Credit Concerns Spark Downgrades! American Express, Capital One, Synchrony Financial Hit By Credit Quality Doubts Analyst

Benzinga - by Nabaparna Bhattacharya, Benzinga Editor.

BMO Capital Markets analyst James Fotheringham downgraded American Express Company (NYSE: AXP) to Underperform from Market Perform, with a price target of $157.

The analyst downgraded the company due to concerns regarding credit quality, loan loss reserve adequacy, decelerating spending growth, rising consumer engagement costs, and valuation.

Further, the $157 AXP target price implies -17% downside for shareholders, the analyst writes.

AXP's 3Q23 sequential credit trend is meaningfully higher than almost all other banks and specialty lenders, per the analyst.

Also Read: Why JPMorgan Is Bullish On American Express, Bearish On Rocket Companies

Further, the company's 3Q23 non-accrual loan balance remains relatively low (up only +6% sequentially), the analyst adds.

AXP's customer engagement expenses could outpace growth in billed business, significantly as consumer spending growth slows to

The analyst worries about the resulting pressure on AXP's overall operating leverage.

Fotheringham downgraded Capital One Financial Corporation (NYSE: COF) to Market Perform from Outperform, with a price target of $124, implying a 6% potential downside.

After COF shares ran up almost +50% into year-end, the stock got a downgrade due to concerns regarding credit quality, regulatory capital pressure, rewards competition, partnership business underperformance, and the potential impact of the CFPB's late fee proposal.

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The analyst estimates that the Fed's Basel 3 End-game (B3E), as currently proposed, could impact COF's Basel 3 common equity tier 1 (B3CET1) ratio by as much as -375 bps.

The analyst cautions that the company's partnership card business has underperformed its branded general-purpose domestic card business, which will scale back its partnership business over the next two years, potentially pressuring revenue growth.

COF acquired Walmart Inc.'s (NYSE: WMT) $8 billion card loan portfolio from SYF in 2019; however, Walmart is now suing COF in an attempt to exit its partnership agreement.

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If Walmart succeeds via litigation, COF may be forced to transfer that loan portfolio to a new credit card issuer as early as January 2025, the analyst adds.

Fotheringham downgraded Synchrony Financial (NYSE: SYF) to Market Perform from Outperform, with a price target of $40.

The analyst flagged cautions on credit quality, regulatory pressure (on late fees and deferred interest promotions), and retail partner concentration risk.

Among the credit card lending coverage, the analyst says SYF could be second-most affected by the new late fee rule (after BFH).

SYF's earnings could be impacted by around -30% in the first year following the potential implementation of the CFPB's late fee rule, less than -20% in year two, and around - 5% in year three, as repricing initiatives make their way through SYF's loan book, the analyst notes.

Now See: Credit Card Companies Sector Shakeup: Analyst Cautions On Near-Term Risks, Yet Sees Long-Term Stability

BMO Capital Markets downgraded Citigroup, Inc. (NYSE: C) shares to Market Perform from Outperform, with a price target of $57.

C shares tend to underperform those of its money-center peers during periods of risk-off or negative sentiment among U.S. bank stock investors, which the analyst forecasts will accompany the impending system-wide credit cycle from 4Q23 to 4Q25.

Fotheringham maintained the Market Perform Rating on OneMain Holdings, Inc. (NYSE: OMF), with a price target of $50.

OMF is currently enjoying strong demand for its lending products, and robust loan growth has resumed following its successful efforts to temper credit costs via tightened underwriting standards following a challenging 2022 loan vintage, the analyst notes.

Also See: OneMain's Prudent Moves Amid Economic Uncertainty: Analyst Highlights Strong Forecast For FY23

Credit trends have moderated, front-book loans are performing in line with pre-pandemic originations, and OMF’s loan delinquencies have moved back in line with normal seasonal patterns, per the analyst.

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