GS Financials Positioning for the Next Leg of the Rally

8/9/2019 GS Financials Positioning for the Next Leg of the Rally

1/41


2/41

April 7, 2010 United States: Financial Services

Goldman Sachs Global Investment Research 2

Table of contents

Portfolio Manager Summary: Life after the crisis 3

Thinking about Financials in the context of a portfolio 5A return to micro from macro 10

Theme #1: Provision leverage in consumer loan portfolios 11

Theme #2: Capital management is beginning to be a key differentiator across the sector 14

Theme #3: Capital market should bounce from a disappointing 4Q2009 17

Theme #4: Real estate prices are stabilizing as the hunt for yield hits real assets 20

Short rates are likely to stay lower for longer, but have to go up eventually 26

Regulatory issues likely to remain a topic for the foreseeable future 30

Sector views: Attractive Large Banks, Asset Managers, Homebuilders and Brokers 34

Disclosures 37

GS Financials Equity Research Team

Banks Insurance Asset Managers Market Structure &Brokers

Real Estate/REITs Homebuilders

Richard Ramsden Christopher M. Neczypor Marc Irizarry Dan Harris, CFA Jonathan Habermann Joshua Pollard

Brian Foran Christopher Giovanni Alexander Blostein, CFA Jason Harbes, CFA Sloan Bohlen Anto Savarirajan

Adriana Kalova Eric Fraser Neha Killa Jehan Mahmood

Quan Mai Cooper McGuire Siddharth Raizada

Vikas Jain

GS Financials Credit Research Team Financials Specialist

Banks Insurance and

Managed Care

Financials Sector

Specialist

Louise Pitt Donna Halverstadt Jessica Binder, CFA

Amanda Lynam


3/41


4/41



Exhibit 1: Top Ideas across the Financials sectorStock ideas from the Financials business unit; priced as of the market close of April 7; $ millions, except per-share data

Key Financials investing themes

Company name Ticker Sector Market cap (current) Price Target price

Upside/downside

to target price

Provision

Leverage

Capital

Allocation

Capital

Markets Real Estate

Buy

Bank of America Corporation BAC Banks 185.0 18.62 20.00 7%

Franklin Resources, Inc. BEN Asset Managers 25.9 112.83 130.00 15%

The Blackstone Group L.P. BX Asset Managers 16.6 14.68 18.00 23%

CB Richard Ellis Group Inc. CBG REITS 3.9 16.23 18.00 11%

D.R. Horton, Inc. DHI Homebuilders 3.8 11.93 17.00 42%

Evercore Partners Inc. EVR MktStructure 1.2 30.68 40.00 30%

J.P. Morgan Chase & Co. JPM Banks 178.7 45.32 54.00 19%

The Nasdaq Stock Market, Inc. NDAQ MktStructure 4.6 21.42 25.00 17%

SunTrust Banks, Inc. STI Banks 14.2 28.53 35.00 23%

Unum Group UNM Insurance 8.4 25.36 26.00 3%

XL Capital Ltd. XL Insurance 6.7 19.47 23.00 18%

Sell

BRE Properties, Inc. BRE REITS 1.9 37.05 25.00 -33% Duke Realty Corp. DRE REITS 3.0 13.01 10.00 -23% Essex Property Trust, Inc. ESS REITS 2.6 94.92 72.00 -24% Federated Investors, Inc. FII Asset Managers 2.7 26.52 21.00 -21%

Hudson City Bancorp, Inc. HCBK Banks 7.5 14.20 13.00 -8% Regency Centers Corporation REG REITS 2.6 38.12 33.00 -13%

For important disclosures, please go to http://www.gs.com/research/hedge.html.

For methodology and risks associated with our price targets, please see our previously published research.

Source: Goldman Sachs Research estimates.

Exhibit 2: GS Financials: Summary of rankings by sub-sectors Exhibit 3: Financials have underperformed since October

Equity Coverage Views

Attractive Neutral Cautious

Asset Managers Credit Cards Life InsuranceBrokers Discount Brokers Specialty Finance

Homebuilders Insurance Brokers

Large-cap Banks Market StructureMortgage InsuranceNon-Life Insurance

Regional BanksREITs

Trust Banks

Credit Coverage Views

Attractive Neutral Cautious

US Banks Insurance

European Banks Mortgage Insurance

5

7

9

11

13

15

17

19

7-Oct-08

7

-Nov-08

7

-Dec-08

7

-Jan-09

7

-Feb-09

7

-Mar-09

7-Apr-09

7

-May-09

7

-Jun-09

7-Jul-09

7

-Aug-09

7

-Sep-09

7-Oct-09

7

-Nov-09

7

-Dec-09

7

-Jan-10

7

-Feb-10

7

-Mar-10

7-Apr-10

600

700

800

900

1000

1100

1200

1300Performance

6-Mar-09 13-Oct-09 6-Mar-09

13-Oct-09 7-Apr-10 7-Apr-10

XLF 146% 7% 165%

SPX 57% 10% 73%

Source: Goldman Sachs Research. Source: Bloomberg, Goldman Sachs Research.


5/41


6/41



Exhibit 5: Mutual funds are still underweight regional banks Exhibit 6: How mutual funds are positioned within Regional Banks

Position Size (bp)

0

50

100

150

200

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Dec-08

Jun-09

Dec-09

Current

Mutual Fund SPX

Overweight/(Underweight)

-140

-120

-100

-80

-60

-40

-20

0

Jan-0

6

Ju

l-06

Jan-0

7

Ju

l-07

Jan-0

8

Ju

l-08

Dec-0

8

Jun-0

9

Dec-0

9

Curren

t

Change in

Current Current Current (bp) Mutual Fund Wgt

Mutual Fund SPX Weight Overweight/ Jun-09 to Current

Weight (bp) (bp) (Underweight) (bp)

BBT 3 21 -18 -7FITB 3 10 -7 1PBCT 0 5 -5 0RF 5 9 -4 4CINF 1 4 -3 -1HCBK 3 6 -3 -2FHN 0 3 -3 -1STI 10 13 -3 4CMA 4 6 -3 3HBAN 1 4 -3 1KEY 4 6 -2 3MTB 4 6 -2 3ZION 2 3 -1 0SNV 0 0 0 0FNFG 0 0 0 0CYN 0 0 0 0MI 6 4 2 5

Source: Lionshare via FactSet and Goldman Sachs ECS Research Source: Lionshare via FactSet and Goldman Sachs ECS Research

Exhibit 7: Mutual funds have largely closed out their underweight position

in Large-cap banks

Exhibit 8: How positioning has changed within large-cap banks since last

summerPosition Size (bp)

0

200

400

600

800

1000

1200

Jan-06

J

ul-06

Jan-07

J

ul-07

Jan-08

J

ul-08

Dec-08

Jun-09

Dec-09

Cu

rrent

Mutual Fund SPX

Overweight/(Underweight)

-300

-250

-200

-150

-100

-50

0

Jan-0

6

J

ul-06

Jan-0

7

J

ul-07

Jan-0

8

J

ul-08

Dec-0

8

Jun-0

9

Dec-0

9

Cu

rren

t

Current (bp) June-09 (bp)

Overweight/ Overweight/ Change

(Underweight) (Underweight) (bp)

BAC 2 -46 47WFC 21 -2 24USB -15 -20 5MS 6 7 -1PNC -1 2 -3

JPM 8 27 -19C -53 -10 -43

Source: Lionshare via FactSet and Goldman Sachs ECS Research Source: Lionshare via FactSet and Goldman Sachs ECS Research


7/41


8/41



1934 (75 bp). To get to 15% return on tangible equity, we assume that banks are required to hold 8% Tier 1 common capital,

although this is clearly still an area of debate among regulators.

Exhibit 11: Financials mostly trade at a discount to history Exhibit 12: Even adjusting for lower ROE, banks trade at a discount tohistory

Currentmultiple Historical avgmultiple Premium / Discount tohistorical average

Mortgage Insurance (2) 1.2x 1.2x 0%

Life insurance (2) 0.9x 1.7x -48%

Banks (1) 1.9x 2.7x -30%

Non-life insurance (2) 0.9x 1.6x -43%

Market structure 13.3x 23.3x -43%

Asset Managers 17.0x 18.0x -6%

Discount brokers 20.8x 18.4x 13%

REITs 15.9x 12.2x 30%

Average -- -- -16%

Current

multipleHistorical avg

multiple

Premium / Discount to

historical average

Price to Earnings

Industrials 17.7x 11.8x 51%

Materials 17.8x 12.8x 39%

Discretionary 16.8x 13.2x 27%

Energy 13.4x 11.4x 17%

Info Tech 15.5x 18.5x -16%

Average (P/E) 16.2x 13.5x 24% (1): Price / Tangible Book; (2) Price / Book; (3) Price/FFO

Normalized

2010

20092008

2007

200620052004

2003

2002

20012000

1999

199819971996

1995

19941993

1992

19911990

R2 = 73%

-5%

0%

5%

10%

15%

20%

25%

50% 100% 150% 200% 250% 300% 350% 400% 450%

Price to Tangible Book

ReturnonTangibleEquity

Eventually should get back here

We may never see this again

Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.

One other issue that investors are wrestling with is the impact of dilution on earnings. The dilution in Financials stocks has been

extreme over the last two years, particularly when compared to other sectors in the market. We calculate that shares are up

60% on average across Financials, with most of the dilution being caused by the Banks. Despite the increase in shares, most banks

have not seen a comparable increase in earning assets. Citigroup exemplifies this story; even if pre-provision were to return to its

previous run-rate, earnings per share would still be significantly depressed due to the increase in share count. But in many cases, C

is an extreme example, and even adjusted for dilution, most banks are still trading at a substantial discount to the historical

average. We believe the large caps are trading at a bigger discount to their long-term average earnings multiples than regionals

and thus rate the large cap banks Attractive and the regionals Neutral. See Exhibits 13-15.


9/41



Exhibit 13: There has been significant dilution in Financials over the lastyear

Exhibit 14: Pre-provision shrinkage and increase in share count has resultedin a big decline in normalized earning power

Change in Share Count (2007-2009)

Average* Median

Consumer Discretionary -3% -1%Information Technology -3% -2%Consumer Staples -3% -3%Telecom Services -1% -1%Industrials 0% 0%Energy 1% 2%Health Care 3% 0%Materials 4% 1%Utilities 5% 4%Financials 59% 12%

* market-cap weighted

$0.39$0.62$0.65

$0.30

$0.80

$1.30

$1.80$2.30

$2.80

$3.30

$3.80

$4.30

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

ImpliedNorm

alizedEPS

Pro-forma for gov't conversion

0

10,000

20,000

30,000

40,000

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Shares

(mm)

Gov't announced its intention to convert

into common shares

Source: Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates.

Exhibit 15: Large banks and regionals are trading at a 24% discount to long-term multiplesprice to normalized EPS by bank, GS-coverage

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

NTRS

PBCT

A

XP M

I

C

YN

BK

RF

FHN

W

AL

HCBK

Z

ION

FNFG

BBT

STT

PNC C

U

SB

HB

AN

C

MA

F

ITB

C

OF

K

EY

STI

B

AC

DFS

W

FC

JPM

MS

PricetoNormalizedEPS

Indicates "Buy" rated stock

Normalized Long-term Avg Difference

Large banks 8.5x 11.2x -24%Regionals 10.4x 12.8x -19%

Average 9.5x 12.0x -21%

Note: regionals ex Northeast. Long-term avg since 1985 where available.

Price to Earnings

Source: FactSet, Goldman Sachs Research estimates..


10/41



A return to micro from macro

Financials are often considered one of the most macro-driven sectors in the market, with many of the stocks trading in lock-step

with one another (see Exhibit 16). While that has certainly been the case over the last few years, correlation across the group has

started to fall dramatically in recent days (see Exhibit 17). In some ways, this is not surprising; as regulatory fears from earlier thisyear dissipate, investors are starting, once again, to concentrate on the fundamental issues, and realize that there are many ways to

differentiate across the group. While we still see some key themes helping drive returns, many of these are more stock-specific and

cut across sectors (consumer provision leverage and capital management) as opposed to being large macro themes. The upcoming

earnings season should provide investors with evidence as to these differentiating trends and provide opportunities for generating

alpha.

Exhibit 16: Financials tend to be one of the most highly correlated sectorsranked by 5-year percentile

Exhibit 17: Financials correlation is at the lowest level since 2006realized correlation across stocks

ETF S&P Sector Current

1-year

median

1-year

percentile

5-year

median

5-year

percentile

XLF Financials 0.29 0.59 0.02 0.60 0.03

XLY Discretionary 0.19 0.40 0.02 0.40 0.11XLU Utilities 0.34 0.61 0.03 0.54 0.13XLV Healthcare 0.25 0.48 0.02 0.44 0.14XLB Materials 0.27 0.40 0.09 0.42 0.16XLE Energy 0.62 0.63 0.38 0.70 0.21XLP Staples 0.26 0.33 0.38 0.33 0.32

XLK Technology 0.47 0.54 0.22 0.52 0.34XLI Industrials 0.64 0.60 0.60 0.58 0.65SPX S&P 500 0.46 0.38 0.69 0.34 0.76

Note: The percentile is the rank of the current value as a percentage of the total observations.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Apr-

06

Jun-0

6

Aug-0

6

Oc

t-06

Dec-0

6

Fe

b-0

7

Apr-

07

Jun-0

7

Aug-0

7

Oc

t-07

Dec-0

7

Fe

b-0

8

Apr-

08

Jun-0

8

Aug-0

8

Oc

t-08

Dec-0

8

Fe

b-0

9

Apr-

09

Jun-0

9

Aug-0

9

Oc

t-09

Dec-0

9

Fe

b-1

0

Apr-

10

Jun-1

0

S&P 500

Financials

Source: Goldman Sachs Research. Source: Goldman Sachs Research.


11/41



Theme #1: Provision leverage in consumer loan portfolios

The credit cycle is clearly moderating, as non-performing asset formation is slowing and reserves are closer to peak levels.

The improvement is most clear in consumer and commercial (C&I), and should current trends continue, we see potential for

reserve releases later this year. On the other hand, some prime jumbo mortgages and CRE continue to get worse. SeeExhibits 18-21.

Exhibit 18: Credit card delinquencies have been better thus far in 2010 Exhibit 19: C&I defaults have started to slow down as well

2Q09 -13bps

3Q09 +4bps

4Q09 +3bps

1Q10 -12bps

Credit Card

Avg chg delinquency

-30

-20

-10

0

10

2030

40

50

60

Jan06

A

pr06

J

ul06

O

ct06

Jan07

A

pr07

J

ul07

O

ct07

Jan08

A

pr08

J

ul08

O

ct08

Jan09

A

pr09

u

ly09

O

ct09

Jan10

Monthovermonth

change

Ann. Defaults #

1Q09 19.8% 8.2%

2Q09 16.8% 12.1%

3Q09 5.0% 8.7%

4Q09 8.4% 8.3%

1Q10 TD 3.6% 6.5%

Leveraged Loans (proxy for C&I)

0%

2%

4%

6%

8%

10%

12%

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Lagging12-monthD

efaultRate

# of defaults

$ of defaults

$

Source: Company data, Loanperformance, Trepp, S&P LCD, Goldman Sachs Research. Source: Company data, Loanperformance, Trepp, S&P LCD, Goldman Sachs Research.

Exhibit 20: Within resi mortgages, prime jumbo is getting worse Exhibit 21: CRE delinquencies continue to trend up

MBS (2006 & 2007 vintages)

-400 bps

-300 bps

-200 bps

-100 bps

0 bps

100 bps

200 bps

300 bps

400 bps

500 bps

600 bps

700 bps

Subprime Op ARM Alt-A Prime

Jumbo

Home

Equity

FRE/FNM

Qo

Q

Change

in30+De

linquency 1Q08 2Q08

3Q08 3Q091Q09 2Q093Q09 4Q091Q10 TD

Avg chg in delinquency

1Q09 +19bps

2Q09 +32bps

3Q09 +37bps4Q09 +56bps

1Q10 TD +80bps

CMBS

-10 bps

0 bps

10 bps

20 bps

30 bps

40 bps

50 bps

60 bps

70 bps

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

CMBS-MoM

change,60+D

elinquency

Source: Company data, Loanperformance, Trepp, S&P LCD, Goldman Sachs Research. Source: Company data, Loanperformance, Trepp, S&P LCD, Goldman Sachs Research.


12/41



Consumer credit, in particular, continues to improve, as evident in the most recent credit card master trust data. Total

delinquency was down 6 bp month on month while early delinquencies are down for the fourth straight month (see Exhibit 22).

Since the peak in October, early delinquencies are down 14%. We continue to believe high but stable unemployment leads to lower

delinquency, while seasonally March to May are always strong on tax refunds and other factors. Delinquencies usually fall 8% over

those months. On this theme, we favor the large banks and credit card issuers vs. the regional banks. In particular, BAC and JPM

are our best ideas given leverage to consumer credit improvement and attractive valuation at 7X our normalized earningsestimates.

Exhibit 22: Scorecard stocks with leverage to US consumer credit moderation

DFS 70% DFS 100% DFS 70%

COF 35% AXP 85% COF 60%AXP 23% COF 77% JPM 30%

BAC 6% JPM 51% AXP 30%

JPM 5% BAC 47% BAC 25%

USB 3% USB 40% USB 20%

WFC 2% WFC 29% WFC 15%

Average 16% Average 62% Average 28%

US consumer credit cost as % of

of revenue

US consumer credit cost as % of

total credit cost *

US consumer credit as % of

normalized earnings **

Source: Company reports, FactSet, Goldman Sachs Research.

Looking ahead to earnings, bank charge-offs typically fall over 20% in 1Q relative to 4Q based on data since 1985. Half of this

seasonal decline is driven by declines in commercial charge-offs (C&I) with the remainder driven by commercial real estate and

auto. This year losses look set to fall although by a smaller degree, as C&I is likely in-line with historical seasonal patterns based on

commercial bankruptcies and leveraged loan defaults (although as a caveat, this regression approach tends to undershoot as

losses are peaking), and auto charge-offs have tracked down 12% using monthly data through February from Capital One and

AmeriCredit. Commercial real estate may be the one outlier in seasonality as delinquency data from the CMBS market implies that

commercial mortgage issues are still increasing. See Exhibit 23.


13/41



Exhibit 23: The seasonality of credit losses typically fall over 20% in 1Q vs. 4Q, with improvement in C&I, CRE and autoavg quarter over quarter change in net charge-offs since 1985; left chart on dollar losses, right table on % NCOs (1992 = 1Q 92 vs. 4Q 91)

Year 4Q FY0 1Q FY1 1Q vs. 4Q (bps)

1992 1.86% 1.25% -61 bps

1990 1.90% 1.30% -60 bps1987 1.33% 0.76% -57 bps

1993 1.41% 0.86% -55 bps

1986 1.26% 0.75% -51 bps

1991 1.65% 1.20% -45 bps

1989 1.20% 0.76% -44 bps

1988 1.32% 0.89% -43 bps

1994 0.92% 0.49% -43 bps

2006 0.64% 0.34% -30 bps

2004 0.90% 0.65% -25 bps

2002 1.30% 1.08% -22 bps

2001 0.91% 0.71% -20 bps

2003 1.06% 0.88% -18 bps

1995 0.55% 0.38% -17 bps

2000 0.70% 0.56% -14 bps

2005 0.62% 0.49% -13 bps

1999 0.70% 0.60% -10 bps

1998 0.69% 0.61% -8 bps

1997 0.64% 0.58% -6 bps

1996 0.62% 0.56% -6 bps

2007 0.53% 0.48% -5 bps

2009 2.04% 2.00% -4 bps

2008 0.86% 0.95% 9 bps

Average 1.07% 0.79% -28 bps

-30%

-20%

-10%

0%

10%

20%

30%

40%

1Q vs. 4Q 2Q vs. 1Q 3Q vs. 2Q 4Q vs. 3Q

Avg

Qo

Qch

anges

ince

1985

Source: Federal Reserve, Goldman Sachs Research.


14/41


15/41



Exhibit 26: Banks pay 30-40% of earnings in dividend Exhibit 27: Normalized dividend yields could be significant

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

Jan-9

2

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Long-term average = 37%

2004-2007 average = 45%

GS

Normalized

EPS

Peak LT Avg Peak LT Avg Peak LT Avg

BAC $2.40 45% 37% 1.08 0.89 6% 5%

WFC $4.35 45% 37% 1.96 1.61 6% 5%

JPM $6.50 45% 37% 2.93 2.41 6% 5%

USB $2.85 45% 37% 1.28 1.05 5% 4%

PNC $6.50 45% 37% 2.93 2.41 5% 4%

AVG 6% 5%

Div Payout Ratio* Normalized Div Yield on Normal Div

Source: Goldman Sachs Research. Source: Goldman Sachs Research.

Buybacks have also picked up recently since the start of the year, nine companies in Financials have announced new

buyback programs, primarily in the Non-Life Insurance, Market Structure and Asset Management space. We highlight the

groups and stocks that have the highest remaining authorized share repurchases as a percentage of market cap (see Exhibits 28-29).

For these names, completion of these programs has the potential to drive upside and significant EPS accretion.

Exhibit 28: Sectors with the largest remaining repurchase authorizations asa percentage of market cap

Exhibit 29: Buy and Neutral rated companies with the largest remainingrepurchase authorizations as a percentage of market cap

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

InsuranceBrokers

Non-LifeInsurance

SpecialtyFinance

MarketStructure

Brokers

CreditCards

RegionalBanks

Homebuilders

Financials

LargeBanks

AssetManagers

MortgageInsurance

TrustBanks

REITs

LifeInsurance

Remainingbuyback

authorization/marketcap

Company Name Ticker Sector

Remaining

buyback

authorization /

market cap

The Travelers Companies, Inc. TRV NonLifeInsurance 25.5%Arch Capital Group Ltd. ACGL NonLifeInsurance 25.3%Janus Capital Group Inc. JNS Asset Managers 23.2%

Validus Holdings, Ltd. VR NonLifeInsurance 21.8%Moody's Corporation MCO Specialty Finance 20.9%

Meritage Homes Corp. MTH Homebuilders 19.8%Aon Corp. AON Insurance Brokers 19.6%The PMI Group, Inc. PMI Mortgage Insurance 17.7%

Knight Capital Group, Inc. NITE Market Structure 17.0%Platinum Underwriters Holdings PTP NonLifeInsurance 15.5%

Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.

A il 20 0 U i d S Fi i l S i


16/41



Our focus on buybacks in the context of capital allocation is largely aimed at identifying supports to both the market and

company stock prices. With these as a backdrop we are aware of investor focus on the impact of buybacks on stocks. Recent

analysis by John Marshall of our Cross-Product team suggests that stocks that announced buybacks during the past year

outperformed the S&P 500 by 290 bp in the four days around the buyback announcement (see Exhibit 30). We have seen this in the

financial space as well. For example, UnumProvident (UNM) and StanCorp (SFG) are smid-cap life insurance companies with

similar underlying businesses (i.e., disability insurance), and while the two traded together for most of the year, SFG can be shownto have significantly outperformed UNM following the announcement of its share repurchase (see Exhibit 31).

There are a number of stocks that we expect will begin to buyback stock this year, including Unum Group (UNM), XL Capital

(XL) and Public Storage (PSA).

Exhibit 30: Stock reactions around share repurchase announcementsThrough February, 2010

Exhibit 31: Shares have reacted favorably to SFGs buyback announcement

3% 3%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Mar-

09

Apr-

09

May-

09

Jun-

09

Jul-

09

Aug-

09

Sep-

09

Oct-

09

Nov-

09

Dec-

09

Jan-

10

Feb-

10

AVG

4day

return(%)aroundauthorization

Stock return (%) Stock return (%) - SPX return (%)

UNM

SFG

1.0

1.5

2.0

2.5

3.0

3.5

4.0

03/09/2009

03/24/2009

04/08/2009

04/24/2009

05/11/2009

05/27/2009

06/11/2009

06/26/2009

07/14/2009

07/29/2009

08/13/2009

08/28/2009

09/15/2009

09/30/2009

10/15/2009

10/30/2009

11/16/2009

12/02/2009

12/17/2009

01/05/2010

01/21/2010

02/05/2010

02/23/2010

03/10/2010

03/25/2010

IndexedPricePerformance

Announces intention toresume share repurchases

Increased buyback

program

Source: Biryini Associates, Goldman Sachs Research. Source: Factset.


17/41


18/41

April 7 2010 United States: Financial Services


19/41



Exhibit 36: Financial sponsor M&A volumes are off to a soft start in 2010Financial sponsor backed M&A announcements ($ billions)

Exhibit 37:but dry powder remains at record levelsCommitted but not yet invested private equity capital globally (as of Dec 09)

0

50

100

150

200

250

300

350

2000Q3

2001Q1

2001Q3

2002Q1

2002Q3

2003Q1

2003Q3

2004Q1

2004Q3

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

Sponsor

Vo

lumes

($bn)

0%

5%

10%

15%

20%

25%

%oftotal

Sponsor Volumes ($ mn) - left axis % of total M&A - right axis

501

462

379

259

178186

280

163

62

-

100

200

300

400

500

600

2003

2004

2005

2006

2007

2008

2009

PrivateEquityDryPowder($bn)

503

Asia

EU

US

Source: Dealogic, Goldman Sachs Research. Source: Prequin, Goldman Sachs Research.


20/41


21/41



22/41


While shadow inventory continues to grow, it theoretically does so in part due to anticipation of successful mortgage

modifications. While not yet material to the overall 4.5 million borrowers behind on their payments, the most recent data point

(January HAMP report from the Treasury) suggests some early signs of success (see Exhibit 42). Specifically, cumulative

permanent modifications increased to 160,000, a 75% increase in one month. Furthermore, there are an additional 76,000 loans

which have been permanently modified by the servicers and are pending final borrower approval. While the sum of these two

(192,000) is a mere 3.5% of delinquent mortgages (60 day+), the rate of acceleration is meaningful. In addition, recent news fromBank of America that they are willing to forgiveness principal for borrowers where loan-to-value ratios are above 120% imply that

banks are willing to work with some borrowers, particularly in those circumstances where losses are likely to be significant anyway.

Exhibit 42: HAMP continues to grow which could begin to meaningfully benefit MI losses on a go-forward basisMortgage Insurance Industry Participation in Home Affordable Modification Program

MTG 1,874 5,623 $26,773 $150,546,621

RDN 1,312 3,936 $19,421 $76,444,116

PMI 1,221 3,662 $18,611 $68,150,613

GNW 1,499 4,498 $19,265 $86,665,198

Implied Cure

Benefit

Incremental

Jan. Mods

Reserve

Per Loan=

1Q2010

Implied ModX

0

20,000

40,000

60,000

80,000

100,000

120,000

HAMPPermanentMods(#ofloans)

MTGRDN

PMIGNWOther MIs

Jan. 2010

HAMPMortgage

InsurersHAMP

Implied

Mortgage

Insurers

10,207

66,465

17,860

116,297

4Q 2009

MIs = 15% MIs = 15%

Source: United States Treasury Department, Goldman Sachs Research, company commentaries.

One issue that has come up a lot more recently is rep and warranty charges, which are likely to be a risk to banks earnings this year.Recent data points suggest continued acceleration of put-back requests from the GSEs. Fannie Mae has been driving most of the

volume and the focus is still on the 2007 vintage. A big swing factor, therefore, is whether Freddie Mac steps up its put back rate.

More importantly, this issue will likely last for several quarters / years as its still unclear how much ultimately gets put back at this

point. See Exhibit 43.


23/41



24/41


Exhibit 44: CRE values are still off 30-40% but may be inflectingindexed as of YE-2000

Exhibit 45: Spreads still wide but recent deals show tighter bids can be hitas of March 2010

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

100

120

140

160

180

200

Monthly Price Change Index Value (Right Axis)

Recent CRE TransactionsAsset Value Date Cap rate Buyer Seller

Griffin Towers (office) $90.0mn Mar-10 8.1% Angelo Gordon JV Maguire PropertiesColumbia Uptown (apt) 11.8mn Mar-10 5.0% Van Metre Compaies Pennrose PropertiesThe Palatine (apt) 118.0mn Feb-10 4.5% Crescent Heights Monument Realty8599 Rochester Ave ( ind) 12.3mn Jan-10 7.3% KTR Capital Par tners Panattoni Dev' l

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

J

'01

A J O J

'02

A J O J

'03

A J O J

'04

A J O J

'05

A J O J

'06

A J O J

'07

A J O J A J O J

'09

A J O J

'10

100

200

300

400

500

600

10-Year Treasury avg cap rate spread (bps)

Source: Moodys, Real Capital Analytics. Source: Real Capital Analytics, Bloomberg.

Fundamentals In most markets, signs of the bottom for rents and occupancy are emerging and we expect comparisons to

improve on a quarterly basis over the course of this year. For REITs specifically, we expect FFO growth to be flat by year-end and

turn positive in early 2011. Market rents have started to flatten out after a period of steep declines in late 2008 and much of 2009.

That being said, a true recovery may take longer than in prior cycles, as our economists expect the unemployment rate to pick up

over the course of this year and not peak until the first half of 2011. See Exhibits 46-47.

Exhibit 46: FFO year-on-year growth comparison to improve incrementallyin 2010

Exhibit 47: CRE fundamentals lag the broader economy we do notanticipate a recovery until 2012 / 2013

FFO growth by sector 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E

Regional Malls -32.9% -16.5% -10.2% -9.5% -18.3% 7.3%

Office -20.6% -19.6% -7.2% 2.6% -16.1% 2.6%

Apartments -20.0% -22.7% -14.1% -2.5% -16.4% 3.8%

Industrial -41.3% -19.9% -15.7% -12.4% -25.7% 5.8%

Shopping Centers -30.6% -18.6% -15.4% -1.7% -18.2% 3.0%

REIT Average -29.1% -19.5% -12.5% -4.7% -18.9% 4.5%

We expect FFO growth to improve onquarterly basis going into 2010 with modest

recovery in 2H and 2011.

4%

6%

8%

10%

12%

14%

16%

18%

20%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

VacancyRate,bysect

or

Office

Industrial

Multifamily

Retail

CRE fundamentals typically lag the

economy by 18-24 months

Source: Goldman Sachs Research estimates. Source: PPR.



25/41


Bank losses The key concern for banks are what losses may ultimately total. To date, banks have recognized losses of about 2.5%,

a fraction of the 7% we expect them to eventually realize. Part of the issue is persistency given the long-tailed nature, we expect it

could take up to 15 years for banks to fully realize the losses on CRE. See Exhibits 48-49.

Exhibit 48: Banks recognized losses are a fraction of what they mayultimately end up being Exhibit 49: It will take 10 years to reach cumulative default

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

G

Ses

t

CommercialMortg

ageLosses:

Cumulativerecognized

todatebybanks

0% 2

%9

%

18%

28%

38%

47% 5

7% 6

4 % 6

9%7

4 % 7

9%

83%

85%8

8%

91%

93%

95%

97%

98%

99%

99%

99%

100%

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 910

11

12

13

14

15

16

17

18

19

20

21

22

23

Years since origination

CREcumulativedefaultprofile

Source: Goldman Sachs Research estimates. Source: PPR.


26/41



27/41


often five years. After that period, the rate is reset and then floats based on a specified index (often the Monthly Treasury Average

(MTA), plus a spread. Currently, payment shock is approximately 30%-40%, which is down considerably from 160% at the end of

2007. Low rates imply that payment shock will fall even further to 20%-30% next year as interest rates stay near zero. Historically,

delinquencies have picked up following the reset, particularly when the payment shock is high. Given that 2010 and 2011 are peak

years for option ARM resets, there is some concern that an increase in rates may result in a new round of losses (see Exhibit 52). A

significant amount of CRE matures over the next few years as well and likely will need to be re-financed.

Exhibit 52: Debt service coverage vs. Loan to value Exhibit 53: Delinquencies positively correlated with payment shock

2007

Origination

Annual cash flow 5 4 -20%

Cap rate 5% 8% 1.6x

Property value 100 50 -50%

Loan 70 70 0%Loan to value (LTV) 70% 140% 2.0x

Loan rate* 5.50% 1.50% -73%

Annual debt expense 4.8 2.9 -39%

Debt service coverage (DSC**) 1.0x 1.4x 1.3x

*Assume 30y amortization schedule, f loating rate LIB+50bp w ith 100bp floor

**Cash f low divided by debt expense

Today Change

0%

10%

20%

30%

40%

50%

60%

70%

1-25% 25-50% 51-75% 76-100% 101+%

payme nt shock at res et

%D

606m

afterreset

Source: Goldman Sachs Research Source: Loanperformance.

One of the biggest beneficiaries of rate increases across the space would be the discount brokers. When the Fed does begin to

tighten its fiscal policy and short-term yields begin to shift higher, net interest margins should move back to more normalized levels.

We estimate that the average EPS effect on the Discounters for the first 100 bp move in Fed Funds/Treasury yields will be roughly

24% on our 2011 estimates (see Exhibit 54). Similarly, a rising Fed Funds rate should benefit security lending spreads at trust banks,

as these companies typically invest cash collateral in LIBOR-based securities but pay out Fed Funds-based rates. Exhibit 55

summarizes how we would be positioned should rates start to increase.



28/41


Exhibit 54: SCHW and TRAD most sensitive to a 100 bp shift higher in rates Exhibit 55: The outlook for different sectors when rates rise

2011E EPS Impact % Change

Charles Schwab $0.80 $0.33 41%

TradeStation $0.40 $0.17 41%

TD Ameritrade $1.50 $0.28 19%

optionsXpress $1.30 $0.24 18%

E*TRADE Financial $0.11 ($0.00) (0%)

Average 24%

Note: TRAD estimate based on 100 bps increase in US Treasury yield

Fed FundsBest Interest Income

PerformanceRationale(s)

Discount Brokers Immediate leverage to higher rates

Cards (ex AXP)Business model has become more asset sensitive but it is hard to

pass on to customers with Fed funds above 1%

Below 1%, regionals don't benefit much given interest rate floors

Above 3%, deposit mix shift from non-interest bearing to CDsbecomes a headwind

Trust banks benefit most in a high rate environment after the Fedhas stopped rising rates. The f irst few increases in rates are usually

neutral to negative for trust banks NII.

0% - 1%

1% - 3% Regionals

Above 3% Trust Banks

Source: Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research.

However, higher rates do not necessarily imply that money market outflows will reverse. In the first quarter, money market

funds saw outflows of nearly $325 billion, approximately 10% of total industry assets or 40% annualized organic decay.

This would mark a record quarterly outflow for the industry. The yield differential between money market funds and CDs remains

at the historically wide level of 125 bp, which is likely to keep pushing investors out of money funds. While higher yields should

theoretically also help money market funds given the more attractive yield, what is important is what is driving the higher rates. If

rates are going up because of inflation concerns, then money markets should see inflows as investors flock to safety. But if rates

rise because of better growth expectations, money markets actually see more dramatic outflows as investors move up the risk

curve. FII is one of the most leveraged names to money market funds, and is one of the key reasons behind our CL-Sell ratingon the stock. See Exhibits 56-57.



29/41


Exhibit 56: Money market funds are on track to see record outflows in 1Q10Quarterly money market fund flows; 1Q2010 data is quarterized based on 2/18 data

Exhibit 57: The yield differential between MMFs and CDs remains wide7-day annualized MMF yield versus 1-year CD rate

*1Q10 is "quarterized"

-300,000

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q09*

MoneyMarketFlows($mm)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

A

nnualizedOrganicGrowthRate

Flows (left axis) Organic growth (right axis)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Oct-06

Dec

-06

Feb

-07

Apr-

07

Jun

-07

Aug

-07

Oct-07

Dec

-07

Feb

-08

Apr-

08

Jun

-08

Aug

-08

Oct-08

Dec

-08

Feb

-09

Apr-

09

Jun

-09

Aug

-09

Oct-09

Dec

-09

Feb

-10

Money Market Yield 1-Year CD Rate

125 bps

Source: Investment Company Institute, Goldman Sachs Research. Source: Bloomberg, Goldman Sachs Research.


30/41


i i l b k h C di S i D h B k UBS B d l l i h l i f


31/41


international banks such as Credit Suisse, Deutsche Bank, UBS, etc. Based on our calculations, the average gross leverage ratio for

the major US banks could quadruple from the current level (see Exhibit 59). While the leverage threshold has not been set, a

stringent requirement would likely result in further deleveraging at large banks. In addition, under the proposed market risk

framework, risk weighting for most assets held on banks trading books would increase significantly. For example, non-agency

RMBS capital utilization would likely increase to 33% from 5% currently under the new proposal, based on our estimates. RMBS

only accounts for 5% of total trading revenue, and as a result, banks may choose to exit this market as it becomes prohibitively

capital intensive (see Exhibit 60).

Exhibit 59: Basel III gross leverage with no netting of derivatives couldquadruple leverage ratioscurrent leverage (TCE as denominatory) vs. leverage on Basel III proposal

Exhibit 60: Non-agency mortgage could turn prohibitively capital intensiveunder market risk proposalsour estimate of non-agency mortgage revenues currently as % of total acrossindustry, and capital utilization under proposed market risk framework

0x

20x

40x

60x

80x

100x

120x

140x

160x

180x

C BAC WFC JPM MS WFC C BAC JPM MS

LeverageRatios

Current: 19X average

gross leverage ratio

Basel III as proposed:

78X average gross

leverage ratio

M easured as 4Q09 = current, Basel III on a pro-f orma basis with no future earnings, changes in b/s size etc.

Leverage measured using tangible common equity.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Revenues Capital Utilization

All Other

Mortgages*

* excluding agency MB S

Source: Company data, Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.

Part of the reason there is such a focus is the potential impact these new capital requirements will have on credit growth. So far this

cycle, bank lending and securitization have shrunk by over $1 trillion, which has been offset by government lending (via Fannie,

Freddie and the FHA). For the longer term, private markets must take up the slack, but at the same time regulatory efforts to make

banks hold more capital or to limit non-deposit liabilities both imply that the banking industry would become smaller, not bigger

(see Exhibit 61).


E hibit 61 Wh dit f b k b k / iti ti d th t/GSE


32/41


Exhibit 61: Where credit comes from banks vs. non-banks/securitization and the government/GSEsbased on total US mortgage, commercial real estate, consumer and corporate credit outstanding of approximately $23 trillion

Outstanding

($TN)*

% of US

Credit Market

YoY %

Change

YoY $bn

Change

Non-banks + securitization 9.2 40% -12% -607

Bank loans 7.2 31% -7% -552

Government incl GSEs 6.5 29% +8% +495

Total 22.9 100% -3% -664

*: non-financial non-government credit outstanding.

Non-banks and securitization account for biggest piece ofcredit outstanding and credit shrinkage

Private credit is being transferred to Government balancesheet

Source: Federal Reserve, Goldman Sachs Research.

In addition, most proposed bank reforms have been targeted at the large banks. The unintended consequence, in our view, is alikely further reduction in credit availability and liquidity across markets and products.The top 5 banks in the United States (BAC,

JPM, C, WFC and MS) have an almost 60% share of total assets and total liabilities (broadly defined) and about 40% of total loans

and deposits in the United States. Forcing large banks to shrink their balance sheets would disproportionately hit consumer credit

availability and would also be an issue for agency MBS demand. Specifically, the top 5 banks have more than 50% market share of

total credit card outstanding, home equity, other consumer, and C&I. In addition they have +40% of the banking systems holdings

in US Treasuries, agency MBS and mortgages (see Exhibits 62-63).

Exhibit 62: The top 5 banks have more than 50% share of liabilities & assets

top 5 banks as % of total US banking industry

Exhibit 63: The top 5 banks have large market shares across most products

top 5 banks as % of total US banking industry

57%56%

42%

40%

25%

30%

35%

40%

45%

50%

55%

60%

Liabilities Assets Loans Deposits

Top5Bank

s'MarketShare

56%54%

51%48% 47%

45%43%

16%

0%

10%

20%

30%

40%

50%

60%

Cards

(Managed)

Other

Consumer

Home

Equity

C&I US

Treasuries

Agency

MBS

Mortgages CRE

Top5Banks'SharebyLoanType

Source: Company reports, SNL, Goldman Sachs Research. Source: Company reports, SNL, Goldman Sachs Research.


33/41


34/41


35/41


36/41


37/41


38/41


39/41


40/41


41/41

Documents

GS Financials Positioning for the Next Leg of the Rally