Credit card industry to remain lucrative: study

(Reuters) - The credit card industry will continue to provide one of the most lucrative returns of the asset classes within banks' portfolios even after new U.S. credit card rules are put in place, analysts at Keefe, Bruyette and Woods said.

Congress is mulling regulations on interchange rates -- fees retailers and merchants have to pay to banks that issue credit cards. The legislation would give merchants and retailers more power to negotiate interchange fees with banks.

Analysts Sanjay Sakhrani and Steven Kwok said they expect the industry to be "somewhat smaller" and "less profitable" after the new card laws, but added that lack of growth opportunities in the industry post cycle could drive M&A once banks are better capitalized.

The analysts said Visa Inc <V.N> and MasterCard <MA.N>, which do not charge interchange fees, are least directly exposed to the regulations, followed by American Express Co <AXP.N> and Discover Financial Services <DFS.N>.

Capital One Financial Corp <COF.N> is relatively more exposed given its reliance on fee income, but will adjust and may even be able to find growth opportunities in the prime segment, they added.

Stocks of credit card issuing companies have risen about 150 percent in the second quarter and have outperformed the industry, despite challenges, KBW analysts' noted.

The brokerage raised Discover Financial Services to "outperform" from "market perform," saying it was a stock to own both based on value and near-term prospects, and increased its price targets on American Express and Capital One Financial.

(Reporting by Archana Shankar in Bangalore; Editing by Aradhana Aravindan)

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