7 Improving Credit Card Stocks

NEW YORK ( TheStreet) -- For most of the nation's largest credit card lenders, delinquency rates continued to decline during February, while card portfolio profitability increased.

Based on master trust filings, KBW reported on Friday that the seven largest credit card securitizers in February saw their average annualized loan charge-off rate decline to 4.15%, from 4.25% in January, and 6.61% in February 2011.

Meanwhile, the average card portfolio yield increased to 21.28% in February, from 20.06% in January, although it was down from 22.51% a year earlier.

Factoring in the improved loss rates, the average excess spread -- a profitability measure showing how much of the portfolio yield is kept by the secrutizer, after netting-out the securities' coupon rate, loan losses and servicing fees -- increased to 13.19% from 12.25% the previous month, and 12.55% a year earlier.

KBW analyst Sanjay Sakhrani said that in "average industry charge-offs still remain in favorable territory below normalized levels of roughly 5%," and that in February "there was a clear industry-wide movement downward in delinquency rates, which should potentially be a positive for future charge-off rates."

The average 30+ days delinquency rate (except for Citigroup ( C) which reports delinquencies of 35 or more days) was 2.99% in February, improving from 3.05% the previous month and 4.02% a year earlier.

Regarding the overall health of the major card securitizers, Sakhrani said "credit quality is trending better than our expectations. Delinquency rates continued to remain constructive with sequential movements in line to slightly better-than-typical seasonal trends seen in February. In terms of loan growth, balances contracted sequentially in February, but for the most part still remained in-line to slightly above our 1Q12 estimates.

The following is a quick review of all seven securitizers covered in the KBW report, along with stock performance and price multiples, and KBW's recommendations. The seven are listed in ascending order by excess spread for their card securitizing subsidiaries.

Sakhrani says that it's not really fair to compare excess spreads, because "during the downturn, some issuers including Discover ( DFS) and American Express ( AXP) provided subordination to their trusts, so their excess spreads are inflated by an effective subordination subsidy."

But for the card securitizer with the highest excess spread, "there was no subordination" according to Sakhrani, so we're looking at a pure number.

7. Citibank

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Citigroup subsidiary Citibank reported a charge-off rate within its credit card master trust managed portfolio of 5.36% during February, increasing from 5.27% in January, but improving from 7.95% in February 2011.

Citibank's 35+ days delinquency rate within the card portfolio was 3.09%, improving from 3.13% the previous month, and 4.24% a year earlier.

Citi's managed card portfolio excess spread was 8.23% in February.

Citigroup's shares returned 38% year-to-date through Thursday's close at $36.27, following a 44% decline during 2011.

The shares trade for 0.7 times tangible book value, according to HighlineFI, and for nine times the consensus 2012 EPS estimate of $3.97, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $4.78.

KBW analyst David Konrad rates Citigroup "Market Perform," with a $42 price target, and is behind the consensus, estimating the company will earn $3.40 a share in 2012, followed by EPS of $4.40 during 2013.

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.

6. Bank of America

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Bank of America ( BAC) reported a charge-off rate within its credit card master trust managed portfolio of 5.56% during February, improving from 5.63% in January, and 8.85% in February 2011.

The 30+ days delinquency rate within Bank of America's card portfolio was 3.75% during February, improving from 3.80% the previous month, and 5.09% a year earlier.

Bank of America's managed card portfolio excess spread was 9.78% in February.

The company's shares returned 66% year-to-date, following last year's drop of 58%.

The shares trade for 0.8 times tangible book value, and 13 times the consensus 2012 EPS estimate of 69 cents. The consensus 2013 EPS estimate is $1.19.

KBW analyst Jefferson Harralson rates Bank of America "Market Perform," with a $9 price target, and estimates the company will earn 65 cents a share during 2012, followed by EPS of $1.20 in 2013.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

5. Chase Issuance Trust

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JPMorgan Chase ( JPM) subsidiary Chase Issuance Trust reported a charge-off rate within its credit card master trust managed portfolio of 3.97% during February, declining from 4.35% in January and 6.21% in February 2011.

Chase's 30+ days delinquency rate within the card portfolio was 2.42% during February, improving from 2.45% the previous month, and 3.29% a year earlier.

Chase's excess spread was 10.58% in February.

JPMorgan Chase's shares returned 35% year-to-date through Thursday's close, following a 20% decline during 2011.

The shares trade for 1.4 times tangible book value, and for 9.5 times the consensus 2012 EPS estimate of $4.73. The consensus 2013 EPS estimate is $5.50.

JPMorgan Chase on Tuesday announced that the Federal Reserve had not objected to its plan to raise its quarterly dividend payout to 30 cents a share from 25 cents. The company also authorized a $15 billion share buyback plan.

KBW analyst David Konrad rates JPM "Outperform" with a $52 price target, and estimates the company will earn $4.72 a share during 2012, followed by EPS of $6.00 during 2013.

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

4. Discover

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Discover reported a charge-off rate within its credit card master trust managed portfolio of 2.80% during February, increasing from 2.75% in January, but improving from 5.79% in February 2011.

The 30+ days delinquency rate within Discover's managed card portfolio was 2.25%, improving from 2.31% the previous month, and 3.70% a year earlier.

Discover's excess spread was 12.66% in February.

Shares of Discover Financial Services returned 33% year-to-date, through Thursday's close at $32.02.

The shares trade for 1.7 times tangible book value, according to Worldscope data provided by Thomson Rueters, and for nine times the consensus fiscal 2012 EPS estimate of $3.46 (Discover's fiscal year ends in November.) The consensus EPS estimate for fiscal 2013 is $3.47.

Sakhrani rates Discover "Outperform," with a $37 price target, and estimates the company will earn $3.79 a share in fiscal 2012, followed by EPS of $3.35 in fiscal 2013.

Interested in more on Discover Financial Services? See TheStreet Ratings' report card for this stock.

3. Capital One

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Capital One ( COF) reported a charge-off rate within its credit card master trust managed portfolio of 3.20% during February, improving from 3.54% in January, and 5.18% in February 2011.

The 30+ days card delinquency rate was 3.34%, improving from 3.46% the previous month, and 3.98% a year earlier.

Capital One's excess spread was 13.28% in February.

Capital One's shares returned 27% year-to-date, through Thursday's close at $53.63.

The company Capital One is in the midst of a major transition, through its recent acquisition of ING Direct (USA), which provided liquidity for the company's coming purchase of HSBC's ( HBC) $30 billion U.S credit card portfolio, for a $2.6 billion premium.

Capital One on Wednesday announced a $1.25 billion offering of common shares, to partially fund the HSBC card portfolio purchase.

Capital One also said on Wednesday that it expected "earnings per share from continuing operations in the first quarter of 2012 of at least $2.50, inclusive of an expected bargain purchase gain of approximately $600 million, or approximately $1.15 per share, related to the ING Direct Acquisition.

The shares trade for nine times the consensus 2012 EPS estimate of $5.88. The consensus 2013 EPS estimate is $6.96.

Sakhrani rates Capital One "Outperform," with a $68 price target, and estimates the company will earn $6.60 a share in 2012, followed by EPS of $6.82 in 2013.

Interested in more on Capital One? See TheStreet Ratings' report card for this stock.

2. American Express

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American Express reported a charge-off rate within its credit card master trust managed portfolio of 2.73% during February, increasing from 2.25% in January, but improving from 4.24% in February 2011.

The 30+ days delinquency rate within AXP's managed card portfolio was 1.58% in Februry, increasing slightly from 1.57% the previous month, but improving from 2.18% a year earlier.

American Express's excess spread 13.39% in February.

American Express's shares returned 21% year-to-date, through Thursday's close at $56.72.

The shares trade for 3.8 times tangible book value, and 13 times the consensus 2012 EPS estimate of $4.25. The consensus 2013 EPS estimate is $4.73.

The company announced on Tuesday that the Federal Reserve did not object to its plan to return capital to investors "through share repurchases of up to $4 billion during 2012 and up to $1 billion in the first quarter of 2013, as well as an increase in the Company's quarterly dividend to $0.20 per share from $0.18 per share, subject to approval of the Company's Board of Directors."

Sakhrain rates American Express "Outperform," with a price target of $66, and estimates the company will earn $4.46 a share in 2012, followed by EPS of $4.89 in 2013.

Interested in more on American Express? See TheStreet Ratings' report card for this stock.

1. World Financial Network

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Alliance Data Systems ( ADS) subsidiary World Financial network reported a charge-off rate within its credit card master trust managed portfolio of 5.43% during February, improving from 6.07% in January and 8.06% in February 2011.

The 30+ days delinquency rate within World Financial's card portfolio was 4.47%, improving from 4.61% the previous month, and 5.53% a year earlier.

World Financial Network's excess spread was 24.43% in February. Sakhraini says the lender's high excess spread is so high because the company is a private-label card lender, and that the "portfolio yields are higher and usually the charge-off rates are higher," both of which reflect borrowers' higher tendency to let credit revolve from month to month.

Alliance Data Systems has seen its shares return 22% year-to-date, through Thursday's close at $126.30.

The shares trade for 15 times the consensus 2012 EPS estimate of $8.50. The consensus 2013 EPS estimate is $9.62.

Sakhrani rates ADS "Market Perform," with a $120 price target, and estimates the company will earn $8.52 a share during 2012, followed by EPS of $9.37 in 2013.

Interested in more on Alliance Data Systems? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 7 Improving Credit Card Stocks portfolio on Stockpickr.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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