Nomura Securities on U.S. Cards: Revenue Suppression Depression: Collecting the Uncollectible
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Rating Summary:
13 Buy, 4 Hold, 0 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 12 | Down: 19 | New: 21
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Nomura Securities on U.S. Cards: Revenue Suppression Depression: Collecting the Uncollectible by Brian Foran
Foran said, "Credit Drives the Top Line Too – Discover (NYSE: DFS) Benefits Most From Here Revenue suppression continues to fall across the credit card industry, as the continued low level of delinquencies results in issuers collecting finance charges and fees they never expected to collect. Discover stands to benefit most here. Historically, Discover’s revenue suppression was in between CapOne’s (NYSE: COF) and Amex’s (NYSE: AXP). Now it is three times higher. We regard this as a meaningful opportunity – if Discover comes back down to in between COF and AXP levels, it is worth ~$0.10 per quarter of EPS and provides ~50bps of net interest margin cushion against pricing competition for loans. This remains part of our Buy thesis on Discover’s stock."
"Discover vs. the rest: Discover’s revenue suppression was 1.33% in 3Q11. Capital One’s was 0.15% on a reported basis, and 0.70% excluding a one-time reserve release. Amex’s was 0.20%, and 0.30% excluding reserve releases. Historically, DFS used to be in between COF, implying that revenue suppression is too high. A lot of this seems tied to accounting – whereas revenue suppression is tightly correlated to early delinquency at COF and AXP, at DFS it is correlated to chargeoffs. This would account for the timing difference and suggest DFS will always lag peers by about two quarters."
"Eventually this becomes a headwind: Once credit starts deteriorating, revenue suppression goes up and becomes a headwind. We think all of the recent increase in early delinquencies is due to seasonality, and as a result revenue suppression is still a tailwind, especially for DFS."
"We also update AXP estimates for 3Q. 2012 stays $4.00; 2013 is $4.40."
Other Card Companies Include: Visa (NYSE: V) and MasterCard (NYSE: MA)
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Foran said, "Credit Drives the Top Line Too – Discover (NYSE: DFS) Benefits Most From Here Revenue suppression continues to fall across the credit card industry, as the continued low level of delinquencies results in issuers collecting finance charges and fees they never expected to collect. Discover stands to benefit most here. Historically, Discover’s revenue suppression was in between CapOne’s (NYSE: COF) and Amex’s (NYSE: AXP). Now it is three times higher. We regard this as a meaningful opportunity – if Discover comes back down to in between COF and AXP levels, it is worth ~$0.10 per quarter of EPS and provides ~50bps of net interest margin cushion against pricing competition for loans. This remains part of our Buy thesis on Discover’s stock."
"Discover vs. the rest: Discover’s revenue suppression was 1.33% in 3Q11. Capital One’s was 0.15% on a reported basis, and 0.70% excluding a one-time reserve release. Amex’s was 0.20%, and 0.30% excluding reserve releases. Historically, DFS used to be in between COF, implying that revenue suppression is too high. A lot of this seems tied to accounting – whereas revenue suppression is tightly correlated to early delinquency at COF and AXP, at DFS it is correlated to chargeoffs. This would account for the timing difference and suggest DFS will always lag peers by about two quarters."
"Eventually this becomes a headwind: Once credit starts deteriorating, revenue suppression goes up and becomes a headwind. We think all of the recent increase in early delinquencies is due to seasonality, and as a result revenue suppression is still a tailwind, especially for DFS."
"We also update AXP estimates for 3Q. 2012 stays $4.00; 2013 is $4.40."
Other Card Companies Include: Visa (NYSE: V) and MasterCard (NYSE: MA)
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