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Equity Spreadsheet document sample
Document Sample
Performance of
Financial Services Firms
Week 2 –
August 31, 2006
J. K. Dietrich - FBE 525 - Fall, 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
Dt Pt Pt 1
Definition: RORt
Pt 1
Interpretation: Dividend Yield + Gain
J. K. Dietrich - FBE 525 - Fall, 2006
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
J. K. Dietrich - FBE 525 - Fall, 2006
Value of $100
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J. K. Dietrich - FBE 525 - Fall, 2006
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Bank Stocks Since 2000
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Citi JPM WFC VwtdRet
J. K. Dietrich - FBE 525 - Fall, 2006
VALUE OF $100 INVESTMENT
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J. K. Dietrich - FBE 525 - Fall, 2006
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ONE AND MEL 1990 2004
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Bank Performance – ONE and MEL
20
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Alternative Valuation Measures
Price-earnings multiples (P-Es)
– Related to cash payouts, growth, risk-adjusted discount
rate
– Think of a price of a dollar of earnings
– Effect of differing P-Es on acquisitions
Book-to-market ratios
Cash flow to price (price of a dollar of cash flow)
Liquidation value (Assets – Liabilities)
Discounted cash flow (DCF) methods
Value Line examples
J. K. Dietrich - FBE 525 - Fall, 2006
Cost of Equity
CAPM estimates
– Source of betas
– Problems with CAPM
– Alternatives (APT, 2-factor models)
Average historical returns
Growth methods based on dividend yield
and return on equity times retention rate
Necessary to evaluate future cash flows to
equity
J. K. Dietrich - FBE 525 - Fall, 2006
Accounting Performance:
Return on Equity
Analysis for financial firms must be tailored
to specifics of their operations
– Deposit-taking
– Insurance
– Securities firms
– Asset management firms
– Others
Analysis proceeds in stages
J. K. Dietrich - FBE 525 - Fall, 2006
Steps to Financial Analysis
Step 1 - Obtain data
Step 2 - Simplify financial statements
Step 3 - Basic ratio analysis
Step 4 - Segment analysis
Steps 5 and 6 - Benchmarks and analysis
These steps required for Part 1 of project
J. K. Dietrich - FBE 525 - Fall, 2006
Bank Income Statement (WFC)
WELLS FARGO & CO
TICKER SYMBOL: WFC SIC: 6020
FINANCIAL SERVICES
($ MILLIONS, EXCEPT
Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97 Dec-96 Dec-95
Total 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 5,717.30
Total Interest Expense 3,817.00 1
3,41 .00 3,977.00 6,741.00 7,860.00 5,020.00 5,065.00 2,664.00 2,617.00 2,448.00
Net Interest Income 7,1
1 50.00 16,007.00 14,482.00 12,460.00 10,865.00 9,355.00 8,990.00 4,033.40 3,701.30 3,269.30
Provision for Loan Losses ,71
1 7.00 1,722.00 1,684.00 1,780.00 1,329.00 1,045.00 1,545.00 524.7 394.7 312.4
Net 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
-1 52.00 27.3 0 0
Total 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 1
31 .8
Total 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 1,422.80
Income Taxes 3,755.00 3,275.00 3,144.00 2,056.00 2,523.00 2,201.00 1,343.00 698.7 627.6 466.8
Minority 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
1 53.90 956
Preferred Dividends 0 3 4 14 17 35 35 17.8 17.8 41.2
Available for Common 7,014.00 6,199.00 5,706.00 3,409.00 4,009.00 3,712.00 ,91
1 5.00 1,333.20 1 36.1
,1 0 914.8
Savings Due to Common Stock
Equivalents 0 0 0 0 0 0 0 0 0 0
Adjusted Available for Common 7,014.00 6,199.00 5,706.00 3,409.00 4,009.00 3,712.00 ,91
1 5.00 1,333.20 1 36.1
,1 0 914.8
Extraordinary Items 0 0 -276 0 0 0 0 0 0 0
Discontinued 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 ,91
1 5.00 1,333.20 1 36.1
,1 0 914.8
------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------
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/.
J. K. Dietrich - FBE 525 - Fall, 2006
Bank Balance Sheet (WFC)
WELLS FARGO & CO
TICKER SYMBOL: WFC SIC: 6020
FINANCIAL SERVICES ANNUAL BALANCE SHEET
($ MILLIONS)
Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97
ASSETS
Cash & Due from Banks 16,526.00 18,292.00 20,994.00 19,498.00 18,576.00 14,804.00 14,248.00 5,926.10
Loans 287,586.00 253,073.00 192,478.00 172,499.00 1 ,1
61 24.00 1
1 9,464.00 107,994.00 54,776.60
Less: 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 1,233.90
Net Loans 283,824.00 249,182.00 188,659.00 168,738.00 157,405.00 1
1 6,294.00 104,860.00 53,542.70
Net Premises and Equipment 3,850.00 3,534.00 3,688.00 3,549.00 3,415.00 2,985.00 3,130.00 1,295.50
Intangibles 18,582.00 17,277.00 15,226.00 16,900.00 16,322.00 13,701.00 12,254.00 2,774.90
Assets Held for Sale 38,674.00 36,722.00 58,014.00 35,321.00 16,479.00 16,835.00 25,265.00 12,305.30
Investment Securities 44,430.00 41,872.00 40,450.00 1
48,1 9.00 42,432.00 ,1
41 85.00 31,997.00 9,21
1 8.00
Investments at Equity . . . . . . . .
Other Assets 20,514.00 15,898.00 17,445.00 1 ,382.00
1 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 8,1
21 02.00 202,475.00 88,540.19
------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------
LIABILITIES
Short Term Borrowings 21,962.00 24,659.00 33,446.00 37,782.00 28,989.00 27,995.00 15,897.00 9,557.00
Total Deposits 274,858.00 247,527.00 6,91
21 6.00 187,266.00 169,559.00 132,708.00 136,788.00 55,457.10
Long Term Debt 73,580.00 63,642.00 50,205.00 38,530.00 32,981.00 24,160.00 20,494.00 12,766.70
Minority Interest C C C C C C C C
Other Liabilities 19,583.00 17,501.00 8,31 .00
1 1 16,777.00 14,409.00 1 08.00
1 ,1 8,537.00 3,737.20
------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------
EQUITY
Preferred Stock -19 -15 61 64 267 271 463 188
Common Stock 2,894.00 2,894.00 2,894.00 2,894.00 2,894.00 2,777.00 2,769.00 ,281
1 .90
Capital Surplus 9,806.00 9,643.00 9,498.00 9,436.00 9,337.00 8,785.00 8,670.00 409.5
Retained Earnings 27,432.00 23,780.00 20,331.00 16,757.00 15,065.00 12,088.00 9,508.00 5,417.60
Less: Treasury Stock 2,247.00 1,833.00 2,465.00 1,937.00 1,075.00 1,790.00 651 274.8
Common 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 31
22,1 .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 8,1
21 02.00 202,475.00 88,540.19
Source: S&P COMPUSTAT data delivered by WRDS http://wrds.wharton.upenn.edu/.
J. K. Dietrich - FBE 525 - Fall, 2006
Bank Ratio Analysis (WFC)
WELLS FARGO & CO
TICKER SYMBOL: WFC SIC: 6020
FINANCIAL SERVICES
(Percentage except as
Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97 Dec-96 Dec-95
PROFIT ABILIT Y
Pretax Profit Margin 31.79 29.8 30.29 19.31 23.76 27.29 16.08 21.28 20.06 18.76
Net Profit Margin 20.7 19.5 19.54 12.06 14.6 7.1
1 9 9.52 14.03 12.99 12.61
Return on Assets 1.64 1.6 1.63 .1
11 1.47 1.7 0.95 1.51 1.42 1.27
Return on Equity 18.51 17.98 18.86 12.56 15.29 16.98 9.44 19.51 19.34 18.26
Return on Investment 7.24 7.22 9 6.13 7.93 1 .28
1 5.7 7.46 6.88 6.13
Net Interest Margin 4.89 5.08 5.53 5.36 5.35 5.66 5.79 5.74 5.63 5.58
Risk-Adjusted Capital Ratio - Total 12.08 12.21 1 .44
1 10.45 10.4 10.5 10.9 1 .01
1 10.42 0.1
1 8
Risk-Adjusted Capital Ratio - Tier 1 8.42 8.42 7.7 6.99 7.29 8.07 8.08 9.09 8.63 8.11
Risk-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
------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------
DIVIDENDS
Dividend Payout 44.91 40.76 32.83 50.16 39.14 34.83 51.28 34.63 33.94 32.42
Dividend Yield 2.99 2.55 2.35 2.3 1.62 1.94 1.75 1.59 2.41 2.73
Dividends per Share 1.86 1.5 1.1 1 0.9 0.79 0.7 0.62 1.05 0.9
One 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 Assets
Reserve for Loan 0.88 1 1.09 1.22 1.37 1.45 1.55 1.39 1.3 1.27
Total Deposits 64.24 63.83 62.12 60.89 62.24 60.85 67.56 62.63 62.53 58.26
Investment Securities 10.38 10.8 1 .58
1 15.64 15.58 18.88 15.8 21.71 21.39 22.39
Shareholder's Equity 8.85 8.89 8.68 8.85 9.72 1 5
0.1 10.25 7.93 7.56 7.36
Total Debt 22.33 22.77 23.96 24.81 22.75 23.91 17.97 25.21 25.76 30.78
Assets for Sale 9.04 9.47 16.61 1
1 .48 6.05 7.72 12.48 13.9 1
1 .49 13.72
Net Loans 66.34 64.26 54.03 54.86 57.78 53.32 51.79 60.47 59.25 62.51
Total Nonperforming Assets ($MM) 1,572.00 1,662.00 1,691.00 1 3.00
,81 1,350.00 855 884 228.5 200 206
Nonperforming Assets 0.37 0.43 0.48 0.59 0.5 0.39 0.44 0.26 0.25 0.29
Total Net Charge-Offs ($MM) -1,666.00 -1 9.00
,71 -1,725.00 -1,779.00 -1 9.00
,21 -1,049.00 ,61
-1 7.00 -499.7 -382.4 -304.2
Net Charge-Offs -0.39 -0.44 -0.49 -0.58 -0.45 -0.48 -0.8 -0.56 -0.48 -0.42
------------------------------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Other
Net Loans/Total Deposits 103.26 100.67 86.97 90.11 92.83 87.63 76.66 96.55 94.77 107.29
Nonperforming Assets/Allowance for
Loan Losses 41.79 42.71 44.28 48.21 36.3 26.97 28.21 18.52 19.22 22.46
Nonperforming Assets/Common
Equity 4.15 4.82 5.59 6.68 5.15 3.91 4.36 3.34 3.4 4.11
Nonperforming Assets/Net Loans 0.55 0.67 0.9 1.07 0.86 0.74 0.84 0.43 0.42 0.46
Net Charge-Offs/Allowance for Loan
Losses -44.28 -44.18 -45.17 -47.3 -32.78 -33.09 -51.6 -40.5 -36.74 -33.17
Net 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/.
J. K. Dietrich - FBE 525 - Fall, 2006
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
J. K. Dietrich - FBE 525 - Fall, 2006
Simplify financials:
Example, WFC 2001-2002
2001 2002
Basic Financial Data FIRST
INCOME STATEMENT HISTORICAL % CHG
Interest 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 3,144
Net Income 3,423 5,710
Preferred Dividends 17 17
Earnings Available for Common 3,406 5,693 67.15%
Dividends 1,569 1,569
Adjustments 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 $3.28
Operating Cash Flow per Share ($5.54) ($8.05)
Common Dividends per Share $0.90
BALANCE 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%
J. K. Dietrich - FBE 525 - Fall, 2006
Calculate Ratios
RATIO ANALYSIS HISTORICAL %CHG
BROR 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%
J. K. Dietrich - FBE 525 - Fall, 2006
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
J. K. Dietrich - FBE 525 - Fall, 2006
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
J. K. Dietrich - FBE 525 - Fall, 2006
PV-FSI - Overview
J. K. Dietrich - FBE525 - (Fall 2003) Analysis of Wells Fargo Corporation
2001 2002 2003 2004 2005 2006
Basic Financial Data FIRST-YEAR YEARS 2-5
INCOME STATEMENT HISTORICAL % CHG ASSUMPTIONS ASSUMPTIONS
Interest 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 $0.90
BALANCE 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 %CHG
BROR 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 11.50
EBT/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 1.0935
VALUATION OF CASH FLOWS TO EQUITY
Cash 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 Assumptions
PV with P-E = $120,846 $101,556 $93,342 P-E= 16
PV 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
J. K. Dietrich - FBE 525 - Fall, 2006
Past Analysis and Assumptions
J. K. Dietrich - FBE525 - (Fall 2003) Analysis of W ells Fargo Corporation
2001 2002
Basic Financial Data FIRST-YEAR YEARS 2-5
INCOME STATEMENT HISTORICAL % CHG ASSUMPTIONS ASSUMPTIONS
Interest 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 3,144
Net Income 3,423 5,710
Preferred Dividends 17 17
Earnings 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 $3.28
Operating Cash Flow per Share ($5.54) ($8.05)
Common Dividends per Share $0.90
BALANCE 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% Calculated
RATIO ANALYSIS HISTORICAL %CHG
BROR 12.52% 18.75% 49.84% Calculated
Composed 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= 11.50
EBT/TA (Before Tax) 1.78% 2.54% 42.31% Calculated
EBT/TA (After Tax) 1.11% 1.63% Calculated
EBT/TA composed of:
((IR-IE)/EA - 4.84% 5.11% 5.60% Calculated
PLL/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 FLOW S TO EQUITY
Cash Flow After Pref Div. (9,619) (13,978)
- Equity Required (Financ'g Chgs.) N/A (3,144)
Dividendable Cash Flow N/A (17,122)
J. K. Dietrich - FBE 525 - Fall, 2006
Projections: Cash Flows
J. K. Dietrich - FBE525 - (Fall 2003)
2003 2004 2005 2006 2007
Basic Financial Data
INCOME STATEMENT
Interest 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 Share
BALANCE 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
J. K. Dietrich - FBE 525 - Fall, 2006
Valuation and Ratios
RATIO ANALYSIS
BROR 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 11.50
EBT/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 1.0935
VALUATION OF CASH FLOWS TO EQUITY
Cash 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
J. K. Dietrich - FBE 525 - Fall, 2006
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
J. K. Dietrich - FBE 525 - Fall, 2006
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
J. K. Dietrich - FBE 525 - Fall, 2006
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