Morgan Stanley Upgrades Consumer Finance Stocks

Morgan Stanley has upgraded its outlook on consumer finance stocks to "attractive," citing positive fundamentals and a friendlier regulatory environment.

Key Drivers

• Easing Inflation
• Lower Unemployment
• Stable Lending Standards

Delinquencies, which slowed significantly in 2024, are expected to decline further in 2025. Earnings per share (EPS) growth for the sector is projected at 15%, marking the fastest pace in four years.

Regulatory Environment

The brokerage highlighted lighter regulatory pressure due to a GOP-controlled government. They predict that the CFPB’s proposed late fee rule may not pass, potentially boosting earnings for companies like Synchrony Financial and Bread Financial.

Stock Upgrades

• Synchrony Financial: Upgraded to “overweight” from “underweight”; target price raised to $82 from $40.
• Bread Financial: Upgraded to “overweight” from “underweight”; target price increased to $76 from $35. Late fees account for about 20-25% of Bread Financial’s revenues.

Economic Impact

The expected $8 late fee cap would have delivered a significant earnings hit, but the lower likelihood of the rule passing influences the market outlook for 2025 and beyond.

Analysts now foresee that the late fee rule will either be rolled back or fail to pass through the courts. Stalled for 9 months, the rule faces challenges in conservative-dominated courts including the Fifth Circuit and Supreme Court.

Loan Growth Concerns

However, there are concerns regarding loan growth. Consumer lending is slowing, with card loan growth projected to stabilize at 3%-4% by mid-2025.

Potential Risks

The note raises flags about higher valuations and uncertainties related to credit quality improvements. Despite this, analysts remain optimistic about companies that will benefit from deregulation and those having EPS catalysts in the coming year.