Credit Cards: The Answer To These Banks' Problems?

Includes: BAC, C, DFS, JPM, USB
by: IncomeHunter

There's no doubt that some investors have been perplexed with banking stocks so far this year. With headlines constantly coming in about collapses, expansions and losses, it's hard to really now what to expect. With the exception of U.S. Bancorp (NYSE:USB), which has mostly been able to keep ahead of the game, we have been disappointed by many banks along the way. However, results for a number of banks, including Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and Discover Financial Services (NYSE:DFS), could be about to improve on the back of credit card delinquency rates. Some will fair better than others, and I will examine how each may benefit soon.

We were all surprised at the news that credit card delinquency is at an all-time low for the last two years. This is not what we or the banks expected to see at all, but it does represent a silver lining in an otherwise rather dismal outlook for the financial domain of the stock market. For Citigroup, for example, the average delinquency rate is down to 2.35 percent, an impressive drop. This is due to the fact that credit rules are tight at the moment and banks are reluctant to take on new lenders with bad credit rates. Citigroup stock has dropped by more than 22% in the last three months and shares are only trading at a little over $29. The stock's dividend yield is nearly dwindled away down to 0.10%, though its EPS of 3.45 is something investors can hang a hat on. For now.

The fact that banks have been forced, for a number of reasons, to go conservative in terms of their credit lending rates has had a great impact on the banking sticks mentioned here. For companies like JPMorgan and Wells Fargo I feel that the credit card delinquency rate represents a ray of sunshine that these banks may otherwise not have seen.

This could significantly affect the outcome of the second quarter reports for these two banking stocks in a way that will surprise us all. What I'm hinting at is that we may soon see a remarkable increase in the stock price (and revenue report) of these two companies. We just have to wait and see what their second quarter earnings reports are and whether or not my optimism is in act mirrored in the information provided.

But, in the last 6 months, JPMorgan's stock has been down by nearly 4% while Wells Fargo has seen an increase a little shy of 12%. I think the lesson to learn from this is that the increase as a result of the low rate in credit card delinquency will benefit Wells Fargo more than it will work to offset the major losses that JPMorgan has experienced of late.

Wells Fargo and JPMorgan pay some of the highest dividend yields among the banks (2.6% for Wells Fargo and 3.2% for JPMorgan). Though, one is clearly the better investment right now. Wells Fargo has a 2.33% revenue growth, while JPMorgan is down 17.8%. Despite JPMorgan's higher 4.45 EPS, Wells Fargo is the better bet for now. This is helped out by an industry leading 94.17% gross profit margin.

Bank of America is one of the large banks that have experienced a drop of 2.35 percent in credit card delinquency from more than 6 percent in early 2009. Again, this could be a silver lining for the company. however if well look at the bank's performance over the last two years we can see that it has experienced a drop of about 50%. In my opinion this is something that could change with the advent of the lower credit card delinquency rates as in the near future I expect that we will see a slight increase in the stock. At the moment the stock is only trading at about $8, a point near its 52-week low. Its revenue growth is a negative 17.5% and its net income (TTM) is a negative $1.31 billion. Not good news for Bank of America, and it could really use some help from credit cards. Until then, though, Bank of America remains a stay away stock for me.

Discover Financial Services reported recently that "its delinquency rate for credit card accounts dropped to 1.91 percent in the most recent quarter, from 2.22 percent three months earlier and from a high of 5.6 percent in November 2009". This correlates with an increase in the company's stock of more than 43 percent, and impressive climb indeed that we have not seen for a while in the banking and financial arena. Right now the company has a solid 4.31 EPS to boot. Its profit margin is sitting near 25% and things are looking fairly solid for quarters to come with Discover. With price targets above $30, it could be a sounder investment in banking, especially if credit card trends keep the way they are.

Conclusion: Stay away from the bigger bank names - Bank of America and JPMorgan have little to offer. The credit card news should be a solid boost for Discovery and should help Wells Fargo keep its revenue growing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.