Deutsche Bank Likes Capital One Over American Express And Discover Financial

Deutsche Bank initiated coverage Wednesday with a Hold rating on American Express Company AXP and a Buy rating on Capital One Financial Corp. COF.  

The firm downgraded Discover Financial Services DFS to Hold.

Analyst David Ho set a $99 price target on Hold-rated American Express. Ho noted that “If rising rates is accompanied by a consumer-driven acceleration of US real growth, revenues could surprise (still, GDP growth forecasts have disappointed in every year since the recovery).

“If/when concerns rise over credit cost normalization, AXP stock is probably where you want to be (more so than DFS). But in the meantime, there are uncertainties over losing some larger retail agreements, interchange rates will continue to decline, and its merchant interchange litigation outcome is on the way.”

American Express Company recently traded at $91.37, down 0.20 percent.

Ho set a $92 price target on Buy-rated Capital One.  Ho commented that “COF stock has under-performed DFS by 11  percent YTD, and the market by 4 percent YTD, given weaker loan growth/credit, noise in expenses, and some margin fears given low rates.

“We believe the thesis for both stock has converged—EPS growth at both COF/DFS benefits from better loan growth at good risk-adjusted margins, but both stocks could face pressure if credit concerns rise in the card space. However, we prefer the risk/reward at COF, given low loan growth expectations (w/ more upside catalysts), better asset sensitivity, and more expense levers. “

Capital One Financial Corp recently traded at $82.14, up 0.70 percent.

In downgrading Discover Financial Services, Ho observed that “while DFS’s card book is higher quality than COF’s, if concerns rise over normalizing credit losses in the card industry, DFS won’t be the place to hide—a 100bps increase in loss rates could be an 18 percent  hit to EPS. If that happens, DFS has fewer offsets: i.e. weaker leverage to higher rates, more limited expense flexibility, and limited capital flexibility (for at least a year).”

Discover Financial Services recently traded at $65.71, down 0.45 percent.