Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

U.S. Card Issuers: The Stocks To Watch In 2014

Since the beginning of 2008, card centric lenders, such as Discover Financial Services (NYSE:DFS), Capital One Financial Corporation (NYSE:COF), and American Express (NYSE:AXP), as a group, have gained more than 3% of market share at the expense of large U.S. banks. Bank of America (NYSE:BAC) alone has witnessed a 40% decline in its portfolio post crisis. While the card centric lenders should be able to register additional share gain in 2014, the business is becoming more competitive as healthy regionals push harder into cards and banks are also reemerging from the crisis. Having said that, the card centric lenders are still better positioned than the large banks. Loan growth was largely flat last year but improved consumer confidence, a leading indicator, points to slightly better loan growth in 2014, which is a positive for card centric lenders including DFS, AXP, and COF. However, AXP, due to its spend-driven model focused on the affluent, is best positioned compared to the other two.

Despite the economic recovery of the last few years, card loans in the U.S. are down 20% from the pre-crisis peak and stand at around $700-$800 billion. According to the Federal Reserve's quarterly report on Household Debt and Credit, card balances hit a peak of $866 billion in 4Q08. However, they currently are at $672 billion, down 22% from peak pre-recession levels. While a significant level of charge-offs during the crisis are part of the large decline in card balance, the remainder reflects banks shifting to the mass affluent and away from subprime due to regulations and heavy losses.

Pre-crisis, a few of the large banks had as much as 25% of their portfolio in subprime. However, post-crisis, banks have scaled back their operations; particularly some of the larger banks have made a conscious decision to run down the higher risk subprime card portfolios. Lenders have backed away from more risky subprime lending, given high credit losses taken during the financial crisis and more punitive capital treatment from Basel rules. However, this void is now being partially filled by small lenders such as Springleaf (NYSE:LEAF).

Post-crisis, the industry is also less concentrated, with the top-6 issuers controlling 75% of loans (down from 78%). DFS has been the clear winner among the large issuers; the company grew its loan portfolio by 5% since year-end 2007. COF is the other card issuer that has held up well during the same period. Some of the smaller players such as U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC) also grew their portfolio by 56% and 35%, respectively, but from a small base compared to the large lenders. On the other hand, larger bank card issuers such BAC, JPMorgan (NYSE:JPM), and AXP have fared the worst and saw considerable declines in their respective portfolios. However, this has a lot to do with banks repositioning their portfolios away from subprime with a new focus on deepening relationships instead of being the biggest. And a smaller portfolio does not mean lower returns in the card business.

Higher equity markets, housing recovery, and better consumer confidence should support a modest improvement in card loan growth over the next 1-2 years, but that is tempered by flattish US card spending (outside of the affluent) and high card payment rates as consumers remain cautious and face sticker shock on APR's. And while there are rumblings of banks quietly trying to dip down in credit, the truth is the issuers will likely remain cautious to stretch on credit for the reasons mentioned earlier. In this situation, DFS and AXP are expected to register the best card loan growth, while COF has the potential to beat expectations via more subprime lending and private label acquisition later in 2014.


Coming out of the crisis, the card centric lenders got in front of many banks, but the lending competition is gaining steam via rewards/balance transfer offers. A slightly less robust year-over-year loan growth at DFS and stabilizing quarter-over-quarter growth at BAC further supports the argument that the competition is picking up. This whole situation has made potential industry loan growth even more important for the stocks and future multiples expansion. Although the competition is picking up, these card centric lenders remain better positioned than large banks. While DFS and AXP are well positioned to register the best card loan growth in the range of 3%-4%, COF also could beat expectations via more subprime lending and private label acquisitions.

In the case of AXP, the risk/reward for the stock is quite attractive, particularly as the downside is protected by a large capital return and expense discipline. The company's affluent focused card member base should also benefit from the wealth effect as U.S. housing prices increase and equities have posted gains. AXP is also trading at attractive valuations within the financial sector.

COF, which focuses on consumer and commercial lending as well as deposit gathering primarily through its regional banks, is also well positioned in the high return card business. The company successfully managed credit quality and the effects of the CARD Act over the most recent economic cycle. Additionally, COF's two recently closed acquisitions, ING Direct and HSBC's U.S. card business, are likely to provide a larger earnings lift than the market presently discounts.

Finally, DFS is also boosting a healthy card business and has significant excess capital. The company maintains a conservative credit profile and strong capital return to investors. Going forward, capital deployment will be a key theme for DFS, as the company is expected to deploy its significant excess capital into modest loan growth and share buybacks. The downside is also protected by a significant capital return.

MissionIR provides investor relations services to publicly traded companies in exchange for compensation. This article may be part of our efforts to widen a client's exposure. To read our full disclaimer, visit