Our conviction level in the card stocks is the highest it has been in the past decade. We derive our year-end 2021 PTs by applying a conservative 9.0x target P/E multiple to our 2022 EPS estimates, which imply 63% / 56% / 53% / 25% upside for SYF / COF / DFS / AXP over the next ~15 months.
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We recommend aggressively accumulating ALLY shares, one of our top picks in Consumer Finance. Our $33 PT (55% upside) is conservative in our view and does not contemplate re-rating potential. Highlights of our bullish thesis below.
Many investors agree that normalized EPS will eventually matter, but they are not sure when the market will start to focus on it. We do not expect the market to begin discounting normalized EPS until negative revision risk is in the rear view, at which point we expect material upside in the consumer finance stocks.
We are launching coverage of Mid-Cap Regional Banks at Market Underweight (MU) and Consumer Finance at Market Overweight (MO). Within Consumer Finance, we are Outperform on AXP, COF, DFS, SYF, and ALLY based on our view that they will benefit from declining credit headwinds and greater top-line torque on their paths to normalized earnings in 2022. Our cautiousness on Regional Banks is based on their anemic topline growth outlooks under ZIRP, but we do see attractive relative value pairing opportunities within the group and initiate at Underperform on CFG, CMA, CFR, KEY, PNC, ZION; Outperform on FITB, FRC, HBAN, MTB, RF, SIVB, TFC, USB; and Peer Perform on PB.
ALLY is a full spectrum auto lender that operates a highly capital generative business model. We expect the strength of ALLY’s credit performance to drive a re-rating on the other side of the current recession, as credit losses peak at ~4%.
While we view the deceleration in AXP’s spending volumes as transitory and don’t expect billings to return to ‘19 levels until ‘22, we expect double-digit EPS growth and >30% ROTCE to resume in ‘22.
CFG has made great strides since gaining independence from RBS, but its ROTCE continues to lag peers and we see it as unlikely to outperform under ZIRP. We expect top-line growth to remain challenged, even as credit headwinds abate and CFG seeks further expense base optimization, with ROTCE remaining in the sub-10% range.
CFR’s top-line growth will be challenged under zero interest rate policy (ZIRP) and its “EPS growth torque” will be limited, even as credit headwinds abate and the company seeks to further optimize its expense base, with ROTCE remaining in the sub-10% range.
CMA’s high degree of asset sensitivity limits its “EPS growth torque” under ZIRP, challenging its top-line growth; even as credit headwinds abate, ROTCE is unlikely to exceed the 9% range without the benefit of higher rates.
COF is a full spectrum consumer and commercial lender that operates a highly capital-generative business model and is well positioned to generate almost $12 of earnings in 2022 despite ZIRP, particularly as its cloud migration efficiency initiatives begin to bear fruit.
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