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FINANCIAL SECTOR COMPANY PRESENTATION 13 March, 2003 Sam Hawkins Sunghoon Kim Shade Okusanya OUTLINE Our Recommendation Buy Business Analysis Financial Analysis Valuation Analysis Rationale Conclusion OUR RECOMMENDATION Market Weight (20.64%) SIM Financial Sector with S&P

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financial sector company presentation
FINANCIAL SECTOR COMPANY PRESENTATION

13 March, 2003

Sam Hawkins

Sunghoon Kim

Shade Okusanya

slide2

OUTLINE

  • Our Recommendation
  • Buy
    • Business Analysis
    • Financial Analysis
    • Valuation Analysis
    • Rationale
  • Conclusion
slide3

OUR RECOMMENDATION

  • Market Weight (20.64%) SIM Financial Sector with S&P

Banks (Buy)

3.78%

Insurance (Maintain)

4.01%

Diversified Fin. Services (Trim & Buy)

11.00%

Real Estate (Maintain)

1.85%

slide4

MAINTAIN WEIGHT

4.01%

1.85%

2.46%

slide5

TRIM

4.00% (6.95%)

1.00% (1.70%)

5.00% (5.79%)

slide6

BUY

1.00%

1.32%

slide7

TRIM (C, JPM, KRB)

  • Rationale
    • Banking as well as Diversified Financial industry remain healthy & profitable despite the recent falloffs in their stocks.
    • Citigroup, J.P.Morgan Chase, and MBNA remain strong and vibrant companies.
    • We should use further weakness in the stocks of C, JPM, KRB to re-enter accumulating position.
    • Capital One and Fifth Third represent a better opportunity for capital appreciation due to the current noise surrounding their stocks.
slide8

BUSINESS ANALYSIS

  • Diversified Financial Services
  • Holding company incorporated in 1995
    • Capital One Bank
    • Capital One FSB
    • Capital One Services Inc. etc.
  • Subsidiaries market financial products and services to consumers
    • Primary business is consumer lending with focus on credit card lending
    • One of top ten bank card issuers
    • $59.7b managed loans
    • 47.4m accounts
slide9

BUSINESS ANALYSIS

  • Corporate Strategy
    • Targeting specific consumer segments
    • Tailoring products meet specific consumer needs
    • Using an information technology based strategy (IBS) to leverage proprietary information
    • Heavy investment in marketing ($210.8m)
slide10

FINANCIAL ANALYSIS – Income Statement

2002

(@ 3rd Qtr.)

2001

2000

1999

Operating Margin

21.44%

21.58%

22.63%

24.71%

Asset Turnover

19.40%

25.70%

28.70%

29.70%

ROE

22.52%

24.29%

27.01%

26.07%

Leverage

8.50

8.91

9.27

8.17

EPS

3.05

2.39

1.83

3.93

slide11

FINANCIAL ANALYSIS – Income Statement

Price/ROE/EPS/GRE Relative to S&P)

slide12

FINANCIAL ANALYSIS – Income Statement

Price/ROE/EPS/GRE Relative to Financial Sector

slide13

FINANCIAL ANALYSIS – Income Statement

Price/ROE/EPS/GRE Relative to Diversified Financials

slide14

FINANCIAL ANALYSIS – Cash Flow

2002

2001

2000

1999

 ’000

Free Cash Flow

($7,109)

($6,304)

($4,543)

($3,240)

Net User of Cash

Change in Cash Flow

$25,802

$470,531

($9,790)

($53,670)

slide15

VALUATION ANALYSIS

P/E

P/S

P/B

EPS

Capital One

7.84

1.50

1.52

3.93

Diversified Financials

23.50

2.59

1.22

3.17

Financial Sector

12.70

17.79

1.93

2.79

S&P500

27.80

3.90

30.53

2001EPS – 2.91

2002 EPS Growth – 35%

2003 EPS Growth Estimate – 15%

slide16

RATIONALE

  • Strong business strategy
  • Increased consumer confidence/spending => increased sales for consumer finance companies
  • Strong finances to support strategy
  • Strong valuations relative to S&P 500, Financial Sector and DFS
slide17

BUSINESS ANALYSIS

  • Financial holding company and multi-bank holding company.
    • engages primarily in commercial, retail and trust banking, electronic payment processing services and investment advisory services.
  • Consolidated total assets, deposits shareholder equity of approximately $71 billion, $45.9 billion and $7.6 billion.
  • Significant subsidiaries:
    • The Fifth Third Company;
    • Fifth Third Leasing Company;
    • Midwest Payment Systems, Inc. (MPS)
slide21

BUSINESS ANALYSIS - RECOGNITION

    • Fifth Third Bancorp Named #1 Superregional Bank For the Second Consecutive Year by Fortune Magazine - Monday March 3, 1:11 pm ET
  • CINCINNATI, March 3 /PRNewswire/ -- Fifth Third is the #1 Superregional Bank for the second consecutive year in Fortune magazine's 21st Annual "America's Most Admired Companies" Survey.
  • Fortune's survey results were based on the views of 10,000 executives, directors and securities analysts who rated the companies in their own industries using eight criteria - Social Responsibility, Innovation, Long-term Investment Value, Use of Corporate Assets, Employee Talent, Financial Soundness, Quality of Products/Services, and Quality of Management.
  • President & CEO George A. Schaefer, Jr. offers, "Our 20,600 employees are committed to delivering the best possible financial products and services, building stronger neighborhoods through community development investments and providing consistent quality growth to our shareholders. One of the keys to consistent growth is Fifth Third's steadfast commitment to a strong, flexible balance sheet. The financial strength of our balance sheet was recently recognized by Moody's Investors Service® with a senior debt rating of Aa2, a rating equaled or surpassed by only three other bank holding companies in the country. Being named the #1 Superregional bank for the second consecutive year by Fortune affirms these efforts."
slide22

FINANCIAL ANALYSIS – Income Statement

2002

(@ 3rd Qtr.)

2001

2000

1999

Operating Margin

%

%

%

59.42%

ROE

20.20%

19.19%

19.76%

19.5%

Leverage

9.75

9.84

10.78

11.01

EPS

1.86

1.97

1.65

2.76

slide25

FINANCIAL ANALYSIS – Income Statement

Price/ROE/EPS/GRE Relative to S&P)

slide26

FINANCIAL ANALYSIS – Income Statement

Price/ROE/EPS/GRE Relative to Financial Sector

slide27

FINANCIAL ANALYSIS – Income Statement

Price/ROE/EPS/GRE Relative to Banks

slide28

FINANCIAL ANALYSIS – Cash Flow

2002

2001

2000

1999

 ’000,000

Free Cash Flow

(5,073)

$1,729

($4,120)

($2,836)

Net User of Cash

Change in Cash Flow

($201)

$324

($185)

$88

slide29

VALUATION ANALYSIS

P/E

P/S

P/B

EPS

Fifth Third

17.62

6.76

3.52

2.76

Financial Sector

12.70

17.79

1.93

2.79

S&P500

27.80

3.90

30.53

2002EPS – 2.76

2002 EPS Percent Change – 48.07%

2003 EPS 5 Year Growth Est – 15.10%

slide30

RATIONALE

  • 28 Years of Consecutive Earnings Growth
  • Great buying opportunity (stock @ 52 wk low)
  • Strong Capital Position (Recent Moody’s Upgrade)
  • Strong valuations compared to S&P 500, Sector, and other well known regional banks
  • Voted #1 Regional Bank for 2nd consecutive year
slide32

OUR RECOMENDATION

  • Market Weight (20.64%) SIM Financial Sector with S&P

Banks (Buy)

3.78%

Insurance (Maintain)

4.01%

Diversified Fin. Services (Trim & Buy)

11.00%

Real Estate (Maintain)

1.85%

slide33

OUR RECOMENDATION

MAINTAIN WEIGHT

4.01%

1.85%

2.46%

slide34

OUR RECOMENDATION

TRIM

4.00%

1.00%

5.00%

slide35

OUR RECOMENDATION

BUY

1.00%

1.32%

20.64%