FINANCIAL SECTORS
SUMMER 2015
Graham Tucker
Rita Xu
Table of Content:
I.  Overview
II.  Business Analysis
III.  Economic Analysis
IV.  Financial Analysis
V.  Valuation
VI. Recommendation
1
OVERVIEW
OSU SIM FUND VS. S&P 500
SIM Portfolio Industry Sector Weights
Top 6 Market Cap
1.  348.03B
2.  293.76B
3.  252.65B
4.  180.32B
5.  170.61B
6.  96.11B
Financials Sector – Industries (GICS)
•
Banks (16 members, 1.17T) •  Insurance (21 members, 514.36B) •  Capital Markets (14 members, 494.66B) •  Diversified Financial Services (7 members, 473.57B) •  Real Estate Investment Trusts (REITs) (23 members, 463.13B) •  Consumer Finance (4 members, 163.13B) •  Real Estate Management & Development (1 member, 12.36B) •  ThriFs & Mortgage Finance (1 member, 5.27B) 80 %
S&P 500 Financial Sector 5 Year Performance
S&P 500 Financial Sector 1 Year Performance
2
BUSINESS ANALYSIS
Cyclical Business and Late Growth Phase
Financial Industry Analysis
Threat'of'New'Entry
Low
Strong'financial'regula7ons'by'the'OCC,''
the'Federal'Reserve,''and'the'SEC.
Threat'of'Subs7tutes
High
Low'switching'costs,'ease'of'subs7tu7on,''
rela7ve'price'performance'of'subs7tute
Rivalry
High
Must'contain'constant'compe77ve'advantage''
to'maintain'customer'base
Low/Medium
Availiability'of'subs7tutes,'low'switching'costs,'
'low'depenendancy'on'exis7ng'channels
High
Federal'Reserve'uses'monetary'policy'to'control'
the'money'supply.
Power'of'Buyers
Power'of'Suppliers
Macroeconomics Analysis
•  Interest rates I.
ECB has begun quanMtaMve easing policy unMl September 2016. II.  Federal Reserve has indicated a slow step up of interest rates in September 2015 aFer QE3 as it looks to slowly sell off assets on its balance sheets. III.  U.S 10 Year Treasury Note=2.35% (06/22/15) 1.65% on 12/01/14. •  GDP Growth I.
Increase in StrenghMng of American dollar II.  StragnaMon of European growth; European sovereign debt crisis has slowed growth in China III.  Unemployment at 5.5% IV.  GDP growth Q1: -­‐.7%, Q2: 1.5% (forecast) Regulatory Factors
•  Basel III Requirements: •  Developed in response to Financial Crisis of 2007-­‐2008 •  Increase bank capital requirements by increasing liquidity and decreasing leverage. (Fed mandated 6% for SIFI). •  Dodd-­‐Frank •  Separate investment banking and commercial banking acMviMes •  Greater transparency with derivaMves trading •  More robust compliance •  Shelby Bill currently in front of the Senate Banking Commibee would free regional banks with less than $500 billion from strictest oversight of Dodd-­‐
Frank. 3
ECONOMIC ANALYSIS
Unemployment Rate
US GDP GROWTH RATE
4
FINANCIAL ANALYSIS
Financial Analysis-Overall Market
Financials
S&P 500
Sub-Industry Historical Performance (P/E and EPS)
2010
2011
2012
2013
2014
2015
2016
EPS
2009
2010
2011
BANKS
2.92
8.66
14.47 15.57 17.14 19.52
19.68
11.68 11.41 13.63 18.38 25.44 24.45
23.84
P/E
2009
BANKS
42.99 17.17
INSURANCE
14.11 16.50 12.49 10.86 11.36 12.56 11.81 10.95
INSURANCE
DIVERSIFIED FINANCE
52.82 11.67
DIVERSIFIED FINANCE
6.09
REAL ESTATE
51.71 33.70 47.92 45.22 40.56 35.09 35.02 32.04
REAL ESTATE
1.82
9.02 10.16 12.20 12.14 12.70 11.45
8.62
9.89 12.96 17.88 15.74
14.4
2012
2013
2014 Current
28.74 26.86 32.52 34.60 28.89
3.58
2.72
3.35
3.67
5.36
29.85
5.85
Profit Margin and ROE (cont’d)
Profit Margin
2009
2010
BANKS
6.16
12.90 18.22 21.97 25.05 17.66 18.84
INSURANCE
0.48
DIVERSIFIED FINANCE
8.35
REAL ESTATE
8.86
8.95
2011
7.46
2012
6.17
2013
8.52
2014
8.51
2015
8.83
10.99 12.95 13.46 15.11 15.61 15.34
9.81
14.63 16.99 19.16 22.89 24.02
ROE
2009
2010
2011
2012
2013
2014
2015
2016
BANKS
1.75
7.15
9.40
11.32
11.79
7.18
8.34
8.78
INSURANCE
25.27 17.13 15.43 16.40 12.48 15.40
DIVERSIFIED FINANCE
2.93
6.64
6.64
6.74
8.38
10.91 11.22 11.72
REAL ESTATE
3.46
4.53
6.95
7.85
8.81
11.09
9.27
9.33
5
VALUATION
VALUATION S&P 500 vs. Financials (10 Years)
Absolute:
HIGH
LOW
Financial
S&P500
Financial
MEDIAN
S&P500
Financial
CURRENT
S&P500
Financial
S&P500
P/E
176.8182
26.2538
10.7146
11.1399
16.77
16.4411
15.1484
18.7794
P/B
2.0942
2.9927
0.4881
1.5323
1.3493
2.4196
1.4023
2.9149
P/S
2.7994
1.881
0.4429
0.7289
1.8224
1.3535
2.3387
1.881
P/EBITDA
9.2101
10.7617
8.7198
4.3993
8.9849
7.6239
9.0352
10.2282
Relative:
HIGH
LOW
MEDIAN
CURRENT
P/E
10.19
0.6879
1.2628
0.8052
P/B
0.7504
0.3185
0.5484
0.4809
P/S
1.8472
0.6077
1.3268
1.2413
P/EBITDA
0.9409
0.8707
0.9077
0.8806
•  RelaMvely cheap since on relaMve basis the current mulMples are below 10-­‐year trading average. •  However, on absolute basis, current overall trading is higher than average. VALUATION S&P 500 vs. Financials (Cont’d)
Financials
S&P 500
Sub-Industry Valuation vs. S&P 500
P/E
Trailing P/E
Forward P/E
P/S
P/B
S&P 500
18.65
17.84
1.85
2.87
BANKS
12.14
12.70
2.83
1.16
INSURANCE
12.56
11.81
1.15
1.1
DIVERSIFIED FINANCE
17.88
15.74
2.61
1.73
REAL ESTATE
35.09
35.02
6.54
2.97
SIM Portfolio Financial Sector
P/E
Trailing P/E Forward P/E
P/S
P/B
S&P 500
18.65
17.84
1.85 2.87
S5FINL
15.36
14.75
2.38 1.42
C
10.8
10.3
1.9
0.85
KEY
14.62
13.76
3.1
1.72
STI
13.23
13.52
2.7
1.05
WFC
14.07
13.76
3.4
1.78
6
RECOMMENDATION
Recommendation
KEYS:
SIM: 16.6%
S&P Financials:16.7%
•  Overweight 40 percent basis points to capture returns - 17%
•  Rising interest rate in September
•  Hedge against possible regulatory risk
Q&A