Wachovia Corporation WB

1
Wachovia Corporation (WB)
Analysts Kur Robin Samson Cheng
Associates Derek Carroll Arthur Lam Stanton
Lenahan Justin Leow Wesley Tillu
October 4, 2006
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Universal Banking Model

• Competitors include Citigroup, Bank of America,
  JPMorgan Chase
• 4th largest bank holding company in the U.S. by
  assets
• 3rd largest U.S. full-service brokerage firm
  based on client assets
• Purchased First Union, Golden West, Prudentials
  brokerage South Trust

Credit/debit Card Trust Services Mortgage /
Home Equity
Treasury Services Investment Banking Corporate
Banking
Retail Brokerage Asset Management Wealth
Management
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Universal Banking Model

• One-stop shop for any customer needs
• Firms commercial banking and investment banking
• Use commercial bank loans to garner IB business
• Uniquely positioned for LBOs because of cheap
  capital
• Consumers
• Mortgages in Wachovias case ARMs
• Loans car, lines of credit, etc.
• Investment Products developed in-house

4
Acquisition Organic Growth

• Merger With GoldenWest
• Loan Mortgage Business
• After merger with GoldenWest will have 402
  billion in loans
• GoldenWest specializes in option ARMs one of the
  fastest growing segments in the mortgage industry
• Deposits
• After merger with GoldenWest will have 390
  billion in deposits
• The increase in deposits will allow them to
  pursue the universal banking model shared with
  only a few other banks (CitiBank, Bank of America
  and JPMorgan)
• Expansion into investment banking
• Head hunting for talent at other Investment Banks
• Recruiting heavily at campuses across country
• Utilizing unique opportunities of universal
  banking model

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Adjustable Rate Mortgage Risk

• Adjustable Rate Mortgagesmortgages in which
  consumers pay some combination of interest and
  principal but not necessarily enough to decrease
  total amount owed
• 99 of GoldenWests mortgage portfolio
• 51.5 billion in ARMs in 2005
• 56.9 of GDW earnings are deferred interest
• As rates rise, the housing market and the economy
  slows down the risk of default increases

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CIB Intl Growth

• CIB Growth
• Continual growth at Corporate and Investment Bank
  to build a universal banking model
• Gained more domestic market share than any other
  firm on Wall Street since 2001
• International
• Lacks international coverage
• Expanded its Fixed Income Division with new
  trading floors in Hong Kong and a series of key
  hires in Europe
• Expanded its global correspondent banking and
  trade services platform with the Union Bank of
  California acquisition

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Interest Rate Sensitivity
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Valuation Ratios
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Valuing Banks

• P/E is not the most accurate way to evaluate a
  diversified bank stock
• P/B is a good metric to value stocks of companies
  in the capital-intensive industries (e.g. banks)
  that have large amount of tangible assets in
  their books.
• P/B is a good indicator of measuring value of
  stocks that have a large amount of fixed assets
  and investments.
• Compared to the industry Wachovia has a slightly
  lower P/B ratio than the industry
• Wachovia does have a low EV/EBITDA at 0.06 which
  would indicate that the stock is undervalued

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Profitability/Accounting
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Positives

• Low revenues and cash flows which indicates room
  for growth
• A slightly high EBITDA margin which indicates
  steady profits but still room for growth. Also a
  normalized Profit margin.
• High return on assets. Extremely important for a
  bank.
• High Dividend Yield and D/E indicating a lot of
  expected growth and willing to finance its growth
  with debt. This makes up for the lower debt as
  mentioned before

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Industry Analyst Ratings

• Mean target 61.32
• Median Target 61.50
• Strong Buy by SP with target of 67
• Buy by Thomson/First Call (61.32 target)
• Conviction Buy by Goldman Sachs
• Most recentNeutral by BofA
• Todays closing 56.72

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Technical Analysis

• Trends
• Support/Resistance
• Moving Averages
• Bollinger Bands
• RSI
• MACD

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Moving Averages 1yr
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Moving Averages 6mo
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Bollinger Bands1yr
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Bollinger Bands6mo
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MACD 1yr
Signal
MACD
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MACD 6mo
Signal
MACD
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RSI
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Conclusion

• Potential Upsides
• Growth opportunity in CIB
• Upside in both the US and intl markets
• Synergy from GDW acquisition
• Potential Downsides
• Slower than expected economic growth
• Integration of GDW