FIN824 The Stock Market Financials Sector Kyle M. Ward-Dahl Marsel J. Tadger Ke Wang Adam J. Wilson 2/2/20101FIN824 The Stock Market

Index & SIM Weights 2/2/2010FIN824 The Stock Market2 Growth in S&P 500’s financials sector Increasing underweighting of SIM Financials12/31/20091/31/2010 S&P %14.71% SIM11.10%11.37% +/--3.28%-3.34%

Size and Composition Market Cap: 1.6 Trillion 14.71% of S&P 500 Industries – Banks – Consumer Finance – Diverse Financial Service – Insurance – Multi-sector Holdings – Real Estate Investment Trust 2/2/20103FIN824 The Stock Market Largest Companies (Market Cap in Billions) American Express (AXP) $44.8 Bank of American (BAC) $150.8 Berkshire Hathaway (BRK) $234.6 Citigroup (C) $93.8 Goldman Sachs (GS) $76.5 Bank of NY Mellon (BK) $35 JP Morgan Chase & Co (JPM) $153.4 Morgan Stanley (MS) $36.4 U.S. Bancorp (USB) $48 Wells Fargo (WFC) $145.3

Sector Performance 2/2/20104FIN824 The Stock Market Revenue increased by 8% in latest Qtr Earnings per share increased by 256% in latest Qtr and 644% in latest 12 months A strong rebound in terms of earnings per share

Business Analysis 2/2/2010FIN824 The Stock Market5 This sector is in the mature stage of its life cycle Financials are cyclical Influenced by economic conditions and conditions in financial markets Regulations are also an important factor Interest rate rise has negative impact

Financial Analysis 2/2/2010FIN824 The Stock Market6 L-T Future Growth Rate for Earning per share is 8% Sector Sales are still extremely down from pre- crises numbers possibly indicating upside Compared with historic numbers, margins are still low in the sector

Valuation Analysis - P/B 2/2/20107FIN824 The Stock Market

Valuation Analysis - P/E 2/2/20108FIN824 The Stock Market P/Trailing E P/Forward E

Valuation Analysis - P/S & P/CF 2/2/20109FIN824 The Stock Market P/S P/CF

Valuation Summary Current P/E and P/CF ratios are way higher than the median Current P/B and P/S ratios are much lower than median For financial institutions, P/B is important because most assets and liabilities are valued at market values. From this perspective, the sector is cheaper than usual 2/2/2010FIN824 The Stock Market10 Absolute BasisHighLowMedianCurrent P/Trailing E P/Forward E P/B P/S P/CF Relative to SP500HighLowMedianCurrent P/Trailing E P/Forward E P/B P/S P/CF

GDP Forecast 2/2/2010FIN824 The Stock Market11

Opportunities & Risks Upside – GDP growth – Sales & earnings growth – Market rebound Downside – Liability tax bill – Interest rate rise – Uncertainties such as other regulations 2/2/2010FIN824 The Stock Market12

Recommendations The conditions in financials sector has improved and sales & earnings are growing. The percentage of this sector in S&P500 also grew by about 0.4%. All these signals demonstrate the market rebound. Future growth is also expected in the sector and the whole market as well, showing the increasing confidence of investors and analysts. However, the uncertainties and risks are not negligible. We recommend to buy 200 basis points to bring SIM weighting relative to S&P500 to 13.10%. As a result, SIM will be underweight in this sector by 1.61%. Thus, SIM can gain from the growth of financials sector and also avoid risks to certain extent. 2/2/2010FIN824 The Stock Market13

Q&A 2/2/2010FIN824 The Stock Market14