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Financials

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  • -approximately 550 million shares outstanding (didn’t find a reference about issuing new shares –given current economic conditions, not likely) -operate in 9 of the top 50 counties in median income -anticipate growth through mortgages and mortgage backed securities one to four family homes make up 98% of primary mortgages Secondary mortgages represent 0.89% of portfolio Have allowance for loan losses of $49 million (out of 29.4B that ain’t bad) Exhaustive evaluation of securities (such as running full credit checks on 10-20% of all loans in the package) Only accept terms that they would dole out in a primary mortgage Non-performing loans were 218 million in 2008 Assets of 48 billion –so safe from the required stress test of 100b or more
  • Mortgage backed securities only from gov’ts—non from private originators -non unionized workforce—about 1500 employees
  • Its underwriting guidelines are very strict with a maximum loan-to-value (LTV) of 90% on smaller loans, and then decreasing to a 60% LTV on loans of $3 million. For example a loan of 600,000 could only be taken out on a house worth $666,666 (LTV of 90%) and the higher the loan, the lower the LTV -  thus reducing the risk to the bank. -also very strict approval policies (under 600,000 loan, two officers have to approve, over 600,000 two VP’s have to approve
  • -No negative EPS in any quarter since IPO in 2003 -announced quarterly dividend increase in 4Q08
  • Class, I am sorry for the delay. The sector decided to change things up at yesterday and didn't want to give you the wrong information. We will be selling our entire stake in Goldman Sachs and buying Hudson City Bancorp (HCBK). Since our sector will be further underweighting, we will be selling off 68 bps of Berkshire Hathaway, buying 60 less basis points than we possibly could with the proceeds from the Goldman sale and selling off 22 bps of Wells Fargo. Thank you
  • Transcript

    • 1. Financial Stocks Kate Farley Ryan O’Connor
    • 2. Agenda
      • Brief overview of Sector
      • Business Analysis
      • Reasons for our stock pick
      • Financials and Valuation
      • Recommendation
    • 3. Financial Sector
      • Worst performing sector of the S&P 500
        • Down over 41% YTD* compared to –14.75% of index
      • Uncertainty regarding Gov’t bailout
        • Potential bank nationalization
        • Increased stake in Citigroup and AIG
      • Currently underweighted by 113bps
      • Will increase underweighting by 150bps
      *As of 2/23/09
    • 4.  
    • 5. Who is HCBK?
      • Hudson City Bancorp Inc.
      • Regional Holding Company based out of New Jersey
      • Traded on the NASDAQ
      • Currently part of S&P 500 Index
      • Weathered the storm better than most
    • 6. Business Analysis of Stocks
      • Goldman Sachs
        • 2008 10-K is 731 pages
        • Bank holding company and global investment banking, security, and investment management firm
        • Investment Banking, trading and principal investments and asset management and securities services are main segments
        • Current Market cap of $37B
      • Hudson City Bankcorp
        • Holding company for only Hudson City Banking
        • 127 banks in NJ, NY, and CT
        • Sources of revenue: interest on mortgages, MB securities and interest and dividends on investments
        • Sources of funds: deposits, borrowings, payments on mortgages, maturities on investments
        • Current Market cap of $5 billion
    • 7. Why HCBK?
      • Never underwritten subprime, negative amortization or Option ARM loans
      • Strict Maximum Loan-to-Value
      • 0.43% non-performing assets
      • Refused TARP money in November
      • Kramer recommended staying away ( Jan 26, 2009)
      • Named Best-Managed Bank in America Two Years in a Row- Forbes Magazine
      http://community.investopedia.com/news/IA/2009/Hudson-City-Flourishes-During-Downturn-HCBK0211.aspx?partner=YahooSA
    • 8. Loan to Value Maximums 60% $2,500,100-$3,000,000 65% $2,000,100-$2,500,000 70% $1,500,100-$2,000,000 75% $1,000,100-$1,500,000 80% $ 600,100-$1,000,000 90% Up to $600,000 Max LTV Max Loan Amounts
    • 9. Recent Earnings and Dividends * Estimates from finance.yahoo.com
    • 10. Hudson City Valuation
    • 11. Hudson City DCF Model
      • Used average expenses percentage over past 3 years
      • Using 14.5% discount rate due to financials cyclical nature
      • Assuming no change in number of shares outstanding
      • Terminal Growth Rate of 4%
      • Assuming constant margins and tax rates based on historic figures
    • 12. Valuation and Price Targets
      • DCF approximately $22 with 123% upside
        • Terminal Discount Rate of 14.5%
        • Terminal FCF Rate of 4.0%
      • Ratio Analysis
        • Gave us price target between $9 and $23 depending ratio
        • P/B was $21.53
      • Our price target is $18.00 (77% upside)
    • 13. Goldman Sachs Valuation
    • 14. Reasons to dump GS
      • 2 students dropped this class after being assigned GS
      • ROE (ttm) 4.3%
      • Sales growth predicted to drop 21% in the next quarter and 19% in 3Q09*
      • Took $10 billion in TARP funds and now has to dance to the Gov’t tune
        • In order to repay has to raise the money in a government approved equity offering of similar amount
      • Price Target of 97.00
      • Berkshire Hathaway has a $5 billion investment
      * finance.yahoo.com
    • 15. New SIM Financials Portfolio Name Symbol % of SIM Financials Berkshire Hathaway Inc. BRK.A 47.2% Wells Fargo WFC 11.7% Hudson City Bancorp HCBK 41.1%
    • 16. Recommendations
      • Sell entire GS position (~400bps)
      • Purchase 340 bps of HCBK
        • Consensus growth rate higher than S&P 500
        • Undervalued compared to financials and itself
        • No exposure to Real Estate
      • Sell off 68 bps of BRKA and 22 of WFC
      • Should bring us to underweighting of 263 bps
    • 17.  
    • 18. Off Balance Sheet Commitments                               107,136 $     16,925 $     17,311 $     1,081,111 $     1,222,483 $   Total     107,136       16,925       17,311       8,404       149,776     Operating leases   —       —       —       516,000       516,000     Mortgage-backed security purchases   —       —       —       219,117       219,117     Mortgage loan purchases   — $     — $     — $     337,590 $     337,590 $   Mortgage loan originations                                             (In thousands)       Five Years     Five Years     Three Years     One Year     Total   Contractual Obligation   More Than     Three Years to     One Year to     Less Than               Payments Due By Period  
    • 19. Not Selling all of WFC…
      • DCF still gives about 25% upside with more conservative estimates than other analysts
      • Ratio valuation gives target in high teens/low twenties
      • EPS of about 28 cents in first quarter expected
      • Still have dividend
      • Lowest weight in ratio

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