Card stocks can provide benefits during the downturn

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  • Shares of credit card issuers like American Express and Capital One could offer an upside despite recession concerns, BofA said.
  • Credit losses should be mitigated in part by healthy balance sheets among consumers who saved money during the COVID shutdowns.
  • “We think card stock valuations already reflect a healthy dose of cyclical concerns in the market.”

The fall in equities this year partly reflects expectations that the United States will fall into a


recession

but shares of American Express, Capital One and those of other credit card companies could weather a potential downturn in the consumer-driven economy, according to Bank of America.

“We believe pure-play card issuers – American Express, Capital One, Discover Financial Services, Synchrony Financial [and] Bread Financial (BFH) – could offer an attractive upside as investors’ attention refocuses on their cheap valuations and healthy balance sheets,” BofA analyst Mihir Bhatia wrote in a note published this week. “Although we appreciate the current degree of macroeconomic uncertainty, our analysis suggests companies are better positioned to weather a weaker macroeconomic backdrop than many realize.”

The


Federal Reserve

is set for June 15 to make its third interest rate hike this year, which could bring the federal funds rate into a range of 1.25% to 1.5%. As higher borrowing costs make lending more profitable, stocks in the financial sector have been pushed back by fears that the rapid pace of rate hikes to combat runaway inflation could tip the world’s largest economy into turmoil. in the recession.

JPMorgan CEO Jamie Dimon said this week that an economic “hurricane” is on the horizon and banks should prepare for a recession.

“Consumers face headwinds in the form of rising prices and interest rates. So buying the product or borrowing money to buy the product will become more expensive over time,” he said. said Sam Stovall, chief investment strategist at investment research firm CFRA. Initiated. “And if we fall into a recession and businesses react the way they traditionally do to recessions, that tends to lead to a hiring freeze or outright downsizing.”

But Bank of America analysts are bullish that consumer finance stocks will rebound after a sell-off that saw Synchrony lose more than 20% and Bread Financial around 18%.

Economic concerns are already priced into card stocks, most of which are trading below historical averages in a recessionary scenario, BofA said. “Overall, this suggests that valuations are undemanding, which could allow card companies to generate strong returns if investor confidence in the earning power of card companies increases.”

Impacts of the recession

BofA said credit losses are expected to rise from levels that were artificially maintained by student loan forbearance programs and fiscal stimulus from the start of the pandemic. But his base case is that credit normalizes without major deterioration, noting a healthy labor market, still strong consumer balance sheets and strong underwriting standards.

Bank of America economists see a 1 in 3 chance of a recession in 2023, and their base case is that there will be a prolonged period of weak growth and any recession will be moderate.

In a somewhat mild to medium recession scenario, BofA’s analysis suggests earnings per share would be 15% to 30% lower for card issuers. American Express would have the smallest impact because it has a prime customer base. At Bread Financial and Capital One, subprime customers account for 39% and 30% of loan balances, respectively.

BofA said the most important macroeconomic variable to watch is the unemployment rate, although a slight increase due to greater labor force participation is less of a concern than an increase due to layoffs. The Labor Department May Jobs Report released on Friday showed the unemployment rate was stable at 3.6%. Payrolls increased by 390,000, beating expectations of 325,000 additions.

“A large majority of consumers generally act rationally and will at least pay their minimum payments if they have a job and can afford it,” Bank of America said.

A chart from Bank of America shows 2023 price/earnings multiples for some credit card companies.

Multiple 2023 price/earnings for AXP, COF, DFS, SYF and BFH.

Bank of America


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