Bank Of America Say Don't Buy These 3 Payment Stocks Ahead Of 'Mild Recession In 2023'

Bank of America analysts said in a note on Tuesday that the investment arm of the bank is staying away from payment stocks including Affirm Holdings Inc AFRM, Discover Financial Services DFS, and Synchrony Financial SYF in 2023.

The Payments Analyst: BofA’s Jason Kupferberg downgraded Affirm, and Syncrony from a Buy to a Neutral rating, and downgraded Discover from a Buy to an Underperform rating as those services cater to the lower-income and lower-credit consumer, which gives those companies the most significant exposure to consumer credit risk.

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“BofA’s Economics research team calls for mild recession in 2023,” Kupferberg wrote, “An economic downturn will create varying degrees of revenue headwind for all our companies under coverage, and inflation will be less of a top-line tailwind, so we favor stocks with the highest degree of EPS visibility.”

The research noted that Capital One’s mid-quarter update in November suggested weakening consumer credit conditions — with unemployment likely to rise, and interest rates continuing to increase, the firm believes those general pressures will intensify over the next few quarters.

Affirm: BofA dealt a price target of $13 on the stock, based on a blend of factors.

Downside risks to Affirm include:

• Increased regulation in the BNPL space
• Increased credit risk from consumers
• Take rate compression from increased competition
• Reversal of eCommerce trends as markets reopen choosing individual stocks in the Payments, IT Services, and Consumer Finance

Upside risks to Affirm include:

• A quicker Fed pivot
• Faster-than-anticipated return of Peloton gross merchandise value
• Quicker rollout of Affirm to SHOP merchants
• New Merchant Wins
• Quicker adoption and more frequent usage of BNPL products by consumers

Discover Financial: BofA issued a $97 price target on the stock, based on a blend of factors.

Downside risks to Discover:

• Recession
• Deteriorating sentiment caused by recession
• A prolonged suspension of Discover’s buyback authorization

Upside risks to Discover:

• Strong consumer balance sheets
• Increased visibility in peak loss rates shifts investor sentiment
• Fed achieves soft-landing
• Outsized capital return

Synchrony Financial: BofA gave a $37 price target, based on a blend of factors.

Downside risk to Synchrony:

• Recession leads to increased defaults
• Deteriorating sentiment caused by the recession
• Loss of retail partners

Upside risk to Synchrony:

• Strong consumer balance sheets
• Increased visibility in peak loss rates shifts investor sentiment
• Fed achieves soft-landing
• Outsized capital return

Price Action:
Shares of AFRM traded 3.99% lower to $11.78 on Tuesday.
Shares of DFS traded 1.22% higher to $106.56 on Tuesday.
Shares of SYF traded 0.51% lower to $35.39 on Tuesday, according to data from Benzinga Pro.