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M AX M. F ISHER C OLLEGE O F B USINESS Sector Presentation: Financial Services

M AX M. F ISHER C OLLEGE O F B USINESS Sector Presentation: Financial Services William Quirk, Nick Stamatis, Sharon Tong and Carolina Tovar. 1. O VERVIEW. 2. Sector Overview: Size of Sector. Market Cap: 7.58 T Percentage of S&P500: 31.5% of S&P 500 (24.06 T)

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M AX M. F ISHER C OLLEGE O F B USINESS Sector Presentation: Financial Services

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  1. MAX M. FISHER COLLEGE OF BUSINESS Sector Presentation: Financial Services William Quirk, Nick Stamatis, Sharon Tong and Carolina Tovar 1

  2. OVERVIEW 2

  3. Sector Overview: Size of Sector • Market Cap: 7.58 T • Percentage of S&P500: 31.5% of S&P 500 (24.06 T) Sector Overview: Performance • Financial Sector 1 year percentage change : 35.32% • S&P 500 Index 1 year percentage change: 19.79%

  4. 1Y Relative Performance

  5. YTD Relative Performance

  6. Sector Overview: Industries • Banks • Capital Market • Consumer Finance • Diversified Financial Services • Insurance • Mortgage REITs • Thrifts & Mortgage Finance

  7. Sector Overview: Largest Companies • J P Morgan Chase &Co: 345.27B • Bank of America Corporation: 284.13B • Wells Fargo & Company: 270.64B • HSBC Holdings plc: 198.59B • Citigroup Inc.: 194.41B • Royal Bank of Canada: 116.99B • Banco Santander, S.A.: 105.23B • Toronto Dominion Bank: 105.05B • Goldmans Sachs Group, Inc.: 94.68B

  8. BUSINESS ANALYSIS

  9. Business Analysis: Life Cycle • The financial sector performs best during the growth and maturity phases of the business cycle. This is when corporate earnings and interest rates are highest • The financial sector struggles in later parts of the business cycle as it is a cyclical industry, and is subject to losses as the economy falters • Current bull run for stocks ---> strong growth • Interest rate hikes • Increasing reliance on technology, M&A to drive growth

  10. Business Analysis: External Factors • Overall state of the U.S. and global economy • Capital projects, personal saving/investing levels rise • More loans=more money • Interest rates • 1.25%, last raised in June 2017 • Subject to increased future raises • Banks, insurance industries • Monetary/fiscal policy • Quantitative Easing, TARP

  11. Business Analysis: Supply/Demand • Users include the vast majority of individual consumers, corporations globally • Market is massive: 34 banks in the United States have over $100 billion in assets, including 4 over $1 trillion (JPM, BAC, WFC, C) • Primarily saturated markets in developed countries • Room for expansion in developing markets--microfinance, booming business development • Demand is driven by: • Consumer preferences for risk/expectations of the future • Strength of the economy • Investment opportunities

  12. Business Analysis: Porter’s Five Forces Barriers to Entry: MODERATE • Incumbents have extensive brand recognition and customer loyalty • Network effect • Local credit unions and regional banks that were comparably risk-averse during the recession have had success and strengthened over the recent time period Supplier Power: MODERATE • In this case, the supplier is primarily the customer • Individuals/institutions can choose which bank to conduct business with based on customer service, rates offered, convenience and other perks

  13. Business Analysis: Porter’s Five Forces Continued Buyer Power: MODERATE • Very similar to supplier power, as the customer/institution both buys capital (mortgages, loans) and supplies capital (savings accounts, CDs) Threat of Substitutes: LOW • The financial sector is necessary to maintain adequate levels of liquidity in the markets • Companies are unable to compete without sufficient funds, so there are no substitutes Competitive Rivalry: HIGH • Companies battle for market share, focus on niche markets/regions, offer different services

  14. ECONOMIC ANALYSIS 14

  15. Financials vs 10-yr yield

  16. Financials vs GDP

  17. Financials during different administrations

  18. Financials vs Household income

  19. Financials vs Fed Funds Rate

  20. Financials vs Consumer Confidence

  21. FINANCIAL ANALYSIS

  22. S&P vs Sector & Sub-Sector - Sales Key S&P 500 Index SPX Financials Sector Subsectors: Insurance Banks Diversified

  23. S&P vs Sector & Sub-Sector - Profit Margin Key S&P 500 Index SPX Financials Sector Subsectors: Insurance Banks Diversified

  24. S&P vs Sector & Sub-Sector - ROE Key S&P 500 Index SPX Financials Sector Subsectors: Insurance Banks Diversified

  25. S&P vs Sector & Sub-Sector - Earnings per Share Key S&P 500 Index SPX Financials Sector Subsectors: Insurance Banks Diversified

  26. S&P vs Sector & Sub-Sector - Cash Flow Key S&P 500 Index SPX Financials Sector Subsectors: Insurance Banks Diversified

  27. S&P vs Sector & Sub-Sector - Capital Expenditures Key S&P 500 Index SPX Financials Sector Subsectors: Insurance Banks Diversified

  28. VALUATION ANALYSIS

  29. S&P 500 v. S5FINL All numbers as of 10/20/2017

  30. S&P 500 v. S5FINLAbsolute Relative Notes • Currently, S5FINL is undervalued • Valuation has expanded since the 2008 crash, aside from P/E which shows stagnation due to volatility • P/BV shows most accurate representation due to nature of the financials sector

  31. Further Breakdown Notes • The valuations for these industries follow a similar pattern to that of S5FINL • Diversified P/E is overvalued within the financial sector due to its stability • Its association to the Insurance and Bank sectors introduce its relative undervaluation in the market as a risky financial sector • The volatility of financial policy and its direct effect on these stocks causes people to be pessimistic in their valuation SPX

  32. Notes • Our current holdings also show pessimism in their valuations • Many are banks, and the political uncertainty at this time has a big impact on the future success or failure of these stocks • The relative high betas reflect the associated risk • AXP and C are closest to the financial sector valuation – possibly due to their avoidance of scandals, AXP’s comparably limited market exposure, and C’s diversification in product • BHF is extremely risky as it is a young company – warranting a lot of caution • These stocks will continue to appreciate in value until major political decisions are made regarding their future. Until then, they are in an appreciating limbo Portfolio Valuation S5FINL SPX

  33. RECOMMENDATION 33

  34. HOLD Financial Sector Aggregate • Undervalue • Keep Weight: 15.5% • However, may not hold in long term... • High volatility due to tax policy and future interest rate policy • Overexposed in banks as opposed to Diversified & Insurance • Until market moves, take no action

  35. QUESTIONS 35

  36. References http://www.sectorspdr.com/sectorspdr/tools/sector-tracker https://us.spindices.com/indices/equity/sp-500-information-technology-sector http://www3.weforum.org/docs/WEF_Global_IT_Report_2015.pdf https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml http://picphotos.net/information-technology-background-images/ http://www.nasdaq.com/screening/companies-by-industry.aspx?industry=Finance&sortname=marketcap&sorttype=1 Bloomberg Terminal

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