1. MAX M. FISHER COLLEGE OF BUSINESS
Sector Presentation: Financial Services
William Quirk, Nick Stamatis, Sharon Tong and Carolina Tovar 1

2. OVERVIEW 2

3. Sector Overview: Size of Sector
Market Cap: T
Percentage of S&P500: 31.5% of S&P 500 (24.06 T)
Sector Overview: Performance
Financial Sector 1 year percentage change : 35.32%
S&P 500 Index 1 year percentage change: 19.79%

4. 1Y Relative Performance

5. YTD Relative Performance

6. Sector Overview: Industries
Banks
Capital Market
Consumer Finance
Diversified Financial Services
Insurance
Mortgage REITs
Thrifts & Mortgage Finance

7. Sector Overview: Largest Companies
J P Morgan Chase &Co: B
Bank of America Corporation: B
Wells Fargo & Company: B
HSBC Holdings plc: B
Citigroup Inc.: B
Royal Bank of Canada: B
Banco Santander, S.A.: B
Toronto Dominion Bank: B
Goldmans Sachs Group, Inc.: B

8. BUSINESS ANALYSIS

9. Business Analysis: Life Cycle
The financial sector performs best during the growth and maturity phases of the business cycle. This is when corporate earnings and interest rates are highest
The financial sector struggles in later parts of the business cycle as it is a cyclical industry, and is subject to losses as the economy falters
Current bull run for stocks ---> strong growth
Interest rate hikes
Increasing reliance on technology, M&A to drive growth

10. Business Analysis: External Factors
Overall state of the U.S. and global economy
Capital projects, personal saving/investing levels rise
More loans=more money
Interest rates
1.25%, last raised in June 2017
Subject to increased future raises
Banks, insurance industries
Monetary/fiscal policy
Quantitative Easing, TARP

11. Business Analysis: Supply/Demand
Users include the vast majority of individual consumers, corporations globally
Market is massive: 34 banks in the United States have over $100 billion in assets, including 4 over $1 trillion (JPM, BAC, WFC, C)
Primarily saturated markets in developed countries
Room for expansion in developing markets--microfinance, booming business development
Demand is driven by:
Consumer preferences for risk/expectations of the future
Strength of the economy
Investment opportunities

12. Business Analysis: Porter’s Five Forces
Barriers to Entry: MODERATE
Incumbents have extensive brand recognition and customer loyalty
Network effect
Local credit unions and regional banks that were comparably risk-averse during the recession have had success and strengthened over the recent time period
Supplier Power: MODERATE
In this case, the supplier is primarily the customer
Individuals/institutions can choose which bank to conduct business with based on customer service, rates offered, convenience and other perks

13. Business Analysis: Porter’s Five Forces Continued
Buyer Power: MODERATE
Very similar to supplier power, as the customer/institution both buys capital (mortgages, loans) and supplies capital (savings accounts, CDs)
Threat of Substitutes: LOW
The financial sector is necessary to maintain adequate levels of liquidity in the markets
Companies are unable to compete without sufficient funds, so there are no substitutes
Competitive Rivalry: HIGH
Companies battle for market share, focus on niche markets/regions, offer different services

14. ECONOMIC ANALYSIS 14

15. Financials vs 10-yr yield
-Banks aren’t banks anymore
-prior to 2008 banks made money off interest spread. Interest rates highly correlated to financial sector performance.
-now they make $$ off other services such as fees, etc. not strong correlation
-trump rally

16. Financials vs GDP Financials vs GDP -Regulation post 2008
-economy recovered
-harder for financials to recover

17. Financials during different administrations
Financials during different political environs
-correlation between administration?
-external factors: dot com bubble and ‘08

18. Financials vs Household income
-higher income, more borrowing for spending

19. Financials vs Fed Funds Rate
-again correlation between spread and derregulation

20. Financials vs Consumer Confidence

21. FINANCIAL ANALYSIS

22. S&P vs Sector & Sub-Sector - Sales
Key
S&P 500 Index
SPX Financials Sector
Subsectors:
Insurance
Banks
Diversified
-diversified lagging

23. S&P vs Sector & Sub-Sector - Profit Margin
Key
S&P 500 Index
SPX Financials Sector
Subsectors:
Insurance
Banks
Diversified
-bank response to derregulation

24. S&P vs Sector & Sub-Sector - ROE
Key
S&P 500 Index
SPX Financials Sector
Subsectors:
Insurance
Banks
Diversified
????

25. S&P vs Sector & Sub-Sector - Earnings per Share
Key
S&P 500 Index
SPX Financials Sector
Subsectors:
Insurance
Banks
Diversified
-regulation

26. S&P vs Sector & Sub-Sector - Cash Flow
Key
S&P 500 Index
SPX Financials Sector
Subsectors:
Insurance
Banks
Diversified

27. S&P vs Sector & Sub-Sector - Capital Expenditures
Key
S&P 500 Index
SPX Financials Sector
Subsectors:
Insurance
Banks
Diversified

28. VALUATION ANALYSIS

29. S&P 500 v. S5FINL
All numbers as of 10/20/2017

30. S&P 500 v. S5FINL Absolute Relative Notes
Currently, S5FINL is undervalued
Valuation has expanded since the 2008 crash, aside from P/E which shows stagnation due to volatility
P/BV shows most accurate representation due to nature of the financials sector

31. Further Breakdown Notes
The valuations for these industries follow a similar pattern to that of S5FINL
Diversified P/E is overvalued within the financial sector due to its stability
Its association to the Insurance and Bank sectors introduce its relative undervaluation in the market as a risky financial sector
The volatility of financial policy and its direct effect on these stocks causes people to be pessimistic in their valuation
SPX

32. Portfolio Valuation Notes
Our current holdings also show pessimism in their valuations
Many are banks, and the political uncertainty at this time has a big impact on the future success or failure of these stocks
The relative high betas reflect the associated risk
AXP and C are closest to the financial sector valuation – possibly due to their avoidance of scandals, AXP’s comparably limited market exposure, and C’s diversification in product
BHF is extremely risky as it is a young company – warranting a lot of caution
These stocks will continue to appreciate in value until major political decisions are made regarding their future. Until then, they are in an appreciating limbo
Portfolio Valuation
Ticker
P/E
P/BV
P/S
Beta
American Express
AXP
17.25
3.82
2.38
1.01
Brighthouse Financial
BHF
7.27
0.62
0.90
2.87
Citigroup C
14.17
0.93
2.34
1.52
Goldman Sachs GS
13.25
1.26
1.40
Metlife
MET
10.11
0.84
0.92
1.45
Wells Fargo
WFC
13.40
1.50
2.85
1.22
SPX
21.90
3.23
2.19
1.00
S5FINL
16.42
1.48
2.48
1.12
S5FINL
SPX

33. RECOMMENDATION 33

34. HOLD Financial Sector Aggregate
Undervalue
Keep Weight: 15.5%
However, may not hold in long term...
High volatility due to tax policy and future interest rate policy
Overexposed in banks as opposed to Diversified & Insurance
Until market moves, take no action

35. QUESTIONS 35

36. References
Bloomberg Terminal