Visa (NYSE:V) and Mastercard (NYSE:MA) just reached what many are calling a landmark agreement. In response to a class-action lawsuit, the two payments processors agreed to lower the swipe fees they charge merchants for credit card transactions and they’ll limit the charges for five years.
The lower fees will save nearly $30 billion over the term of the settlement. It was a case that had been kicking around for decades, which is why others, including the Merchants Payments Association, view it as unhelpful. “This settlement is a bad deal for merchants. A few years of very small relief followed by business as usual is not a good outcome from 20 years of litigation,” the organization said in a press release.
Credit card stocks may see some tangential benefit from the settlement. The majority of the money card issuers make comes from interest charged on balances customers carry on their cards plus any fees they assess. Limiting the swipe fees in theory could create incentives for consumers to use their cards more often.
Not that they need much encouragement. According to the Federal Reserve Bank of New York, U.S. consumers have a massive $1.13 trillion balance on their credit cards. Because of rampant inflation and inflated interest rates, consumers have been forced to resort to using their credit cards to get by.
That poses a risk to credit card stocks, too. Total consumer debt — housing, cars, credit cards, etc. — now stands at $17.5 trillion and delinquencies are rising. Credit card delinquencies jumped 50% last year and have surpassed pre-pandemic levels. Those issuers most exposed to credit card debt could be at risk. But here are two credit card stocks to buy in April and one to sell.
JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) is the largest credit card issuer. It has over 150 million cards in circulation and opened 10 million new accounts just last year. While it provided consumers with $239 billion in new credit in 2023, that is just 10% of the total $2.3 trillion it provided to all customers, including businesses, non-government agencies and government itself.
Of course, JPMorgan is more than just a credit card company. It is foremost a bank with $2.4 trillion in deposits. It also makes loans based on those deposits, some $1.3 trillion at the end of 2023. With the Fed having aggressively raised interest rates, the net interest income (NII) it earns has soared. Last year it earned over $89 billion, a 34% increase from 2022. In total, it has $3.9 trillion in assets, 20% more than its nearest peer, Bank of America (NYSE:BAC).
It should be noted JPMorgan is also expecting more consumers to default on their credit card balances. Its provision for credit card losses surged 80% last year, hitting $6 billion. Yet it is a financial rock and its premiere position atop the banking industry makes it too big to fail.
American Express (AXP)
American Express (NYSE:AXP) is the second largest card issue behind JPMorgan, with over 112 million cards in circulation worldwide. While AmEx is not immune from account delinquencies, their impact is minimized.
Last year American Express increased its provisions for credit losses along with the amounts it had to write off. However, because it targets customers with higher incomes and net worth the markdowns tend to be lower than AmEx’s peers. According to the credit card stock, “Net write-off and delinquency rates remained best-in-class.”
At the same time American Express has pursued a younger demographic. Still staying within its target of being the financial services company for the well-heeled, going for younger consumers can create a longer-lasting relationship with them.
AmEx’s NII also soared last year in the high-interest rate environment, rising 33% from the prior year. It hit $13.1 billion in 2023 from $9.9 billion in 2022. While falling rates could weigh on NII that seems to have been pushed to the back burner as inflation remains stubbornly high.
AmEx is a favorite of Warren Buffett who has owned shares for years. With American Express stock near an all-time high, investors can still confidently buy this credit card stock.
Capital One Financial (COF)
Capital One Finance (NYSE:COF) is set to become a behemoth in the credit card world. Beyond it’s own vast assets and position in the market (Capital One is the fourth largest issuer), it is in the process of acquiring No. 6 card issuer, Discover Financial Services (NYSE:DFS).
In February, Capital One agreed to buy its rival for more than $35 billion and if approved, will become the sixth-largest bank in the U.S. with more than $450 million in deposits. It will also own the fourth-largest credit-card payment network behind Visa, Mastercard and AmEx. A Capital One-Discover company will account for over 18% of consumer credit card balances.
Capital One’s 30-day-plus delinquencies surged 34% from last year while Discover’s skyrocketed 73%. The more worrisome 90-day-plus delinquency rate was up 50% and 86%, respectively.
As one of the most-exposed credit card stocks that’s about to become even bigger, Capital One Financial stock is a sell.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.