Free Credit Report: Deutsche Bank Likes Capital One, Downgrades Discover

Analysts at Deutsche Bank expressed concerns over the U.S. consumer credit market, but that doesn't necessarily mean there aren't opportunities for investors looking for exposure to credit card providers.

Deutsche Bank's David Ho commented in a research report Monday that consumers are still in a "benign credit normalization stage" of the overall U.S. consumer credit cycle in terms of credit quality. The analyst added the stage is now in its "third or fourth inning" based on the last peak in consumer credit losses in 2009.

Upgrading Capital One To Buy

Ho commented that while he has been bearish on Capital One's growth trajectory since early last year, but he is now more positive that the company's 2017 credit outlook and expectations is "properly marked."

Discover Downgraded To Hold

According to Ho, Discover's revenue growth and operating leverage remains both "solid" despite the competitive environment. Unfortunately for investors, the outsized card balance growth seen from 2015 to 2016 could result in greater than expected pressure on credit trends versus its peers. The analyst also added that there are "less visible" near-term offsets to weakening credit trends. Related Links: Benzinga's Top Upgrades, Downgrades For May 1, 2017 Deutsche Bank's Top 2 Consumer Finance Picks For 2017

However, consumer credit losses have now "inflected upwards," which implies the market has "likely past the mid-point" of the credit normalization stages. Moreover, U.S. consumers that are 30 days-plus delinquent are still 140 basis points from "peak to trough" compared to the pre-financial crisis level but at the same time U.S. consumer debt growth has returned to the pre-financial crisis level.

While there are some concerning signs today, the current state of the cycle is different for seven reasons:

1. Consumers can now support higher levels of non-mortgage debt.
2. Consumer loss frequency trends are below historical lows.
3. Regulatory reforms have "changed the game."
4. There is less risk today in interest rate shock.
5. There is also less risk in overall subprime credit.
6. Consumers are more conservative.
7. Consumers are likely to benefit from tax cuts and job creations.

Ho upgraded shares of Capital One Financial Corp. COF from Hold to Buy with no assigned price target despite the company's earnings report falling shorting of estimates.

Ho continued that based on the inflection of loss curve performance on recent vintages, more noticeable slowing, and mix improvements, any downside surprises to credit provisions in cards start to level off from here.

Although it may be difficult to predict the exact timing, a de-risking cycle at Capital One will eventually play out and lead to the stock's outperformance.

Ho also downgraded shares of Discover Financial Services DFS from Buy to Hold with a price target slashed from $87 to $71.

Nevertheless, Ho stated that investors have no reason to "lose sleep" over the company's credit card book over the near term, the fact remains the company has fewer levers to offset rising credit costs.