With the U.S. economy steadily improving for much of the past three years, consumer confidence is rising correspondingly. This should come as a boost for credit card providers and companies such as Capital One (COF, Financial) look attractive to buy in the short to medium term. Here is a look at some of the contributing factors that make Capital One and other similar regional banks a good buy despite the fall in share prices earlier this week.
GDP Growth
The annual GDP growth rate since 2012 has been over 2%. Despite a de-growth in the first quarter of 2014 and a downward revision of the 2014 fourth quarter GDP growth rate to 2.2%, the annual growth in 2014 at 2.4% is still higher than the previous two years. According to the Bureau of Economic Analysis of the U.S. Department of Commerce, the GDP growth in 2014 “reflected positive contributions from personal consumption expenditure” which increased by 4.2% in the fourth quarter, compared with an increase of 3.2% in the third.
The improving consumer scenario is bound to benefit consumer lending. As is the case with other major credit card providers, Capital One has seen a rise in consumer spending from US$ 31.4 billion in first quarter of 2012 to US$ 53.7 billion in the third quarter of 2014. Similarly, U.S. Bancorp (USB, Financial) saw purchase volumes rising from US$ 24.6 billion to US$ 30.8 billion in the same period. The fourth quarter of 2014 should see a further growth in spending, since the holiday season typically sees the highest consumer spending.
Since the regulations on card transaction first came in to effect in 2009, this growth in consumer spending is the only way for card companies to grow, and the figures are a very good indicator of strong performance by these companies.
Jobs Data
The steady GDP growth also affects the employment scenario positively. The numbers for job openings and new hires have both improved, with jobless rates down in all states in the U.S. in 2014, and the latest figures from February 2015 showing an addition of 295,000 jobs. Higher employment, in turn, leads to higher disposable income and hence fewer delinquencies on loan repayments. As per a historical data chart drawn up by Morningstar that correlates delinquencies and unemployment, charge-off rates on credit card receivables have plummeted since the financial crisis in 2008, are close to their lowest ever levels and are expected to remain low as well. This bodes well for credit card providers who can expect higher consumer spending to reflect in their business, leading to higher profits for them.
Fed’s Stress Test
The 31 biggest banks in the country have been put through the annual stress tests as part of the Dodd-Frank financial reforms, and 28 of them have passed, with Bank of America (BAC, Financial) required to resubmit its capital plan to the Federal Reserve. Capital One, U.S. Bancorp and PNC Financial Services (PNC, Financial) (another significant regional rival) have all passed the second round with more leeway to increase their dividend pay-out and share buybacks than most of the bigger players. This makes them even more attractive to investors. Given the above factors, credit card companies, especially those just below the top rung on the list of heavy weights, make a very good buy proposition at current levels.
