1. Paul Verdier, Xiang Wu, Huiwu Wang, Zhihao Wang
MAX M. FISHER COLLEGE OF BUSINESS
Sector Presentation: Financial Sector
Paul Verdier, Xiang Wu, Huiwu Wang, Zhihao Wang

2. OVERVIEW

3. Overview Market Cap - 3.75T Percentage of S&P 500 - 3.75/$23.9T
SPY 1YR Perf %
Financials 1YR Perf %

4. Overview Money Center Credit Services Investments Insurance
Asset Management
REITS

5. Largest company within the financial sector

6. BUSINESS ANALYSIS

7. Business Cycle —— Maturity
Commercial Banking
Annual Growth (12-17): 0.9%
steady growth
more regulation
a smaller number of banks
Investment Banking
Annual Growth (12-17): 2.9%
increased regulation
extensive merger and acquisition activity
Insurance
Annual Growth (12-17): 3.0%
stable demand growth
enterprise consolidation

8. Porter’s Five Forces Threat of Entry: Low
Capital Intensity: need to raise capital to run operations
Regulation & Policy: supervision of and regular inspections by the FDI, SEC etc.
Supplier Power: High
Main selling industry: central banking, Stock & Commodity Exchanges, Insurance Brokers & Agencies
Highly affected by macro policy
Consumer Power: Medium
Main buying industry: Mining, Construction, Consumers, Pension Funds, Life Insurance
Profit seeking: Prefer higher return or lower fees
Substitution: High
Undifferentiated products and low switching costs
Rivalry: High
Nonbank organizations with fewer regulation, low fees charged, competitively quality

9. Key External Drivers —— Investment Banking
Investor Uncertainty
Low investor uncertainty creates a favorable environment for IPOs, M&A and trading activity
Corporate profit
Changes in corporate profit influence the performance of equities markets

10. Key External Drivers —— Commercial Banking
Aggregate household debt
Industry interest revenue increases when consumers choose to borrow more money from banks and hold higher debt levels
Prime Rate
a low prime rate usually boosts loan demand
a higher prime rate causes higher net interest income and revenue

11. Key External Drivers —— Insurance
Median age of population
demand increases as the average age of the population rises
Per capita disposable income
strong link between rising household wealth and demand for life insurance

12. ECONOMIC ANALYSIS

13. Key Economic Indicators
Interest Rates
ex .Citigroup in 2017 derived 60% of their Revenue (less Interest Expense) from Interest
GDP
Tracks economic activity
Measures demand for goods and services - financials included
Government Regulation and Fiscal Policy
Expansionary vs Contractionary
Regulation after 2008
International Trade, Brexit …
Existing Home Sales
↑Homes = ↑Mortgages = ↑Interest Revenue
Volatility
Fee-based income relies heavily on trading volume
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

14. Interest Rates Financials vs GDP -Regulation post 2008
-economy recovered
-harder for financials to recover

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

16. Government Regulation and Fiscal Policy
Financials vs household income
-higher income, more borrowing for spending

17. Existing Home Sales Financials vs fed funds rate
-again correlation between spread and derregulation

18. FINANCIAL ANALYSIS

19. S&P 500 vs S5FINL -- Performance
Financial Sector outperformed before 2008
It reverses after that..
-diversified lagging

20. Total Return Analysis: S&P vs S5FINL
03/31/2008~02/28/2018
S&P 500 : % vs
S5FINL: 73.79%

21. Sub-industry comparison
Outperformed
????

22. S&P vs S5FINL-- Operating and profit margin
Operating and profit margin of financial sector dropped below 0 during financial crisis
But exceeded that of S&P 500 by the end of 2010
Operating margin of financial sector much higher than 20%, indicating financial efficiency and stability
-regulation

23. S&P vs S5FINL -- ROE
S&P 500: 13.5%
S5FINL: 8.4%

24. S5FINL EPS BOA: $17 billion share buyback last through June 2018
Wells Fargo: $22.6 billion for 350 million shares’ worth of stock buybacks, about 7% of total floating stock

25. VALUATION ANALYSIS

26. S&P 500 vs S5FINL

27. Sector valuation Absolute
Relative
The absolute analysis shows the sector multiples are below the markets and therefore, financial sector is undervalued now.
Relative valuation expends because of 2008 crash

28. Industry Valuation
We select four industries in Financial sector and these industries follow a similar pattern to the Financial Sector.
P/E levels vary due to several factors including growth rate and macroeconomic conditions, and valuations are different across industries. The P/E for real estate and diversified financials are high since they are more stable
SPX

29. Portfolio Valuation
Our holdings are traded at a cheaper price compare to the whole sector’s multiples
Most of our holdings are banks and it is associated with high uncertainty (beta)
The portfolio will continue to grow as long as the administration and the government don’t put more regulations on the markets
SPX

30. Technical Analysis

31. RECOMMENDATION

32. we suggest hold for most of the stock and sell the Citigroup Inc until its stock price reaches 66.
The uncertainty for financial sector is high as the whole sector could be easily influenced by the government policies and administrations. Hence, we recommend not hold too long and take actions when markets change.

33. QUESTIONS