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