Deep Dive: Here’s how hard the coronavirus shutdown will bite the big credit card lenders

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As identified coronavirus infections increase rapidly in the U.S., the biggest economic effects will be felt months from now.

Still, analysts at Oppenheimer have projected that five U.S. credit card lenders will remain profitable in 2021, despite a large increase in loan losses. Those projections are below.

The Oppenheimer analysts, Dominick Gabriele and Raphael Posadas, published their report on March 25, before seeing Thursday’s unemployment figures, which included a record 3.28 million in claims for the week ended March 21.

It is also important to note that the S&P 500 Index SPX, +3.63%  hit a record high Feb. 19. The stock market tends to look ahead of economic reality. We won’t see the full effect of the coronavirus shutdown until the second quarter, and the Bureau of Economic Analysis normally publishes its first-estimate GDP estimate four weeks after the quarter ends. J.P. Morgan has predicted a 14% annualized decline in GDP for the second quarter.

So the stream of bad economic reports started March 26 but will go on for months.

Card processors versus lenders

When you think about the credit card business, your thoughts probably turn to Visa V, +3.84%  and Mastercard MA, +1.44%, the dominant U.S. payment processors. (Two card lenders, American Express AXP, +8.76%  and Discover Financial Services DFS, +12.47%, use their own processing systems.)

Visa and Mastercard have the incredible advantage of not being lenders. They are toll-takers. A severe recession will undoubtedly have an effect on their revenue and earnings, but they will not face mounting loan losses or liquidity pressure. During the “good times” over the past five full years, Visa’s annual revenue has increased 81% and Mastercard’s annual revenue has increased 78%. Leaving out the effect of share buybacks, Visa’s annual net income (not earnings per share) increased 115% and Mastercard’s annual net income increased 124%.

This stability and the lower-risk nature of their business is why Tom Plumb, the manager of the Plumb Balanced Fund PLBBX, +1.93%, said during an interview March 16: “If you don’t own Mastercard and Visa, I think you should be stepping in and buying them.” Shares of Visa were down 24% from the close on Feb. 19 (when the S&P 500 reached its record closing high) through March 25, while shares of Mastercard were down 26%.

The Oppenheimer analysts focused on five purer-play card lenders, leaving out the “big four” U.S. banks, J.P. Morgan Chase JPM, +5.10%, Bank of America BAC, +5.21%, Citigroup C, +7.67%   and Wells Fargo WFC, +2.87%, whose credit-card losses will only be one part of a complicated mix of results through the expected coronavirus recession.

One comforting factor for the credit card industry is that during the aftermath of the 2008 credit crisis, the peak level of credit card loan delinquencies was 3.19%, a far cry from the 7.21% peak level of mortgage loan delinquencies, according to TransUnion. Of course mortgage credit standards have tightened considerably since then, but the 3.19% peak delinquency rates for card loans was low, especially when you consider how high card loan interest rates are.

Estimates for the five card lenders

The Oppenheimer analysts assumed a 15% annualized GDP decline for the second quarter, and a bouncing-back annualized 5% GDP growth rate for the third quarter. “Non-essential spend by our calculation makes up ~20% of total GDP or ~$3T annualized. We’re anticipating a 50% reduction,” the analysts wrote.

Using recession data going back to 1940, the analysts estimated “corresponding job losses” of about 10 million additional and average U.S. unemployment rates of 3.7% for the first quarter, 6.6% for the second quarter, peaking at 8.9% in the third quarter, before reversing with a 7.2% fourth-quarter rate and a 4.5% rate for 2021.

“We expect losses to materialize meaningfully in 4Q20, peaking in 1Q21, 180 days after assumed peak unemployment,” the analysts wrote.

Gabriele and Posadas were careful to say that the following projections needed to be “taken with a grain of salt,” and that their objective was to “ create a template for investors to think about their own assumptions and make a determination.”

“With many variables that we have thought of and likely haven’t, this is our first crack at a base case,” they wrote, citing net interest income and recoveries of some loan losses as factors not yet modeled-in.

Here are the Oppenheimer analysts’ 2021 estimates for the five card lenders:

Alliance Data Systems

Alliance Data Systems ADS, +10.33%  focuses on lending through store-branded cards. Oppenheimer increased its estimate for the company’s 2021 provision for loan losses to $1.57 billion from $1.41 billion. The provision for loan losses is the amount a lender adds to its loan loss reserves in anticipation of charge-offs. It lowers pretax earnings. Oppenheimer lowered its 2021 estimate of ADS’s net income available to common shareholders to $524 million from $996 million and its earnings-per-share estimate to $11 from $20.92.

The analysts have an “outperform” rating on ADS.

American Express

For American Express US:AXP, the Oppenheimer analysts increased their 2021 provision for loan losses estimate to $4.63 billion from $4.33 billion. They lowered their 2021 estimate for earnings available to common shareholders to $5.46 billion from $7.82 billion and their EPS estimate to $6.90 from $10.15.

The analysts rate American Express “outperform.”

Capital One

The analysts upgraded Capital One Financial COF, +13.52%  to an “outperform” rating, writing that while the lender is “not immune” from the economic downturn, it is “well-positioned to weather the storm and likely to increase market share as the tide turns.” They added that they saw “upside to the current stock price even when pricing in a recession.”

Gabriele and Posadas increased their estimate for Capital One’s 2021 loan loss provision to $10.07 billion from $8.17 billion. They lowered estimated 2021 net income available to common shareholders to $3.38 billion from $5.57 billion and EPS to $7.30 from $12.74.


The analysts increased their 2021 estimate for Discover Financial Services’ US:DFS  loan loss provision to $5.28 billion from $4.1 billion. The cut their 2021 estimate for earnings available to common shareholders to $1.21 billion from $2.74 billion and EPS to $3.90 from $9.68.

Gabriele and Posadas have a neutral “perform” rating on Discover’s shares.

Synchrony Financial

Synchrony Financial SYF, +15.31%  was originally General Electric’s GE, +6.35%  consumer lending unit, separated from its former parent in 2015. The Oppenheimer analysts estimate the company’s 2021 provision for loan losses will increase to $5.84 billion from $5.82 billion, with estimated net income available to common shareholders declining to $1.79 billion from $2.33 billion and EPS declining to $2.83 from $4.61.

The analysts rate Synchrony “outperform.”

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