To The Moon

Wall Street analysts noted on Monday that former President Donald Trump's proposal to cap credit card interest rates at 10% could significantly impact the banking industry, with repercussions extending to consumer-facing sectors like airlines and retail. The policy might also force consumers toward alternative, higher-cost borrowing channels—such as neobanks and payday lenders—triggering a chain reaction within the market ecosystem. Meanwhile, card issuers are likely to adopt multiple strategies to mitigate the pressure from an interest rate cap, including raising card fees, reducing rewards programs, cutting operational expenses, and tightening credit lines. These countermeasures would become more pronounced if the cap were made permanent. However, the feasibility of implementing such a cap remains highly questionable, as numerous past attempts have ended in failure. Morgan Stanley analyst Jeffrey Adelson highlighted in a client note that since the Supreme Court rejected state-level credit card rate caps in 1978, repeated federal efforts to legislate a ceiling have been unsuccessful. Evercore ISI analysts John Pancari and Glenn Schorr wrote in a report, "For card issuers, the negative impact on total revenue would be significant before any offsets; however, enforcing such a cap is challenging and has failed in the past." Over the weekend, a coalition of banking industry groups—including the Bank Policy Institute, American Bankers Association, Consumer Bankers Association, Financial Services Forum, and Independent Community Bankers of America—issued a joint statement warning that the executive order would reduce credit availability and push consumers toward less regulated, more expensive alternatives. KBW analyst Sanjay Sakhrani commented in a report, "We view the probability as low, but given the administration's stated intent, we are monitoring developments. We doubt regulators have the authority to set any fee caps; Congressional action would be required." Currently, Trump has called for a one-year cap on credit card rates at 10%. Equity analysts generally believe that for most card issuers, this short-term policy remains manageable. However, if the cap were made permanent, Morgan Stanley's Adelson noted it would trigger multiple ripple effects—significantly impacting earnings per share for most credit card companies and potentially leading to systemic adjustments such as tighter credit strategies (e.g., reduced lending to non-prime consumers), scaled-back rewards programs, higher fees, and operational cost-cutting. KBW's Sakhrani added, "In an economy where about 70% is driven by consumer spending (with credit card spending accounting for just over 20%), any reduction in credit issuance could have potential ripple effects on the broader economy." He pointed out that airlines and retailers rely heavily on credit card-related revenue. Moreover, as credit tightens, consumers may turn to alternative lenders like neobanks and payday loan providers. J.P. Morgan analyst Vivek Juneja wrote, "The real issue is that post-pandemic high inflation, increased pricing power due to market concentration, and the growing income/wealth gap have marginalized middle-income groups, creating sustained pressure." Although credit card rates have risen sharply as the Federal Reserve hikes interest rates to combat inflation, Juneja argued this is not the primary cause of a payment ability crisis. "In our view, a one-year temporary cap not only fails to address the problem but could exacerbate it in the long run." Among large money-center banks, Citigroup Inc. (C.US) has the highest exposure to credit card loans, accounting for 23% of its total loans, followed by JPMorgan Chase & Co. (JPM.US), Bank of America Corp. (BAC.US), U.S. Bancorp (USB.US), and Wells Fargo & Co. (WFC.US). KBW estimates that Citigroup's 2026 earnings per share could decline by approximately 10%, with smaller impacts on JPMorgan, Bank of America, Wells Fargo, and U.S. Bancorp, ranging from -1% to -4%. Morgan Stanley believes credit card companies would face severe hits to their book value: under a temporary cap, Bread Financial Holdings, Inc. (BFH.US), Synchrony Financial (SYF.US), Capital One Financial Corp. (COF.US), and American Express Company (AXP.US) could see book value declines of 20%–40%. Adelson from Morgan Stanley stated, "Under simplified assumptions and without any offsetting actions, a decline in credit card yield would completely wipe out earnings for Bread Financial, Capital One, and Synchrony Financial, reduce American Express earnings by 80%, and cut Citigroup's by 60%. However, we expect the industry to make significant strategic adjustments, including reducing credit to the lowest FICO score consumers (benefitting provisions/net charge-offs), raising fees, lowering rewards, and cutting costs elsewhere." Evercore ISI reached a similar conclusion: "Our revenue sensitivity analysis shows card issuers most reliant on net interest income could face a 60–70% negative impact, while more diversified players would see a 10–30% hit; universal and regional banks would experience low- to mid-single-digit effects, which are relatively manageable." These assessments do not account for potential offsetting measures lenders may implement. Monday's stock market performance reflected the perceived risks: lenders with larger exposure to lower-score borrowers saw the steepest declines. Bread Financial closed down over 10%, Synchrony Financial fell 8.36%, and Capital One dropped 6.42%. Among major banks, Citigroup fell 2.98%, JPMorgan declined 1.43%, Bank of America dropped 1.18%, Wells Fargo slid 1.03%, and U.S. Bancorp decreased 1.49%. J.P. Morgan consumer finance analyst Richard Shane concluded, "At this stage, we assess the event as having a broad impact but low probability of occurrence, though it may face significant legal challenges. Therefore, we have not adjusted our fundamental forecasts but emphasize that industry uncertainty has risen notably, which could pressure valuation multiples." The firm's baseline scenario projects low single-digit returns for the consumer finance business in 2026, with "downside risks slightly above normal levels."