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Coronavirus, Low Rates Mar Consumer Loans Industry Outlook

Swayta Shah
·5 min read

The Zacks Consumer Loans industry comprises firms that offer mortgages, refinancing, home equity lines of credit, credit cards, auto loans, student loans and personal loans, among others. Prospects of these companies are sensitive to the nation’s overall economic health.

In addition to offering the above-mentioned products and services that help generate interest income, which is an important part of revenues, many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery for generating fee revenues.

A couple of prominent stocks in this industry are Discover Financial Services (DFS) and Capital One (COF).

Here are the three major industry themes:

  • The Federal Reserve cut interest rates to near zero in March with an aim of supporting the U.S. economy amid the coronavirus-induced slowdown. Further, weak consumer sentiments owing to shutdowns and halt in business activities significantly hurt loan demand. Thus, growth in net interest margin and net interest income for consumer loan companies is expected to be hampered in the near term.

  • Increased lending to subprime borrowers has resulted in an increase in revenues for consumer loan providers. However, this has resulted in higher provision for credit losses, thereby hurting bottom-line growth to some extent. Further, increase in delinquency rates for credit card and auto loan, as well as coronavirus-related ambiguity are major concerns for these companies.

  • With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, credit scores of some consumers have moved higher. This has increased the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet increased demand for loans.

Zacks Industry Rank Reflects Dull Prospects

The Zacks Consumer Loans industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #223, which places it in the bottom 12% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of weak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have plunged 81.8%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms Sector and S&P 500

The Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past three years.

While the stocks in this industry have collectively lost 34.2% over this period, the Zacks S&P 500 composite rallied 20.1% and the Zacks Finance sector declined 18.9%.

Three-Year Price Performance


Industry’s Valuation

On the basis of price-to-tangible book ratio (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their results from one quarter to the next, the industry currently trades at 0.60X. The highest level of 1.57X and a median of 1.20X was recorded over the past five years.

This compares with the S&P 500’s trailing 12-month P/TBV of 11.30X, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

As finance stocks typically have a lower P/TBV ratio, comparing consumer loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 3.30X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

Bottom Line

Though consumer loan stocks are likely to benefit from easing lending standards and digitization of operations, weak consumer sentiments, lower interest rates and uncertainty over impact of the pandemic on the economy pose major concerns. Also, rise in credit costs and delinquency rates will hurt consumer loan providers.

Despite these concerns, one can look at a couple of consumer loan stocks that have witnessed positive earnings estimate revisions.

We are presenting two stocks with a Zacks Rank #2 (Buy) that investors may consider betting on.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

EZCORP, Inc. (EZPW): This Austin, TX-based company has lost 43.9% over the past year. The Zacks Consensus Estimate for 2020 earnings has been revised marginally upward over the past 30 days.

Price and Consensus: EZPW


Encore Capital Group Inc (ECPG): This San Diego, CA-based company has lost 4.8% over the past six months. The company's 2020 earnings have moved 3% upward over the past 30 days.

Price and Consensus: ECPG


5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

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EZCORP, Inc. (EZPW) : Free Stock Analysis Report
Encore Capital Group Inc (ECPG) : Free Stock Analysis Report
Discover Financial Services (DFS) : Free Stock Analysis Report
Capital One Financial Corporation (COF) : Free Stock Analysis Report
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