UBS Analyst Hits Credit Cards


Fears of an impending U.S. consumer-led recession this year and rising unemployment sparked UBS analyst Eric Wasserstrom to slap sell ratings on three consumer credit companies.

Wasserstrom cut his rating on American Express(AXP) to sell from buy, in a note on Monday. He also downgraded Capital One Financial(COF) and Discover Financial Services(USB) to sell from neutral.

Wasserstrom says that credit card growth is likely to remain low, "given high levels of consumer leverage and the potential impact from additional government rebates." In addition, net interest margins will remain under pressure at the companies, given "elevated securitization spreads, including on highly rated securities."

"Hence we expect higher losses, limited balance sheet growth, and lower margins to result in lower earnings through 2008-09," Wasserstrom writes in the note.

Wasserstrom cut his 12-month price target on American Express by $22 to $45 and by $4 to $14 on Discover. He kept his price target on Capital One unchanged at $46.

Credit losses will be particularly acute at the New York travel and card services giant, American Express, due to their "aggressive" growth in receivables over the past two to three years "which likely reflected a degree of loosening underwriting standards at the trough of the credit cycle," he writes. Still, American Express remains Wasserstrom's preferred stock of the group.

Wasserstrom has been cautious about Discover since it was spun off from Morgan Stanley(MS) in late 2006, because "the company was likely to suffer risk-adjusted margin compression as a result of higher funding costs as an independent entity, and higher credit costs as a result of normalization into a slowing economic environment," he writes.

Discover is also unlikely to be sold in the near future -- particularly not at a significant premium -- due to the company's poor financial performance and a lack of buyers right now.

Despite fears of a recession, Wasserstrom cautioned that the combined interest rate cuts and stimulus package "may blunt the extent of the economic downturn and support consumer credit performance," as well as the companies cost cuts and capital management, he wrote.

Shares of all three companies fell significantly on Monday. American Express' stock closed down 3.9%, while Capital One and Discover fell 7.6% and 9%, respectively.

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