Whatever financial flexibility credit cards offer customers, investors are unwilling to place the same trust in the companies that issue them.
Through the four largest standalone credit card issuers in the United States – American Express, Capital One Financial, Discover Financial Services and Synchrony Financial – acquirers made $579 billion in purchases on their cards during the first quarter, an 11% year-on-year increase.
However, that did little to lift their stock off the discount rail. All are down between a fifth and a tenth since February. On a price-to-earnings basis, all four stocks are trading below their three-, five- and 10-year averages.
turmoil in the US banking sector in addition to rising provisions, costs and financing expenses have prompted concerns that profitability has peaked after a strong 2022.
These concerns are not unfounded. Amex made more than $1 billion in provisions for souring loans after net charges soared in the first quarter. The move, coupled with higher expenses related to card member rewards and services, weighed on bottom line. These fell 13% to $1.8 billion despite a sharp increase in revenue.
Credit quality is slowly deteriorating. Across all US banks, the charge rate for credit card loans — or the percentage of outstanding debt that issuers write off as a loss — increased by 91 basis points at 2.55%. last year, according to the Federal Reserve.
At Capital One, the metric nearly doubled year-over-year to over 4% during the first quarter.
Even so, credit cards remain a lucrative business. Debt interest rates range from the mid-teens up to 30%. Amex, Discover and Synchrony still generated relatively high returns on invested capital of 30.1%, 28% and 23.2% respectively during the first quarter. Capital One was a notable laggard, at 7.1%.
Amex, with its focus on wealthier consumers, appears best positioned of the four to weather higher financing costs and any economic slowdown. But at 13 times forward earnings, its valuation is nearly double that of its rivals. Find trades at nearly half, but with a better credit profile than Capital One and Synchrony, should offer more upside.
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