PaymentsJournal
SUBSCRIBE
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
No Result
View All Result

Bank Dividends and Credit Cards: New Limits Protect but Reduce Investor Returns

Brian Riley by Brian Riley
July 22, 2020
in Analysts Coverage, Credit
0
Bank Dividends and Credit Cards: New Limits Protect but Reduce Investor Returns

Bank Dividends and Credit Cards: New Limits Protect but Reduce Investor Returns

0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

The term “widow and orphan stock” dates back to the 1930’s and is used to describe “mature companies with fat dividends” and strong market positions. Placing an estate check or life insurance payout in this asset class would provide reliable, lifetime income. 

After the Fed’s recent ruling on Comprehensive Capital Analysis and Review (CCAR), you will not find many bank stocks in that category, at least for a while.

Second Quarter 2020 results are in for many banks, and today’s WSJ covers the topic in a piece titled “The Deck is Stacked Against (Credit) Card lenders.”

  • Capital One COF +2.20% Financial Corp. reported another big quarterly loss Tuesday, as it set aside $2.7 billion for potential credit defaults. In light of the Federal Reserve’s new bank dividend policy, the lender now expects to slash a planned 40 cent quarterly dividend to 10 cents. There’s a potential opportunity for investors in beaten-up card lenders. But it may not pay off for a while.

This is certainly no surprise to Capital One, a credit card lender that mastered portfolio analytics early in the history of credit cards. Capital One is known for its ability to lend on the fringes of credit, price effectively, and, most importantly, collect on risky accounts.

  • With Capital One’s significant reserves socked away and a dividend cut priced into the stock, it is tempting to believe that the worst might be over, especially if more stimulus is on the way to help borrowers keep making payments. Like Ally Financial, Capital One’s still-strong credit performance measures and most positive experience with forbearance programs do suggest that on present trends, credit losses may not approach the dire scenarios banks are reserved against.

Yet, credit risk is not the sole exposure. The WSJ cites interest income margins as another issue. Credit losses affect net non-interest income  Here we have a problem of revolving accounts paying down their balances.

  • But reserves aren’t the total earnings story. Capital One also reported a sharp drop in net interest margin, a full percentage point from the first quarter to the second quarter. One driver of that is lower interest rates. Another is that the same stimulus helping consumers avoid default is also leading some to save more and pay down credit-card debt. The bank described this as “the flip side of good credit” and a “hidden factor” in slow growth.
  • Still, this dynamic puts investors in a tight spot. If government stimulus is extended, Capital One and other card lenders may not add much more to allowances, helping future earnings. But unless the economy is also concurrently picking up to drive spending and not saving—a big question mark right now—stimulus won’t fully relieve the pressure.
  • As a committed consumer lender, Capital One could nab market share if its big-bank competitors are forced to be more cautious about balance sheet growth. But that is a longer-term story, and investors can expect a bumpy ride.

Capital One is typically a good tool to use when considering credit cards because of the company’s reliance; about 2/3rds of its revenue comes from that channel.

For the fixed income market, investors need to keep in mind that the current business cycle is less than smooth, though it will likely rebound as COVID-19 tempers.  The problem is that the timing is still unknown and out of the market’s control.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

Tags: AllyCapital OneCredit Cardsinvestment
0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

    Analyst Coverage, Payments Data, and News Delivered Daily

    Sign up for the PaymentsJournal Newsletter to get exclusive insight and data from Javelin Strategy & Research analysts and industry professionals.

    Must Reads

    deposit fraud

    Early Warning’s Verify Deposit Risk Leverages Predictive Intelligence to Stop Deposit Fraud

    November 28, 2023
    financial management

    How Intuit QuickBooks is Providing Tools for More Effective Financial Management at Every Stage of Small Business Growth

    November 27, 2023
    credit cards

    Credit Card Industry Remains Robust but Must Brace for Economic Instability

    November 22, 2023
    Complaints About Empty Gift Cards Continue into the Holiday Season

    Complaints About Empty Gift Cards Continue into the Holiday Season

    November 21, 2023
    Virtual Cards Are Gaining Ground in B2B Payments

    Virtual Cards Are Gaining Ground in B2B Payments

    November 20, 2023
    API and UI Intersection Accelerates Digital Banking

    API and UI Intersection Accelerates Digital Banking

    November 17, 2023
    fraud AI

    How Turnkey AI Solutions Can Help Payments Stakeholders Mitigate Fraud

    November 16, 2023
    New Mastercard Launch Allows Fast and Secure Cross-Border Payments

    Central Banks and Fintechs Compete to Shape Cross-Border Payments Mobility

    November 15, 2023

    Linkedin-in Twitter

    Advertise With Us | About Us | Terms of Use | Privacy Policy | Subscribe
    ©2023 PaymentsJournal.com

    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Videos
    Menu
    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Videos
    • Industry Opinions
    • Recent News
    • Resources
    Menu
    • Industry Opinions
    • Recent News
    • Resources
    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Industry Opinions
    • Faster Payments
    • News
    • Jobs
    • Events
    No Result
    View All Result