Credit-card companies have continued to shine this year as more consumers shift from paper money to plastic and loan performance exceeds expectations. But the ongoing enactment of new regulations and the threat of litigation could overshadow those metrics, particularly for Visa Inc. (V) and MasterCard Inc. (MA), the two largest card networks in the world.
Visa and MasterCard, whose stocks are up 18% and 16%, respectively, this year, don't lend or issue cards to consumers but generate fees from banks for helping process transactions. They have seen the number of transactions and dollar volume routed over their networks increase thanks to a global shift to electronic payments, and the outlook for both remains strong with Discover Financial Services (DFS) last month reporting an increase in processed transactions.
But investors will be looking for details about whether the companies' efforts to mitigate new debit-card rules are working, as well as progress being made toward an expected settlement of numerous merchant lawsuits that could cost more than $6 billion and result in changes to business practices.
American Express Co. (AXP), which lends to consumers in addition to processing transactions like Visa and MasterCard, is not named in those lawsuits but faces separate litigation, including a Department of Justice case, over its own practices with merchants.
In addition, the company said in February that it faces a possible enforcement action by the Consumer Financial Protection Bureau and other regulators over certain late-fee practices. On the credit-quality front, American Express continues to be a leader among the largest credit-card lenders, as its delinquency and net charge-off rates remain near historic lows. Its stock is up 22% this year, but investors will be focused on its ability to control costs as tailwinds it benefited from last year, such as large settlement payments from Visa and MasterCard and loan-reserve releases, go away.
What to Watch For
American Express - Reports April 18
Wall Street Expectations: Analysts surveyed by Thomson Reuters expect earnings of $1 per share on revenue, net of interest expense, of $7.6 billion. In the same period a year earlier, profit was 97 cents per share on $7.03 billion in revenue.
Key Issues: As credit-quality continued to perform better than many analysts' expectations last year, American Express decided to take money previously set aside to cover future loan losses and invest it in new growth areas, like mobile payments and prepaid cards. But now American Express faces some headwinds, with expectations that lenders will have to build loan reserves again and the disappearance of payments from Visa and MasterCard stemming from a past legal settlement. Chief Executive Officer Ken Chenault said in February that the company has been prepared for these changes and doesn't anticipate trouble rejiggering its investments in certain areas, such as marketing, which had increased for many credit-card issuers. Investors will also be looking for commentary on loan-balance growth, which has been tepid at best for most issuers.
Visa - Reports May 2
Wall Street Expectations: Analysts estimate earnings of $1.50 per share on revenue of $2.48 billion. A year earlier, it reported $1.23 per share and $2.25 billion, respectively.
Key Issues: Visa has been revising its playbook in the U.S. in response to the Durbin amendment, which capped how much banks can charge merchants every time a consumer swipes a debit card. The second part of that regulation, which took effect April 1, is expected to have a bigger effect on Visa's business because it requires banks to offer multiple processing networks on their debit cards [in the past some had exclusive contracts with Visa].
That threatens to reduce the transaction volume that Visa relies on, and as such, the company has been rolling out fee changes intended to entice merchants to continue sending volume its way. Investors will be looking for details on how clients are responding to the changes, as well as the status of settlement negotiations with merchants over numerous lawsuits attacking the fees they pay to accept Visa and MasterCard credit cards. Visa said in December it was depositing $1.6 billion into a litigation escrow set up to pay for such a settlement, bringing the total in the account to about $4.3 billion.
MasterCard - Reports May 2
Wall Street Expectations: Analysts predict earnings will rise to $5.28 per share from $4.29 per share and revenue will increase to $1.73 billion from $1.5 billion.
Key Issues: MasterCard would also be affected by a settlement of the merchant lawsuits. It recorded a $770 million pretax charge in the fourth quarter based on progress made in the case. Analysts estimate a total settlement, which would also involve large banks like Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM), would cost as much as $6.5 billion based on Visa's and MasterCard's disclosures.
Aside from litigation, investors also want to know if MasterCard's business, which generates about 60% of its revenue from foreign markets, has been affected by economic headwinds in Europe. Both it and Visa have been investing more in mobile-payments technology, especially in developing regions where many consumers have basic cell phones but use paper money, not plastic cards, to pay for goods. Their hope is that by penetrating these markets, they will drive more transaction volume over their networks.