Overview

Industries:

● Banks ● Insurance
○ 3.91T ○ 1.33T

● Capital markets ● Mortgage REITs

○ 1.25T ○ 69.34B

● Consumer Finance ● Thrifts & Mortgage Finance

○ 251.54B ○ 93.00B

● Diversified Financial Services

○ 533.60B
 Financials Overview

● Market Cap: 7.56T

● % of S&P 500: 14.01%

● SPY 1 year: +13.54%

● Financials 1YR: +12.61%

 Largest Companies

 Berkshire Hathaway  Citigroup

 471.65B  170.284B

 Goldman Sachs Group

 JP Morgan Chase & Co
 83.163B
 366.134B

 American Express
 Bank of America Corporation  83.421B
 296.679B
 US Bancorp
 Wells Fargo and Company  81.844B
 268.398B
 Performance

YTD 1 Year 3Year 5 Year

Financials -1.71% +12.99% +35.61% +71.86%

Banks -2.18% +15.34% +35.58% +80.88%

Capital Markets +3.58% +20.75% +27.31% +71.54%

Consumer Finance -2.70% +19.78% +14.94% +38.66%

Diversified Financial S -3.85% +11.42% +40.01% +83.93%

ervices

Insurance -5.01% -1.04% +22.34% +53.26%

S&P 500 ® Index +3.75% +14.00% +32.06% +69.23%

1 Year vs
S&P500

5 Year vs
S&P500

Financial Sector
 Financials:
Business Analysis
 Business Cycle

● Financials show top performance during growth and maturity phases

● High interest rates improve outlook
● As cycle progresses, financials lose due to lower spending
 Porter’s 5 Forces

Barrier to Entry Moderate Difficult to raise necessary capital to gain entry

Highly supervised
Small banks able to offer more

Supplier Power Moderate Policy has large impact

Customer can change very easily

Buyer Power Moderate Buy and supplies capital

As rates increase, may increase power due to more
competition for money

Substitution Moderate Many small companies taking aim at segments

Increased competition and low rate products

Rivalry High Highly competitive

Small banks have different regulations
Fees a big topic
Similar products
 Supply/Demand

● Consumers are people, companies, governments

● Drivers:
○ Interest rates
○ Inflation
○ Economic conditions
○ Government regulations
● Overall financial sector is second largest
 Financials:
Economic Analysis
 Factors of High Influence

● Economic Conditions in US (S&P 500)

● Interest Rates
● Consumer Confidence
● US Gross Domestic Product
● Unemployment
● Regulations, Policy and Taxes
 S&P 500

A strong economy drives personal and business investing

 Interest Rates

Changes in interest rates drive how investors function

Increased rates are good for lenders
 Consumer Confidence

High confidence leads to more investing and purchasing

 GDP

Economic growth trends towards more lending and borrowing

 Unemployment

A fully staffed workforce means increased business investment

Historically low rates raise questions on the trend’s outlook
 Analysis and Projections

S&P 500 = Financials

Interest rates = Financials

Consumer confidence = Financials

GDP = Financials

Unemployment = Financials
 Financials:
Financial Analysis
Financial Projections
Key Financial Overview – Income Statement
Key Financial Overview – Balance Sheet
Key Financial Overview – Balance Sheet
Key Financial Overview – Cash Flows
 Key Drivers of Financial Performance

● Tax law changes

● Interest rates

● Frank Dodd executive action

 Financials:
Valuation Analysis
S&P 500 vs. S5FINL
S&P 500 vs. S5FINL
Sector Valuation
Industry Valuation
Portfolio Breakdown
 Recommendation

● Recommendation is to remain “neutral”

● Current position is overweight

● Previously underperformed the S&P… BUT

○ Current relative multiples are lower than their median
○ Current S&P multiples are higher than their median

● Expect the financial sector to outperform S&P

moving forward