What Trump’s Call for 10% Cap on Credit Card Rates Could Mean for Issuer Stocks

On Jan. 9, US President Donald Trump called for a temporary 10% cap on credit card interest rates, effective Jan. 20. Consumer finance company shares are trading sharply lower in response.

Why it matters: Notably, Trump’s statement was mostly a call to action and did not contain any policy or legislative announcements. As it stands, we think a cap is unlikely to be implemented, but if enacted, it would have dire consequences for credit card profitability.

• Many credit card portfolios carry credit costs that are too high to be supported under a 10% limit on interest rates. We would expect Capital One, Synchrony, and Bread Financial Holdings to suffer heavy losses under a cap that low.

The bottom line: Given the lack of tangible progress toward implementation, we will maintain our fair value estimates for American Express, Capital One, Synchrony, and Bread for now, but we note that the risk for these firms has increased.

• A one-year 10% cap on credit card rates would reduce our fair value estimates for wide-moat American Express from $292 per share to $280, and for narrow-moat Capital One from $216 per share to $185.
• We see the private-label card issuers as structurally more exposed, since they typically charge higher rates and their portfolios have weak credit quality. We see a cap on interest rates reducing our fair value estimates for no-moat Synchrony from $72 per share to $58, and for Bread from $64 per share to $38.

Big picture: This represents a worst-case scenario, as the credit card issuers would likely respond by cutting credit limits, cutting marketing spending, and increasing other fees. However, a longer-lasting interest rate cap, like the one proposed by senators Bernie Sanders and Josh Hawley, would do far more damage.

• American Express is least exposed to action on credit card interest rates. The bank only receives around 25% of its revenue from net interest income, and it faces lower credit costs than peers.