.

Shannon Zimmerman: A couple more questions about Oakmark Global. So Oakmark International is fairly significantly exposed to financials, European and otherwise. You own Credit Suisse, I believe, in Oakmark Equity and Income and in Global?

Clyde McGregor: Just in Global.

Zimmerman: I interviewed David Herro recently about his fund. So I have a little bit of the back story on Credit Suisse. What attracted you to that name, and what's your take on European financials generally? I know that Oakmark likes to take advantage of volatile areas of the market because there could be mispricing there. What is your take on financials, European financials in particular?

McGregor: Our European financial holdings have been based on the idea that the private-banking sector was underpriced within the total framework of the banks. So that we were in essence getting the investment bank not just free, but for a negative value in essence. At the private-banking level we had transactions. We continue to see small transactions of rollups of Swiss private banks. This suggests that whether it's Credit Suisse or for that matter UBS or certainly Julius Baer, which is another one we have in Global, that private-banking [businesses] are wonderful assets that are mispriced or underpriced in the market.

The risk in something like Credit Suisse is that the investment bank could have a big negative number in front of it, which is what we saw happen with UBS in the great recession. And to some extent we have seen that with Credit Suisse. But we prefer the management team there to some other opportunities.

We don’t have U.S. banks because I felt that the blend of assets or the blend of businesses in the Swiss banks was more attractive than what we had available to us in the U.S. Now, I will not say never. I am certainly thinking a lot more about U.S. financials today than I was in the previous few years.

Zimmerman: In the financials sector, in particular, a couple of things are in play to a greater degree than in other sectors of the market. There is regulatory risk, and that happened recently with Credit Suisse. They were well on track to get their reserves where they needed to be and they were called out for not doing it quite fast enough, even though they were going to meet the deadline in advance. So that kind of regulatory risk is very difficult, I have to imagine, to discount for when you’re doing valuation work.

McGregor: Absolutely.

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