At least three of the nation’s largest credit card issuers, as a result of their strategic actions and market positioning, may eke out growth this year despite the sluggish economy, according to a new report from Keefe, Bruyette and Woods.
While the jury is still out on whether or not the economy will sink into a second recession, slower-than-expected growth and modestly higher unemployment are likely to pose only “minimal damage” for American Express Co., Discover Financial Services and Capital One Financial Corp., the firm said in a recent note to investors.
The report noted that consumers are continuing to pay off a higher percentage of revolving credit card debt and monthly credit card payment rates are at record levels.
“Consumers are also saving a significant higher amount than pre-recession levels, which should help to soften potential financial hardships” that could lead to credit card defaults and losses, the report said.
Recent economic news suggests credit card issuers are unlikely to see real growth anytime soon. The Federal Reserve Board on Sept. 8 said revolving consumer credit, 98% of which is credit card debt, in July declined by $3.4 billion in July after showing gains in May and June. Revolving credit in July fell to $792.5 billion, down 0.43% from $795.9 billion in June, the Fed said. It was the largest decline in revolving credit in the last six months.
But even if the U.S. sees “almost zero” credit card loan growth for the rest of this year, Capital One is likely to see growth as a result of its pending acquisition of HSBC’s private-label card portfolio, the analysts said. Cap One in August announced plans to purchase the credit card operations of HSBC Holdings for $2.6 billion.
Discover also may see benefits this year from its ongoing efforts to expand its merchant acceptance, which could help drive volume growth on its proprietary cards, the report noted.
“Furthermore, there remains an opportunity for (Discover) to gain market share in the U.S. debit space following the final Fed rules on the Durbin Amendment and Visa’s pricing change,” the analysts contended.
Amex is also in a better position than some of its competitors to survive a sluggish economy economic due to the fact that “its business model is more levered to spending from its affluent customers that are typically more resilient during downturns,” the analysts wrote.
If the economy dips again, issuers might see new pressures that could affect their fortunes, the report suggested.
Cap One, for example, could be at risk for increased losses because of its relatively higher share of subprime card loans.
“That said, given the length and depth of the recent Great Recession, stronger underwriting criteria post the recession, and modest new loan growth, we think charge-offs are unlikely to approach the peak levels unless there is a material rise in new jobless claims and/or strong shock to the economic environment,” the report concluded.
