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

OVERVIEW

Overview Market Cap - 3.75T Percentage of S&P 500 - 3.75/$23.9T SPY 1YR Perf. - 23.18% Financials 1YR Perf. - 17.14%

Overview Money Center Credit Services Investments Insurance Asset Management REITS

Largest company within the financial sector

BUSINESS ANALYSIS

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

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

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

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

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

ECONOMIC ANALYSIS

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

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

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

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

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

FINANCIAL ANALYSIS

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

Total Return Analysis: S&P vs S5FINL 03/31/2008~02/28/2018 S&P 500 : 153.97% vs S5FINL: 73.79%

Sub-industry comparison Outperformed ????

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

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

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

VALUATION ANALYSIS

S&P 500 vs S5FINL

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

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

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

Technical Analysis

RECOMMENDATION

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.

QUESTIONS