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FINANCIAL SECTOR OUTLOOK Sam Hawkins Sunghoon Kim  Shade Okusanya 13 February, 2003
<ul><li>Financial Sector Overview </li></ul><ul><li>Business Analysis </li></ul><ul><li>Financial Analysis </li></ul><ul><...
<ul><li>Key Highlights </li></ul><ul><li>Smallest % sector of S&P in 1965 </li></ul><ul><li>Largest % sector of S&P 500 to...
Financial Sector Overview Industry Groups (% of Sector) FINANCIAL SECTOR OUTLOOK Banks 36% Consumer Finance 3% Diversified...
Largest Companies (IG/Mkt. Cap) Financial Sector Overview FINANCIAL SECTOR OUTLOOK 0.00 20.00 40.00 60.00 80.00 100.00 120...
<ul><li>Banks {Mature/Cyclical} </li></ul><ul><li>Insurance {Mature/Defensive} </li></ul><ul><li>Diversified Financials {M...
Business Analysis <ul><li>Outlook for Sector Drivers </li></ul><ul><ul><li>Normal Yield Curve -  long term rates higher th...
Business Analysis <ul><li>Demand Analysis  </li></ul><ul><ul><li>Consumer Confidence (?)  could dampen economic recovery i...
Business Analysis <ul><li>Supply Analysis  </li></ul><ul><ul><li>Industry Consolidation (+)  Fewer competitors   especiall...
Business Analysis <ul><li>Profitability & Pricing  </li></ul><ul><ul><li>Increased distribution channels such as the Inter...
<ul><li>Income Statement Analysis  </li></ul><ul><li>Cash Flow Analysis </li></ul><ul><li>Dupont Analysis </li></ul><ul><l...
<ul><li>High and stable operating margins </li></ul><ul><ul><li>99.02% in 2001 and 98.96% 09/2002  </li></ul></ul><ul><li>...
Net Profit Margin Relative to S&P Financial Analysis FINANCIAL SECTOR OUTLOOK
Price/PE/EPS Relative to S&P Financial Analysis FINANCIAL SECTOR OUTLOOK
ROE/Dividend Yield Relative to S&P Financial Analysis FINANCIAL SECTOR OUTLOOK
Growth Rate Estimate Financial Analysis FINANCIAL SECTOR OUTLOOK
Financial Analysis Cash Flow FINANCIAL SECTOR OUTLOOK (562)  775  958  (70) 637  689  680  265  Change in Cash Flow       ...
Dupont Analytics Financial Analysis EBT  T  Sales  Assets  ------- ------- 1  - ---- ------- ------- ROE  Acct  ROE  Sales...
Valuation Analysis  FINANCIAL SECTOR OUTLOOK 10.45 2.30 2.05 13.92 Financial Sector  ---- 2.5 1.23 17.4 S&P500 0.34 1.26 3...
Financial  sector  undervalued  compared to S&P500. Valuation  (based on mean reversion) FINANCIAL SECTOR OUTLOOK 2.77 12....
Price = present value (future stream of cash dividend) P 0  = D 1 /(k-g),  where, k= r f  + beta* risk premium = 1.17%+1.0...
S&P500 ADJ Finance M-Wtd FINANCIAL SECTOR OUTLOOK
P/B, P/S, P/E, ROE FINANCIAL SECTOR OUTLOOK
Equity risk premium FINANCIAL SECTOR OUTLOOK
ROE FINANCIAL SECTOR OUTLOOK
<ul><li>Financials Sector  - 20.64% </li></ul><ul><ul><li>Banks (7.61%) </li></ul></ul><ul><ul><li>Insurance (4.85%) </li>...
<ul><li>SIM  - 20.64% </li></ul><ul><ul><li>Banks (6.37%) * increase 4.09% </li></ul></ul><ul><ul><li>Insurance (4.55%) </...
Recommendation – in terms of valuation <ul><ul><li>Match SIM Portfolio weight with S&P  financials sector - 20.64%  </li><...
<ul><li>War / Terrorism </li></ul><ul><li>Poor Stock Market Performance </li></ul><ul><li>Consumer Confidence / Businesses...
QUESTIONS FINANCIAL SECTOR OUTLOOK
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  1. 1. FINANCIAL SECTOR OUTLOOK Sam Hawkins Sunghoon Kim Shade Okusanya 13 February, 2003
  2. 2. <ul><li>Financial Sector Overview </li></ul><ul><li>Business Analysis </li></ul><ul><li>Financial Analysis </li></ul><ul><li>Valuation Analysis </li></ul><ul><li>Recommendation </li></ul>Outline FINANCIAL SECTOR OUTLOOK
  3. 3. <ul><li>Key Highlights </li></ul><ul><li>Smallest % sector of S&P in 1965 </li></ul><ul><li>Largest % sector of S&P 500 today {20.64%} </li></ul><ul><li>Mkt. Cap. of $1,596B </li></ul><ul><li>Industry Groups </li></ul><ul><ul><li>Banks (29) </li></ul></ul><ul><ul><li>Insurance (25) </li></ul></ul><ul><ul><li>Diversified Financials (23) </li></ul></ul><ul><ul><li>Real Estate (4) </li></ul></ul>Financial Sector Overview FINANCIAL SECTOR OUTLOOK
  4. 4. Financial Sector Overview Industry Groups (% of Sector) FINANCIAL SECTOR OUTLOOK Banks 36% Consumer Finance 3% Diversified Fin. Services 35% Insurance Brokers 2% Life & Hlth. Insurance 5% Multi-line Insurance 10% Prop. & Casualty Insurance 7% REIT 2% 24% 38%
  5. 5. Largest Companies (IG/Mkt. Cap) Financial Sector Overview FINANCIAL SECTOR OUTLOOK 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 180.00 Equity Office EQ Resident Simon Prop. Group American Ins. Group All State Capital Marsh & McLennan Bank Of America Wachovia Corporation Bank One Corporation Citigroup Fannie Mae JP Morgan Chase Mkt. Capitalization ($B) 9.92 6.41 6.32 121.10 22.22 21.79 101.60 47.20 41.35 164.20 63.07 43.96 Real Estate Insurance Banks Diversified Financials
  6. 6. <ul><li>Banks {Mature/Cyclical} </li></ul><ul><li>Insurance {Mature/Defensive} </li></ul><ul><li>Diversified Financials {Mature/Cyclical} </li></ul><ul><li>Real Estate {Mature/Defensive} </li></ul>Business Analysis Life/Business Cycle Classification FINANCIAL SECTOR OUTLOOK
  7. 7. Business Analysis <ul><li>Outlook for Sector Drivers </li></ul><ul><ul><li>Normal Yield Curve - long term rates higher than short </li></ul></ul><ul><ul><li>Expansionary Fed Policy - currently in stage between the last Fed easing and 1 st Fed tightening (period averages approximately 12 months) </li></ul></ul><ul><ul><li>Rates Remain Near Historic Lows – Fed Funds 1.25% </li></ul></ul><ul><ul><li>Low Inflation – pressure from Energy sector, but stable overall </li></ul></ul><ul><ul><li>GDP – consensus for slow but healthy 3.25%–3.5% 2003 growth </li></ul></ul><ul><li>* All positive factors for economic recovery and stronger demand for financial products by business and consumer </li></ul>FINANCIAL SECTOR OUTLOOK
  8. 8. Business Analysis <ul><li>Demand Analysis </li></ul><ul><ul><li>Consumer Confidence (?) could dampen economic recovery if falters due to War possibilities, poor economic data, etc.. ** recently fell to 51.4 (above 50 considered positive, while less than 50 considered negative) </li></ul></ul><ul><ul><li>Improved Stock Market Returns (+) more IPO, M&A, and other financing activity; results in higher loan demand and fee income ( market averages 19% during 12 month period after Fed easing, but before Fed tightening </li></ul></ul><ul><ul><li>Demographics ( N ) % of population between 25-60 expected to decline 2% in 2003; Baby boomers to be replaced by “Echo Generation” </li></ul></ul>FINANCIAL SECTOR OUTLOOK
  9. 9. Business Analysis <ul><li>Supply Analysis </li></ul><ul><ul><li>Industry Consolidation (+) Fewer competitors especially in Banking </li></ul></ul><ul><ul><li>Technology & Innovation (+) able to provide better services at a lower costs </li></ul></ul><ul><ul><li>Continued Easing of Regulations (+) able to pursue new areas of growth opportunity </li></ul></ul>FINANCIAL SECTOR OUTLOOK
  10. 10. Business Analysis <ul><li>Profitability & Pricing </li></ul><ul><ul><li>Increased distribution channels such as the Internet, will allow fewer companies to compete in more markets (true for all industries in the sector ) </li></ul></ul><ul><ul><li>New growth areas will provide the greatest opportunity to generate higher sales and revenue streams: ie.. Banks offering insurance products and brokerage services </li></ul></ul><ul><ul><li>Outlook Next 12 months: </li></ul></ul><ul><ul><ul><li>Positive for Banks and Diversified Financial Services </li></ul></ul></ul><ul><ul><ul><li>Stable for Real Estate and Insurance </li></ul></ul></ul>FINANCIAL SECTOR OUTLOOK
  11. 11. <ul><li>Income Statement Analysis </li></ul><ul><li>Cash Flow Analysis </li></ul><ul><li>Dupont Analysis </li></ul><ul><li>Relative Comparison </li></ul>Financial Analysis FINANCIAL SECTOR OUTLOOK
  12. 12. <ul><li>High and stable operating margins </li></ul><ul><ul><li>99.02% in 2001 and 98.96% 09/2002 </li></ul></ul><ul><li>Slight decrease in net profit margin </li></ul><ul><ul><li>43.7% in 2001 to 41.12% as at 09/2002 </li></ul></ul><ul><li>High net profit margin relative to S&P though declined in 2002 </li></ul>Financial Analysis Income Statement FINANCIAL SECTOR OUTLOOK
  13. 13. Net Profit Margin Relative to S&P Financial Analysis FINANCIAL SECTOR OUTLOOK
  14. 14. Price/PE/EPS Relative to S&P Financial Analysis FINANCIAL SECTOR OUTLOOK
  15. 15. ROE/Dividend Yield Relative to S&P Financial Analysis FINANCIAL SECTOR OUTLOOK
  16. 16. Growth Rate Estimate Financial Analysis FINANCIAL SECTOR OUTLOOK
  17. 17. Financial Analysis Cash Flow FINANCIAL SECTOR OUTLOOK (562)  775 958 (70) 637 689 680 265 Change in Cash Flow                     (11) (17) (703) 134 129 66 (1,468) 117 Other Cash Flow   4,720 12,625 11,851 11,868 15,753 7,555 5,937 6,355 Net Cash from Financing   (5,271) (11,833) (10,190) (12,072) (15,245) (6,932) (3,789) (6,207) Free Cash Flow                   (10,025)   (14,285) (14,128) (15,914) (19,161) (9,488) (6,157) (8,511) Net Cash from Investing   4,756 2,452 3,938 3,842 3,916 2,556 2,368 2,304 Net Cash from Operations 09/2002 2001 2000 1999 1998 1997 1996 1995  
  18. 18. Dupont Analytics Financial Analysis EBT T Sales Assets ------- ------- 1 - ---- ------- ------- ROE Acct ROE Sales EBIT EBT Assets Equity Rpt% Adj % Adj % 2001 0.25 67.71 13.76 12.51 4.15 16.65 2000 0.28 66.60 13.99 17.01 3.19 20.21 1999 0.33 67.52 13.82 18.33 2.73 21.06 1998 0.28 67.42 13.41 15.22 3.51 18.73 1997 0.30 66.38 13.59 17.13 1.98 19.11 2002 13.33 10.87 41.25 43.70 9.84 6.72 MARGIN% EBIT INT TAX ASSET BURDEN BURDEN% TURN LEVERAGE EBT T Sales Assets ------- ------- 1 - ---- ------- ------- ROE Acct ROE Sales EBIT EBT Assets Equity Rpt% Adj % Adj % 2001 0.25 67.71 13.76 12.51 4.15 16.65 2000 0.28 66.60 13.99 17.01 3.19 20.21 1999 0.33 67.52 13.82 18.33 2.73 21.06 1998 0.28 67.42 13.41 15.22 3.51 18.73 1997 0.30 66.38 13.59 17.13 1.98 19.11 2002 13.33 10.87 41.25 43.70 9.84 6.72 MARGIN% EBIT INT TAX ASSET BURDEN BURDEN% TURN LEVERAGE FINANCIAL SECTOR OUTLOOK
  19. 19. Valuation Analysis FINANCIAL SECTOR OUTLOOK 10.45 2.30 2.05 13.92 Financial Sector ---- 2.5 1.23 17.4 S&P500 0.34 1.26 3.15 10.43 Real Estate 4.87 2.26 1.87 14.88 Insurance 7.82 2.36 1.72 14.03 Diversifed Financials 7.41 2.30 2.46 13.33 Banks Weight(%) P/B P/S P/E
  20. 20. Financial sector undervalued compared to S&P500. Valuation (based on mean reversion) FINANCIAL SECTOR OUTLOOK 2.77 12.5 16.93 1.9 Current 1.58 17.4 1.23 2.5 S&P500 15.5 9.1 21.4 PE 1.90 19.35 2.5 Mean 0.99 6.42 1.5 Lowest 2.77 28.21 3.4 Highest EPS P/S P/B Factors
  21. 21. Price = present value (future stream of cash dividend) P 0 = D 1 /(k-g), where, k= r f + beta* risk premium = 1.17%+1.05 * 6.24% = 7.722% D 1 =0.88(1+g) = 0.88(1+0.04582) = $0.9203 ($Mil) g=ROE* (payout ratio)=15.8%*0.29= 4.582% P 0 =0.9203/(0.07722-0.04582)=0.9203/0.0314= $29.309 Intrinsic value : $27,832($Mil) (# of share*P 0 = $29.309 * 949.6 (Mil) Market Value: $32,884 ($Mil)……. Overvalued compared to Intrinsic value Intrinsic value (based on current price) FINANCIAL SECTOR OUTLOOK
  22. 22. S&P500 ADJ Finance M-Wtd FINANCIAL SECTOR OUTLOOK
  23. 23. P/B, P/S, P/E, ROE FINANCIAL SECTOR OUTLOOK
  24. 24. Equity risk premium FINANCIAL SECTOR OUTLOOK
  25. 25. ROE FINANCIAL SECTOR OUTLOOK
  26. 26. <ul><li>Financials Sector - 20.64% </li></ul><ul><ul><li>Banks (7.61%) </li></ul></ul><ul><ul><li>Insurance (4.85%) </li></ul></ul><ul><ul><li>Diversified Financial (7.84 %) </li></ul></ul><ul><ul><li>Real Estate (0.34%) </li></ul></ul><ul><li>SIM - 23.38% </li></ul><ul><ul><li>Banks (2.28%) </li></ul></ul><ul><ul><li>Insurance (4.55%) </li></ul></ul><ul><ul><li>Diversified Financial (14.67%) </li></ul></ul><ul><ul><li>Real Estate </li></ul></ul><ul><ul><li>Other (1.88%) </li></ul></ul>Recommendation – Current Weights S&P 500 FINANCIAL SECTOR OUTLOOK
  27. 27. <ul><li>SIM - 20.64% </li></ul><ul><ul><li>Banks (6.37%) * increase 4.09% </li></ul></ul><ul><ul><li>Insurance (4.55%) </li></ul></ul><ul><ul><li>Diversified Financial (7.84%) * reduced 6.83% </li></ul></ul><ul><ul><li>Real Estate </li></ul></ul><ul><ul><li>Other (1.88%) </li></ul></ul>Recommendation – Proposed Weights FINANCIAL SECTOR OUTLOOK
  28. 28. Recommendation – in terms of valuation <ul><ul><li>Match SIM Portfolio weight with S&P financials sector - 20.64% </li></ul></ul><ul><ul><li>Intrinsic Value suggest Financial Sector overvalued. </li></ul></ul>FINANCIAL SECTOR OUTLOOK
  29. 29. <ul><li>War / Terrorism </li></ul><ul><li>Poor Stock Market Performance </li></ul><ul><li>Consumer Confidence / Businesses Expectations </li></ul>Recommendation Major Risks FINANCIAL SECTOR OUTLOOK
  30. 30. QUESTIONS FINANCIAL SECTOR OUTLOOK
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