June 17, 2024

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Better Buy: Capital One vs. American Express vs. Discover

Share prices of Capital One Financial (NYSE: COF), American Express (NYSE: AXP), and Discover Financial Services (NYSE: DFS) have been trading between 35% and 45% each since February 20, when the broader stock market began to fall sharply. Has done. Credit card companies are naturally more risky than traditional banks because credit card loans almost always have higher charge-off and default rates than other credit segments, even under normal economic conditions. However, since there is potential for long-term value for large companies to survive the recession, it is best to take a look now when there are a lot of potential upsides.

All three companies fought in the first quarter of the year. American Express made লাভ 7 million, down 76% year-on-year. This proved to be the best performance of the group. Discover reported net losses of millions in the first quarter, while Capital One reported a net loss of .3 billion.

Despite being the group’s biggest loser, I prefer Capital One in the long run. The reason is here.

The most conservative debt-loss provision

The largest of the three companies in terms of total assets, Capital One has set aside more cash for the quarter to deal with potential impending debt losses. The bank has taken a total credit provision of 4 .4 billion this quarter, an increase of almost 200% over the combined quarter. Meanwhile, American Express and Discover have 156% and 116% provisions, respectively. ‘My personal view is that you guys have taken a more conservative approach. So we appreciate that. I think some card issuers may have a big reserve build in the next quarter, ”said Donald J. Fundetti, an analyst at Wells Fargo Securities, in a recent earnings call from Capital One.

Discover has a larger coverage ratio than Capital One. A coverage ratio is a measure of the total cash that is specifically hidden for a loan loss as opposed to a company performing an outstanding loan (the loan is outstanding 90 days ago). At the end of the quarter, Discover’s coverage ratio increased to 7.44%, while Capital One’s increased to 5.35%. However, Discover has a much larger credit card portfolio on a percentage basis. Credit card loans are close to 80% of its total loan book, while in Capital One that percentage is only 45%, so it would make sense to expect more losses for Discover.

The best-positioned portfolio

One interesting thing about American Express is that unlike Capital One and Discover, it earns more money from merchant fees than interest on credit card loans. This may have helped AmEx perform better in the first trimester, but it could be problematic down the line.

Consumer spending was down 7.5% in March, and one industry that has hit hard is travel. Jeffrey Campbell, CFO of American Express, said in a recent earnings call that proprietary billing volume, which is spent on American Express cards issued by the company, fell by 45% in April. This is being driven by spending in the travel and entertainment industry, which accounts for 30% of the company’s total ownership billing and a staggering 95% in April. Even when normal life begins again, it may take some time for travel and recreation to return.

Although I don’t see any breakdown of the industry in Capital One’s revenue instruments, CEO Richard Fairbank said in a revenue call that weekly purchases fell nearly 30% year-on-year as of April 17, suggesting the company relied on lower travel costs than American Express. Unlike American Express and Discover, Capital One is involved in a more traditional banking line and has more than 5 5 billion in commercial and consumer loans (excluding credit cards). These portfolios are not immune to the recession but have traditionally been more secure than credit card debt.

Capital One’s nearly billion-dollar commercial portfolio structure isn’t terrible either. The real estate, finance, and healthcare industries make up 67% of the portfolio, while the company has 5% exposure to oil and gas and 4% exposure to retailers. More liquidity of the company is available, with a general equity level 1 capital ratio, a measure of a bank’s principal capital expressed as a percentage of its total risk-weighted assets, 12%, which has increased year by year.

Go with Capital One

When you look at them, all three of these major credit card companies have different business models. American Express Card derives most of its revenue from spending fees; Discover’s largest credit card loan portfolio by percentage; And Capital One has a larger, more traditional banking unit. Despite the tough quarter, I prefer Capital One because of its seemingly conservative approach and the combination of its portfolio.