Oppenheimer analyst Dominick Gabriele downgraded Alliance Data Systems (NYSE:ADS) to Perform from Outperform as the Russian invasion of Ukraine pushes oil prices higher, increasing the likelihood that credit quality will deteriorate.
"We see increasing likelihood NCO (net charge-off) rates could revert to 2019 levels by 2023 with risk of higher magnitude/sharper rise," Gabriele wrote in a note to clients.
He points out that historically commercial bank credit card net charge-off growth has increased with a spike in oil prices/CPI. "Persistent inflation likely impacts the consumer's 'real' income growth hurting their ability to pay," the analyst said.
Investors should focus on general purpose credit card issuers vs. private label (such as ADS) due to the mix of consumer spending tilted to inflationary industries and more balanced between non-discretionary/discretionary spending.
The war in Ukraine weighs on financial sector stocks as the flight to safety pushes down Treasury yields. Financial Select Sector SPDR ETF (NYSEARCA:XLF) slides 2.0% in late morning trading in New York. Credit card stock are falling more than most, with Alliance Data (ADS) dropping 4.9%. American Express (NYSE:AXP) is reportedly suspending operations in Russia and Belarus, following Visa (NYSE:V) and Mastercard's (NYSE:MA) moves to halt operations in Russia.