The recent rebound in consumer confidence is likely to lead to consumers opening up their wallets and using their credit cards, at least according to a December 11 Report from Citi Research. Analysts Donald Fandetti, Michael Kaye and Steven DeBartolo suggesting that the industry will see 1-2% loan growth in 2014 versus flat in 2013.
As an overview, the report highlights that the trend toward card-centric lenders growing their market share at the expense of big banks remains intact. Total credit card loans are currently in the neighborhood of $700-$800 billion in the U.S., down one-fifth from 2008. Nearly 12% of this decline results from charge-offs, the rest of the decline relates to bank shifting to more well-heeled customers and away from subprime.
The credit card industry is also just a bit less concentrated, with the top six issuers controlling 75% of loans, a decrease from 78% pre-crisis. DFS has been the market share winner among big banks, with their loan portfolio increasing more than 5% since year end 2007. Among mid-tier card lenders, Wells Fargo & Co (NYSE:WFC)’s portfolio is up by 35% and USB increased by 56%. Portfolio declines include Bank of America Corp (NYSE:BAC) at -40%, JPMorgan Chase & Co. (NYSE:JPM) at -22% and American Express Company (NYSE:AXP) at -17%.
Looking ahead
Fandetti and colleagues augur a relatively rosy future for the credit card sector. “We believe the card centric lenders ‘got in front of’ many banks coming out of the crisis, but lending competition is picking up via rewards/balance transfer offers…This dynamic makes potential industry loan growth that much more important for the stocks and future multiple expansion.”
The report also argues that improved consumer confidence, higher equity markets and continued growth in the housing market “should support a modest improvement in card loan growth over the next 12- 24 months”. This optimism is tempered, however, by a cautious American consumer and the likelihood of continued high card payment rates.
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In terms of specific credit card providers that Cit expects to outperform the markets, the report mentions American Express Company (NYSE:AXP), Discover Financial Services (NYSE:DFS) and Capital One Financial Corp. (NYSE:COF). American Express is Citi’s top pick in the sector. “Over the next 12-months, in our coverage universe, we expect the best card loan growth from DFS and AXP in the 3-4% range, with COF a wildcard that could beat expectations later in 2014 via more subprime lending and private label acq’s.”
