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"Subprime problem" for credit card sector - Wells Fargo downgrade

  • Analyst Jason Harbes and team downgrade the credit-card sector to Market Weight from Overweight.
  • Harbes takes note of net charge-offs for the group rising to 3.6% in Q1 - that's up 43 basis points from a year ago, and at a four-year high. Harbes sees this staying elevated for the rest of the year, even in a benign economic environment.
  • A 100 basis point increase in the provision rate would cut EPS for the sector by 27% on average, with Capital One (COF +1%) faring the worst (48%), followed by Discover (DFS +1.3%) and Synchrony (SYF +2.6%) in the 22%-23% range, and American Express (AXP +0.6%) at 15%.
  • The good news: The capital return story remains a good one for the names, with the CCAR results in June a possible positive catalyst.
  • Source: Bloomberg's Lily Katz
  • Synchrony's outsized gain today comes following last night's better-than-expected capital return announcement.

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