Credit cards: issuers could use their own flexible friends

Whatever financial flexibility credit cards offer to customers, investors are unwilling to extend the same trust to the companies issuing them.

Across the four biggest standalone credit card issuers in the US — American Express, Capital One Financial, Discover Financial Services and Synchrony Financial — shoppers made $579bn in purchases on their cards during the first quarter, an 11 per cent jump year on year.

That has done little to lift their shares off the discount rail though. All have fallen between a fifth and a tenth since February. On a price to forward earnings basis, all four stocks trade below their three-, five- and 10-year averages.

Turmoil in the US banking sector plus rising provisions, funding costs and expenses have prompted fears that profitability has peaked following a strong 2022.

These concerns are not baseless. Amex set aside more than $1bn in provisions for souring loans after net charge-offs rose in the first quarter. The move — along with higher expenses related to card member rewards and services — weighed on profits. These dropped 13 per cent to $1.8bn despite a sharp jump in revenue.

Credit quality is slowly worsening. Across US banks, the charge-off rate for credit card loans — or the percentage of outstanding debt that issuers write off as a loss — increased 91 basis points to 2.55 per cent last year, according to the Federal Reserve.

At Capital One, the metric nearly doubled year on year to more than 4 per cent during the first quarter.

Even so, credit cards remain a lucrative business. Interest rates on debt range from the mid-teens to as high as 30 per cent. Amex, Discover and Synchrony still generated relatively high returns on capital employed of 30.1 per cent, 28 per cent and 23.2 per cent respectively during the first quarter. Capital One was a notable laggard, at 7.1 per cent.

Amex, with its focus on more affluent consumers, looks best placed among the four to weather higher funding costs and any economic slowdown. But at 13 times forward earnings its valuation is nearly twice those of its rivals. Discover trades at almost half that, but with a better credit profile than Capital One and Synchrony, should offer more upside.