Sector Presentation: Financials
Rahul Choudhry, Xiangyuan Li,
Jiachen Wang, Shunxian Zou
1. Overview &
Business Analysis
2. Economic &
Financial Analysis
Agenda
4. Recommendation
3.
Risks &
Valuation Analysis
Overview
Financials: Composition
• Banks
• Diverse Financial Services
• Insurance Companies
• Real Estate
Financial Sector Performance
Source: finviz.com
Industries
Performance
Financial
Sector
Performance
Sectors Market Capitalization
Market Cap (in Trillions)
3.00
2.50
2.00
1.50
1.00
0.50
Info Tech
Financials
Health Care
Cons. Disc.
Energy
Cons. Staples
Industrials
Utilities
Materials
Telecom
0.00
Source: Standard and Poor’s
SIM Market Capitalization
Financials are underweighted
(1.32%) relative to S&P 500
-SIM: 14.00%
-S&P: 15.32%
Business Analysis
Business Cycle
• Upswing
Confidence builds up
Attract more capital projects and labor
Personnel Investing
Larger Number of Loans
• Downswing
Lower number of new firms
Less expansion, M&A
Default rates go up
Waves of Layoff
Porter’s Five Forces
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Intensity
of
Rivalry
Threat of
Substitution
Bargaining
Power of
Buyers
Porter’s Five Forces
Threat of New
Entrants
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
• Low. Very difficult to become a money center bank eg.JPM / BOA
• Medium-High: Not difficult to become Asset Management Firms / Financial Services Companies
• Low to mediums
• Source of capital: 1.Depositors 2.Credit market 3.Credit market
• Lower power for small individual customers
• High switching cost after you are in business
• High power for large for large corporation / Institutional investors
• Low. It’s such a broad sector and cover most of the possible services
• Can’t go back to barter
Threat of
Substitution • Precious metals-----GOLD
Intensity of
rivalry
• Intense
• Consolidation---Very large banks holding majority of assets
Economic Analysis
Consumer Confidence
Velocity of Money Supply
2 year Treasury Notes
10 year Treasury Notes
Operation Twist: Flattening of Yield Curve
30 Year Fixed Mortgage Rate
Federal Funds Rate
Case-Schiller Home Price Index
Unemployment Rate
Trade Deficit
Financial Analysis
Earnings & Revenue Growth
Revenue Analysis
Earnings Analysis
Return on Equity
Industry Revenue Analysis
Industry Earnings Analysis
Risk Analysis
Risk Analysis
Regulation Risks
Basel III
Dodd Frank
Economic Risks
Sdf Slow Recovery
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Eurozone Crisis
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Foreclosure Regulation
Operation Twist
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Emerging Markets Slowdown
Basel II
10%
8%
6%
4%
2%
2%
0%
Tier 1 Common
Equity Ratio
Basel III
Dodd Frank
Highlights
Tough Capital Requirement
Fees Oversight
Volcker Rule
Prohibit Unfair Lending
Ends “Shallow” Financial System
Impact on Credit Ratings Agencies
“Skin in the Game”
Foreclosure
• Restrictions on Foreclosures
• HAMP
– Home Affordable Modification Program
Operation Twist
Lower 10Y Treasury Rates
Lower Mortgage and C&I Rates
Tightened Spreads for Banks
Economic Risks
• Slow Economy Recovery
SUMMARY OUTPUT
• Eurozone Crisis
• Risks in Emerging Markets
Regression Statistics
Multiple R
0.867002
R Square
0.751692
Adjusted R Square 0.748549
Standard Error
4.812643
Observations
81
– Slowing Growth in BRIC Countries
– Political Instability in Latin America and India
Valuation Analysis
Sector: Financials
Absolute Basis
High
Low
Median
Current
P/Trailing E
135.2
8.1
13.7
10.4
P/Forward E
20.1
8.8
12.4
10.9
P/B
2.7
0.5
1.9
1.0
P/S
2.7
0.6
2.2
1.5
P/CF
140.7
7.2
9.8
9.6
Relative to SP500
High
Low
Median
Current
P/Trailing E
7.8
0.65
0.76
0.77
P/Forward E
1.4
0.65
0.79
0.82
P/B
0.9
0.3
0.7
0.5
P/S
1.8
0.9
1.5
1.2
P/CF
13.4
0.7
0.9
1.0
Diverse Financial Services
Insurance
Regional Banks
Diverse Financial Services
Insurance
Regional Banks
Bollinger Bands
MACD Moving Average Convergence/Divergence
RSI Relative Strength Index
Recommendations
3. Gradually Improving
Very
4. Low
lowFed
current
Funds
P/B
Rate
ratio
1. 2.
Banks
managed
to increase
capital
Unemployment Rate
Cons
Regulations: Limited Profitability
Highly correlated with global markets
10Y Treasury
Rates
GreatLower
uncertainty
in the future
Consumer Confidence Level is shaky
Long-lasting Impact of Bad Assets
Final Recommendation
Hold
Q & A
Any Questions?