Credit card stocks are in a sweet spot, according to Nash, who said in a report on Sunday that "valuations remain very attractive," and that he expected the group to "see further outperformance in 2013," because "credit losses remain below normalized levels" and "superior capital generation drives higher capital returns for the group, with payouts surpassing 100% for some."
With the nation's largest banks now submitting their 2013 capital plans to the Federal Reserve as part of the regulator's annual stress tests, Nash said that card lenders "are in the best positions for returning capital," as the group has "a higher starting point, with an average Tier 1 common ratio of 12.4% (banks are at about 10.0%) and this matters greatly for these stocks as the cards generate capital much more quickly than the banks (260 bps vs. 75-90bp at banks on an annual basis)."
Nash also sees further upside for the credit card lenders as the group continues to take market share from money center banks, including Bank of America (BAC), Citigroup , and JPMorgan Chase (JPM). For the 12-month period ended Sept. 30, Goldman Sachs said that Bank of America's credit card loan balances declined by 9%, while its total loans declined by 4%. For Citigroup, card balances were down 4%, although total loans grew by 3%. JPMorgan Chase saw its credit card loans decline by 2% while total loans grew by 4%.Meanwhile, according to Goldman, American Express (AXP) grew its card loans (and total loans) by 6%, while Discover Financial Services (DFS) saw its credit card loan balances climb by 4%, while total loans grew by 10%. Capital One's credit card balances were down 1%, although total loans grew by 5%. Nash said that "COF should continue to show strong core underlying growth, but this would likely be masked by strategic run-off in mortgage and card."
Capital One Upgraded
Nash upgraded Capital One to a "Buy," rating from a "Neutral" rating, while increasing his price target for the shares to $75 from $65 and leaving his 2013 earnings estimate unchanged at $6.90. Nash raised his 2014 EPS estimate by 20 cents to $7.50.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV