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BUY SELL Financial Sector American Express PacWest Bancorp Current Price: $77.99 Target Price:$71-$74 Current Price: $45.32 Target Price: $49.67~$51.69 Krause Fund Spring 2015
BUYSELL
Financial SectorAmerican Express PacWest Bancorp
Current Price: $77.99Target Price:$71-$74
Current Price: $45.32Target Price:$49.67~$51.69
Krause Fund Spring 2015
Economic outlookReal GDP：
stable growth to 3.1% in two years.
The Federal Effective Rate:
is expected to be 0-0.25% in the short term and reach to around 3% in three
years.
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Market Competition
AXP is still the leader in consumer finance industryCurrent trends: AXP got a hit, years to recover
Termination of some co-branded relationship: Costco: 20% of Amex’s worldwide loans and about 10% of world cards in force
Visa-exclusive credit card partner; Citibank - Costco-branded credit card Jet Blue
Metrics American Express
Discover Capital One
Bank of America
JPMorgan Citigroup
Market Cap 79.24B 26.05B 44.20B 164.5B 233.20B 162.21B
Market share
20% 7% 14% 18% 17% 9%
EPS (ttm) 77.99 58.39 80.44 15.64 62.60 52.9P/E 13.66 12.00 10.60 22.80 11.47 21.37ROE 28.48% 20.49% 10.21% 3.51% 9.84% 3.93%Net interest margin 2014
4.3% 9.765% 6.64% 2.25% 2.18% 2.90%
Krause Fund Spring 2015
American Express’ business model is challenged
2/3 Core functions of American Express are challenged by Google wallet,Amazon AllSaints and Apple Pay Transaction Media: provide connections between consumers and merchants (Now
challenged)
Trust provider: Guarantee each party can finish the trade with honor (Now challenged)
Financial services provide: Offer credits and loans for consumers to make purchase (Coming soon)
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Game ChangingKrause Fund Spring 2015
Valuation Model
Key Assumptions:Short Term: (1-2 years) Lost partnership with Costco
Medium Term: (2-5years) Interest rate change
Long Term:(5-10 years) Competition from Google, Amazon, Apple
Model Target Price
% difference with current price of $77.6
DCF&EP $73.23 5.63%DDM $109.37 140%
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Regional-bank Industry OverviewBenefits from the rebound of the U.S. economyOutperforms in the financial industry and is expected to continuously growMinimizes the impact from the fluctuating exchange rate between countries
Krause Fund Spring 2015
Source from FactSet
PacWest Bancorp Business ModelCommunity Banking in California
80 full-service branches
Cross selling
National lending Support middle to small businesses
Highly diversified by loan type, industry and geography
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Map of PacWest Bancorp’s branches. Source from PacWest Bancorp Website
Financial Highlights• Highly Profitable
Industry Leading Net Interest Margin: 5.89%
• Effective ManagementLow Efficiency ratio: 40.40%
• Solid Credit QualityNon-performing Asset (NPA) ratio: 1.04%
• Strong Capital LevelTangible Common Equity (TCE) Ratio:12.20%Tangible book value per share: $17.36 Net Interest Margin Comparison
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Investment Positives and Negatives
Growing company with robust earnings
Diversified loan portfolio
Negatives
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Positives
Acquisition plans
Federal funds rate
Valuation Model
Model Target Price
% higher than current price of $45.32
DCF&EP $51.69 14.06%DDM $49.67 9.60%
Krause Fund Spring 2015
Key Assumptions:Cost of Equity: 7.54%CV growth: 2%Interest YieldDividend Payout Ratio:60%~80%
BUYSELL
Financial SectorAmerican Express PacWest Bancorp
Current Price: $77.99Target Price:$71-$74
Current Price: $45.32Target Price:$49.67~$51.69
Krause Fund Spring 2015
Appendix--Valuation Assumptions
Interest Revenue/expense Rate Forecast:
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Appendix—Acquisition StrategyKey Drivers:
Cost SavingsCustomer RetentionMargin ImprovementMarket Expansion
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