Sector Analysis Project—Financials  

Sector Description

The financial sector comprises institutions and firms providing financial services to retail and financial customers. The sector involves various industries such as insurance companies, banks, investment organizations, and real estate organizations.  A significant part of the sector gets revenue from loans and mortgages that acquire value while the interest rates reduce. Most individuals think of Wall Street and the financial sector because of the exchanges happening. However, it is the most critical part for a developing economy because it consists of institutions maintaining daily Wall Street business. As detailed by Bloomberg (2021), Financials is the second performing after the Energy sector, with a price change of +1.58%.  

Top Companies

Based on revenue, the top five companies include Berkshire Hathaway with 247 billion, Ping An Insurance group with 163 billion, Allianz insurance with 143 billion, AXA insurance company with 113 billion, and JP Morgan banking company 105 billion. On the other hand, there are also the most profitable finance companies. They include China's commercial and Industrial Bank, China Construction Bank Corporation, China’s Agricultural Bank, JP Morgan, and the Bank of China (Johnson, 2020). The company stock prices can determine sales growth. Therefore, financial companies with the most valuable stocks include Berkshire Hathaway, JP Morgan, Paypal, VISA inc., and Mastercard inc. (Kabir, 2021).

Market Share

A company’s market share refers to its industry percentage of the total sales earned by a specific company in a particular period. The metric gives a general idea of the company's size concerning the market and its competitors. It is not easy to determine market shares in the financial sector because of the inconsistent industry scope. However, the banking sector with publicly traded shares can give an estimate. In 2021’s first quarter, the banking sector had a global market capitalization of about 7.3 trillion Euros, similar to 8.58 trillion dollars (Ross, 2021). Combining the value for each company listed on every global stock exchange is approximately 56 trillion dollars. Therefore, it will be correct to accord about 14% of the world’s economy to the banking sector with such metrics.  

In addition, the assets under management (AUM) statistics are worth analysis. AUM refers to a figure that records total asset amounts managed by an investment company. In general, the total wealth is approximated at 431 trillion dollars, meaning that the investment and banking sector add up to only a quarter of the global assets (Ross, 2021). The insurance sector is a significant arm in the financial sector as it helps businesses moderate risks. These companies are expected to grow. For example, the U.S. in 2020 took up 29%of the world premiums, with china taking only 11%. By 2020, the gross premiums were predicted to reach 5.8 trillion dollars. That year’s annual GDP was about 84.5 trillion dollars; hence the insurance industry occupying an additional 6.8% of economic activity (Ross, 2021). Many technologies are threatening the banking industry; however, they also present an opening. For example, organizations leveraging advanced analytics using big data to enhance customer experience can utilize it to build loyalty, trust, and revenues, bringing success in the future. Technologies such as blockchain are causing market disruption as it reduces operational risks and verifies documents in real-time.

Consolidating Sector

Regional banks have been big on acquiring new capabilities, for example, brokerages, financial technology, and investment company organizations. However, they have recently adapted equals growth-focused mergers (MOEs) and other significant-scale acquisitions. The changes are due to the changing marketplace and regulations and relaxed Dodd-Frank provisions. The market shifts have resulted in commoditization and fee pressure, thus increasing the scale value. Combined with a constructive regulatory environment and updated economic metrics suggesting constant economic expansion, it will be a bank consolidation catalyst.

Customers, Suppliers, Supply Chain and Trade Wars

The financial sector offers financial services to commercial and retail customers. The commercial customers include the large, medium, and small-sized corporate while the retail customers include the vast personal customers market. According to Maverick (2020), there are two leading suppliers in the financial service sector: depositors and employees. Depositors are individuals seeking liquidity or safe investments for their cash. On the other hand, employers are suppliers because they provide labor. Unlike the manufacturing sector that moves physical products, issues with the supply chain in the financial sector involve knowledge and information transfer. The company’s human capital holds the information, and losing it to attrition, turnover, fraud, and complacency is risky (Zhang, 2020). The risks can be mitigated by leveraging data and analytical tools. Financial companies exist in an era where tariff tweets and trade wars rattle markets. Trade wars fuelled by politics create perverse uncertainty and increased stock market volatility. The tension building up is reflected in the investment sentiment (Vilmi, 2019).

Financials Vs Nasdaq and S&P 500

Nasdaq-100 has performed better in terms of the financial sector compared to S&P 500 in terms of financials in the last ten years, as shown in the table below, because Nasdaq-100 is heavily focused on top-performing industries such as health care, consumer services, and technology (Fidelity, n.d.).

Finance sector period	Financials	Nasdaq	S&P 500
1 year ago	48%	36%	31%
3 years ago	32%	84%	49%
5 years ago	90%	181%	103%
10 years ago	189%	471%	257%

 

Outlook and Economic Indicators

The financial sector’s outlook will reach 26 trillion dollars by 2022 (Bizvibe, n.d.). As many activities have been fully virtualized and executed, operations were running smoothly. The financial sector has successfully deployed technology and showed unprecedented resilience and agility. The financial sector thrives when the industry is transformed with unmatched transparency, adhering to regulations, and efficient modern systems. In contrast, the sector fails when consumers and businesses cannot pay their debts, the assets’ prices steeply decline and liquidity shortages in financial institutions. Therefore, it is essential to monitor and evaluate the sector to be prepared for crisis. The economic indicators to watch out for include interest rates, housing sales, inflation, and economic growth and productivity (Ross, 2021). These indicators touch approximately all-economy parts.

 

OUTLINE

• Sector Analysis
  1. Provide an overall description of your sector. What products/services does it provide?
  2. Identify the top players in your sector by market capitalization and/or revenues (say top 5 companies). How about the top 5 companies in sales growth? Top 5 of the sector's biggest 10 companies by market capitalization in net profit margin?
  3. Describe the level of competition market share, are there economies of scale such that big firms dominate? etc; who's getting on who's tuff? Is there a threat in a form of disruptive technology (e.g., a technological breakthrough) That could turn the table on existing dominant players in your sector?
  4. Is the Sector consolidating (i.e., mergers & acquisitions)?
  5. Who are the customers? suppliers? Where are they located? Is there an issue with supply chain disruption? Is the supply chain vulnerable to politically driven trade wars?
  6. How is your sector performed vs. S&P 500 and Nasdaq over the past 1, 3, 5, and 10 years?
  7. What is the outlook for the Sector? When does it thrive/shrink?
  8. What key economic indicators you find relevant to watch to understand the potential impact on your sector?