Financial Stock Analysis Adam Riegle, Nikolas Ristev, and James Rochowiak

Status Quo – Current Holdings StockCurrent Price CostDollars Invested Total Return Deutsche Bank $114.86$107.84$423, % Fifth Third Bank $38.05$37.96$604, % Citigroup$48.66$41.48$1,011, % Merrill Lynch $69.94$58.13$1,012, % Capital One $82.48$64.08$1,013, %

Industry Analysis – Interest Rates Interest Rates Fed just raised interest rates another 0.25% and continued 2 years of consecutive rate hikes Undiversified regional banks suffer from rising interest rates that cause net interest margins to decline Fed expected to pause rate hikes in the short term as commodity prices decline and US bond activity rises over fears of a slowing economy

Industry Analysis – Yield Curve Inverted Yield Curve Higher short-term yield rates create a situation where overexposed banks cannot generate higher net interest revenues The traditional view of the banking business holds that banks pay interest on their deposits based upon shorter-term interest rates while making loans tied to longer-term interest rates The difference between interest paid and received—the margin—should be influenced by the slope of the yield curve

Industry Analysis – Yield Curve

Industry Analysis - Banks

Industry Analysis – Div. Fin. Services

Industry Analysis – Sec. Brokerages

Fifth Third Bancorp

Risks Flattening yield curve and rising interest rates are narrowing net interest margins NIM down 5% YTD despite 4% growth in average earning assets Recently switched to daily competitive rates to attract core deposits, but this will create higher interest expense in 2006 Potential acquisitions may distract management from organic improvement

Fifth Third Bancorp Target Price: $40.07 Current Price: $38.05 Potential: 5.3% Technical Recommendation: HOLD Yahoo! Finance Target Price: $39.18 However, we recommend that we SELL all of our FITB holdings for a better investment Trade a “single” for a “double” or “triple”

Capital One

Current Price: $82.48 Yahoo! Finance Target Price: $99.83 Potential Upside: 21% Technical Recommendation: BUY Outlook: Acquisition of Hibernia Bank added $16.3 billion in loans, $23 billion in assets, and 262 banking centers located in Texas and Louisiana Auto finance division continues to outperform as auto loans increased over 16% YTD Credit card business is struggling from stiff competition and inverted yield curve impacts margins

Citigroup

Current Price: $48.66 Yahoo! Finance Target Price: $55.35 Potential Upside: 13.8% Technical Recommendation: HOLD Outlook: Smith Barney Division experienced healthy increases in assets under management Result of steady internal growth and the acquisition of Legg Mason (124 branches and 1,200 financial advisors) Has a strong foothold across a number of businesses with solid growth prospects Credit card business has experienced poor performance in the past years due to high numbers of bankruptcy filings This effect should decline due to tougher legislation that is now in effect

Deutsche Bank

Current Price: $ DCF Target Price: $ Upside: 19.6% Yahoo! Finance Target Price: $ Technical Recommendation: HOLD Outlook: Exposure to US interest rate risk limited Recent announcement of acquisition of Chapel Funding to strengthen residential mortgage backed securities business 1 st qtr profits rose 55% over last year’s 1 st qtr results

Merrill Lynch

Current Price: $69.94 Personal Target Price: $84.33 Upside: 20.6% Yahoo! Finance Target Price: $88.00 Technical Recommendation: BUY Outlook: 1 st qtr profits were their highest quarterly net revenues ever, rising 28% over last year’s 1 st qtr results 1 st qtr EPS were $0.12 higher than analysts’ expectations 4 of the last 5 changes in analysts’ opinions have been upgrades to buy or overweight

MasterCard Mastercard Income StatementFY (Mills$)2007E2006E Operations Fees$2,567.0$2,232.2$1,941.0$1,637.0$1,431.0 Assessments1,318.51, Net Revenue3,885.53,378.72,938.02,593.02,231.0 General and Administrative1,756.21,527.21,352.01,186.01,099.0 Advertising and Marketing Development1,352.21,175.81, US Merchant Lawsuit and other Legal Settlements Depreciation and Amortization Total Operating Expenses3,265.32,862.82,545.02,246.02,833.0 Operating Income (Loss) (602.0) Total Other Income (Expense) (23.0)(10.0) Income (loss) before tax expense (benefit) and cumulative effect of accounting change (612.0) Income tax expense (benefit) (221.0) Cumulative effect of accounting change, net of tax Net Income (loss)$438.3$366.3$267.0$238.0$(386.0) Basic & Diluted EPS (3.86) Diluted shares

MasterCard IPO Price: $40.00-$43.00 IPO scheduled for May 24 th Target Price: $63.07 Upside: 46.7% DCF Recommendation: BUY

MasterCard Sensitivity Analysis Terminal Discount Rate 8.0%9.0%10.0%11.0%12.0%13.0%14.0% FCF Growth 1.0%$81.72$70.53$61.93$55.13$49.63$45.09$ %$85.26$72.95$63.65$56.38$50.56$45.80$ %$89.39$75.73$65.58$57.78$51.59$46.58$ %$94.28$78.92$67.78$59.33$52.73$47.43$ %$100.13$82.66$70.28$61.09$53.99$48.36$ %$107.29$87.07$73.18$63.07$55.40$49.39$ %$116.24$92.36$76.55$65.34$56.99$50.53$45.40

MasterCard Outlook Pros 1 st qtr revenue is up 12.3% from st qtr EPS were up $0.34 an increase of 36.6% Increasing cash flows even in year with negative NI Decreasing A/R and steady A/P Cons Did have a year with negative NI (2003) Currently involved in several legal cases Costs of more than $700million since 2003 Several more cases pending

Recommendation Summary Hold – DB, COF, C, MER Sell all of Fifth Third Performing poorly for several quarters in a row Fairly valued (both analysts and our opinion) Buy MasterCard Use proceeds from Fifth Third and additional money to buy At $45.00, buy to make it 427 basis points of the SIM Class portfolio Has a strong upside potential even with conservative estimates