1. Student Investment Management Financial Sector
Grant Daniels
Arvind Mukundan
John Ohrstrom
Logan Olson

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

3. Supply & Demand Financial Sector is in an EXPANSION phase
Evidenced by improving economy and rising interest rates
Financial industry has still not fully recovered from 2008 crisis. Expansion is ongoing we expect this to continue as rates rise and economies improve.
Further expansion is based on rising rates and continued economic health.
The Fed holds significant power in determining continued expansion
Foreign economies/governments will effect length of expansion (Ex – Brexit)
The sector could also benefit from a reduction in overall taxation and regulation coming out of Washington DC
Provided worldwide economies continue to improve, we expect to see both retail and institutional consumers continue to seek additional services, further continuing the expansion phase of the economic cycle.

4. Five Forces Analysis

5. Interest Rates – All Time Low

6. Economic Factors
Financial Sector is cyclical with the market and hence any factor that affects market will have a direct impact on the performance of the Finance stocks as well. Here are a few macro economic factors that affect market

7. Economic Factors Cont.

8. Financial Analysis S&P 500 Financials vs. S&P 500
Until the financial crisis, historically the sector had outperformed the broader market.
Since 2008 though, the trend has reversed.
Increased regulation of the financial industry and fallout from the crisis have hampered the sector. Tech stocks have taken over leadership in the broader index
Furthermore, many benchmarks show a considerable lag between the sector and the broader market.
With a recent pull back in the IT sector and the improved position of firms relative to the regulatory environment the sector has been advancing recently.

9. Financial Analysis Cont.
Summary Data
Profit margins for the sector have been trending up recently from 11.3% to The S&P as a whole is up only 0.4% over the same period.
Likewise, operating margin has increased significantly for Financials, while is up only 0.2%
Earnings are expected to rise to $27.7 b. Should that estimate hold, that would be an increase of 47.3% since 2012 with the S&P experiencing a gain of 31.6 % over the same period.

10. Financial Analysis Cont.
Selected Company Highlights
Many of the big names in the sector are trading at a discount to the market as a whole.
JPMorgan Chase is especially interesting given its strong performance as well relatively low multiple.
AON is actually trading at a premium to the S&P.
Many individual firms in the sector have passed this year’s stress tests and have been the ability to begin increasing payouts to shareholders to 93%.
Only American Express was required to resubmit its disbursement plans.

11. Sector Valuation
Historically, the Fin. Sector has been cheaper than the S&P
This continues today, but on a relative basis is significantly cheaper than 10 year median relative to S&P in every valuation ratio – see below

12. SIM Valuation

13. We recommend the SIM portfolio be OVERWEIGHT compared to the S&P 500.
Recommendation
We recommend the SIM portfolio be OVERWEIGHT compared to the S&P 500.
Sector is in an expansion phase which we predict to continue
Interest rates are expected to rise, which will lead to increased sector revenue
Potential for decreased taxation and regulation from Washington

14. What questions do you have?