Credit card stocks showed strength for a second straight day Thursday in the wake of the Federal Reserve's 50-point interest rate cut, as investors clung to the hope of a healthier economy characterized by improving credit quality and more mortgage refinancing.
Wednesday's cut of short-term interest rates had already propelled the shares of credit card companies higher, and the momentum sustained even though the broader market lost steam. Shares of Capital One Financial remained unchanged at $67 Thursday, and shares of MBNA Corp. rose 75 cents, or 1.97%, ending the day at $38.75.
The American Banker index of the top 225 stocks rose 2.17% Thursday, while the index of the top 50 banks went up 1.64%. The Nasdaq fell 1.9%, and the Dow Jones industrial average lost 0.3%.
Analysts and investors have stood by credit card companies despite a number of class actions filed against lenders in 2000.
At yearend, Providian Financial Corp. of San Francisco agreed to pay $105 million in a settlement stemming from accusations about its marketing and sales practices. It was the second hit in 2000 to Providian, which had agreed in June to pay $300 million to consumers to settle a class action and an administrative enforcement action from the Office of the Comptroller of the Currency. The lawsuit alleged that Providian routinely tacked fee-based products on to bills - products that customers had not requested - and that it charged them. After that settlement, Providian launched a public relations campaign to polish its image.
Also last year, Bank One Corp. agreed to pay nearly $40 million to settle complaints from customers of its First USA unit.
Industry watchers generally thought the credit card companies' responses to the lawsuits were appropriate, and the cases did little damage to credit card stocks.
Nonetheless, some analysts expect losses across the credit card industry this year, though some say a resurgence in mortgage financing should soften losses those companies might take.
But right now it seems there is no stopping credit card stocks. Some have been so strong since the interest rate change that analysts have started to downgrade them simply on price.
David Hochstim of Bear Stearns cut his rating for Capital One to "attractive" from "buy," Thursday. He said the previous day's 8% rise in the stock, which brought it close to his target price of $75, triggered the downgrade. Mr. Hochstim made the same adjustment on his rating of American Express Co., whose stock fell 3.13% Wednesday.
A factor to consider: Shares of card companies that rely on spending, such as American Express, are "going to be more susceptible to weakness as a result of the spending slowdown we saw in the past couple of weeks" than the stocks of companies that also rely on interest income, said Moshe A. Orenbuch, an analyst at Credit Suisse First Boston.