JPMorgan Upgrades Capital One To Overweight

Due to lower credit expenses over the past few years, Capital One Financial Corp. COF has increased rewards, driving an increase in transactions volumes, as well as sustainable gains in market share.

JPMorgan’s Richard Shane upgraded the rating on the company to Overweight, while raising the price target from $73 to $83.

‘Lender-Centric’ Trends

Shane mentioned that “low credit losses have created an environment that favors the “lend-centric” card issuers,” and a review of industry trends revealed that Capital One had been the biggest beneficiary, with increased rewards leading to “increased transaction volume, market share gains and industry-leading asset growth.”

Related Link: A Sector ETF For Share Buybacks

Consistently low credit losses in the recent past “distorted” the behavior of card issuers with improvement in the risk adjusted lending margins. Shane believes that this environment favors cards issuers that are “lender-centric,” or specifically skewed to the middle income consumer.

These card issuers have been able have to “harvest the increased returns on lending to fund more competitive rewards programs, effectively “giving away transactions” to drive portfolio growth,” according to the JPMorgan report.

Average ‘Credit Beta’

Shane also pointed out that data suggests that Capital One has lower credit sensitivity than the basic metrics imply, driven by the company’s best-in-class underwriting, which has led to about average “credit beta” for the company, despite a higher concentration of borrowers with lower than 600 FICO scores.