For Immediate Release
Chicago, IL – September 14, 2023 – Today, Zacks Equity Research discusses Capital One Financial Corp. COF, Credit Acceptance Corp. CACC and Navient Corp. NAVI.
Industry: Consumer Loans
The Zacks Consumer Loans industry continues to bear the brunt of high inflation and expectations of economic slowdown. Deteriorating asset quality is a major near-term headwind too.
Nonetheless, easing lending standards, which have increased the number of clients eligible for consumer loans, and digitization of operations will keep benefiting industry players. Further, steady spending on non-discretionary categories will result in decent consumer loan demand, thereby supporting revenue growth. Hence, industry players like Capital One Financial Corp., Credit Acceptance Corp. and Navient Corp. are worth keeping an eye on.
About the Industry
The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments.
In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
3 Key Themes Shaping Consumer Loan Industry's Prospects
Decent Loan Demand: The persistent inflation (though cooling now) and other ongoing macroeconomic and geopolitical headwinds continue to weigh heavily on consumer sentiments. Further, the Conference Board Consumer Confidence Index and the Expectations Index (which shows a six-month outlook) declined in August. Nonetheless, consumer fears of an imminent recession continued to ebb.
Dana Peterson, Chief Economist at The Conference Board, added “On a six-month moving average basis, plans to purchase autos and appliances continued to trend upward but plans to buy homes—more in line with rising interest rates—continued to trend downward. The dip in overall confidence notwithstanding, consumer plans to go on vacation, especially abroad, leapt upward in the month and slightly exceeded August 2022 readings, suggesting a continued penchant for spending on services.”
This will thereby result in decent demand for consumer loans in the future. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be stable.
Easing Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet loan demand.
Worsening Credit Quality: For most of 2020, consumer loan providers built extra provisions to tide over unexpected defaults and payment delays due to the economic downturn resulting from the COVID-19 mayhem. This considerably hurt their financials. But with solid economic growth and support from government stimulus packages, industry players began to release these reserves back into the income statement.
The current macroeconomic headwinds may curtail consumers’ ability to pay back loans. Thus, consumer loan providers are building additional reserves to counter any adverse fallout from unexpected defaults and payment delays. This is leading to a deterioration in industry players’ asset quality and several credit quality metrics are slowly creeping up toward pre-pandemic levels.
Zacks Industry Rank Reflects Bright Picture
The Zacks Consumer Loans industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #83, which places it in the top 33% 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 outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to keep on your radar, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry vs. Broader Market
The Zacks Consumer Loans industry has outperformed both the Zacks S&P 500 composite and its own sector over the past three years.
The stocks in this industry have collectively gained 35.1% over this period while the Zacks S&P 500 composite and Zacks Finance sector have rallied 33.2% and 28.6%, respectively.
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing consumer loan stocks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 0.88X, below the median level of 1.15X, over the past five years. This compares with the highest level of 1.56X and the lowest level of 0.48X over this period. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.23X and the median level is 10.07X.
As finance stocks typically have a lower P/TBV, 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 4.32X for the same period is way above the Zacks Consumer Loan industry’s ratio.
3 Consumer Loan Stocks on the Radar
Capital One: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending as well as deposit origination. Strength in credit card and online banking operations, decent loan growth, robust balance sheet position and strategic inorganic expansion initiatives will support Capital One’s financials.
With the Federal Reserve likely to keep interest rates high in the near term to control inflation, this Zacks Rank #3 (Hold) company’s NII and NIM are expected to witness improvements, though rising funding costs will weigh on both. Revenue prospects look encouraging on the back of the company’s solid credit card and online banking businesses as well as decent loan demand. Strong growth opportunities in card loans and purchase volumes are expected despite an intensely competitive environment.
The Zacks Consensus Estimate for earnings for 2023 and 2024 has remained unchanged over the past seven days. Also, COF’s shares have risen 5.2% over the past six months.
Credit Acceptance: Headquartered in Southfield, MI, CACC offers financing programs and related products and services to automobile dealers across the United States, enabling them to sell vehicles to consumers irrespective of their credit history. Further, it is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by dealers on vehicles financed by the company.
Revenue growth remains a major positive for Credit Acceptance, witnessing a six-year (2016-2022) CAGR of 11.2%. Growth is primarily attributable to a steady rise in finance charges, which is also the main revenue component. While finance charges are likely to witness headwinds from macroeconomic factors in the near term, the same will rebound once the operating backdrop improves. A decent rise in dealer enrolments and active dealers is also expected to support the company’s top-line growth.
Over the past week, the Zacks Consensus Estimate for earnings has remained unchanged for both 2023 and 2024. Shares of this Zacks Rank #1 (Strong Buy) company have rallied 22.9% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Navient: This Zacks Rank #3 stock is a leading provider of education loan management and business processing solutions. Headquartered in Wilmington, DE, the company is one of the leading servicers to the U.S. Department of Education under its Direct Student Loan Program.
NAVI is growing its in-school originations. However, with the increase in overall interest rates, the extension of the federal loan payment holiday, loan forgiveness proposals and programs are anticipated to create uncertainty and limit refinance loan origination volume in the near term. Yet, over the long term, demand for refinancing loans should rebound once direct federal loan repayments begin.
Focus on introducing new products leveraged with technology and cost control efforts will continue supporting Navient in the quarters ahead. Additionally, the company focuses on delivering operating efficiency and improving customer experience by building technology-enabled solutions.
Navient’s shares have rallied 7.6% over the past six months. Over the past week, the Zacks Consensus Estimate for earnings has remained unchanged for both 2023 and 2024.
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