Why Deutsche Bank Likes Credit Card Stocks Before Earnings

In a report issued Tuesday, Deutsche Bank analyst David Ho provides a preview of second quarter earnings for U.S. consumer finance stocks. Here's a look into the firm’s expectations for its top picks in the space: American Express Company (NYSE: AXP) and Synchrony Financial (NYSE: SYF), both Buy rated.

Trends In The Credit Card Industry

Deutsche Bank highlights five trends among credit card issuers heading into Q2:

1) Higher rates should continue to lift most card issuers.

2) Low gas prices could also drive management credit cost outlooks.

3) Although card spending is relatively weak (when compared to the same quarter last year), it should see a sequential surge.

4) “Marketing/rewards costs may be a bigger focus in 2Q.”

5) Although commercial card spending will most likely be weak, the analysts see little likeliness of a meaningful deterioration.

American Express

American Express’ stock is down about 18 percent year-to-date. Deutsche Bank sees this pullback as an alluring opportunity to construct a long position in the stock, which is trading at only 13 times the firm’s 2016 earnings estimate.

The analysts believe “expectations are too low and FX/rates/commercial spending weakness mostly priced in.” This situation sets up the company nicely for a potential recuperation in domestic card spending.

Ho thinks expense visibility should start to improve as of the second quarter, and assumes an increase in investment spend of $200 million to $300 million: "There will be more positive commentary on Plenti and separately, irmwide ROTCEs should remain >30%.”

Synchrony Financial

For Synchrony Financial, the firm anticipates higher card volumes/loans in the second quarter, driven from likely increased private label card promotions.

The analysts see loan growth delivering some upside. "Recall that Q1 loans rose 7.3% y/y despite only 2% retail sales growth (vs. 2.7% so far in 2Q), 25-50% of consumer savings from lower gas prices used for deleveraging, and a 2-3% drag from the Dillard’s exit last year —these drags should lessen in 2H15,” they explain.

The report notes that Synchrony has “under-appreciated leverage to higher rates” and recent positive internal stress test results suggest potential for strong capital deployment.