Why Tax Refunds And Stimulus Payments Are Bad News For Credit Card Stocks

Stimulus checks and tax refunds could be a positive one-two punch for many stocks, but Bank of America analyst Mihir Bhatia said they may be bad news for credit card companies in the near-term.

What Happened? Credit card stocks, including Alliance Data Systems Corporation ADS, American Express Company AXP, Discover Financial Services DFS and Synchrony Financial SYF have outperformed the overall market so far in 2021 on expectation that the end of the pandemic will produce a boom in credit card spending. Bhatia said Americans have been paying down their credit card debt throughout the pandemic, and industry-wide credit card balances dropped 10.8% in 2020.

Bhatia said loan growth has continued to decelerate in early 2021.

“Even as the economy reopens and spending picks up, we think card balances are likely to be pressured by tax refunds and stimulus,” he wrote in a note.

Related Link: Schwab, TD Ameritrade Experts Talk Retail Trader Sentiment, Inflation, Reopening Plays

Why It’s Important: As a result, Bank of America is projecting credit card loan growth will fall short of consensus expectations in 2021, particularly in the first half of the year.

• Bhatia said American Express and Alliance Data Systems may be hit particularly hard because of their exposure to discretionary spending and in-store sales.
• Synchrony could be more insulated due to its partnerships with companies like Amazon.com, Inc. AMZN, Paypal Holdings Inc PYPL and Lowe's Companies Inc LOW.
• Discover could also be more insulated due to its focus on revolvers.

Benzinga’s Take: While it’s generally good news for the health of Americans’ finances that they have paid down credit card debt in the past year, it’s bad news for credit card companies who profit from the interest they earn on that debt.

The stimulus payments and tax refunds won’t last for long, and Americans will likely be splurging on retail, restaurants, travel and entertainment by the summer months.

See also: How to Invest Your $1,400 Stimulus Check