Credit card companies surged early Thursday despite analysts warnings that their stocks could come under pressure if certain economic indicators continue to show signs of weakness and fuel higher delinquencies.
Shares of MBNA Corp., Providian Financial Corp., and Capital One Financial Corp. rose 4% to 5% during trading Thursday morning. MBNA closed up 1.37% to $37, Providian 4.33% to $55.75, and Capital One 1.09% to $63.625.
The American Banker index of top 50 banks climbed 0.58%, and the index of 225 banks rose 1.01%. The Dow Jones industrial average increased 0.05%.
We urge investors to be selective in the specialty finance sector, wrote Joel J. Houck, an analyst at A.G. Edwards & Sons Inc. in St. Louis in a monthly industry statement published Thursday. He also warned investors not be lulled into a false sense of security by the yearend rally in specialty finance stocks.
Mr. Houck expressed particular concern over card issuers. Rising delinquency rates could cause chargeoff rates to rise 20% by the end of the second quarter and cause deterioration in credit quality, he wrote.
Kenneth A. Posner, a principal in research at Morgan Stanley, Dean Witter & Co. echoed this notion in an industry report published Monday.
The principal negative catalyst we foresee is investors reaction to rising unemployment data, Mr. Posner wrote. In a hard landing scenario, unemployment could rise above 5%, he wrote.
Though card company stocks should be long-term winners, a number of them are overvalued right now, he wrote. With that in mind, Mr. Posner recently reduced his ratings for Providian and Capital One to neutral from outperform. However, he maintained MBNAs outperform rating.
Mr. Houck reiterated his reduce rating for MBNA on Thursday, despite the Wilmington, Del., companys 26.3% increase in fourth-quarter per-share profits, to 48 cents. MBNA reported earnings of $1.53 per share for the year.
Sales and cash advance volume slowed for the fourth consecutive quarter, while managed delinquencies increased 0.29% form the third quarter, he wrote. We believe the risk-reward ratio is unfavorable.
In a report published Thursday, Robert G. Hottensen of Goldman, Sachs & Co., wrote that he is still recommending MBNA, and that he is impressed with the companys $4.21 billion loan growth. The numbers are consistent with the industrys 8.7% fourth-quarter increase in consumer loan growth, he wrote.
Looking ahead, trends and prospects remain excellent, even as the economic backdrop slows, he wrote.
Keith Horowitz of Salomon Smith Barney initiated coverage of SunTrust Banks on Thursday with a neutral rating.
In his initial coverage, Mr. Horowitz described SunTrust as one of the best franchises among the regional banks. However, he cautioned that the Atlanta companys near-term fundamentals are less favorable due to mid-single-digit revenue growth and higher credit costs.
The company came under some scrutiny in October, when analysts expressed concern over its exposure to syndicated loans. The company reported fourth-quarter operating earnings of $1.12 per share Wednesday, in line with consensus estimates.
SunTrust shares rose 31.25 cents Thursday, or 0.5%, to close at $62.3125.
