With data indicating credit card loan quality is trending better this year than he expected, KBW analyst Sanjay Sakhrani reiterated his “buy” ratings for Discover Financial Services, Capital One, and the credit card gold standard, American Express.
Sakhrani said Thursday, that based on January reports by the major credit card loan securitizers, “average industry charge-offs still remain in favorable territory as they continue to stay below normalized levels of roughly 5 percent.”
Major credit card players seeing continued improvement included American Express, with the lowest charge-off rate — uncollected debts from consumers — of 2.25 percent in January, improving from 2.28 percent in December.
World Financial Network — a subsidiary of Alliance Data Systems — had the highest charge-off rate of 6.07 percent, improving from 6.39 percent in December.
Bank of America saw its January credit card charge-off rate decline to 5.63 percent from 6.05 percent in December.
Discover’s charge-off rate declined to 2.75 percent in January, from 3.15 percent the previous month.
Major card securitizers seeing increased January charge-off rates included Capital One, with a 3.54 percent charge-off rate, compared to 3.43 percent in December; JPMorgan Chase’s Chase Issuance Trust, with a charge-off rate of 4.25 percent, increasing from 4.11 percent in December; and Citigroup subsidiary Citibank, with a charge-off rate of 5.27 percent, increasing from 5.11 percent the previous month.
Discover’s shares have returned 21 percent year-to-date, through Wednesday’s close at $29.01. The shares trade for nine times the consensus fiscal 2012 earnings estimate of $3.36 a share, among analysts polled by Thomson Reuters.
The company reported a return on average equity (ROE) of 30 percent for its fiscal 2011, ended Nov. 30.
Sakrhani reiterated his “outperform” rating for Discover, with a $32 price target.
Sakrhrani is ahead of the consensus, estimating that that Discover will earn 43.48 a share during fiscal 2012, although his $3.10 EPS estimate for fiscal 2013 is behind the consensus estimate of $3.37.
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