Financial Stocks

Kate FarleyRyan O’Connor

AgendaBrief overview of SectorBusiness AnalysisReasons for our stock pickFinancials and ValuationRecommendation

Financial SectorWorst performing sector of the S&P 500

Down over 41% YTD* compared to –14.75% of index

Uncertainty regarding Gov’t bailoutPotential bank nationalizationIncreased stake in Citigroup and AIG

Currently underweighted by 113bpsWill increase underweighting by 150bps

*As of 2/23/09

Who is HCBK?Hudson City Bancorp Inc.Regional Holding Company based out of New

JerseyTraded on the NASDAQCurrently part of S&P 500 IndexWeathered the storm better than most

Business Analysis of StocksGoldman Sachs

2008 10-K is 731 pagesBank holding company and

global investment banking, security, and investment management firm

Investment Banking, trading and principal investments and asset management and securities services are main segments

Current Market cap of $37B

Hudson City BankcorpHolding company for only

Hudson City Banking127 banks in NJ, NY, and

CTSources of revenue:

interest on mortgages, MB securities and interest and dividends on investments

Sources of funds: deposits, borrowings, payments on mortgages, maturities on investments

Current Market cap of $5 billion

Why HCBK?Never underwritten subprime, negative

amortization or Option ARM loansStrict Maximum Loan-to-Value0.43% non-performing assetsRefused TARP money in NovemberKramer recommended staying away ( Jan 26,

2009)Named Best-Managed Bank in America Two

Years in a Row- Forbes Magazine

http://community.investopedia.com/news/IA/2009/Hudson-City-Flourishes-During-Downturn-HCBK0211.aspx?partner=YahooSA

Loan to Value Maximums

Max Loan AmountsMax LTV

Up to $600,000 90%

$ 600,100-$1,000,000 80%

$1,000,100-$1,500,000 75%

$1,500,100-$2,000,000 70%

$2,000,100-$2,500,000 65%

$2,500,100-$3,000,000 60%

Recent Earnings and Dividends

Actual Earnings

Y-o-Y Growth

Actual Dividend

Y-o-Y Growth

2009* $1.06 17.78% $0.56 24.44%

2008 $0.90 55.17% $0.45 36.36%

2007 $0.58 11.54% $0.33 10.00%

2006 $0.52 94.12% $0.30 11.99%

2005 $0.48 119.84% $0.27 22.69%2004 $0.43 $0.22

* Estimates from finance.yahoo.com

Hudson City ValuationHigh Low Mean Current

Price/forward earnings 30.6 9.8 20.9 9.8Price/book 29.3 11 25 11

P/E/G 7.2 2.3 4.9 2.3ROE 18 5.5 8.5 9.3

Price/forward earnings 2.27 0.24 1.43 0.65Price/book 99.99 0.31 0.85 1.87

P/E/G 2.63 0.63 1.48 0.67ROE 3.65 0.35 0.68 3.65

Price/forward earnings 1.78 0.46 1.13 0.8Price/book 99.99 0.17 0.54 0.64

P/E/G 0.91 0.44 0.65 0.46ROE 2.13 0.57 1.25 0.58

HCBK v HCBK

HCBK vs SP-40

HCBK vs SP5A

Hudson City DCF ModelUsed average expenses percentage over past

3 yearsUsing 14.5% discount rate due to financials

cyclical natureAssuming no change in number of shares

outstandingTerminal Growth Rate of 4%Assuming constant margins and tax rates

based on historic figures

Valuation and Price TargetsDCF approximately $22 with 123% upside

Terminal Discount Rate of 14.5%Terminal FCF Rate of 4.0%

Ratio AnalysisGave us price target between $9 and $23

depending ratioP/B was $21.53

Our price target is $18.00 (77% upside)

Goldman Sachs ValuationHigh Mean Low Current

Price/forward earnings 40.2 18.8 9.7 15.8Price/book 8.9 3.4 1.7 2.1

P/E/G 3 1.5 0.8 1.3ROE 20.9 18 13.8 20.4

Price/forward earnings 2.03 1.48 0.22 0.96Price/book 3.62 1.62 1.24 3.62

P/E/G 2.3 1.35 0.88 1.2ROE 8.27 1.1 0.93 8.27

Price/forward earnings 2.63 0.61 0.32 0.78Price/book 1.05 0.73 0.35 0.53

P/E/G 1.1 0.76 0.42 0.72ROE 3.07 1.18 0.34 0.34

GS vs GS

GS vs SP-40

GS vs SP5A

Reasons to dump GS2 students dropped this class after being

assigned GSROE (ttm) 4.3%Sales growth predicted to drop 21% in the next

quarter and 19% in 3Q09*Took $10 billion in TARP funds and now has to

dance to the Gov’t tuneIn order to repay has to raise the money in a

government approved equity offering of similar amount

Price Target of 97.00Berkshire Hathaway has a $5 billion investment

* finance.yahoo.com

New SIM Financials Portfolio

Name Symbol % of SIM Financials

Berkshire Hathaway Inc.

BRK.A 47.2%

Wells Fargo WFC 11.7%

Hudson City Bancorp

HCBK 41.1%

RecommendationsSell entire GS position (~400bps)Purchase 340 bps of HCBK

Consensus growth rate higher than S&P 500Undervalued compared to financials and itselfNo exposure to Real Estate

Sell off 68 bps of BRKA and 22 of WFCShould bring us to underweighting of 263 bps

Off Balance Sheet Commitments  Payments Due By Period  

            Less Than    One Year

to    

Three Years to     More Than  

Contractual Obligation   Total     One Year    

Three Year

s    

Five Year

s     Five Years  

    (In thousands)  

                                         

Mortgage loan originations   $ 337,590     $ 337,590     $ —     $ —     $ —  

Mortgage loan purchases     219,117       219,117       —       —       —  

Mortgage-backed security purchases     516,000       516,000       —       —       —  

Operating leases     149,776       8,404      17,31

1      16,92

5      107,13

6  

 

Total   $ 1,222,483     $ 1,081,111     $17,31

1     $16,92

5     $107,13

6  

                           

Not Selling all of WFC…DCF still gives about 25% upside with more

conservative estimates than other analystsRatio valuation gives target in high teens/low

twentiesEPS of about 28 cents in first quarter

expectedStill have dividendLowest weight in ratio