Financial Services Industry Profitability: Moderate Level Profitability

1
Financial Services Industry ProfitabilityModerat
e Level Profitability

• Tiburon Research
• September 17, 2014

2
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

3
Financial Services Industry Profitability Have
Evolved through Three Phases, Including their
Early, Middle, Recent Phases
Financial Services Industry Profitability History
Financial Services Industry Profitability Emerged
Financial Services Industry Profitability Today
Early Phase
Middle Phase
Recent Phase
Approximate Dates
1956 - 1982
1999 - 2014
1920 - 1955
2014
1983 - 1998

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Key Steps

• --

• --

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Source 3/29/11 Advisor Perspectives 11/25/02
American Banker 4/15/02 Fortune 4/12/02 Wall
Street Journal 12/01 Money 11/15/01 Schwab
Conference Call (Lehman) Tiburon Research
Analysis
4
Financial Services Firms Strategic Initiatives
Financial Services Firms Strategic Initiatives

• CEO focus better integration interconnection
  in critical functions such as risk management,
  compliance, finance, technology
• --

• --

Source Tiburon Research Analysis
3
5
Tiburon CEO Summit XXVI Attendees Said that a New
Product Launch or Investment Strategy is the Top
Strategic Initiative for their Firms in 2014
Tiburon CEO Summit XXVI Attendees By Top
Strategic Initiative in 2014
Source 3/10/14 Tiburon CEO Summit XXVI Content
Survey Data Tiburon Research Analysis
6
Several Attendees Noted that they Intend to Use
Technology to Enhance their Firms Efficiency
Tiburon CEO Summit XXVI Content Survey
Feedback Top Strategic Initiative in 2014
Efficiency improvements using technology

• Scott Curtis
• Raymond James Financial Services
• Tiburon CEO Summit XXVI

Source 3/5/14 Tiburon CEO Summit XXVI Content
Survey (Curtis) Tiburon Research Analysis
7
Several Attendees Noted that they Intend to
Improve their Firms Client Experience
Tiburon CEO Summit XXVI Content Survey
Feedback Top Strategic Initiative in 2014
Improving the client experience

• Kent Christian
• Wells Fargo Advisors Financial Network
• Tiburon CEO Summit XXVI

Source 3/5/14 Tiburon CEO Summit XXVI Content
Survey (Christian) Tiburon Research Analysis
8
Consumer Gains were Largest in the Standard
Poors 500s Consumer Discretionary Sector at 324
Consumer Gains?
Consumer Gains By Standard Poors 500 Market
Sector
Need SP logo
Time period?
Source 3/8/14 Wall Street Journal (FactSet)
Tiburon Research Analysis
9
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

10
Financial Services Profitability can be Analyzed
Many Ways
Comments

• --

Source 4/12/02 Wall Street Journal 12/01
Money 11/15/01 Schwab Conference Call (Lehman)
Tiburon Research Analysis
11
The Financial Services Industry Profitability can
Specifically be Analyzed by Individual Segments,
Including Retail Banks, Insurance Companies,
Brokerage Firms, and Investment Management Firms
Financial Services Industry Profitability Segments
Financial Services Industry Profitability Segments
Retail Banks
Brokerage Firms
Investment Management Firms
Insurance Companies
Source Tiburon Research Analysis
12
Financial Services Industry has 2.7 Trillion
Market Capitalization, With Retail Banks
Insurance Companies Accounting for 2.4 Trillion
New York Stock Exchange market capitalization
13.4 trillion
Financial Services Industry Market
Capitalization ( Trillion)
Financial services 20 of SP 500 market
capitalization
Market capitalization 13.4 trillion x 20
Ratio used retail banks (50), insurance
companies (40), brokerage firms (9), asset
managers (1)
Another source said 59 trillion
Source 4/1/11 Yahoo Finance Web Site 4/1/11
Lightyear Capital Web Site 4/1/11 Wikipedia Web
Site Tiburon Research Analysis
13
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

14
Financial Services Industry Profitability can be
Measured Many Ways
Comments

• --

Source 4/12/02 Wall Street Journal 12/01
Money 11/15/01 Schwab Conference Call (Lehman)
Tiburon Research Analysis
15
The Financial Services Industry Profitability can
Specifically be Measured by Revenues Net Profits
Financial Services Industry Profitability
Indicators
Source Tiburon Research Analysis
16
The Financial Services Industry Generates 13.1
Trillion Revenues, Down 10 Since 2006
Needs update
Financial Services Industry Revenues (
Trillions)
65.7 trillion (total household assets) x 20
Copied from Future of Advice
Source Tiburon Research Analysis
17
The Financial Services Industry Earns 3.9
Trillion, Down 10 Since 2006
Needs update
Financial Services Industry Net Profits (
Billions)
Revenues x 30
426.5 billion in 4Q/10
Copied from Future of Advice
Source 3/18/11 Wall Street Journal (US
Department of Commerce) Tiburon Research
Analysis
18
Financial Services Industry Earnings Have
Traditionally Averaged About 25-35 of All
Corporate Profits, with 2010 Results Back in
Familiar Territory
Needs update
Financial Services Industry Net Profits As a
Percentage of Corporate Net Profits
4Q/08
Source 4/13/11 Hellman Friedman Presentation
(Thorpe) 3/18/11 Wall Street Journal (US
Department of Commerce) Tiburon Research
Analysis
19
The Finance Sector Accounted for 26 of US
Corporate Profits in 2013
US Corporate Profits Share from the Finance Sector
Source 9/13 Business Week Tiburon Research
Analysis
20
Financials Make Up 17 of the Dow Jones
Industrial Average
Down Jones Industrial Average By Sector
Source 9/11/13 Wall Street Journal Tiburon
Research Analysis
21
Financial Services Firms Stock Prices, Valuation
Levels, Market Capitalizations
Rich Repetto (Sandler ONeil)
Financial Services Firms Stock Prices, Valuation
Levels, Market Capitalizations

• Financial services firms are
• 22 of the DJIA

• FIG stocks are up
• Envestnet hit 1.0 billion market capitalization
• Huge multiples on Fin Tech firms
• ENV over 400!

Source Tiburon Research Analysis
20
22
The Standard Poors 500 Consumer Discretionary
Sector Increased by 320 Since March 2009
Standard Poors 500 Performance By
Sector (March 2009 through March 2014)
Source 3/13/14 Financial Times (Bloomberg)
(Thomson Reuters Datastream) Tiburon Research
Analysis
23
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

24
The Leading Financial Services Institutions in
Terms of Profitability can be Defined Many Ways
Comments

• --

Source Tiburon Research Analysis
25
The Leading Financial Services Institutions in
Terms of Profitability can be Specifically be
Defined by
Financial Services Industry Indicators
Financial Services Industry Indicators
--
--
--
--
Source Tiburon Research Analysis
26
Bank of America Citigroup Have Large Market
Capitalization But Relatively Low Price-to-Book
Value Ratios
Considered deep value
Market Capitalization Comparison
Large
Bank of America Corporation
JP Morgan Chase
Wells Fargo Corporation
Citigroup
UBS
American Express
Morgan Stanley
State Street Corporation
Market Capitalization
Northern Trust Corporation
Raymond James Financial
Small
Low
High
Price-to-Book Value Ratio
Source 3/29/11 Advisor Perspective Tiburon
Research Analysis
27
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

28
Financial Services Industry Profitability can be
Segmented Many Ways
Comments

• --

Source Tiburon Research Analysis
29
Financial Services Industry Profitability can
Specifically be Segmented to Include Retail Bank
Profitability, Insurance Company Profitability,
Brokerage Firm Profitability, Investment
Management Firm Profitability
Financial Services Industry Profitability Market
Profitability
Financial Services Industry Profitability Market
Profitability
Retail Bank Profitability
Brokerage Firm Profitability
Investment Management Firm Profitability
Insurance Company Profitability
Source Tiburon Research Analysis
30
Retail Banks Have the Highest Revenues in the
Financial Services Industry
Needs data
Financial Services Industry Revenues By
Segment ( Billions)
Source Tiburon Research Analysis
31
Retail Banks Have the Highest Earnings in the
Financial Services Industry
Needs data
Financial Services Industry Earnings By
Segment ( Billions)
Source Tiburon Research Analysis
32
Investment Management Firms Have the Highest
Return on Earnings at 25.7, with Insurance
Companies Next at 10.7
Average
Financial Services Industry Return on
Earnings By Segment
Return on equity
Source 4/6/11 Yahoo Finance Web Site Tiburon
Research Analysis
33
Brokerage Firms Investment Management Firms
Have the Largest Net Profit Margins at 8.6
8.3 Respectively
Average
Financial Services Industry Net Profit Margin By
Segment
Source 4/6/11 Yahoo Finance Web Site Tiburon
Research Analysis
34
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

35
Retail Banks are Profitably
Comments

• --

Source Tiburon Research Analysis
36
Retail Bank Profitability Have a Number of Key
Issues, Including Macro Economic Pressure and
Segment Competition
Retail Bank Profitability Key Issues
Retail Bank Profitability Key Issues
Marco Economic Pressures
Segment Competition
Source Tiburon Research Analysis
37
Retail Bank Stocks are Sensitive to Macro
Economic Pressures
Bank stocks fell 12 in 2002 compared to 23 for
the overall market
Comments

• --

Source 9/1/03 New York Times 3/2/03 Fortune
Tiburon Research Analysis
38
Retail Bank Stocks Have Been Steady for a Number
of Reasons, Including Falling Interest Rates,
Surging Deposit Growth, Booming Mortgage Loan
Markets
Retail Banks Valuations Reasons for Steadiness
Booming Mortgage Loan Markets
Falling Interest Rates
Surging Deposit Growth

• --

• --

• --

Source 9/1/03 New York Times 3/2/03 Fortune
Tiburon Research Analysis
39
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

40
Insurance Companies are Profitable
Comments

• --

Source Tiburon Research Analysis
41
Insurance Company Profitability Have a Number of
Key Issues
Insurance Company Profitability Key Issues
Insurance Company Profitability Key Issues
--
--
Source Tiburon Research Analysis
42
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

43
Brokerage Firms are Profitable
Comments

• --

Source Tiburon Research Analysis
44
Brokerage Firm Profitability Has a Number of Key
Issues
Brokerage Firm Profitability Key Issues
Brokerage Firm Profitability Key Issues
--
--
Source Tiburon Research Analysis
45
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

46
Investment Management Firms are Profitable
Comments

• --

Source Tiburon Research Analysis
47
Investment Management Firms Profitability Has a
Number of Key Issues
Investment Management Firm Profitability Key
Issues
Investment Management Firm Profitability Key
Issues
--
--
Source Tiburon Research Analysis
48
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

49
Financial Services Industry Profitability Future
Predictions Include Decrease in Retail Bank
Insurance Company Profitability Increase in
Brokerage Firm Investment Management
Profitability
Financial Services Industry Profitability Future
Predictions
Source Tiburon Research Analysis
48
50
The Fixed Income, Currencies, Commodities
Business Represents Up to One-Third of the Net
Profits of Some Investment Banks, Including
Goldman Sachs Group
Tiburon CEO Summit XXV Page
Investment Banks Net Profits Share from Fixed
Income, Currencies, Commodities Businesses
Source 9/24/13 Financial Times Tiburon Research
Analysis
51
Almost All Investment Banks are Realizing Lower
Revenues from their Fixed Income, Currencies,
Commodities Businesses, Including at Citigroup
and Morgan Stanley, which Each Posted a 21
Decline
Tiburon CEO Summit XXV Page
Investment Banks Fixed Income, Currencies,
Commodities Businesses Quarterly Revenue Change
Citigroup
Morgan Stanley
Bank of America Corporation
JP Morgan Chase Company
Source 9/25/13 Wall Street Journal Tiburon
Research Analysis
52
Wealth Management Fees Represent a Larger Portion
of Revenue in 2012 at 11, Almost Double that of
2008
Tiburon CEO Summit XXV Page
Financial Services Firm Revenues Share from
Wealth Management
Asset and/or wealth management?
Source 10/1/13 CNN Money.Com Web Site Tiburon
Research Analysis
53
Morgan Stanleys Revenue Sources Shifted After
the Financial Crisis with a Reduction in
Investment Banking Trading from 70 to 50 of
its Revenues, While Wealth Asset Management
Filled the Gap
2013 data? 41, 41, 12?
Morgan Stanley Revenues By Business
Other Businesses
Wealth Asset Management
Investment Banking Trading
Source 2/25/14 Morgan Stanley 10Q Report
9/10/13 Wall Street Journal Tiburon Research
Analysis
54
Role of Wealth Asset Management
Tiburon CEO Summit XXV Page
Role of Wealth Asset Management
Move up to chapter one?
Fee-based products, especially wealth management,
remain a focus for the big banks

• The history
• Asset wealth management account for relatively
  small shares of revenues and net profits of most
  large financial services firms

• The news
• FICC down
• Asset wealth management up

Source 10/1/13 CNN Money.Com Web Site 9/25/13
Wall Street Journal 9/24/13 Financial Times
9/10/13 Wall Street Journal Tiburon Research
Analysis
53
55
Tiburon CEO Summit XXVI Attendees Said that the
Importance of Asset Wealth Management to
Financial Services Firms will Increase Over the
Next Five Years
Tiburon CEO Summit XXVI Attendees By Importance
of Asset Wealth Management to Financial
Services Firms Over Next Five Years
Source 3/23/14 Tiburon CEO Summit XXVI Content
Survey Data Tiburon Research Analysis
56
Tiburon CEO Summit XXVI Attendees Said that Big
Banks Will Not Divest Asset Wealth Management
Businesses in the Next Downturn
Tiburon CEO Summit XXVI Attendees By View Retail
Banks Strategy in Next Market Downturn
Source 3/30/14 Tiburon CEO Summit XXVI Content
Survey Data Tiburon Research Analysis
57
Several Tiburon CEO Summit XXVI Attendees
Commented that Banks will Divest Non-Core
Businesses in the Next Downturn
Tiburon CEO Summit XXVI Content Survey
Feedback View Retail Banks Strategy in Next
Market Downturn
Yes, banks will divest asset wealth management
businesses in the next downturn. Those are
considered non-core and thus will be the first to
go

• Craig Wietz
• First Rate Investment Systems
• Tiburon CEO Summit XXVI

Source 3/30/14 Tiburon CEO Summit XXVI Content
Survey (Wietz) Tiburon Research Analysis
58
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

59
Retail Bank Profitability is Likely to Decline
Comments

• --

Source Tiburon Research Analysis
58
60
Outline

• Evolution of Financial Services Industry
  Profitability
• Market History
• Market Definition
• Key Valuation Measures
• Leading Financial Services Industry Profitability
• Market Segmentation
• Retail Bank Profitability
• Insurance Company Profitability
• Brokerage Firm Profitability
• Investment Management Firm Profitability
• Financial Services Industry Profitability Future
  Predictions
• Decrease in Retail Bank Insurance Company
  Profitability
• Increase in Brokerage Firm Investment
  Management Profitability

61
Brokerage Investment Management Firm
Profitability is Likely to Increase
Comments

• --

Source Tiburon Research Analysis
60
62
Trust Banks Share Buybacks are Expected to be 30
through March 2015
Expected Share Buybacks By Bank Type (Through
March 2015)
Source 3/17/14 Wall Street Journal (Goldman
Sachs Group) Tiburon Research Analysis
63
Trust Banks Credit Card Firms Earnings per
Share are Expected to be 5 through March 2015
Earnings per Share By Bank Type (Through March
2015)
Source 3/17/14 Wall Street Journal (Goldman
Sachs Group) Tiburon Research Analysis
64
FIG Profitability
FIG Profitability

• 8.3 ROE
• Up moderately

• Depends on interest rates
• 26 of corporate profits

Source 9/24/13 Commonwealth Financial Network
Email (Rooney) 9/24/13 Tiburon CEO Summit XXV
Content Survey Data 9/14/13 The Economist 9/13
Business Week Tiburon Research Analysis
63
65

Tiburon CEO Summit XXV Attendees Anticipate that
Financial Services Firms Profitability Will
Increase Over the Next Five Years
Financial Services Firms Profitability Over Next
Five Years By Tiburon CEO Summit XXV Attendee Vote
Source 9/24/13 Tiburon CEO Summit XXV Content
Survey Data Tiburon Research Analysis
66
Some Attendees Believe that Financial Services
Firms Profitability Over the Next Five Years is
Dependent on Short-Term Interest Rates
Financial Services Firms Profitability Over Next
Five Years
90 depends on if or when short-term rates go
up

• John Rooney
• Commonwealth Financial Network
• Tiburon CEO Summit XXV

Source 9/24/13 Commonwealth Financial Network
Email (Rooney) Tiburon Research Analysis
67
Role of Wealth Asset Management
Role of Wealth Asset Management

• The history
• Asset wealth management account for relatively
  small shares of revenues and net profits of most
  large financial services firms

• The news
• FICC down
• Asset wealth management up

Source 10/1/13 CNN Money.Com Web Site 9/25/13
Wall Street Journal 9/24/13 Financial Times
9/10/13 Wall Street Journal Tiburon Research
Analysis
66
68
Asset Management Fees Represent a Larger Portion
of Revenue in 2012 at 11, Almost Double that of
2008
Financial Services Firm Revenues Share from
Wealth Management
Source 10/1/13 CNN Money.Com Web Site Tiburon
Research Analysis
69
Tiburon Strategic Advisors
Comments

• Focus on corporate-level strategy
• Serve senior executives only at financial
  services companies
• Key services market seminars, market research,
  strategy consulting
• Served over 400 corporate clients and completed
  over 1,700 projects since 1998
• Host semi-annual CEO Summits, offer free weekly
  research releases, and offer free business
  benchmarking tools for all types of advisors
• Chip Roame background
• McKinsey Company
• Charles Schwab Company
• Tiburon since 1998

Source Tiburon Research Analysis
68