If successful in enacting a one-year cap on credit-card interest rates, President Donald Trump could dramatically alter financial-sector earnings and business models. But investors shouldn't panic just yet, as one analyst sees his proposal as "highly unlikely" to come to fruition.
The president put out a surprise social-media post on Friday, saying he planned to follow through with a campaign promise for a 10% cap on credit-card annual percentage rates, starting Jan. 20.
Jefferies analyst John Hecht, however, wrote Saturday that Trump doesn't have executive authority to make such a move on his own. And if he brings the issue to Congress, it would presumably be "dead on arrival," he said, given the likely spillover effects of a rate cap and a lack of support for similar initiatives in the past.
"The legislative risk remains relatively low, but clearly higher now that the president has called for this action," Raymond James policy analyst Ed Mills added in a Sunday note to clients. He noted that caps "are generally state-specific laws."
Hecht, echoing what banking-industry groups have said recently, warned that a 10% rate cap wouldn't mean that credit-card companies simply lend as usual but with lower rates. Rather, they would be expected to tighten lending standards, shutting out borrowers with lower credit scores. And as a result, that could drive "weaker retail sales and consumption across the entire economy, hurting GDP," Hecht noted.
Still, he thought through how Trump's proposal would ripple across the financial-services sector in the event it did get implemented, and crunched the numbers for American Express $(AXP)$, Atlanticus Holdings $(ATLC)$, Bread Financial Holdings $(BFH)$, Capital One Financial $(COF)$, Synchrony Financial (SYF). (Visa (V) and Mastercard $(MA)$ operate credit-card networks but don't actually lend to consumers.)
Bread's stock was down 12%; $Synchrony Financial(SYF-B)$ shares were off 8%; Capital One shares were off 7%; American Express shares were off 5%; Citi down 3%; Visa and Mastercard shares were both down more than 2%.
American Express has a more premium customer base, but "at face value," a 10% cap could still reduce its net interest margin to an estimated 5.7% from 9.2%, according to Hecht's calculations on the metric - a measure of banking-industry profitability. The impact would be far more dramatic for other companies with more subprime exposure, as the chart below shows.
Doing the math is somewhat difficult, he conceded, since credit-card companies likely wouldn't sit still and would probably put in place new fees to help make up for lost revenue and earnings.
Truist Securities analyst Brian Foran put the situation more bluntly, calling the proposal "not great" for the card companies even though its severe potential consequences could stop it from becoming a reality.
In Foran's view, "even if 10% doesn't happen, it opens the debate about whether some amount of pricing cuts are on the table."
He seemed to take a more severe view of the financial consequences, writing that the credit-card business could become downright unprofitable if these changes were to get enacted.
Synchrony and Bread, which put out store cards, have the most to lose, "because they are relative pure plays on cards, and because they have higher yields on their loans," he wrote in a note to clients. "Full-spectrum lenders like [Capital One] would be next," with Amex presumably "a little more insulated by its spend-heavy business mix."
TD Cowen's Jaret Seiberg agreed Trump doesn't have unilateral authority, and also noted Congressional reticence, but said the move may put political pressure on the issuers. He suggested they might bring an existing 36% cap on interest rates for the military to all consumers.
Meanwhile, "alternative" financial-services companies might benefit from Trump's proposal, were it to actually take effect, according to the Raymond James policy team. They called out buy-now-pay-later operators, namely Block (XYZ). Affirm Holdings (AFRM) also operates a BNPL business and is a pure play on installment payments.
Investors could find out more about what to expect when financial companies hold their earnings calls in the coming days and weeks.
"Against the doom and gloom, it is worth nothing that over time the credit card industry has shown a remarkable ability to adapt the offer to regulatory changes," Foran noted.
