2 Big Winners Out of 3 Credit Card Stocks From Goldman Sachs
Credit card stocks are in a sweet spot, according to Nash, who said in a report on Sunday that "valuations remain very attractive," and that he expected the group to "see further outperformance in 2013," because "credit losses remain below normalized levels" and "superior capital generation drives higher capital returns for the group, with payouts surpassing 100% for some."
With the nation's largest banks now submitting their 2013 capital plans to the Federal Reserve as part of the regulator's annual stress tests , Nash said that card lenders "are in the best positions for returning capital," as the group has "a higher starting point, with an average Tier 1 common ratio of 12.4% (banks are at about 10.0%) and this matters greatly for these stocks as the cards generate capital much more quickly than the banks (260 bps vs. 75-90bp at banks on an annual basis)."
Nash also sees further upside for the credit card lenders as the group continues to take market share from money center banks, including Bank of America (BAC) , Citigroup , and JPMorgan Chase (JPM) . For the 12-month period ended Sept. 30, Goldman Sachs said that Bank of America's credit card loan balances declined by 9%, while its total loans declined by 4%. For Citigroup, card balances were down 4%, although total loans grew by 3%. JPMorgan Chase saw its credit card loans decline by 2% while total loans grew by 4%.
Meanwhile, according to Goldman, American Express (AXP) grew its card loans (and total loans) by 6%, while Discover Financial Services (DFS) saw its credit card loan balances climb by 4%, while total loans grew by 10%. Capital One's credit card balances were down 1%, although total loans grew by 5%. Nash said that "COF should continue to show strong core underlying growth, but this would likely be masked by strategic run-off in mortgage and card."
Capital One Upgraded
Nash upgraded Capital One to a "Buy," rating from a "Neutral" rating, while increasing his price target for the shares to $75 from $65 and leaving his 2013 earnings estimate unchanged at $6.90. Nash raised his 2014 EPS estimate by 20 cents to $7.50.
Discussing the company's ability to sustain "a $7 earnings run-rate," Nash said that "further clarity of a path to (and above) $7 of earnings should help drive shares higher. While almost 25% of core loans are in run-off, because those loans tend to be lower yielding (mortgages), any mix shift (into card, auto) should make the headwind manageable. We estimate COF will need 11% growth over the next 3-4 years to offset the headwind; we view this growth as manageable."