Credit Card Companies Get a Lift After Legislation Passes

The outlook for a pair of credit card firms seems a little stronger only a couple of weeks after the approval of the “credit cardholders bill of rights” legislation.

The law, signed by President Obama at the end of May included several restrictions for credit card companies in terms of rate changes and billing procedures that some initially thought could hurt the firms. But in the last week, FBR Capital Markets upped its rating for Discover (NYSE: DFS) to outperform, while American Express (NYSE: AXP) announced a public offering of $500 million in common stock at $25.25 per share.

FBR said Discover’s capital cushion is one of the strongest in the industry, although credit losses could put pressure on future earnings, with operating losses likely over the next two fiscal years.

Even though Moody’s had a slightly different take on Discover, lowering the company’s senior unsecured debt rating, the investment firm said “is well capitalized and maintains a solid franchise in the U.S. general purpose credit card market.”

Dana Wiklund, research director, global risk management for Financial Insights, says that the difference between the FBR and Moody’s moves on Discover are because the credit card firm generally does a better job communicating its value to equity analysts than to bond analysts. He added that Moody’s tends to take a more conservative view of a firm’s financial health than do equity analysts.

The FBR upgrade and the American Express offerings weren’t all but impossible before the credit card bill was signed into law due to any last minute changes in the legislation. There were no late changes to the credit card rules, although a gun bill putting gun control in national parks under state governance was attached just before the legislation passed.

“Now the fear of the unknown is removed,” Wiklund said. “There was a concern about how heavy a hand that the government would take.”

Adil Moussa, analyst for Aite Group, expects the income of Discover and the other credit card firms to take an initial hit as the credit card legislation takes effect at the beginning of next year, but also expects the firms to devise new fees and services that will eventually replace any initial losses of revenue.

However, receivables are still growing as are chargeoffs, Wiklund acknowledged, which were the primary reasons for Moody’s actions.

American Express issued the stock in part to acquire funds in which to repay funds received from the Troubled Asset Relief Program (TARP), following in the steps of some of the major financial institutions that have announced their intentions to repay the government as soon as possible, in part to get the government out of their businesses.

“No company wants the government in the board room with them,” Wiklund said. “American Express and Chase did not want TARP funds.”

Moussa added that American Express tends to have less risky cardholders than other issuers, so the company’s stock is more attractive in the market.