Financials

1
Financials

• David Kaplan, Nikhil Ketkar, Jonathan Khoury,
  Steve Kuljko

2
Agenda

• Sector Analysis
• Economic Analysis
• Financial Analysis
• Valuation
• Recommendations

3
SIM v. SP 500 Weightings
Sector SP 500 Weight SIM Weight /-
Consumer Discretionary 10.11 9.53 -0.58
Consumer Staples 11.26 11.77 0.51
Energy 10.88 10.10 -0.78
Financials 16.50 11.93 -4.57
Health Care 12.15 15.27 3.11
Industrials 10.50 13.03 2.53
Information Technology 18.87 19.87 1.00
Materials 3.48 1.80 -1.67
Telecommunications 2.81 3.62 0.82
Utilities 3.44 1.88 -1.57
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Returns by sector (as of 3/31/2010)
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Comparison of Returns - as of April 26, 2010
Time period SP 500 Financial Sector
2 weeks -0.31 -2.62
1 month 2.06 0.77
3 months 8.49 10.72
6 months 11.97 11.17
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Sector Composition

• SIM Holdings

Market Cap 6.8 T

• Key Industries

• Goldman Sachs Group (GS) 4.97
• Hudson City Bancorp (HCBK) 2.50
• JP Morgan Chase (JPM) 1.74
• Progressive Corp (PGR) 2.73

• Life Insurance 2,199B
• Money Center Banks 1,014B
• Foreign Money Center Banks 753B
• Closed-End Fund Equity 586B
• Prop Casualty Ins 440B
• Foreign Regional Banks 284B

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Sector Analysis

• The sector is extremely cyclical
• Sector beta 1.7
• In the mature phase of the life cycle
• External drivers
• Financial Regulation
• Interest Rates
• Housing starts

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Industry Analysis

• Product Segmentation

• Ease of Entry

Industry Breakdown  Percent
1. Diversified Financial Services 28.30
2. Insurance 22.70
3. Commercial Banks 19.80
4. Capital Markets 16.40
5. Real Estate Investment Trusts (REITs) 7.50
6. Consumer Finance 4.70
7. Thrifts Mortgage Finance 0.40
8. Real Estate Management Development 0.20
Company Market Cap (in Billions)
Goldman Sachs 82.80
J.P. Morgan 178.50
Hudson City 7.20

• Not an easy industry to enter
• Large companies with years of experience
• Learning curve
• Intellectual property e.g. Financial Models,
  Research Documents etc

9
Economic Analysis

• 2-Year Treasury vs. Financials

• 10 Year Treasury Yield Vs. Financials

R .67
R .54
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Economic Analysis

• Employment

• Consumer Spending

R .82
R .73
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Competition

• Economic Analysis- Multiple regression

• High level of interdependence
• Swaps, Derivatives, Futures
• Repurchase, Reverse Repurchase
• E.g.- Lehman Brothers collapse

Multiple R-Square Adjusted StErr of
Summary R R-Square R-Square Estimate
0.9184 0.8435 0.8375 37.8813061
Coefficient Standard t-Value p-Value Confidence Interval 95 Confidence Interval 95
Regression Table Coefficient Error t-Value p-Value Lower Upper
Constant 247.2984867 12.32280818 20.0684 lt 0.0001 222.8618956 271.7350777
Federal Funds Rate 14.24715975 6.824771466 2.0876 0.0393 0.713381825 27.78093768
Case Schiller 2.104365785 0.388171389 5.4212 lt 0.0001 1.334607353 2.874124217
Business Spending- Real Capital Spending 3.733779024 0.598753412 6.2359 lt 0.0001 2.54642854 4.921129508
2 year Treasury Rate 19.58210932 9.014500955 2.1723 0.0321 1.706015641 37.45820299
R .83
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Financial Analysis

• Net Income Vs. SP 500

• ROE Vs. SP 500

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Key Indicators

• Revenues
• 30 from the high in 07
• Negative in terms of growth for the past 5 years
• 50 increase over the past 10 years
• EPS growth
• Large amount of volatility
• Increased exponentially in 2009-2010
• Expected reversion to mean by 2011
• Net profit margins
• Winners Foreign closed end funds, diversified
  investments, healthcare and industrial REITS
• Losers Investment brokerage, banks, hotel REITS
• Net profit margins decreasing since 1994, now at
  par with the SP
• ROE had been at par with the SP now trading at
  discount
• Margins are increasing

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Net Income Chart- by Industry
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Largest Companies by market Capitalization
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Financial Sector Valuation

• Price to Book lower than 22 yr median
• P/S and P/ Trailing E currently near
• record lows
• Price to Forward E remains elevated

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Technical Analysis Historical Data

• Levels of support and resistance evident
• Sharp uptick in valuation compared to Bollinger
  Bands
• Trading above 50/200 day averages

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Variation Across Industries
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Variation Across Companies
Charles Schwab (SCHW)
Morgan Stanley (MS)
Goldman Sachs (GS)
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Recommendations

• We are overweight in Financials, sell Financials
  and invest in something more reliable
• Technical Analysis suggests we are overvalued
• What happens when interest rates increase?
• Political Reform will affect the financial sector
  negatively, so lets be prepared