Financial Sector Analysis Student Investment Management Yuxi Bi, Yao Yao, Andrew Zalic and Sally Zhang 4th, March, 2014 Agenda • Sector Overview • Business Analysis • Economic Analysis • Financial Analysis • Valuation • Recommendation Overview Overview • Asset Management • Blackrock, Ameriprise, Invesco • Banks • JPMorgan Chase, Wells Fargo, Citigroup • Credit Services • Visa, Capital One, American Express • Insurance • Prudential, American International Group, Allstate • Investment Brokerage • Goldman Sachs, Morgan Stanley, Charles Schwab Overview Financials Markets Cap ~ $2.685 trillion Company Berkshire Hathaway Inc Wells Fargo & Co JPMorgan Chase & Co Bank of America Corp Citigroup Inc Market Cap $ 285,522,362,368.00 $ 244,254,736,384.00 $ 215,167,418,368.00 $ 174,691,287,040.00 $ 147,309,985,792.00 Overview YTD One Year • Sector Overview 10 Year • Sector Overview Business Analysis Barriers to Entry HIGH Regulation increases costs (Dodd Frank) Brand equity - who would you trust with your money? Power of Suppliers HIGH Fed influences rates through open market operations Depositors have many options of where to put their money Power of Buyers (Borrowers) HIGH Low switching costs, unless heavily invested in one bank Internet has made it easy to compare rates Credit cards, loans, preferred financing, Paypal Threat of Substitutes HIGH Cash, Equity, Fixed Income, Alternatives New - but questionable and volatile - options like bitcoin Rivalry HIGH Institutions fight for customers - literally give away money Banks fighting to offer most convenient service at lowest cost Business Analysis • How will the taper play out? • Banks lend at long-term rates and borrow at short-term rates • When will short-term rates rise? • How much more fallout is there from the Crisis? • Six largest banks have spent >$100mm in legal fees, settlements, and lawsuits • Is there anything left to sue banks over? • Is a market correction coming? • Cyclical business – very dependent on how the economy is doing. • Was 2013’s bull market warranted? Or is a correction on its way? Unemployment Rate R Square = 84.3% Fed Fund Rate R Square = 83.5% 2-year Treasury Notes R Square = 82.5% 10-year Treasury Notes R Square = 63.9% Consumer Confidence R Square = 56.2% Money Supply R Square = 49.4% Disposable Income R Square = 24.1% GDP R Square = 8.2% Financials vs S&P 500-Last Price Financials vs S&P 500-P/E Financials vs S&P 500-P/E Financials vs S&P 500-CPS Financials-Profitability Analysis Financials-Cash Position Analysis Industries Comparison-Multiples Industries Comparison-Profitability Industries Comparison-Solvency Valuation (as of 3/3/2014) P/E P/B P/S Financials S&P 500 Financials S&P 500 Financials S&P 500 1-yr High 14.0 19.2 1.4 2.8 2.2 1.7 1-yr Low 12.4 17.0 1.1 2.4 1.7 1.4 Average 13.2 18.1 1.3 2.5 1.9 1.5 Median 13.2 18.0 1.3 2.6 1.9 1.5 Valuation Industry Financials Mkt Cap ($ in billions) Price/Earnings 2,080,016 17.0 National Banks Life Insurance Asset Management Property & Casualty Insurance Credit Services Mortgage Investment Investment Brokerage - National Real Estate Development Insurance Brokers Property Management 2,016,111 12,709 11,094 9,288 5,931 3,950 3,371 3,337 2,940 2,130 16.7 24.2 24.0 20.9 22.6 43.5 20.7 13.9 30.5 28.8 Price/Book 1.7 Price/Free Cash Flow (mrq) 7.8 1.7 1.3 4.0 2.0 5.3 2.5 1.8 1.6 -12.5 3.4 7.5 8.1 -22.3 28.2 105.4 25.5 5.3 -9.0 68.0 -276.4 Valuation SIM Portfolio Companies Wells Fargo (WFC) JP Morgan (JPM) Bank of America (BAC) Citigroup (C) PNC Financial Services (PNC) Capital One Financial (COF) BB&T Corporation (BBT) M&T Bank Corp (MTB) KeyCorp (KEY) People's United Financial (PBCT) Sector Average Beta Trailing P/E (ttm) Forward P/E (fye Dec. 2015) PEG (5-yr expected) Price/Book Price/Sales (ttm) 0.87 11.9 10.9 1.2 1.6 3.0 1.91 13.1 9.0 1.7 1.1 1.1 1.97 18.3 10.2 0.6 0.8 2.0 2.28 11.0 8.5 0.5 0.8 2.1 0.94 11.1 10.9 1.5 1.1 2.8 1.39 10.6 10.1 1.7 1.0 2.2 1.02 17.3 11.3 2.2 1.3 3.0 0.87 14.2 13.2 2.2 1.5 3.5 1.59 13.5 11.7 2.3 1.2 2.9 0.79 19.2 14.6 1.4 0.9 3.6 17.0 1.3 1.9 Fibonacci H-L Retracement Levels Recommendation • Interest rate expected to remains flat in 2014 • household debt is expected to increase slowly in 2014 • Corporate profit is expected to increase during 2014 Regulation is expected to increase in 2013 • Consider including alternative financial firms in the SIM portfolio Hold