slides week 2

J. K. Dietrich - FBE 525 - Fall, 2006

Performance of Financial Services Firms

Week 2 – August 31, 2006


Stock Performance:Market Rate of Return

Most important to investors Increase in wealth is focus

– Can be measured by share price changes– Standard way is to look at rate of return

Definition:

Interpretation: Dividend Yield + Gain

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Assessing Performance Interpretation must be careful

– Market performance– Comparable firm performance– Risk and return must be considered

Compare biggest banks since 1990 What are the best firms in banking?

– Answer in terms of market rate of return– Future may not be like past


Bank Share Performance Comparative Performance

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Bank Performance – ONE and MELONE AND MEL 1990 2004

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Alternative Valuation Measures Price-earnings multiples (P-Es)

– Related to cash payouts, growth, risk-adjusted discount rate– Think of a price of a dollar of earnings– Effect of differing P-Es on acquisitions

Book-to-market ratios Cash flow to price (price of a dollar of cash flow) Liquidation value (Assets – Liabilities) Discounted cash flow (DCF) methods Value Line examples


Cost of Equity CAPM estimates

– Source of betas– Problems with CAPM– Alternatives (APT, 2-factor models)

Average historical returns Growth methods based on dividend yield and

return on equity times retention rate Necessary to evaluate future cash flows to

equity


Accounting Performance:Return on Equity

Analysis for financial firms must be tailored to specifics of their operations– Deposit-taking– Insurance– Securities firms– Asset management firms– Others

Analysis proceeds in stages


Steps to Financial Analysis Step 1 - Obtain data Step 2 - Simplify financial statements Step 3 - Basic ratio analysis Step 4 - Segment analysis Steps 5 and 6 - Benchmarks and analysis These steps required for Part 1 of project


Bank Income Statement (WFC)WELLS FARGO & COTICKER SYMBOL: WFC SIC: 6020FINANCIAL SERVICES ($ MILLIONS, EXCEPT

Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97 Dec-96 Dec-95Total Interest Income 20,967.00 19,418.00 18,459.00 19,201.00 18,725.00 14,375.00 14,055.00 6,697.40 6,318.30 5,717.30Total Interest Expense 3,817.00 3,411.00 3,977.00 6,741.00 7,860.00 5,020.00 5,065.00 2,664.00 2,617.00 2,448.00Net Interest Income 17,150.00 16,007.00 14,482.00 12,460.00 10,865.00 9,355.00 8,990.00 4,033.40 3,701.30 3,269.30Provision for Loan Losses 1,717.00 1,722.00 1,684.00 1,780.00 1,329.00 1,045.00 1,545.00 524.7 394.7 312.4Net Interest Income After Provision for Loan Losses 15,433.00 14,285.00 12,798.00 10,680.00 9,536.00 8,310.00 7,445.00 3,508.70 3,306.60 2,956.90

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------Other Noninterest Inc/Exp (Net) . . . . . . . . . . Special Items -174 0 0 -1,484.00 -701 0 -1,152.00 27.3 0 0Total Other Income . . . . . . . . . .

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------Salaries, Occupancy & Equipment . . . . . . . . . . Salaries, Depreciation 3,449.00 4,305.00 4,297.00 2,961.00 1,790.00 1,893.00 1,205.00 853.2 681.6 311.8Total Other Expenses . . . . . . . . . . Pretax Income 10,769.00 9,477.00 8,854.00 5,479.00 6,549.00 5,948.00 3,293.00 2,049.70 1,781.50 1,422.80Income Taxes 3,755.00 3,275.00 3,144.00 2,056.00 2,523.00 2,201.00 1,343.00 698.7 627.6 466.8Minority Interest C C C C C C C C C C Income Before Extraordinary Items and Discontinued Operations 7,014.00 6,202.00 5,710.00 3,423.00 4,026.00 3,747.00 1,950.00 1,351.00 1,153.90 956Preferred Dividends 0 3 4 14 17 35 35 17.8 17.8 41.2Available for Common 7,014.00 6,199.00 5,706.00 3,409.00 4,009.00 3,712.00 1,915.00 1,333.20 1,136.10 914.8Savings Due to Common Stock Equivalents 0 0 0 0 0 0 0 0 0 0Adjusted Available for Common 7,014.00 6,199.00 5,706.00 3,409.00 4,009.00 3,712.00 1,915.00 1,333.20 1,136.10 914.8Extraordinary Items 0 0 -276 0 0 0 0 0 0 0Discontinued Items 0 0 0 0 0 0 0 0 0 0

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------Adjusted Net Income 7,014.00 6,199.00 5,430.00 3,409.00 4,009.00 3,712.00 1,915.00 1,333.20 1,136.10 914.8

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------Earnins Per Share (Primary) - Excluding Extra Items & Disc Ops 4.15 3.69 3.35 1.99 2.36 2.26 1.18 1.78 3.07 2.76

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------Earnins Per Share (Primary) - Including Extra Items & Disc Ops 4.15 3.69 3.19 1.99 2.36 2.26 1.18 1.78 3.07 2.76

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------Earnins Per Share (Fully Diluted) - Excluding Extra Items & Disc Ops 4.09 3.65 3.32 1.97 2.33 2.23 1.17 1.75 3.07 2.73

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------Earnins Per Share (Fully Diluted) - Including Extra Items & Disc Ops 4.09 3.65 3.16 1.97 2.33 2.23 1.17 1.75 3.07 2.73

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------EPS from Operations 4.21 3.69 3.35 2.56 2.63 2.26 1.64 1.75 3.07 2.76

Source: S&P COMPUSTAT data delivered by WRDS http://wrds.wharton.upenn.edu/.


Bank Balance Sheet (WFC)Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97

ASSETSCash & Due from Banks 16,526.00 18,292.00 20,994.00 19,498.00 18,576.00 14,804.00 14,248.00 5,926.10Loans 287,586.00 253,073.00 192,478.00 172,499.00 161,124.00 119,464.00 107,994.00 54,776.60Less: Allowance for Loan Loss 3,762.00 3,891.00 3,819.00 3,761.00 3,719.00 3,170.00 3,134.00 1,233.90Net Loans 283,824.00 249,182.00 188,659.00 168,738.00 157,405.00 116,294.00 104,860.00 53,542.70Net Premises and Equipment 3,850.00 3,534.00 3,688.00 3,549.00 3,415.00 2,985.00 3,130.00 1,295.50Intangibles 18,582.00 17,277.00 15,226.00 16,900.00 16,322.00 13,701.00 12,254.00 2,774.90Assets Held for Sale 38,674.00 36,722.00 58,014.00 35,321.00 16,479.00 16,835.00 25,265.00 12,305.30Investment Securities 44,430.00 41,872.00 40,450.00 48,119.00 42,432.00 41,185.00 31,997.00 19,218.00Investments at Equity . . . . . . . . Other Assets 20,514.00 15,898.00 17,445.00 11,382.00 13,655.00 8,951.00 10,721.00 -6,522.30

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------TOTAL ASSETS 427,849.00 387,798.00 349,197.00 307,569.00 272,426.00 218,102.00 202,475.00 88,540.19

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------LIABILITIESShort Term Borrowings 21,962.00 24,659.00 33,446.00 37,782.00 28,989.00 27,995.00 15,897.00 9,557.00Total Deposits 274,858.00 247,527.00 216,916.00 187,266.00 169,559.00 132,708.00 136,788.00 55,457.10Long Term Debt 73,580.00 63,642.00 50,205.00 38,530.00 32,981.00 24,160.00 20,494.00 12,766.70Minority Interest C C C C C C C C Other Liabilities 19,583.00 17,501.00 18,311.00 16,777.00 14,409.00 11,108.00 8,537.00 3,737.20

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------EQUITYPreferred Stock -19 -15 61 64 267 271 463 188Common Stock 2,894.00 2,894.00 2,894.00 2,894.00 2,894.00 2,777.00 2,769.00 1,281.90Capital Surplus 9,806.00 9,643.00 9,498.00 9,436.00 9,337.00 8,785.00 8,670.00 409.5Retained Earnings 27,432.00 23,780.00 20,331.00 16,757.00 15,065.00 12,088.00 9,508.00 5,417.60Less: Treasury Stock 2,247.00 1,833.00 2,465.00 1,937.00 1,075.00 1,790.00 651 274.8Common Equity 37,885.00 34,484.00 30,258.00 27,150.00 26,221.00 21,860.00 20,296.00 6,834.20

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------TOTAL EQUITY 37,866.00 34,469.00 30,319.00 27,214.00 26,488.00 22,131.00 20,759.00 7,022.20

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------TOTAL LIABILITIES AND EQUITY 427,849.00 387,798.00 349,197.00 307,569.00 272,426.00 218,102.00 202,475.00 88,540.19Source: S&P COMPUSTAT data delivered by WRDS http://wrds.wharton.upenn.edu/.

($ MILLIONS)

WELLS FARGO & COTICKER SYMBOL: WFC SIC: 6020FINANCIAL SERVICES ANNUAL BALANCE SHEET


Bank Ratio Analysis (WFC)WELLS FARGO & COTICKER SYMBOL: WFC SIC: 6020FINANCIAL SERVICES (Percentage except as

Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97 Dec-96 Dec-95PROFITABILITYPretax Profit Margin 31.79 29.8 30.29 19.31 23.76 27.29 16.08 21.28 20.06 18.76Net Profit Margin 20.7 19.5 19.54 12.06 14.6 17.19 9.52 14.03 12.99 12.61Return on Assets 1.64 1.6 1.63 1.11 1.47 1.7 0.95 1.51 1.42 1.27Return on Equity 18.51 17.98 18.86 12.56 15.29 16.98 9.44 19.51 19.34 18.26Return on Investment 7.24 7.22 9 6.13 7.93 11.28 5.7 7.46 6.88 6.13Net Interest Margin 4.89 5.08 5.53 5.36 5.35 5.66 5.79 5.74 5.63 5.58Risk-Adjusted Capital Ratio - Total 12.08 12.21 11.44 10.45 10.4 10.5 10.9 11.01 10.42 10.18Risk-Adjusted Capital Ratio - Tier 1 8.42 8.42 7.7 6.99 7.29 8.07 8.08 9.09 8.63 8.11Risk-Adjusted Capital Ratio - Tier 2 3.66 3.79 3.74 3.46 3.11 2.43 2.82 1.92 1.79 2.07

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------DIVIDENDSDividend Payout 44.91 40.76 32.83 50.16 39.14 34.83 51.28 34.63 33.94 32.42Dividend Yield 2.99 2.55 2.35 2.3 1.62 1.94 1.75 1.59 2.41 2.73Dividends per Share 1.86 1.5 1.1 1 0.9 0.79 0.7 0.62 1.05 0.9One Year Total Return . -5.25 -20.41 -7.25 28.11 -27.38 -1.24 -2.97 -43.87 -24.14

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------BALANCE SHEET% of Total AssetsReserve for Loan 0.88 1 1.09 1.22 1.37 1.45 1.55 1.39 1.3 1.27Total Deposits 64.24 63.83 62.12 60.89 62.24 60.85 67.56 62.63 62.53 58.26Investment Securities 10.38 10.8 11.58 15.64 15.58 18.88 15.8 21.71 21.39 22.39Shareholder's Equity 8.85 8.89 8.68 8.85 9.72 10.15 10.25 7.93 7.56 7.36Total Debt 22.33 22.77 23.96 24.81 22.75 23.91 17.97 25.21 25.76 30.78Assets for Sale 9.04 9.47 16.61 11.48 6.05 7.72 12.48 13.9 11.49 13.72Net Loans 66.34 64.26 54.03 54.86 57.78 53.32 51.79 60.47 59.25 62.51Total Nonperforming Assets ($MM) 1,572.00 1,662.00 1,691.00 1,813.00 1,350.00 855 884 228.5 200 206Nonperforming Assets 0.37 0.43 0.48 0.59 0.5 0.39 0.44 0.26 0.25 0.29Total Net Charge-Offs ($MM) -1,666.00 -1,719.00 -1,725.00 -1,779.00 -1,219.00 -1,049.00 -1,617.00 -499.7 -382.4 -304.2Net Charge-Offs -0.39 -0.44 -0.49 -0.58 -0.45 -0.48 -0.8 -0.56 -0.48 -0.42

------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------OtherNet Loans/Total Deposits 103.26 100.67 86.97 90.11 92.83 87.63 76.66 96.55 94.77 107.29Nonperforming Assets/Allowance for Loan Losses 41.79 42.71 44.28 48.21 36.3 26.97 28.21 18.52 19.22 22.46Nonperforming Assets/Common Equity 4.15 4.82 5.59 6.68 5.15 3.91 4.36 3.34 3.4 4.11Nonperforming Assets/Net Loans 0.55 0.67 0.9 1.07 0.86 0.74 0.84 0.43 0.42 0.46Net Charge-Offs/Allowance for Loan Losses -44.28 -44.18 -45.17 -47.3 -32.78 -33.09 -51.6 -40.5 -36.74 -33.17Net Charge-Offs/Net Loans -0.59 -0.69 -0.91 -1.05 -0.77 -0.9 -1.54 -0.93 -0.8 -0.67

Allowance for Loan Losses/Net Loans 1.33 1.56 2.02 2.23 2.36 2.73 2.99 2.3 2.19 2.03

Source: S&P COMPUSTAT data delivered by WRDS http://wrds.wharton.upenn.edu/.


Dupont Analysis Relate balance sheet to income statement Simple spreadsheet PV-FSI.xls follows text

discussion Analysts all follow somewhat different

approaches– Breakdown of categories (e.g. fees, expenses)– Use of quarter-ending, annual ending, averages

Objective is to project future performance


Simplify financials: Example, WFC 2001-2002

2001 2002Basic Financial Data FIRST-YEARINCOME STATEMENT HISTORICAL % CHGInterest Revenue 19,201 18,832 -1.92%Interest Expense 6,741 3,977 -41.00%Provision for Loan Losses 1,780 1,733 -2.64%Non-Interest Revenue 7,690 9,641 25.37%Non-Interest Expense 12,891 13,909 7.90%Earnings Before Tax 5,479 8,854 61.60%Tax 2,056 3,144Net Income 3,423 5,710Preferred Dividends 17 17Earnings Available for Common 3,406 5,693 67.15%Dividends 1,569 1,569Adjustments to Net Cash (13,025) (19,671)Operating Cash Flows (9,619) (13,978)# SHARES (Million) 1,736.38 1,736.38 Earnings per Share $1.96 $3.28Operating Cash Flow per Share ($5.54) ($8.05)Common Dividends per Share $0.90BALANCE SHEET (PARTIAL) Cash and Reserves 16,968 17,820 5.02%Fixed and Other Assets 33,072 40,682 23.01%Total Assets 307,569 349,259 13.55%Book Value of Equity 27,214 30,358 11.55%


Calculate RatiosRATIO ANALYSIS HISTORICAL %CHGBROR 12.52% 18.75% 49.84%Composed of:PULLTHRU x 62.16% 64.30% 3.43%LEVERAGE x 11.30 11.50 1.79%EBT/TA (Before Tax) 1.78% 2.54% 42.31%EBT/TA (After Tax) 1.11% 1.63% EBT/TA composed of:((IR-IE)/EA - 4.84% 5.11% 5.60%PLL/EA) x 0.69% 0.60% -13.77%EA/TA + 83.73% 83.25% -0.57%(NIR-NIE)/TA -1.69% -1.22% -27.73%(IR-IE)/EA composed of:IR/EA - 7.46% 6.48% -13.13%IE/L x 2.40% 1.25% -48.13%L/EA 1.0886 1.0968 0.75%


Valuation of Financial Firms Best approach is based on discounted cash flows

and, following Copeland et al, we use cash flows to equity

Spreadsheet PV-FSI is abbreviated but captures more complete models

You are free to change the spreadsheet– Add product lines (we will discuss NEWPVFSI briefly

but it is available)– Change forecast and continuing value periods


Valuation and Projections Dividendable cash flows correspond to cash

flows to equity Spreadsheet has two years of history and a

five year explicit forecast horizon Continuing value captured with multipliers

of fifth year values– Book-to-market– Price-earnings


PV-FSI - OverviewJ. K. Dietrich - FBE525 - (Fall 2003) Analysis of Wells Fargo Corporation

2001 2002 2003 2004 2005 2006Basic Financial Data FIRST-YEAR YEARS 2-5INCOME STATEMENT HISTORICAL % CHG ASSUMPTIONS ASSUMPTIONSInterest Revenue 19,201 18,832 -1.92% 20,378 23,043 24,195 25,404 Interest Expense 6,741 3,977 -41.00% 5,486 7,407 7,777 8,166 Provision for Loan Losses 1,780 1,733 -2.64% 2,195 2,304 2,419 2,540 Non-Interest Revenue 7,690 9,641 25.37% g= 10.00% g= 10.00% 10,605 11,666 12,832 14,115 Non-Interest Expense 12,891 13,909 7.90% g= 5.00% g= 5.00% 14,604 15,335 16,101 16,906 Earnings Before Tax 5,479 8,854 61.60% 8,698 9,663 10,729 11,907 Tax 2,056 3,144 3,044 3,382 3,755 4,168 Net Income 3,423 5,710 5,653 6,281 6,974 7,740 Preferred Dividends 17 17 17 17 17 17 Earnings Available for Common 3,406 5,693 67.15% 5,636 6,264 6,957 7,723 Dividends 1,569 1,569 p= 30.00% p= 30.00% 1,691 1,879 2,087 2,317 Adjustments to Net Cash (13,025) (19,671) 2,195 2,304 2,419 2,540 Operating Cash Flows (9,619) (13,978) 7,831 8,568 9,376 10,263 # SHARES (Million) 1,736.38 1,736.38 # = 1,736 # = 1,736 Earnings per Share $1.96 $3.28 3.25$ 3.61$ 4.01$ 4.45$ Operating Cash Flow per Share ($5.54) ($8.05) 4.51$ 4.93$ 5.40$ 5.91$ Common Dividends per Share $0.90BALANCE SHEET (PARTIAL) Cash and Reserves 16,968 17,820 5.02% R/TA= 5.50% R/TA= 5.50% 20,650 21,682 22,767 23,905 Fixed and Other Assets 33,072 40,682 23.01% F/TA= 11.00% F/TA= 11.00% 41,300 43,365 45,533 47,810 Total Assets 307,569 349,259 13.55% g= 7.50% g= 5.00% 375,453 394,226 413,937 434,634 Book Value of Equity 27,214 30,358 11.55% Calculated 32,648 34,281 35,995 37,794 RATIO ANALYSIS HISTORICAL %CHGBROR 12.52% 18.75% 49.84% Calculated 17.26% 18.27% 19.33% 20.43%Composed of:PULLTHRU x 62.16% 64.30% 3.43% t= 35.00% t= 35.00% 64.80% 64.82% 64.84% 64.86%LEVERAGE x 11.30 11.50 1.79% Lev= 11.50 Lev= 11.50 11.50 11.50 11.50 11.50EBT/TA (Before Tax) 1.78% 2.54% 42.31% Calculated 2.32% 2.45% 2.59% 2.74%EBT/TA (After Tax) 1.11% 1.63% Calculated 1.50% 1.59% 1.68% 1.78%EBT/TA composed of:((IR-IE)/EA - 4.84% 5.11% 5.60% Calculated 4.75% 4.75% 4.75% 4.75%PLL/EA) x 0.69% 0.60% -13.77% Ratio= 0.70% Ratio= 0.70% 0.70% 0.70% 0.70% 0.70%EA/TA + 83.73% 83.25% -0.57% Ratio= 83.50% Ratio= 83.50% 83.50% 83.50% 83.50% 83.50%(NIR-NIE)/TA -1.69% -1.22% -27.73% -1.50% -1.07% -0.93% -0.79% -0.64%(IR-IE)/EA composed of:IR/EA - 7.46% 6.48% -13.13% Rea= 6.50% Rea= 7.00% 6.50% 7.00% 7.00% 7.00%IE/L x 2.40% 1.25% -48.13% RL= 1.75% RL= 2.25% 1.60% 2.06% 2.06% 2.06%L/EA 1.0886 1.0968 0.75% 1.0935 1.0935 1.0935 1.0935VALUATION OF CASH FLOWS TO EQUITYCash Flow After Pref Div. (9,619) (13,978) 7,831 8,568 9,376 10,263 - Equity Required (Financ'g Chgs.) N/A (3,144) (2,290) (1,632) (1,714) (1,800)Dividendable Cash Flow N/A (17,122) 5,541 6,936 7,662 8,463

Discount Rate = 8.00% 12% 14% Terminal Value AssumptionsPV with P-E = $120,846 $101,556 $93,342 P-E= 16PV with P/B = $89,661 $75,556 $69,544 P/B= 2.3

Per Share PV with P-E = 69.60$ 58.49$ 53.76$ Per Share PV with P/B = 51.64$ 43.51$ 40.05$


Past Analysis and AssumptionsJ. K. Dietrich - FBE525 - (Fall 2003) Analysis of Wells Fargo Corporation

2001 2002Basic Financial Data FIRST-YEAR YEARS 2-5INCOME STATEMENT HISTORICAL % CHG ASSUMPTIONS ASSUMPTIONSInterest Revenue 19,201 18,832 -1.92%Interest Expense 6,741 3,977 -41.00%Provision for Loan Losses 1,780 1,733 -2.64%Non-Interest Revenue 7,690 9,641 25.37% g= 10.00% g= 10.00%Non-Interest Expense 12,891 13,909 7.90% g= 5.00% g= 5.00%Earnings Before Tax 5,479 8,854 61.60%Tax 2,056 3,144Net Income 3,423 5,710Preferred Dividends 17 17Earnings Available for Common 3,406 5,693 67.15%Dividends 1,569 1,569 p= 30.00% p= 30.00%Adjustments to Net Cash (13,025) (19,671)Operating Cash Flows (9,619) (13,978)# SHARES (Million) 1,736.38 1,736.38 # = 1,736 # = 1,736 Earnings per Share $1.96 $3.28Operating Cash Flow per Share ($5.54) ($8.05)Common Dividends per Share $0.90BALANCE SHEET (PARTIAL) Cash and Reserves 16,968 17,820 5.02% R/TA= 5.50% R/TA= 5.50%Fixed and Other Assets 33,072 40,682 23.01% F/TA= 11.00% F/TA= 11.00%Total Assets 307,569 349,259 13.55% g= 7.50% g= 5.00%Book Value of Equity 27,214 30,358 11.55% CalculatedRATIO ANALYSIS HISTORICAL %CHGBROR 12.52% 18.75% 49.84% CalculatedComposed of:PULLTHRU x 62.16% 64.30% 3.43% t= 35.00% t= 35.00%LEVERAGE x 11.30 11.50 1.79% Lev= 11.50 Lev= 11.50EBT/TA (Before Tax) 1.78% 2.54% 42.31% CalculatedEBT/TA (After Tax) 1.11% 1.63% CalculatedEBT/TA composed of:((IR-IE)/EA - 4.84% 5.11% 5.60% CalculatedPLL/EA) x 0.69% 0.60% -13.77% Ratio= 0.70% Ratio= 0.70%EA/TA + 83.73% 83.25% -0.57% Ratio= 83.50% Ratio= 83.50%(NIR-NIE)/TA -1.69% -1.22% -27.73% -1.50%(IR-IE)/EA composed of:IR/EA - 7.46% 6.48% -13.13% Rea= 6.50% Rea= 7.00%IE/L x 2.40% 1.25% -48.13% RL= 1.75% RL= 2.25%L/EA 1.0886 1.0968 0.75%VALUATION OF CASH FLOWS TO EQUITYCash Flow After Pref Div. (9,619) (13,978) - Equity Required (Financ'g Chgs.) N/A (3,144)Dividendable Cash Flow N/A (17,122)


Projections: Cash FlowsJ. K. Dietrich - FBE525 - (Fall 2003)

2003 2004 2005 2006 2007Basic Financial DataINCOME STATEMENTInterest Revenue 20,378 23,043 24,195 25,404 26,675 Interest Expense 5,486 7,407 7,777 8,166 8,574 Provision for Loan Losses 2,195 2,304 2,419 2,540 2,667 Non-Interest Revenue 10,605 11,666 12,832 14,115 15,527 Non-Interest Expense 14,604 15,335 16,101 16,906 17,752 Earnings Before Tax 8,698 9,663 10,729 11,907 13,208 Tax 3,044 3,382 3,755 4,168 4,623 Net Income 5,653 6,281 6,974 7,740 8,585 Preferred Dividends 17 17 17 17 17 Earnings Available for Common 5,636 6,264 6,957 7,723 8,568 Dividends 1,691 1,879 2,087 2,317 2,571 Adjustments to Net Cash 2,195 2,304 2,419 2,540 2,667 Operating Cash Flows 7,831 8,568 9,376 10,263 11,236 # SHARES (Million)Earnings per Share 3.25$ 3.61$ 4.01$ 4.45$ 4.93$ Operating Cash Flow per Share 4.51$ 4.93$ 5.40$ 5.91$ 6.47$ Common Dividends per ShareBALANCE SHEET (PARTIAL)Cash and Reserves 20,650 21,682 22,767 23,905 25,100 Fixed and Other Assets 41,300 43,365 45,533 47,810 50,200 Total Assets 375,453 394,226 413,937 434,634 456,366 Book Value of Equity 32,648 34,281 35,995 37,794 39,684


Valuation and RatiosRATIO ANALYSISBROR 17.26% 18.27% 19.33% 20.43% 21.59%Composed of:PULLTHRU x 64.80% 64.82% 64.84% 64.86% 64.87%LEVERAGE x 11.50 11.50 11.50 11.50 11.50EBT/TA (Before Tax) 2.32% 2.45% 2.59% 2.74% 2.89%EBT/TA (After Tax) 1.50% 1.59% 1.68% 1.78% 1.88%EBT/TA composed of:((IR-IE)/EA - 4.75% 4.75% 4.75% 4.75% 4.75%PLL/EA) x 0.70% 0.70% 0.70% 0.70% 0.70%EA/TA + 83.50% 83.50% 83.50% 83.50% 83.50%(NIR-NIE)/TA -1.07% -0.93% -0.79% -0.64% -0.49%(IR-IE)/EA composed of:IR/EA - 6.50% 7.00% 7.00% 7.00% 7.00%IE/L x 1.60% 2.06% 2.06% 2.06% 2.06%L/EA 1.0935 1.0935 1.0935 1.0935 1.0935VALUATION OF CASH FLOWS TO EQUITYCash Flow After Pref Div. 7,831 8,568 9,376 10,263 11,236 - Equity Required (Financ'g Chgs.) (2,290) (1,632) (1,714) (1,800) (1,890)Dividendable Cash Flow 5,541 6,936 7,662 8,463 9,346

12% 14% Terminal Value Assumptions$101,556 $93,342 P-E= 16 137,094

$75,556 $69,544 P/B= 2.3 91,273 58.49$ 53.76$ 43.51$ 40.05$


Case Discussion: AIG Introduction to insurance industry Assessment of financial performance

performance Application of analysis of financial

information to understand reasons for performance variations

Think about valuation issues in terms of insurance application to PV-FSI


For Next Two Weeks Prepare AIG case for discussion on September 7 –

see questions in objectives for Week 3 Organize team and choose firms for your segment

of financial services industry Prepare to discuss Chapter 8 during class Week 4

– We will discuss underlying economics of value creation in financial services and specifically in credit-related services discussed in Chapter 8

Part I of project is due in class of Week 4

slides week 2

Economy & Finance