KBW Takes Another Look at Credit Cards

July 19, 2018         By: Steven Anderson

Recently, the folks at Keefe, Bruyette & Woods (KBW) dropped word our way about the latest look taken at the credit card space, which as we all know is a major part of—and to some extent the foundation of—the mobile payments space. KBW recently tipped us off to discussion between moderator Brian Gardner and KBW lead consumer and finance payments analyst Sanjay Sakhrani, which spelled out some of the biggest issues facing the space right now.

Sakhrani reiterated some of the earlier points we’d heard out of KBW when talking about credit card stock issue, though noted there was an unusual gap emerging between card issuers and large regional banks. Large regional banks were trading at a slight discount compared to card issuers, which was puzzling given that regions were experiencing a flattening yield curve. Card issuers, meanwhile, were trading at a much larger discount, which Sakhrani found almost incomprehensible.

Word from investors didn’t do much to clarify things for Sakhrani, either, as he noted investor sentiment was that the US economy was at “late cycle” status. That in turn led to belief that credit quality would fall apart soon, and faster than loan growth rates would.

This led Sakhrani to point out several key points that should have addressed the issue: yield curves may be flattening, but overall gross domestic product (GDP) is still on the rise. Throw in falling unemployment figures, and it almost looks like card issuers are pricing in negative economic outlooks, not positive ones as the jobs numbers and GDP numbers suggest.  

There’s a small point Sakhrani doesn’t seem to notice here that may explain the disparity; credit card companies have a much broader market than regional banks do. That exposes the credit card companies not only to a wider possible pool of revenue, but also a wider possible pool of defaults, failures, and general drags on the bottom line. So while the regional banks have smaller markets, they’ve also got lower risk. This is especially true depending on the market.

Some could make a case that card issuers have aggregate risk factors that helps protect them, while regional banks don’t. No matter what you think here, it’s clear that the market isn’t responding so well to credit card issuers, at least for now.