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Financial Stock Analysis

Financial Stock Analysis. Adam Riegle, Nikolas Ristev, and James Rochowiak. Status Quo – Current Holdings. Industry Analysis – Interest Rates. Interest Rates Fed just raised interest rates another 0.25% and continued 2 years of consecutive rate hikes

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Financial Stock Analysis

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  1. Financial Stock Analysis Adam Riegle, Nikolas Ristev, and James Rochowiak

  2. Status Quo – Current Holdings

  3. Industry Analysis – Interest Rates • Interest Rates • Fed just raised interest rates another 0.25% and continued 2 years of consecutive rate hikes • Undiversified regional banks suffer from rising interest rates that cause net interest margins to decline • Fed expected to pause rate hikes in the short term as commodity prices decline and US bond activity rises over fears of a slowing economy

  4. Industry Analysis – Yield Curve • Inverted Yield Curve • Higher short-term yield rates create a situation where overexposed banks cannot generate higher net interest revenues • The traditional view of the banking business holds that banks pay interest on their deposits based upon shorter-term interest rates while making loans tied to longer-term interest rates • The difference between interest paid and received—the margin—should be influenced by the slope of the yield curve

  5. Industry Analysis – Yield Curve

  6. Industry Analysis - Banks

  7. Industry Analysis – Div. Fin. Services

  8. Industry Analysis – Sec. Brokerages

  9. Fifth Third Bancorp

  10. Fifth Third Bancorp • Risks • Flattening yield curve and rising interest rates are narrowing net interest margins • NIM down 5% YTD despite 4% growth in average earning assets • Recently switched to daily competitive rates to attract core deposits, but this will create higher interest expense in 2006 • Potential acquisitions may distract management from organic improvement

  11. Fifth Third Bancorp • Target Price: $40.07 • Current Price: $38.05 • Potential: 5.3% • Technical Recommendation: HOLD • Yahoo! Finance Target Price: $39.18 • However, we recommend that we SELL all of our FITB holdings for a better investment • Trade a “single” for a “double” or “triple”

  12. Capital One

  13. Capital One • Current Price: $82.48 • Yahoo! Finance Target Price: $99.83 • Potential Upside: 21% • Technical Recommendation: BUY • Outlook: • Acquisition of Hibernia Bank added $16.3 billion in loans, $23 billion in assets, and 262 banking centers located in Texas and Louisiana • Auto finance division continues to outperform as auto loans increased over 16% YTD • Credit card business is struggling from stiff competition and inverted yield curve impacts margins

  14. Citigroup

  15. Citigroup • Current Price: $48.66 • Yahoo! Finance Target Price: $55.35 • Potential Upside: 13.8% • Technical Recommendation: HOLD • Outlook: • Smith Barney Division experienced healthy increases in assets under management • Result of steady internal growth and the acquisition of Legg Mason (124 branches and 1,200 financial advisors) • Has a strong foothold across a number of businesses with solid growth prospects • Credit card business has experienced poor performance in the past years due to high numbers of bankruptcy filings • This effect should decline due to tougher legislation that is now in effect

  16. Deutsche Bank

  17. Deutsche Bank • Current Price: $114.86 • DCF Target Price: $137.39 • Upside: 19.6% • Yahoo! Finance Target Price: $133.11 • Technical Recommendation: HOLD • Outlook: • Exposure to US interest rate risk limited • Recent announcement of acquisition of Chapel Funding to strengthen residential mortgage backed securities business • 1st qtr profits rose 55% over last year’s 1st qtr results

  18. Merrill Lynch

  19. Merrill Lynch • Current Price: $69.94 • Personal Target Price: $84.33 • Upside: 20.6% • Yahoo! Finance Target Price: $88.00 • Technical Recommendation: BUY • Outlook: • 1st qtr profits were their highest quarterly net revenues ever, rising 28% over last year’s 1st qtr results • 1st qtr EPS were $0.12 higher than analysts’ expectations • 4 of the last 5 changes in analysts’ opinions have been upgrades to buy or overweight

  20. MasterCard

  21. MasterCard • IPO Price: $40.00-$43.00 • IPO scheduled for May 24th • Target Price: $63.07 • Upside: 46.7% • DCF Recommendation: BUY

  22. MasterCard Sensitivity Analysis

  23. Pros 1st qtr revenue is up 12.3% from 2005 1st qtr EPS were up $0.34 an increase of 36.6% Increasing cash flows even in year with negative NI Decreasing A/R and steady A/P Cons Did have a year with negative NI (2003) Currently involved in several legal cases Costs of more than $700million since 2003 Several more cases pending MasterCard Outlook

  24. Recommendation Summary • Hold – DB, COF, C, MER • Sell all of Fifth Third • Performing poorly for several quarters in a row • Fairly valued (both analysts and our opinion) • Buy MasterCard • Use proceeds from Fifth Third and additional money to buy • At $45.00, buy to make it 427 basis points of the SIM Class portfolio • Has a strong upside potential even with conservative estimates

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