student investment management deven suthar · sector performance vs. s&p 500 . 9 sector...

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Financial Sector Student Investment Management

Deven Suthar

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• Financial Sector Overview • Business Analysis • Economic Analysis • Financial Analysis • Valuation • Recommendation • Questions

Table of Contents

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Largest sector in the S&P 500, $6.59T

Financial Sector Overview

Size of the Sector

4

SIM Fund financial holdings underweight S&P 500


Student Investment Management Fund

5

Sector consists of eight industries


Industries within the Sector

43.4%

17.2% 15.7%

10.0% 8.4%

2.6% 1.4% 1.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

Banks Insurance REITs CapitalMarkets

DiversifiedFinancialServices

ConsumerFinance

Real EstateManagement

Thrifts &MortgageFinance

Market Cap ($B) % of Total

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Largest Companies in the Sector

-

5,000

10,000

15,000

20,000

25,000

0

50

100

150

200

250

Prof

it ($

000

's)

Mar

ket C

ap ($

B)

Market Cap Profit

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Sector performance past 3 months


Sector Performance vs. S&P 500

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Year-to-date sector performance



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Sector performance past 5 years • Financial sector has underperformed the S&P 500 over

the past 10 years



Sectors YTD 1 Year 3 Year 5 Year 10 YearS&P 500 ® Index 1.3% -1.2% 27.3% 63.4% 65.5%Utilities 16.7% 19.5% 34.2% 54.1% 57.5%Telecommunication Services 16.2% 13.2% 8.7% 34.7% 33.9%Energy 11.7% -11.1% -14.6% -6.5% 26.6%Materials 8.4% -5.4% 18.1% 29.5% 56.9%Consumer Staples 5.9% 11.4% 31.3% 71.6% 124.7%Industrials 4.5% 1.5% 29.4% 58.4% 58.9%Consumer Discretionary -0.2% 2.1% 39.1% 108.0% 137.0%Information Technology -1.4% 0.0% 42.1% 82.0% 130.2%Health Care -2.8% -6.1% 44.5% 101.7% 130.2%Financials -5.1% -9.3% 16.2% 53.5% -28.6%

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Economic cycle for financial sector – Mid Stage • Inflation pressure remains low, interest rates also

remain low

Business Analysis

Economic Cycle Analysis

- Growth +

EARLY MID LATE RECESSION EARLY MID LATE

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Business Analysis

Porters 5 Forces Analysis

Power of Suppliers High Federal Reserve has high influence over the financial industry through monetary policy and control of the money supply

Rivalry High Undifferentiated product and low switching costs leads to high rivalry

Threat of Substitutes Med Undifferentiated products but lack of substitutes to existing financial instruments

Power of Buyers Low/Med Low switching costs and low brand loyalty

Threat of New Entry Low High regulation and capital requirements force strong barriers to new entrants

Overall an undifferentiated product along with high external factors leads to an unattractive sector

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Lowest interest rates 5000 years • 2/3 of Citigroup’s revenues in 2015 generated from

interest revenue

Economic Analysis

Interest Rates

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Positive but inconsistent and shrinking GDP growth rate

Economic Analysis

US GDP

-2.00%

0.00%

2.00%

4.00%

6.00%

13 - Q1

13 - Q2

13 - Q3

13 - Q4

14 - Q1

14 - Q2

14 - Q3

14- Q4

15 - Q1

15 - Q2

15 - Q3

15 - Q4

16 - Q1

US Quarterly GDP Growth Rate

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June, 2016 Federal Open Market Committee (FOMC) meeting notes

• Growth in economic activity has picked up • Housing sector has continued to improve • Inflation continues to run below the committee’s 2

percent long run objective • Pace of improvements in the labor markets has slowed • Maintain the target range for the fed funds rate at .25 to

.50 percent (rate which banks charge for overnight loans)

• Fed discount rate remains at 1 percent (rate at which banks borrow from Federal Reserve)

Economic Analysis

Federal Reserve Notes

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Uncertainty affecting global markets • Lowest China GDP growth rate since 1999 • European debt crisis • Potential exits in the Eurozone • South American recession (especially Brazil) • Slowdown in M&A activity • Middle East conflicts

Economic Analysis

Global Uncertainty and Slowdown

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Financial Analysis

Yearly Sales

192.5 188.5

138.8

172.6

141.4

129.6 138.3 137.8

141.5 143.3 141.7

100

125

150

175

200

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sales numbers have not returned to pre-financial crisis levels

• Sales growth has diminished since 2012 • Sales have been steady since 2012

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Margins have been improving since the financial collapse • Higher margins then before the financial collapse

Financial Analysis

Improving Margins

11.8%

-11.4%

7.6%

15.9% 15.6% 15.8%

20.5% 20.4% 22.3% 21.3%

8.9%

-17.9%

4.8%

10.4% 11.5% 11.3% 14.3% 14.0%

15.9% 15.5%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Operating Margin Profit Margin

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Financial earnings increasing at a slower rate

• Flat earnings growth for 2015. 2016 YTD earnings growth at -5% • Lower sales but improving margins has lead to 2007 level earnings

Financial Analysis

Earnings and Earnings Growth Rate

-200.0%

-150.0%

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

-40

-20

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014 2015

S&P 500 Earnings Financial EarningsS&P 500 Earnings Growth Financial Earnings Growth

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ROE recovered substantially since 2008 • Improvements stagnant since 2013

Financial Analysis

Return on Equity

9.0%

-15.7%

1.4%

7.3% 7.5% 7.5% 9.0% 8.5% 9.5% 9.0%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

ROE

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Valuation

Sector Valuation

Financial Sector vs. S&P 500 - Relative High Low Median Current

P/E 50.490 0.973 0.843 0.773 P/B 0.688 0.366 0.510 0.455 P/S 1.390 1.000 1.285 1.166 P/EBITDA 0.839 1.639 1.131 0.750

Over the past 10 years Financial Sector has been show what cheaper then S&P 500

• One exception is 2008 and 2009 when Earnings were negative • On a relative basis the financial sector is cheaper with the

exception of P/S Financial Sector vs. S&P 500 - Absolute Basis

High Low Median Current S&P 500 Financial S&P 500 Financial S&P 500 Financial S&P 500 Financial P/E 24.48 1236.00 12.10 11.77 16.71 14.09 19.32 14.93 P/BV 2.98 2.05 1.64 0.60 2.41 1.23 2.79 1.27 P/S 1.87 2.60 0.74 0.74 1.44 1.85 1.87 2.18 Price/EBITDA 10.87 9.12 4.40 7.21 7.33 8.29 10.86 8.15

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Current SIM Fund valuation • Each holding relatively inexpensive compared to sector • Historically big banks have traded close to 1x BV,

Citigroup is currently 40% below historical BV

Valuation

SIM Valuation

Company Ticker % of Portfolio Trailing PE Forward PE Trailing EPS Forward EPS P/S P/BV

Wells Fargo WFC 4.27% 11.39 11.43 4.09 4.08 2.6 1.37 Goldman Sachs GS 4.08% 9.89 10.15 14.72 14.35 1.8 0.80 American Express AXP 2.85% 11.6 11.11 5.33 5.57 1.8 2.84 Citigroup C 4.08% 7.91 8.99 5.37 4.73 1.5 0.59 S&P 500 SPX N/A 19.16 17.7 108.1 117.65 1.85 2.77 Fin Sector S5FINL N/A 14.76 13.92 20.69 21.94 2.15 1.25

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Hold current 3.5% underweight position to S&P 500

• Remain fairly conservative on the key factors affecting the financial sector

• Continued delay in fed funds rate increase • Continued global risks weighing on sector

Switch from underweight to makeweight following clear path to interest rate increases

Recommendations

student investment management deven suthar · sector performance vs. s&p 500 . 9 sector...

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