U.S. card companies are expected to benefit as pandemic-weary consumers continue to fuel demand for travel, one of the biggest contributors to revenue, despite rising inflation.
With more companies resuming business travel and people planning vacations, Visa Inc, Mastercard and American Express are likely to see a jump in cross border volume, according to analysts.
“So far, despite the macro, you continue to see a somewhat stable consumer,” Wedbush Securities analyst Moshe Katri said, adding that monthly data from Visa and Mastercard showed no hit to payments or cross-border volumes.
“Bottom line, the sky isn’t falling, at least yet.”
Cross border volumes are a measure of travel demand reflecting spending on cards outside the country they were issued.
Pent-up demand for travel, coupled with inflation, was making U.S. travelers spend 35% more in the fall this year compared with 2021, according to a report from travel insurance aggregator Squaremouth.com.
American Airlines, United Airlines Holdings and Delta Air Lines have also forecast strong profits for the rest of the year, in a sign that travel demand was offsetting concerns about expensive air fares.
GRAPHIC: Change in profit for H1 2022
THE CONTEXT
Card companies tend to make more money when prices surge as they typically charge a percentage of the dollar value of transactions.
But high inflation can weigh on consumer spending if it is accompanied by rising interest rates, like in the United States, that could tip the economy into recession.
A darkening economic outlook has not yet crimped spending by consumers who remain in good financial health, according to U.S. banking giants that reported earnings earlier this month.
American Express, which is more sensitive to interest rate increases as credit cards comprise a large part of the company’s business, remains well-positioned.
“AmEx’s (credit) loss rates have stayed firmly in check. Its core customers are likely to have higher incomes, who are expected to be less impacted by inflation,” BofA Securities analyst Mihir Bhatia said.
American Express will report its quarterly earnings on Friday, followed by Visa and Mastercard next week.
AmEx shares have dropped 12%, while Mastercard and Visa are down 17% and 14% this year, respectively.
GRAPHIC: U.S. card issuers stock performance YTD
THE FUNDAMENTALS
Company Refinitiv revenue Refinitiv EPS
estimate estimate
American Express $13.50 bln (up 24% $2.41
y-o-y)
Visa $7.55 bln (up 23% $1.87
y-o-y)
Mastercard $5.65 bln (up 13% $2.56
y-o-y)
WALL STREET SENTIMENT
** American Express – 15 of 28 brokerages rate the stock “buy” or higher, 11 “hold” and 2 “sell”; median PT $170 – Refinitiv data
** Visa – 36 of 40 brokerages rate the stock “buy” or higher and 4 “hold”; median PT $257
** Mastercard – 35 of 39 brokerages rate the stock “buy” or higher, 4 “hold” and 2 “sell”; median PT $405
