Financial Stock Analysis

1
Financial Stock Analysis

• Adam Riegle, Nikolas Ristev, and James Rochowiak

2
Status Quo Current Holdings
Stock Current Price Cost Dollars Invested Total Return
Deutsche Bank 114.86 107.84 423,396 6.51
Fifth Third Bank 38.05 37.96 604,320 0.24
Citigroup 48.66 41.48 1,011,744 17.31
Merrill Lynch 69.94 58.13 1,012,892 20.32
Capital One 82.48 64.08 1,013,820 28.71
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
  receivedthe marginshould 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 years 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 years 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
Mastercard
Income Statement FY FY FY FY FY
(Mills) 2007E 2006E 2005 2004 2003
Operations Fees 2,567.0 2,232.2 1,941.0 1,637.0 1,431.0
Assessments 1,318.5 1,146.6 997.0 956.0 800.0
Net Revenue 3,885.5 3,378.7 2,938.0 2,593.0 2,231.0
General and Administrative 1,756.2 1,527.2 1,352.0 1,186.0 1,099.0
Advertising and Marketing Development 1,352.2 1,175.8 1,008.0 916.0 851.0
US Merchant Lawsuit and other Legal Settlements 50.0 50.0 75.0 22.0 763.0
Depreciation and Amortization 106.9 109.8 110.0 122.0 120.0
Total Operating Expenses 3,265.3 2,862.8 2,545.0 2,246.0 2,833.0
Operating Income (Loss) 620.2 515.9 393.0 347.0 (602.0)
Total Other Income (Expense) 15.0 15.0 14.0 (23.0) (10.0)
Income (loss) before tax expense (benefit) and cumulative effect of accounting change 635.2 530.9 407.0 324.0 (612.0)
Income tax expense (benefit) 196.9 164.6 140.0 86.0 (221.0)
Cumulative effect of accounting change, net of tax - - - - 5.0
Net Income (loss) 438.3 366.3 267.0 238.0 (386.0)

Basic Diluted EPS 3.65 3.05 2.67 2.38 (3.86)
Diluted shares 120.0 120.0 100.0 100.0 100.0
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
Terminal Discount Rate Terminal Discount Rate Terminal Discount Rate Terminal Discount Rate Terminal Discount Rate Terminal Discount Rate Terminal Discount Rate Terminal Discount Rate
  8.0 9.0 10.0 11.0 12.0 13.0 14.0
FCF Growth 1.0 81.72 70.53 61.93 55.13 49.63 45.09 41.30
FCF Growth 1.5 85.26 72.95 63.65 56.38 50.56 45.80 41.84
FCF Growth 2.0 89.39 75.73 65.58 57.78 51.59 46.58 42.44
FCF Growth 2.5 94.28 78.92 67.78 59.33 52.73 47.43 43.08
FCF Growth 3.0 100.13 82.66 70.28 61.09 53.99 48.36 43.78
FCF Growth 3.5 107.29 87.07 73.18 63.07 55.40 49.39 44.55
FCF Growth 4.0 116.24 92.36 76.55 65.34 56.99 50.53 45.40
23
MasterCard Outlook

• 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

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