Sector Presentation :
Financials
Edouard Sevil
Manpreet Singh
Shazia Sultana
Rahul Verma
Summary
Overview
2) Business Analysis
3) Economic Analysis
4) Financial Analysis
5) Valuation Analysis
6) Recommendations
1)
1. Overview
Edouard Sevil
What are the Financials?
 “Firms
that provide financial services to
commercial and retail customers.”




Banks
Insurance Companies
Real Estate
Diversified Financials
Source:
www.investopedia.com
Market Cap (in billions)
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$-
Source: biz.yahoo.com
Financials in the S&P 500
14.2%
Financials
Other sectors
85.8%
Source:
www.standardandpoors.com
Financials in the SIM Fund
9.9%
Financials
Other sectors
90.1%
Source:Fisher College of
Business
Financials in the Fortune 25
5 – Fannie Mae
(6 – General Electric)
7 – Berkshire Hathaway
9 – Bank of America
13 – JPMorgan (SIM)
14 – Citigroup
17 – AIG
20 – Freddie Mac
23 – Wells Fargo (SIM)
Source: money.cnn.com
Performance
Source:
investing.businessweek.com
2. Business Analysis
Manpreet Singh
Porter’s 5 forces analysis
Barriers to Entry: Medium
High capital Investment and regulations

Supplier Power: Medium
US Federal Reserve / Depositors

Buyer Power: Low for individuals / High for companies
Low switching costs, negotiation power determined by size

Threat of Substitutes: Low
It is a commodity type offering with not many available
substitutes.

Competition: High
Market is not growing in the U.S. due to gloomy Economy.

Trends
 Mature
sector
 Before
and during the Financial Crisis : major
consolidation in the sector


JP Morgan w/ Washington Mutual & Bear Sterns
Bank of America w/ Countrywide & Merrill Lynch
 Post


financial-crisis: getting lean
Asset sale
Layoffs announced by BofA, Goldman Sachs, UBS,
Credit Suisse…
Economics and Politics
•
•
•
•
•
•
•
•
Low interest rates
Growth in BRIC countries
High unemployment rate in the U.S
US corporate tax laws
Euro-zone sovereign debt issues
New BASEL III capital requirements
Dodd-Frank Act – Uncertainties on post-crisis
regulations
Occupy Wall Street protests
3. Economic Analysis
Rahul Verma
Federal Funds Rate
Treasury Notes : 2-year
Treasury Note: 10-year
Money Supply
Unemployment: Rate
Unemployment: Duration
Delinquency Rates
Strongest: Consumer Confidence
4. Financial Analysis
Shazia Sultana
Major players
Sector Growth
Revenues
Earnings
Sector Revenue Analysis
Sector Earnings Analysis
Industries Revenue Analysis
Industries Earnings Analysis
ROE Analysis
5. Valuation Analysis
Shazia Sultana
Sector valuation
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
135.2
20.1
2.9
2.7
140.7
Low
8.1
8.8
0.5
0.6
7.2
Median
13.9
12.6
2.0
2.3
9.8
Current
8.7
9.8
0.9
1.2
8.2
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
7.8
1.4
0.9
1.9
13.4
Low
0.65
0.6
0.3
0.9
0.7
Median
0.76
0.78
0.7
1.6
0.9
Current
0.70
0.81
0.4
1
1
Trailing P/E Analysis
Forward P/E Analysis
P/B Analysis
P/S Analysis
Industry Valuation Analysis
Life Insurance Industry
Absolute
Relative To S&P500
Relative to Sector
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
Trailing P/E
P/B
High
15.4
2
1.5
0.87
0.7
1
1.2
1.4
P/S
0.7
Low
4
0.5
0.3
0.38
0.3
0.4
0.1
0.6
0.4
Median
12.7
1.4
1.1
0.68
0.6
0.7
0.9
0.8
0.5
Current
8
0.9
0.8
0.6
0.4
0.6
0.8
0.9
0.6
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
High
54.8
2.6
3.9
4.6
0.9
2.7
1.2
1.7
1.8
Low
9.5
0.7
0.8
0.61
0.6
1.2
0.2
0.9
1.2
Median
13.5
2.1
3.3
0.75
0.7
2.2
1
1.1
1.4
Current
10.7
1.2
1.9
0.81
0.6
1.6
1.1
1.3
1.4
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
High
296.3
2.9
4.1
19.4
1
3
19.4
1.2
1.7
Low
8.3
0.3
0.6
0.53
0.2
0.9
0.4
0.6
0.8
Median
14.1
1.9
3.3
0.8
0.7
2.2
1
1
1.3
Current
13.8
0.8
1.6
1
0.4
1.3
1.4
0.8
1.2
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
High
47
1.9
1.6
1.9
0.6
1.1
2.6
1.4
1
Low
7.2
0.7
0.6
0.45
0.4
0.7
0.1
0.6
0.5
Median
11.7
1.5
1.2
0.68
0.6
0.9
0.9
0.8
0.6
Current
16.2
1.1
1.1
1.2
0.5
0.9
1.7
1.2
0.8
Banks
Absolute
Relative To S&P500
Relative to Sector
Regional Banks
Absolute
Relative To S&P500
Relative to Sector
Insurance Property
Absolute
Relative To S&P500
Relative to Sector
Industry Valuation Analysis
Asset Management
Absolute
Relative To S&P500
Relative to Sector
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
High
23.7
4.7
5.2
1.2
1.3
3.4
1.8
2
2.3
Low
8.6
0.9
1.3
0.74
0.6
1.7
0.1
1.3
1.3
Median
18.1
2.8
3.4
1
1
2.4
1.3
1.6
1.7
Current
12.4
1.2
2.2
0.94
0.6
1.8
1.3
1.3
1.6
Reits
Absolute
Relative To S&P500
Relative to Sector
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
High
28.7
3.9
7.8
2.3
1.8
6.5
3.1
4.1
6.2
Low
7.5
0.9
1.9
0.67
0.7
2.7
0.1
1.5
2.3
Median
19.1
2.7
5.4
1.2
1.2
4
1.6
2.4
3.3
Current
27.6
3.4
6.8
2.1
1.7
5.6
2.9
3.5
5.1
Investment Banks
Absolute
Relative To S&P500
Relative to Sector
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
Trailing P/E
P/B
P/S
High
151.5
2.9
3
8.7
0.9
3.1
4.6
1.6
2.6
Low
8
0.5
1
0.52
0.3
1
0.5
0.8
0.7
Median
13.4
1.9
2.3
0.79
0.7
1.6
1
1
1
Current
12.2
0.8
1.4
0.92
0.4
1.1
1.3
0.9
1
Technical Analysis
Higher highs
Lower lows
6. Recommendations
Edouard Sevil
Pros of financials:
 Currently

underweighted in the Student Fund.
9.9% SIM vs. 14.2% S&P
 Valuation




analysis argues for reinforcement
All current ratios below Median
P/E around 75% of S&P
P/B around 40% of S&P
Technical: higher highs, lower lows
Cons of financials:
 Business


Analysis:
Political uncertainty (regulations)
Economic uncertainty (Europe, double-dip?)
 Reinforced


by Economic Analysis:
Negatively correlated to what is high
Positively correlated to what is low
Timing’s everything
Buy low, sell high
vs.
Don’t catch a falling knife
Our recommendations:
 Keep
Financials underweighted
 Differentiate




between industries:
Banks: neutral
Insurance: reinforce
Real-Estate: neutral
Diversified financials: neutral