Credit Card Trends Aren't Signaling a Recession, Analysts Say

(Bloomberg) -- November data reported by credit card issuers like American Express Co. and Capital One Financial Corp. may soothe some concerns about an impending recession and credit deterioration, analysts said. Those worries have been contributing to stock market swings in recent weeks, but the latest data look “benign to slightly improved” compared to a year ago, according to Compass Point.

Shares of American Express pared gains of as much as 1.4 percent in midday trading; Synchrony Financial trimmed gains of as much as 2 percent, while Discover Financial Services pared gains of as much as 2.5 percent. Capital One fell as much as 0.9 percent.

Here’s what analysts are saying:

Morgan Stanley, Betsy Graseck

“Investors fear recession, but card issuers keep posting strong credit results,” with American Express, Capital One, Discover and Synchrony all reporting better credit results for November than Morgan Stanley had expected.

Master card issuers -- those with securitized credit card books -- showed “another strong credit month” with net charge-offs dropping on a year-over-year basis for a second month in a row. Net-charge offs fell eight basis points, in line with last month’s decline of nine basis points, which was the first year-over-year decline since September 2016. Delinquencies also continue to trend slightly lower, while payment rates increased.

Graseck cut her card net charge-off estimates and raised earnings-per-share estimates.

Compass Point, William Ryan

November master trust and total portfolio credit quality data showed monthly trends that reflected normal seasonal patterns, and year-over-year trends that were “benign to slightly improved. ” Ryan encourages investors to look at the year-over-year performance “as a better indicator of macro credit trends.” He believes the “collective data reflect the impact of tax cuts, job growth, wage gains, and some credit tightening among various issuers in 2016,” although there were some outliers including weakness at Alliance Data Systems Corp.

While growing recession and some micro concerns are weighing on the sector, the “larger tax refunds expected early next year could help drive better seasonal improvement and/or incremental spending among various credit spectrums (specifically prime revolvers to subprime).”

“Stocks could see meaningful upside if more imminent signs of a recession do not materialize by February or March 2019, and favorable seasonal credit quality patterns take hold.”

Credit Suisse, Susan Roth Katzke

Katzke says Citigroup, Bank of America and JPMorgan master trusts month-to-month delinquency and loss rates were up as she continues to “expect a modest and manageable lift in loss rates as credit costs normalize.” Credit Suisse’s earnings estimates “embed a gradual uptick in consumer loan and credit card loss rates as this year progresses into next; the current low levels of consumer leverage and unemployment remain a net positive core credit quality indicator.”

RBC, Jason Arnold

Arnold called loan growth “robust,” with “credit still unconcerning.”

“We remain positive in our outlook for the card space, as delinquency and macro consumer data don’t suggest that credit pressure is en route anytime soon.”

Jefferies, John Hecht

“November showed consistent seasonal patterns reflecting benign conditions, which were generally in line with our expectations.” Jefferies highlights “that system-wide trends look generally positive given seasonal patterns, with range bound trends developing.”

Year-to-date auto metrics “reflect ongoing stabilization in our view,” with “encouraging” sharp decreases in delinquencies. Hecht adds a caveat: Jefferies’s dataset is heavily skewed toward Capital One and Santander Consumer USA, “which have more variability given exposure to subprime assets.”

“For the majority of issuers under coverage we observe stabilizing credit trends and absent a material shock to the consumer or material deviation in underwriting trends, we expect most of the ’normalization’ has occurred and for overall credit to remain range-bound in the intermediate term.”

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