FinancialsDavid Kaplan, Nikhil Ketkar, Jonathan Khoury, Steve Kuljko

Agenda

• Sector Recap• Recommendations• Business/Financial Analysis & Valuation:

Hudson City Bank• Business/Financial Analysis & Valuation: JP

Morgan Chase and Co.• Review of Recommendations

Recap: SIM v. S&P 500 WeightingsSector S&P 500 Weight SIM Weight +/-

Consumer Discretionary 10.11% 9.53% -0.58%

Consumer Staples 11.26 11.77 0.51

Energy 10.88 10.10 -0.78

Financials 16.50 11.93 -4.57

Health Care 12.15 15.27 3.11

Industrials 10.50 13.03 2.53

Information Technology 18.87 19.87 1.00

Materials 3.48 1.80 -1.67

Telecommunications 2.81 3.62 0.82

Utilities 3.44 1.88 -1.57

Previous Recommendations

• Overweight in Financials: sell Financials and move investment to more reliable sectors– Technical analysis suggested we were overvalued – Worries prevalent about interest rate increases– Political Reform and its negative impact on the

financial sector

Class Consensus: Remain at current underweight level

Company Recommendations

• Position Alterations:• J.P. Morgan: Sell all (172 basis points)• Progressive: Hold (299 basis points)• Goldman Sachs: Hold (441 basis points)• HCBK: Buy (increase by 172 basis points)

Recommendation 1JP Morgan Chase (Sell)• Stock Price: $39.84 • Market Cap: $154.7B• Outstanding diluted shares: 3.98B• Beta: 1.16• Lines of Business:

– Investment Banking: 26% of sales– Retail Financial Services: 30%– Card Services: 19%– Commercial Banking: 5%– Treasury and Security Services: 7%– Asset Management: 7%– Corporate/Private Equity: 6%

JPM v. S&P 500 (1 year)

JPM v. S&P 500 (6 months)

JPM return vs. FS returns

Time JPM Financial Sector

1 month -12.59% -7.29%

3 months -0.56% 4.62%

1 year 14.03% 31.19%

Background Information

Earnings Revenues

JPM DCF

JPM Valuation

Risks to JPM• Headline risk

– SEC currently conducting criminal investigation against JPM, C, GS and others

• Interest Rate risk– Rates currently at all time lows, will increase– Increased interest rates will hurt investment banking

business and margins in the market• Regulation

– Volcker Rule– No longer too big to fail– Moody’s will downgrade debt ratings if the regulation

passes

Recommendation 2

• HCBK (Buy)– Strong Buy 28% Upside– Target Price: $16.50 – Buy 170 Basis Points, currently 2.4% of SIM – Increase Holding to 4.1% – Use HCBK as a hedge against regulation

Background Information: 1

• Current Price: $13.00• Dividend Yield: 4.6% • Dividend Growth 5 Yr: 19.79%• Market Cap: 6.8 Billion• Shares Outstanding: 470 M• Beta Vs. S&P: 0.95 • Industry: Thrift & Savings

Background Information: 2

Earnings Revenues

Income Statement: Graph

Discounted Cash Flow ModelYear 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Net Interest Income 1,271,185 1,420,361 1,467,610 1,526,314 1,587,367 1,650,861 1,716,896 1,785,571 1,856,994 1,912,704 1,970,085

% Growth 11.7% 3.3% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.0% 3.0%

Subtractions 676,196 753,495 779,872 811,067 843,509 877,250 912,340 948,833 986,787 1,016,390 1,046,882

% of Revenues 46.8% 47.0% 46.9% 46.9% 46.9% 46.9% 46.9% 46.9% 46.9% 46.9% 46.9%

                       

Free Cash Flow 594,989 666,866 687,738 715,247 743,857 773,611 804,556 836,738 870,208 896,314 923,203 % Growth 12.1% 3.1% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.0% 3.0%

Terminal Discount Rate 11.3%Terminal FCF Growth 3.0%

NPV of Cash Flows 4,467,400 53%NPV of terminal value 3,968,994 47%Projected Equity Value 8,436,394 100%Free Cash Flow Yield 9.07%

Terminal Value 11,526,054 Free Cash Yield 8.01%Terminal P/E 5.9

Current P/E 5.2 4.6 4.5 Projected P/E 6.6 5.9 5.7

Shares Outstanding 492,751

Current Price $ 13.31 Implied equity value/share $ 17.12 Upside/(Downside) to DCF 28.6%

Strong Buy

Sensitivity Analysis

Valuation: Relative Multiples

Relative to Industry

High Low Median Current

P/Trailing E 3.4 0.65 2.1 0.68P/Forward E 3.3 0.26 2.2 0.67P/B 19.5 0.3 1.1 1.1P/S 33.4 0.9 3.4 1.0P/CF 6.6 0.1 4.2 0.7

Relative to S&P 500 High Low Median Current

P/Trailing E 2.0 0.53 1.4 0.73P/Forward E 1.7 0.49 1.2 0.79P/B 1.8 0.2 0.7 0.6P/S 14.0 3.1 8.9 4.7P/CF 2.9 0.7 2.3 1.1

Valuation: Absolute Multiples

Absolute Valuation

High Low Median Current #Your Target Multiple

*Your Target E, S, B, etc/Share

Your Target Price (F x G)

A. B. C. D. E. F. G. H.P/Forward E 31.6 9.8 19.4 12.2 15 1.35 20.25P/S 19.4 4.3 12.9 6.0 7 2.97 20.8P/B 5.7 1.1 1.8 1.4 1.6 10.32 16.51P/EBITDA 15.46 2.86 10.13 3.28 5.4 4.40 23.6P/CF 33.5 10.9 23.6 12.1 18 1.20 21.6

The Price-to-Book 1.6x

Risks• Interest rates

•Negatively correlated with interest rates •Interest rates will increase soon

• Economic risks•10% Unemployment•High national debt

Questions?

Sell: JPMBuy: HCBK

Recommendation 1: GS•Market Cap: $77.14 B•Outstanding diluted shares: 538.6 M•Stock Price: $143.23•Beta: 1.40•Lines of Businesses:

•Investment Banking (10.62% of total sales)•Trading and Principal Investments (76.1% of total sales)•Asset Management and Securities Services (13.30% of total sales)

•Competitors:•JP Morgan Chase Co.•Morgan Stanley•Citigroup

Price Movement: GS

Sales of GS

2012E 2011E 2010E 2009 2008 2007 2006 2005

Investment Banking 5265.774833 5015.02365 4868.955 4797 5179 7555 5613 3599% sales increase 5% 3% 2% -7% -31% 35% 56%Principal and Trading 32445.5565 30322.95 28879 28879 8095 29714 24027 15452% sales increase 7% 5% 0% 257% -73% 24% 55%Asset Managament and security services 4489.685025 4275.8905 4151.35 4090 4672 4731 4527 3090% sales increase 5% 3% 2% -12% -1% 5% 47%Operating Revenues 42,201.02$ 39,613.86$ 37,899.31$ 37768.49 17944.96 42000.58 34168.11 22141

Interest revenue 16695.90978 15178.0998 14185.14 13907 35633 45968 35186 21250% increase 10% 7% 2% -61% -22% 31% 66%Interest Expense 7665.84 7098 6825 6500 31357 41981 31688 18153% increase 8% 4% 5% -79% -25% 32% 75%Net Interest Income 9,030.07$ 8,080.10$ 7,360.14$ 7407 4276 3987 3498 3097as a percent f sales 0.13 0.13 0.13 0.163961 0.192431 0.086697 0.092869 0.122712Net Total Revenue including income 51,231.09$ 47,693.96$ 45,259.45$ 45175.49 22220.96 45987.58 37666.11 25238

•This quarter was a PERFECT trading quarter. Not one day did GS sustain a loss•0% increase for principal and trading reflects the rest of the year being tough in light of the SEC and regulation

DCF for GS

•Higher terminal Discount rate for headline risk still doesn’t take the upside away… 20% upside from the current price with 18% discount rate

Goldman Sachs (GS)

Analyst: David Kaplan Terminal Discount Rate = 18.0%4/18/2010 Terminal FCF Growth = 3.0%(in Millions)Year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 45,314 47,762 51,315 53,881 56,305 58,557 60,607 62,425 64,298 66,227 68,214 % Grow th 5.4% 7.4% 5.0% 4.5% 4.0% 3.5% 3.0% 3.0% 3.0% 3.0%

Operating Income 11,672 12,458 14,318 14,548 14,921 15,518 15,758 16,231 16,074 16,557 17,053 Operating Margin 25.8% 26.1% 27.9% 27.0% 26.5% 26.5% 26.0% 26.0% 25.0% 25.0% 25.0%

Interest Income 7,360 8,080 9,030 9,429 9,572 9,662 9,697 9,988 10,288 10,596 10,914 Interest % of Sales 16.2% 16.9% 17.6% 17.5% 17.0% 16.5% 16.0% 16.0% 16.0% 16.0% 16.0%

Taxes 6,661 7,188 8,405 8,632 8,817 9,316 9,418 9,701 10,018 10,318 10,628 Tax Rate 35.0% 35.0% 36.0% 36.0% 36.0% 37.0% 37.0% 37.0% 38.0% 38.0% 38.0%

Net Income 10,558 11,917 13,403 15,345 15,675 15,863 16,037 16,518 16,345 16,835 17,340 % Grow th 12.9% 12.5% 14.5% 2.2% 1.2% 1.1% 3.0% -1.0% 3.0% 3.0%

Add Depreciation/Amort 1,786 1,822 1,858 1,832 1,802 1,815 1,818 1,873 1,929 1,987 2,046 % of Sales 3.9% 3.8% 3.6% 3.4% 3.2% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0%

NPV of Cash Flows 66,666 75% Shares Outstanding527 NPV of terminal value 22,750 25% Terminal Value 119,067 Projected Equity Value 89,416 100% Current Price 142.32$ Free Cash Flow Yield 14.08% Implied equity value/share169.70$ Free Cash Yield 14.56%Current P/E 7.1 6.3 5.6 Terminal P/E 6.9 Projected P/E 8.5 7.5 6.7 Debt 222,601 Current EV/EBITDA 19.3 18.2 16.0 Cash 38,291 Terminal EV/EBITDA 15.9 Projected EV/EBITDA 20.3 19.2 16.9 Cash/share 72.67

Valuation of GSRelative to Industry High Low Median Current

P/Trailing E 1.2 .13 .96 .44P/Forward E 1.1 .13 .93 .86P/B 1.5 .8 1.0 1.0P/S 1.2 .3 .6 .9P/CF 1.8 .2 1.1 .7

Relative to S&P 500 High Low Median Current

P/Trailing E 2.1 .33 .70 .34

P/Forward E 1.4 .51 .72 .52

P/B 1.1 .4 .7 .5

P/S 2.1 .5 1.1 1.3

P/CF 1.7 .5 1.0 .6

Absolute Valuation

High Low Median Current #Your Target Multiple

*Your Target E, S, B, etc/Share

Your Target Price (F x G)

A. B. C. D. E. F. G. H.P/Forward E 21.5 7.5 12.2 7.5 8.0 18.36 146.88P/S 3.6 .4 1.7 1.6 1.7 81.00 138.00P/B 5.7 .7 2.1 1.1 1.1 150.00 165.00P/EBITDA 4.01 .52 2.38 2.86 2.86 50.08 143.23P/CF 21.3 3.9 11.9 5.3 5.0 27.02 135.12

Risks to recommendation

• Headline risk– Damaged reputation from S.E.C charges– Material fines and business reduction

• Interest Rate risk– currently low, will increase…– Increased interest rates will hurt margins for

trading, lower volume, less activity• Regulation

– Material effects of financial reform on GS business

Analysis: PGR

Analysis: PGR

Qualitative Assessment: PGR

• Price target: $22 (8.10%)• Limited volatility in relation to other financial

stocks (product offering…)• Acquisition of market share promising• April EPS consistent with April ‘09, revenues

up to $1.47bn vs $1.41bn