INVESTMENT MANAGEMENT, LLC. Evaluating Financials In a State of Panic

Transcription

1 P Z E N A INVESTMENT MANAGEMENT, LLC Evaluating Financials In a State of Panic

2 Financial Stocks in Free Fall Lehman Brothers Holdings Inc. (LEH) 29-Dec-2006 to 27-Nov-2007 (Daily) High: U.S. Dollar Low: Last: Citigroup Inc. (C) 29-Dec-2006 to 27-Nov-2007 (Daily) High: U.S. Dollar Low: Last: Volume in Millions (max/avg) 45 Volume in Millions (max/avg) 230 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Data Source: Prices / Exshare FactSet Research Systems Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Data Source: Prices / Exshare FactSet Research Systems Fannie Mae (FNM) 29-Dec-2006 to 27-Nov-2007 (Daily) High: U.S. Dollar Low: Last: Freddie Mac (FRE) 29-Dec-2006 to 27-Nov-2007 (Daily) High: U.S. Dollar Low: Last: Volume in Millions (max/avg) Volume in Millions (max/avg) 85 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Data Source: Prices / Exshare FactSet Research Systems Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Data Source: Prices / Exshare FactSet Research Systems

3 Financials Stocks are Extremely Cheap U.S. Financial Stocks * Relative Price-to-Book Ratio 1965 through Late-November 2007 Higher Price-to-Book Ratios Current Beginning Lower Price-to-Book Ratios Percentile (100=Financials Cheapest) Source: Corporate Reports, Empirical Research Partners Analysis *Largest 1,500 stocks; capitalization-weighted data 2

4 Subprime Borrower Not All Deadbeats Average Loan Size Average Down Payment Average Second Mortgage Average Home Price Owner Occupied % Weighted Average Coupon % FICO < 600 $223,000 33,000 19,000 $275,000 95% 8.3% 33% Source: Company Reports and Pzena Estimates 3

5 Subprime Borrower Not All Deadbeats Monthly Income Monthly Payment First 2 Years Monthly Payment After Reset Avoided Rent Budget Cut to Make New Monthly Payment # of Months Savings to Recoup Down Payment $3,900 1,642 1,846 1,000 5% 39 Source: Company Reports and Pzena Estimates 4

6 GSE s Credit Portfolios are Very High Quality FRE Credit Guarantee Portfolio at September 2007 LTV Ratio Product Type 125 Above* 80% % Interest Only 1% Option ARM 5% Other Below 80% LTV FRE Current FRE at Origination U.S. Market Alt- U.S. Market A 2006 VintageSubprime 2006 at Origination Vintage at Origination 5% Hybrid ARM 80% Fixed Weighted Average Loan to Value 60% 73% 81% 85% *Credit enhancement required for GSE origination above 80% LTV by charter Source: Freddie Mac 5

7 FRE s Credit Portfolio Continues to Perform Well 90 Day Delinquency Rate 1.00% 0.75% 0.50% 0.25% 2004 Sept 2007 Source: Freddie Mac and Mortgage Brokers Association 6

8 FRE Profitability (basis points) Credit Guarantee Recent Vintage Expected Actual Current Market Fees Expected Losses (4) (9) (3) Operating Expenses (6) (6) (6) Operating Margin Implied ROE 20% 10% 39% Retained Portfolio OAS Implied ROE 14% 24% Source: Company Reports and Pzena estimates 7

9 FRE Calculation of Earnings Power Fair Value Implied ROE Normal Earnings June 1, 2007 $39 Less: Impairment Due to Expected Credit Losses (3) $35 X 18% $6.30 Less: Impairment Due to Over-Reserving (4) $31 Less: Impairment Due to Interest Rate Moves (6) September 30, 2007 $25 X 25% $6.30 Source: Company Reports and Pzena Estimates 8

10 FRE Earnings Power Low Case Base Case High Case Common Equity Issued $20/share 0 Long-term ROE 18% 20% 25% Long-term Growth Rate 3% 5% 8% Capital Surcharge 30% 15% 0% 2012 EPS $3.75 $6.25 $9.25 Source: Company Reports and Pzena Estimates Source:? 9

11 Further Information These presentation materials are intended for use by the recipient named on the front cover hereof for the exclusive purpose of evaluating the investment advisory services of Pzena Investment Management, LLC. Any other use is strictly prohibited. These presentation materials and any attachments delivered separately herewith may contain non-public or confidential information of Pzena Investment Management. Accordingly, neither this booklet nor any portion hereof may be reproduced or redistributed without the prior written consent of Pzena Investment Management. Disclosure of the information presented in this booklet to anyone other than the recipient s employees, officers, directors, or financial or legal representatives is also prohibited without the prior written consent of Pzena Investment Management. Pzena Investment Management, LLC, All rights reserved. 10