August 24, 2009 / 10:40 AM / 9 years ago

UPDATE 1-Barclays upgrades US card cos on improved earnings view

Aug 24 (Reuters) - U.S. credit card issuers will see earnings steadily increase in the next three to five years, as recent signs of stabilization in the rate of defaults suggest the improvement is more than seasonal and that the industry has reached an inflection point in credit, Barclays Capital said, and upgraded American Express Co (AXP.N) and two others to “overweight.”

Barclays, which previously rated American Express, Capital One Financial Corp (COF.N), and Discover Financial Services (DFS.N) “equal-weight,” expects the three to post positive earnings in 2010, more normalized earnings by second half of 2011, and historical above average earnings-per-share by 2012.

“We estimate that earnings leverage is significant just from a reduction in credit costs without making material increase in revenue growth,” analyst Bruce Harting wrote in a note to clients.

Guarded optimism that the worst would soon pass for the credit card industry increased after several big credit card lenders last Monday reported better-than-forecast default rates for July. Average delinquencies, or late payments, which are a measure of future defaults, across the largest credit card issuers fell by 10 basis points in July, when delinquencies normally rise 2 to 4 basis points, suggesting that the rapid deterioration in credit that began last year is now over, Harting said.

Still, normal seasonal trends may push delinquencies higher in the second half of this year, but the increases should be more consistent with seasonal patterns than the outsized increases seen from last September through March this year, the analyst said.

Credit card defaults, which have risen sharply in recent months and which many analysts feared could rival mortgages as a headache for banks, usually track unemployment that is expected to peak at more than 10 percent by year-end. Analyst Harting raised his price target on shares of American Express by $10 to $38, on Capital One by $20 to $50 and on Discover Financial by $2 to $16.

“With five straight months of declining early stage credit card delinquencies, we believe the stock market has shifted its focus to valuing these stocks more on future earnings power than on defensive valuation methods like price to tangible book,” Harting said.

Even after the recent increases in stock prices, the stocks still have significant upside potential if viewed from a multiyear future earnings growth perspective, he added.

Shares of American Express closed at $32.85, Capital One at $36.48 and Discover Financial at $13.51 Friday on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)

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